What are the rules according to the IRS for using Canadian vendors and making payments to them? I've never seen a company send a 1099 to a foreign entity.


For foreign entities including Canada, there are some different rules, and different forms to use for tax code chapter 3 compliance—namely, forms W-8 (there are several) or 8233 rather than a W-9, and reporting form 1042-S rather than on a 1099-MISC.

As with 1099s, withholding and reporting depend on whom you pay for what, but also the “source” of the income—for example, if you are paying a vendor for services, source depends on where the services were performed—in the U.S. (U.S.-source) or in Canada (non-U.S.-source) ; for rent, source depends on where the property is located; for royalties, where the property is being used.

Dealing with foreign vendors is somewhat further complicated now by FATCA reporting rules (chapter 4), though for typical AP vendor payments, those requirements are satisfied with correct documentation on form W-8BEN-E or form 8233.

As with U.S. vendors, merchandise payments are not reportable. Document that the payment is exempt using the PO, contract or invoice indicating that the transaction is purchase of goods.

Service payments of U.S.-source income are reportable, as are rents, royalties, settlements, etc. You must also withhold 30% on such payments unless the payee has submitted appropriate documentation claiming a valid tax treaty that will reduce or exclude withholding.

On TAPN, please see under the AP Compliance Suite >> 1099/1042-S/W-9/W-8 >> 1042-S Reporting for several articles that will provide information on foreign vendor withholding and reporting.

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