Article 16 - Artistes and Athletes

A U.S.-resident professional athlete signed a multi-year contract with a Canadian sports team which, in addition to salary, provided for the payment of a “Signing Bonus,” payable in annual instalments, but providing that if the taxpayer withdrew his services or breached the contract, he would only be entitled to a pro rata portion of the bonus, and would be required to repay any amount received in the current sport year. In finding that the portion of the bonus at issue (the first instalment) could be taxed by Canada as employment remuneration consistent with Art. XV(1) of the Canada-U.S. Convention rather than the Canadian tax rate being limited under Art. XVI(4) to 15% on the basis that it was an “inducement to sign” the contract (a signing bonus), the Directorate stated:

Although the Agreement defines the Bonus as meaning compensation for signing the contract, the contractual requirement for the payment of the Bonus links the amount of the Bonus to which the Taxpayer is entitled to the performance of employment services.

A U.S.-resident actor provides Canadian acting services through an LLC or S corp. The 23% withholding tax under ITA s. 212(5.1) on the gross consideration paid could be avoided if the corporation files a Part I return for the year by its filing due date therefor and elects therein to have s. 216.1 apply. CRA considered that if the non-resident corporation misses this deadline, there is no ability to access s. 216.1, and (based on s. 115(2.1)) the non-resident corporation cannot late-file a “regular” Part I return where the provision of the acting services had resulted in it having a Canadian permanent establishment under the Treaty. CRA then added:

[I]ncome from the acting services provided in Canada by the actor through another person (such as a company owned by the actor) may be taxed in Canada notwithstanding Article VII of the Treaty. In other words, Article XVI overrides Article VII and allows Canada to tax such income irrespective of whether the company maintains a permanent establishment in Canada.

A U.S.-incorporated resident of the U.S. for Treaty purposes (“Non-Resident Corporation”), whose shares were 50% owned by a non-resident artist whom it represented, presented various shows in Canadian provinces, and received a share of the revenues from the promoter. For each show, it (through its employees) had to install the stage, lights, sound system, etc. on the day of the show, and used a number of trailer trucks to transport the stage equipment.

Before finding that Non-Resident Corporation did not have a permanent establishment in any province for purposes of Part IV of the Regulations, the Directorate stated:

Article XVI of the Convention … applies without regard to, inter alia, Article VII of the Convention, and ... permits Canada to tax income derived by a non-resident company from performances in Canada without requiring that such income be earned through a permanent establishment in Canada under the Convention.

By virtue of paragraph 1 of Article XVI of the Convention, an American artist or athlete ("Non-resident") has, in your opinion, no tax payable in Canada if his or her Canadian-source artistic or athletic income is less than $15,000.

Is the $15,000 exemption accorded under Art. XVI(1) of the Canada-U.S. Convention to an American artist or athlete (the “Non-resident”) also applicable under Art. XVI(2) where the Non-resident does business in Canada through a corporation ("Foreign Co), of which the Non-resident is the sole shareholder? CRA responded:

With respect to the income from activities exercised personally by the Non-resident as an artist or an athlete which accrue to Foreign Co, the provisions of paragraph 2 of Article XVI of the Convention apply to Foreign Co and permit Foreign Co to be subjected to Canadian tax on all business income so accruing to it. Consequently, we are of the view that the rule on gross receipts derived in Canada in paragraph 1 of Article XVI does not apply to Foreign Co. In other words, even if the total gross receipts of the "other person" (Foreign Co) do not exceed $15,000, the income of that "other person" from the gross receipts is not exempted from tax under paragraph 2 of Article XVI, regardless of the receipts of the artist or athlete (the Non-resident) for the purposes of paragraph 1 of Article XVI of the Convention.

Regarding income earned by a US-resident athlete from Canadian activities through an “S Corp.”, CCRA referred to the provisions of Art. XVI of the Canada-US Treaty, and stated:

Although the provisions of Articles VII (Business Profits) and XIV (Independent Personal Services) of the Convention do not allow Canada to tax the income allocated by the athlete to another person because the latter does not have a permanent establishment (or fixed place of business) in Canada, paragraph 2 of Article XVI of the Convention constitutes an exception that allows Canada to tax the income accruing to the other person who is a resident of the United States. In other words, under the provisions of paragraph 2 of Article XVI of the Convention, Canada may tax the income of a corporation owned by the athlete (for example, an "S corporation") to the extent that such income is attributable to activities carried on in Canada by the athlete, regardless of the corporation not having a permanent establishment in Canada.

An association of professional racing car teams is not a league "with regularly scheduled games" for purposes of paragraph 3(a) of Article XVI of the U.S. Convention because the racing car teams would generally not be required to enter each event.