29 May 2002 Internal T.I. 2002-0142017 - Taxation of XXXXXXXXXX

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: Canadian income tax treatment of XXXXXXXXXX

Position: N/A

Reasons: Summary of provisions provided

Ms. Bruna Rados

Director
Client Services Division
191 Laurier Avenue West, 15th Floor 2002-014201
Ottawa ON K1A 0L5 T. Cook

May 29, 2002

Re: XXXXXXXXXX

Dear Ms. Rados:

We are writing you in response to your memorandum of May 15, 2002, in which you asked us to outline any exemptions from Canadian income tax that would normally be accorded to international sporting events like the XXXXXXXXXX The tax exemptions available under the Income Tax Act (the "Act") for these events are very limited. The type of blanket exemption from income tax contemplated by the draft 'Tax Ruling' prepared by XXXXXXXXXX could only be provided by the Department of Finance. Should XXXXXXXXXX wish to pursue this route, they need to contact the Department of Finance directly.

Some general comments on the Canadian income tax system that may be helpful to XXXXXXXXXX are set out below. If more detail is provided by XXXXXXXXXX, we would be in a better position to be more definitive in our comments.

Income Tax

The Government of Canada levies a federal income tax on the worldwide income of residents of Canada. Canada's provinces and territories also impose income taxes, which closely mirror the federal income tax. An individual is a resident of Canada for federal income tax purposes if Canada is the place where the individual, in his or her settled routine, regularly or customarily lives. A corporation incorporated in Canada will normally be resident in Canada, and a corporation whose central management and control is located in Canada will be resident in Canada, even if it was incorporated elsewhere. Non-residents that are employed in Canada, carry on business in Canada, or dispose of property located in Canada, are also subject to the federal income tax; however, they are taxed only on income earned in Canada.

Canada has entered into a network of tax treaties that ensure that income is not subject to double taxation. The tax treaties provide rules for determining residence for purposes of the treaty, and for apportioning the right to tax income between the two countries. Employment income is normally taxed in the country the employee is resident in, unless certain thresholds of time spent, or employment income earned, in the non-resident country are met. Business profits are normally taxed in the country where the permanent establishment that gave rise to the income is located. The earnings of athletes are generally taxed in the country in which those earnings arose.

Based on the information we have, it is not possible to meaningfully comment on whether XXXXXXXXXX would likely be carrying on business in Canada through a permanent establishment, or whether their employees would be subject to Canadian income tax. If any of the participants in the XXXXXXXXXX are remunerated, or prize money is awarded, such amounts may be subject to tax.

The only general exemption under the federal income tax likely applicable in this instance is that for non-profit organizations ("NPOs"). An organization established for a non-profit purpose is generally exempt from the federal income tax as long as it is not operated for the financial benefit of its members/shareholders. An NPO may be operated for financial benefit of its members if the primary purpose of the members is to promote amateur athletics in Canada. Since both resident and non-resident organizations may qualify as NPOs, both XXXXXXXXXX could qualify if they meet the relevant criteria.

Payments to Non-Residents

A federal non-resident withholding tax is levied on certain payments made to non-residents. Generally, tax at a rate of 25 percent of dividends, interest, rent and royalties is imposed. Of particular importance for events of this nature, we note that payments for trademarks, etc. fall within the definition of royalty and so attract non-resident withholding tax. Canada's tax treaties usually reduce the withholding tax rate, and in some cases exempt certain types of payments from withholding. Since the withholding tax rates and the definitions of various terms (e.g. royalty) differ by treaty, whether withholding tax is applicable and the correct rate can only be determined on a case-by-case basis.

Fifteen percent of amounts paid to non-residents in respect of services rendered in Canada must be withheld, unless a waiver is obtained from the Canada Customs and Revenue Agency. Similarly, employment income earned in Canada by a non-resident is subject to employee withholdings. These are withholdings on account of tax rather than final tax liabilities. If the amounts withheld exceed the non-resident's tax liability under the federal income tax, the excess is refunded.

We trust that these general comments are of some help. If you have any queries or need further assistance, please do not hesitate to contact either Jim Wilson at 957-2049 or Ted Cook at 946-4165.

Yours truly,

R.S. Biscaro
Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch