The Twelve Points of the CRA

The twelve days of Christmas are soon upon us, so, I thought it would be nice if  The Tax Issue contributed to the holiday cheer by reproducing for you, the CRA’s twelve indicators to determine where a business is carried on for Canadian tax purposes. I’ll spare you any musical accompaniment. 🙂

One of the basic tenets of Canadian tax law is that any non-resident carrying on business in Canada is subject to tax in Canada. This criterion is similarly relevant in determining whether you are required to collect GST/HST.

So, what does it mean to be “carrying on business in Canada”? There is no clear definition in the legislation, so we must look to the jurisprudence and the CRA’s guidelines.

In 2002, the CRA issued a comprehensive policy statement with regard to whether a business is being carried on in Canada. This policy takes into account the jurisprudence, as well as other factors such as the global economy. The CRA has established a list of twelve factors that determine where a business is carried on for Canadian tax purposes. You can read one per day during the holidays, set them to music, or read them all at once. Just remember, once they’re gone, they won’t be back till next year! 🙂

1.      The place where agents and employees of the non-resident are located;

2.      The place of delivery;

3.      The place of payment;

4.      The place where purchases are made or assets acquired;

5.      The place from which transactions are solicited;

6.      The location of assets or an inventory of goods;

7.      The place where business contracts are made;

8.      The location of a bank account;

9.      The place where a non-resident’s name and business are listed in a directory;

10.  The location of a branch or office;

11.  The place where the service is performed; and

12.  The place of manufacture or production

What’s You Tax Issue? Non-Resident Providing Services

The Tax Issue:

Can a Canadian Corporation employ a non-resident (Swedish citizen) on its Canadian payroll, directly, take off withholdings etc. This individual resides in Sweden, works with us from there and visits twice yearly for a month at a time. If we can do that, it is beneficial for him as paying his consulting company in Sweden is even more onerous for him.

The Answer:

It is up to you to decide to enter into a contract with a consulting company or with an individual personally. I can’t comment on what the Swedish tax implications would be in either case. Also, whether this person is an employee or is self-employed is another issue that must be addressed. Either way though, if he is performing services in while Canada, his fees are likely subject to Canadian withholding taxes of 15% under Regulation 105 (see my previous post on this topic).

Payroll withholding generally only applies to employees who regularly report to work at an establishment in Canada. A non-resident employee is generally exempt from this withholding, provided he is subject to tax in his country of residence.

Whether he is actually subject to income tax in Canada with respect to services rendered here is another question, and it depends on the total length of time he spends here, and the provisions of the Canada-Sweden tax treaty. He will likely have to file a Canadian income tax return in any case, to recover the withholding taxes.

Canadian Tax on the Entertainer

Like most people, while enjoying a live concert or watching a movie, my mind inevitably begins to wander away from the performers on stage towards the Canadian income tax rules that apply to them. They are truly talented and unique, these non-residents of Canada, and as such, special tax rules apply to them.

General Rule for Services Rendered in Canada

In my August 31 post you will recall that we dealt then with Regulation 105 withholding requirements. When a non-resident enters Canada to perform services, he is subject to a 15% levy (plus an additional 9% in Quebec) on account of income tax payable in Canada. This charge applies similarly to musicians, and other performing artists. According to the CRA, these performers are carrying on business in Canada and are subject to tax on their income earned in this country.

In many cases, however, services rendered by a resident of a treaty country, such as the US would be exempt from Canadian taxes. Business income is exempt under most treaties unless the taxpayer has a “fixed base regularly available to him” in this country.

Artistes and Athletes

A special section found in most of Canada’s treaties deals specifically with “Artistes and Athletes”. This provision essentially provides that the above treaty exemption for business income does not apply to income of more that $15,000 in a year, derived as an entertainer such as a movie, theatre, radio or television artiste, a musician or an athlete. Accordingly, these talented people have to “pay to play”, so to speak.

Requirement to File a Tax Return

Whether or not a person is exempt from Canadian tax under a treaty provision, he must file a Canadian income tax return. The 15% tax withheld does not relieve a non-resident of this duty. If the income is exempt under a treaty, then the full amount withheld would be claimed as a refund. If the taxpayer is not exempt, he must report his net income earned in Canada, and the 15% tax withheld is applied as a credit against taxes owing. Failure to file a Canadian return would result in penalties.

Like Me, Some People Are Not Artistic Enough

Billy Joel in Montreal - Must file a Canadian tax return

Billy Joel in Montreal - Must file a Canadian tax return

The question of whether a taxpayer is an “artiste or athlete” can be difficult to answer at times. In the case of Thomas F. Cheek v. The Queen, Toronto Blue Jays announcer Tom Cheek was held not to be a “radio artiste”, because he was simply reporting on the games and was not attracting his own audience by virtue of his talents as a radio personality. The court found he was exempt under the Canada –US Treaty.

More Issues for Athletes

For athletes, questions can become even more complex. US athletes playing for Canadian sports teams might be considered resident in Canada depending on their circumstances, and vise versa. Non-resident employees of sports teams might benefit from treaty protection if they are not present in Canada for more than 183 days in a year. However, self-employed athletes, such as tennis players would likely have no treaty protection.

Special Rules for Film Actors

Finally, a completely separate set of overriding rules applies to actors who provide acting services in a film or video production. These taxpayers, whether they provide services directly or through a corporation, are subject to a flat 23% withholding tax under Part XIII of the Act. This rate applies to income from acting services, including residuals and contingent compensation. Further, these taxpayers are not required to file Canadian income tax returns.

However, a special election is available to actors who choose to file a tax return. Under this election the 23% withholding tax does not apply, and they will be taxed under Part I on their net income earned in Canada. To be valid, this election must accompany a Canadian income tax return filed by the person’s filing due date.

Note that these special rules do not apply, for example, to stage actors or radio artistes. They do not apply to other income earned by the actor, such as from services as a producer or director. Nor do they apply to other personnel working behind the scenes in the film industry. All these other services are subject to the normal 15% Reg. 105 withholding and the requirement to file a return.

Payments to Non-Residents

Regulation 105 of the Income Tax Act (“the Act”) provides that all taxpayers must withhold 15% from any payment to a non-resident in consideration for services rendered in Canada. In addition, if the service is rendered in Quebec, a further 9% must be withheld and remitted to the Ministére du revenu. Amounts withheld must be remitted to the two governments by the 15th day of the month following the payment. These withholding rates are not reduced by any tax treaty.

For anyone who has chosen to remain ignorant of this requirement, I need only to point to the previous post in this series to prove that the CRA finds the “Global Economy” a very interesting topic and has various tools to check up on non-compliance. For example, in form T106, and on the corporate income tax return form T2, schedule 29, taxpayers are asked to identify payments made to non-residents that may be subject to withholding.

You must withold 15% from non-resident contractors

You must withold 15% from non-resident contractors

Ignorance may be bliss, but it won’t shelter a taxpayer from the significant penalties and interest that may be levied under the Act for failure to withhold. The penalties include $2,500 per failure, on top of an additional 10% of the tax, or 20% if the failure is attributable to gross negligence.

Who are these non-residents providing services to Canadians? They could be employees of a non-resident company, or self-employed individuals that provide any type of service such as consulting, installation or selling services to the Canadian taxpayer.

Whether the payee is subject to Canadian income tax at all is not of any concern to the payer. The non-resident must comply with Canada’s tax laws, and the regulation 105 withholding is a way for the CRA to ensure that that happens. In addition, from the payee’s point of view, any non-resident corporation carrying on business in Canada must file a return, subject to penalties for non-compliance, regardless of whether it is exempt from Canadian tax under a treaty.

In order to recover the taxes withheld, the non-resident must file a Canadian income tax return. If he is not taxable in Canada by virtue of a tax treaty, he will receive the full amount of the withheld tax as a refund. Of course, this is of little comfort to those with cash flow concerns.

The only way to avoid the withholding is for the non-resident to apply for a waiver. The application must be made at least 30 days prior to the payment, and it is a difficult process, with the requirement to show that a treaty does, in fact apply to eliminate the non-resident’s Canadian tax liability. Alternatively, the waiver application could ask that the withholding be based on the net income earned after any deductible expenses.

Regulation 105 is yet another tool to be wielded by the CRA to ensure compliance. Canadian payers caught unaware, may be forced to pay the price on behalf of their non-resident suppliers.

Canada Revenue Agency tries the Double-Dip

Who can resist the double dip? Apparently not the CRA.

Once in a while a case comes along that makes me wonder what they’re smoking over at the Appeals Division. In the case of Stora Enso v. The Queen the CRA taxed the same payment twice. Not surprisingly, the Tax Court held against them.

The case deals with Regulation 105 withholding. Anyone paying a non-resident person a fee in respect of services rendered in Canada must withhold 15 per cent of such payment. This regulation is in place to ensure that if a non-resident does business in Canada, the CRA doesn’t have to send their agents around the globe to enforce the law. The key thing to remember here is that it doesn’t matter who the parties to the actual payment are. The withholding requirement applies to any payment in respect of services rendered in Canada by a non-resident, regardless of who pays and who gets paid.

With that in mind, in this case, the CRA went a bit too far. The facts are simple. A Canadian company (Canco) hired a Swedish consulting firm (Swedco). Instead of Canco paying Swedco, a related company (Sisco) chipped in to settle the bill. Canco then reimbursed Sisco.

Some time later, during an audit, the CRA noticed that Canco made a payment to Sisco in respect of a service rendered by Swedco, a non-resident. Since Reg. 105 applied, Canco remitted the 15% to the CRA. But the story does not end here.

The CRA then assessed Sisco for 15% of the amount it paid to Swedco in respect of the same service. Defies logic, right? Well, that’s precisely what the Tax Court said, and decided in favour of Sisco.

Two other noteworthy points came out of this case. First, when Canco made its remittance, it simply calculated 15% of the amount paid to Swedco. However, the tax itself was also considered part of the payment to Swedco, as it was ostensibly paid on account of Swedco’s Canadian tax liability. So Canco was assessed correctly for 15% of the 15%  tax remittance.

And finally, the Court commented on the application of the withholding tax on payments for “out-of-pocket” disbursements. Since such amounts were not itemized on Swedco’s invoice, they could not be distinguished clearly and so the 15% applied. Where an amount paid is clearly in respect of disbursements, however, and not the services rendered, the tax does not apply.

Anyhow, all of this begs the question I’m sure you are all asking: What is this Regulation 105 withholding tax all about, and why should you care? Stay tuned.