12 February 2014 External T.I. 2013-0505511E5 - Cancellation fees paid to a non-resident artist

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 cancellation fees paid to a US non-resident artist are subject to Canadian withholding tax?

Position: Depends on the facts. The cancellation fees are not subject to Canadian taxation under section 105 of the Regulations when no service is rendered in Canada by an Artist or an Athlete.

Reasons: OECD commentaries to Articles 17, 15 and 7

XXXXXXXXXX
2013-050551
Marie-Hélène Chouinard
(418) 558-1892

February 12, 2014

Dear XXXXXXXXXX,

Re: Withholding Tax on Cancellation Fees

This is in response to your email dated September 19, 2013, wherein you asked for our interpretation as to whether a cancellation fee paid to a U.S. musician would be subject to Canadian withholding tax. You indicated that the fee would be paid for the cancellation of a performance that was supposed to be done in Canada. You also indicated that you cannot confirm if there were any rehearsals or any other activity in Canada.

Written confirmation of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.

Unless otherwise stated, all references to a statute are references to the provisions of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) as amended to the date hereof (the Act), and every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.

Our comments

Paragraph 153(1)(g) of the Act specifically provides that "every person paying at any time in a taxation year [...] fees, commissions or other amounts for services, other than amounts described in subsection 115(2.3) or 212(5.1) [...] shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall [...] remit that amount [...]". The "prescribed rules" are found in subsection 105(1) of the Income Tax Regulations (Regulations), which provides that "every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever shall deduct or withhold 15 per cent of such payment".

As indicated at paragraph 6 of the IC 75-6R2 — Required Withholding from Amounts Paid to Non-Resident Persons Performing Services in Canada, "The CRA takes a broad interpretation of the wording "in respect of". Therefore, a particular payment need not necessarily be paid only for services or, be paid to the person who performed the services in order for Regulation 105 withholding to apply." Preparation, rehearsals, and training are considered normal activities of an artist or athlete ("performer") and any payments received for these activities for a performance that occurs in Canada or connected to a performance in Canada, are considered to be paid in respect of services rendered in Canada.

Whether a payment to a non-resident person is a fee, commission or other amount for services rendered in Canada is a question of fact that can only be determined after an analysis of all of the relevant facts and circumstances, including all of the relevant agreements. There is generally no withholding requirement under subsection 105(1) of the Regulations where a person makes a payment to a non-resident person for services that are not performed or rendered in Canada.

Where a performer receives a payment in respect of a performance to be done in Canada, notwithstanding that the payment may be in respect of the performance itself or for its preparation, rehearsals, or training, the requirement to withhold under section 105 of the Regulations still exists, unless a treaty based waiver is obtained. A treaty based waiver may be granted if the performer establishes that the payment received is not taxable in Canada because of treaty protection. Article XVI of the Canada-US Income Tax Convention states that the income earned by Artistes and Athletes who are residents of United States may be taxed in Canada when the activities of the entertainer or athlete are exercised in Canada and when the gross receipts derived by entertainer or athlete exceed fifteen thousand dollars (CAD$15,000).

Generally, there would be no requirement to withhold tax under section 105 of the Regulations on the cancellation fee paid to a non-resident performer if in fact no services were ever rendered in Canada and the non-resident performer did not come to Canada in respect of the cancelled performance.

We trust that we have been of some assistance.

Yours truly,

Guy Goulet, CPA, CA, M. Fisc.
Manager
International Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch