12 June 2002 External T.I. 2002-0143925 - Article XVI and Provincial FTC

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 an actor who is resident in Ontario has acting income but no PE in the United States, does the interaction between Article XVI, section 120 and the provincial foreign tax credit system mean that he may be subject to unrecoverable double-taxation?

Position: Yes.

Reasons: The actor will only get to use the federal FTC up to the amount of federal income tax paid, but he will have to pay provincial tax on his income earned in the U.S. because he has no PE there. The provincial tax system does not provide a foreign tax credit for business income tax, so there will be an element of double-tax where the provincial tax and the U.S. tax overlap. Normally, there wouldn't be U.S. tax payable unless there was a PE, and if there was a PE then the actor would have to pay surtax (which is federal) rather than provincial tax. The rest of the FTC could then be claimed against the surtax. The situation arises because Article XVI provides that the U.S. can tax business income earned by an actor in the U.S. (as long as it is over US$15,000) even though there is no PE in the U.S. The actor may not be able to ever use up the room carried forward as a business-income-tax FTC, because this situation will generally repeat itself every year.

XXXXXXXXXX 2002-014392
Eliza Erskine
June 12, 2002

Dear XXXXXXXXXX:

Re: Federal Foreign Tax Credit ("FTC") Available to a Canadian Resident Actor with U.S. Acting Income and no Permanent Establishment ("PE") in the U.S.

This is in reply to your letter of May 30, 2002, requesting our views regarding the above-noted subject matter. We also acknowledge our recent telephone conversations and communications by voicemail with you (XXXXXXXXXX/Wilson).

Our Comments

The situation outlined in your letter appears to relate to a completed transaction or series of events involving a specific taxpayer. We note that written confirmation of the tax implications arising from particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are willing, however, to provide you with some general comments.

As set out in your letter, a Canadian resident actor who earns acting income in excess of US$15,000 in the U.S. may be taxed in the U.S. regardless of whether he or she has a PE in the U.S., pursuant to Article XVI of the Canada-U.S. Income Tax Convention (the "Convention"). This leads to two possible scenarios.

If the actor has a PE in the U.S., then the acting income will not be "income earned in a province" for purposes of section 120 of the Income Tax Act (the "Act") and the relevant provisions of the Income Tax Regulations (the "Regulations"). This means that instead of being subject to provincial tax, the acting income will be subject to a federal "surtax" under subsection 120(1) of the Act. As a result, the total Canadian income tax payable will generally be sufficient to use up the FTC available as a result of the actor's U.S. business income tax liability.

On the other hand, if the actor does not have a PE in the U.S., the acting income will be "income earned in a province" for purposes of section 120 of the Act and will be subject to provincial tax. The FTC will still be available in respect of the tax paid to the U.S., however, the federal Canadian tax payable will not usually be sufficient to absorb the full amount of the credit. At the same time, the provinces generally do not provide a foreign tax credit for foreign business income tax paid, because in most cases (i.e., where there is a tax treaty between Canada and the foreign country), there will only be foreign business income tax payable where there is a PE in the foreign country, and where there is such a PE, the business income allocated to that PE will not be "income earned in a province" that is subject to provincial tax. Moreover, the FTC provisions in the Act provide for a carry-forward of FTCs arising from foreign business income tax paid, which means that there is usually some opportunity for an individual with such FTCs to make use of the credits in a subsequent year. The difficulty for an actor who regularly earns acting income in the U.S. is that he or she might never be able to use his or her FTCs, because the same situation will arise each year. The result is that such an actor will be subject to both provincial tax and U.S. tax on the same income with no opportunity to take full advantage of Canada's FTC system.

In conclusion, we agree with you that a Canadian resident actor (or any other individual to whom Article XVI of the Convention applies) who works regularly in the U.S., but does not have a PE in the U.S., will potentially be subject to significant, ongoing double-taxation. We do not see any reason for this in policy terms, particularly as the situation does not arise for Canadian resident actors who actually establish a PE in the U.S.. For this reason, we intend to bring this matter to the attention of the Legislative Policy Division of the CCRA, who not only deal with provincial taxation matters but also act as our liaison with the Department of Finance. It is our hope that either the Legislative Policy Division or the Department of Finance will be able to resolve this matter.

We trust that the above comments will be of assistance to you. If you require further information with respect to the issues discussed in this letter, please contact Eliza Erskine at (613) 952-1361.

Yours truly,

Jim Wilson
for Director
International and Trusts Division
Income Tax Rulings and
Interpretations Directorate