How To Reduce Or Eliminate US Withholding Tax For Canadians?

Have you heard of W-8BEN or W-8BEN-E? Read on to learn more.

U.S. companies that make payments to non-US contractors are typically required to withhold tax on those payments. The company, referred to as the withholding agent, is responsible for deducting and withholding that tax from the contractor’s income and paying it to the Internal Revenue Service (IRS).

If the withholding agent fails to do this, they can be held personally responsible for paying the tax owed by the non-US contractor. For this reason, US companies typically take every precaution to ensure that this obligation is being met.

Tax Treaties Can Help!

Residents of foreign countries can have their withholding reduced or eliminated if their country of residence has an existing Income Tax Treaty with the US.

Canada and the US have very close economic ties and many citizens and residents of the US work, invest and conduct business in Canada and vice versa. To avoid double taxation, the two countries signed a tax treaty.

The Canada-USA 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.

Article VII of the tax treaty between Canada and the U.S. provides that business profits earned in the U.S. 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.

A Canadian resident notifies the US Company that the tax treaty applies to their situation by filing Form W-8BENCertificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individual).

In brief, 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.

A 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.

If you need any help filling completing the W-8BEN or W-8BEN-E forms, please contact us for assistance.

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