How does the Canada-US treaty reduce withholding tax on a lump-sum US pension payment to a Canadian resident?

The Canada-US tax treaty caps the rate of US withholding tax that can be applied to pension payments, including lump-sum payments, made to a Canadian resident, generally at a lower rate than the US would otherwise apply under its own domestic rules to a payment leaving the country. Without claiming the treaty rate, a payer might default to withholding at the higher statutory US rate, leaving you to recover the difference later rather than benefiting from the reduced rate upfront.

To actually get the reduced rate applied at the time of payment, you typically need to provide the right documentation to the US payer certifying your Canadian residency and treaty eligibility, rather than assuming the reduced rate is applied automatically just because a treaty exists. If US tax is withheld at a rate higher than the treaty allows, you generally have options to recover the excess, whether by claiming a refund from the US or through the foreign tax credit mechanism in Canada, though getting the treaty rate applied correctly from the start is usually simpler than untangling an over-withholding afterward.

Because a lump-sum payment can involve meaningful money and both countries' tax systems at once, confirming the paperwork with the payer before the payment is made is worth the effort.