Author: Grant Gilmour, CPA, CA
What is an Internal Revenue Service (IRS) form W-8BEN and why do I need one?
More and more people that do business with American businesses or have American investments are being asked, even out right demanded, to file a W-8BEN. If they do not fill it in and return it, they will not get paid. If they do fill it in but make a mistake, then they may be paid less than they should be. Refunds of overpayments are very challenging and involve deeper tax issues, including the requirement to file US tax returns.
The United States Government has been tightening documentation and control of funds paid out of the United States of America (USA) to non-residents over the past few years. You may have heard of the Foreign Account Tax Compliance Act (FATCA) and other measures that require US resident businesses to report transactions and investments, such as bank accounts, with non-residents of the USA and other non-resident businesses. It is surprising how many people have some financial link to the USA and thus, how many people may be asked to file a W-8BEN.
So what is a W-8BEN? It is a form provided to you, a non-resident of the USA, by a company or business in the USA that pays you money. That might be money for goods or services or it may relate to your US investments. There are many situations where a USA company would pay a business or individual in Canada (or outside of the USA). The W-8BEN is required by the company you are doing business with to help them establish your non-resident status and withhold the proper taxes on payments to you. The USA resident is required to withhold 30%, in most cases, from payments to non-residents (you) unless they have proof that you are from a nation with a tax treaty with the USA. If you read the W-8BEN for individuals, for example, in part 2 it asks what country you are from and what exact Article of the tax treaty exempts you from tax or reduces your tax rate. If you do not specify the correct Article of the treaty, your withholding rate may be wrong. The default rate is 30%, but the reduced rate is 0% in many cases, and 5% or 15% in others. Not completing the form correctly can cost you a lot of money! The W-8BEN form for individuals is only 1 page and has only 3 parts while the W-8BEN-E form for businesses is 8 pages long and has 29 parts. Being a business, therefore, results in a much longer and more complex form completion process in order to arrive at the correct withholding rate.
If you would like to discuss if your company requires a W-8BEN, please contact Gilmour Knotts Chartered Accountants.Download a copy of this issue