We paid a contractor in Canada from our US company — do we file 1042?
If the payment is US-source and the recipient is a foreign person, the paying company is a withholding agent, and the annual return of tax withheld is the payer's return rather than the contractor's. That holds whether or not anything was actually withheld: the return reports what was withheld, and a nil or under-withheld position is exactly what it makes visible. The question to settle first is whether the payment is US-source and what rate applied to it, because the return is the reconciliation of that answer to what was actually deposited.
Who is the withholding agent when payments go through an intermediary?
Anyone with control of a US-source payment to a foreign person can be a withholding agent, so in a chain there is often more than one. Responsibility does not pass along with the money simply because somebody downstream took it on. In practice each party has to know what the party above it documented and what it relied on. This is worth understanding before the year end rather than after, because the return reconciles the recipient statements to what was deposited, and a gap between the two is where the questions begin.
Does a small company with one foreign supplier really have to file this?
Size is not the test. The obligation attaches to the character of the payment and the status of the recipient, so a company paying US-source amounts to a single foreign person is a withholding agent for that payment. What varies with size is how the work is organised, not whether it applies. Companies usually discover this when a supplier asks why nothing was withheld, or when a review compares what was deposited with what was reported. A single supplier is a small piece of work; a single supplier ignored for several years is not.
Do we still file if we withheld nothing because of a treaty?
Yes, and the treaty position is the reason to. A reduced or nil rate claimed under a treaty is a position resting on documentation the payer holds, and the return is where the payment, the rate applied and the amount deposited are put side by side. Reporting the payment at a reduced rate with the certificate on file is a documented position. Not reporting it at all leaves the payer with no record of why nothing was withheld, and the liability for tax not withheld sitting with the payer.
What happens if we withheld too little from a foreign payee?
The shortfall is the withholding agent's own liability for tax, not merely a penalty on a form. That is the part companies are most often surprised by: the money has already gone to the recipient, and the amount that should have been withheld is still owed by the payer. Recovering it from the recipient is a commercial question between the two of you, and often an unsuccessful one. It is why reconciling the recipient statements to the return, and to the deposits actually made, is done before the return is filed rather than after.
Is the annual return the same thing as the recipient statements we send?
No. The statements report to each foreign recipient, and to the administration, what that person was paid and what was withheld from them. The annual return is the payer's own return of tax withheld for the year, covering all of it. The two have to agree with each other, and both have to agree with what was actually deposited. Three records, one set of facts. Where they disagree, the return is the document that shows it, which is why the reconciliation is the real work and the form is only the output.
How are non-residents taxed on Canadian rental income?
By default the payer or agent withholds a flat rate on the gross rent and remits it, with no deduction for mortgage interest, taxes or repairs. Electing under section 216 lets you file on the net rental result instead, which for most properties recovers a substantial part of what was withheld; an NR6 undertaking filed before the year starts lets the withholding itself be computed on net rather than gross. See the section 216 return.
What is Form 5471 and who has to file it?
The information return a US person files about a foreign corporation they own or control, in one of several filer categories that determine which schedules apply. It is not a tax computation, which is exactly why it gets missed — and why the penalty regime is severe. The consequence people underestimate is that a missing 5471 can keep the limitation period open on the whole return, not merely on the foreign company's figures. See Form 5471.
