Over 25 years after it was first introduced in Canada, the Goods and Services Tax ("GST"), while simple in concept, remains one of the more confusing taxes in Canada to apply, especially when it comes to non-residents.
The GST is a Canadian federal value added tax. Similar to other value added type taxes from around the world and unfamiliar to those in the United States, the GST for most businesses, is intended to be a cost only to the person who consumes the good or service. An entity, like a business, who is not the end consumer, would normally be able to recover any GST paid. At the same time, it is the responsibility of the business to collect GST on each sale of good or service that it provides in Canada.
These rules apply no differently in the entertainment industry, when an actor or musician (other than an employed actor or musician) acts in a motion picture or performs a concert in Canada. However, the confusion as to when or how it applies may be greater.
The rules that govern whether a non-resident entertainer should register and thus charge GST for their services are based on the concept of "carrying on business in Canada." Unfortunately, the phrase "carrying on business in Canada" is not clearly defined in law and therefore is unclear whether the non-resident entertainer, performing for a production company or promoter should register.
The Canada Revenue Agency ("CRA"), the governmental agency in charge of administering the tax laws in Canada, has released a 31-page policy document complete with possible scenarios when a non-resident may, or may not be, carrying on business in Canada. There are 12 factors they consider when determining whether a non-resident is carrying on business in Canada. No one factor is determinative, and the CRA goes on to state, "The determination requires judgment in establishing the importance of each factor in light of the type of supply that is being made in the context of the relevant facts". And if that's not esoteric enough, none of the 21 examples provided relate to an actor or musician, so only loosely-based comparisons can be made.
Given no direct examples exist in the policy paper, the CRA was asked to comment and the response was a technical interpretation as it relates to actors. In this interpretation they have provided some degree of clarity. The CRA has concluded that in a simple scenario when an actor comes to Canada to act in a single movie, they likely would not be considered carrying on business in Canada. However, when that actor performs in multiple movies in Canada or acts in a television series with multiple episodes, that actor would, more likely than not, be carrying on business in Canada.
This provides some degree of clarity for a single occurrence in Canada and may be more readily applicable to a musician who performs in Canada. However, the number of concerts or the number of movies it takes before that threshold is crossed, remains a question. Recently, when dealing directly with the CRA in registration matters they've seemed to focus on the employment test and have been using an arbitrary 21-day threshold. There is however, no jurisprudence and no written commentary to confirm.
If a non-resident entertainer is considered to be carrying on business in Canada, they must register and charge GST. The rate of GST is 5%, however, in some participating provinces the provincial sales taxes are harmonized with the GST to form a harmonized sales tax ("HST"). HST is charged at a rate of between 13 and 15% depending on the province in which you perform. For example in Ontario (where Toronto, the largest city in Canada, is located), the rate is 13%. If you fail to charge GST or HST as applicable, you will be held liable for the tax you failed to charge, plus penalties and interest. Therefore, the stakes for non-compliance may be high.
Aside from the penalties involved, this liability may be mitigated since businesses can recover the tax and as such the non-resident entertainer may be able to track down their customers to recover any taxes assessed. However, these assessments may come years after the fact. In the movie and music industries, it is common that the businesses from whom a recovery can be made, may not be in existence at the time of assessment. Therefore the ability to recover any assessed tax could be difficult and the liability would remain with the non-resident entertainer.
Consequently in many circumstances, the non-resident entertainer is now choosing to mitigate their risks and taking the position that they are, in fact, carrying on business in Canada. As noted above, registering to collect and administer the tax could prove to be a benefit. After registering, any direct GST expense incurred in the course of carrying on the business in Canada (i.e., GST or HST paid on hotels, travel, 50% of meals, supplies, etc.) can now be fully recoverable, as opposed to deductible. Further, Canadian businesses (i.e., the promoter or production company), with whom you will be charging, will not view the tax you charge as an added cost, since the tax will be recoverable to them. The ultimate tax will be borne by the movie-goer when they pay for their tickets at the theatre or the concert-goer when they buy their tickets to the show.
There are also some disadvantages to registering. These include the added compliance burden, the administrative costs of registering and tracking the GST/HST paid and charged, and compliance costs of filing the returns. A GST/HST return is required to be filed on an annual basis if gross revenues are less than $1.5 million and more frequently if income is higher. In addition, non-residents have added registration burdens over and above Canadian resident taxpayers. Given that you are acting as an agent to collect government funds charged to your customers, the CRA requires all non-residents to post security to ensure the monies are turned over to them. This security can be in the form of cash, or in most scenarios, an insurance bond. Additionally, you must ensure that your records can be made available for a CRA agent to audit, if necessary, either in Canada, or that you will pay for the transportation of an auditor to your location.
GST/HST is yet one more consideration that must be reviewed with your advisor before performing in Canada. Don't get caught singing the blues and proactively determine whether registration is right for you.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article.
Connect with the Authors
Adam Scherer, BA, CPA, CA
Adam is a Tax partner at Crowe Soberman who's client portfolio includes high-net-worth individuals, owner-managers, professional athletes, film directors and producers, U.S. corporations operating in Canada, and individuals immigrating to and emigrating from Canada. He is also the co-leader of the firm's Sports & Entertainment practice. .
Jeffrey Steinberg, BA, CPA, CA
Jeffrey is a partner in Audit & Advisory at Crowe Soberman, as well as the co-leader of the firm's Sports & Entertainment practice. He is knowledgeable, practical and results-oriented in the professional service he provides clients and his holistic approach to client needs is what separates him from others.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.