This is a common question and it is a valid one because a form W-8BEN can be confusing if you don’t understand why you’ve been asked to complete one.
Being asked to complete one likely means you are doing (or have done) business with a U.S. company and because of that, you will be receiving income from that company. But just like in Canada, American companies must withhold income taxes on incomes being paid. Failing to complete a form W-8BEN means that company is only legally allowed to pay you 70% of your invoice and must send the remaining 30% to the IRS. As you are a Canadian residing in Canada, you usually don’t need to pay U.S. income tax as you already pay Canadian income taxes. But reclaiming your missing 30% can become an annoying exercise in paperwork.
This is where a form W-8BEN comes in. By simply completing it before receiving payment, you claim U.S.-Canada tax treaty benefits and avoid having your business income taxed by the U.S. Government.
Claiming tax treaty benefits doesn’t only apply to small business owners; it applies to anyone who does business south of the border. You need to complete a form W-8BEN, for example, if you have an interest bearing bank account with a U.S. bank, have published a book with an American publishing house and are expecting to receive royalties, or have acted as a consultant or contractor for a U.S. company. Whatever the case may be, as a Canadian resident doing business in the United States, you need to complete a form W-8BEN stating that you are merely conducting business while residing in Canada.
For most sole proprietors doing business with a U.S. company, here is how to fill out question 10 in Part II of form W-8BEN. If you’re claiming royalties or interest, a different Article applies, so get in touch and we’ll help you out. The rest of the form is comparatively straightforward.
Special rates and conditions (if applicable—see instructions): The beneficial owner is claiming the provisions of Article and paragraph Article VII of the treaty identified on line 9 above to claim a 0% rate of withholding on (specify type of income): Business profits.
Explain the additional conditions in the Article and paragraph the beneficial owner meets to be eligible for the rate of withholding: The beneficial owner is a resident of Canada, does not carry on business in the United States.
Now, one important thing to note — we are talking about a form W-8BEN, not a form W-8BEN-E. The first is for individuals and is a straightforward one-page form; the latter serves the same purpose of claiming U.S.-Canada tax treaty benefits but is for corporations. It is a multi-page, multi-section questionnaire that is far more complex and requires a far greater amount of detail.
If you have received a form W-8BEN-E, or if you need help completing a form W-8BEN, please get in touch!