14.1 Introduction to Article XIV – Independent Personal Services
Article XIV deals with the provision of independent services in one Contracting State by an individual who is resident in the other Contracting State. Services rendered by an enterprise are governed by Article VII. Services rendered by an individual in the capacity of an employee are governed by Article XV.
Article XIV limits the ability of the Contracting State which the independent personal services are rendered to tax the income derived from such services by an individual resident in the other Contracting State. Specifically, the source State may only tax such income to the extent that it was attributable to a fixed base that was regularly available to the individual service provider in the source State.
It should be noted that the requirement for source State taxation under Article XIV is the finding of “fixed base” while under Article VII the recondition is the existence of a “permanent establishment”.
14.2 Explanation & Interpretation of Article XIV under Canadian Law
14.2.1 Canadian Domestic Law
14.2.1[a] Basis for Taxing Non-Resident Service Providers
A non-resident of Canada who carried on business in Canada in a taxation year or in a previous year will be subject to Canadian income tax under Part I of the Act on any income from such business derived in Canada. To fall within the ambit of this provision, the activities conducted by the non-resident must constitute a business and such business must be considered to have been carried on in Canada.
14.2.1 [b] Meaning of Business
The term business is defined in the Act to include a “profession, calling, trade, manufacture or undertaking of any kind whatever” but not an “office or employment”. Accordingly, all income derived by an individual from non-employment personal services will be considered, for the purposes of the Act, to be income from carrying on a business. Consequently, it is necessary to distinguish between the two concepts in determining a non-resident’s ultimate Canadian income tax liability and the availability of treaty relief.
14.2.1 [c] Carrying on a Business in Canada
The Act does not comprehensively define the phrase “carrying on a business in Canada”, but an extended meaning is provided in section 253 of the Act whereby a non-resident will be deemed to have carried on a business in Canada if the non-resident conducts any of the activities specified in that section such as producing, manufacturing or offering for sale anything in Canada. Where section 253 is not applicable, the determination of whether a particular business has been carried out in Canada will be made in accordance with Canadian domestic jurisprudence.
14.2.1 [d] Allocation of Income
Where a non-resident carries on business in more than one place, the Act stipulates that the business income must be sourced to the place where it is earned. Only the business income that is earned in Canada will be considered to be part of the non-resident’s taxable income earned in Canada.
14.2.1 [e] Withholding Taxes
The Act and Regulations contain rules that require persons making certain payments to withhold amounts from such payments on account of the recipient’s ultimate Canadian tax liability. Section 105 of the Regulations requires persons who pay a non-resident in respect of services rendered in Canada to withhold 15 percent of the payment on account of withholding taxes. Regulation 105 does not apply to remuneration paid by an employer to an employee.
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell