12 September 1986 Income Tax Severed Letter 5-1872 - []

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.

D.S. Delorey (613) 957-2125

XXXX

September 12, 1986

Dear Sir:

This is in reply to your letter of July 11 concerning the 1980 Canada- U.S. Income Tax Convention (the "U.S. Convention") as it relates to an entertainer.

With respect to the questions raised, you ask us to provide an advance income tax ruling. Since such a ruling is given only to a particular taxpayer(s) with respect to a specific proposed transaction(s), we are unable to reply in the manner indicated. We enclose a copy of Information Circular 70-6R which explains the Department's position with respect to advance income tax rulings. Accordingly, the following comments are expressions of opinion on the general issues raised by you. Your questions are repeated in the order presented and our comments follow.

1. If a U.S. corporation

(a) were to contract to perform services in Canada (as an entertainer),

(b) did not have a permanent establishment ("P.E.") in Canada,

(c) was a resident of the U.S., and

(d) could establish that the net profit from the venture was nil

you ask if you would be correct in assuming that part 2 of Article XVII of the U.S. Convention would be applicable and that withholding tax would be nil.

Our Comments

The provisions of part 2 of Article XVII of the Convention apply only to amounts paid or credited to an individual. Thus, insofar as amounts paid to a U.S. corporation are concerned, those provisions are irrelevant.

Where amounts are paid to a U.S. resident individual, the provisions of part 2 of Article XVII of the U.S. Convention provide that the individual may apply to the competent authority of Canada for a waiver from, or reduction of, the withholding otherwise exigible pursuant to section 153 of the Income Tax Act (the "Act"). This, of course, would be done on a case-by-case basis.

2. With respect to "the Revenue Canada Regulations" dated January 1, 1983, you ask whether the format for calculation of the expenses is the same as that set down in those regulations, or per actual documented costs.

Our Comments

There are no such Regulations to the Income Tax Act. Presumably, therefore, you are referring to administrative guidelines of the Department with respect to an application for a lesser withholding than that called for under subsection 105(1) of the Income Tax Regulations. The extent to which these guidelines apply to a particular situation would be decided by personnel in the relevant district taxation office. With respect to their general application, we contacted an official of the Source Deductions Division, which Division is responsible for the overall administration of the guidelines, and were advised that the guidelines were established because actual costs are normally not known at the waiver stage. If they are known, however, they will be taken into consideration in determining if a reduction of the required withholding is justified.

3. If

(a) the contractor were to sub-contract to a U.S. resident (by way of written agreement for a set fee less than that of the contractor's fee) the services to be performed,

(b) all payments to the sub-contractor were made offshore,

(c) the sub-contractor did not have a P.E. in Canada, and

(d) the sub-contractor was not resident in Canada for more than 183 days in the calendar year

you ask if you would be correct in assuming that either Article XIV or part 2 of XV of the U.S. Convention would be applicable to the sub-contractor and that no withholding tax would be required.

Our Comments

Under the Act, a withholding is required at the time that the payment is made for the services performed in Canada. A particular taxpayer may apply to the relevant district taxation office for a waiver of all or part of the required withholding, and a decision with respect to such application will be made using guidelines established by the Source Deductions Division, as referred to above in our answer to number 2. Alternatively, if the taxpayer is a U.S. resident individual, he may apply to the competent authority of Canada, pursuant to part 2 of Article XVII of the U.S. Convention, for a reduction of the required withholding. Otherwise, the Canadian payer is required to withhold at the applicable rate, regardless of the particular Article of the U.S. Convention that applies to the recipient of the payment.

We understand that the Source Deductions Division is currently reviewing its guidelines with respect to the issuance of waivers of required withholdings. Thus, you may wish to contact an official of that Division at (613) 996-9321.

4. Alternatively, you ask if the sub-contractor would be deemed to be an "Artiste" such that "employment" income flowing to the sub-contractor would be subject to withholding in the contracting state per Article XVI of the U.S. Convention.

Our Comments

As indicated in our answer to 3 above, a withholding is required under the Act at the time that a payment for services rendered in Canada (or for duties of employment performed in Canada) is made, regardless of which Article of the U.S. Convention is applicable. Should a taxpayer make an application for a waiver of part or all of the required withholding in the manner set out above in our answer to No. 3, the applicable Article of the U.S. Convention will be relevant to determining the extent to which the application will be granted. This of course can be done only on a case-by- case basis having full knowledge of all the facts.

In the scenario described in question 3 above, it is our view that the applicable Article of the U.S. Convention would be Article XVI because the U.S. sub-contractor would be deriving his income as an entertainer from personal activities as such exercised in Canada.

We trust the above comments will be of assistance.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch