performing in canada: taxation of non-resident artists ... · general principles 592 taxation of...

canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3, 589 - 638

589

Performing in Canada: Taxation of Non-Resident Artists, Athletes, and Other Service Providers

Mark Jadd, Norman Bacal, and Kay Leung*

P r é c i s

Cet article passe en revue l’état actuel du droit fiscal canadien et des pratiques administratives applicables aux non-résidents qui fournissent des services au Canada et aux entreprises qui retiennent leurs services. On accorde une attention particulière aux règles relatives aux athlètes et aux fournisseurs de services étrangers de l’industrie du divertissement, incluant un aperçu des dispositions particulières qui régissent l’imposition des acteurs non-résidents. Dans l’article on examine la responsabilité fiscale de fond des fournisseurs de services étrangers en vertu du droit canadien et les conséquences que les conventions fiscales peuvent avoir sur cette responsabilité. On aborde plus particulièrement l’impact du 5e protocole à la convention fiscale entre le Canada et les Etats-Unis. Les auteurs examinent la distinction entre employés et entrepreneurs indépendants à même leurs commentaires sur les implications fiscales pour les travailleurs étrangers. Pour terminer, l’article passe en revue les obligations de retenue des personnes qui effectuent des paiements à des fournisseurs de services non-résidents et les allégements administratifs qui sont disponibles dans le cas de retenue excédentaire.

A b s t r A c t

This article reviews the current state of Canadian tax law and administrative practice applicable to non-residents who provide services in Canada and to the businesses that engage them. Particular emphasis has been placed on the rules pertaining to foreign athletes and service providers within the entertainment industry, including an overview of the special provisions governing taxation of non-resident actors. The article examines the substantive tax liability for foreign service providers under Canadian domestic law and the effect that tax treaties may have on such liability. In particular, the impact of the fifth protocol to the Canada-us income tax convention is considered. In commenting on the tax implications for foreign workers, the authors examine the distinction between employees and independent contractors. They also review the withholding obligations of

* OfHeenanBlaikieLLP,Toronto.WewishtothankManonThivierge,ofHeenanBlaikieLLP,Montreal,andAngieWynnofHeenanBlaikieLLP,Toronto,fortheirvaluablecommentsandassistanceinthepreparationofthisarticle.Anyerrorsoromissionsremainourresponsibility.

590 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

persons who make payments to non-resident service providers and the administrative relief available in respect of excessive withholding.

Keywords: Artists n Athletes n films n non-resident n services n treAty

c o n t e n t s

Introduction 591Legislative Basis for Taxing Non-Residents 592

General Principles 592Taxation of Actors 594

The Actor Tax 594Use of Personal Services Corporations 595

Taxation of Other Performing Artists and Professional Athletes 597Distinction Between Independent Contractors and Employees 598

General Principles 598Application of Wiebe Door and Sagaz to Performing Artists and

Behind-the-Camera Personnel 600Allocation of Income Between Canada and Other Countries 604

General Principles 605Allocation of Income for Actors 606Allocation of Income for Other Performing Artists 608Allocation of Income for Athletes 609

Treaty-Based Exemptions from Taxation 612General Principles 612Treaty Exemptions Generally Available to Independent Contractors 613Treaty Exemptions for Dependent Personal Services 618

Income Taxes for Employees 618Social Security and Employment Insurance 620

Treaty Exemptions for Artistes and Athletes 620Artistes 621Athletes 621Use-of-Likeness Payments to Artistes and Athletes 623

Withholding Obligations 623General Principles 623Withholding Obligations for Actors 627

Fees for Acting Services 628Per Diems, Travel Expenses, and Living Expenses 629Residuals and Participations 629

Withholding Obligations for Athletes and Behind-the-Camera Personnel 631The 2010 Vancouver Olympic Winter Games 631

Withholding Tax Waivers 632General Principles 632Regulation 102 Waivers 633Treaty-Based Regulation 105 Waivers 634

General Rules for Eligibility 634Athletes, Actors, and Other Performing Artists 635Behind-the-Camera Personnel 635

Income and Expense Waivers 637Conclusion 637

taxation of non-resident artists, athletes, and other service providers n 591

intro duc tio n

Oneoftheconsequencesoftheglobalizationofthemarketplaceisasteadyincreaseinthenumberofforeign-ownedbusinesseswithoperationsinCanada.Thesefor-eignbusinesses(mostofwhichareAmerican)operatethroughavarietyofbusinessstructures.WhilemanyhaveestablishedCanadiansubsidiariesorbranches,othershaveamore tangential connection, carryingonbusiness inCanada through thetemporarypresenceofnon-residentemployeesorsubcontractors.

ThenumberofinternationalsportingeventsheldinCanadaisalsoontherise.TheNationalHockeyLeague(NHL), theNationalBasketballAssociation(NBA),majorleaguebaseball(MLB),majorleaguesoccer,andtheNationalLacrosseLeagueeachhaveatleastonefranchiselocatedinCanada.InmanyoftheseCanadianfran-chises—notablyteamsintheNHL,theTorontoRaptors(NBA),andtheTorontoBlueJays(MLB)—most,ifnotall,oftheplayersarenon-Canadian.TheteamsintheCan-adianFootballLeague(CFL)alsoemployasignificantnumberofforeignplayers.Inaddition,therearenumerousminorleagueteamsoperatinginCanadaonwhichforeignnationalsplay.

Outsidethesportsleagues,manyotherinternationalsportingeventsregularlytakeplaceinCanada.Automobileracing,tennis,andgolf,forexample,attractcompeti-torsfromaroundtheworld,aswellasCanadianparticipants.Inaddition,the2010WinterOlympicGamesinVancouverwillinvolvethousandsofpaidnon-residentsinorganizingandpreparingforthisevent.

InternationalperformingartistsarealsocomingtoCanadawithincreasingregu-larity.Newvenueshaveopenedupinmetropolitancentresandinsmallercitiesandtownsthatarecapableofhostingconcertsfeaturinginternationalstars.Atthesametime,foreign-financedfilmandtelevisionproductioncarriedoutinCanada(par-ticularlyshootingonlocationbyusproductioncompanies)hascontinuedataveryhighlevelsinceitsexplosivegrowthinthelate1990s.

ForeignserviceprovidersandbusinessesthatengagethemneedtobeawareoftheCanadiantaximplicationsassociatedwiththeperformanceofservicesinCanada.Overthepastdecade,therehasbeensignificantadministrative,legislative,andjudi-cialactivityrelatingtothetaxationofnon-residentsinrespectofservicesrenderedinCanada.Particularlyimportantinthepresentcontextistherecentsigningofthefifth protocol to the Canada-us income tax convention (1980),1 which, once in

1 TheConventionBetweenCanadaandtheunitedstatesofAmericawithRespecttoTaxesonIncomeandonCapital,signedatWashington,DConseptember26,1980,asamendedbytheprotocolssignedonJune14,1983,March28,1984,March17,1995,andJuly29,1997(hereinreferredtoas“theustreaty”);andProtocolAmendingtheConventionBetweenCanadaandtheunitedstatesofAmericawithRespecttoTaxesonIncomeandonCapitalDoneatWashingtonon26september1980,asAmendedbytheProtocolsDoneon14June1983,28March1984,17March1995and29July1997,signedatChelsea,Quebeconseptember21,2007(hereinreferredtoas“thefifthprotocol”).CanadaratifiedthefifthprotocolonDecember14,2007andtheussenateapprovedtheprotocolonseptember23,2008.Thefifthprotocolwillbeinforceupontheexchangeofdiplomaticnotesbetweenthetwocountries.


force,willprovidenewrulesfortheavailabilityoftreaty-basedexemptionsforusresidentsperformingservicesinCanada.

Thisarticledescribesthecurrentstateofthelawandadministrativepracticeap-plicabletonon-residentswhoprovideservices inCanadaandtobusinessesthatengagethem.Whilewewillreviewthegeneralprinciplesgoverningthetaxationofnon-residentemployeesandindependentcontractors,ourmainfocuswillbethetaxationof athletes, performing artists, andother serviceproviders (behind-the-camerapersonnel)inthemotionpictureandtelevisionindustries.2

Anumberoffactorsaretakenintoaccountindeterminingwhetherandtowhatex-tentanon-residentwillbetaxedinCanadaforservicesrenderedhere.Thesefactorsincludetheperson’sstatusasanindependentcontractororanemployee,theexistenceofafixedbaseorpermanentestablishmentinCanadathroughwhichtheservicesareprovided,theperson’scountryofresidence,andthenatureoftheservicesren-dered.Thediscussionthatfollowsexaminesindetailtheimpactofeachofthesefactorsonthenon-resident’sultimatetaxliability,withintheframeworkofdomesticandinternationaltaxlawandpractice.

LegisL Ati v e b A sis fo r tA x ing no n - re sident s

General Principles

IncometaxationinCanadaisbasedonresidence.undertheIncomeTaxAct,3indi-vidualsandcorporationsthatare“resident”inCanadaaresubjecttoincometaxontheirworldwide incomefromallsources.Non-residentsaresubjecttoCanadianincometaxonly inrespectoftheir incomefromspecificsources.Inparticular,anon-residentpersonwillbesubjecttotaxunderpartIoftheITAonlytotheextentthatthepersonhasbeenemployedinCanada,carriedonabusinessinCanada,ordisposedoftaxableCanadianproperty.4Insuchcase,thenon-residentwillbere-quiredtopayCanadianincometaxonhisorher“taxableincomeearnedinCanadaforataxationyear.”5Anon-residentmayalsobesubjecttotaxunderpartxIIIoftheITA6inrespectofcertainpaymentsreceivedfromapersonresidentinCanada,

2 Theapplicationofwithholdingtaxestonon-residentsengagedinthefilmandtelevisionindustrywasalsothefocusofa1986articlebyNormanBacalandRichardLewin,“TheTaxationinCanadaofNonresidentPerformingArtistsandBehind-the-CameraPersonnel”(1986)vol.34,no.6Canadian Tax Journal1287-1330.

3 RsC1985,c.1(5thsupp.),asamended(hereinreferredtoas“theITA”).unlessotherwisestated,statutoryreferencesinthisarticlearetotheITA.ThetaxconsequencesundertheQuebecTaxationAct,RsQ,c.I-3(hereinreferredtoas“theTAQ”)fornon-residentpersonswhoareemployedorcarryingonabusinessinQuebecaresubstantiallythesameasthosediscussedundertheITA,exceptasotherwisenoted.

4 subsection2(3).

5 subsection115(1).

6 ThereisnoequivalenttopartxIIIundertheTAQ.


includingmanagementfees,7interest,8royalties,9andcertaincompensationpaidtoactors.10However,anysuchtaxliabilitymaybereducedoreliminatedthroughtheapplicationofarelevantincometaxtreaty.11Consequently,thedeterminationofaperson’sresidencefortaxpurposesiscrucialtothequantificationofthatperson’slia-bilityforCanadiantaxes.Adetailedreviewoftherulesfordeterminingaperson’sresidenceisbeyondthescopeofthisarticle.12Accordingly,ourcommentaryislimitedtotheCanadiantaximplicationsaffectingthosepersonswhohavebeendeterminedtobenon-residentsofCanadaforthepurposesoftheITA.

Onceithasbeendeterminedthatanon-residentissubjecttotaxunderpartIoftheITA,itisnecessarytoquantifytheamountoftheperson’staxableincomethatisconsideredtobeearnedinCanada.Forthepurposesofthisarticle,therelevantcom-ponentsofthiscalculationarefoundinsubparagraphs115(1)(a)(i)and(ii).13Theseprovisionsrequirethenon-residenttoinclude,incomputingtaxableincomeearnedinCanada,all“incomesfromthedutiesofofficesandemploymentsperformedbythenon-residentpersoninCanada”14andall“incomesfrombusinessescarriedonbythenon-residentpersoninCanada.”15Ifthenon-residentisearningincomeasanemployee,subparagraph115(1)(a)(i)willapply,whereasifthenon-residentisconsid-eredtobeanindependentcontractor,thensubparagraph115(1)(a)(ii)willapply.

Theconclusionastowhetheraparticularnon-residentisrenderingservicesasanemployeeorasanindependentcontractorisalsorelevantinanalyzingwhetherataxexemptionisavailableunderarelevanttreaty,aswellasdeterminingthewith-holdingobligationsofthepartypayingfortheservices.Thedistinctionbetweenanemployeeandanindependentcontractorisdiscussedbelow.

7 Paragraph212(1)(a).

8 Paragraph212(1)(b).

9 Paragraph212(1)(d).

10 section216.1.

11 Thetreatyprinciplesgoverningthetaxationofnon-residentsarediscussedbelow.

12 Fordiscussionofthedeterminationofresidence,see,forexample,PaulLefebvre,“Canada’sJurisdictionToTax:ResidencyandtheThomsonDecision60YearsLater,”PersonalTaxPlanningfeature(2006)vol.54,no.3Canadian Tax Journal762-80;andEdwinG.Kroft,“JurisdictionToTax:Anupdate,”inTax Planning for Canada-US and International Transactions,1993CorporateManagementTaxConference(Toronto:CanadianTaxFoundation,1994),1:1-138.

13 section1089(b)oftheTAQtaxes“incomefrombusinessescarriedonby[anon-residentperson]inCanadathatisattributable,inprescribedmanner,toanestablishmentinQuébec”(emphasisadded).Therefore,anon-residentindependentcontractorissubjecttotaxinQuebeconlyifhehasanestablishmentinQuebec.ForthepurposesofcertainprovisionsintheTAQ,ifanon-residentpersonisresidentordeemedresidentinacountrywithwhichCanadahasenteredintoataxtreatyandsuchtreatycontainsadefinitionof“permanentestablishment,”theword“establishment”intheTAQhasthemeaningassignedbythattreaty.

14 subparagraph115(1)(a)(i).

15 subparagraph115(1)(a)(ii).


Taxation of Actors

untilrecently,theITAdidnotdistinguishbetweenactingservicesandanyothertypeofservicesperformedinCanada.16Historically,actorswererequiredtocomputetheirincomeinaccordancewiththegeneralprinciplesoutlinedabove.However,incontrasttothetaxtreatmentofotherserviceproviders,mostofCanada’staxtreatiesnegotiatedoverthepast25yearsprovideforonlylimitedrelieffromCanadiantaxa-tioninrespectofactingservicesrenderedinCanadabyforeignactors.17Forexample,underthecurrentustreaty,Americanactors,otherperformingartists,andathletesareexcludedfromclaimingtreatyreliefthatwasavailabletothemunderthe1942treaty18andthatremainsavailabletootherserviceproviders.19

Whilenon-residentactorsworkinginCanadawererequiredtofileincometaxreturnsandreportincomeearnedundersection115oftheITA,theyrarelycompliedwiththatrequirement,andtheCanadiantaxauthoritiesrarelyenforcedtheobliga-tion.20BoththeactorsandtheCanadiangovernmentappearedtobesatisfiedwiththeremittanceofasourcedeductionof15percentpursuanttoregulation105oftheIncomeTaxRegulations.21However,withmanyforeignactorsontelevisionseriesmaintainingaregularandrecurringpresenceinCanada,thisunofficialpolicyofdisregardingCanadiantax-reportingobligationsbecameuntenable.RumoursthattheCanadiangovernmentwouldbegindemandingthatAmericanactorsfileCanad-iantaxreturnsthreatenedtoscareoffthoseactorsfromworkinginCanada,therebydealingapotentiallycriticalblowtotheCanadianfilmandtelevisionproductionindustry.

The Actor TaxWiththerapidincreaseinCanadianfilmproductioninthelate1990s,theDepartmentofFinancefinallyintervenedtonegotiateasolution.AfternumerousconsultationsamongtheDepartmentofFinance,theCanadaRevenueAgency(CRA),representa-tivesoftheCanadianfilmproductionindustry,andusfilmstudios,acompromisewasreached,andlegislativechangeswereenactedin2001.Thesolutionwastoamend

16 TheTAQstilldoesnotmakethisdistinction.

17 Asdiscussedbelow,limitedreliefissimilarlyaffordedtoathletesandotherperformingartists.

18 ConventionandProtocolBetweentheunitedstatesandCanadafortheAvoidanceofDoubleTaxationandthePreventionofFiscalEvasionintheCaseofIncomeTaxes,signedonMarch4,1942,asamended(hereinreferredtoas“the1942treaty”).ThecurrentustreatycameintoforceonAugust16,1984,effective,inrespectoftaxesotherthanwithholdingtaxes,fortaxationyearsbeginningonorafterJanuary1,1985.However,byvirtueofarticlexxx(5)ofthetreaty,provisionsofthe1942treatythathadprovidedgreaterrelieftoataxpayercontinuedinforceforanadditionaltaxationyear.

19 ustreatyarticlesxIV(IndependentPersonalservices),xV(DependentPersonalservices),andxVI(ArtistesandAthletes).Thesetreatyprovisionsarediscussedinfurtherdetailbelow.

20 Canada,Report of the Auditor General of Canada to the House of Commons 2001(Ottawa:OfficeoftheAuditorGeneralofCanada,December2001),chapter7.

21 CRC1978,c.945,asamended.


partxIIIoftheITAtoprovideafullandnon-refundablewithholdingtaxinrespectofgrossincomeearnedbyanon-residentactorfromservicesperformedinCanada(“theactortax”),22asanalternativetothegeneralrulesforreportingsuchincome.specifically,subsection212(5.1)wasaddedtoimposea23percentwithholdingtaxforamountspaidorcreditedafter2000foractingservicesprovidedbyanon-residentactororbyacorporationrelatedtotheactor:

212(5.1) Notwithstandinganyregulationmadeunderparagraph214(13)(c),everypersonwhoiseitheranon-residentindividualwhoisanactororthatisacorporationrelatedtosuchanindividualshallpayanincometaxof23%oneveryamountpaidorcredited,orprovidedasabenefit,tooronbehalfofthepersonfortheprovisioninCanadaoftheactingservicesoftheactorinafilmorvideoproduction.

Byvirtueofafurtheramendmentinsubsection115(2.1),anyamountthatissubjecttotaxundersubsection212(5.1)isnotincludedintheactor’staxableincomeearnedinCanadaandthusisexcludedfromtaxunderpartIoftheITA.Consequently,pro-videdthatthenon-residentactorhasnootherpartIincome,heorshegenerallywillnotbeunderanyobligationtofileaCanadianincometaxreturn.23

Ifthenon-residentactordeterminesthatthetaxonnetincomeunderpartIoftheITAwouldbelessthan23percentofthegrossremunerationandnototherwisecreditableforforeigntaxpurposes,theactorcanelectoutoftheactortax.specific-ally,subsection216.1(1)allowsthenon-residentactortofileaCanadianpartItaxreturnbythefiling-duedate,24electingtobesubjecttopartItaxationratherthantheactortaxunderpartxIII.Wheresuchanelectionismade,anyamountwithheldundersubsection212(5.1)willbeconsideredtohavebeenpaidonaccountoftheactor’sultimatepartItaxliability.25Furthermore,subsection115(2.1)willnotbeapplicable;consequently,theactingincome(totheextentthatitrelatestotheper-formanceofservicesinCanada)willbeconsideredtobetaxableincomeearnedinCanadabytheactor.

Use of Personal Services CorporationsItisstandardpracticeforAmericanactorstoprovidetheiractingservicesthroughapersonalservicescorporation,referredtoasa“loan-out”company.Inthisway,actorsareabletomakegenerouscontributionstotheirpensionplans,whichwillbedeductibleforustaxpurposes.Generally,theloan-outcompanypaysasalarytothe

22 TheTAQdoesnotcontainanyprovisionsanalogoustotheactortax.Thus,aforeignactorprovidingservicesinQuebecwillnotbesubjecttotaxundertheTAQunlessheorshehasanestablishmentinQuebec.

23 subsection150(1.1).

24 “Filing-duedate”isdefinedinsubsection248(1)as“thedayonorbeforewhichthetaxpayer’sreturnofincomeunderPartIfortheyearisrequiredtobefiledorwouldberequiredtobefilediftaxunderthatPartwerepayablebythetaxpayerfortheyear.”

25 subsection216.1(2).


actorsothatthecompany’snetincomeafterdeductingallothertax-deductibleex-penses(forexample,agent’scommissions,manager’sfees,andlegalfees)isnil.

However,theuseofaloan-outcompanycreatesthepossibilityofdoubletaxa-tion.Aloan-outcompanyisgenerallynottaxableintheunitedstates(sinceitsnetincomeisgenerallynil);consequently,itcannottakeadvantageofanyforeigntaxcreditsinrespectoftaxespaidbyitinCanada.Furthermore,sinceactorsperformingservicesinCanadathroughaloan-outcompanyhistoricallyhavenotpaidCanadianincome tax (generally, only the sourcedeductions in respectof payments to theloan-outcompanyareremittedtotheCanadiantaxauthorities),theyhavenotbeenabletoclaimataxcreditagainstustaxonthesalariesreceivedfromtheloan-outcompany.Thisproblem is obviated,whenpossible, by eitherusing a usfiscallytransparent entity (such as a qualified subchapter s corporation) as the loan-outcompany,orhavingtheactorpersonallyenterintothecontractfortheprovisionofCanadianservices.Thelatterarrangementhassometimesresultedinanoddsitua-tionforCanadianproductions,whererehearsalservicesintheunitedstatesoractingservicesoutsideCanadaareprovidedbytheactorthroughtheloan-outcompanywhileCanadianactingservicesareprovidedbytheactorpersonally,underseparatecontracts.

Theuseofloan-outcompanieshasalsocreatedthepotentialfordoubletaxationundertheactortaxprovisions,sinceboththeloan-outcompanyandtheindividualactorcouldbesubjecttoCanadiantax.subsection212(5.2)wasdesignedtodealwiththisissue;itreadsasfollows:

212(5.2) Whereacorporationisliabletotaxundersubsection(5.1)inrespectofanamountforactingservicesofanactor(inthissubsectionreferredtoasthe“corpora-tionpayment”)andthecorporationpays,creditsorprovidesasabenefittotheactoranamountforthoseactingservices(inthissubsectionreferredtoasthe“actorpay-ment”),no tax ispayableunder subsection (5.1)withrespect to theactorpaymentexcepttotheextentthatitexceedsthecorporationpayment.

Consequently,salariespaidbytheloan-outcompanytotheactorforCanadianact-ingservicesareexemptfromwithholdingtaxundersubsection212(5.1)providedthattheydonotexceedtheamountofthepaymentreceivedbytheloan-outcom-panyinrespectofsuchservices.

subsection216.1(3)isananti-avoidanceprovisionthatensuresconsistencybe-tweentheapproachesappliedbytheloan-outcompanyandtheactor.specifically,iftheloan-outcompanyelectsoutoftheactortaxandisthereforesubjecttopartItaxation,theactorisdeemedtohavealsoelectedtobesubjecttopartItaxationonthesalaryreceivedfromtheloan-outcompany.Thisensuresthatiftheloan-outcompanyfilesanilCanadianpartIreturn(asaresultofpayingouttheincomeassalarytotheactor),theactorisrequiredtofileapartIreturntoreporttheemploy-mentincome.

Anotheranti-avoidanceprovisioniscontainedinsubsection115(2.2).Thisprovi-sionclarifiesthataloan-outcompanythathaspaidpartxIIItaxinrespectofincomefromactingservicescannotdeductsalariespaidinasubsequentyearinrespectof


suchservicesincomputingitspartIincomeforanytaxationyear.Thesalariesarealsonotincludedintheactor’staxableincomeearnedinCanadaforthatsubsequentyear.

Taxation of Other Performing Artists and Professional Athletes

unlike non-resident actors, who are subject to specifically targeted rules, otherperformingartistsandprofessionalathletesaresubjecttoCanadiantaxationunderthegeneralprinciplesapplicabletootherserviceproviders.Non-residentathleteswhoareemployedbyaprofessionalsportsteamwillbetaxedundersubparagraph115(1)(a)(i), while independent contractors such as professional golfers will betaxedundersubparagraph115(1)(a)(ii).Non-residentperformingartists(otherthanactors)willgenerallybeconsideredtobeindependentcontractorssubjecttosub-paragraph115(1)(a)(ii).

Athletesemployedbyprofessionalsportsclubsmust include intheiremploy-mentincomeearnedinCanadaallsalaries(includingincomefrompersonalservicescontracts),allperformance-relatedbonuses,andfeesforpromotionalservicesper-formedforthebenefitoftheclubtotheextentthatsuchwagesandfeespertaintoservicesrenderedinCanada.26Inaddition,paragraph115(2)(c.1)requiresanathletetoincludeinhisorhertaxableincomeearnedinCanadaanysigningbonusesreceivedinconsiderationforenteringintoanemploymentcontractoranagreementtoper-formservicesinCanadatotheextentthatthebonusisdeductibleincomputingtheincomeofaCanadiantaxpayer.However,theCRAhastakentheadministrativeposi-tionthatparagraph115(2)(c.1)appliesonlytotheportionofthesigningbonusthatcanreasonablybeconsideredtobeattributabletoservicesperformedinCanada.27

Asdiscussedaboveinconnectionwithactors,itisoftenadvantageousforotherperformingartistsandathletestoprovidetheirservicesthroughaloan-outcom-pany.Theloan-outcompanymaybeestablishedaseitheraCanadianoraforeigncorporation.28Wherethecompanyisanon-residentofCanada,itwillbesubjecttoincometaxinCanadaonthefeesearnedfromtheservicesrenderedinCanada.29Inaddition,theathleteorperformingartistwillbesubjecttoCanadianincometaxinrespectofanywagesorfeesreceivedfromtheloan-outcompanythatareattribut-abletoservicesrenderedinCanada.30unlikethesituationforactors,theITAdoes

26 Interpretation BulletinIT-168R3,“AthletesandPlayersEmployedbyFootball,HockeyandsimilarClubs,”May13,1991,paragraph1.Theallocationoftheathlete’sincomebetweenCanadaandothercountriesinwhichservicesareprovidedisdiscussedbelow.

27 CRAdocumentno.9819311,August11,1998.

28 usloan-outcompaniesaregenerallyestablishedasscorporations,forthereasonsdiscussedaboveinrelationtoAmericanactors.


30 Paragraph115(1)(a).Dependingonthelegalnatureoftherelationshipbetweentheindividualandtheloan-outcompany—thatis,employeeorindependentcontractor—subparagraph115(1)(a)(i)or(ii)willapply.


notcontainamechanismtoexcludepaymentsreceivedfromtheloan-outcompanyfrompartItaxation.31

dis tinc tio n be t ween indePendent co ntr Ac to r s A nd emPLoy ee s

TheITAtaxesnon-residentsofCanadaonemployment incomeandbusiness in-comeearnedinCanada.Thecategorizationofaparticulararrangementisrelevanttoascertainingthewithholdingobligationofthepersonwhohiredthenon-residentandtheavailabilityofdeductionsandtreatyexemptionstothenon-residentserviceprovider.Thereisalargebodyofjurisprudenceonthedeterminationofaworker’sstatus.Thisjurisprudencehasbeenextensivelyreviewedinpriorarticles.32Ratherthanrepeatingthatanalysis,thisarticlesummarizestheprinciplesarisingfromtheleadingcasesandcanvassesthenewjurisprudentialtrendsinthisarea.Theappli-cationoftheseprinciplestoathletes,performingartists,andfilmcrews(otherwisereferredtoas“behind-the-camerapersonnel”)willbespecificallyexamined.

General Principles

TheleadingCanadianincometaxcaseonwhetheraworkerisanemployeeoranindependentcontractoristheFederalCourtofAppealdecisioninWiebe Door Ser-vices Ltd. v. mnR.33RelyingonthePrivyCouncildecisioninmontreal v. montreal Locomotive Works,34theCourtofAppealadoptedafour-parttesttodeterminethestatusofaworker.Thefourelementsconsideredbythecourtwere

1. thedegreeorabsenceofcontrolexercisedbytheemployer, 2. ownershipoftools, 3. chanceofprofit,and 4. riskofloss.

31 Asdiscussedabove,suchpaymentstoactorsareexcludedpursuanttosubsection212(5.2).

32 see,forexample,AlainGaucher,“AWorker’sstatusasEmployeeorIndependentContractor,”inReport of Proceedings of the Fifty-First Tax Conference,1999ConferenceReport(Toronto:CanadianTaxFoundation,2000),33:1-98;JoanneMagee,“PersonalservicesBusinesses,”PersonalTaxPlanningfeature(2007)vol.55,no.1Canadian Tax Journal160-83;LaraFriedlander,“WhatHasTortLawGotToDowithIt?DistinguishingBetweenEmployeesandIndependentContractorsintheFederalIncomeTax,EmploymentInsurance,andCanadaPensionPlanContexts”(2003)vol.51,no.4Canadian Tax Journal1467-1519;PhilipFriedlan,“EmployeeVersusIndependentContractorVersusPersonalserviceCorporation,”in1997 Ontario Tax Conference(Toronto:CanadianTaxFoundation,1997),tab13;TimothyW.Clarke,“TheEmployee/IndependentContractorConundrum,”in2004 British Columbia Tax Conference(Toronto:CanadianTaxFoundation,2004),tab10;andJehadHaymourandJ.scottBodie,“Employment-RelatedTaxLitigation—TipsandTraps,”in1999 Prairie Provinces Tax Conference(Toronto:CanadianTaxFoundation,1999),tab6.

33 87DTC5025(FCA).

34 [1947]1DLR161(PC).


TheFederalCourtofAppeal’sdecisioninWiebe Doorhasbeencitedandrelieduponinnumerousdecisionsdealingwiththeissueofwhetheraworkerisanin-dependentcontractororanemployee.35ThesupremeCourtrefinedthefour-parttestin671122 Ontario Ltd. v. Sagaz Industries Canada Inc.,36holdingthatthefourfactorsconstituteanon-exhaustivelistandtherelativeweightofanyparticularfac-torwilldependonthefactsandcircumstancesofthecase.Thecourtindicatedthatnosingleconclusivetestcanbeuniversallyappliedtodeterminewhetherapersonisanemployeeoranindependentcontractor;rather,thetaskistoweighallfactorsrelevanttothenatureoftherelationshipbetweenthepartiesandtodeterminetheprevailingcharacterofthatrelationship.AccordingtothesupremeCourt,thetestboilsdowntoonecentralquestion:“Whosebusinessisit?”37Whilethecourtdidnotsetoutaparticulartestorspecifythefactorstobeapplied indeterminingaworker’sclassification,itreiteratedthat“whatmustalwaysoccurisasearchforthetotalrelationshipoftheparties.”38TheCRAhasreviseditspublication“Employeeorself-Employed?”39toreflecttheapproachadoptedbythesupremeCourtinSagaz.

Recentjurisprudencehasaddedanewtwisttotheanalysisbyfocusingmoreat-tentionontheparties’statedintention.Inthisregard,ithasbeenacommonpracticefortaxpractitionerstoadvisetheirclientstoenterintoawrittenagreementsettingouttheparties’intentpriortoenteringintoarelationship,inordertoavoidanymisunderstanding.Inthepast,thecourtshaveconsideredthecontractualintentbe-tweenthepartiestobearelevantfactor,buttheyhaveheldthatitisnotconclusive.severalrecentdecisionsshowadeparturefromthisapproach.InCombined Insurance Company of America v. Canada (national Revenue),theFederalCourtofAppealar-ticulatedthattherelevantfacts,includingtheparties’intentregardingthenatureoftheir contractual relationship,mustbe lookedat in lightof the factors inWiebe

35 WhereaworkerprovidesservicesinQuebec,therelationshipbetweentheworkerandahirershouldbeconsideredinlightoftheCivilCodeofQuébec,sQ1991,c.64,asamended,whichsetsouttheelementsofa“contractofemployment”(articles2085and2086)anda“contractforservices”(articles2098and2099).TherearetwoschoolsofthoughtregardingtheappropriatetestfordeterminingtherelationshipbetweenahirerandaworkerinQuebec.OneschoolofthoughttakesthepositionthatinQuebecthefour-parttestinWiebe Doordoesnotapplyandtheonlyelementconsideredinanemployer-employeerelationshipistheelementofcontrol:seeVaillancourt v. mnR,2005TCC328;andPierreArchambault,“Contratdetravail:PourquoiWiebeDoorservicesLtd.nes’appliquepasauQuébecetparquoiondoitleremplacer,”inL’Harmonisation de la législation fédérale avec le droit civil québécois et le bijuridisme canadien: deuxième recueil d’études en fiscalité(Montréal:Associationdeplanificationfiscaleetfinancière,2005),2:1.Indeterminingwhethercontrolexists,Quebeccourtshaveexaminedanumberofindiciaofcontrol:seeLévesque v. mnR,2005TCC248.Thesecondschoolofthoughtholdsthatthefour-parttestestablishedundercommonlawisequallyapplicableinQuebec:see97980 Canada Inc. v. Québec (Sous-ministre du Revenu),JQno.995.

36 [2001]2sCR983.

37 Ibid.,atparagraph50.


39 CanadaRevenueAgencyguideRC4110(E),“Employeeorself-Employed?”


Door.40TheFederalCourtofAppeal’sdecisioninCombined Insurancefollowsanewlineofcases,suchasWolf v. The Queen,41Le Livreur Plus Inc. v. Canada (national Revenue),42SARA Consulting & Promotions Inc. v. mnR,43andPrecision Gutters Ltd. v. Canada (national Revenue).44Inthesecases,thecourtshaverecognizedthat“intheabsenceofclearandcredibleevidencethatthedescriptionofarelationshipisotherthanasagreedbetweenarm’slengthparties,thedescriptionagreeduponbythosepartiesmuststand.”45Thesedecisionsareawelcomedeparturefrompreviousjudg-mentsbecausetheyacknowledgethattaxpayersareentitledtoarrangetheirownaffairs.Onceanagreementhasbeenreached,thetaxpayerscansummarizetheirar-rangementandrelationshipinwriting,andthatdocumentationwillbeacceptedbyacourt,providedthatthenomenclatureaccuratelyreflects,andisnotmeanttodis-guise,thetruenatureoftherelationship.

ItisimportanttonotethatthesejudgmentswererenderedafterthesupremeCourt’sdecision inShell Canada Limited v. The Queen et al.,46 inwhichthecourtadoptedthe“plainmeaning”approachtotheinterpretationoftaxstatutes.underthisapproach,courtsmustrespectandgiveeffecttotheactuallegaltransactionscarriedoutbythetaxpayerandnotlookbehindthetransactionsforthe“trueeco-nomic realities” or the bona fide purpose. In SARA Consulting, the Tax Court ofCanadaagreedthat,absentasham,window-dressing,oranexpressstatutoryprovi-siontothecontrary,thewrittenagreementbetweenthehirerandtheworkermustberespected.

Tosumupthegeneralprinciplesestablishedbythecourtsindeterminingthestatusofaworker,therelevantfactors,includingtheparties’intentionregardingthenatureoftheircontractualrelationship,mustbelookedatnotonlyinlightofthedegreeofcontrol,ownershipoftools,chanceofprofit,riskofloss,andintegration,butalsoinlightofanyotherfactorthatmayprovetoberelevantintheparticularcircumstancesofthecase.Thereisnopredeterminedwayofapplyingtherelevantfactors,andtheirimportancewilldependonthecircumstancesandtheparticularfactsofthecase.

Application of Wiebe Door and Sagaz to Performing Artists and Behind-the-Camera Personnel

Thedeterminationofwhetheraworkerisanemployeeorindependentcontractorisparticularlyrelevanttonon-residentperformingartistsandbehind-the-camera

40 2007FCA60,atparagraph35.

41 2002DTC6853(FCA).

42 2004FCA68.

43 2001TCC2000-3982(EI)and2000-3984(CPP).

44 2002FCA207.

45 SARA Consulting,supranote43,atparagraph92.

46 99DTC5669(sCC).


personnel.Fortheseindividuals,theclassificationmaydeterminetheavailabilityofatreaty-basedexemptionfromCanadiantax.ThecourtshavebeenaskedtomakethedeterminationgenerallyinapureCanadiancontext,buttheiranalysesinrespectofthesespecializedworkersareinformativeindeterminingthestatusofnon-residentworkers.Inthissection,weprovideexamplesofcasesinwhichthecourtshavegivenweightorconsiderationtooneormoreoftheWiebe Door/Sagazfactors.

InThe Royal Winnipeg Ballet v. mnR,47theFederalCourtofAppealoverturnedadecisionoftheTaxCourtofCanadathatheldthatdancersengagedbytheRoyalWinnipegBallet(“RWB”)wereemployeesratherthanindependentcontractorsforthepurposesof theCanadaPensionPlanand theEmployment InsuranceAct.48ThemajorityoftheFederalCourtofAppealheldthattheintentionofthepartieswithrespecttothestatusofthedancersmustbeconsidered.Theuncontradictedevidencewasthatthepartiessharedacommonunderstandingthatthedancerswereself-employedandwerenotemployeesoftheRWB.Thecourtstatedthatthefactsmustbeexaminedastowhether,onbalance,theywereconsistentwiththeparties’intention.Inlookingattheparticularfacts,themajorityofthecourtconcludedthattheelementofcontrolthattheRWBexercisedoverthedancerswasnotsuchthatitcreatedanemployer-employeerelationship.Rather,thedancerswereconsideredtobeindependentcontractors.AccordingtothereasonsofsharlowJA,

[t]hecontrolfactorinthiscase,asinmostcases,requiresparticularattention.ItseemstomethatwhilethedegreeofcontrolexercisedbytheRWBovertheworkisextensive,itisnomorethanisneededtostageaseriesofballetsoverawellplannedseasonofperformances.IftheRWBweretostageaballetusingguestartistsinallprincipalroles,theRWB’scontrolovertheguestartistswouldbethesameasifeachrolewereper-formedbyadancerengagedfortheseason.If it isaccepted(as itmustbe), thataguestartistmayacceptarolewiththeRWBwithoutbecomingitsemployee,thentheelement of control must be consistent with the guest artist being an independentcontractor.Therefore,theelementsofcontrolinthiscasecannotreasonablybeconsid-eredtobeinconsistentwiththeparties’understandingthatthedancerswereindependentcontractors.49

AsimilaranalysisoftheimpactofcontrolinthecontextofperformingartistswasusedbytheFederalCourtonanapplicationfor judicialreviewinDupuis v. CRA.50 Mr. Dupuis worked as a guest artist for Cirque du soleil. He contestedCirquedusoleil’sdecisiontoconsiderhimanemployeeandrequestedthattheCRA

47 2006DTC6323(FCA).

48 CanadaPensionPlan,RsC1985,c.C-8,asamended;EmploymentInsuranceAct,sC1996,c.23,asamended.

49 supranote47,atparagraph66.

50 2007DTC5106(FC).ThisdecisionwasrenderedbeforetheFederalCourtofAppealdecisioninRoyal Winnipeg Ballet.


makeadjustments inrespectof the incometaxwithholdingsmadebyCirquedusoleil.ThecourtorderedtheCRAtoconsidertherequestedadjustmentsonthebasisoftheapplicant’sspecificsituationandtheapplicablecriteriafordistinguishingaperformingartistwhoisanemployeefromanartistwhoisanindependentcontract-or.Inthereasonsforthedecision,MartineauJmadethefollowingcommentonthecontroltest:

However,thefactmustbeunderlinedthatinthefieldoftheperformingarts,certaintraditionalindiciaofcontroldonotalwaysallowadistinctiontobedrawnbetweenanemployeeandanindependentcontractor.Forexample,decisionsconcerningrehears-als,thenumberofshowsgivenduringoneseasonandthedates,thecostumesworn,thechoiceandreplacementofartistsforacollectiveperformancewillmostprobablyalwaysbemadebytheartcompany,whetheritisballet,operaortheatre.Asunder-linedbyMr.JusticeCampbellJ.MilleroftheTaxCourtofCanadainRoyal Winnipeg Ballet v. Canada (minister of national Revenue), 2004 TCC 390 at paragraph 33, 35C.C.E.L. (3d) 101, dockets 2003-2569(EI) and 2003-2580 (CPP), on appeal: appealdocketA-443-04(judgmentreserved):

Torelyonthosefactorstofindanemploymentarrangement,wouldeffectivelyprecludeanypossibilityofan independentcontractorarrangement inaper-formingartssetting.Ifindthatthesetypeoffactorsdonotassistindrawingadistinctionbetweenanemployeeandan independent contractor in theper-formingartsenvironment.Onlythosefactorswherethereisroomtomaneuvertoapositionofmoreorlesscontrolshouldbeassessed.51

InProductions Petit Bonhomme Inc. v. mnR,52theTaxCourtofCanadaexaminedthestatusofcameraoperators,soundrecordists,switchers,unitmanagers,makeupartists, electricians, directors of photography, and video recorder operators whowereengagedtoprovideservicesinconnectionwiththeproductionofatelevisionprogram.Inconcludingthateachoftheseworkerswasanindependentcontractor,thecourtremarkedthatinthetelevisionprogramproductionindustry,“thefinishedproductwillbe the resultof the talent,know-howandcreativitycontributedbyeachpersonateachstageofproduction.”53Accordingtothecourt,

eachperson’sinvolvementintheproductionoftheprogramsinquestionsupporttheconclusionthataproductionofthistypeistheresultoftheideas,talent,creativity,andknow-howbroughtbyalltotheperformanceoftheirrespectiveduties,whichtheycarryoutunderthecontroloftheproducerintermsofhowtheirworkistobedone.Everythingtakesplaceinanatmosphereofcollaborationamongprofessionals.Thus,thesituationoftheworkersintheseappealsismorelikethatofself-employedworkers.54

51 Dupuis,supranote50,atparagraph12.

52 2002TCC2000-3683(EI)(aff ’d.2004FCA54).




InBig Pond Publishing and Production Ltd. et al. v. mnR,55theTaxCourtofCanadaexaminedtherelationshipbetweenBigPond,thecompanythathandledtheadminis-trationofthemusicalcareerofRitaMacNeil,awell-knownCanadianentertainer,andthemembersofherband.Therelationshipbetweenthepartieswasgovernedbyacontractthatprovidedthatthenatureoftherelationshipwasoneofhirer-independentcontractor.Themusicianswerepaidamonthlyfeeplusadditionaldailyfeesiftheyworkedmorethan100daysinanyparticularyear.Themusicianswerereimbursedfortheirairfare,hotel,andaccommodations,werepaidaperdiemamountforex-penseswhiletravelling,andreceivedmedicalanddentalbenefits.Themusiciansprovidedtheirowninstruments,butBigPondprovidedmuchoftheamplificationequipment.Theevidencebeforethecourtindicatedthatthemusicianswereprofes-sionalmusicians.ManyofthemhadplayedforBigPondforanumberofyears.Afewmusiciansalsoperformedservicesforothers.

Withrespecttothecontrolissue,thecourtheldthatalthoughtherewascontroloverwhatmusicthemusiciansplayedandwhen,therewasnocontrolastohowthoseinstrumentswereplayed,andthusthecontroltestwouldindicatearelation-shipofhirer-independentcontractor.Withrespecttotheintegrationtest,thecourtrecognizedthatfromBigPond’spointofview,themusicianswereanintegralpartoftheshows;withoutthemtheentertainerhadnobandandnomusic.However,fromthemusicians’pointofview,theywerenotintegratedintoBigPond’sbusi-ness.Whileasubstantialpartoftheirincomeintheperiodwasderivedfromthissource,theyclearlyhadopportunitiestoavailthemselves,anddidavailthemselves,ofothersourcesofincome.Inthecourt’sview,thisalsosupportedthefindingthatthemusicianswereindependentcontractors.

TheCRAhaspublisheditspositionondeterminingthestatusofaworkingartist.InInterpretation BulletinIT-525R“PerformingArtists,”theCRAacknowledgesthatthedeterminationofanartist’sstatusisdifficult:

Whendealingwithpersonsofparticularskillsandexpertise,suchasartists,supervi-sionandcontrolofthemannerinwhichtheworkisdonemaynotbeacriticalanddecisive factor. However, the determination of whether or not an artist is under acontractofserviceoracontractforservicesisaquestionoffact,andwilldependonthenatureandthetermsofthecontractorarrangement(writtenororal),itsduration,andalltheelementsthatconstitutetherelationshipbetweentheparties.56

TheCRAliststhefollowingfactorsasindiciaofanemploymentrelationship:

(a) therighttodecideonorchangethesizeofthegroupwithwhichtheartistperforms;

(b) therighttochoosethenatureoftheartist’sperformance(opera,ballet,the-atre,films,musicals, concerts, classical,popular, jazz)withoutobtaining theartist’sagreement;

55 [1998]TCJno.935.

56 Interpretation BulletinIT-525R(Consolidated),“PerformingArtists,”paragraph4.


(c) thecontinuingauthoritytodictatethetimeandplaceoftheartist’sperform-anceincludingrehearsals,again,withoutobtainingtheartist’sagreement;

(d) theunilateralrighttochangethedates,times,andplacesfromthoseordinarilyscheduled,orincreasethenumberofrehearsalsorperformances;

(e) theobligationtopayovertime;or(f ) theresponsibilitytoprovideorauthorizetransportationfortheartist.57

Incontrast,theCRAwouldconsideranartisttobeanindependentcontractorwheretheartist

(a) hasachanceofprofitorriskofloss;(b) providesinstrumentsandotherequipment;(c) hasanumberofengagementswithdifferentpersonsduringthecourseofayear;(d) regularlyauditionsormakesapplicationforengagements;(e) retainstheservicesofanagentonacontinuingbasis;(f ) canselectorhireemployeesorhelpers,fixtheirsalary,directthemordismiss

them;(g) canarrangethetime,place,andnatureofperformances;or(h) isentitledtoremunerationthatisdirectlyrelatedtoparticularrehearsalsand

performances.58

Insummary,thereisnosinglefactorthatisdeterminativeofarelationshipofemployeeorindependentcontractor.Instead,theentirenatureoftherelationshipbetweenthepartiesmustbeexamined,asdirectedbythesupremeCourtofCanadaintheSagazdecision.Recentcaselawillustratestheimportanceoftheparties’in-tentionatthetimetheyenteredintotherelationship.Thisnewtrendconfirmsthepracticeofmanypractitionerswhoadviseclientstoconcludeawrittenagreementpriortoenteringintoarelationshipashirerorworker.

A LLo c Atio n o f income be t ween c A n A dA A nd other co untrie s

Aspreviouslymentioned,non-residentserviceproviderswillbetaxedinCanadaontheirincomeonlytotheextentthattheincomewasearnedinCanada.Whilethisamountmaybereadilydeterminablewheretheproviderrendersservicestothepar-ticularrecipientexclusivelyinCanada,itismorechallengingtoascertaintheamountwhereservicesarerenderedpartiallyinCanadaandpartiallyinanothercountry.

For example, anAmericanemployeeof a us companymaybe transferred toCanadaforashortperiodoftimetoassistthecompany’sCanadiansubsidiary,oraprofessionalathletemaybeamemberofa teamthatplays someof itsgames inCanadaandsomeintheunitedstates.Inbothcases,theindividualwillhaveto




allocateincomebetweenthetwocountries.EvenactorswhoperforminmoviesthatarefilmedentirelyinCanadaregularlyallocateaportionoftheactingfeestotheunitedstates,whereancillaryservicessuchaspromotionandrehearsalaregener-allycarriedout.

General Principles

Whereapersonisemployedorcarriesonbusinessinmorethanonejurisdiction,thepersonisrequiredtocomputeincomeinrespectofaparticularjurisdictiononthefollowingassumptions:59

1. thepersonhadnoincomeorlossotherthantheincomeorlossfromthepartofthebusinessthatwascarriedoninthejurisdiction,orfromthedutiesper-formedintheparticularjurisdiction;and

2. thepersonwasallowedonlythosedeductionsthatwerewhollyapplicabletosuchpartofthebusiness,ortosuchduties.

Foranon-residentemployeewhosesalaryisnotdelineatedbetweenCanadianandforeignservices,theallocationisgenerallydoneonaperdiembasissuchthatthetaxpayerneedonlyincludeincomeforthepercentageofdaysworkedinCanada.60Thereareexceptionstotheperdiemrule.Forexample,whereanon-residentisemployedininternationaltransportation,kilometrestravelledinCanadaandabroadmaybeabettermeasure;61orwhereasalesemployeeearnscommissionincome,theparticularcommissionshouldbeallocatedtothecountryinwhichtheeffortwasexpendedtoearnit.62

Non-residentindependentcontractorsmustdeterminetheamountofincomethatisattributableto“businessescarriedonbythenon-residentpersoninCanada.”63sincethisphraseisnotspecificallydefinedintheITA,64themeaningmustbedeter-minedbyreferencetothejurisprudence.65Thefactorsconsideredinanyparticularcasewillvarydependingonthetypeofbusinessactivitiesconductedbythenon-resident.InCutlers Guild Ltd. v. The Queen,theFederalCourtlistedthevariousteststhatapplywhendeterminingwhetherataxpayercarriesonabusinessinCanada:

59 section4oftheITA.

60 Interpretation BulletinIT-420R3,“Non-Residents—IncomeEarnedinCanada,”March30,1992,paragraph7.

61 Ibid.

62 Interpretation BulletinIT-270R3,“ForeignTaxCredit,”November25,2004,paragraph25.


64 However,section253doesprovideforanextendedmeaningofthephrasebydeemingcertainactivitiestoconstitutecarryingonbusinessinCanada.

65 Foracomprehensivediscussion,seeConstantineA.Kyres,“CarryingOnBusinessinCanada”(1995)vol.43,no.5Canadian Tax Journal1629-71.


Whetherornotataxpayeriscarryingonabusinessinanothercountryisaquestionoffacttobedeterminedineachcase.Courtshaveruledthattheplacewheresales,orcontractsofsale,areeffectedisofsubstantialimportance.However,theplaceofsalemaynotbethedeterminingfactorifthereareothercircumstancespresentthatout-weighitsimportance.

Anothertestemanatingfromthejurisprudenceis“Wheredotheoperationstakeplacefromwhichtheprofitsarise?”solicitingordersinonecountrymayonlybean-cillarytotheexerciseofatradeinanothercountry.Certainauthoritiesestablishthatactivitiesandoperationsotherthancontractsforsaleconstitutethecarryingonofabusiness,especiallywheretheserespectiveactivitiesandoperationsproduceorearnincome.Whileincomemayberealizedthroughsales,itmaynotariseentirelyfromthatoneactivityoroperation.Purchasingofmerchandiseinonecountry(i.e.Japan)withtheviewoftradinginitelsewhere(Canada)doesnot,ofcourse,constituteanexerciseofthetradeintheformercountry.66

Accordingly,inordertocarryonbusinessinCanada,theremustbeoperationsoractivitiesinCanadafromwhichbusinessprofitsarise(orareexpectedtoarise).TheCRAhasprovidedsomeguidanceonhowitdeterminesthelocationofthesourceofbusinessincome.67Notsurprisingly,wherethebusinessconsistsoftherenderingofservices,theincomewillbeconsideredtohaveariseninthelocationwheretheserviceswereperformed.68

Allocation of Income for Actors

Actorsgenerallyperformmultiplefunctionsinconnectionwiththeproductionofafilm.Clearly,themostimportantservicethatafilmactorrendersistheperformanceduringprincipalphotography.However,evenwhereallprincipalphotographyisperformedinCanada,itislikelythattheactorwillrendersignificantservicesintheunitedstatesorinathirdcountry.Forexample,leadactorsaregenerallyrequiredtopromoteafilmpriortoitsreleasebyconductingamultitudeoflocalmarketin-terviewsaswellasappearingontalkshowsbroadcastovernationalnetworks.Theactorisalsogenerallyrequiredtoreportforrehearsalslongbeforefilmingoccurs.Inaddition,theactormayberequiredduringpost-productiontoperform“loop-ing”(whichisessentiallyaretapingofcertaindialoguethatwasnotcapturedclearlyduringprincipalphotography).Wheretheactorispaidalump-sumamountforallservicestoberenderedinconnectionwiththefilm(excludingcontingentcompen-sationbasedonfilmrevenues),heorshewillneedtoallocatetheincomebetweenthe services rendered in Canada (generally principal photography) and all otherservicesrendered.

Duringthepastdecade,agentsforHollywoodactorsbecamequiteaggressiveinallocatingincometotheunitedstates.Itwasnotuncommonforactorstotakethe

66 81DTC5093,at5095(FCTD).

67 IT-420R3,supranote60.



positionthat50percentormoreoftheincomefromaproductionfilmedentirelyinCanadashouldbeallocatedtotheunitedstates.Furthermore,agentsbeganre-quiringthatproductioncompaniesenterinto“bifurcated”agreementswiththeirclients—anagreementcoveringCanadianservicesandaseparateagreementcover-ingusservices.Eachagreementincludedaspecifiedfeefortheparticularservicescoveredbytheparticularagreement,therebypotentiallysidesteppingthe“alloca-tion”issue.Theinsistenceonarelativelylargefeeintheusagreement,comparedwiththerequiredservicesundertherespectiveagreements,createddifficultiesfortheproductioncompanies,whichwereliableforanyshortfallinwithholdingtaxesifitwasdeterminedthatalargerportionoftheoverallfeepaidtotheactorshouldhavebeenallocatedtotheCanadianagreement.69

TheCRAbecameawareoftheaggressiveallocationapproachesbeingusedbysomeHollywoodactors.Consequently,theFilmservicesunitoftheCRAissuedamemorandumsettingforthwhatitconsiderstobetheonlyacceptablemethodofallocating incomeearnedbyactorsbetweenCanadaandanothercountry.70Theformulafirst requires thecomputationof thenumberofdays that theactorwasphysicallyinCanadaduringtheproduction,whetherornotserviceswererenderedonsuchdays.“InCanada”daysincludethedaysofarrivalinanddeparturefromCanada,weekends,statutoryholidays,anddayswhentheactorwasonstandby,oncall,oronshortbreaksiftheactorremainedatorneartheset.Thenextstepistocomputethenumberofdaysspentworkingontheproduction“outsideCanada.”Thisisequaltothenumberofdaysthattheactoractually provided servicesoutsideCanadamultipliedby7⁄5(totakeintoaccountweekends).

ThepercentageofthetotalremunerationpaidtotheactorforservicesrenderedontheproductionthatistobeallocatedtoCanadaisequalto

“InCanada”days

“InCanada”days+“outsideCanada”days×100%.

WhiletheCRAhasnotspecifiedwhattypesofservicesmaybeincludedincomputingthe“outsideCanada”days,theruleofthumbisthatforaproductionfilmedentirelyinCanada,theportionoftheactor’sincomeallocatedtoCanadashouldrepresentatleast70percentofhisorhertotalremuneration.

Inadditiontofeesforservices,allactorsareentitledtoresiduals;inaddition,insomecircumstances,actorsareentitledtoparticipations.Residualsarecontingentpaymentsbasedonrepeatbroadcastsofafilm,program,orcommercialaftertheinitialbroadcasthasaired.Therighttoresidualsisgenerallyprotectedbycollectivebargaining agreements.Participations are contractual arrangementsbetween theproducerofafilmortelevisionshowandaperformerwherebythelatterisentitled

69 Withholdingtaxobligationsarediscussedbelow.

70 CanadaRevenueAgency,“AllocatingIncometoCanadaforActingservices”(online:http://www.cra-arc.gc.ca/tx/nnrsdnts/film/ctrs/llct-eng.html).


toapercentageoftheprofitsor,insomecases,apercentageofthegrossrevenuesfromtheexhibitionofthefilm.

Bothresidualsandparticipationsrepresentcontingentpayments.TheCRAisoftheviewthatwherenon-residentactorsrenderservicesinCanada,suchpaymentsaresubjecttoCanadiantaxation.Althoughpaymentsmaybecontingentanddeferredtosubsequentyears,theCRAisoftheviewthatthepaymentsarefortheservicespreviouslyrenderedinCanada.WhereservicesareprovidedinCanadaandothercountries,anallocationofthesepaymentsmustbemade.71

WhiletheCRA’spositionwithrespecttoresidualsappearstobecorrect(becausetherighttoresidualpaymentsisembeddedinthecollectivebargainingagreementinrespectoftheprovisionofactingservices),itisquestionablewhetherparticipa-tionpaymentsarenecessarilyfortheactingservicesrenderedinCanada.

Ordinarily,participationswillbeofferedbyproducersorstudiostoactorsinoneoftwosituations:wheretheproducerisfinancingan“artistic”productionorapictureforwhichfinancingismoredifficulttoobtain.Inthesecondcase,actorsofsignificantreputationmaybeofferedparticipationsaspartoftheircontractforservicesontopofsignificantfees.Inthiscase,theissueiswhethertheparticipationisremunerationfortheCanadianservicesorwhetheritisofferedforthe“boxoffice”valueoftheactor’s name and reputation. The participation is a payment based on revenuesgenerated,whicharelargelydependentonthecommercialsuccessofthefilm.Thatsuccessisoftenattributabletothenameandreputationoftheactor,ratherthanthequalityoftheparticularperformance.Insuchcase,theargumentthatthepaymenttotheactorisfornameandreputation,ratherthanforservices,mayhavemerit.

Asamatterofpractice,whereaforeignproducercontractswithanon-residentactorforproductionservicesinCanadaandtheactorhasanentitlementtopartici-pations,twocontractsmaybeexecuted.ThefirstcontractcouldbeinrespectofCanadianactingservicesforafixedfee.Thesecondagreementcouldbeinrespectof servicesprovidedoutsideCanada, includingacting services (if applicable), re-hearsalservices,andpromotionofthefilm,aswellastheuseoftheactor’snameinpromotionofthefilm,forwhichareasonableportionofthefeeandtheparticipationswouldbeoffered.unlesssuchanagreementcouldbechallengedasbeingpatentlyunreasonable,itappearsthatitwouldbedifficultfortheCRAtoarguethattherighttoparticipationscontainedintheforeignservicescontractshouldbesubjecttotheactortax.

Allocation of Income for Other Performing Artists

Whereaperformingartistispaidonaper-showbasis,itisrelativelystraightforwardtocomputegrossincomeearnedinCanada.Withrespecttodeductions,anyde-ductibleexpensesshouldbeallocatedonabasisthatisreasonableandconsistentwiththeincomeallocation.

71 CanadaRevenueAgency,“InformationonWithholdingTaxonResidualsandContingentCompensation”(online:http://www.cra-arc.gc.ca/tx/nnrsdts/film/ctrs/wthhldg-eng.html).


However,whereaperformingartistearnsalumpsumbasedonperformancesinCanadaandabroad,itbecomesnecessarytodeterminetheappropriateamounttoallocatetoCanada.WhileastraightallocationofincomebasedonthenumberofperformancesinCanadaandthenumberofperformancesabroadmaybeappropri-ateinsomecircumstances,itisquestionablewhetherthatwouldbeanappropriateallocationmethodiftheperformer’searningsweredirectlylinkedtoticketsalesandtheaudiencesizepershowinCanadianvenuesdifferedgreatlyfromthatinotherlocales.

InSumner et al. v. The Queen,72Gordonsumner(therockstarsting)wasre-assessedontheallocationofincomethatheearnedfromaNorthAmericanconcerttour.stingwasaresidentoftheunitedKingdomatthetimeandwasemployedbyRoxanneMusicInc.(“Roxanne”),aus-residentcorporation.Roxannewasresponsibleforhandlingsting’sNorthAmericanconcerttourandwascontractuallyrequiredtopaysting95percentofitsnetprofitsfromthetour.73stinghadallocated2.5per-centofhisoverallsalaryfromRoxannetoCanadaeventhoughCanadianconcertsgenerated9.11percentofthetotalNorthAmericantourrevenues.The2.5percentallocationwasbasedonthefactthattherewereonlysixCanadianconcertdatesoveranallegedperiodof240daysfortheentiretour.stingwasreassessedonthebasisthatheshouldhaveallocated9.11percentofhissalarytoCanada.TheTaxCourtupheldthereassessmentonthebasisthatstingdidnotdemonstratethattheperdiemmethodwasmoreaccuratethanthegrossrevenuemethodusedbytheminis-ter.74 In reaching its decision, the Tax Court noted that Roxanne had deducted9.11percentofsting’ssalaryfromitsgrossCanadianrevenueincomputingitstax-ableincomeearnedinCanada,andstinghadtreatedalmostthesameamountasCanadian-sourceincomewhenhecompletedhisustaxreturn.

Allocation of Income for Athletes

Aprofessionalathlete,suchasagolferortennisplayer,whocompetesinaneventheld inCanada, is required to includeall incomeandwinningsearned fromtheeventincomputingtaxableincomeearnedinCanada.Thecalculationwouldalsoincludeanyguaranteed“appearancefees”75paidtotheathleteforparticipatingintheevent.Moreover,signingorappearancefeesreceivedbytheathletethatcouldbeviewedasconsiderationforenteringintoaperformancecontract,ratherthanfortheCanadianservicesthemselves,maybedeemedunderparagraph115(2)(c.1)toconstitutetaxableincomeearnedinCanadaifthepersonpayingthefeeswasorwill

72 2000DTC1667(TCC).

73 AlthoughthesharesofRoxannewerenotownedbysting,thecourtdidnotaccepttheassertionthatitdealtatarm’slengthwithhim.

74 TheapproachofchoosingthemorereasonableoftheallocationmethodsappliedbythetaxpayerandtheministerwasalsofollowedinSutcliffe v. The Queen,2006DTC2076,atparagraph66(TCC)(appealedtotheFederalCourtofAppeal).

75 CRAdocumentno.9506595,May9,1995.


beentitledtoadeductionundertheITAinrespectofsuchfees.AstheCRAstatesinInterpretation BulletinIT-168R3,

[n]on-residentsarealsoliable,byvirtueofparagraph115(2)(c.1),fortaxonpaymentsreceivedforagreeingtoenterintoacontractforservicestobeperformedinCanada(i.e.signingbonuses),forundertakingnottoenterintosuchacontractwithanotherpartyorasremunerationfordutiesorservicestobeperformedinCanada,if the amount so received is deductible by the payer in computing income for Canadian income tax purposes.76

Wheretheathleteisemployedbyaprofessionalsportsteam,theathleteandtheteammustdeterminetheportionof theathlete’s income(includinganysigningbonuses)thatrelatestoemploymentdutiesperformedinCanada.77Invariousin-terpretations,theCRAhassuggesteddifferentapproachesonhowtoapportiontheincome.TheseincludeaperdiemapproachbasedontheactualnumberofdaysthatanathletewaspresentinCanadainateam’sseason,beginningwiththefirstdayofpre-seasontrainingcampuntil the lastdayonwhichthe teamplays inaplayoffgame;78perdiemexcludingplayoffs;79andthepercentageofgamesplayedinCanadaregardlessofthehomelocationoftheteam.80

InAustin v. The Queen,81theTaxCourtexaminedanallocationinconnectionwiththecontractforKentAustin,aus-residentquarterbackwhoplayedfortwoCFLteams(thesaskatchewanRoughridersandtheTorontoArgonauts).Duringthe1994and1995seasons,theCFLhadanumberofus-basedfranchises.Mr.Austinplayedthreegamesintheunitedstatesin1994andfourgamesin1995.Theminister’spositionwasthatMr.Austin’sincomeshouldbeallocatedbetweenCanadaandtheunitedstatesonaperdiembasisontheassumptionthatMr.Austinwasphysicallypresentintheunitedstatesfor6daysovera180-dayperiodin1994and8daysovera149-dayperiodin1995.TheTaxCourtreviewedMr.Austin’scontractandconcludedthatsinceMr.Austin’ssalarywaspayableininstalmentsaftereachgame,andhedidnotgetpaidforgamesthathedidnotplayforanyreasonotherthanin-jury,anallocationbasedonnumberofgamesplayedineachcountrywasfarmorereasonablethantheminister’smethodinthecircumstances.

Allocating incomebetween jurisdictionsbecomesevenmoredifficultwhereacontractincludesbonusfeatures.Forexample,assumethatahockeyplayerwiththeNHL’s Edmonton Oilers has a contract that awards him a $500,000 bonus if hescores40ormoregoalsinaseason.Iftheplayerachievesthetarget,shouldthe

76 supranote26,atparagraph5(emphasisadded).

77 Certaintreaties(suchastheustreaty)exemptathletesonforeign-basedteamsfromCanadiantaxationinrespectofgamesplayedinCanada.Theimpactoftaxtreatiesisdiscussedbelow.

78 CRAdocumentno.9601625,May28,1996.

79 CRAdocumentno.9819311,August11,1998.

80 CRAdocumentno.2001-0087644,July18,2001.

81 2004DTC2181(TCC).


bonusbeallocatedinthesamemannerashisbasesalary,orshouldtheCanadian-sourceincomebebasedonthepercentageofgoalsscoredinCanada?Whileinter-estingargumentscanbemadeforbothinterpretations,itisourviewthatthebonusfeatureissimplyoneelementusedinthedeterminationoftheplayer’sultimatesal-aryentitlementand,assuch,shouldbeallocatedinthesamemannerasthebasesalary.

Independentathleteswhoparticipateintoureventssuchasgolf,tennis,orautoracingalsofaceinterestingallocationissueswhereseriesbonusesareprovidedtotheathletes.seriesbonusesaregenerallybasedonapointssystemwherebytheathleteisawardedacertainnumberofpointsdependingonhisorherperformanceatapar-ticularevent.Forexample,theProfessionalGolfers’AssociationTourrunsapointssystemcurrentlycalledtheFedExCup,wherebypointsareawardedtothetop70golfersineachevent.82Attheendoftheseason,atotalof$35millioninannuitiesisdistributedamongthecompetitorsaccordingtotheirtotalpointsaccumulation,with$10millionbeingawardedtotheplayerwhoearnsthemostpoints.similarly,theIndyRacingLeagueawardspointsaftereachautomobileraceandprovidesa$1millionbonustotheIndyCarserieschampion.Theseseason-longpointsystemsraisethequestionofwhetheranathletewhoreceivessuchayear-endbonusshouldberequiredtoallocateasCanadian-sourceincomeaportionofthebonusmoneyequaltothepercentageofpointsearnedfromCanadianevents.Whileitappearstobeappropriatetodoso,theCRAhasnotissuedapositiononthisissue,norareweawareofanynon-residentathleteswhohaveactuallyallocatedaportionoftheirseriesbonustoCanada.

Professionaltennisposessimilar,ifmoreremote,issues.specifically,theAssoci-ationofTennisProfessionals(ATP)runstheATPRace.ParticipantsinworldwideATPtenniseventsearnpointstowardtheATPRace,althoughmorepointsareawardedtotopfinishersintheGrandslamtournaments83andtheATPMastersseries.TheATPMastersseriesismadeupofnineevents,oneofwhichisheldinCanada(theRogersCup).ThetopeightfinishersintheATPRacequalifytoplayintheTennisMasters Cup, where approximately us$4.5 million in prize money is allocatedamongtheparticipants.Accordingly,whileearningpointsataCanadianeventdoesnotprovidethetennisplayerwithanydirectbonuses,itmayprovidehimorherwiththeopportunitytocompeteforsubstantialadditionalprizemoney.Inthiscase,theissueiswhetheraparticipantintheTennisMastersCupshouldberequiredtoallocateaportionoftheprizemoneyfromthattournamenttoCanadaiftheplayerwouldnothavequalifiedforthateventbutforhisorherparticipationandsuccessintheCanadiantournament.

82 undercurrentrulesforaregularevent,thewinnerreceives4,500pointswhilethe70thplacefinisherreceives50points.

83 ThefourGrandslamtournamentsaretheFrenchOpen,Wimbledon,theusOpen,andtheAustralianOpen.


Insummary,theredoesnotappeartobeasingleacceptedmethodologytoallo-cateanathlete’sincomebetweenCanadaandaforeigncountry.Rather,thespecifictermsoftheparticularathlete’scontractwillneedtobereviewedinordertodeter-mineanappropriateallocationformulaintheparticularcircumstances.

tre At y- b A sed e x emP tio ns from tA x Atio n

Anon-residentindividualorcorporationthathastaxableincomeearnedinCanadafromrenderingemploymentservicesorcarryingonabusinessinCanadamaystillqualifyforanexemptionfromCanadiantaxationonsuchincomebyvirtueofanapplicablebilateraltaxtreaty.Canada’streatiesgenerallyprovideanexemptioninrespectofsuchincomewherethepersonprovidingtheserviceshasonlyatangen-tialconnectiontoCanada.However,thenatureoftheexemptionvaries,dependingonwhetherthepersonrenderingtheservicesisanindividualoracorporationandwhethertheservicesareinthenatureofemployment(dependentpersonalservices)orthoseofanindependentcontractor(independentpersonalservicesorbusinessoperations).

General Principles

InorderforapersontoclaimanexemptionbasedonaprovisioninataxtreatythatCanadahasenteredintowithanothercountry,thepersonmustbearesidentoftheothercountryforthepurposesofthetreaty.Thetreatydefinitionof“resident”isgenerallynarrowerthantheordinarymeaning,sinceitisusuallylimitedtopersonswhoare“liablefortax”intheparticularcountry.84Thus,auslimitedliabilitycom-pany(LLC)doesnotmeetthecurrentdefinitionof“resident”forthepurposesoftheustreaty,becauseitisthemembersofanLLC,andnotthecompanyitself,whoaresubjecttousincometax.However,thefifthprotocolwillextendtreatybenefitstousresidentswhoderiveincomethroughanentity,suchasanLLC,thatisfiscallytransparentunderthelawsoftheunitedstates.85

Whereanexemptionisavailableunderabilateraltaxtreaty,thenon-residentmay claim a deduction under subparagraph 110(1)(f )(i) of the ITA equal to theamountthatisexemptfromtaxunderthetreaty.Totheextentthatthisdeductioncompletelyoffsetstheincomeearnedbythenon-residentinCanadasuchthatnoCanadianincometaxispayableintheyear,thenon-resident(ifanindividual)isex-emptfromtherequirementtofileaCanadiantaxreturnforthatyear.86Where,however,thenon-residentisacorporation,itmuststillreporttheincomeandoff-settingdeductionbyfilingacorporatetaxreturnunlesstheonlyincomeearnedbythecorporationwasincomefromactingservicesonwhichtaxwaspayableundersubsection212(5.1).87

84 ustreatyarticleIV(Residence).

85 Fifthprotocolarticle2,addingparagraph7totreatyarticleIV(Residence).


87 Paragraph150(1)(a).


Historically,Canada’staxtreatieshavefollowedtheOECDmodelconvention88withrespecttotheexemptionsandlimitationsonsource-countrytaxationofper-sonalservices.However,theOECDmodelconventionwasamendedinApril2000toremovethearticledealingwithindependentpersonalservices(servicesrenderedbyindependentcontractors).suchservicesnowfallundertherubricofthegeneralbusinessprofitsarticle.ThischangereinforcesthepositiontakeninCanada89thatthereisnodistinctionbetweena“permanentestablishment,”whichisthethresholdcriterionforsource-countrytaxationofbusinessprofits,anda“fixedbase,”whichhistoricallyhasbeentherequirementforsource-countrytaxationofindependentpersonalservices.ThefifthprotocolhasfollowedtheOECDmodelconventiononthispointinremovingarticlexIV(IndependentPersonalservices)oftheustreaty.90Furthermore,DepartmentofFinanceofficialshaveconfirmedthatitisCanada’sin-tentiontofollowthechangeintheOECDmodelconventionfornewtreatiesunlessthecounterpartyinsiststhattheindependentpersonalservicesarticleberetained.91

Giventheamountofcross-bordermovementofserviceproviders,thediscussionbelowfocusesonthespecifictermsoftheustreatyasamendedbythefifthproto-col,particularlyarticlesVII(BusinessProfits),xV(DependentPersonalservices),andxVI(ArtistesandAthletes).However,sincemostofCanada’staxtreatiesstillretainat leastthenotionaldistinctionbetweenbusinessprofitsandincomefromindependentpersonal services, the languagecontained inarticle xIVwill alsobediscussedherein.

Treaty Exemptions Generally Available to Independent Contractors

underCanada’shistoricaltaxtreatyparlance,anindividualwhoprovidesservicesasanindependentcontractorisconsideredtohaverendered“independentpersonalservices” or “professional services,” whereas any other type of entity renderingsuchservicesisconsideredtohaveearned“businessprofits.”

Forexample,underarticle14oftheCanada-uKincometaxconvention,92CanadahastherighttotaxincomederivedbyaresidentoftheunitedKingdominrespectofprofessionalservicesorotherindependentactivitiesofasimilarcharacterrendered

88 OrganisationforEconomicCo-operationandDevelopment,model Tax Convention on Income and on Capital: Condensed Version(Paris:OECD,July2005)(hereinreferredtoas“theOECDmodelconvention”).

89 seeDudney v. The Queen,99DTC147(TCC);aff ’d.2000DTC6169(FCA).

90 Fifthprotocolarticle9.

91 RecenttreatiesenteredintobyCanadawithFinlandandMexicodonotcontaintheindependentpersonalservicesarticle.

92 ConventionBetweentheGovernmentofCanadaandtheGovernmentoftheunitedKingdomofGreatBritainandNorthernIrelandfortheAvoidanceofDoubleTaxationandthePreventionofFiscalEvasionwithRespecttoTaxesonIncomeandCapitalGains,signedatLondononseptember8,1978,asamendedbytheprotocolssignedonApril15,1980,October16,1985,andMay7,2003(hereinreferredtoas“theuKtreaty”).


inCanadaonlytotheextentthattheincomeisattributabletoafixedbasethattheindividualhasregularlyavailabletohimorherinCanada.93similarly,article7oftheuKtreatyprovidesthatCanadamaytaxthebusinessprofitsofauKenterpriseonlyiftheenterprisecarriesonbusinessthroughapermanentestablishmentsitu-atedinCanada,andthenonlytotheextentthattheprofitsareattributabletosuchpermanentestablishment.ArticlesVIIandxIVofthecurrentversionoftheustreaty(thatis,priortothecomingintoforceofthefifthprotocol)containsimilarlanguagetothatintheuKtreaty.

Asmentionedabove,theOECDhaseliminatedthedistinctionbetweenfixedbaseand permanent establishment through the deletion of the independent personalservicesarticle.Consequently,servicesrenderedbyindependentcontractorsnowfallunderthebusinessprofitsarticleinwhichthethresholdcriterionforsource-countrytaxationistheexistenceofapermanentestablishment.

TheleadingCanadiancaseonthemeaningof“permanentestablishment”isthesupremeCourtofCanada’sdecisioninSunbeam Corp. (Canada) Ltd. v. The Queen.94InSunbeam,thesupremeCourtconsideredthemeaningoftheterm“permanentestablishment”inthecontextofprovincialtaxation.sunbeammaintaineditsheadofficeandmanufacturingplantinOntariobutsolditsproductsinQuebecthroughasalesrepresentativelocatedinMontreal.TheissuewaswhethersunbeamhadapermanentestablishmentinQuebecandwasthusentitledtoclaimprovincialtaxcredits.Thecontractwiththesalesrepresentativeprovidedforcommissionsalesinrespectofcertainsunbeamproducts,withaminimumamountguaranteed.Thesalesrepresentativewasrequiredtopayhisownexpensestoworkexclusivelyforsun-beam,wasrequiredtofollowsunbeam’sinstructions,anddidnothavetheauthoritytomakecontractsonbehalfofsunbeam.Hehadasmallnumberofsunbeamprod-uctsfordisplaypurposes,buttheorderswerefilledfromsunbeam’sOntarioplant.Thesalesrepresentativemaintainedanofficeandofficeequipmentinhisresidence,butsunbeamdidnotcompensatehimfortheseexpenses.ThesupremeCourtheldthatsunbeamdidnothaveafixedplaceofbusinessofitsowninQuebecbyvirtueof theemploymentcontractwiththesalesrepresentative.Accordingly,sunbeamdidnothaveapermanentestablishmentinQuebecthatwouldentitleittotheprov-incialtaxcredits.

InDudney,95theFederalCourtofAppealupheldaTaxCourtofCanadarulingonthemeaningof“fixedbase”withinthecontextofarticlexIV(IndependentPer-sonalservices)ofthecurrentustreaty.Atthetriallevel,BowieJcomparedtheuseoftheterms“fixedbase”and“permanentestablishment”forthepurposesoftheustreatyandconcludedthat“thereislittle,ifany,realdifferenceinmeaningbetweenthetwoexpressionsasusedintheConvention.”96

93 Thislimitationdoesnotapplytoperformingartistsorathletes(discussedbelow).

94 [1969]sCR221.

95 supranote89.

96 Ibid.(TCC),atparagraph11.


Mr.Dudney,aresidentoftheunitedstates,washiredasanindependentcon-tractorbyauscompanythatprovidedtechnicaltrainingservicestoPanCanadianPetroleumLimited(“PanCan”),aCanadiancorporation.AllservicesprovidedbyMr.DudneywereperformedonPanCan’spremises,andMr.Dudneywasnotper-mittedtoconductanyotherbusinessfromPanCan,includingusingthetelephonefornon-PanCanpurposes.Mr.Dudneyhadno letterheadorbusinesscards thatidentifiedhimasworkingatPanCanorelsewhereinCanada.TheFederalCourtofAppealnotedthattheterm“fixedbasedregularlyavailabletohim”isnotdefinedintheustreatyandreferredtothecommentariesontheOECDmodelconventionindeterminingitsmeaning:

These commentaries indicate that an enterprise has a “permanent establishment”whereithasa“fixedplaceofbusiness,”anidentifiablelocationwithacertaindegreeofpermanenceinwhichthebusinessoftheenterpriseisbeingcarriedon.Byanalogy,aparticularlocationisa“fixedbaseregularlyavailable”toapersonwhoprovidesin-dependentpersonal servicesonly if thebusinessof thatperson isbeingcarriedonthere.97

Thecourtthenidentifiedthefactorstodeterminewhetherapersoncarriesonabusinessthroughafixedbasedregularlyavailabletohim:

Thus,whereapersonisdeniedthebenefitofArticlexIVonthebasisthathehasafixedbaseregularlyavailabletohiminCanada,thequestiontobeaskediswhetherthepersoncarriedonhisbusinessatthatlocationduringtherelevantperiod.Thefactorstobetakenintoaccountwouldincludetheactualusemadeofthepremisesthatareallegedtobehisfixedbase,whetherandbywhatlegalrightthepersonexercisedorcouldexercisecontroloverthepremises,andthedegreetowhichthepremiseswereobjectivelyidentifiedwiththeperson’sbusiness.Thisisnotintendedtobeanexhaust-ivelistthatwouldapplyinallcases,butitissufficientforthiscase.98

TheCourtofAppealagreedwiththeTaxCourt’sfindingthatthePanCanprem-isesdidnotconstitutealocationthroughwhichMr.Dudneycarriedonhisbusiness,sincehecouldusethepremisesonlyduringbusinesshoursandonlyforthepurposeofperformingthecontractedservicesforPanCan.Accordingly,thecourtconcludedthatMr.Dudneydidnothavea“fixedbaseregularlyavailabletohim”andthushecouldrelyontheexemptioninarticlexIVoftheustreaty.

TheCRAannouncedinIncome Tax Technical newsno.2299thatitwouldapplyDudneyincaseswhereitcouldbeconcluded,onthefacts,thatthetaxpayerdidnothavesufficientphysicalcontrolofthespacewithinanotherperson’spremisestobe

97 Ibid.(FCA),atparagraph16.


99 Income Tax Technical newsno.22,January11,2002.


carryingonhisorherbusinessintheparticularplace.However,inIncome Tax Tech-nical newsno.33,100theCRAclarifiedthecircumstancesinwhichitwouldfollowthedecisioninDudney.TheCRAemphasizedthatlegalcontrolaloneisnotsufficientinmakingadeterminationofafixedbaseorpermanentestablishment.ItstressedthatthecourtinDudneyhadidentifiedthreefactorstobeconsideredinthatcase,buthadindicatedthatthefactorswerenotexhaustive.TheCRAclarifieditsviewthatitwasnotnecessaryforanon-residenttocarryonallaspectsofhisbusinessinCanadain order to have a permanent establishment in Canada, given the definition ofpermanentestablishmentinCanada’streaties.Moreover,theCRAindicatedthatitdetermineswhetherapermanentestablishmentexistsbyexaminingallofthefactsof thegivensituation in lightof theparticular treaty, the jurisprudence,andtheOECDcommentary.

Ina2005decision,Toronto Blue Jays Baseball Club et al. v. Ontario (min. of Fin.),101theOntarioCourtofAppealconsideredthedefinitionof“permanentestablishment”forthepurposesoftheEmployerHealthTaxAct(Ontario)(EHTA).TheissueinthecasewaswhetherdressingroomsandotherfacilitiesusedbytheTorontoBlueJays,theTorontoMapleLeafs, and theTorontoRaptorsduringawaygamesoutsideOntarioconstituted“permanentestablishments”oftheteamsforthepurposesoftheEHTA.Indeterminingwhetherapermanentestablishmentexistedattheawaygames, thecourtconsideredthebusinessofprofessionalsports teamsanddeter-minedwhere these activities tookplace.Thecourt found that fundamental to aprofessionalsportsbusinessarethecontractsenteredintowiththeplayers,thesell-ingoftickets,thelicensingofconcessions,andnegotiationsrelatingtosponsorships,advertising,andtelevisionandradiobroadcastingrights.Alloftheseactivitiestookplaceatthehomevenuesoftheteams.ThespaceusedatthelocationsoutsideOn-tariowascomparabletooccupancyofahotelroom.Accordingly,thecourtconcludedthattheteams’connectionswithandcontrolofthevenuesoutsideOntariowassotransitorythattheycouldnotbeviewedashavingfixedplacesofbusinessatthosevenues.

TheCRAhasindicatedthat,initsview,theToronto Blue Jaysdecisionisoflittlepersuasivevalue,becauseitwasnotdecidedbyafederalcourtandinvolvedprovin-ciallegislation;accordingly,theCRAwouldnotbeboundbytheOntarioCourtofAppeal’sanalysisindeterminingwhetherapermanentestablishmentexistsinCanadaforthepurposeofataxtreaty.102However,whilethedefinitionofpermanentestab-lishmentintheEHTAisnotidenticaltothedefinitioninthemajorityofCanada’streaties,itcontainsthesamecomponents.Thedefinitionrequirestheemployertohaveabusiness;thebusinessmustbeinafixedplace;and,byvirtueofdeemingrulesinthelegislation,thedefinitionencompassesplaceswheretheemployerwhollyor

100 Income Tax Technical newsno.33,september16,2005.

101 2005DTC5360(Ont.CA).

102 Income Tax Technical newsno.34,April27,2006.


partlycarriesonthebusiness.ItisthereforequestionablewhethertheTaxCourtwouldassignaslittlevaluetothedecisionastheCRAsuggeststhatitwarrants.

someofCanada’staxtreatiesoverridethecommon-lawprinciplesbydeeminganon-residenttohaveafixedbasewherethenon-residentispresentinCanadaforanaggregateperiodexceeding183daysinacalendaryear.103severaltreatiesdonotcontainafixedbaserequirementatall.104

Asnotedabove,whenthefifthprotocolcomesintoforce,articlexIVwillbede-letedfromtheustreaty.Consequently,incomefromindependentservicesrenderedbyanindividualwillhenceforthbedealtwithunderarticleVII,thebusinessprofitsprovision,suchthatCanadamaytaxtheincomeearnedbyanindividualfromser-vicesrenderedinCanadaonlytotheextentthatsuchincomeisattributabletoapermanentestablishmentsituatedinCanada.Thefifthprotocolwillalsoexpandthedefinitionof“permanentestablishment”bydeemingcertainenterprisestohaveapermanentestablishmentintheabsenceofafixedlocation.105Forexample,anindi-vidual who carries on a services business will be considered to provide servicesthroughapermanentestablishmentinCanadaiftheindividualispresentinCanadaforaperiodorperiodstotallingatleast183daysinany12-monthperiod,andif,during thatperiodorperiods,more than50percentof thegrossactivebusinessrevenues fromthatservicesbusinessconsistof incomederived fromtheservicesperformedbytheindividualinCanada.Itappearsthatthetestwouldnotbemetwhereaparticularbusinessenterpriseengagestwoormoreindividuals,whoareinCanada(eitherindividuallyorcollectively)for183ormoredaysinany12-monthperiod,andwho,intheaggregate(butnotindividually),generatemorethan50per-centofthegrossactivebusinessrevenuesofthebusinessenterprisefromservicesrenderedinCanada.Whenaskedaboutthisscenario,aDepartmentofFinanceof-ficialverballyconfirmedthatitappearstobeoutsidethescopeoftheprovision.

AnentitywillalsobedeemedtohaveapermanentestablishmentifitprovidesservicesinCanadaforaperiodtotallingatleast183daysina12-monthperiodwithrespecttothesameoraconnectedprojectforcustomerswhoareresidentsofCan-adaorwhomaintainapermanentestablishmentinCanada,andiftheservicesareprovidedinrespectofthatpermanentestablishment.106

103 see,forexample,articlexIVoftheConventionBetweenCanadaandthestateofIsraelfortheAvoidanceofDoubleTaxationandthePreventionofFiscalEvasionwithRespecttoTaxesonIncomeandonCapital,andtheaccompanyingprotocol,signedatOttawaonJuly21,1975.similarprovisionsareincludedintheCanada-Estoniaincometaxconvention,signedJune2,1995;theCanada-Koreaincometaxconvention,signedseptember5,2006;theCanada-Latviaincometaxconvention,signedApril26,1995;theCanada-Lithuaniaincometaxconvention,signedAugust29,1996;theCanada-southAfricaincometaxconvention,signedNovember27,1995;andtheCanada-Zimbabweincometaxconvention,signedApril16,1992.

104 Forexample,theCanada-Barbadosincometaxagreement,signedJanuary22,1980;andtheCanada-Jamaicaincometaxagreement,signedMarch30,1978.

105 Fifthprotocolarticle3,amendingtreatyarticleV(PermanentEstablishment).

106 Ibid.


Treaty Exemptions for Dependent Personal Services

Income Taxes for EmployeesAsageneralrule,mosttreatieswithCanadapermitCanadiantaxationofanon-residentemployeeiftheemploymentisexercisedinCanada.AccordingtotheOECDcommentary,employmentisexercisedintheplacewheretheemployeeisphysicallypresentwhenperformingtheactivitiesforwhichtheemploymentincomeispaid.MostbilateraltaxtreatieswithCanadacontainlanguageintheirdependentpersonalservicesarticle107thatprovidesataxexemptionfromCanadiantaxtotheemployeeif(1)theemployeeisnotpresentinCanadaformorethan183days,108(2)there-muneration ispaidby anon-resident employer, and (3)the remuneration isnot“borneby”anemployerwithafixedbaseorpermanentestablishmentinCanada.109

under theOECDmodelconvention, thefirstcondition is that theamountoftimespentinthecountryofemploymentmustnotexceed183daysin“anytwelvemonthperiodcommencingorendinginthefiscalyearconcerned.”However,mostofCanada’staxtreatiesrequiretheemployee’spresenceinCanadatobelessthan183daysinacalendar year.Inapplyingthe183-dayrule,theword“day”includesanydayorpartofadayofthecalendaryear inwhichthepersonwasphysicallypresentinCanada(includingholidaysandweekends),regardlessofthenumberofhourspresent.Thecalendaryearinwhichthe183daysarecountedistheyearinwhichtheemploymentisexercised,notnecessarilytheyearinwhichtheremuner-ationisreceived.110

Currently,theustaxtreatyreferstothecalendaryear.InordertomirrorthewordingintheOECDmodelconvention,thefifthprotocolwillamendarticlexVbyreferring to “any twelve-monthperiod commencingor ending in thefiscal yearconcerned.”Thecommentaryaccompanying the OECDmodel convention statesthatthiswordingensuresthatany12-monthperiodiscovered.

Thesecondconditioninthedependentpersonalservicesarticleisthattheem-ployerpayingtheremunerationmustnotbearesidentofthecountryinwhichtheemploymentisexercised.ThecommentaryontheOECDmodelconventionexplainsthatthepurposeofthisconditionisto“avoidthetaxationofshort-termemploymentstotheextentthattheemploymentincomeisnotallowedasadeductibleexpenseinthestateofsource”111becausetheemployerisnotresidentinthatcountry.

107 IntheOECDmodelconvention,withtheeliminationoftheindependentpersonalservicesarticle,thetitleofarticle15hasbeenchangedto“IncomefromEmployment.”

108 ThreetreatiesrequirethattheemployeenotbepresentinCanadaformorethan90days:theCanada-Egyptincometaxconvention,signedMay30,1983;theCanada-Indonesiaincometaxconvention,signedJanuary16,1979;andtheCanada-PapuaNewGuineaincometaxconvention,signedOctober16,1987.

109 see,forexample,article15oftheuKtreaty.

110 Information Circular75-6R2,“RequiredWithholdingfromAmountsPaidtoNon-ResidentsPerformingservicesinCanada,”February23,2005,paragraph93.

111 Paragraph6.2ofthecommentaryonarticle15oftheOECDmodelconvention.


underthethirdcondition,relieffromsource-countrytaxationisgrantedtoanemployeewheretheremunerationisnot“borneby”theemployer’spermanentes-tablishmentinthecountrywheretheemploymentwasexercised.TheOECDmodelconventionstates that thephrase“borneby”mustbe interpreted in lightof thepurposeofthesecondcondition,whichisintendedtoensurethatthereliefdoesnotapply to remuneration that couldgive rise to adeduction to theemployer.TheOECDcommentaryexplainsthatthefactthattheemployerhas,orhasnot,deductedtheremunerationincomputingtheprofitsattributabletoapermanentestablish-ment isnotconclusive.TheCRAhasadopted theOECD’s interpretation that thewords“borneby”meanthattheexpenseisallowableasadeductionincalculatingtaxableincomeundertheITA.Accordingly,theexpensecannotbeallowableincal-culatingtaxableincomebyaresidentofCanadaoranemployerwhohasapermanentestablishmentorfixedbaseinCanadaforanon-residentemployeetobeeligibleforatreaty-basedwaiver.Remunerationisconsideredtobebornebyapersoniftheremunerationisultimatelychargedbacktothatpersoneitherdirectlyorindirectly,throughamanagementoradministrationfeeorotherwise.Thefactthattheem-ployeecontinuestobepaidfromtheothercountryisnotrelevantindecidingbywhomtheremunerationwasborne.112

Theterm“employer”isnotdefinedintheITAorintaxtreatieswithCanada.TheCRAreliesonthecommon-lawtest,discussedabove,todeterminethenatureof the relationship between the worker and the hirer. The commentary on theOECDmodelconventionrecognizesthepotentialforabuse,incaseswherealocalemployerhiresforeignworkersthroughanintermediaryestablishedabroadwhopurportstobetheemployeroftheforeignworkers.Inthisscenario,theworkersmeetalloftheconditionstoqualifyfortreatyrelief.AccordingtotheOECDmodelconvention,theterm“employer”shouldbeinterpretedas“thepersonhavingrightsontheworkproducedandbearingtherelativeresponsibilityandrisks.”Thecom-mentarystatesthat“inthiscontext,substanceshouldprevailoverform.”113Asnotedearlier,recentCanadianjurisprudencereflectsadeparturefromthisinterpretation;thatis,indeterminingtherelationshipbetweenahirerandaworker,thecourtsgiveweighttowrittenagreementsbetweentheparties.InlightoftheOECDcommen-tary, the CRAmayargue that, in thecontextof interpretinga tax treaty,writtenagreementsshouldbegivenreducedornoweight.ItwillbeinterestingtoseehowtheCanadiancourtsreconciletherecentjurisprudencewiththeOECDcommentary,especiallygiventhatthecourtshavegenerallyreliedonthecommentaryasanin-terpretiveaid,asillustratedinDudney.

Finally,articlexVof theustreatycontainsanadditionalexemption, inpara-graph2,thatapplieswheretheremunerationearnedfromtheparticularemploymentdoesnotexceed$10,000(inthecurrencyofthecountrywheretheemploymentwas

112 IC75-6R2,supranote110,atparagraph95.

113 seeparagraph8ofthecommentaryonarticle15oftheOECDmodelconvention.


exercised). The $10,000 exemption is applied against each employment, not allemployments.114

Social Security and Employment InsuranceundertheCanada-ussocialsecurityagreement,whereanemployeeresidentintheunitedstatesisrequiredbyanemployertoworktemporarilyinCanada,theem-ployeewillnotbesubjecttotheCanadaPensionPlanregime;rather,theemployeewillbesubjecttothesocialsecuritylawsoftheunitedstatesonly.115Aus-residentemployeemayrequestacertificateofcoveragefromthesocialsecurityAdministra-tionintheunitedstates.Generally,aus-residentemployeewillneedacertificateonlyifheorshewillbeworkinginCanadaformorethan183daysinacalendaryear.IftheemployeewillbeinCanadafor183daysorless,acertificatewillnotbeneededunlesstheothercountryrequestsone.

Employeesandemployersarerequiredtomakepaymentswithrespecttoemploy-mentinsuranceonlyiftheemploymentisconsideredtobe“insurableemployment.”116undersection7oftheEmploymentInsuranceRegulations,117anon-residentpersonwhoissubjecttounemploymentinsurancelawsinhisorhercountryofresidencewillnotbeconsideredtobeperforming“insurableemployment”withinthemeaningoftheEmploymentInsuranceAct.specifically,thatsectionstates,“[E]mploymentinrespectofwhichpremiumsarepayableunder...theunemploymentinsurancelawofanystateoftheunitedstates,theDistrictofColumbia,PuertoRicoortheVirginIslands,byreasonoftheAgreement between Canada and the United States Re-specting Unemployment Insurance”isnotinsurableemployment.

Treaty Exemptions for Artistes and Athletes

underCanada’s tax treatiesand theOECDmodelconvention,performingartists(referredtoas“artistes”or“entertainers”)andathletesaregenerallynotpermittedtoclaimtreatyexemptionstothesameextentaspersonsinotheroccupationsinrespectoftheprovisionofpersonalservices.118specifically,thereliefgenerallyavailablein

114 Prescott v. The Queen,96DTC1372(TCC).

115 ArticleV(2)(a)oftheAgreementBetweentheGovernmentofCanadaandtheGovernmentoftheunitedstatesofAmericawithRespecttosocialsecurity,signedatOttawaonMarch11,1981,readsinpartasfollows:“WhereapersonwhoisnormallyemployedintheterritoryofoneContractingstateandwhoiscoveredunderitslawsinrespectofworkperformedforanemployerhavingaplaceofbusinessinthatterritoryissentbythatemployertoworkforthesameemployerintheterritoryoftheotherContractingstate,thepersonshallbesubjecttothelawsofonlythefirstContractingstateinrespectofthatwork,asifitwereperformedintheterritoryofthefirstContractingstate.TheprecedingsentenceshallapplyprovidedthattheperiodofworkintheterritoryoftheotherContractingstateisnotexpectedtoexceed60months.”

116 EmploymentInsuranceAct,supranote48,section5.

117 sOR/96-332,asamended.

118 see,forexample,ustreatyarticlexVI.


respectof theprovisionof independentpersonal servicesordependentpersonalservices119doesnotapply,withcertainexceptions,toanentertaineroranathlete.This carve-out allows Canada to tax non-resident professional athletes on theirearningsfromCanadiangamesorevents,andnon-residentmusiciansonproceedsfromCanadianconcerts.

Withrespecttotheustreaty,thecarve-outfromgeneraltreatyrelief iscon-tainedinarticlexVI.However,asindicatedabove,articlexVIdoescontaincertainexceptionstothedenialoftreatybenefits.Forexample,thecarve-outdoesnotap-plytous-residententertainersandathleteswhoseincomefromCanadianactivitiesdoesnotexceed$15,000intheparticularcalendaryear.120Insuchcases,theenter-tainerorathletemaybeentitledtoclaimtreatyreliefunderarticleVII,xIV,orxVoftheustreaty,ifapplicable.

ArtistesArticlexVIappliestoanon-residentwhoderivesincomefrom“personalactivities”performed“asanentertainer,suchasatheatre,motionpicture,radioortelevisionartiste,oramusician.”121Inatechnicalinterpretation,theCRAtookthepositionthataus-residentlightingdesignerwhoperformedservicesinCanadaforoperaandtheatrewasnotan“artiste”withinthemeaningofarticlexVI.122TheCRAcon-cludedthattechnicalpersonnelandothersupportstaffshouldnotbeconsideredtobeentertainersandarethereforeentitledtothegeneralreliefprovidedinCanada’staxtreaties.However,inCheek v. The Queen,123theCRAarguedthatthelong-timeradioannouncerfortheTorontoBlueJays,ThomasCheek,wasaradio“artiste”andthusfellwithinthescopeofarticlexVI.TheTaxCourtofCanadadisagreedwiththeCRAandconcludedthatfansturnedontheradiotofollowthebaseballgameratherthantolistentotheannouncers;thus,thecourtheldthatMr.CheekwasajournalistratherthananentertainerandwasthereforenotsubjecttoarticlexVIoftheustreaty.

AthletesArticlexVIdoesnotapplytoAmericanathleteswhoparticipateina leaguewithregularlyscheduledgamesinbothCanadaandtheunitedstates.124Accordingly,athleteswhofallwithinthiscategorymaybeentitledtorelieffromCanadiantaxationbyvirtueofarticlexVoftheustreaty.Thiswillexemptmostplayersonus-based

119 see,forexample,ustreatyarticlesVII,xIV,andxV.

120 ustreatyarticlexVI(1).The$15,000limitappliestogrossreceipts,includingexpensesreimbursedorbornebytheentertainerorathlete.

121 ustreatyarticlexVI(1).

122 CRAdocumentno.1999-0009997,March2,2000.

123 2002DTC1283(TCC).



franchisesfromCanadiantaxationinrespectofgamesplayedinCanadaprovidedthattheathleteispresentinCanadafornomorethan183daysinanyparticularcalendaryear(sincetheremunerationwouldgenerallynotbebornebyaCanadianresidentoraCanadianpermanentestablishmentoftheAmericanfranchise).How-ever,mostnon-residentathletesemployedbyfranchiseslocatedinCanadawillbesubjecttoCanadiantaxationontheportionoftheirsalarythat isattributabletoservicesperformedinCanada.125

TheCRAhastakenthepositionthatthereferenceinarticlexVIto“regularlyscheduledgames”wasintendedasa“concessiontohockeyandbaseballplayersetc.wheretheteamsarerequiredtocompeteinallgamesinaregularschedule.”126TheCRAconcludedthatarace-cardriverwhoperformsinatouringracingseriesisanathletebutdoesnotqualifyfortheexemptionfromthecarve-out,sincetheracingteamisnotrequiredtoentereacheventintheseriesandthustheserieswouldnotbeconsideredtobe“aleaguewithregularlyscheduledgames.”127

ArticlexVIoftheustreatyalsolimitssource-countrytaxationofsigningbonusespaidtonon-residentathletesto15percentofthegrossamountofthepayment.128However,sinceCanadaonlytaxestheportionofthesigningbonusthatisreasonablyattributabletoservicesperformedinCanada,thelimitationwillberelevantonlytotheextentthattheCanadianfederalandprovincialtaxontheCanadianportionofthepaymentexceeds15percentofthegrossamountofthefullpayment.

AlthougharticlexVIdoesnotrefer topaymentsmade toanathlete to signacontractnottoperformforotherteams,thetechnicalexplanationaccompanyingtheustreatyindicatesthatsuchpaymentswouldbetaxableinCanadaattherateof15percent.Thetechnicalexplanationissilentonwhetheranamountpaidtoanathlete as consideration to waive other rights contained in the player’s contract(suchasa“notrade”clause)wouldalsobetaxableinCanadaunderarticlexVI.ItwillbeinterestingtoseeiftheCRAconsiderssuchpaymentstofallwithintheambitoftheterm“restrictivecovenant”129forthepurposesofproposedsection56.4oftheITAand,asaresult,besubjecttowithholdingtaxunderproposedparagraph212(1)(i)oftheITA.

125 seethediscussionaboveregardingtheallocationofanathlete’sincomebetweenCanadaandothercountries.

126 CRAdocumentno.9204805,July15,1992.

127 Ibid.


129 underproposedsection56.4,a“restrictivecovenant”isbroadlydefinedas“awaiverofanadvantageorrightbythetaxpayer...whetherlegallyenforceableornot,thataffects,orisintendedtoaffect,inanywaywhatever,theacquisitionorprovisionofpropertyorservicesbythetaxpayer.”seeBillC-10,AnActToAmendtheIncomeTaxAct,IncludingAmendmentsinRelationtoForeignInvestmentEntitiesandNon-ResidentTrusts,andToProvidefortheBijuralExpressionoftheProvisionsofThatAct,passedbytheHouseofCommonsonOctober29,2007.


Use-of-Likeness Payments to Artistes and AthletesNotwithstandingthegeneralexclusionfromtreatyrelieffornon-residentartistesandathletes, treatyreliefmaybeavailablewherethenon-residenthasagreedtoprovideuseoflikeness(thatis,toallowhisorherimagetobeincluded)inamer-chandisingcampaign(forexample,ontee-shirts).WhileapaymentforuseoflikenesswithinCanadamaybeconsideredtobeapaymentwithintheambitofsubpara-graph212(1)(d)(i)oftheITAasa“rent,royaltyorsimilarpaymentfortherighttouse in Canada any property,” and thus subject to 25percent withholding tax, itwouldnotbeconsideredtobea“royalty”withinthemeaningofarticlexIIoftheustreaty.130ThepaymentmaybeoutsidethescopeofarticlexVIoftheustreatyaswell,sinceitisarguablynotderivedfrompersonalactivitiesexercisedinCanada.Accordingly,suchpaymentmayfallwithinthegeneralbusinessprofitsprovisionsandwouldbetaxableinCanadaonlytotheextentthattheartisteorathletemain-tainedafixedbaseorpermanentestablishmentinCanada.

withho Lding o bLig Atio ns

General Principles

TheITAimposestaxwithholdingobligationsonpersonswhomakecertaintypesofpaymentstonon-residents.131Theamountswithheldfromthepaymenttothenon-residentarerequiredtoberemittedtothereceivergeneralonaccountofthenon-resident’staxespotentiallypayableundertheITA.However,thedetermina-tionoftheamounttobewithheld(absentanadministrativewaiverfromtheCRA)iscomputedindependentlyofthenon-resident’sultimatetaxliability.Forexample,aparticularnon-residentmaybeexemptfromCanadiantaxationinrespectofapar-ticularpaymentbyvirtueofataxtreaty;nevertheless,thepaymentmaystillbesubjecttowithholding.Totheextentthattheamountwithheldexceedsthenon-resident’sactualtaxespayable,thenon-residentcanrequestarefund.Thisisaccomplishedbyfilinganon-residenttaxreturninrespectofpartItaxeswithheldorbymakinganapplicationforarefundofamountswithheldinthecaseofpartxIIIwithholdingtax.132

WhilepartxIIIoftheITAsetsoutacompleteregimeforwithholdingonspecifiedtypesofpaymentstonon-residents(generally,passiveincomesourcedinCanada),

130 ustreatyarticlexII(4)defines“royalties”as“paymentsofanykindreceivedasaconsiderationfortheuseof,ortherighttouse,anycopyrightofliterary,artisticorscientificwork...,anypatent,trademark,designormodel,plan,secretformulaorprocess,orfortheuseof,ortherighttouse,tangiblepersonalproperty...and...includesgainsfromthealienationofanyintangibleproperty.”Thelicenceofanintangiblepersonalityrightdoesnotcomeunderthisdefinition.TheuKtreatyprovidesasimilarresult.

131 ITApartI,section153andrelatedregulations,andITApartxIII.TheITAalsoimposeswithholdingobligationsinrespectofcertainpaymentstoresidentsofCanada—forexample,sourcedeductionsonsalariesandbonuses.

132 subsection227(6).


the withholding obligations for active income earned by a service provider arefoundinsection153oftheITAandinpartIoftheregulations.specifically,subsec-tion153(1)requirespersonsmakingvarioustypesofpaymentstowithholdtaxesonaccountoftherecipient’sliability.Thequantumofthewithholdingisprescribedundertheregulationsandvariesdependingonthenatureofthepaymentandtheresidenceoftherecipient.Forthepurposesofthisarticle,therelevantprovisionsinsubsection153(1)areparagraphs(a)and(g).Paragraph153(1)(a)pertainstopaymentsofsalary,wages,orotherremuneration(thatis,employment-relatedpayments),andparagraph 153(1)(g) applies to fees, commissions, or other amounts for services(thatis,paymentstoindependentcontractors).Bothprovisionsexcludepaymentsthataresubjecttotheactortax(subsection212(5.1))133orthatfallwithintheambitofsubsection115(2.3)(whichdealswithincomeearnedbycertainnon-residentsinconnectionwiththe2010OlympicorParalympicWinterGames).

PartIoftheregulationssetsouttherulespertainingtothedeductionandremit-tanceofamountsrequiredtobewithheldundersubsection153(1).Themannerofwithholdingwilldependonwhetherthepaymentconstitutes“remuneration.”Re-munerationisdefinedinregulation100andincludes,interalia,salary,wages,orcommissions.134Whereanemployerpaysanamountofremuneration,theemployermustwithholdtheamountofsourcedeductionsdescribedinregulations102(peri-odicpayments)and103(non-periodicpayments).Employeesourcedeductionsarerequiredregardlessoftheemployee’sresidencestatus,exceptwheretheemployeewasneitheremployednorresidentinCanadaatthetimeofthepayment(unlesstheemployeewaspreviouslyresidentinCanadaorthepaymentwasreasonablyattrib-utabletoemploymentservicesperformedortobeperformedinCanada).135

IfthepersonismakingapaymentinrespectofservicesrenderedinCanadathatisnot“remuneration”asdefinedinregulation100(1),regulation105willapply.Reg-ulation105requires“everyperson”payingafee,commission,orotheramounttoanon-residentofCanadainrespectofservicesrenderedinCanada(otherthan“re-muneration”)towithhold15percentofthatamount.136Notethatregulation105doesnotapplysolelytoCanadian-residentpayers:foreignpersonsmustalsowith-hold15percentoftheamountpaidtoindependentserviceproviderstotheextentthattheservicesareperformedinCanada.137

133 ThereisnosuchexclusionundertheTAQ.

134 Regulation100(1).

135 Regulation104.

136 seeregulation105(1)andtheexceptioninregulation105(2).

137 Regulation1015R8oftheTAQimposesasimilarwithholdingtaxattherateof9percentifapersonmakesa“paymentforservicesrenderedinQuébecbyapersonwhoisnotresidentinCanada,otherthaninthecourseofregularandcontinuousemployment.”Therefore,servicesrenderedinQuebecbyanon-residentindependentcontractoraresubjecttowithholdingtaxesatthecombinedfederalandprovincialrateof24percent.


Itispossiblethatcertainarrangementscouldresultinmultiplelevelsofwith-holding.Consider,forexample,aforeigncompanythatprovidestechnicalexpertisetoCanadiancustomersbysendingitsemployeestothecustomer’splaceofbusiness.Paymentsmadebythecustomertotheforeigncompanywilllikelybesubjectto15percentwithholdingunderregulation105,sincetheforeigncompanyreceivesafeeinrespectofservicesrenderedinCanadabyitsemployees.However,theforeigncompanywillalsoberequiredtowithholdunderregulation102onpaymentsofremunerationtoitsemployeesinrespectofthesameservices.Thisdoublewith-holding can create significant cash flow problems, especially where the foreigncompanyisaloan-outcompanyforthepersonwhoprovidestheservicesinCanada.IftheindividualprovidedtheservicesdirectlytotheCanadianclientratherthanthroughtheloan-outcompany,therewouldonlybewithholdingunderregulation105.Inthesesituations,itmaybepossibletorequestthattheCRAwaiveaportionoftheoverallamountofwithholdingpursuanttothehardshipprovisionsinsubsec-tion153(1.1).138Theproceduresforrequestingwaiversareoutlinedbelow.

Itisimportanttonotethatwithholdingunderregulation105isnotlimitedtodirectfeesforservicesrenderedinCanada,butratherappliestopayments“inre-spectof”servicesrenderedinCanada.139Thephrase“inrespectof”hasbeenheldtohavethewidestpossiblemeaninginconveyingaconnectionbetweentworelatedsubjectmatters.140Therehavebeentworecentcasesthathaveexaminedthescopeofthisphraseinthecontextofregulation105;onewidenedthescopeofsituationswhereinwithholdingapplies,andtheothernarrowedthewithholdingobligation.

InOgden Palladium Services (Canada) Inc. et al. v. The Queen,141 theappellantsprovided stadium facilities and related services to Marco Entertainment, Inc.(“Marco”),theus-residentproducerofafigureskatingshowstarringElvisstojko.TherelatedservicesprovidedbytheappellantstoMarcoincludedtheproductionandsaleoftickets,ticketcollection,provisionofmaintenancestaff,saleoffoodandbeverages,andsaleofsouvenirs,programs,andnovelties.sincethetaxpayerswereresponsibleforrevenuecollection,theymadethepaymentofnetrevenuestoMarcoafterrecoveringtheirfeesforthestadiumusageandservices.Nowithholdingunderregulation105wasmadeinrespectoftheremittanceofnetrevenuestoMarco,onthebasisthatMarcodidnotrenderservicestothetaxpayers(rather,thetaxpayersprovidedservicestoMarco).Theministerarguedthatthepersontowhomtheser-viceshadbeenrenderedwasnotrelevanttotheassessment,andthatifapaymenthadbeenmadetoanon-resident inrespectofanyservicesrendered inCanada,thentheregulation105withholdingobligationsapplied.TheTaxCourtfoundthatMarco,astheproduceroftheshow,wasprovidingservicesinCanadabypresentingtheshowforthebenefitofthepublic.Inaddition,theTaxCourtfoundthatthe

138 Alsoseesection1016oftheTAQ.

139 Incontrast,theTAQtaxesonlypaymentsforservices.seesupranote137.

140 nowegijick v. The Queen et al.,83DTC5041(sCC).

141 2001DTC345(TCC);aff ’d.2002DTC7378(FCA).


performerswereprovidingservicesinCanadatowhichthepaymentstoMarcorelat-ed.Accordingly,theTaxCourtconcludedthatthetaxpayersdidhaveanobligationtowithholdunderregulation105.Thiscaseindicatesthatthewithholdingrequire-mentsunderregulation105arequitebroadandcancapturepaymentswherethepayerisnotreceivinganyservicesinCanadafromthenon-residentrecipientofthepayment.

TheCRAhasconfirmed itsacceptanceof thisposition in Information Circular75-6R2:

TheCRAtakesabroadinterpretationofthewording“inrespectof.”Therefore,apar-ticularpaymentneednotnecessarilybepaidonlyforservicesor,bepaidtothepersonwhoperformedtheservicesinorderforRegulation105withholdingtoapply.142

Interestingly,regulation105usesthewording“inrespectof”(which,asnotedbytheCRA,isquitebroad),whereasparagraph153(1)(g),theenablinglegislativeauthority,usesthephrase“forservices,”whichdenotessomethingmorerestrictive.IthaslongbeenheldthatCabinetcannotenactregulationsthatgobeyondthescopeoftheenablinglegislation.143Thisraisesthequestionofwhetherregulation105isultravires.

TherecentdecisionoftheTaxCourtofCanadainWeyerhaeuser Company Limited v. The Queen144consideredthisargumentandfoundthatregulation105isnotultravires.Inreachingitsconclusion,thecourtnotedthatparagraph153(1)(g)doesnotimposetaxbutsimplyensuresthattherearefundsavailabletosatisfythenon-residentperson’sobligation(ifany)undertheITA.Relyingontheprinciplethatwheretherearetwopossibleconstructionsofthestatute,onethatwillresultinthestatutebeingintraviresandonethatwillhavethecontraryresult,theformerconstructionshouldbeadopted,145thecourtconcludedthatitwaspossibletoreadregulation105inamannerthatwouldrendertheregulationintravires.Thecourtwrote:

IwouldneverthelesshaveconcludedthatitwasentirelybeyonddoubtthattheGov-ernorinCouncil’sintentioninenactingRegulation105wastorequirewithholdingattherateof15%fromallpaymentstonon-residentserviceproviderstothefullestextentthatparagraph153(1)(g)of theActpermits—that is, fromallpaymentshaving thecharacterofremunerationforservicesrenderedinCanada,andthuspotentiallytax-ablebyCanadainthenon-resident’shands.146

Althoughthecourtheldthatregulation105isintravires,thecourtheldthatwith-holdingunderregulation105“doesnotextendbeyondrequiringthepayortodeduct


143 mnR v. midwest Hotel Co. Ltd.,70DTC6316(Ex.Ct.);aff ’d.72DTC6440(sCC).

144 2007DTC392(TCC).

145 mcKay v. The Queen,[1965]sCR798.

146 Weyerhaeuser,supranote144,atparagraph13.


andwithholdfrompaymentsofamountsthatareinthenatureoffeesorcommis-sions that, in thehandsof therecipient,have thecharacterof incomeearned inCanada.”147

Thecourtalsoclarifiedtheintendedscopeofsection153andregulation105,holdingthattheirapplicationislimitedtoamountsthatwouldbeconsideredincomeearnedinCanadabythenon-resident.Accordingly,thecourtheldthatareimburse-mentofthenon-resident’sout-of-pocketexpenses,feesfortimespentinrespectoftraveltoCanada,andretainersforworktobecompletedoutsideCanadawereallbeyondthescopeofregulation105,andnowithholdingwasrequiredinrespectofsuchamounts.

ThelatterelementofthedecisioninWeyerhaeuserdirectlyrefutesanumberoftheadministrativepositionstakenbytheCRAinIC75-6R2.Inparticular,ithasbeentheCRA’sposition that regulation105withholdingwouldapply topayments fortimespenttravellingtoandfromthenon-resident’shomecountryonthebasisthatthepaymentwouldbeconsideredtohavebeenpaidinrespectofservicesrenderedin Canada.148 Furthermore, the CRA exempts withholding for reimbursement ofout-of-pocketexpensesonlyinlimitedcircumstances.Generally,theCRAexemptswithholdingonperdiemsformeals,upto$45perday,andaccommodation,upto$100perday,withoutrequiringreceipts.(Differenttreatmentappliestoactors,asdiscussedbelow.)Reasonabletravelexpensesinexcessofsuchamountswillbeexemptfrom withholding only if they are supported by third-party vouchers. In Weyer-haeuser,thecourtheldthattheinvoicessuppliedbythenon-resident,whichindicatedtheamountofdisbursementsthatthenon-residenthadincurred,constitutedsuffi-cientprimafacieevidencetosupporttheexemptionfromwithholding.Todate,theCRAhasnotprovidedfurthercommentsontheWeyerhaeuserdecisionorIC75-6R2.

Withholding Obligations for Actors

Asstatedabove,paragraphs153(1)(a)and(g)containexclusionsforamountspaidtoanon-residentactorortoacorporationrelatedtoanon-residentactor.However,suchpaymentsaresubjecttopartxIIIwithholding,pursuanttotheactortaxprovi-sions(subsections212(5.1)to(5.3)).Furthermore,theverytransientnatureoffilmlocationshootingraisesuniqueissuesforfilmcrews.Accordingly,IC75-6R2specif-icallyexcludesfromitsapplicationthoseindividualswhoareengagedinthefilmandvideoproductionindustryinCanada.TheCRAhasestablishedspecializedfilmservicesunitsinthemainCanadianproductioncentresinordertoaddresswith-holdingandotherissuesthatarespecifictothefilmandtelevisionindustry.

subsection215(1)requiresapersonwhopays,credits,orprovides,orisdeemedtohavepaid,credited,orprovided,anamount that is subject topartxIII tax (orwhichwouldbesubjecttopartxIII tax if theITAwerereadwithoutreferenceto

147 Ibid.



subsection216.1(1)) todeductorwithholdfromtheamountof thepaymenttherequisiteamountofpartxIIItaxandremitthetaxtothereceivergeneralonbehalfofthenon-resident.Thereferencetosubsection216.1(1)makesitclearthattheob-ligationtowithholdunderpartxIIIinrespectoftheactortaxexistseveniftheactorelects to be subject to partI taxation rather than the actor tax under partxIII.However, the CRA does permit a non-resident actor to apply for a reduction inwithholdingtaxes(byfilingformT1287,“ApplicationbyaNon-ResidentofCanada(Individual)foraReductionintheAmountofNon-ResidentTaxRequiredToBeWithheldonIncomeEarnedfromActinginaFilmorVideoProduction”)wheretheactorwillbemakinganelectionundersection216.1.Theapplicationrelatesstrictlytoactingincome.Whereanon-residentearnsbothactingandnon-actingfees(forexample,producerordirectorfees),aseparateapplicationforaregulation105withholdingtaxwaiverwillberequiredfortheotherfees.149uponreceiptofformT1287,theCRAwilldeterminewhetherasection216.1electionwouldbenefittheactor;ifitwould,theCRAwillauthorizetheproductioncompanytoreducetheamountoftaxthatitwouldotherwisewithholdfromtheactor’scompensation.

Thewithholdingobligationsinconnectionwiththeactortaxdifferfromthoseunderregulation105.Asdiscussedabove,regulation105requireswithholding“inrespectof”servicesrenderedinCanada.Incontrast,withholdingfortheactortaxislimitedtoamountspaidorcredited,orprovidedasabenefit,tooronbehalfofthenon-residentfortheprovisioninCanadaoftheactingservices.ThisappearstoexcludepaymentsofthenaturereferredtoinOgden Palladium150fromtheambitofpartxIIIwithholding.However,thepartxIIIwithholdingobligationswillstillre-quireadeterminationofwhatportionoftheoverallcompensationpaidtotheactorissubjecttowithholding.

Fees for Acting ServicesFeesforactingservicesaresubjecttotheactortaxprovidedthattheyrelatetotheprovisionofservicesinCanada.WhereservicesareprovidedinCanadaandelse-where(forexample,inthecaseofaninternationalproductionthathasrehearsalandshootingdays invarious jurisdictions),a reasonableallocationmustbemade foractingservicesinCanada.TheCRA’spositioninthisregardhasbeenelaboratedinanearliersectionofthisarticle.

similarly,whereanactorprovidesadditionalfunctionsonaproduction(forex-ample,asadirectororanexecutiveproducer),areasonableallocationmustbemadefortheportionofthefeethatisallocabletoactingservicessubjecttopartxIIItaxandtheportionthatisattributedtootherservicessubjecttopartItax.Thelatterportionmayalsoqualifyforatreaty-basedexemption.

149 Thewaiverprocedureisdiscussedinmoredetailbelow.

150 seesupranote141andtheaccompanyingtext.


Per Diems, Travel Expenses, and Living ExpensesTheCRA’sfilmservicesunitshaveestablishedtheirpositionforwithholdingonperdiems,travelexpenses,andlivingexpensesforactors;however,thatpositionhasnotyetbeen revisited in lightof theWeyerhaeuser decision.151Theexemptions fromwithholdingonactors’perdiemsaresubstantiallysimilartothoseaccordedtootherforeignserviceproviders.However,foractors,theexemptionforunreceiptedmealexpensesisraisedfromthegenerallimitof$45perdayto$100perday,andthereisnoallowanceforunreceiptedhotelexpenses.

Residuals and ParticipationsBothresidualsandparticipationsrepresentcontingentpayments.TheCRAisoftheviewthattheactortaxappliestoallpaymentstonon-residentactorswhorenderservicesinCanada.152Althoughpaymentsmaybecontingentanddeferredtosub-sequentyears,theCRAisoftheviewthatthepaymentsarefortheservicesrenderedinCanada.Consequently,thewithholdingobligationofthepayermayextendwellbeyondtheyearinwhichthefilmisshot.

Thisongoingobligationraisesvariouspracticalproblemsforforeignproductionentities.ProceduresfordealingwithwithholdingobligationstoCanadiantaxau-thoritiesaretypicallysetupforpaymentsmadeduringtheCanadianphaseoftheproduction, andarehandledby localproductionexecutives.Once theCanadianphasehasbeencompleted,accountingrecordsaregenerallyremovedfromCanada,andanysubsequentcontingentpaymentstoactorsarehandledoutsideCanadabystudioaccountingexecutives.Forexample,assumethataHollywoodstudiocon-tractswithahigh-profileactortofilminVancouverin2007.Thefilmgeneratesaprofitin2011,aportionofwhichispayableasaparticipationtotheactor.Itisun-likelythatanyofthestudioaccountingexecutiveskeepingtrackofthepaymentswouldbeawarethatthefilmwasshotinCanadaandthatCanadianwithholdingwasrequired.Oftentheparticipationpaymentismadebyapersonotherthanthepro-ductioncompany.Further,whereservicesonaproductionhavebeenrenderedinmultiplejurisdictions,theallocableportionofthecontingentpaymenttoCanadianservicesbecomesdifficulttoidentify.

Inlightofthesedifficulties,in2006theCRAproposedanewadministrativepolicyfornon-residentpayerswhomayexperiencedifficultyindeterminingtheportionoffuturewithholdingdueonaccountofresidualsandparticipations.153However,becauseofseriousconcernsraisedbythefilmindustry,thisnewpolicyisnotyetin

151 seesupranote144andtheaccompanyingtext.

152 see“InformationonWithholdingTaxonResidualsandContingentCompensation,”supranote71.

153 Ibid.


forceandhasbeendelayed“indefinitely.”untilsuchtimeastheCRAmakesadefinitivestatement, itappearsthatCanadawillnotbeseekingwithholdingtaxfromnon-residentpayersofcontingentpaymentsexceptintwocircumstances:theobligationtowithhold actor taxwill apply topayments in respectof acting serviceson acommercial,andtopaymentsmadeduringthecourseofproductionorduringthepaymentperiodonaccountofabuy-out,advancepayment,orprepaymentofthefu-turecontingentpayment.ThepolicydoesnotapplytopayerswhoareresidentsofCanada.Thus,iftheobligationtopayresidualsand/orparticipationsrestswiththeCanadianproductioncompanyratherthantheforeignstudio,therewillnotbeanyreprievefromwithholdingobligationsasaresultofthepolicy.

Theproposedpolicyrequirespaymentbythenon-residentofthe23percentactortaxonthefullamountofanycontingentpaymentallocabletoCanadianservices.However,ifthenon-residentpayercannotdeterminetheappropriateallocation,itmayfollowtheprocedureoutlinedbelow:

1. Thepayermustincludeaclauseintheactor’scontractaffirminghisorherobligationtopaythe23percentactortaxoncontingentcompensation.TheCRAwillprovideastandard-formaddendumthatmustbeappendedtothecontract,andreceiptmustbeacknowledgedbytheactor.

2. ThepayermustprovidedetailednotificationinwritingtotheCRAofthepotentialsituation,includingtheearliestpossiblestartdateforparticipationpayments,identificationofallrelevantparties(includingagents,prospect-ivepayersofresiduals,orparticipants),contractinformationfortheactor,andacopyofthecontract,dealmemo,oragreement.Thenotificationshouldalsoexplainhowtheproposedwithholdingwillapply,andincludeanunder-takingtoprovidedetailedinformationofanycontingentpaymentsmade,ifsorequestedbytheCRA.

3. IftheCRAissatisfiedastothemethodofcalculationandthattheactorwillpaythetaxpersonally,itwillissuealetterindicatingthatanyfutureenforce-mentactionwillbeinitiatedagainsttheactoronly.

Thispolicy,ifadopted,wouldsetCanadaapartfromotherjurisdictionsinitsen-forcementofdomestictaxlawsapplicabletoforeignactors.Giventheproposedrequirementssetoutabove,itisunderstandablethatthereisconcerninthefilmin-dustryoverthisdegreeofcompliancetodealwithcontingentpaymentstoactors.Inlightofthemobilityoftheindustry,thereisariskthatthistypeofpolicymaydriveforeign“bigbudget”featurefilmproductionsawayfromCanada.

Finally,asamatterofenforcement,participationsaregenerallypayableyearsaftertheserviceswererendered.TheCRAwouldhavedifficultyinenforcingthewithholdingprovisionsonpaymentsallegedlyduefromonenon-residenttoanotherwheretherearenoremainingconnectionstoCanada.Toourknowledge,theCRAhastakennoactiontoenforcecollectionoftaxonsuchpaymentsrelatingtoproductionsfilmedinCanada;however,thereareonlyafewthatmighthavebeensuccessfulenoughtogenerateparticipations.


Withholding Obligations for Athletes and Behind-the-Camera Personnel

Incontrasttoactors,non-residentathletesandfilmcrewswillbesubjecttowith-holdinginaccordancewiththegeneralprinciplesoutlinedabove.Accordingly,totheextentthatapaymentpertainstoservicesrenderedinCanadabytheathleteorbehind-the-cameraserviceprovider,withholdingwillberequiredunderregula-tion102,103,or105,dependingonthenatureofthepaymentandthestatusoftheindividualasemployeeorindependentcontractor.ThemethodologyforallocatingincomeofanathleteorotherserviceproviderbetweenCanadaandothercountrieshasbeendiscussedinanearliersectionofthisarticle.

Tournamentwinningsearnedbyathletesraiseaninterestingissue.Whilesuchearningsclearlyfallwithintheambitofsubparagraph115(1)(a)(ii),154andarethere-foretaxableinCanada,theydonotseemtofitneatlyintoanyofthewithholdingcategoriessetforthinsection153.specifically,prizewinningsdonotseemtocon-stitute “fees, commissions or other amounts for services” within the context ofparagraph153(1)(g), sincetheearningsare forsuccess in thecompetitionratherthanforanyparticularservices.Inanunreporteddecision,theTaxCourtofCanadaheldthattheInternationalCyclingunion,whichwasthetournamentorganizerforacyclingraceheldinCanada,wasnotobligatedtocomplywithregulation105inrespectofwinningspaidtonon-residentparticipants.155

The 2010 Vancouver Olympic Winter Games

Itisalong-standingtraditionthathostcountriesprovidetaxreliefinordertofa-cilitatetheOlympicGames.Tothisend,Canadahasenactedmeasuresthatapplyspecificallytothe2010VancouverOlympicandParalympicWinterGames.Inpar-ticular,theInternationalOlympicCommittee(IOC)andtheInternationalParalympicCommittee(IPC)areexemptedfromnon-residentwithholdingtaxesonpaymentsmade to themafter2005andbefore2011 thataremade inconnectionwith the2010WinterGames.156Moreover,employeesandconsultantsoftheIOCandIPC,foreignathletes,teamsupportstaff,officials,andaccreditedforeignmediaorganiza-tionsandtheiremployeeswillbeexemptedfromCanadianincometaxesonincomederivedfromtheiractivitiesinconnectionwiththeWinterGamesafter2009and

154 Prizesearnedinthecourseofcarryingonabusinessaretreatedasbusinessincomeandincludedinincomeundersubsection9(1)oftheITA:seeInterpretation BulletinIT-75R4,“scholarships,Fellowships,Bursaries,Prizes,ResearchGrantsandFinancialAssistance,”June18,2003,paragraph19;andHammond v. mnR,71DTC5389,at5390(FCTD),inwhichPratteJheldthat“prizemoneyisincomeonlyinasmuchasthetaxpayer’sracingactivitiesaresuchthattheycanbeconsideredasabusiness.”

155 Union Cycliste Internationale v. The Queen,1999-1969(IT)G(TCC)(unreported).seealsoGestion d’évènements Gestev Inc. v. The Queen,1999-1974(IT)G(TCC)(unreported).



beforeApril2010.157Finally,regulation105willnotapplytopaymentstothesein-dividuals,organizations,andemployeesforservicesrenderedinCanada.158Thus,forexample,ifanon-residentathleteispaidbyacommercialsponsoronthebasisofhisorher2010WinterGamesperformance, incomefromthisactivityfallingwithinthespecifiedtimelinewillbeexemptfromCanadianincometaxesandthenon-residentwithholdingtaxwillbewaived.

withho Lding tA x wA i v er s

General Principles

Often,non-residentsperformingemploymentdutiesinCanadaorrenderingser-vicesinCanadawillhavenoCanadianincometaxliabilityasaresultofanexemptionunderarelevanttreatyor,inthecaseofanindependentcontractor,becausethecon-tractorhasnonetCanadian-sourceincome.159IfthepayeriswithholdingthefullamountasrequiredundertheITAandthenon-residentisentitledtoarefundoftheamountonlyafterfilingaCanadiantaxreturn(whichcouldbemanymonthsafterthepaymenthasbeenmade),thismayactasadisincentiveforanon-residenttoworkorprovideservicesinCanada.Accordingly,theCRAmaywaiveorreducethewithholdingpursuanttotheunduehardshipprovisionsofsubsection153(1.1)whereanon-residentcandemonstrate,onthebasisoftreatyprotectionorestimat-edincomeandexpenses,thatthenormallyrequiredwithholdingisinexcessoftheultimateCanadiantaxliability.160

ThewaiverapplicationprocessconstitutesanadvancescreeningbytheCRAoftheapplicant’sultimatetaxliability.Ifthereisinsufficientinformationtoconclu-sivelysupporttheapplicant’spositionthattheamounttobewithheldwillexceedhisorheractualtaxliability,theCRAwilldenythewaiverandrequiretheapplicanttofileanon-residenttaxreturntoclaimarefundofanyexcesswithholdings.

Itshouldbenotedthatthegrantingofawaiverorreductionofwithholdingonamountstobereceivedbyanon-residentdoesnotrelievethenon-residentfromtherequirementtowithhold,remit,andreportallpaymentsthatitmakestootherpersons(suchasemployees)forservicesprovidedinCanada.161Ifthenon-resident


158 Paragraphs153(1)(a)and(g).

159 Asnotedearlier,undertheTAQ,thecontractorwillnotbesubjecttotaxinQuebeciftheincomefromthebusinesscarriedonbyhiminCanadaisnotattributabletoanestablishmentinQuebec.seesupranote13.

160 IC75-6R2,supranote110,atparagraph56.HardshipwaiversinrespectofQuebecwithholdingtaxesareprovidedforundersection1016oftheTAQ.seeInterprétation Revenu QuébecADM.7-1,“ReductioninsourceDeductionsofIncomeTaxinRespectofaPaymentforservicesRenderedinQuébecbyaPersonNotResidentinCanada,”November30,2004.

161 IC75-6R2,supranote110,atparagraph43.


serviceproviderhassuchpaymentobligationsandasubsequentfollowupbytheCRAdisclosesthatthenon-residentpayer/employerhasnotfulfilledtherequirementsunder the ITA inrespectof suchpayments, thewaivermaybecancelledandthepayertoldtobeginwithholdingaccordingly.162

Even if theCRA issuesa treaty-basedwaiver, itmayrequireaCanadianbankguaranteeorotherappropriatesecurityforanamountequivalenttothepotentialCanadiantaxliabilityofthenon-residentinCanada.Thiscouldariseincaseswheretherearesecondarywithholdingtaxissuesaffectingthenon-residentapplicant.163

Whereanon-residenthas a contract toperformservices inCanadabut sub-contractswitheitherresidentsofCanadaorothernon-residentstoundertaketheactualperformanceofthoseservices,atreaty-basedwaiverwillnotbegrantedinrespectofthecontractunlesstheactivitiesofthesubcontractors,alongwithanyotheractivitiesthattheprimarycontractorundertakesinCanada,fallwithintheguidelines.Forthepurposeofapplyingtheguidelinesinthissituation,theactivitiesoftheCanadian-residentsubcontractorswillbeviewedasifthesubcontractorswerenon-residentsandtheironlyactivitiesinCanadawerethoseunderthesubcontract.Paymentstosubcontractorswillbeconsideredfordeductionunderanalternativeincomeandexpensewaiverapplication.

Generally,waiverapplicationsshouldbesubmittedatleast30daysbeforeeitherthecommencementofservicesinCanadaortheinitialpayment,inordertoensurethatthewaiverisobtainedbeforethefirstpaymentismade.164Awaiverapplicationcanbemadesubsequenttothestartofpayment;however,thewaiverwillapplyonlytopaymentsmadeafterthewaiverwasissued.165

Regulation 102 Waivers

TheCRAwillgrantaregulation102treaty-basedwaiverifanon-residentemployeecanprovideevidencethatthepaymentswillbeexemptunderabilateraltreatybetweenCanadaandtheemployee’sjurisdictionofresidence.Toapplyforaregulation102waiver,theemployee(ortheemployerwiththeemployee’sauthorization)mustsub-mit a copyof the employment contract andproofof residence status, andmustidentifytheparticulartreatyarticlepursuanttowhichtheemployeeisclaiminganexemptionfromCanadiantaxation.166


163 Ibid.,atappendixB.



166 Ibid.


Treaty-Based Regulation 105 Waivers

General Rules for EligibilityNon-residentswhoprovideindependentservicesinCanadamayapplyforawaiverofregulation105withholdingtaxesbyfilingformR105.167Asdiscussedabove,regu-lation105requireswithholdinginrespectofservicesrenderedinCanada.

TheCRAhasissuedguidelinesdescribingthecircumstancesinwhichitwillgrantawaiverofamountsrequiredtobewithheldunderregulation105.168Theguide-linesstatethatawaiverwillbegrantedwheretheapplicant(theserviceprovider)is“anon-residentindependentindividualwhoearnsless than CAn$5,000 for the current calendar year(includingexpensesreimbursedorpaidonthewaiverapplicant’sbe-half ).”169Inthissituation,awaivermaybegrantedeveniftheserviceproviderisnotresidentinatreatycountry.Awaivermayalsobegrantedwhereanon-residentper-son(anindividualoracorporation)candemonstratethatthenon-residentisexemptfromCanadiantaxationpursuanttoaprovisioninataxtreatybetweenCanadaandthejurisdictionofresidence,andtheapplicant(serviceprovider)is“anon-residentpersonwhosepresence in Canada is not ‘recurring’andwhoperformsservicesinCan-adafor less than 180 days under the current contract/engagement”or“anon-residentpersonwhosepresence in Canada is ‘recurring’,butwhosecumulativepresenceisless than 240 days during ‘the period’, and less than 180 days under the current contract/engagement.”170Presencewillbeconsideredtobe“recurring”ifthenon-residentundertakestoperformservicesforasecondorsubsequentcontract/engagementinCanadawithin“theperiod.”“Theperiod”isdefinedtoincludethecalendaryearthatthewaiverpertainsto,thethreeimmediatelyprecedingcalendaryears,andthethreeimmediatelyfollowingcalendaryears.171

Thereareexceptionstothegrantingofwaivers,evenwherethenon-residentser-viceprovidermeetsoneoftheprecedingtests.172Wherethenon-residenthasasinglecontractthatgrantstheindividualtherighttoperformservicesinCanadaintwoormoreyears(includingcontractrenewalrights),awaiverwillbedenied.similarly,wherethereisnomulti-yearcontractbutahistoryofrepetitiveservicesperformedinthesameorsimilarlocations(suchasparticipationinairshows,rodeos,combine

167 CanadaRevenueAgencyformR105,“Regulation105WaiverApplication.”

168 CanadaRevenueAgency,“GuidelinesforTreaty-BasedWaiversInvolvingRegulation105Withholding”(online:http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rndr/trty-RDM.html).ForQuebec,waiversfromwithholdingunderregulation1015R8totheTAQarebasedontheabsenceofaQuebecestablishmentratherthanontreatyexemptions.seesupranote160.

169 supranote168(italicsinoriginal).

170 Ibid.(italicsinoriginal).

171 Ibid.

172 TheexceptionsdonotapplytoapplicationsbasedonearningsoflessthanCdn$5,000intheparticularcalendaryear.


harvestingcompetitions,etc.)intwoormorepreviousyears,173thewaiverwillnotbegranted.Finally,whereatreatydeemsthenon-residenttohaveapermanentes-tablishmentinCanadaonlyifheorsheprovidesparticularservicesforaspecifiedperiod,thetimelinesdiscussedabovewillbemodifiedtocorrespondtotheparticu-lartreaty.Forexample,manyofCanada’streatiesdeemaconstructionsitetobeapermanentestablishmentonlyif it lastsmorethan12months.Furthermore,thedeemedpermanentestablishmentrulescontained in thefifthprotocol to theustreaty(discussedabove)willlikelyaffecttheavailabilityofwaiversinthecircum-stancescontemplatedbythenewtreatyprovisions.

Athletes, Actors, and Other Performing ArtistsTherearerestrictionsontheabilityofathletesandperformingartiststoapplyforaregulation105waiver.sinceCanada’staxtreatiesgenerallyprecludeathletesandperformingartistsfromclaimingatreaty-basedexemptionfromCanadiantaxationon the basis of having no permanent establishment in Canada, withholding taxwaiversaregenerallynotavailableforsuchindividuals.However,wheretheathlete,actor,orentertainerisaresidentoftheunitedstatesforthepurposesoftheustreatyandearnsgrossfeesinCanadaofCdn$15,000orless(includingexpensesre-imbursedorpaidontheartist’sorathlete’sbehalf )intheparticularcalendaryear,awaivermaybeissued.Thisexceptionislimitedtousresidents,sinceCanada’sothertreatiesdonotcontainthe$15,000carve-out.

us-residentathletesandperformingartistsotherthanactorsearningbelowthe$15,000thresholdshouldapplyforawaiverinthesamemannerasotherserviceproviders—thatis,bycompletingandfilingformR105.sincewithholdingforactorsoccurs,notunderregulation105,butratherunderpartxIII,actorsinthispositionmustfileformT1287174torequestareductionintheamountwithheld.

Behind-the-Camera PersonnelspecialrulesapplytopersonsprovidingservicesinCanadainrespectofthefilmandtelevisionindustry.Non-residentswhoworkbehindthescenesinthefilmandtelevisionindustry,suchascameraoperators,lightingexperts,andsoundtechnicians,areofteninauniquepositioncomparedwithothernon-residents.specifically,sincelocationshootingisbyitsnaturemobile,thereisgenerallynopermanentestablish-mentassociatedwiththeproduction.Inaddition,non-residentswhohaveexperienceworkingonproductionsfilmedinCanadawillregularlybehiredforotherCanadianshootsbydifferentproducers.Accordingly,whilesuchpersonswillusuallybeexempt

173 Previousyearsneednotbeconsecutive.

174 CanadaRevenueAgencyformT1287,“ApplicationbyaNon-ResidentofCanada(Individual)foraReductionintheAmountofNon-ResidentTaxRequiredToBeWithheldonIncomeEarnedfromActinginaFilmorVideoProduction.”


fromCanadiantaxationbyvirtueofnotworkingatapermanentestablishment,theymay fail the recurring presence test generally applicable to non-resident serviceproviders.Inrecognitionoftheuniquecircumstancesofbehind-the-cameraper-sonnel,andinordertoavoiddiscouragingforeignproductions(bypursuingwhatwouldbeconsideredinHollywoodasadraconiantaxpolicy),theCRAhasdevelopedspecialguidelinesfortheseserviceproviders.175

TheapplicationforthewaiverismadebyfilingformR107176withtheCRAfilmservicesunitthatservesthelocationwheretheserviceswillbeprovided.AccordingtotheCRA’sguidelines,atreaty-basedwaiverwillbegrantedwherethefollowingcriteriaaremet:

n theapplicant’spresenceinCanadaunderthecontractfortheparticular“project”willbelessthan180days;and

n servicesforthecurrentprojectandotherprojectswithinthe“period”areper-formedinCanadaatidentifiablydifferent“productionsites”;orthecurrentprojectisnot“related”totheotherprojects;and

n servicesarenot“repetitive.”177

TheCRAdefinesa“project”tomeanaproductioninCanadaofafilmordigitallyrecorded visual production, including a feature film, television movie, televisionseries,episode,documentary,videoproduction,orcommercial.Projectsareconsid-eredtobe“related”whenthesecondprojectcontinuestheservicesprovidedaspartofthefirstprojectandarecarriedoutbythesameproductioncompanyormajorstudio.TheCRAalsoconsidersprojects tobe“related” if theservices tobeper-formedbythebehind-the-scenespersonnelareprovidedunderthesamecontractforservices.178

The“period”isthecurrentcalendaryear,thethreeimmediatelyprecedingcal-endaryears,andthethreeimmediatelyfollowingcalendaryears.179

A“productionsite”isageographiclocationinCanadausedforaproject,deter-minedrelativetotheindustryandtypeofactivity(suchasshootingafeaturefilm)underconsideration.Aproductionsiteisnotlimitedtotheproductionoffice,studiospace,orstudiolotsusedbythenon-resident,unlessalloftheproductionactivitiesoccurthere.TheCRAconsidersthemetropolitanareaofacitytobeaproduction

175 CanadaRevenueAgency,“WithholdingTaxWaiverGuidelinesforBehindthescenes(BTs)PersonnelintheFilmandTelevisionIndustry”(online:http://www.cra-arc.gc.ca/tx/nnrsdnts/film/bts/wvrs/rg105/gdlns-eng.html).

176 CanadaRevenueAgencyformR107,“Regulation105WaiverApplication—FilmIndustry.”

177 Ibid.

178 Ibid.

179 Ibid.


sitewheretheactivitiesoftheproductionareperformedinvariousplaceswithinthatarea.180

TheCRAconsidersservicestobe“repetitive”whenthebehind-the-scenesper-sonnelroutinelyprovideservicesinCanadainthesamegeographiclocation.181

Income and Expense Waivers

Anon-residentwhodoesnotqualifyforatreaty-basedwaivermaysubmitanappli-cationforareductionoftheregulation105withholding(an“I&Ewaiver”)basedonastatementoftheestimatedincomeandexpensesrelatingtotheservicestobeprovidedinCanada.182

TheI&Ewaiverprocessprovidesthatanon-residentpersonmayclaimexpensesagainstCanadian-sourceincome,withthenetincomebeingsubjectedtotaxatgradu-atedrates,ratherthanbeingsubjecttoregulation105withholding.Iftheestimatedtaxpayable,aftertheapplicationofgraduatedrates,islowerthantheregulation105withholdingnormallyrequired,thenon-residentpersonmaybenefitfromthelowerrate.

TheCRAwillreviewthewaiverapplication,considerthereasonablenessoftheexpensesclaimed,anddeterminewhetherthenon-residentqualifiesforareductionofthewithholdingbasedontheI&Ewaiverapplication.Iftheapplicationisac-cepted,security(suchasabankguarantee)equaltothewithholdingtobewaivedmayberequired.Providedthattheforegoingconditionsaremet,theCRAwillau-thorizethepayer(s)toreducetheregulation105withholdingaccordingly.

co ncLusio n

ForeignserviceprovidersarecomingtoCanadawithincreasingfrequency.It isincumbentonboththenon-residentserviceproviderandthe localbusiness thatengagesthatpersontobecognizantoftheintricaterulesaffectingthetaxationoftheseservices.Theproperconclusioninanyparticularcircumstancewilldependonthe interactionofCanadiandomestic lawand international tax treaties towhichCanadaisaparty.Allofthespecificlegalrequirementsmustthenbeappliedagainstapanoplyoffactualvariations.Theseincludethecategorizationoftheservicepro-viderasdependent(anemployee)orindependent(acontractor),thelengthofstayinCanada,thejurisdictionofresidenceoftheforeignworker,thetypeofindustryorthenatureoftheservicesprovided,andtheavailabilityofCanadianadministra-tiverelief.

180 Ibid.

181 Ibid.

182 IC75-6R2,supranote110,atappendixB.


Analysisofalloftheabove-notedcircumstancespriortothecommencementoftheservicesisessentialinordertominimizeCanadiantax,reduceadministrativecompliance,andmaximizeforeigncredits.Inparticular,theavailabilityoftheCRA’swithholding taxwaivers isdependenton the foreignworker’sproviding theCRAwithsufficientleadtime(generallyatleast30days)tomakeadeterminationofeli-gibilityforthewaiverbeforetheservicefeesbecomepayable.

Actors,entertainers,andbehind-the-camerapersonnelwilllikelyneedspecial-izedassistancefromtaxadviserswhohaveknowledgeoftheindustryandarefamiliarwiththeCRAproceduresthatapplytosuchserviceproviders.

performing in canada: taxation of non-resident artists ... · general principles 592 taxation of...

Documents