20 August 1990 Income Tax Severed Letter AC59352 - Withholding Tax on Payments to Entertainers under Canada-U.S. Income Tax Convention

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.

M.P. Sarazin
                                        957-2125

24(1)

Attention: 19(1)

August 20, 1990

Dear Sirs:

This is in reply to your letter dated January 3, 1990 in which you requested a technical interpretation regarding the application of paragraph 2 of Article XVI of the 1980 Canada-U.S. Tax Convention (the "Convention") in the following situation. We apologize for the delay in responding to your request.

1. A non-resident entertainer corporation (E Co.) enters into a contract with a non-resident booking corporation (B Co.) to provide the services of entertainers for a flat fee.

2. E Co. and B Co. are not related persons within the meaning of subsection 251(2) of the Income Tax Act (Canada) (the "Act").

3. B Co. negotiates the fees with various theatres and accepts the risk for each performance.

4. B Co., E Co. and the entertainers do not have a permanent establishment in Canada.

5. Canadian theatres currently withhold tax on payments to B Co.

You are of the opinion that paragraph 2 of Article XVI of the Convention excludes B Co. from having tax withheld at the source by the Canadian theatres. Your position is based upon the fact that without a permanent establishment in Canada, B Co. is exempt from the provisions of Article VII of the Convention which taxes business income earned in Canada and B Co. would not qualify as an Artiste or Athlete for the purposes of Article XVI of the Convention. As such, B Co. would be exempt from tax in Canada under the provisions of the Convention.

We do not agree with your conclusion that Canadian theatres should not be withholding taxes on payments to B Co. Theatres are required to withhold tax on payments to B Co. pursuant to paragraph 153(1)(g) of the Act at the rate of 15% as prescribed under subsection 105(1) of the Income Tax Regulations (the "Regulations"). The provisions of the Convention do not apply to absolve the theatres from the requirement to withhold taxes on payments made to non-residents. B Co. would then file a tax return to claim a refund of the taxes withheld at the source on income exempt from tax in Canada under the provisions of the Convention.

In addition, B Co. would in turn be liable for the taxes that must be withheld and remitted on the flat fees paid to E Co. for the services performed in Canada under paragraph 153(1)(g) of the Act at the rate of 15% as prescribed under subsection 105(1) of the Regulations. The flat fees paid to E Co. for the services performed in Canada are subject to tax in Canada under the provisions of paragraph 2 of Article XVI of the Convention.

We would like to draw your attention to the fact that B Co. may apply for a waiver from the withholding tax requirements by writing to the Chief, Source Deductions in the applicable District Taxation Office. This of course can be done only on a case-by-case basis.

We would expect that payment of the withholding taxes on amounts paid to the entertainers (including corporations and partnerships) would be a prerequisite prior to the issuance of a waiver.

The foregoing comments represent our general views with respect tothe subject matter of your letter.

T. Harris for Director Reorganizations and Non-Resident Division Rulings Directorate Legislation and Intergovernmental Affairs Branch