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U.S. INTERNAL REVENUE SERVICE FORMS
8840 Closer Connections
W8-BEN Certificate of Foreign Status
Canadian residents who winter in the U.S. are technically subject to U.S.income tax if they exceed a specific number of days (based on a calculation onthe form 8840) in the U.S. in any one year.
To avoid U.S. taxation, IRS form 8840 (Closer Connection Exemption Statementfor Aliens) needs to be filed annually with the U.S. Internal Revenue Service.
The form, in essence, acknowledges that you met or exceeded the "substantialpresence test" BUT are not going to be filing a U.S. income tax return due tothe fact that you maintain "a closer connection" to a foreign country, such asCanada, where you will be paying annual income tax.
You will be considered to have a "closer connection" with a country other thanthe U.S. based on the location of:
Canadians should pro-actively complete and file a new 8840 form each year withthe U.S. Internal Revenue Service. This is a positive acknowledgment that youare entering the U.S. each year as a "temporary visitor for pleasure" and arecomplying with U.S. tax laws. A photocopy of each year's completed form shouldalso be carried, when crossing the border into the U.S. the following year, toindicate that you are entering the U.S. as a temporary visitor from Canada.
If you have a bank account with a financial institution in the U.S. that earnsinterest on deposits, then you should complete IRS form W8-BEN (Certificate ofForeign Status) with your U.S. financial institution to avoid possibly having30% of any interest earned on your deposits withheld and sent to the IRS.
As Canadian residents are aware, bank interest earned on their accounts(regardless how small) is considered a form of taxable income when completingeach year's Canadian income tax return with the Canada Revenue Agency (CRA) -formerly known as Revenue Canada.
Similarly, Canadian banks are required to withhold 30% (the maximum income taxrate) of any bank interest they pay to foreigners on their Canadian bankaccounts because non-Canadians rarely receive T5 slips and complete a Canadianincome tax return. Non-Canadians must, in turn, complete a Canadian income taxreturn in order to receive any refund.
In the U.S., a similar situation exists for U.S. banks and credit unions payinginterest earned on the accounts of Canadians (foreigners).
IRS form W8-BEN is a withholding tax exemption form that the bank or creditunion must keep on file to explain to the U.S. Internal Revenue Service whythey did not hold back any bank interest paid to you or conversely did notissue you the U.S. equivalent of a Canadian T5 income tax slip.
Unlike the 8840 form that is sent directly to the IRS each year, the W8-BENform is kept on file by the financial institution for IRS audit purposes and isvalid for up to three years.