Principal Issues: [TaxInterpretations translation] By virtue of paragraph 1 of Article XVI of the Canada-U.S. Convention, an American artist or athlete has no tax payable in Canada if his or her gross receipts (related to the arts or sports) from Canadian sources are less than $15,000.
Is this exemption also accorded to the same artist or athlete doing business in Canada through a corporation of which he is the sole shareholder, as provided for in paragraph 2 of Article XVI of the Convention?
Position: No.
Reasons: Interpretation of the Convention.
XXXXXXXXXX 2008-029595 Danielle Bouffard September 16, 2009
Dear Sir,
Subject: Article XVI of the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital (the "Convention")
This is in response to your email of October 6, 2008, in which you asked our opinion on the above subject.
By virtue of paragraph 1 of Article XVI of the Convention, an American artist or athlete ("Non-resident") has, in your opinion, no tax payable in Canada if his or her Canadian-source artistic or athletic income is less than $15,000.
You wish to know if this exemption is also accorded under paragraph 2 of Article XVI of the Convention to a Non-resident who does business in Canada through a corporation ("Foreign Co), of which the Non-resident is the sole shareholder?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. In addition, when determining whether a completed transaction has received proper tax treatment, the determination is first made by our tax services offices following a review of all the facts and documents, which is generally done in the course of an audit engagement. However, we can offer the following general comments which we hope you will find useful. These comments may, however, in certain circumstances, not apply to your particular situation.
Paragraph 1 of Article XVI of the Convention sets out the rules that apply to income earned in Canada by an artist or an athlete who is a resident of a Contracting State. Under this provision, Canada may tax income earned in Canada by an individual who is a resident of the United States, where such income was derived from the individual’s personal activities as an artist or athlete carried on in Canada, if the gross receipts derived in Canada personally by the individual exceed $15,000 (including expenses reimbursed to or borne on behalf of such entertainer or athlete) in a calendar year. Paragraph 1 of Article XVI of the Convention allows Canada to tax income earned from activities carried on in Canada by an artist or athlete even if the provisions of Articles VII (Business Profits) and XV (Dependent Personal Services) of the Convention do not apply to the artist or athlete. It should be noted that if the artist's or athlete's gross receipts exceed $15,000, the income subject to Canadian tax will be the full amount of such receipts, not just the portion in excess of the $15,000. On the other hand, if the gross receipts derived in Canada by the artist or athlete do not exceed $15,000, the income is not taxable in Canada under paragraph 1 of Article XVI of the Convention, although it may be taxable in Canada under Article VII or XV of the Convention, as the case may be.
Paragraph 2 of Article XVI of the Convention allows Canada to tax income from activities performed personally by an artist or athlete that accrues in the hands of another person, such as a corporation, provided that the artist or athlete or a person related to the artist or athlete participates in the profits of that other person. Although the provisions of Article VII (Business Profits) of the Convention do not allow Canada to tax income attributable to the artist or athlete that accrues to another person because the other person does not have a permanent establishment (or fixed place of business) in Canada, paragraph 2 of Article XVI of the Convention constitutes an exception that allows Canada to tax income accruing to the other person. In other words, according to the provisions of paragraph 2 of Article XVI of the Convention, Canada may tax the income of a company accruing to a foreigner (e.g. Foreign Co) to the extent that the income is attributable to the activities carried on in Canada by the Non-resident, irrespective of the fact that Foreign Co does not have a permanent establishment in Canada.
With respect to the income from activities exercised personally by the Non-resident as an artist or an athlete which accrue to Foreign Co, the provisions of paragraph 2 of Article XVI of the Convention apply to Foreign Co and permit Foreign Co to be subjected to Canadian tax on all business income so accruing to it. Consequently, we are of the view that the rule on gross receipts derived in Canada in paragraph 1 of Article XVI does not apply to Foreign Co. In other words, even if the total gross receipts of the "other person" (Foreign Co) do not exceed $15,000, the income of that "other person" from the gross receipts is not exempted from tax under paragraph 2 of Article XVI, regardless of the receipts of the artist or athlete (the Non-resident) for the purposes of paragraph 1 of Article XVI of the Convention.
We hope that these comments are of assistance.
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.