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If you’re a Canadian resident who receives business or investment income from the U.S., find out how U.S. withholding tax works and how to pay less.
U.S. withholding tax often applies to U.S. income received by Canadian residents who own U.S. assets or work for U.S. companies as a sole proprietor or independent contractor. In general, the U.S. charges 30% withholding tax on income earned by foreigners. Taxable income may include interest, dividends, royalties and other payments. Withholding tax may also apply to purchases of real estate or interests in partnerships.
The U.S. government has a tax treaty with Canada to avoid double taxation and to help prevent tax evasion. Under this treaty, Canadians can earn dividends and interest in registered retirement savings plans (RRSPs) and certain other retirement plans tax-free. Unfortunately, this exemption doesn’t apply to tax-free savings accounts (TFSAs), registered education savings plans (RESPs) or other registered accounts.
You can reduce the tax you pay by filing the W-8BEN form every three years. This form certifies that you are not a U.S. resident, you report your income to the Canada Revenue Agency (CRA), and you wish to pay tax at the reduced rate available to Canadians under the treaty. This form is found on most bank and online brokerage websites. It must be filed with the “withholding agent”—your investment dealer—or U.S. client, if you are receiving business income.
Example: “When Maha rented out her cottage in Nantucket, she filed a W-8BEN to reduce the withholding tax the U.S. government charged on her rental income.”
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