Introduction - What Canadian Tax Law Issues Might Foreign Musicians Face?
Canada can be a particularly lucrative market for international musicians looking to schedule concerts, tours and live performances. Canada's tax law structure makes provision for non-resident entertainers that will impact musicians travelling to Canada to perform. Canada's treatment of foreign musicians invites questions concerning rights and obligations under Canadian tax laws, and the way those laws interplay with international tax treaties. Musicians who have questions about how these factors may apply to their own circumstances should consult one of our expert Canadian tax lawyers.
Canadian Taxes Payable for Foreign (Non-Resident) Musicians
A non-resident of Canada is subject to different income tax rules than a resident Canadian taxpayer. A non-resident will be responsible for tax on income in Canada only to the extent that the income was derived directly from sources in Canada. Under Canadian tax law this will include among, other sources, income earned from employment while in Canada or from business carried on in Canada by a non-resident or income from Canadian property. A foreign musician who performs in Canada will therefore be responsible for paying Canadian income tax on profits earned, but only on income earned in Canada from performance or sales of music. That individual's employment or business income will be taxed according to Canada's progressive income tax scale. A foreign musician will also be required to account for any income from royalties (Under Part XIII of the Income Tax Act) paid by Canadian residents to the musician. This would include, for example, profits from a Canadian merchandising deal.
The Importance of the Contractor/Employee Distinction For Non-Resident Musicians
works as an independent contractor or as an employee. The central question will be whether the musician being engaged to perform is performing as a person in business on that worker's own account. The courts have established several factors to be weighed against one another in making this determination:
- The degree of control exercised: Where the musician has the power to hire assistants and to choose how to perform, this is an indication the musician is an independent contractor.
- The ownership of tools: Where a musician provides a majority of tools and equipment themselves, this is evidence that the musician is an independent contractor. If a service recipient instead provides the tools and instruments, the musician is more likely an employee.
- The chance of profit: Where the musician's remuneration is determined by the quality of a performance, this leans toward the musician being an independent contractor. A musician that receives a flat rate for service is more likely an employee.
- The risk of loss: A musician that bears a personal financial risk for underperformance or any decision to walk away from a performance is more likely to be an independent contractor. An employee could be protected from loss from non-performance or underperformance by a contract.
The courts have also accepted that the intention of parties concerning their contractual relationship, and whether the worker was intended to operate independently or as an employee, may be a factor in determining a worker's status. How a musician is classified can be important for the rights and obligations that a foreign musician has concerning tax on profits. Most musicians evaluated on these factors will be classified as independent contractors.
Where a foreign musician is classified as an independent contractor, that musician will be responsible for reporting all types of Canadian-sourced income from any performances. The musician will additionally be entitled to deduct all reasonable expenses incurred in connection for the purpose of earning income in Canada, but not related personal or living expenses. A musician would therefore be entitled to deduct assistant fees and agent commissions, among others, from taxable Canadian income related to Canadian performances.
A musician classified as an employee will be obligated to report all remuneration, fees and bonuses received for that musician's services in Canada. Deductions will only be permitted on certain expenses permitted by Canadian tax law, like personal travel expenses for work and musical instrument purchases required for performing in Canada.
Canadian Tax Return Filing Requirements
under Section 150(1) of the Income Tax Act. Filing a Canadian tax return is required by any resident or non-resident who has earned Canadian-source income as an independent contractor or from employment in Canada.
International Tax Treaties and Musicians
Conflicts are not uncommon between the objectives of different countries' income tax schemes. Canada-source income of a foreign musician may be subject to tax by both Canada and the musician's resident country. Canada's bilateral tax treaties aim to avoid double taxation on foreign income by setting down the rights of countries to tax income of a taxpayer.
Under Canada's tax treaty schemes, musicians (like other entertainers and "artistes") are explicitly exempted from claiming treaty relief that is otherwise available to workers in other industries. The one exception to this rule comes from the Canada-US tax treaty, which provides relief for US-resident musicians who earn less than $15,000 in a calendar year (including expense reimbursements) from activities in Canada. Only qualifying US-based musicians will be able to obtain tax treaty relief and avoid being subject to Canada's tax scheme. All other musicians with Canadian-source income will be unable to avoid these Canadian tax filing obligations on reliance of a bilateral tax treaty.
Withholding Obligations on Profits
The Canadian tax system imposes an obligation on the payer, rather than the artists themselves, to withhold a portion of the payment to a foreign entertainer. The payer is then responsible for remitting the withheld funds to the Canada Revenue Agency. Gross payments received, including fees and commissions, are subject to a 15% withholding in the hands of payers. That 15% withholding will either become part of the foreign musician's ultimate tax liability, or where the musician's total tax liability is assessed as lower than the 15% withholding, the musician will be entitled to a refund. Any amount paid by a Canadian concerning a royalty or merchandising deal will be subject to a 25% withholding obligation instead.
It is important to emphasize that a foreign musician's ultimate liability is valued independently from the withholding. The payor will be required to withhold that percentage of payment unless a waiver is filed for with and explicitly obtained from the Canada Revenue Agency, regardless of any relief under a tax treaty or any potential refund that a musician might receive. This obligation applies to all payers, not simply Canadian-resident payers; foreign purchasers of tickets will also be required to hold 15% of payment, to the extent that the purchase relates to performances in Canada.
The purpose of the withholding obligation is to incentivize foreign workers to file Canadian tax returns. A musician should not be tempted to forego Canadian filing obligations simply because Canadian tax payable will exceed the 15% withholding obligation. The tax treaties that Canada has established with foreign countries ensure that competent tax authorities may collect taxes on behalf of bilateral partners when necessary. A US-resident musician that does not file a Canadian tax return on Canadian-source income, for example, may be subject to the authority of the American Internal Revenue Service on behalf of the Canada Revenue Agency.
Pro Tax Tips - Reporting Obligations for Foreign Musicians
A foreign musician should act diligently to file a Canadian tax return on Canadian-source income. Failing to do so could result in monetary penalties or criminal prosecution. The Canada Revenue Agency offers the Voluntary Disclosure Program (VDP) to grant relief from penalties for qualifying taxpayers who voluntarily disclose errors or omissions in tax filings. This program is available to both resident and non-resident taxpayers and for many potential filing issues, including a failure to file a tax return on time or for under-reporting income on a filed tax return. However, a resident or non-resident taxpayer is generally entitled to obtain the benefits of the Voluntary Disclosure Program only once. It is crucial that the first application be carefully drafted and prepared.
Our experts in Canadian tax law have assisted countless taxpayers to avoid sanctions and penalties through the . If you are potentially facing penalties for failure to report Canadian-source income, or are looking to find out whether you qualify for the Voluntary Disclosure Program, consult one of our experienced Canadian tax lawyers today.
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