Are you a Canadian sole proprietor who receives payment from U.S. companies? Then you need to know about Form W-8BEN.
Every Canadian freelancer or sole proprietor appreciates a good U.S. client or two. With a population that’s nearly 10 times higher than ours, the U.S. is home to big and small companies in all kinds of industries.
In fact, it’s not unusual for a talented Canadian graphic designer, writer, PR maven, IT specialist, or other sole proprietor service provider to have American clients. With similar cultural references and business processes, working together is often a seamless experience. And with the proliferation of online and virtual business relationships, it’s possible that a U.S. client isn’t even aware of where their service provider resides when they begin working with them!
A favorable exchange rate may even mean Canadians can pull in some extra bucks when working with an American client, doing the same work they provide to Canadian clients.
However, working with U.S. companies means you need to be aware of applicable tax legislation, including Form W-8BEN. Here are all the answers you need to understand and complete Form W-8BEN.
- How Does U.S. Tax Law Affect Canadian Sole Proprietors?
- Does Canada Have a Tax Treaty with the U.S.?
- What Is a W-8BEN Form?
- Who Needs to Fill Out a W-8BEN Form in Canada?
- What’s Considered Income on a W-8BEN Form?
- How Often Do You Need to Fill Out Form W-8BEN?
- What If You Don’t Fill Out Form W-8BEN?
- What Happens If a U.S. Client Withholds Tax in Error?
- When Do You Need to Fill Out a W-8BEN Form?
- How Do I Fill Out Form W-8BEN in Canada?
- What Else Should I Remember About Form W-8BEN?
How Does U.S. Tax Law Affect Canadian Sole Proprietors?
U.S. companies usually withhold 30% tax on income they pay to foreign contractors. Your American client company, referred to as the withholding agent in tax parlance, is responsible for deducting and withholding this tax from the contractor’s income and paying it to the Internal Revenue Service (IRS).
If they fail to do this, they can be held responsible for paying the tax owed by the contractor.
For Canadian sole proprietors, this means you could be taxed twice on any income you earn from U.S. sources: Once in the U.S. and again in Canada.
Does Canada Have a Tax Treaty with the U.S.?
The short answer? Yes.
Due to their close proximity, Canada and the U.S. have always had strong economic ties. Many citizens and residents of the U.S. work, invest, and conduct business in Canada and vice versa. To avoid double taxation, the two countries signed a tax treaty.
The Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital (also known as the Canada-U.S. Income Tax Treaty) ensures that residents of the U.S. and Canada are not taxed by each of the two countries on the same income in the same year.
Most importantly for Canadian sole proprietors who serve U.S. clients, Article VII of the treaty stipulates that business profits earned in the United States by Canadian residents are taxed in the U.S. only to the extent that those profits are related to a permanent establishment in the U.S.
In other words, if you don’t have an office, branch, or another place of business in the U.S., income from U.S. sources is not taxable so long as you pay tax on that income to Canada.
Canadian sole proprietors with U.S. clients can claim exemption from tax withholdings thanks to the Canada-U.S. income tax treaty by filling out what’s commonly known as Form W-8BEN. This is usually issued directly to your U.S. client so they can file it with their corporate taxes.
What Is a W-8BEN Form?
Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), is an IRS tax document. By providing a completed Form W-8BEN, you are confirming that you are:
- Not a U.S. resident
- The beneficial owner of the income for which Form W-8BEN is being provided
- Claiming a reduced rate or an exemption from withholding as a resident of a foreign country with which the U.S. has an income tax treaty
Form W-8BEN allows Canadians, and other foreign contractors from countries with similar treaties with the U.S., to claim exemptions or special withholding rates. Canadian sole proprietors or independent contractors can claim an exemption from withholdings (i.e., not have their payments from U.S. clients taxed at a 30% rate). Rather, the payment would be taxed at a 0% rate thanks to the tax treaty. You will instead pay the taxes on that income in Canada.
Who Needs to Fill Out a W-8BEN Form in Canada?
If you’re a sole proprietor who receives payment from a U.S. client, you must submit Form W-8BEN to the company that is paying out the income. The form includes a declaration that you’ll include this income on your Canadian tax return.
Your client is required by the United States to ascertain your status as a non-U.S. person to determine the amount of withholding required to be withheld from their payments to you.
What’s Considered Income on a W-8BEN Form?
For U.S. tax purposes, it’s not just payments for your services that are considered income. Also included are:
- Interest or dividends
- Additional fixed gains
How Often Do You Need to Fill Out Form W-8BEN?
Unless your circumstances change dramatically, your W-8BEN form will typically remain in effect until the last day of the third calendar year after you sign it. For example, if you submit the form to a U.S. client on December 1, 2019, it will be effective until December 31, 2022.
What If You Don’t Fill Out Form W-8BEN?
If you choose to ignore a U.S. client’s request to complete Form W-8BEN, they will be required to withhold 30% of any amounts subject to withholding. That includes interest, dividends, rents, royalties, and, most relevant for you, compensation.
What Happens If a U.S. Client Withholds Tax in Error?
You can attempt to prepare the 1040-NR by carefully following the instructions, but you may prefer to find a tax accountant who is experienced with non-resident tax returns.
When Do You Need to Fill Out a W-8BEN Form?
Good question. Form W-8BEN is applicable only for individuals or sole proprietors.
If you are a corporation, partnership, or another business entity, you’ll use Form W-8BEN-E. This form is much longer due to information required by the Foreign Account Tax Compliance Act (FATCA) for foreign entities.
How Do I Fill Out Form W-8BEN in Canada?
Filling out Form W-8BEN is fairly straightforward. Here’s what to expect:
- Line 1: Name of individual who is the beneficial owner
- Line 2: Country of citizenship
- Line 3: Permanent residence address
- Line 4: Mailing address (if different from above)
- Line 5: U.S. taxpayer identification number, i.e., Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
Note: If you’re not eligible for an SSN, you can apply for an ITIN by filing Form W-7 with the IRS. It usually takes four to six weeks to get an ITIN. However, if you have a Social Insurance Number (SIN), you can skip this line and enter your SIN on Line 6
- Line 6: Foreign tax identifying number (i.e., Canadian SIN)
- Line 7: Reference number (leave blank in most cases)
- Line 8: Date of birth
- Line 9: Input your residence country (Canada)
Note: Under the tax treaty between Canada and the U.S., Canadian taxpayers pay a 0% rate of withholding tax under Article VII
- Line 10: Special rates and conditions (typically not applicable for sole proprietors)
- Certification that the information you enter is true, correct, and complete
The W-8BEN is filed with the withholding agent, so there is no need to mail a copy to the IRS. Generally, your W-8BEN will remain in effect for three years, unless a change in circumstances makes any information on the form incorrect.
What Else Should I Remember About Form W-8BEN?
Completing Form W-8BEN confirms to the IRS that you are not a U.S. resident, that you do not work in the U.S., and that you will report your income to the Canada Revenue Agency.
Whether you complete the form yourself or ask your tax advisor to assist you with completing it, don’t ignore your client’s request for this important form! Without it, they’ll send 30% of your payments to the IRS, and you’ll have to jump through even more hoops to get it back.
This post was updated in March 2021.