If you’re a Canadian business with a customer in the US you may have been asked to fill out a W8-BEN-E form. Before retaining a US tax specialist or planning your getaway from the IRS, there are a few things you should know about the form.
When doing business with a foreign entity, certain rules apply on payments. For example, when paying a vendor outside of the country, at times the customer is required to withhold a percentage of the fee and remit it to the tax authorities. For example, suppose a US company requires graphic design services and retains a designer based in Vietnam. If the designer charges the US company $100 for the work, $15 may need to be remitted to the IRS and the designer may only receive the net $85.
This type of tax which is deducted at source is called a ‘withholding tax.’ The idea is to ensure that foreign entities doing business in the home country are paying their share of taxes – even though in their own countries their tax rates may differ considerably. It’s also a way of deterring tax evasion so that someone living in a tax free zone can’t withdraw their income from the home country tax free.
In order to make it easier to do business with foreign entities, many countries have tax treaties with each other. While the treaties themselves are long and complex, the idea is to solidify where the income is actually taxed.
The idea behind the W8-BEN-E form is to determine if any withholding taxes should be deducted on payments to you or if they can be paid out in full. Your US customer is essentially placing the onus on you to let them know the tax treatment of the money they owe you.
For most active Canadian companies, the W8-BEN-E form will be used to determine that no withholding taxes should apply on the money paid to you due to the Canada – US tax treaty. By stating that you’re an ‘Active NFFE’ (Part XXV in the 2016 version of the form), you’re stating that you’re not a financial institution and that more than half of your income was produced from active business in Canada. If you’re offering a service like web development, graphic design, or any kind of consulting, you’re probably an NFFE. That being said, if you’re a holding company or own a substantial amount of corporate investments, you may want to review the form with an accountant. You may also want a professional opinion if you own an online store or sell on Amazon since specific rules apply on shipments of products to the US. Finally, if you’re not incorporated, you’ll likely need to use the W8-BEN form which is a simpler version of the W8-BEN-E.
As an ‘Active NFFE,’ you can typically sign and date the form then submit to your customer – certifying that the income that the form relates to is exempt from withholding tax. With that, you should be able to rest easy that you’ll be getting paid in full from your US customer and don’t have to deal with the IRS!