Form W-8BEN is a tax form that foreign persons who receive income from U.S. companies must submit to their employer in order to have U.S. federal income taxes withheld. Canadian independent contractors can use it to claim exemption from tax withholdings due to an income tax treaty between the U.S. and Canada.
If you are a Canadian independent contractor, knowing how to use Form W-8BEN will help you avoid the hassle of being taxed in both countries. Learn more about how this Form W-8 works and how to fill it out.
What Is Form W-8BEN?
American companies generally withhold income taxes on income paid to foreign individuals who are doing work for them. This tax rate would generally be a flat 30%. Any U.S. firm or company will need your name, address, and tax identification numbers to facilitate payments to you and any tax withholding that might be required by the U.S. government. This information is obtained when you complete Form W-8BEN.
In addition to the above details, Form W-8BEN allows people from countries with which the U.S. has particular agreements to claim exemptions or special withholding rates. For Canadian independent contractors, this means they can claim an exemption from withholdings.
The United States-Canada Income Tax Convention
The United States-Canada Income Tax Convention resulted in a treaty between the countries and signed in September 1980. After numerous tweaks and changes, the U.S. Senate advised that the treaty be ratified in June 1984.
The treaty officially went into effect in January 1985, and it prevents Canadians from having to pay the U.S. a tax on income earned here on top of taxes paid to the Canada Revenue Agency for the same income.
As a result, you can avoid having your business income taxed twice by both the U.S. and Canada if you meet the residency rules and the fixed place of business rules. Article VII of the tax treaty provides that business profits earned in the United States by Canadian residents are taxed in the U.S. only to the extent that the profits are related to a permanent establishment in the United States.
Who Uses Form W-8BEN?
Any foreign contractor who receives payment from sources such as interest, dividends, royalties, compensation for services, or other forms of income, must submit Form W-8BEN to the person or entity that provided the income. That person or entitiy is then required to withhold and file income taxes from those payments unless the contractor can show they are exempt.
As a Canadian contractor earning income from a U.S. source, you are required to submit a properly completed Form W-8BEN to the party or company that is providing you with income. The form includes a declaration that you'll include this U.S. income on your Canadian tax return.
Withholding is a prepayment of tax that is taken out of an employee's paycheck or a payment made to a foreign contractor subject to withholding.
Your Form W-8BEN will generally remain in effect until the last day of the third calendar year after you sign it unless your circumstances change significantly. So, for example, if you sign the form on December 1, 2020, it will remain effective until Dec. 31, 2023, unless something changes in your status to invalidate it sooner.
Determining Your Canadian Residency
Your ability to claim exemption, of course, hinges on your ability to claim residency and obligation as a Canadian taxpayer. This depends on a few factors regarding where you live and where you operate your business.
The Residency Rules
You're considered to be a resident of the country in which you have a "permanent home," so you're treated as a resident of Canada if your permanent home is there.
If you are a dual-resident taxpayer in both Canada and the United States, Article IV clarifies your residency status using a tie-breaker rule. The tie-breaker rule uses the following criteria to determine your residency:
- Where you have a permanent home
- If you have a permanent home in both places, where you have closer personal and economic relationships, known as a center of vital interests
- If your center of vital interests cannot be determined, where you habitually live
- If you habitually live in both countries, where you are a citizen
- If you are a citizen of both or neither countries, where the United States and Canada mutually agree that you are a resident
If you are employed by a state, local, or federal government, you are generally considered to be a resident of the country where that government is located.
Locating Your Fixed Place of Business
If you are an independent contractor or business owner, you may have one or more business locations.
Working through or with U.S. companies does not establish the U.S. as your fixed place of business. Instead, your fixed place of business is a permanent establishment where your business is wholly or partly carried on, such as a:
- Place of management
- Office or branch
- Factory or workshop
- Extraction location for natural resources, such as a mine, oil or gas well, or quarry
- Building or construction site (only if it lasts more than 12 months)
- Drilling rig or ship (only if it is used more than three months in a 12 month period)
If you have two offices, one in Canada and one in the United States, you have two fixed places of business. You must treat each office differently for income tax purposes.
The location of your fixed places of business impacts where you are considered a resident and where you must pay taxes. If your fixed place of business is in Canada, you are treated as a Canadian contractor doing business with U.S. companies.
Where to Get a Form W-8BEN
You can get a copy of Form W-8BEN on the IRS website or request one from the company or person with whom you're doing business. Once you have a copy, simply fill it out and return it to them. Do not send it to the IRS.
How to Fill Out and Read Form W-8BEN
Form W-8BEN is relatively straightforward to fill out. You'll need to 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. tax identification number.
- Line 6: Enter your foreign tax identifying number.
- Line 7: Provide your Canadian Social Insurance number or your Canadian corporate tax identification number.
- Lines 9 and 10: Specify the tax treaty rules that apply to you and check the appropriate box if you are operating under a business name.
Claiming a Refund of Your U.S. Income Tax Withholding
Should your U.S. clients withhold some of your income, you can get this money back by filing a nonresident U.S. income tax return, Form 1040-NR, along with Form 8833 to disclose your position under the U.S.-Canada Tax Treaty.
For any tax forms that you must fill out to conduct business, whether to work for a U.S. company or to reclaim U.S. tax withholding, consult a tax accountant who is experienced in nonresident tax returns.
- Form W-8BEN is a tax form that U.S. nonresidents must fill out when they earn income from U.S. sources in order to determine their required tax withholdings.
- Canadian independent contractors earning income from U.S. sources must fill out the form, but they can use it to claim exemption from withholdings due to income tax agreements between the U.S. and Canada.
- Submitting Form W-8BEN will prevent Canadian contractors from being taxed twice—once from the Canadian government and once from the U.S. government.