Cross-border celebrity investing, US and Canada compared

What to take away

How cross-border celebrity investing works

A celebrity investor with a brand, a licensing deal or a stake in a startup usually touches two tax systems at once. The United States taxes income connected to a US trade or business and US-source income paid to non-residents. Canada taxes income connected to a Canadian business or Canadian property, and Canadian-source payments to non-residents.

The country where the money is earned gets the first claim. The country where the investor lives gets a second claim, then grants a credit or exemption so the same dollar is not fully taxed twice.

For a Canadian musician with a US tour, the US payer withholds on performance fees. For a US actor with a Canadian endorsement, the Canadian payer withholds. The mechanics differ, but the logic is the same.

Characterization decides the rate. A royalty is treated differently from a service fee, and a capital gain differently from business profit. Two deals with the same cash flow can carry very different tax bills.

The IRS sets out the US position for non-resident aliens in Publication 519, U.S. Tax Guide for Aliens, which covers residency, source rules and treaty claims. Canada's equivalent starting point is the CRA's guidance on non-resident income tax.

Residency: the first question

The United States and Canada test residency differently. The US counts days under the substantial presence test: a person is a US resident for tax purposes if present in the US for at least 31 days in the current year and 183 days across a three-year weighted count. Canada treats a person present for more than 183 days in a year as a deemed resident, and otherwise weighs residential ties such as a home, a spouse and dependants.

For example, a performer who spends 130 days in Los Angeles and 100 in Toronto can meet the US test on paper, and the Canadian residential-ties analysis then decides the Canadian side.

When both countries claim residency, the treaty tie-breaker applies. It looks at a permanent home, then the centre of vital interests, then habitual abode, then nationality. The answer decides which country taxes worldwide income.

Most celebrity wealth sits inside entities rather than personal names. A holding company, a loan-out corporation or a limited partnership can change the source and character of income, and therefore the withholding rule. The entity types in celebrity companies explain how these vehicles are usually set up. A Canadian resident who invests in a US fund through a Canadian corporation is in a different position from one who invests directly.

The two sides at a glance

IRS withholding rules for Canadian celebrities investing in the US

A Canadian resident who earns US-source income generally faces withholding at 30 percent unless a treaty or a statutory exception applies. The payer is responsible for withholding, not the celebrity. The payer's side is set out in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

If a US production company fails to withhold on a Canadian performer, the IRS pursues the payer first, then the recipient. The celebrity still owes the tax.

Independent contractors face a different regime from employees. A Canadian celebrity hired as a US employee is subject to federal employment tax withholding, set out in Publication 15, Employer's Tax Guide (Circular E).

Central withholding agreements exist for performers who expect deductions. Form 13930, Application for Central Withholding Agreement, asks the IRS to approve a reduced rate based on projected profit and loss for the US activity. It must be filed before the first payment, and the form's instructions set the lead time. Approval is not automatic.

For example, a $40,000 US fee paid with no treaty claim and no agreement would have $12,000 withheld at 30 percent. A treaty certificate or an approved agreement can reduce that amount, and the difference is recovered only through a return.

A Canadian celebrity with a US loan-out corporation faces a further question: is the corporation or the individual the beneficial owner entitled to treaty benefits? The answer changes the rate and the filing. Treaty benefits generally require the recipient to be a Canadian resident and the beneficial owner of the income. A corporation set up in a third country does not qualify just because its owner lives in Toronto.

Claiming a treaty rate usually means giving the payer a Form W-8BEN for an individual or a Form W-8BEN-E for an entity. Without the form, the payer withholds at the full statutory rate. A Canadian resident who gives a Form W-9 instead is treated as a US person and loses treaty relief until the error is corrected.

Even with correct withholding, a Canadian celebrity with US-source income generally must file Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Withholding is a prepayment, not a final tax. If too much was withheld, the refund comes only after filing.

State withholding is separate. California withholds 7 percent of the gross payment for a performance in California when a nonresident entertainer's California-source payments exceed $1,500 in a calendar year. The payer files Form 592 and issues Form 592-B to the payee, who attaches it to a California return to claim credit. A payee can ask the Franchise Tax Board for a waiver or a reduced rate, using the board's current forms, before payment. New York has its own rules for certain entertainment income, so check the New York State Department of Taxation and Finance before the first booking.

Real estate adds a specific rule. A foreign person selling US real property is subject to FIRPTA withholding under the Foreign Investment in Real Property Tax Act. The buyer usually acts as withholding agent and withholds 15 percent of the amount realized, which is generally the gross sales price, not the seller's gain. The buyer reports it on Form 8288 within 20 days of the transfer. The seller can ask for a reduced amount with Form 8288-B.

CRA treatment of US celebrities investing in Canada

The Canada Revenue Agency taxes non-residents on Canadian-source income. For a US celebrity with a Canadian endorsement, a Canadian property or a stake in a Canadian company, the CRA is the relevant authority.

Withholding is the main collection tool. A Canadian payer that pays royalties, rent, management fees or certain other amounts to a US resident withholds under Part XIII of the Income Tax Act. The statutory rate is 25 percent, and the treaty cuts royalties to 10 percent and dividends to 15 percent, subject to the treaty tests described below.

Service income is treated differently. Under Regulation 105, a payer of a fee for services performed in Canada must withhold 15 percent and remit it by the 15th of the following month. A non-resident can ask for a waiver with Form R105, filed before the services begin or the first payment, with the lead time set by CRA's current guidance.

A US celebrity selling goods into Canada through a distributor usually has a withholding issue, not a permanent establishment issue. Opening a Canadian office can create both.

Permanent establishment is the threshold for business profits. Under the treaty, Canada can tax a US resident's business profits only if the resident has a permanent establishment in Canada, such as a fixed place of business or a dependent agent. Marketing and travel alone usually do not create one.

Sales tax applies separately. The federal GST is 5 percent. Ontario applies HST at 13 percent. Quebec applies GST plus QST. A non-resident business making taxable supplies in Canada may need to register, charge and remit, whatever its income tax position.

A US celebrity with a Canadian cannabis brand faces additional licensing. Cannabis is federally regulated in Canada, and a brand cannot simply license its name to a Canadian producer without the producer holding the right approvals, as covered in the route to a Health Canada licence.

Property income is another CRA concern. Rental income from Canadian real estate is subject to withholding on gross rents unless the owner elects under section 216 of the Income Tax Act to file a return on net income. The election is made on form T1159, and the CRA's guide T4144 explains it. The election is time-sensitive. Without it, the CRA collects withholding on gross rents, and the owner recovers the difference only by filing a Canadian return.

The US-Canada tax treaty and its impact on celebrity investors

The treaty is the Convention between Canada and the United States with respect to taxes on income and on capital, signed at Washington on 26 September 1980 and amended by later protocols. It allocates taxing rights and caps withholding rates. It does not eliminate double taxation by itself. Each country's domestic credit or exemption rules do that.

The caps sit in the text of the Convention. Royalties may be taxed where they arise, but if a resident of the other country is the beneficial owner, the tax shall not exceed 10 per cent of the gross amount. Copyright royalties for a literary, dramatic, musical or artistic work, other than film and television royalties, are taxable only in the owner's country of residence. Dividends are capped at 15 per cent of the gross amount, with a lower rate for a company owning at least 10 per cent of the voting stock of the payer. Check the current text, including its protocols, for that lower rate.

For performers, Article XVI (Artistes and Athletes) lets the country where an entertainer performs tax that income. The exception is gross receipts that do not exceed $15,000 in that country's currency for the calendar year. The article can also reach income routed through a company that provides the artist's services, which is why a loan-out company does not automatically escape source taxation.

For employment income, the treaty lets the country where the work is performed tax it. A US celebrity filming in Vancouver owes Canadian tax on those wages even if the paycheque is deposited in New York.

For capital gains, the country of residence generally taxes, with exceptions for real property and certain share disposals. A Canadian resident selling US real property is an exception, which is why FIRPTA applies.

Treaty benefits are not automatic. The investor must be a qualifying resident and must satisfy the limitation on benefits provision if claiming through an entity. Article XXIX A denies relief to companies with substantial third-country ownership or a principal purpose of treaty shopping. A celebrity holding company incorporated in Canada but controlled elsewhere may fail it.

Documentation proves the claim. Forms W-8BEN and W-8BEN-E go to US payers, and Form NR301 goes to Canadian payers. Competent authority assistance is available when the two countries disagree, but it is slow and formal.

The treaty changes through protocols, so work from the current text rather than an old client memo.

Structuring a cross-border celebrity investment

The structure decides which treaty article applies, which withholding rate is used and which country gives a credit. It is the highest-value decision in the exercise.

The default for many US celebrities is a US holding company with separate subsidiaries for each line of business. A Canadian resident investing in the US often does the reverse: a Canadian holding company that owns a US LLC or corporation.

The choice between an LLC and a corporation changes the treaty analysis. Canada can treat a US LLC as a corporation for some purposes and as a partnership for others, which creates timing and credit problems that a simple structure avoids.

A workable sequence for moving capital across the border:

5. Build the annual filing calendar for both countries, including information returns and foreign account disclosure, and review the structure whenever a new income type appears.

A worked example shows why order matters. Suppose a Canadian musician earns US tour income and forms a US corporation to receive it. The corporation does not automatically qualify for treaty benefits, and Article XVI may still let the US tax the income. The better route is often a central withholding agreement in the individual's name, with deductions documented up front.

Equity investments need their own analysis. A celebrity buying shares in a US startup is making a portfolio investment, which the treaty's capital gains and dividend articles generally cover. A large stake or active management can look like a business instead. For how a stake is priced before the tax question arises, see celebrity brands valuation.

Intellectual property is the most portable asset and the most sensitive to structure. A trademark held personally, licensed to a Canadian company and sublicensed to a US distributor creates three taxing points. The licensing questions to settle first include who owns the mark and where royalties are paid.

Debt is a tool and a risk. Canada's thin capitalization rules limit the interest deduction on debt owed to specified non-resident shareholders above a 1.5 to 1 debt-to-equity ratio, so a Canadian subsidiary funded by a US parent needs a debt plan before the loan is made.

Compliance and reporting for dual-country investments

Filing obligations multiply across the border. Activity in both countries can mean two income tax returns, several information returns and a set of withholding forms, all on different deadlines.

The US side requires a nonresident return for US-source income (Form 1040-NR). It also requires a foreign bank account report (FBAR) filed with FinCEN when the aggregate value of foreign financial accounts exceeds $10,000 at any time in the calendar year. Form 8938, Statement of Specified Foreign Financial Assets, applies when specified foreign assets exceed the reporting threshold. Penalties for missed information returns can be larger than the tax at stake.

The Canadian side requires a non-resident return for Canadian-source income, a waiver form to reduce withholding where available, and GST or HST registration where the business makes taxable supplies in Canada.

A checklist for the annual cycle:

A celebrity business with US employees must handle payroll tax under the IRS employer guide. Canadian payroll has its own source deductions and remittance schedule.

Securities rules apply when a celebrity invests in or promotes a public company. The Securities and Exchange Commission governs US offerings, and undisclosed promotional payments are a recurring enforcement theme. The SEC's treatment of endorsements and investment stakes is covered separately. The Federal Trade Commission's endorsement rules require disclosure of paid endorsements in the US, and Canada's Competition Act covers misleading endorsement claims. A cross-border campaign must meet both.

A celebrity paid in stock or options has a securities question as well as a tax one, because recognition timing differs between grant, vest and sale. Anyone wiring money into a deal should check residency as part of due diligence, using the celebrity companies by industry comparison as a reference point for how these businesses are structured.

Record keeping is the quiet failure point. A celebrity with income in two currencies, three entities and four payers needs one ledger that both accountants can reconcile, or the credits will be wrong.

Advisors should be named, not assumed. A US CPA who does not practise Canadian tax and a Canadian accountant who does not practise US tax can each produce a return that is defensible alone and wrong together.

Common questions