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 specifically excludes business profits from double taxation. Article XIV clarifies that income from services as an independent contractor will avoid double taxation as long as you meet the residency and fixed place of business rules.
Withholding
The tax treaty specifically allows for US companies to withhold income taxes on self-employed Canadian residents (Article XVII, paragraph 1). Withholding will be 10% on the first $5,000 of income, and 30% on income over that threshold. The client and independent contractor may agree on a lesser percentage of withholding if these amounts are considered "excessive" (Article XVII, paragraph 2).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). Form W-8BEN is used to inform the US company that you are "a beneficial owner that is a foreign person entitled to a reduced rate of withholding." You qualify for a reduced rate of withholding if you meet the residency and fixed place of business rules.
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, 2005, the Form will expire on December 31, 2008.)
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. In Line 10, write in "XVII" next to the word Article and write in "10" next to the percentage sign. Next to type of income write in "independent personal services." In space for an explanation, write in "individual is a resident of Canada and has no fixed place of business in the USA."
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, and change the wording on Line 10 to say "business is a resident..." and so forth.
