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Why is the W-8BEN-E Form required?
Foreign (eg. Canadian) companies that receive payments from US sources are required to complete the Form W-8BEN-E – Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) and submit the form to the American payor in order to comply with the Fair and Accurate Credit Transactions Act (FATCA).
For individuals (eg. sole proprietorship in your own name), you’ll need to complete Form W-8BEN.
The Convention Between Canada and the United States of America tax treaty initially signed in 1980 was developed to avoid:
- tax evasion
- double taxation
Tax evasion
The W-8BEN-E form is required by the IRS to collect information about foreign entities (eg. corporations) for reporting and tracking purposes. It classifies the type of business based on its operations and transactions rather than its form which can be designed to enable tax avoidance or evasion.
This reporting requirement was created in response to the increasingly popular and complex schemes employed by American taxpayers who shift income offshore through foreign businesses and investments firms in order to avoid paying tax. Some tax avoidance schemes may employ overseas partners, including Canadian firms with beneficiary owners located in the United States.
Double taxation
By default, foreign entities are subject to a 30% withholding tax on most forms of US source income (interest, dividends, rents, compensation, etc.). The US payor must withhold a flat 30% of the amount they pay to the foreign (eg. Canadian) company. The payor then remits this withholding tax to the American government.
Canadian companies that meet certain criteria outlined in the tax treaty can have the 30% withholding tax reduced or eliminated entirely and the W-8BEN-E form is used to determine which of the criteria an entity meets.
Canadian companies that can avoid the 30% tax
In general, to avoid the withholding tax, an entity must:
- Have a permanent establishment in Canada, but not in the US
- Be classified as an Active Non-Financial Foreign Entities (NFFE) – All businesses that are not a foreign financial institution (FFI) (in substance or form).
Most active businesses operating from Canada and providing services to American clients will satisfy the above conditions and avoid the respective withholding requirements. The W-8BEN-E form is a formality for privately-owned Canadian businesses that transparently and ethically provide services to American customers.
How to complete W-8BEN-E Form for a Small Canadian Corporation
The following guide provides an example of how a Canadian Corporation can complete theUS W-8BEN-E formrequested by their customer/client in the US. It is to be used only by Canadian entities that are not Financial Institutions.
Please note that the way the sample form below is filled out does not apply to all Canadian companies and should be used as a reference only. For reference, here are the IRS’s full instructions on how to complete the W-8BEN-E form.
W8-BEN-E Form PDF Sample Template
- Part I 1 Enter your corporation’s name
- Part I 2 – Enter the country of incorporation (“Canada”)
- Part I 4 – Check “Corporation”
- Part I 5 – Check “Active NFFE. Complete Part XXV” SeeDefinition of Active & Passive NFFEs.
- Part I 6 – Enter corporation’s address
- Part I 9b – Enter 9 digit CRA business number (XXXXXXXXXRC0001)
- PartIII 14a – Enter “Canada”
- PartIII 14b – Check “Company with an item of income that meets active trade or business test”.
- Part XXV 39 – Check to certify that the corporation is an active NFFE. SeeDefinition of Active & Passive NFFEs.
- Part XXX – Sign, print name & date form.
1. Have a permanent establishment in Canada, but not in the US
Article VII, Business Profits, of the Canada-US tax treaty provides that:
1. The business profits of a resident of a Contracting State (Canada or US) shall be taxable only in that State (country) unless the resident carries on business in the other Contracting State through a permanent establishment situated therein. If the resident carries on, or has carried on, business as aforesaid, the business profits of the resident may be taxed in the other State (country) but only so much of them as are attributable to that permanent establishment.
According to Article V, examples of a permanent establishment (fixed place of business) are (but not limited to): place of management, office, branch, factory, workshop, mine/quarry. This provision allows some individuals and businesses operating wholly or in part in the jurisdiction of the other party to the treaty to avoid the 30% withholding tax by establishing permanent establishment.
So for a Small Canadian Corporation which actively operates a business in Canada, only has a permanent establishment(s) in Canada and provides services to US customers as part of ordinary operations is therefore exempt from all US government filings, tax payments and withholdings. They only have to report income and pay the respective taxes in Canada.
2. Be classified as an Active NFFE
Company with an item of income that meets active trade or business test
Form W-8BEN-E distinguishes an Active versus Passive NFFE to determine appropriate tax treatment. In order to qualify as an active NFFE, the entity must satisfy the conditions below as outlined by the form:
- The entity must not operate in substance or form as a financial institution;
- Less than 50% of gross income from the preceding calendar year may arise from passive income; and
- Less than 50% of the assets generate or are held for the production of passive income.
Under the current interpretation of Chapter 4 of the Internal Revenue Code, entities meeting all of the above conditions avoid the 30% withholding requirement. Most active businesses operating from Canada and providing services to American clients will satisfy the above conditions and avoid the respective withholding requirements.
Over to you
We’re interested to know, what kind of business do you do with US companies? Is your business exempt from the withholding tax? Let us know in the comments!
