What you need to know about form w-8ben in Canada

If you’re a freelancer or sole proprietor and have started working with clients or customers in the US, you might have been asked to complete a W8-BEN form.

This is an important piece of paper, as it ensures you don’t need to pay tax twice on US sourced income. The document confirms to your employer that you’ll pay your tax to the CRA, so they should not withhold money from your income to cover your US tax liabilities. However, if you fail to submit the WB-BEN on time, you may find 30% of your money is withheld at source¹.

Here’s what you need to know about the W8-BEN form and how to complete it.

• What is form W8-BEN, and what counts as income under the rules
• Who needs to fill out the form
• How do you fill out the form
• What different types of W8-BEN forms are there

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What is form W8-BEN?

If you earn an income from the US, but don’t live there, form W8-BEN is used to make sure you don’t have income withheld due to US tax requirements.

Let’s say you’re a Canadian freelance graphic designer, and you’re working on a project with a US company.

Under normal circumstances, the US company is required to withhold 30% of your earnings, as a prepayment on your American taxes. However, if you’re already paying tax on your income to the Canadian Revenue Agency (CRA), you can complete the W8-BEN form and give it to your client, to confirm that they should release your full payment with nothing withheld.

This works because the US and Canada have a tax treaty which is in place to stop double taxation². You should not have to pay tax twice on the same income - so as a Canadian, paying taxes to the CRA, you probably don’t need to pay tax to the US authorities.

There are a couple of important caveats here, of course.

Firstly - this particular form applies only if you’re a freelancer or sole proprietor. Different paperwork is needed for other business types. If you’re ever unsure about your tax status, seek professional advice. Getting this wrong can be costly.

Secondly - you may need to pay tax in the US if you have a business office or branch there, or if you become a US tax resident due to spending a lot of time south of the border.

And finally - the tax treaty can only be applied if you complete and submit the form on time. If not, your client will withhold 30% of your money - and you’ll have to complete yet more paperwork to see it again.

What counts as income under the W8-BEN rules?

It’s worth noting that income is not just payment for services provided. You’ll also need to complete this form if you get any of the following from US sources³:

• Interest or dividends
• Royalties
• Rental income
• Premiums
• Annuities
• Other fixed gains

Who needs to fill out form W8-BEN?

If you’re a non-US citizen, and don’t reside in the US for tax purposes, but you earn an income from clients there, you probably need to complete the W8-BEN form³⁺⁴. If you fail to complete this paperwork, you’ll end up paying tax twice on your US sourced income.

It’s worth noting, though, that the W8-BEN form is usually only used for people like freelancers and sole proprietors - there are other documents you’ll need to complete if you have a different business type, like a corporation or partnership. Make sure you’re completing the right form - and take qualified legal advice if you’re unsure.

How do I fill out form W8-BEN?

You can find the W8-BEN form on the Internal Revenue Service (IRS) website, along with instructions about how to complete it. Here are a few helpful pointers to get you started³:

• The address you enter on line 3 should be your tax residence, or where you usually live if you don’t have a tax residency status. It can’t be a PO Box or an address of a bank for example
• If you don’t have an ITIN - a tax number issued by the US authorities - you can apply for one, or enter your Canadian SIN on Line 6 which asks for a foreign tax number, instead
• Assuming you’re claiming tax relief in the US under the Canadian/US tax treaty, you’ll need to confirm on Line 9 that you’re a Canadian resident
• Line 10 may not be relevant - it’s used if you’re claiming some specific benefits, and mainly applies to foreign students and researchers, and some people earning royalties in the US
• Sign, date, and submit your form in good time so your income is not withheld unnecessarily

Don’t forget that your W8-BEN form lasts only for a fixed period, and will be invalidated if your situation changes. Your form will be active from the date signed, until December 31st of the third succeeding calendar year, providing your circumstances remain the same.

Which W-8 forms are there, and what’s the difference between them?

There are a few different variants on the W-8 form which have different uses.

W8-BEN

As we have reviewed, this form is for foreign persons, like sole proprietors and freelancers, who are completing it themselves.

W8-BEN-E

Used by foreign business entities like partnerships and corporations

W8-IMY

Completed by intermediaries on behalf of foreign individuals and companies, when these intermediaries have received withholdable payments on behalf of these foreign individuals or companies.

W8-ECI

Used by foreign individuals earning an income connected to trade or business in the US, although not if your connection is via a partnership

W8-EXP

This form is used by, for example, foreign governments, foreign tax exempt companies or private organizations to claim a reduced rate of withholding, or an exemption.

Getting the correct form first time will save you time and potentially a lot of hassle. If you’re not sure which form to use, take professional advice from a tax accountant before you get started.

Tax is seldom anybody’s favourite part of running a business. But having your income wrongly withheld because of a lack of paperwork is even worse.

If you’re working with clients or customers in the US, it’s important to understand and submit the correct W8 form for your situation, early - so you don’t end up chasing your money later. Take advice from a tax specialist if you need it, and make sure you get your W8-BEN form completed correctly and on time, so there are no nasty surprises later.

What is Wise Business? You can read more here

Sources used for this article:
1.Blog - Tax Tips for Canadians Who Work for U.S. Companies
2.CRA - Convention Between Canada and the United States of America
3.IRS - Instructions for Form W-8BEN
4.IRS - About Form W-8 BEN
*All sources checked on June 26, 2020