What is an IRS Form, W8BEN?

What is a W8BEN?

The W8BEN, or Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) is a form which, when completed, is provided to the US income provider (Not the IRS!) in order to prevent 30% of your earnings being withheld and remitted to the IRS.

The W8BEN claims the treaty rate between Canada and the US which means you cannot be taxed by both countries on the same income, and by completing this form, you are certifying the following information to the IRS;

  • I am the individual that is the beneficial owner (or am authorized to sign for the individual that is the beneficial owner) of all the income to which this form relates or am using this form to document myself as an individual that is an owner or account holder of a foreign financial institution,
  • The person named on line 1 of this form is not a U.S. person
  • The income to which this form relates is:
    • (a) not effectively connected with the conduct of a trade or business in the United States,
    • (b) effectively connected but is not subject to tax under an applicable income tax treaty, or
    • (c) the partner’s share of a partnership’s effectively connected income,
  • The person named on line 1 of this form is a resident of the treaty country (in this case, Canada) listed on line 9 of the form (if any) within the meaning of the income tax treaty between the United States and that country, and
  • For broker transactions or barter exchanges, the beneficial owner is an exempt foreign person as defined in the instructions. Furthermore, I authorize this form to be provided to any withholding agent that has control, receipt, or custody of the income of which I am the beneficial owner or any withholding agent that can disburse or make payments of the income of which I am the beneficial owner.
  • I agree that I will submit a new form within 30 days if any certification made on this form becomes incorrect (changes).

In a nutshell, you’re telling the IRS, you are NOT a US person, that you do not work in the US and that you will report your income to the CRA.

Otherwise, they keep 30% of it.

 

The difference between C & S Corporations for dividend payments and sales

The difference between C & S Corporations for dividend payments and gross proceeds payments as far as I can make it out to be:

For dividend payments it does not matter if it is a “C” Corporation or a “S” Corporation as they are treated the same for withholding and reporting – they are exempted from withholding and reporting.

For gross proceeds (sales) the “C” Corporation is exempted from withholding and reporting, however, the “S” corporations is subject to withholding (28%) and reporting on sales beginning in 2012.

CRA releases New Forms for Treaty-Reduced Rates of Canadian Withholding Tax

The Canada Revenue Agency (CRA) recently released final versions of new forms, NR301, NR302 and NR303 which is to be provided by recipients of payments from Canadian residents to certify eligibility for treaty-reduced rates of Canadian withholding tax.

These Forms are not to be provided to the CRA, but rather to the Canadian resident payer of the withholdable amount or to certain intermediaries along a chain of payments subject to withholding.

Until recently, the CRA generally accepted reliance on the payee’s address for determining whether to apply a treaty rate. By releasing these forms, it signals that the CRA is requiring a greater level of diligence on the part of payers of withholdable amounts to be as sure as possible that the correct reduced treaty rate is applied.

Although the use of the Forms is not mandatory, and they will not guarantee avoidance of penalties, interest, or liabilities for underwithheld tax, many taxpayers will likely apply a 25% withholding rate on payments of withholdable amounts to recipients who do not complete the Forms.

The CRA is looking at the payor, to review the information provided by a non-resident on these forms, or in another format, and to make sure they have enough information to support that the non-resident is eligible for tax convention/treaty benefits on the income being paid.

In cases of inconstencies, the CRA is looking for intermediaries, prior to establishing a withholding tax rate, to question the information given and look at other information received from the non-resident, or known about the non-resident, if the payer knows or has reasonable cause to believe that the information on the form:
• is not correct or is misleading;
• contradicts information in the payer’s files; or
• is given without knowledge or consideration of the facts of a situation.

Forms are valid for the earlier of 2 years, or a change in the eligibility for convention benefits.

* Completing Form 301 is not mandatory. However, if a non-resident refuses to provide certification of beneficial ownership, residency, or eligibility for treaty benefits on request by a payer, the full statutory rate should be withheld.

One question that came up after the release of these forms was that they do not address holding global securities through CDS or DTC.

For some direction, you need to check the update to IC76-12, “Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries with Which Canada Has a Tax Convention” related to Forms NR301, NR302, and NR303.

In this update, the CRA states that payments made to CDS on securities registered in the name of Cede & Co. (the nominee name for DTC) are made without tax. Tax will be withheld by CDS based on information received from DTC and collected by DTC’s participants.

I recommend you read the news release below to familiarize yourself with these forms.

The link to the release follows; http://www.cra-arc.gc.ca/formspubs/frms/nr301-2-3-eng.html

Here are the forms;

Form NR301, Declaration of eligibility for benefits under a tax treaty for a non-resident taxpayer; http://www.cra-arc.gc.ca/E/pbg/tf/nr301/nr301-10e.pdf

Form NR302, Declaration of eligibility for benefits under a tax treaty for a partnership with non-resident partners; http://www.cra-arc.gc.ca/E/pbg/tf/nr302/nr302-10e.pdf

Form NR303, Declaration of eligibility for benefits under a tax treaty for a hybrid entity; http://www.cra-arc.gc.ca/E/pbg/tf/nr303/nr303-10e.pdf

Withholding rates for debt instrument – Canada / US

As a follow up to a question I was aksed a few weeks ago about Corporation X’s proposed issuance of about $100 million of debt to be packaged and marketed by a foreign institution, I am providing the general withholding tax rules and one of the exceptions that would be applicable to Corporation X’s proposed debt issuance.

Generally, interest paid from US sources to foreign corporations is subject to US withholding at a rate of 30% or the lower rate under an applicable tax treaty.

Interest would be considered US-source if paid by a US citizen or resident or by a domestic corporation. However, no withholding tax is applied to US-source interest payments in the case of
interest on “portfolio debt obligations” of US issuers, defined as corporate and partnership debt issued in registered form and held by persons who own less than 10% of the equity of the issuing corporation (or less than 10% of the capital or profits if the issuing entity is a partnership).

Bearer instruments may also qualify if applicable guidelines are met.
The portfolio exemption does not apply to contingent interest, i.e. interest calculated by reference to the receipts, sales, income, profits, assets, or dividends of the debtor or a related party.

Withholding, Roth IRA’s and Part XIII

Last week I was approached by a CEO of a very large US Corporation who was questioning the need to have withholding tax taken off his dividend payment, when the funds were earmarked for his Roth IRA.

From pervious communication on this matter I knew there should be no withholding, but I wanted something more concrete to put on my website in order to have for nay future queries and to educate all of you who look for an answer.

So I called the CRA international office and they confirmed that the dividend paid to U.S. holder who registered in Individual Retirement Accounts (“IRAs) are not subject to Part XIII (non-resident withholding) tax.

Also they advised me that there is no specific document regarding IRAs provided on CRA website.

Please see below statement from Canada – U.S income tax convention:

http://www.fin.gc.ca/treaties-conventions/USA_1-eng.asp

ARTICLE 13
3. For the purposes of this Convention:
(a) The term “pensions” includes any payment under a superannuation, pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances and amounts paid under a sickness, accident or disability plan, but does not include payments under an income-averaging annuity contract or, except for the purposes of Article XIX (Government Service), any benefit referred to in paragraph 5; and
(b) The term “pensions” also includes a Roth IRA, within the meaning of section 408A of the Internal Revenue Code, or a plan or arrangement created pursuant to legislation enacted by a Contracting State after September 21, 2007 that the competent authorities have agreed is similar thereto. Notwithstanding the provisions of the preceding sentence, from such time that contributions have been made to the Roth IRA or similar plan or arrangement, by or for the benefit of a resident of the other Contracting State (other than rollover contributions from a Roth IRA or similar plan or arrangement described in the previous sentence that is a pension within the meaning of this subparagraph), to the extent of accretions from such time, such Roth IRA or similar plan or arrangement shall cease to be considered a pension for purposes of the provisions of this Article.

Now you know!

US Source Income IRS remitting and reporting rates and requirements.

IRS Remitting and Reporting requirements for U.S. sourced income securities:
•For a US holder that is W9 certified- no IRS backup withholding tax. They receive a 1099DIV form
•For a US holder without a W9 submitted – 28% IRS backup withholding tax needs to be deducted. They receive a 1099DIV form
•For a non-US holder that is W8 certified – IRS NRA tax will be deducted based on the maximum 30% rate or US treaty rate, if applicable – They recieve a 1042-S
•For a non-US holder without a valid W8 – 30% IRS NRA tax will be deducted. They receive a 1042-S.

Tax Treaty signed between Canada and the Republic of Namibia

The Department of Finance has announced that a tax treaty between Canada and the Republic of Namibia for the avoidance of double taxation and the prevention of fiscal evasion was signed on March 25, 2010, in Windhoek.

The treaty limits the rate of withholding tax to 5% for dividends between affiliated companies and 15% for dividends in all other cases, and 10% for interest and royalties.

The treaty will enter into force once both countries have taken the necessary ratification measures and have notified each other of such ratification.

The full text of the treaty can be found on the Department of finance website.

http://www.fin.gc.ca/treaties-conventions/namibia-eng.asp

This treaty is NOT in full force yet.