Are you a Canadian resident or sole proprietor who receives payment from U.S. companies? Then this article is important for you.
Why? Because it will help you keep more of your money in your pocket.
U.S. companies that make payments to foreign contractors are required to withhold 30% tax on those payments. The company, referred to as the withholding agent, is responsible for deducting and withholding that tax from the contractor’s income and paying it to the Internal Revenue Service (IRS).
If the withholding agent fails to do this, they can be held personally responsible for paying the tax owed by the contractor. For this reason, U.S. companies typically take every precaution to ensure that this obligation is being met.
For Canadian residents, this means you’ll be taxed twice on any income you earn from U.S. sources: once in the U.S. and again in Canada.
Residents of foreign countries can have their withholding reduced or eliminated if their country of residence has an existing Income Tax Treaty with the U.S.
Canada and the U.S. have very close economic ties. Many citizens and residents of the U.S. work invest and conduct business in Canada and vice versa. To avoid double taxation, the two countries signed a tax treaty.
The Canada-U.S. Income Tax Treaty ensures that residents of the U.S. and Canada are not taxed by each of the two countries on the same income in the same year.
To avoid being double taxed you must fill the form and give to the company who make the payments to you.
Article VII of the tax treaty between Canada and the U.S. provides that business profits earned in the U.S. by Canadian residents are taxed in the U.S. only to the extent that those profits are related to a permanent establishment in the U.S.
It means if you don’t have an office or another place of business in the U.S., income from U.S. sources is not taxable so long as you pay tax on that income to Canada.
A Canadian resident notifies the U.S. company that the tax treaty applies to their situation by filing the form.
By providing a completed form, you are confirming that you are:
o Not a U.S. resident
o The beneficial owner of the income
o Claiming a reduced rate or an exemption from withholding as a resident of a foreign country with which the U.S. has an income tax treaty.
If you choose to do not complete the form, the withholding agent is required to withhold 30% of any amounts subject to withholding. That includes interest, dividends, rents, royalties, and compensation.
If money was withheld erroneously, you should contact the accountant to fix this. You may prefer to find an accountant who is experienced with non-resident tax returns.
Don’t ignore to complete this form and give to the company who pays you. Because if you will ignore, they will take from you 30% and will pay to IRS. After that you will have to run after IRS to take this back.