Introduction-Form W-8BEN-E: a common request by American suppliers from Canadian businesses
The US has always been Canada's largest trade partner. Indeed, as of 2022, trade volume with the US alone accounts for two third of Canada's worldwide volume and is about five times that of the runner up, the European Union. Likewise, as of 2023, Canada is still the largest trade partner of the US even though Mexico and China are not very far behind. With such a high level of interconnectedness between the two neighbouring economies, it is very common for a business in one country to have customers and suppliers across the border.
If you are a Canadian business with suppliers in the US, you are likely to find yourself being asked by your American suppliers to fill out the Form W-8BEN-E for American withholding tax purpose. In this article, we will take a look at the tax consequences of business profits for an active non-financial foreign entity ("NFFE") from Canada and how to navigate the IRS Form W-8BEN-E. More on active NFFE below.
American withholding tax on business profits for a Canadian business
The question whether your business may face any tax obligations in the US lies in the tax treaty between Canada and the US. For the purpose of this article, the following analysis and instruction regarding Form W-8BEN-E rely on a number of assumptions, which are laid out below.
Assuming that the company is created only in Canada (and not in the US), then it shall be deemed to be a tax resident only in Canada (and not in the US), per Article IV.3(a) of the Canada-US tax treaty.
Generally speaking, a tax resident in Canada is only liable for taxation in Canada. However, it might also be liable for taxation in the US in certain circumstances such as, among others, when the business profits are earned through a permanent establishment ("PE") in the US, and only to the extent of the business profits that are earned through that PE in the US. A PE means a fixed place of business where the business is carried on, including a place of management, a branch, an office, a factory, a workshop, a mine, etc. Assuming that the company does not have any PE in the US, then the US cannot tax your company's business profits, per Article VII.1 of the tax treaty.
If your company in the course of business engages a subcontractor or a partner in the US, there could be an argument that those subcontractors or partners in the US are your dependent agents, acting on your behalf in the US, and thus might be deemed to be your PE in the US. However, it is a relatively high bar for a person to be deemed a dependent agent, as such an agent must, among other things, have the authority to conclude contracts on your behalf. Assuming that your subcontractors or partners in the US act independently, then typically the US cannot tax your company's business profits.
Filling out Form W-8BEN-E
With that in mind, in Form W-8BEN-E, you would fill out:
- Part I. Identification of Beneficial Owner
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- In Line 5, assuming that your company is an active non-financial foreign entity, tick "Active NFFE".
- In Line 9, provide you CRA Business Number in 9b Foreign TIN (tax identification number).
- Part III. Claim of Tax Treaty Benefits
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- In Line 14, tick "a" and fill in "Canada".
- In Line 15, fill in "VII.1", "0", "business profits", and "the beneficial owner does not carry on business through a permanent establishment situated in the U.S."
- Part XXV. Active NFFE
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- In Line 39, tick "I certify", assuming that your agency is (i) not a financial institution, (ii) earned less than 50% gross income from passive sources (examples of passive sources include dividends, interest, rents, royalties, annuities, etc.) in previous calendar year, and (iii) holds less than 50% assets that produce or are held to produce passive income.
- And of course, Part XXX. Certification.
Upon filling out the form, give it to your customers in the US (so-called the withholding agents). Do not send it to the IRS.
Pro-tax Tips-Seek experienced tax lawyers when filling out Form W-8BEN-E
Business profits will not be subject to US withholding tax if your company is created only in Canada and does not conduct business through a PE in the US. Filling out Form W-8BEN-E is relatively simple if your company is an active NFFE.
Again, the above analysis and instruction are based on the aforesaid assumptions which might not match your particular situation. It will get more complicated where you are a financial institution or a passive non-financial foreign entity, where you earn profits through a PE in the US, or where the income is otherwise not business profit. Our experienced Canadian tax lawyers will be happy to assist you further with a detailed review and advice.
FAQ
What determines if a Canadian company is liable for US taxation on business profits?
A Canadian company created only in Canada is liable for US taxation on business profits earned through a permanent establishment (PE) in the US, as per the Canada-US tax treaty. If a company does not have a PE in the US, its business profits cannot be taxed by the US.
When could subcontractors or partners in the US be considered a PE for a Canadian company?
Subcontractors or partners in the US could be deemed a PE of a Canadian company if they act as dependent agents for the company, as evidenced by, for instance, having the authority to conclude contracts on the company's behalf. However, this is a high bar and typically, when they act independently, the US cannot tax the Canadian company's business profits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.