Form 1042-S: Getting Back Over-Withheld US Tax as a Canadian

Form 1042-S (Foreign Person’s US Source Income Subject to Withholding) is the US equivalent of Canada’s NR4 slip. It reports income paid to a non-resident alien and the amount of US tax withheld. If the withholding agent applied the wrong rate (typically the default 30% instead of the treaty rate), the 1042-S shows the over-withholding, and you file a US non-resident return (Form 1040-NR) to claim the refund.

When do I receive a 1042-S?

You receive a 1042-S when a US withholding agent (a bank, brokerage, corporation, university, or other payor) pays you US-source income and withholds tax under IRC 1441 or IRC 1442. Common situations:

• Dividends from US stocks. A Canadian holding US stocks in a non-registered account (or through a Canadian brokerage that uses a US custodian) receives dividends with withholding. The brokerage issues a 1042-S. The treaty rate under Article X is 15% (or 5% if you own 10% or more of the voting stock).
• US pension or IRA distributions. A Canadian receiving distributions from a US pension plan, IRA, or 401(k) as a non-resident may have withholding applied. The treaty rate under Article XVIII is 15% on periodic payments (and potentially 0% on Social Security, though the US does not withhold on Social Security paid to Canadian residents).
• Royalties. A Canadian author, musician, or software developer receiving US-source royalties may have 30% withheld. The treaty rate under Article XII is 0% for copyright royalties and 10% for industrial/patent royalties.
• Scholarship or fellowship grants. A Canadian student or researcher at a US university may receive a 1042-S for the taxable portion of a scholarship or fellowship, with withholding applied. Article XX or XXI of the treaty may reduce or eliminate the tax.
• Interest. Though most arm’s-length interest paid to non-residents is exempt from withholding (the “portfolio interest” exemption under IRC 871(h)), some interest is not exempt (e.g., interest from related parties, or interest on certain types of obligations). If withholding is applied, the treaty rate under Article XI is generally 0%.

How do I get the refund?

File Form 1040-NR (US Nonresident Alien Income Tax Return) for the year in which the income was received. The process:

• Report the income. Enter the gross income from the 1042-S on the appropriate line of Form 1040-NR (Schedule NEC for FDAP income not effectively connected with a US trade or business).
• Claim the treaty rate. On Form 1040-NR, you indicate the treaty article and the reduced rate. The tax is calculated at the treaty rate, not the 30% statutory rate.
• Claim the withholding. Enter the total withholding from all 1042-S forms as tax already paid. The excess (30% withheld minus 15% treaty tax, for example) is your refund.
• Attach Form 8833. If you are claiming a treaty-based return position, Form 8833 must be attached to disclose the treaty article being relied upon.
• File with an ITIN. If you do not have a US Social Security Number, you need an ITIN (Individual Taxpayer Identification Number). Apply on Form W-7, which can be filed with the 1040-NR.
• The 1040-NR is due June 15 for non-residents with no US wages (the automatic 2-month extension for non-residents living outside the US), or April 15 if you had US wages. An extension to October 15 is available on Form 4868.

What if the withholding was correct?

If the withholding matches the treaty rate, there is generally no refund to claim. However, you may still need to file Form 1040-NR if:

• You have effectively connected income (income from a US trade or business, employment income, or rental income) that requires a US return.
• You want to claim deductions or credits that reduce your US tax below the amount withheld.
• You have US-source income from multiple categories, and the combined tax calculation on the 1040-NR produces a different result than the flat treaty rates applied at source.

How does the 1042-S relate to the NR4?

The NR4 is Canada’s equivalent. When a Canadian payor (a bank, brokerage, or pension plan) pays income to a non-resident, it issues an NR4 slip showing the Canadian-source income and the Part XIII withholding. The non-resident uses the NR4 to file a Canadian return (section 216/217 election) or to claim an FTC on their US return.

• The 1042-S flows in the opposite direction: it shows US-source income and US withholding paid to a non-US person. The Canadian uses it to file a US 1040-NR (to claim a US refund) and to claim an FTC on the Canadian T1 (to credit the US withholding against Canadian tax on the same income, if applicable).
• How to report an NR4 on a US tax return, the Canadian-side equivalent
• NR301: claiming treaty benefits in Canada, reducing Canadian withholding at source

What should I do next?

If you received a 1042-S with 30% withholding and the treaty rate is lower, file Form 1040-NR to claim the refund. If you do not have an ITIN, apply for one on Form W-7 at the same time. If the withholding was correct at the treaty rate, check whether a US return is otherwise required.

• W-8BEN for Canadian freelancers, preventing over-withholding before it happens
• Form 1040-NR for Canadians, the non-resident return
• Form 8833 and treaty positions, disclosing the treaty article
• How to apply for an ITIN, the tax ID for non-residents without an SSN
• Part XIII withholding when leaving Canada, the Canadian-side withholding regime

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.