US Withholding for Canadian Independent Contractors: Form W-8BEN
Using Form W-8BEN to Claim US-Canada Tax Treaty Benefits
American companies generally withhold income taxes on income paid to foreign nationals. 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.
The United States–Canada Income Tax Convention
The United States–Canada Income Tax Convention resulted in treaty entered into 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 in addition to paying the Canada Revenue Agency a tax on the same money.
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 U.S.
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. Article IV of the treaty clarifies your residency status if you have some other living situation.
A Fixed Place of Business
Your business might have one or more business locations. Your fixed place of business is a permanent establishment where your business is wholly or partly carried on. Article V of the tax treaty clarifies the definition of "permanent establishment."
For example, you might have only one office, and it's located in Canada. Canada is therefore your fixed place of business. But if you have two offices, one in Canada and one in United States, you have two fixed places of business. You must treat each office differently for income tax purposes.
Even though you work through or with various U.S. companies, that doesn't establish the U.S. as your fixed place of business. This is clarified in Article V, paragraphs 6, 7, and 8 of the tax treaty.
Rules for Withholding
U.S. companies are normally required to "withhold 30 percent of any payment of an amount subject to withholding made to a payee that is a foreign person," according to the instructions for Form W-8BEN. Withholding is essentially a prepayment of tax.
The treaty prevents this withholding provided that you meet the rules, but you must submit a properly completed Form W-8BEN to the party or company who's providing you with income. The form includes a declaration that you'll include this U.S. income on your Canadian tax return.
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 non-resident U.S. income tax return, Form 1040NR, along with Form 8833 to disclose your position under the U.S. Canada Tax Treaty. Be sure to follow the instructions for Form 1040NR carefully, or find a tax accountant who is experienced with non-resident tax returns.
Filling out Form W-8BEN
- Provide your name on line 1 and check "individual" on line 3. If you're working under a business name, however, you would provide your business name on line 1 and check the appropriate type of entity on line 3.
- Enter your U.S. tax identification number, such as a Social Security number, individual taxpayer identification number, or employer identification number, on line 6. Leave this line blank if you don't have one of these tax numbers. Your Form W-8BEN will remain in effect until any information on the form becomes incorrect if you provide a U.S. tax number, but it will remain in effect only until the last day of the third year after you signed it if you don't provide a number. Your Form W-8BEN will expire on December 31, 2022, if you sign it on July 13, 2019.
- Provide your Canadian Social Insurance number on line 7.
- Specify that tax treaty rules that apply to you on lines 9 and 10. Check Line 9a and write in "Canada." Check any other boxes that apply to you.
- Check the appropriate boxes on line 9 if you're operating under a business name, then provide your Canadian corporate tax identification number in box 7.