4 February 2009 Internal T.I. 2008-0300871I7 - Art XVI Canada-US Convention, Artists and athletes

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.

Principal Issues: Whether an American artist can benefit from the treaty exemption in paragraph 1 of Article XVI of the Canada-US Tax Convention without considering the amount received by a U.S. corporation that is subject to paragraph 2 of that provision for the application of the threshold limit?

Position: Yes. Paragraph 1 of Article XVI of the Canada-US Tax Convention applies independently of paragraph 2 of that provision.

Reasons: Wording of the Convention and previous position.

									February 4, 2009

	Robert Greene						HEADQUARTERS
	Non-Resident Policy Advisor
	Small and Medium Enterprises Directorate		Income Tax Rulings
	Compliance Programs Branch	  			Directorate
	Canada Revenue Agency					Yannick Roulier
	112 Kent Street						(613)957-2134
	Ottawa ON  K1A 0L5					2008-030087

Article XVI of the Canada - U.S. Convention: Artist and Athletes

This is in reply to your email of November 19, 2008, wherein you requested our views with respect to the application of paragraphs 1 and 2 of Article XVI of the Canada - United States Tax Convention ("Convention") to a specific fact situation.

Background

We understand the facts submitted to be as follows:

1. X and Y are resident in United States ("US") and are members of a US based band

(the "Band").

2. The Band's contracts were concluded by a US corporation ("US Corp"), of which X and Y are the unique shareholders.

3. The Band played XXXXXXXXXX shows in Canada in XXXXXXXXXX earning $XXXXXXXXXX in gross receipts.

4. The total gross receipts have been paid to US Corp, who subsequently paid salary of $XXXXXXXXXX to each of X and Y during the year.

In this context, the taxpayers agree that paragraph 2 of Article XVI of the Convention applies to US Corp, resulting in Canadian compliance obligations and tax liability for the corporation in application of the Income tax act ("ITA").

X and Y argue, however, that they can respectively claim a treaty exemption on the salary they personally received from US Corp during the year XXXXXXXXXX based on paragraph 1 of Article XVI of the Convention, as the amount received by each of them is under the threshold limit of $15,000 of gross receipts for the year.

Question

More specifically, your question is whether X and Y are entitled to the treaty exemption stated in paragraph 1 of Article XVI of the Convention in respect of the salary they respectively received during the year, which is under the threshold limit, without considering that amounts accrued to US Corp that are subject to paragraph 2 of Article XVI?

Position and comments

Our view is that paragraph 1 of Article XVI of the Convention applies independently of paragraph 2 of that provision. The application of those provisions must be done in a manner consistent with the Canadian income tax system that applies generally one taxpayer at a time. The wording of paragraphs 1 and 2 of Article XVI of the Convention is clear and prevents any interpretation contrary to this general approach.

In this instance, US Corp is a body corporate with legal personality separate from that of its shareholders. We understand that it is considered to be a corporation for Canadian and US income tax purposes. Consequently, in the case under analysis, X, Y and US Corp are each subject to tax in Canada pursuant of the ITA and are entitled to the treaty benefits in the Convention on their own merits and facts.

Therefore, in the situation described above the threshold limit of $15,000 entitles each of X and Y to the treaty exemption stated in paragraph 1 of Article XVI of the Convention in respect of the salary received by each of them during the year. The fact that amounts subject to paragraph 2 accrued to US Corp is irrelevant. Furthermore, it is appropriate to note that the determination as to whether the $15,000 threshold has been exceeded is determined on a yearly basis.

This position is consistent with the wording of Article XVI of the Convention and with the intention of the contracting states to the Convention. As mentioned in the Technical explanation of the Convention issued by Finance Canada in 1984 in respect of Article XVI, paragraph 2 does not affect the rule of paragraph 1 that applies to the entertainer or athlete himself.

Comments to the same effect have also been published by the Internal Revenue Service ("IRS") in the "United States Model Technical Explanation accompanying the United States Model Income Tax Convention of November 15, 2006". Although this document reflects the general policies of the IRS in respect of the US model, the relevant provisions are drafted in a manner that is similar to paragraphs 1 and 2 of Article XVI of the Convention. Those comments are not binding on the Canada Revenue Agency ("CRA") but they are indicative of a reasonable interpretation of similar wording provisions.

It is appropriate to note that Article 17 "Artists and sportsmen" of the Model Tax Convention on Income and on Capital published by the Organisation for Economic Co-operation and Development ("OECD") does not state any threshold limit. Therefore, the OECD's comments are of limited assistance. In other respects, the issue under consideration has already been addressed by our Division. We refer you to the technical interpretation 2002-0146465, dated December 11, 2002, of which a copy is enclosed. The conclusions presented in this interpretation are the same as those expressed above, that is, that paragraphs 1 and 2 of Article XVI have to be applied independently. XXXXXXXXXX .

Finally, it is appropriate to note that the 5th Protocol concluded on September 21, 2007 between the Canada and the US does not implement any fundamental changes of Article XVI of the Convention.

We trust the above comments will be of some assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayers.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch