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US Withholding for Canadian Independent Contractors

Using Form W-8BEN to Claim US-Canada Tax Treaty Benefits

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American companies generally withhold income taxes on income being paid to foreign nationals. The US firm will need your name, address and tax identification numbers to facilitate payments to you and any tax withholding required by the US government; this information is obtained using Form W-8BEN.

Residency Rules

You are a resident of that country in which you have a "permanent home." If you're permanent home is in Canada, then you are a resident of Canada. Article IV of the treaty clarifies your residency status if you have some other living situation.

Fixed Place of Business Rules

Your business may 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 meaning of permanent establishment.

For example, you have only one office, and it is located in Canada. Canada is your fixed place of business. However, if you have two offices (Canada and United States), then you have two fixed places of business, and you must treat each office differently for income tax purposes.

Even though you work through or with various US companies, that does not establish the US as your fixed place of business. This is clarified in Article V, paragraphs 6, 7, and 8 of the tax treaty.

Avoiding Double Taxation

If you meet the residency rules and fixed place of business rules, you can avoid having your business income taxed twice (by the US and Canada). Article VII of the tax treaty provides that business profits earned in the United States by Canadian residents is taxed in the US only to the extent the profits are related to a permanent establishment in the US.

Withholding

Normally, US companies are required to "withhold 30% of any payment of an amount subject to withholding made to a payee that is a foreign person" (Instructions for Form W-8BEN). Withholding is essentially a prepayment of tax. The amount withheld could exactly pay for any US tax, or the withholding could be too high (so that you have overpaid any US tax), or the withholding could be too low (so that you have underpaid any US tax). In order for withholding to be credited to you, the US company will use the information contained on Form W-8BEN to fill out information documents that are filed with the Internal Revenue Service.

Filling out Form W-8BEN

Provide your name in Line 1 and check "individual" in Line 3. However, if you are working under a business name, provide your business name in Line 1 and check the appropriate type of entity in Line 3.

On Line 6 write in your US tax identification number (such as a Social Security Number, individual taxpayer identification number, or employer identification number). If you do not have one of these tax numbers, leave Line 6 blank. If you provide a US tax number, your Form W-8BEN will remain in effect until any information on the form becomes incorrect. If you leave the tax number blank, the form will remain in effect until the last day of the third year after you signed the form. (So if you sign the Form on July 13, 2009, then your Form W-8BEN will expire on December 31, 2012.)

Provide your Canadian social insurance number in Line 7.

On Lines 9 and 10, you will specify that tax treaty rules that apply to you. Check Line 9a and write in "Canada." Check any other boxes if they apply to you.

If you are operating under a business name, provide your Canadian corporate tax identification number in Box 7, check the appropriate boxes on Line 9.

Claiming a Refund of Your US Income Tax Withholding

Your US clients probably will withhold some of your income. You can get this money back by filing a non-resident US income tax return Form 1040NR (PDF) along with Form 8833 (PDF) to disclose your position under the US-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.

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