canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3, 589 - 638
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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.
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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.
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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.
taxation of non-resident artists, athletes, and other service providers n 593
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).
594 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3
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.
taxation of non-resident artists, athletes, and other service providers n 595
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).
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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
taxation of non-resident artists, athletes, and other service providers n 597
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.
29 subparagraph115(1)(a)(ii).
30 Paragraph115(1)(a).Dependingonthelegalnatureoftherelationshipbetweentheindividualandtheloan-outcompany—thatis,employeeorindependentcontractor—subparagraph115(1)(a)(i)or(ii)willapply.
598 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3
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).
taxation of non-resident artists, athletes, and other service providers n 599
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.
38 Ibid.,atparagraph46.
39 CanadaRevenueAgencyguideRC4110(E),“Employeeorself-Employed?”
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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).
taxation of non-resident artists, athletes, and other service providers n 601
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.
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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).
53 Ibid.,atparagraph95.
54 Ibid.,atparagraph104.
taxation of non-resident artists, athletes, and other service providers n 603
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.
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(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
57 Ibid.,atparagraph6.
58 Ibid.,atparagraph7.
taxation of non-resident artists, athletes, and other service providers n 605
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.
63 subparagraph115(1)(a)(ii).
64 However,section253doesprovideforanextendedmeaningofthephrasebydeemingcertainactivitiestoconstitutecarryingonbusinessinCanada.
65 Foracomprehensivediscussion,seeConstantineA.Kyres,“CarryingOnBusinessinCanada”(1995)vol.43,no.5Canadian Tax Journal1629-71.
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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.
68 Ibid.,atparagraph23.
taxation of non-resident artists, athletes, and other service providers n 607
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).
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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).
taxation of non-resident artists, athletes, and other service providers n 609
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.
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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).
taxation of non-resident artists, athletes, and other service providers n 611
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.
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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).
86 subsection150(1.1).
87 Paragraph150(1)(a).
taxation of non-resident artists, athletes, and other service providers n 613
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”).
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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.
taxation of non-resident artists, athletes, and other service providers n 615
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.
98 Ibid.,atparagraph19.
99 Income Tax Technical newsno.22,January11,2002.
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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.
taxation of non-resident artists, athletes, and other service providers n 617
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.
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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.
taxation of non-resident artists, athletes, and other service providers n 619
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.
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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.
taxation of non-resident artists, athletes, and other service providers n 621
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).
124 ustreatyarticlexVI(3).
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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.
128 ustreatyarticlexVI(4).
129 underproposedsection56.4,a“restrictivecovenant”isbroadlydefinedas“awaiverofanadvantageorrightbythetaxpayer...whetherlegallyenforceableornot,thataffects,orisintendedtoaffect,inanywaywhatever,theacquisitionorprovisionofpropertyorservicesbythetaxpayer.”seeBillC-10,AnActToAmendtheIncomeTaxAct,IncludingAmendmentsinRelationtoForeignInvestmentEntitiesandNon-ResidentTrusts,andToProvidefortheBijuralExpressionoftheProvisionsofThatAct,passedbytheHouseofCommonsonOctober29,2007.
taxation of non-resident artists, athletes, and other service providers n 623
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).
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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.
taxation of non-resident artists, athletes, and other service providers n 625
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).
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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
142 supranote110,atparagraph6.
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.
taxation of non-resident artists, athletes, and other service providers n 627
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.
148 supranote110,atparagraph14.
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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.
taxation of non-resident artists, athletes, and other service providers n 629
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.
630 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3
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.
taxation of non-resident artists, athletes, and other service providers n 631
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).
156 subsection212(17.1).
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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
157 subsection115(2.3).
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.
taxation of non-resident artists, athletes, and other service providers n 633
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
162 Ibid.,atparagraph44.
163 Ibid.,atappendixB.
164 Ibid.,atparagraph60.
165 Ibid.,atparagraph61.
166 Ibid.
634 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3
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.
taxation of non-resident artists, athletes, and other service providers n 635
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.”
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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.
taxation of non-resident artists, athletes, and other service providers n 637
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.
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Analysisofalloftheabove-notedcircumstancespriortothecommencementoftheservicesisessentialinordertominimizeCanadiantax,reduceadministrativecompliance,andmaximizeforeigncredits.Inparticular,theavailabilityoftheCRA’swithholding taxwaivers isdependenton the foreignworker’sproviding theCRAwithsufficientleadtime(generallyatleast30days)tomakeadeterminationofeli-gibilityforthewaiverbeforetheservicefeesbecomepayable.
Actors,entertainers,andbehind-the-camerapersonnelwilllikelyneedspecial-izedassistancefromtaxadviserswhohaveknowledgeoftheindustryandarefamiliarwiththeCRAproceduresthatapplytosuchserviceproviders.
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