2015-0603271E5 Subsection 216.1(1) and permanent establishment

Principal Issues: Whether a non-resident corporation providing acting services in Canada that misses the deadline for filing an elective income tax return under subsection 216.1(1) can late-file a “regular” income tax return under Part I where the provision of the acting services by the actor resulted in a permanent establishment of the corporation in Canada under the Canada-U.S. Treaty?

Position: No.

Reasons: Wording of subsections 212(5.1), 216.1(1), and operation of 115(2.1) and Article XVI of the Canada-U.S. Treaty.

Author: Graham, Kanwal
Section: 216.1(1); 212(5.1)

XXXXXXXXXX                                                                                                            2015-060327
                                                                                          `                                         Kanwal Graham
July 27, 2016

Dear Ms. XXXXXXXXXX:

Re: Subsection 216.1(1) and permanent establishment

This is in reply to your email of August 5, 2015, in which you asked about the income tax filing requirements and obligations by certain non-resident corporations that provide acting services in Canada. We apologize for the delay in responding to your request.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R7, Advance Income Tax Rulings and Technical Interpretations however, we offer the following general comments, which may be of assistance to you.

Please note that all legislative references in this letter refer to the Act, unless otherwise specified.

Our Comments

You indicated that U.S.-resident actors often provide acting services in Canada through a U.S.-resident corporation that is owned by the actor.  Generally, the corporation is either a limited liability company (“LLC”) or an “S” corporation. Both types are considered corporations for purposes of the Act. Such corporations are subject to a withholding tax of 23% under Part XIII, subsection 212(5.1), on the amounts paid or credited, or provided as a benefit, to or on behalf of the actor for the provision in Canada of the acting services of the actor in a film or video production (“acting services”), unless the corporation elects to file an income tax return and pay tax under Part I pursuant to subsection 216.1(1). Subsection 216.1(1) states that no tax is payable under subsection 212(5.1) if the non-resident person files a return of income under Part I for the year on or before the person’s filing due date for the year and the person elects in the return to have this provision apply. If the elective return is filed late, the election will be considered invalid.

If the non-resident corporation missed the deadline for filing the elective return for the year, you asked whether it could late-file a “regular” income tax return under Part I where the provision of the acting services by the actor resulted in a permanent establishment of the corporation in Canada under the Canada-U.S. Income Tax Convention (1980) (the “Treaty”). We assume that the corporation is not carrying on any other activities in Canada.

Generally, subject to relief under a tax treaty, a non-resident’s income from a business carried on in Canada is included in the computation of the non-resident’s taxable income earned in Canada and is taxable under Part I of the Act. (footnote 1)  However, subsection 115(2.1) excludes income from the acting services to which subsection 212(5.1) applies from the computation of the non-resident’s taxable income earned in Canada. As a result, such income is taxable under Part XIII and is not taxable under Part I unless a valid election is made under subsection 216.1(1). In addition, absent the election, a non-resident corporation providing the acting services is not required to file an income tax return under Part I of the Act. (footnote 2)

The Treaty does not alter this result. Pursuant to Article VII of the Treaty, the business profits of a U.S.-resident attributable to a permanent establishment in Canada may be taxed in Canada. (footnote 3)  However, where the issue involves the taxation of income from the provision of the acting services, one must also consider Article XVI of the Treaty, which deals specifically with income of entertainers, including actors, from their activities as such.

Paragraph 1 of Article XVI of the Treaty states the following:

Notwithstanding the provisions of Article VII (Business Profits) and XV (Income from Employment), income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his personal activities as such exercised in the other Contracting State, may be taxed in that other State, except where the amount of the gross receipts derived by such entertainer or athlete, including expenses reimbursed to him or borne on his behalf, from such activities do not exceed fifteen thousand dollars ($15,000) in the currency of that other State for the calendar year concerned.

Paragraph 2 of Article XVI of the Treaty states, in part:

Where income in respect of personal activities exercised by an entertainer or an athlete in his capacity as such accrues not to the entertainer or athlete but to another person, that income may, notwithstanding the provisions of Articles VII (Business Profits), and XV (Income from Employment), be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised.

Therefore, income from the acting services provided in Canada by the actor through another person (such as a company owned by the actor) may be taxed in Canada notwithstanding Article VII of the Treaty. In other words, Article XVI overrides Article VII and allows Canada to tax such income irrespective of whether the company maintains a permanent establishment in Canada. The manner in which such income will be taxed in Canada is determined by applying the rules in the Act described above.

As previously stated, non-resident actors, or corporations related to such actors, who earn income from the acting services of the actor in a film or video production in Canada are subject to the 23% withholding tax on such income under Part XIII. The exception to this rule occurs only when a valid election under subsection 216.1(1) is made by the actor or the corporation to be taxed on such income under Part I.

We trust that our comments have been of assistance.

Yours truly,

Julia Belova, Manager
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Subsections 2(3) and 115(1).
2  Clause 150(1)(a)(i)(B).
3  Note the application of Article IV(6) to fiscally transparent LLCs.

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