The US-Canadian tax treaty is a unique treaty in that it exempts retirement income and dividends from taxation. I believe it is the only treaty that designates dividend income in IRAs and other ERISA accounts as exempt from taxation.

If the US/Canadian Tax treaty bilaterally exempts income from investments within retirement accounts, why do many US financial firms continue to allow withholding to be taken from US retirement accounts yielding canadian investment dividends? Why does withholding occur in these US retirement accounts at all? Could it be malfeasance or negligence on the US financial custodian’s part?

Why aren’t these same US financial firms filing as “custodian” of the assets to recover withheld funds wrongly taken from US retirement accounts? From my understanding, retirement account dividends and income are reported to the canadian government under the custodian’s tax payer ID, technically, beneficial retirement account owners do not have the authority to recover, but must rely on the custodian of their assets to manage the care custody and control of IRA trust assets, including recovery of any tax withheld when none was due.

I am surprised that there hasn’t been an explosive class action challenging the negligence of US financial institutions that allowed withholding on custodial assets since the early 1980’s. I worked for a financial firm that mistakenly instructed their depositories to withhold tax on US IRA accounts for over 20 years. I know other US firms made the same errors. I wonder how many billions of dollars has the Canadian government enjoyed from US financial industry negligence?

What surprises me most is that US tax professionals don’t seem to understand that the US-Canadian tax treaty is distinct from other US signed tax treatys (bilateral exemption from taxation of retirement income). The rules used with other foriegn tax issues within US IRA accounts do not apply, the tax treatys are different.