9 May 2002 Internal T.I. 2002-0132897 - Art. XVI U.S. and Foreign Tax Credits

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Where the income of a resident of Canada is subject to the application of paragraph 1 of Article XVI of the Canada-United States Income Tax Convention, would he automatically be considered to have a permanent establishment or fixed base in the U.S.?

Position: No.

Reasons: He does not need to have a permanent establishment or fixed base before paragraph 1 of Article XVI applies. In fact, the preamble of that paragraph stating "notwithstanding the provisions of Article XIV and Article XV" appears to imply that is the case. We could not find anything in that paragraph to say that the taxpayer is deemed to have a permanent establishment or fixed base.

May 9, 2002

Marlyss Anderson International Section I
Appeals Division S. Leung
Ottawa Tax Services Office 952-4666
333 Laurier Avenue West
Ottawa ON K1A 0L9
2002-013289

Interaction among Section 126 of the Income Tax Act (the "Act"),
Part XXVI of the Income Tax Regulations ("ITR") and Article XVI(1)
of the Canada-United States Income Tax Convention (the "Convention")

We are writing in reply to your e-mail of April 4, 2002 in which you requested our view as to whether a Canadian resident self-employed actor who carries on an acting business in the U.S. is automatically considered to have a permanent establishment in the U.S. pursuant to Article XVI of the Convention and whether the U.S. tax paid on the income from such business carried on by that person is eligible for a foreign tax credit in the province he resided at the end of the year in which such income was earned.

Our Comments

Since no detailed information was provided in your e-mail regarding the facts and circumstances of a particular taxpayer, we can only offer general comments as follows.

We do not think that a taxpayer, who is an individual and a resident of Canada for the purposes of the Convention, would automatically be considered to have a permanent establishment or fixed base in the U.S. solely as a consequence of the United States maintaining its right to tax the taxpayer pursuant to paragraph 1 of Article XVI of the Convention. It is always a question of fact whether a taxpayer carries on business through a permanent establishment or fixed base in a particular Contracting State, which can only be determined when all the facts and circumstances of a particular situation have been reviewed and analysed.

Paragraph 1 of Article XVI of the Convention simply states that an individual resident in a Contracting State, who falls into the categories of those persons described in that paragraph and who performs personal services in the other Contracting State, may be taxed in the second-mentioned State unless the amount of the gross receipt from the activities does not exceed $15,000 for the year. This is so notwithstanding the rules in Article XIV and Article XV of the Convention. In other words, among other things, there is no need to fulfil the requirement of Article XIV of the Convention to have a fixed base before the other Contracting State can have the right to tax the income from the performance of an independent personal service of a taxpayer earned in that fixed base in that State if that taxpayer is one of those persons referred to in paragraph 1 of Article XVI of the Convention. That means as long as paragraph 1 of Article XVI applies, it does not matter whether the activities were performed through a fixed base or not in the other Contracting State. The question of "fixed base" or "permanent establishment" simply does not enter into the picture.

For a person who is an individual resident in a province of Canada at the last day of a taxation year and who does not have a permanent establishment in the U.S. through which he carries on his acting business as an actor at any time in that year, for the purpose of section 120 of the Act, the income earned from that business is considered to be "income earned in the year in a province" as that term is defined under subsection 120(4) of the Act. This is because subsection 2601(1) of the ITR states that where an individual resided in a particular province on the last day of a taxation year and had no income for the year from a business with a permanent establishment outside the province, his income earned in the taxation year in the province is his income for the year (i.e., including the income earned from carrying on the acting business in the U.S.).

It should be noted that Part XXVI of the ITR is for the purpose of determining "income earned in the taxation year in a province" for the purposes of section 120 of the Act which is to determine whether certain income of the taxpayer is subject to the federal surtax. It has no bearing on the claiming of the foreign tax credit under section 126 of the Act or any provincial tax legislations. In other words, the fact that the income earned by the taxpayer from carrying on an acting business in the U.S. that is considered to be 'income earned in the taxation year in a province" under section 120 of the Act does not necessarily mean it is not foreign source income for foreign tax credit purposes (that is, for the purposes of section 126 of the Act). It is our view that the U.S. tax paid on such income is "business-income tax" within the meaning in subsection 126(7) of the Act and is eligible for federal foreign tax credits in Canada. In Ontario, as far as we are aware, no provincial foreign tax credit is available for business-income tax paid by an individual. This seems to be appropriate because the federal foreign tax credit system allows a taxpayer to carry forward unused foreign tax credits with respect to foreign business-income taxes paid by the taxpayer.

We trust you will find the above to be of assistance. If you have any question regarding the above, please do not hesitate to contact us.

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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