New Canadian Income Tax Rules Affecting U.S. Actors Working in Canada
I have provided below the Canadian income tax implications to U.S. actors who would like to use their United States "S" corporations to earn income in Canada rather than earning it personally. The actor's United States "S" corporation would earn revenue form the provision of acting services while the actor is physically working in Canada on the set of a film or video production being made in Canada.
General Comments Regarding U.S. Residents Working or Deriving Income in Canada
Generally, a self-employed non-resident (U.S.) individual is only taxed in Canada if he or she is a resident or is deemed to be a resident of Canada for Canadian income tax purposes or derives income in Canada through a fixed base regularly available to him in Canada. Without a fixed base in Canada, a U.S. self employed person deriving income in Canada is not taxed. For U.S. employees working in Canada, these employees are taxed only if they earn greater than C$10,000 of employment income for providing services in Canada or if they are in Canada for greater than 183 days in a given calendar year and their remuneration is borne by a U.S. employer's permanent establishment or fixed based in Canada.
Pursuant to "Article XVI - Artistes and Athletes" of the Canada-U.S. Income Tax Treaty, Canada has the jurisdiction and the right to tax U.S. artistes (entertainers, such as theater, motion picture, radio or television artistes and musicians) and U.S. athletes on income they derive from personal activities exercised in Canada. However, if the gross revenue (including expenses reimbursed) earned by U.S. artistes and athletes do not exceed C$15,000, they would not be taxed in Canada as long as they are not or are not deemed to be a resident of Canada for Canadian income tax purposes. A U.S. artiste or athlete who is in Canada for greater than 183 days in any given calendar year may be deemed to be a resident of Canada for Canadian income tax purposes.
Canada's right to tax U.S. artistes and athletes also extends to their corporations, who may be under contract to derive income in Canada from the provisions of acting and other services in Canada by the U.S. artistes and athletes. The acting services covered by Article XVI of the Treaty relate to productions being made in Canada, which include feature films, movies of the week, television series, documentaries, video productions and commercials. Accordingly, a U.S. actor's "S" corporation, under contract with a studio to provide that actor's acting services in Canada, can and will also be taxed in Canada on income earned by the "S" corporation.
Article XVI of the Canada-U.S. Income Tax Treaty applies even if the U.S. actor is not a resident of Canada or if the U.S. actor's U.S. corporation does not have a permanent establishment or fixed base (office, branch, factory, workshop, etc.) in Canada. It should be noted that a U.S. "S" corporation will be treated as a regular "C" corporation in Canada and not treated as a pass-through entity, even if the U.S. shareholder of the "S" corporation has made an election to file as a pass-through entity for U.S. tax purposes.
The provisions of Article XVI only apply to acting services provided by U.S. entertainers in Canada on film and video productions being made in Canada and do not apply to other services provided by the actors, such as those generally provided by "behind the scene" personnel such as producers, directors, technicians, etc. The Canadian income tax rules applying to services provided by U.S. "behind the scene" personnel in Canada are different than the rules applying to actors.
General Comments Regarding the Taxability of Income from the Provision of Acting Services in Canada by U.S. Actors Directly or Through Their U.S. Corporations
New Canadian Income Tax Regime Affecting U.S. Actors Working in Canada
U.S. actors, who entered into agreements after December 31, 2000 to provide acting services in Canada, either personally or through a corporation related to the actor, will be subject to a new tax regime in Canada. This new tax regime was announced after extensive consultations with affected film industry groups and organizations on both sides of the border. It is well known in Canada that certain film industry groups in Hollywood strongly oppose U.S. studios that are increasingly making film and video productions in Canada, at the expense of what they perceive to be a loss of hundreds of U.S. jobs, mostly for behind the scene technicians who work on movie sets. The main reason why U.S. studios are increasingly making more and more films in Canada is because it is much cheaper to make movies here rather than in the U.S. The Canadian dollar is currently just under 63 cents U.S. and large Canadian cities look very much like large American cities, so that a movie being filmed in Toronto or Vancouver looks very much like it was filmed either in New York, Chicago or Los Angeles. In addition, the availability of trained and skilled technicians, fully equipped studios and suitable locations are further attractions. This new tax regime was partly put into place to somewhat level the playing field by ensuring that U.S. actors pay their fair share of Canadian tax on income earned for working in Canada.
Under this new regime, gross revenue from acting services will be taxed at a flat rate of 23%. This will be the final tax that U.S. actors or their U.S. companies would have to pay in Canada on gross revenue earned from providing acting services in Canada. U.S. actors receiving remuneration from their U.S. companies that have already paid the 23% tax on gross revenue will not be subject to further Canadian taxation on their remuneration.
Studios or their designates (payers) making payments to U.S. actors would be required to withhold the 23% tax from such payments and remit these withholdings to the Canada Customs and Revenue Agency (CCRA). The 23% withholding applies to all amounts paid or credited to the actor, per diem payments for days in Canada, amounts paid on the actor's behalf to 3rd parties and similar benefits. Based on my discussions with a Film Services Unit auditor from CCRA, although the law imposes a 23% tax on acting services income as well as on per diem payments, CCRA's administrative policy is not to impose the tax on reasonable per diem payments, reasonable travel expenses, etc. received by the actor. The items on which the 23% withholding tax would not apply, is listed below. The withholding of 23% is not required from the following amounts:
- Reasonable travel expenses (airfare, hotels) paid directly to third parties on behalf of the U.S. actor, and
- Reasonable travel expenses reimbursed to the
U.S. actor provided they are adequately supported by vouchers,
maintained by the payer. (Reimbursement of meals including incidentals
to a maximum C$100/day will not require receipts). Travel expenses
excluded from the gross are restricted to expenses incurred for
commercial transportation, accommodation and meals.
Amounts above C$100/day reimbursed for meals will require that the payer retain receipts from the U.S. actor. If receipts for the full amount paid are not retained, withholdings of 23% on the amount in excess of the total receipts retained are required. For example, a U.S. actor is paid a per diem amount of C$600/day for a 10-day period. The payer obtains receipts for the period from the U.S. actor of approximately C$200/day. The payer must therefore withhold on the additional C$400/day paid to the U.S. actor for which the payer does not retain receipts.
Amounts of C$100/day or less paid, as a reimbursement of meals expenditures will require only that the payer obtain an attestation from the U.S. actor that such amounts were incurred. However, the U.S. actor is required to retain the receipts for possible subsequent verification by the CCRA. It is expected that payers exercise reasonable discretion in accepting such attestations from U.S. actors. For example, where shooting for a particular period took place in a remote area without access to restaurants, and all meals were provided on the set, it would not be reasonable to accept an attestation that the U.S. actor incurred meal expenditures of C$100/day for this period.
The 23% withholding tax is required to be remitted to the Receiver General of Canada by the 15th of the month following the month in which the payments were made. For example, if a per diem were paid to a U.S. actor on January 10, 2002 the remittance of the withholding tax would be required to be made to the Receiver General by February 15 2002. Payers and U.S. actors should consider these time frames when determining whether the withholding tax should be applied and whether receipts may be provided to the payer by the U.S. actor before the time required for remitting the tax.
Alternative Method Available to U.S. Actors for Calculating Canadian Income Tax
The Federal Income Tax Act (Canada) provides an alternative to U.S. actors and their U.S. companies. As an alternative, U.S. actors or their U.S. companies can choose to pay tax in Canada at the general income tax rates on "net income" earned. Net income is gross revenue less allowable expenses. The general rule of thumb is that, low income actors would benefit from choosing the alternative method of paying tax in Canada as the average tax rate applying on net income would probably be lower than the 23% flat tax on gross revenue. High income actors on the other hand would be better off paying tax at the flat rate of 23% on gross revenue since the average tax rate on net income, if the alternative method is chosen, would probably yield a higher tax burden.
Actors choosing to file an income tax return in Canada (either personal or corporate) will be allowed to deduct from gross revenue, reasonable expenses incurred and paid for by the actor and that were required and directly related to earning the acting services income in Canada. Examples of such expenses (net of any reimbursements) that may be deducted are fees paid to agents, reasonable meals and entertainment expenses, reasonable hotel lodging expenses, reasonable travel expenses, payments made to personal trainers or acting coaches who may accompany the actors to Canada, supplies and special clothing, cosmetics and make-up, remuneration paid to the actor, etc.
Remuneration paid to the actor from his or her corporation will be taxed in Canada since the deduction would be allowed to the company. This remuneration will not be taxed at the flat rate of 23% but will be taxed at the normal graduated personal income tax rates (see below), which apply to all Canadian taxpayers. It would have to be determined if it is beneficial for the actor's company to deduct remuneration in calculating its corporate profit subject to tax and then having the actor pay personal tax on the remuneration or by not deducting remuneration at the corporate level and leaving the profit to be taxed in the company. Due to the varying Canadian corporate and personal income tax rates the calculation would have to be made to determine which way would be more beneficial overall.
As noted above, for low-income actors, choosing the alternative method (paying tax at the regular income tax rates on net income) may result in a lower tax payable than paying tax at the rate of 23% on gross revenue.
U.S. actors choosing to file an income tax return, whether personal or corporate, under the alternative method have to comply with the filing requirements. Canadian corporate income tax returns are due no later than 6 months after the company's fiscal year-end, although any estimated tax owing has to be made 2 months after the fiscal year-end otherwise interest will be charged. Canadian personal income tax returns for a particular calendar year are due no later than April 30th of the year following the calendar year, if the actor is an employee earning remuneration and no later than June 15th of the year following the calendar year, if the actor is self-employed earning acting services income directly and not through a corporation.
All U.S. actors will be subject to the 23% withholding tax on acting services income earned in Canada personally or through a corporation, even if he or she later chooses to use the alternative method. However, if the actor has decided that her or she would be better off choosing the alternative method, since it would result in lower tax, he or she can apply to have the 23% withholding reduced. Prescribed application forms are available to make these requests.
Allocation of Income to Canada
U.S. actors who are under contract to provide acting services for a particular movie, which is being filmed in part in Canada and in part in the U.S., may have to work on both sides of the border. Accordingly, the acting services income earned by the U.S. actor or his or her company would have to allocate part of their income to Canada. This allocation is done based on a formula which requires the determination of the number of days the actor is present in Canada on the project, the number of days the actor is outside Canada working on the project and the total acting services income received per the contract. Days present in Canada includes the days the actor arrived in and departed from Canada, weekends, statutory holidays, days the actor was on "standby," days the actor was "on call," and short breaks if the actor remained at or near the work location. The percentage of income is allocated to Canada is calculated as follows:
Number of Days in Canada
Acting Services Income x -------------------------------------
Total Number of Days on the Production
The "total number of days in the production" equals the number of days in Canada the actor was working on the project plus 7/5 multiplied by the total number of days outside Canada the actor was working on the project.
2002 Canadian Personal and Corporate Income Tax Rates
For the year 2002, the Canadian personal income tax rates for individuals are graduated and range from 16% to 29%. In addition, the provincial income tax rates are graduated as well and range from 6.05% to 11.16% for the province of Ontario and range from 6.95% to 14.70% for the province of British Columbia. It is our understanding that the majority of U.S. movies being made in Canada are filmed either in Toronto, Ontario or in Vancouver, British Columbia (B.C.). Accordingly, we have provided the income tax rates for both of these provinces.
For individuals, the 2002 combined (Federal + Provincial) personal income tax rates are as follows:
It is easy to see that U.S. actors earning income personally in Canada and who choose the alternative method to pay tax using the general personal graduated income tax rates will be subject to fairly high personal income tax rates on taxable income above about C$30,700. Accordingly, it may be more beneficial for them to pay tax at the flat tax rate of 23% on gross revenue.
For U.S. actors who earn income from providing acting services in Canada through their U.S. corporations can also choose the alternative method for their U.S. corporations and report income in Canada and pay tax at the general corporate tax rates on net income. The 2002 Canadian Federal corporate income tax rate on net taxable income is 26.1%, the 2002 Ontario corporate income tax rate is 12.5% and the 2002 B.C. corporate income tax rate is 13.5%. The combined 2002 Federal + Provincial corporate income tax rates are as follows:
As it can be seen above, the corporate tax rates applying to U.S. corporations carrying on business and deriving income in Canada are fairly high. Accordingly, choosing the alternative method to report income in Canada for the corporation may not be beneficial and the actor may be better off paying a flat 23% tax on gross revenue earned by his U.S. corporation as a result of the provision of acting services in Canada.
This is a joint page of Chang and Boos and McCarney, Greenwood, LLP. The article was provided courtesy of Mr. Roy Ohm, C.A., C.P.A.
McCarney Greenwood, LLP
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Attention: Mr. Roy Ohm, C.A., C.P.A. (Illinois)
Tel: (416) 362-0515, Extension 358
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