28 Feb 2019
Are you a Canadian resident or sole proprietor who receives payment from U.S. companies? You need to know about the W-8BEN Form.
Why? Because it will help you keep more of your money in your pocket.
First, An Overview of U.S. Tax Law
U.S. companies that make payments to foreign contractors are typically required to withhold 30% tax on those payments. The company, referred to as the withholding agent, is responsible for deducting and withholding that tax from the contractor’s income and paying it to the Internal Revenue Service (IRS).
If the withholding agent fails to do this, they can be held personally responsible for paying the tax owed by the contractor. For this reason, U.S. companies typically take every precaution to ensure that this obligation is being met.
For Canadian residents, this means you’ll be taxed twice on any income you earn from U.S. sources: once in the U.S. and again in Canada.
Introducing: Tax Treaty to the Rescue!
Residents of foreign countries can have their withholding reduced or eliminated if their country of residence has an existing Income Tax Treaty with the U.S.
Due to their close proximity, Canada and the U.S. have very close economic ties. Many citizens and residents of the U.S. work, invest and conduct business in Canada and vice versa. To avoid double taxation, the two countries signed a tax treaty.
The Canada-U.S. Income Tax Treaty ensures that residents of the U.S. and Canada are not taxed by each of the two countries on the same income in the same year.
What Is a W-8BEN Form?
Article VII of the tax treaty between Canada and the U.S. provides that business profits earned in the U.S. by Canadian residents are taxed in the U.S. only to the extent that those profits are related to a permanent establishment in the U.S.
In other words, if you don’t have an office, branch or another place of business in the U.S., income from U.S. sources is not taxable so long as you pay tax on that income to Canada.
A Canadian resident notifies the U.S. company that the tax treaty applies to their situation by filing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individual).
By providing a completed Form W-8BEN, you are confirming that you are:
- Not a U.S. resident
- The beneficial owner of the income for which Form W-8BEN is being provided
- Claiming a reduced rate or an exemption from withholding as a resident of a foreign country with which the U.S. has an income tax treaty.
Note: A W-8BEN is applicable only for individuals or sole proprietors. If you are a corporation, partnership, or another business entity, you’ll use Form W-8BEN-E.
This form is much longer due to information required by the Foreign Account Compliance Act (FATCA) for foreign entities.
What If You Don’t Fill Out Form W-8BEN?
Your client is required by the U.S. to ascertain your status as a non-U.S. person to determine the amount of withholding required to be withheld from their payments to you.
If you choose to ignore their request to complete Form W-8BEN, the withholding agent is required to withhold 30% of any amounts subject to withholding. That includes interest, dividends, rents, royalties, and compensation.
The withholding is essentially a prepayment of tax. If money was withheld erroneously, you could file a U.S. tax return, Form 1040NR along with Form 8833, to disclose your position under the U.S.-Canada Treaty. You can attempt to prepare the 1040NR by carefully following the instructions, but you may prefer to find a tax accountant who is experienced with non-resident tax returns.
Next Steps: How to Complete Form W-8BEN
Part I of Form W-8BEN asks for simple identification information: your name, country of citizenship, residence address, mailing address (if different), and date of birth.
Line 5 of Part I ask for your identification number, either a U.S. Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN). If you’re not eligible for a U.S. SSN, you can apply for an ITIN by filing Form W-7 with the IRS. It usually takes four to six weeks to get an ITIN.
However, Canadians who possess a Social Insurance Number (SIN) don’t need to enter an SSN or an ITIN. You can simply enter your SIN on Line 6.
In Part II, you’ll enter your country of residence on Line 9. On Line 10, you’ll enter the relevant section from the U.S. tax treaty with your country. For Canada, as of this writing, the relevant section is 12.3 and the corresponding withholding rate is 0%.
On the next line, you’ll specify the type of income. In most cases, you’ll enter “Services” in this field. You typically do not have to enter anything on the lines where it asks you to explain the conditions that make you eligible for the reduced rate of withholding.
Finally, sign and date the form in Part III. The W-8BEN is filed with the withholding agent, so there is no need to mail a copy to the IRS. Generally, your W-8BEN will remain in effect for three years, unless a change in circumstances makes any information on the form incorrect.
In a nutshell, completing Form W-8BEN confirms to your client that you are not a U.S. person, that you do not work in the U.S., and that you will report your income to the CRA.
Whether you complete the form yourself or ask your tax advisor to assist you with completing it, don’t ignore your client’s request for this important form! Without it, they’ll send 30% of your payments to the IRS, and you’ll have to jump through even more hoops to get it back.