Every year, Canada attracts a variety of foreign professional entertainers and athletes to work in Canada and compete for prize money or earn fees for services. It is important that the individual and his/her financial advisor understand the Canadian tax obligations that can arise to ensure meeting the various filing deadlines.
It should be understood that not all professional athletes are taxed the same in Canada. We review the basic Canadian tax obligations of the self-employed athlete, actor or artist (as opposed to the employed-athlete for a sports team).
As an introduction to Canadian taxation, a non-resident individual is subject to tax on income earned in Canada. As there is no diminimus filing threshold, a non-resident individual is taxable from the first dollar of earnings in Canada. Canada’s income tax rules also distinguish between non-resident actors/actresses and other artists and athletes.
For the independent non-resident professional athlete or entertainer competing in Canada, the Canadian tax issues can be more complex than the issues associated with the employed-athlete. As many independent athletes and entertainers may choose to use a corporate structure to carry out their professional endeavours in Canada, the Canadian tax reporting becomes even more complicated. The distinction was put in place in part to help attract large budget movie productions to Canada in order to benefit from the associated economic stimulus.
As part of the effort to attract motion picture activity to the country, Canada introduced a flat-rate taxation system on actors and actresses. Under the default taxation rules, a flat taxation rate of 23% applies to gross payments for acting services in Canada. This flat tax represents a final tax liability.
In the event that the actor/actress has business expenses to offset the gross income, the actor/actress may elect to file a regular income tax return and pay Canadian tax computed on the net income using Canada’s progressive tax rates that range from approx. 20% up to over 50%.
The decision to make this election can only be made after careful review of the benefits of election.
For independent artists and athletes not engaged in acting services, the receipt of prize money and other service fees is subject to a withholding tax of 15% on the gross payments received or credited.
Unlike the 23% flat tax for actors, many non-resident artists, athletes and their financial advisors mistakenly believe that the 15% withholding tax represents the final Canadian tax liability. Unfortunately, this 15% tax is only a temporary withholding tax that is applied to the actual Canadian tax liability once calculated.
Following the end of the calendar year, the artist/athlete will need to file a non-resident income tax return to report their gross earnings in Canada and offset such income with expenses associated with the activity in Canada. Where the artist/athlete carries on business using a corporate entity, that entity will be required to file a corporate income tax return.
It is important to appreciate that while a corporate structure may be considered a “flow-through” entity to the underlying individual athlete/artist in the home country such that the individual is personally taxable on the activities of the entity (e.g. US single-member LLC or US S-corporation), Canada may treat the entity as a corporate entity. Such a corporate entity would be viewed for income tax purposes as separate from its owner. Taxpayers and their international tax advisors may want to consider forgoing the use of the structure while carrying on business in Canada in order to simplify tax reporting.
Corporate taxpayers should also be mindful of the filing due date as there can be significant late filing penalties with respect to non-resident corporations carrying on business in Canada. The penalties are generally assessed by the Canada Revenue Agency even if there is no actual tax liability due on filing, because either expenses exceed income or the 15% withholding tax was sufficient to cover the actual Canadian tax due on the net professional income.
Compensation planning is an important issue to co-ordinate with the tax advisors in both Canada and the country of residence to ensure that personal and corporate tax integration is achieved and incremental tax is avoided whenever possible. Poor choices can lead to additional withholding and reporting in Canada while also creating a risk for double taxation in the country of residence.
Before starting the annual tax compliance process, the individual/entity will need to apply for a Canadian tax ID number. For an individual, this will typically mean applying for a Canada Revenue Agency Individual Tax Number. For a corporation, this will be a more involved process by applying for a CRA Business Number. Once the applicable tax ID is issued, be sure to provide it to the payor of any prize money or compensation to ensure that the 15% withholding tax is properly credited.
Understanding how a non-resident actor, artist or independent athlete is taxed in Canada on any service fees or prize-money is an important first step to planning the income tax reporting process. As there can be a number of issues to consider, such an individual is advised to seek the necessary professional advice to properly plan their professional or business activities in Canada.
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