The W-8BEN form is a tax form that foreign individuals receiving income from American companies must submit to their employer so that U.S. federal taxes can be withheld from their income. Canadian independent contractors can use the form to claim exemption from tax withholding due to the income tax treaty between the United States and Canada.
What is the W-8BEN Form?
Generally, American companies withhold income taxes on payments made to foreign individuals they employ. The rate of this tax is a fixed 30%. Any American company or institution will need your name, address, and tax identification numbers to facilitate financial payments to you and any tax withholding that may be required by the U.S. government. This information is obtained when you fill out and submit the W-8BEN form.
Income Tax Treaty between the United States and Canada
The income tax treaty between the United States and Canada resulted in the signing of a treaty between the two countries in September 1980. The U.S. Senate advised ratifying the treaty in June 1984 after several amendments and changes. The tax treaty came into effect in January 1985. The treaty prevents Canadians from paying tax to the U.S. government on income earned here in addition to the taxes paid to the Canada Revenue Agency on the same income. The protocols were slightly amended in 1997, 1995, and 2007.
Who Uses the W-8BEN Form?
Any foreign contractor receiving a payment such as interest, dividends, compensation for services, or other forms of income must submit the W-8BEN form to the person or entity providing the income. This person or entity is required to ensure that taxes are withheld and to submit a tax declaration for those payments unless the contractor can prove that they are exempt from taxes. You must submit a correctly completed W-8BEN form to the party or company providing you with income if you are a Canadian contractor receiving income from a U.S. source. The form includes a declaration that you will include this U.S. income on your Canadian tax return.
Establishing Your Canadian Residency
Your ability to claim an exemption depends on your ability to establish residency and Canadian tax obligations. This depends on a number of factors related to where you live and where you conduct your business.
Residency Rules
You are considered a resident of the country where you have a “permanent home.” You will be treated as a Canadian resident if you have a permanent home there. Article Four clarifies your residency status using the tie-breaker rule if you are subject to taxation as a dual resident in Canada and the U.S. The following criteria determine your residency:
- Where your permanent home is located
- Where you have closer personal and economic ties (referred to as “centre of vital interests”) if you have a permanent home in both places
- Your habitual residence if it’s difficult to determine your centre of vital interests
- Your nationality if you reside in both countries
- The mutual agreement between the United States and Canada that you are a resident if you are a citizen of both countries or of neither
Determining Your Permanent Establishment
You may have one or more locations for your business if you are an independent contractor or business owner. Working with U.S. companies does not in itself establish a permanent establishment for your business in the U.S. Your permanent establishment is considered to be a fixed place of business where you perform your activities, either in part or in full, such as:
- Place of management
- Office or branch
- Factory or workshop
- Location of resource extraction, such as a mine or oil/gas well or quarry
- Construction site (only if it lasts longer than 12 months)
- Drilling platform or ship (only if used for more than three months in a 12-month period)
How to Obtain the W-8BEN Form
You can
Obtain a copy of the W-8BEN form from the U.S. Internal Revenue Service (IRS) website or request it from the company or individual you are dealing with. Simply fill out the form and return it to them once you have a copy. Do not send it to the U.S. Internal Revenue Service office.
How to Fill Out and Read the W-8BEN Form
Filling out the W-8BEN form is relatively easy, but you should be prepared with the following information:
- Line 1: Provide your name or your business name
- Line 2: Provide your country of citizenship
- Line 3: Enter your permanent residence address
- Line 5: Enter your U.S. taxpayer identification number
- Line 6: Enter your foreign taxpayer identification number
- Line 7: Provide your Canadian social security number or Canadian business taxpayer identification number
- Lines 9 and 10: Specify the tax treaty provisions that apply to you. Check the appropriate box if you are operating under a trade name.
Requesting a Refund of U.S. Withheld Income Tax
If your U.S. clients have withheld some of your income, you can reclaim this amount by submitting a U.S. income tax return for non-residents, Form 1040-NR. Submit it with Form 8833 to disclose your position under the tax treaty between the United States and Canada. Consult a tax accountant experienced in preparing tax returns for non-residents regarding which tax forms you need to fill out to conduct business, whether for working for a U.S. company or reclaiming withheld U.S. income tax.
Source: https://www.thebalancemoney.com/us-withholding-for-canadian-independent-contractors-3193495
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