Since 2008 I’ve owned and operated online businesses that have received payments for services (advertising, affiliate fees) from US companies such as Google and Amazon – both as a sole-proprietorship and via a Canadian corporation. Here’s how I’ve completed the W-8BEN form for my company before it incorporated.
Before a US company will send you payment to a Canadian individual/sole-proprietorship, they are required to collect a completed W-8BEN form. The W-8BEN Form is for individuals (ex. sole proprietorship in your own name).
For entities (corporations), you’ll need to complete Form W-8BEN-E.
Why is a W-8BEN Form required?
Foreign (eg. Canadian) taxpayers that receive payments from US sources are required to complete theForm W-8BEN– Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) and submit the form to the American payor in order to comply with the Fair and Accurate Credit Transactions Act (FATCA).
TheConvention Between Canada and the United States of Americatax treaty initially signed in 1980 was developed to avoid:
- tax evasion
- double taxation
The W-8BEN form is required by the IRS to collect information about foreign individuals for reporting and tracking purposes.
Foreign individuals who receive certain types of income from U.S. based sources are subject to taxation by the US government. The American payor of this income typically withholds the appropriate amount of tax from their payment to the foreign person or business and is therefore called the “withholding agent”.
In order to determine whether to withhold taxes from the payments they issue, the withholding agent must receive a completed Form W-8BEN from the foreign payee (eg. Canadian taxpayer). This form contains the payee’s name, address, and tax identification number.
Most individuals and small businesses operating from Canada that provide services to American clients will avoid the respective withholding tax. The W-8BEN form is a formality for taxpayers in Canada who transparently and ethically provide services to US customers.
How to complete W-8BEN Form for an individual in Canada
Please note that the way the sample form below is filled out does not apply to all Canadians and should be used as a reference only. For reference, here are the IRS’s full instructions onhow to complete the W-8BEN form.
- Line 1: provide your name.
- Line 2: enter your country of citizenship
- Line 3: enter your address
- Line 4: enter a mailing address if it is different than your personal address.
- Line 5: list your U.S. tax identification number, such as a Social Security number or individual tax identification number or employer identification number. If you provide an identification number, your Form W-8BEN will remain in effect until this identification number no longer applies to you or your business.
- If you do not have one of these identifying numbers, leave Line 5 blank. In this case, is form remains in effect until the last day of the third year after signature and submission of Form W-8BEN. For example, if you sign and submit Form W-8BEN on July 13, 2017, this form will require renewal after December 31, 2020.
- Line 6: input of your Canadian social insurance number (SIN).
- Line 8: provide your date of birth
- On Line 9a, place the word “Canada” in the blank next to: “I certify that the beneficial owner is a residence of ___”.
- Part III: Print your name and sign and date the form.
What is the 30% Withholding Tax?
US companies are required by law to withhold a flat rate of 30% of any payment of an amount subject to withholding made to a payee that is a foreign person, for payment to the US government. It is essentially a prepayment of tax that the foreign individual owes the US government on the income. This tax rate applies to all US-source income that is not explicitly exempted by a tax treaty (such as the one between the US and Canada).
Avoiding the 30% tax
In addition to the specific exemption of certain types of income, treaties between the United States and foreign jurisdictions may have tests that, if met, exempt the payee from taxation and the payor from the obligation to withhold taxes.
In other words, if you meet the residency and fixed place of business rules, you can avoid having your income taxed twice (by the US and Canada).
Residency rules
If you only have a permanent home in Canada, then you are a resident of Canada and qualify to avoid the withholding tax by filling out the W-8BEN form.
If this does not describe your situation, please see Article IV of the treaty to determine which country you are a resident of (according to the treaty) for tax purposes.
Fixed place of business rules
Article VII of the Canada-U.S. tax treaty states that Canadian residents are only obligated to pay taxes on the profits earned in the United States to the extent that these profits are related to a permanent establishment (PE) (home or office) in the US. The treaty’s definition of a permanent establishment is any fixed place of business through which a non-U.S. person carries on a business wholly or in part. Article V of the tax treaty further defines the meaning of a permanent establishment.
For example, if your business operates out of one office located in Canada, your firm’s fixed place of business (PE) is in Canada and should fill out a W-8BEN form to avoid the tax. However, if your firm operates out of two locations (one located in Canada, the other in the United States), you possess two fixed places of business, which will receive different tax treatment from the U.S. government.
Note: Operating through or in conjunction with multiple American companies does not count as permanent establishment in the United States.
Further clarification exists in Articles VI, VII, and VIII of the treaty (IRS’ PDF version here)
Over to you
We’re interested to know, what kind of business do you do with US companies? Are you (or your business) exempt from the withholding tax? Let us know in the comments!
