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 and submit Form W-8BEN. Form W-8BEN also allows people from countries with which the U.S. has agreements to claim exemptions or special withholding rates. This means that Canadian independent contractors can claim an exemption from withholding.
The United States-Canada Income Tax Convention
The United States-Canada Income Tax Convention resulted in a treaty between the countries, signed in September 1980. The U.S. Senate advised that the treaty be ratified in June 1984 after numerous adjustments and changes. The tax treaty went into effect in January 1985. It prevents Canadians from having to pay the U.S. government a tax on income earned here on top of taxes paid to the Canada Revenue Agency for the same income. The protocols have been since were amended slightly in 1997, 1995, and 2007. You can avoid having your business income taxed twice by both the U.S. and Canada as a result, but you must meet the residency rules and the fixed-place-of-business rules. Article VII of the tax treaty provides that business profits earned in the U.S. 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 such as interest, dividends, royalties, compensation for services, or other forms of income must submit Form W-8BEN to the person or entity that provides the income. That person or entity is then required to withhold and file income taxes from those payments unless the contractor can show that they’re exempt. You’re required to submit a properly completed Form W-8BEN to the party or company that’s providing you with income if you’re a Canadian contractor earning income from a U.S. source. The form includes a declaration that you’ll include this U.S. income on your Canadian tax return. Your Form W-8BEN will remain in effect until the last day of the third calendar year after you sign it unless your circumstances change significantly. The form would remain effective until December 31, 2023, if you signed it on December 1, 2020, unless something changes in your status to invalidate it sooner.
Determining Your Canadian Residency
Your ability to claim an exemption hinges on your ability to claim residency and your 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.” You’re treated as a resident of Canada if your permanent home is there. Article IV clarifies your residency status using a tiebreaker rule if you’re a dual-resident taxpayer in both Canada and the U.S. The following criteria decide your residency:
Where you have a permanent homeWhere you have closer personal and economic relationships (known as a “center of vital interests)” if you have a permanent home in both placesWhere you habitually live if your center of vital interests cannot be determinedWhere you’re a citizen if you live in both countriesWhere the U.S. and Canada mutually agree that you’re a resident if you’re a citizen of both countries or neither country
You’re considered to be a resident of the country where that government is located if you’re employed by a state, local, or federal government.
Locating Your Fixed Place of Business
You may have one or more business locations if you’re an independent contractor or business owner. Working through or with U.S. companies doesn’t itself establish the U.S. as your fixed place of business. Your fixed place of business is a permanent establishment where your business is wholly or partly carried on, such as:
Place of managementOffice or branchFactory or workshopExtraction location for natural resources, such as a mine, oil or gas well, or quarryBuilding or construction site (but 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)
The locations of your fixed places of business impact where you’re considered a resident and where you must pay taxes. You’re treated as a Canadian contractor doing business with U.S. companies if your fixed place of business is in Canada.
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. Simply fill it out and return it to them when you have a copy. 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, but 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. 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. File it along with Form 8833 to disclose your position under the U.S.-Canada Tax Treaty. Consult a tax accountant who is experienced in nonresident tax returns for any tax forms that you must fill out to conduct business, whether it’s to work for a U.S. company or to reclaim U.S. tax withholding.
