Learning, Teaching and Leadership

This post is for all my Canadian author friends who sell – or are thinking of selling – their books as e-books using Amazon’s Kindle service.

I started selling Kindle books last year. This week, I got a surprise in the mail from Amazon, a “Foreign Person’s U.S. Source Income Subject to Withholding”. Amazon will withhold 30% of the royalties they paid on the Kindle books. They are required to do this by the IRS.

However, those of us living and working in Canada are exempt from royalty tax withholding. As I understand it (and I could be wrong here, but this is what I have been able to ascertain from talking to both the Canada Revenue Agency and the Internal Revenue Service (IRS) in the U.S.), the reason for the exemption is that if you are honest about your royalty income and report it at tax time, the Canadian government will tax you on that income. The level of that tax depends on your total annual income, but it would be reasonable to say that it might be around 30% or so.

When Amazon withholds the tax, you’re essentially taxed twice… 30% on the U.S. side and another 30% by the Canadian side, totaling about 60% tax.

So, the American and Canadian governments came to an agreement that more or less says, “Canadians are exempt from U.S. taxes on royalties because they have to pay tax on their income in Canada.” (Again… I am paraphrasing according to what I understand… and I could be wrong.)

However, a problem arises when Canadians sign up for a Kindle account. Canadian authors must “claim treaty benefits” in order to not be taxed by both the U.S. and Canadian governments. (No one tells you this when you sign up for a Kindle account.) You need to correctly fill out, sign and submit a W8-BEN form in order to claim these “treaty benefits”. You can get a W8-BEN form online form here: http://www.irs.gov/pub/irs-pdf/fw8ben.pdf

Amazon will not process the form without a TIN (Tax Identification Number).

There are two types of TINs:

• ITIN – Individual Taxpayer ID Number – This number is for individuals (e.g. freelance writers and sole proprietors) (More info here: http://www.irs.gov/individuals/article/0,,id=96287,00.html)
• EIN – Employer ID Number – This number is for businesses that are employers (e.g. corporations and small incorporated businesses) (More info here: http://www.irs.gov/businesses/small/article/0,,id=98350,00.html)

Steps to follow:

1. Figure out what type of TIN you need.
2. Apply for the correct type of TIN with the IRS. You can do this over the phone, by mail or by fax. (Canadians are not eligible to apply for these numbers online.)
3. Fill out the W8-BEN form. You must include either your ITIN or your EIN on your form or Amazon will not process it.
4. Send your completed, signed form to Amazon. You can scan your form and e-mail it to them through the e-mail address they provide on their site.

Do all this as soon as you set up your Kindle Direct Publishing (KDP) account. That means, do it before you make your first sale on Amazon. Do not wait! Get it done right away.

If you do not claim the correct treaty benefits using the W8-BEN form, Amazon will withhold tax. (They are just following the rules required by the IRS).

Then, you will need to fill out both a W8-BEN form AND an affidavit form to backtrack. (I am still waiting for confirmation that they will reimburse me for the taxes they withheld for 2011).

Today I spent over three hours on the phone with the IRS (much of the time I was on hold). In total, I spoke with nine different IRS agents to try and figure this all out. (No, I am not kidding).

Most of them could not help. What I can tell you is that there are two different sets of phone numbers to call. Americans can call the toll-free 1-800 number. The folks who answer those lines can’t help foreign nationals much. There are different numbers for foreigners to call. Today I called 1-267-941-1000 and eventually got through to someone who could help.

The best answer I got was “All this e-commerce stuff is new… We’re not trained in it… But basically, if you are a Canadian working and producing your writing in Canada, paying your taxes in Canada and you do not live in the US, you should be able to claim treaty benefits.”

The one question no one was able to answer clearly for me was, “If I have a TIN will I be required to file US taxes?” The best answer that came was, “Probably not, because you are claiming treaty benefits. You may have to fill out a form to claim exemption.” But whether or not this is actually the case remains to be seen…

My big disclaimer: I am not an expert in US taxes, or Canadian taxes either, for that matter. I claim no authority or expertise in these matters. This information is provided for informational and educational purposes only. I am simply sharing my own experience and what I learned as a result of it. It is your responsibility to do your own research and adhere to all the tax laws of your jurisdiction.

Resources for Canadian writers and publishers to check out:

W8-BEN Instructions

Article 901 – US Tax Treaties

IRS Publication 515

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Sarah Elaine Eaton is a faculty member in the Werklund School of Education, University of Calgary, Canada.