On July 1, 2014, a Canada/U.S. intergovernmental agreement (IA) came into effect requiring financial institutions in Canada to begin identifying "U.S. person" account holders (for example, U.S. citizens and U.S. residents) for the purposes of disclosing specific information to the U.S. Internal Revenue Service. This agreement is a result of the Foreign Account Tax Compliance Act (FATCA), U.S. legislation that was signed into law in 2010 to address U.S. tax avoidance using offshore bank accounts. Regardless of their clients' U.S. ties or actual presence in the U.S., foreign financial institutions (FFIs), including Canadian financial institutions, are required to identify U.S. persons owning bank or financial accounts in excess of $50,000. An FFI that fails to provide this information will be subject to a 30 per cent withholding by the U.S. payee on certain payments, such as investment income, made to the FFI.
As part of this due diligence, the FFIs are asking their clients to complete IRS Form W-8. There are a number of different versions of Form W-8 but the two most common are W-8BEN and W-8BEN-E. The former deals with individuals and the latter deals with entities other than individuals. Many clients are surprised to receive these forms and can feel uneasy about completing an IRS form, especially when they are not U.S. citizens and/or they have little to no physical presence in the U.S.
The W-8BEN form serves several purposes. Historically, the form was used by U.S. institutions to document an individual's foreign (non-U.S.) status and to allow the foreign person to claim certain treaty benefits for various U.S. source payments. However, since the IA came into effect, the form is now also used by Canadian financial institutions to establish or clarify their clients' U.S. or non-U.S. status. Note that, for U.S. persons (again, a U.S. citizen or U.S. green card holder), the W-8 form should not be used; instead, form W-9 should be used (to confirm status as a U.S. person). The taxation issues associated with being a U.S. person are beyond the scope of this article, but they have been covered in several earlier issues of U.S. Tax Alert.
Once an individual completes form W-8BEN, it is returned to the financial institution and kept on file. The form is not sent directly to the IRS but the information is provided to the Canada Revenue Agency, which in turn, pursuant to the IA, will share it with the IRS. If a client fails to complete this form at the request of the financial institution, and the institution's records indicate that the client may be a U.S. person (for example, U.S. mailing address), it may assume the client is a U.S. person and unnecessarily provide bank details to the IRS.
Form W-8BEN is a one-page form and is relatively simple to complete; however, there are two comments that we regularly receive from our clients:
- 1. I have to complete Form W-8BEN but I don't have a U.S. social security number or any other U.S. tax identification number to include on the form.
Individuals may use their Canadian social insurance number (SIN) on the form. Those who do not want to provide their Canadian SIN may apply for a U.S. Individual Taxpayer Identifying Number.
- 2. The form allows me to claim tax treaty benefits but I don't know how to answer this question.
The response to this comment varies from situation to situation. The treaty provisions to be used depend on the type of U.S. source income the taxpayer expects to receive. Individuals should consult with their tax advisor to properly complete this section.
New Form W-8BEN-E serves the same purpose as form W-8BEN but it is to be used by "entities" rather than individuals. Entities required to complete this form include corporations, partnerships, trusts and foundations. Form W-8BEN-E is a new form as of 2014 and can be intimidating to the recipient due to its length (eight pages) and U.S. tax-specific terminology. For many Canadian entities required to complete this form, the outcome will be no different than it was using the old form; namely, proving that the entity is exempt from U.S. tax. However, due to some of the unique U.S. definitions and rules and the complexity of the FATCA legislation, we recommend that taxpayers seek advice from their tax advisor to properly complete the form.
It is worth noting that the recent buzz around Form W-8 has led to it being used as part of an online phishing scam. In short, a modified version of the W-8 form is emailed to an individual and they are asked to complete the form and return it to the sender, who claims to be an IRS agent. The modified W-8 form and the email itself can appear genuine but the information being requested on the form, such as banking information and other personal data should raise a red flag. In fact, the IRS never communicates with taxpayers by email (nor does the CRA). Individuals should be wary of unsolicited emails requesting such information and, if unsure about the validity of a request, should contact their financial institution or a U.S. tax advisor.
Although Form W-8 and its various versions are not all new, both FATCA and the recent IA have made these forms more important and relevant than ever before. Clients should not ignore requests from financial institutions to complete these forms. We encourage you to speak to a Collins Barrow tax advisor to ensure that the forms are properly completed.
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.