We are using an independent contractor from Toronto Canada.  

We are an S-Corporation and would normally require the independent
contractor to fill out a form w-9.  We would then issue a 1099 at the
end of the year if amounts paid were $600 or more.

What do we need to do (ie forms to file and our requirements) given
the fact that this contractor is from Canada?

thanx in advnce,

Hello and thank you for your question.

You need to collect Form W-8BEN from your worker, and in general you
must withhold 30% of pay for federal taxes.  If the worker gives you
Form 8233, claiming certain tax exemptions on a pro-rated basis for
less than a full year's work, you can withhold less than the full 30%

Here's the background:
"In general, [Internal Revenue Code] section 1441 requires 30% Federal
income tax withholding on compensation for independent personal
services .... Sections 1441, 3401, and 3402 require withholding,
sometimes at 30% and sometimes at graduated rates, on compensation for
dependent personal services (defined on page 2). However, some
payments may be exempt from withholding because of a tax treaty or the
personal exemption amount.
http://www.irs.gov/instructions/i8233/ch01.html

See also page 41 of Publication 519
http://www.irs.gov/pub/irs-pdf/p519.pdf

The mechanism for this withholding requirement is Form W-8BEN which
you must require your independent contractor to provide to you.  Page
6-7 of the following NYU release shows how the form is filled out. 
Note that a Canadian cannot use the Canada social security number on
the form - - they must apply for a US ITN number, which they can
obtain by filing Form W-7 with the IRS.
http://www.nyu.edu/cdv/site20/pdf/TaxGuidelinesNRA-AP.pdf

Form W-8BEN
http://www.irs.gov/pub/irs-pdf/fw8ben.pdf
Instructions
http://www.irs.gov/pub/irs-pdf/iw8ben.pdf

Form W-7
http://www.irs.gov/pub/irs-pdf/fw7.pdf

"You must withhold at the statutory rate of 30% on all payments unless
the alien enters into a central withholding agreement or receives a
final payment exemption.
The amount of pay subject to 30% withholding may be reduced by the
personal exemption amount [see below] if the alien gives you a
properly completed Form 8233 (Fill-in PDF). A nonresident alien is
allowed only one personal exemption. However, individuals who are
residents of Canada, Mexico, Japan, or South Korea, or are U.S.
nationals (defined below) are generally entitled to the same
exemptions as U.S. citizens"
30% rate
http://www.irs.gov/businesses/small/international/article/0,,id=106259,00.html

Your worker gets a break by filling out For 8233 - - $8.47 per
exemption per day of the payment is exempt from withholding
"If Hans were a resident of Canada or Mexico or a national of the
United States, working under contract with a domestic corporation, $
4,110 (100 days X $ 8.22 per day for each of five exemptions) would be
allowed against the payments for personal services performed in the
United States. Tax must be withheld at 30% on the rest of his
earnings, $ 1,890 ($ 6,000 - $ 4,110)."

The example gives the 2002 rate - - for 2004 it is $8.47 per exemption per day.
http://www.irs.gov/publications/p519/ch08.html

Independent Contractors
"If there is no employee-employer relationship between you and the
person for whom you perform services, your [worker's] compensation is
subject to the 30% (or lower treaty) rate of withholding. However, if
[your worker is] engaged in a trade or business in the United States
during the tax year, [the] compensation for personal services as an
independent contractor (independent personal services) may be entirely
or partly exempt from withholding if [the worker reaches] an agreement
with the Internal Revenue Service on the amount of withholding
required. Also, the final payment to [the worker] during the tax year
for independent personal services may be entirely or partly exempt
from withholding if [the worker is] engaged in a trade or business in
the United States during the year and files the forms and provide the
information required by the IRS."
http://www.irs.gov/publications/p519/ch08.html#d0e9028

You do not need to withhold Medicare and Social Security
Self-employment tax is the social security and Medicare taxes for
individuals who are self-employed. Nonresident aliens are not subject
to self-employment tax.
Self-Employment Tax
http://www.irs.gov/publications/p519/ch08.html#d0e9969

Search terms used:
2004 "daily exemption amount"
w-8ben canada treaty

Thanks again for bringing us your question.

Sincerely,
Google Answers Researcher
Richard-ga