Principal Issues: Will Canada charge Part XIV tax (branch tax) to a U.S. entertainment company that carries on business in Canada but not through a permanent establishment?
Position: No
Reasons: The treaty prevents Canada from charging branch tax unless there is a PE.
January 23, 2008
Steve Carscadden HEADQUARTERS Senior International Officer Income Tax Rulings Small & Medium Enterprises Directorate Directorate Compliance Programs Branch 117 Kent Street S.E. Thomson Ottawa ON K1A 0L5 (613) 957-2122
2007-026237
Part XIV tax on non-resident entertainment company
We are writing in response to your query on December 5, 2007 to Legislative Policy Directorate. You ask whether Canada can charge Part XIV tax (i.e. "branch tax" under section 219 of the Income Tax Act) to a U.S. entertainment company (a "Star Company") that does not have a permanent establishment in Canada. The Star Company put on a concert in Canada by a famous entertainer, and has therefore carried on business in Canada. The Star Company maintains that, under the Canada-U.S. Tax Convention (the "Treaty"), Canada cannot levy branch tax on the company unless the company carries on business through a permanent establishment in Canada.
OUR VIEWS
Canada's position is that where there is an article in the treaty such as Article X(5) of the Treaty that prohibits Canada from taxing "undistributed profits", Canada cannot charge branch tax, unless the particular treaty has a provision such as Article X(6) of the Treaty to override that result. Article X(6) of the Treaty provides that Canada can charge branch tax, albeit to a limited extent, if the corporation carries on business in Canada through a permanent establishment. Therefore, if the Star Company did not have a permanent establishment in Canada, Canada cannot apply branch tax, regardless of Article XVI [Artistes and Athletes] of the Treaty.
We trust we have been of assistance.
Yours truly,
Olli Laurikainen, Manager
For Director
International & Trusts Division
Income Tax Rulings Directorate
Cc: Carole Plouffe, Film Advisory Services Section