HAPPY NEW YEAR

From everyone at Parker Garber & Chesney LLP to all of our clients and friends, we wish you the best of the new year.

PRESCRIBED INTEREST RATES

CRA has announced the prescribed rates for the first quarter, January 1 to March 31, 2011. The following rates apply:

• Interest charged on overdue taxes – 5%
• Interest paid on overpaid corporate tax – 1%
• Interest paid on overpaid personal tax – 3%
• Interest calculated on taxable benefits for shareholders and employees – 1%

ARTISTS AND ATHLETES

Artists and athletes have always had special circumstances related to their tax issues as the result of the peculiarities of their employment conditions, out-of-pocket expenses related to their professions and the added issues of multi-jurisdictional tax reporting.

Incorporation - Under Canadian law artists and performers may be considered self-employed individuals and may, in some circumstances, even be able to incorporate their business activities. There are numerous tax cases that have supported this position. Even if the performer is a full-time employee they are allowed certain special deductions for the maintenance, rental and insuring of musical instruments. All employed performers and athletes are eligible to claim employment expenses if they are a requirement of their employment contract and the employer has completed a form T2200 (Conditions of Employment). CRA has engaged in some aggressive reviews of such expenses and they are open to challenge.

Athletes face a much different treatment domestically. Those that are not part of a team organization, such as professional golfers, track stars, boxers and tennis players may be able to incorporate and organize their planning to maximize the benefits of Canadian tax rates and also to simplify cross-border tax issues.

However, team sport members such as hockey, basketball, football and baseball players have much more difficult issues to deal with. Previous court decisions support the CRA view that these team members cannot incorporate and therefore are quite restricted in the area of tax structuring. Also, most professional sports are subject to a collective agreement and these agreements do not have specific reference to employment expenses. Although clubs have physical conditioning requirements for all players the CRA will not allow the deduction for physical training, off-season conditioning and other related expenses incurred by individual players in order to meet team standards. It would be helpful for these requirements to be considered an employment requirement and allow teams to indicate that these are conditions of employment allowing players to claim the expenses on their personal tax returns.

Foreign Tax Issues – The reality of performers and athletes is that their work regularly takes them into other tax jurisdictions. While the US is the most likely location for many of these individuals, many of them will also find themselves in locales in any number of foreign countries. However, since the United States is the most prominent place for many performers and athletes to appear it will be the focus of the balance of this article.

Self-employed - Those artists and athletes that are self-employed will be required to obtain a taxpayer identification number in the US (ITIN) which is a number similar to a Social Security Number and allows a taxpayer to file US Federal and state tax returns. Most promoters and others contracting for these artists and athletes will request a number or else will withhold 30% of all payments.

Employees – Performers and athletes who are employees of a tour company, production company or sports team will be paid from the employer’s place of residence for tax purposes in most situations. Therefore a member of a sports team located in Ontario will be considered an employee in Ontario even though most games may be played outside Canada. Ontario withholding taxes will be deducted and submitted. While the Canadian team may not withhold US taxes for the earnings from appearances in the US the individual team member is required to file tax returns in all US jurisdictions that have personal income tax requirements. That means that the Canadian resident team member will be required to file a US Federal return (1040NR) as well as state returns in most states where games have been played and, in some circumstances, will also have to file county or city tax returns.

Team members who play for US teams but are Canadian residents will also be required to file all of the same returns noted above. As Canadian residents, in both cases, the Canadian return will be calculated to include a foreign tax credit for all taxes paid in the US (Federal, state and city) which should eliminate most, if not all, duplicated tax.

Incorporated Performers – Canadian performers who have their own production company can provide services in the US. Just as with individuals these companies will be required to apply for an ITIN or employer identification number (EIN) in order to avoid withholding taxes at source. The corporation will be required to file a US federal tax return (1120F) and, depending upon the states where performances take place, may have to file state income tax or franchise tax returns. Many promoters will withhold tax despite the ITIN or EIN because of the foreign address of the performance company.

IRS Activities – Since the introduction of new regulations in 2007 the IRS has begun projects to pursue non-resident performers and athletes with unusual vigour. Sports teams have received demands for records indicating the participation of foreign players in the US.

Conclusion – It is obvious that, as governments find their budgets stretched, they are going to pursue taxpayers, many of whom have avoided or failed to file tax returns, and high-profile individuals whose presence in the US is well-documented is definitely the low-hanging fruit. Since they can use the power of refusing admission to the US, which would severely restrict the taxpayers’ earning potential, this is a matter that should be addressed proactively and avoid the potential problems.

TRANSFER PRICING –FOREIGN TRANSACTIONS ARE NOT NECESSARY

CRA has begun looking at what are commonly referred to as Domestic Transfer Pricing issues. These are inter-corporate transactions between Canadian companies even without any foreign transactions. They are reviewing transactions between related companies such as a manufacturer and wholesaler that are related or between an operating company and a related consulting corporation.

The result of such a review may be double taxation as the following examples will demonstrate:

• Company A sells product or provides services to Company B, a related company. Both are Ontario corporations and only transact business in Canada. Company A sells the product/service for $1,000 but CRA determines the fair market value is only $800. Company A will still pay tax on the sale at $1,000 but Company B will only be allowed to deduct the expense for $800. The $200 difference is taxed in both companies. In addition, HST will apply as well so that there will also be an HST double-dip by CRA.

 

• In the same scenario as above Company A sells the product/service for $1,000 but CRA determines the fair market value to be $1,200. Company A will be deemed to have an income of $1,200 but Company B will only have a deduction of $1,000 and once more there is a double tax on the $200 and a double-dip on the resulting HST.

 

These same rules will apply to services provided between corporations for which there is no charge at all.

Another major issue is inter-corporate management fees. CRA will review the value of such fees charged to determine fair market value, were services provided and would the company have paid a third party to provide the services otherwise.

This is a “shot across the bow” for businesses playing loosely with the numbers in order to absorb losses in a related group. Interestingly the Ministry of Finance is currently reviewing the option for a related group to file an amalgamated tax return which would nullify the issue of domestic transfer pricing.