Citation: 2003TCC58
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Date: 20030224
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Docket: 2001-3398(IT)I
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BETWEEN:
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CONNIE CLOUTIER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] In computing her
income for the 1999 taxation year, the appellant reported
employment income of $12,724 and claimed a corresponding
deduction. By Notice of Assessment dated October 10, 2000, the
Minister of National Revenue (the "Minister")
disallowed the deduction. The appellant is appealing the
assessment.
[2] It was agreed by
the parties that the followings facts were applicable to the
determination of this appeal:
1.
The appellant is a citizen of the United States but resident in
Canada at all material times.
2.
During the 1999 taxation year, she was employed as a teacher by
the Maine School Administrative District # 27 in the
United States.
3. On her 1999
income tax return, the appellant reported other employment income
of $12,724 and claimed a deduction for the same amount under
subparagraph 110(1)(f)(i) on the grounds that it was
exempt under Article XIX of the Canada-US Income Tax
Convention.
4. The total
remuneration received by the appellant for services performed
during the course of employment in the United States was $8,654
in U.S. currency. The deduction was disallowed by the
Minister.
5. The appellant
had a permanent home available to her in Canada and did not have
a permanent home available to her in the United States.
[3] The only fact
denied by the appellant was that the services performed by the
appellant as a teacher were not rendered in the discharge of
functions of a governmental nature. Neither party called
witnesses.
[4] The issue in this
appeal is whether the appellant's employment income while
employed as a public school teacher in the United States is
exempt from taxation in Canada by reason of Article XIX of the
Canada-US Income Tax Convention (the
"Convention"), which applies in respect of
remuneration for the exercise of governmental functions. The
appellant does not dispute the fact that she is a resident of
Canada and therefore required to pay income tax on her employment
income. Can she claim a deduction under subparagraph
110(1)(f)(i) of the Income Tax Act (the
"Act") which reads:
110(1) For the purpose of computing the
taxable income of a taxpayer for a taxation year, there may be
deducted such of the following amounts as are applicable:
(f)... or any amount that is
(i) an amount exempt from income tax in
Canada because of a provision contained in a tax convention or
agreement with another country that has the force of law in
Canada,
The provision of the Convention on which the
appellant relies is Article XIX. It reads:
Remuneration, other than a pension, paid by a
Contracting State or a political subdivision or local authority
thereof to a citizen of that State in respect of services
rendered in the discharge of functions of a governmental nature
shall be taxable only in that State. However, the provisions of
Article XIV (Independent Personal Services), XV (Dependent
Personal Services) or XVI (Artistes and Athletes), as the case
may be, shall apply, and the preceding sentence shall not apply,
to remuneration paid in respect of services rendered in
connection with a trade or business carried on by a Contracting
State or a political subdivision or local authority thereof.
[5] The
appellant's position is that Article XIX of the Convention
provides for only two types of services that can be performed by
government employees. Either the services are rendered in the
"discharge of functions of a governmental nature" or
they are rendered in "connection with a trade or
business". There is no third category of services that are
neither governmental in nature nor connected with a trade or
business. If there is, the services performed by the appellant
are nevertheless governmental in nature and remuneration for such
services shall be taxable only in that state, i.e. the United
States.
[6] The
respondent's position is that Article XIX of the Convention
was intended to apply only when functions of a governmental
nature are rendered in a situation where one state (the sending
state) sends an individual in the other state (the host state) to
render services of a governmental nature and does not apply to
citizens employed in the jurisdiction where they are deemed
resident for purposes of the Convention. As an example, counsel
suggested that it applies to a situation where a person working
for the U.S. military is sent to work for the U.S. government but
in Canada. Counsel's position is supported by
paragraph 2 of the Technical Explanation to Article XIX of
the Convention which reads:
" ... As a result, a U.S. citizen
resident in Canada and performing services in Canada in the
discharge of functions of a governmental nature for the United
States is taxable only in the United States on remuneration for
such services."
[7] Counsel for the
respondent further argues that the fact that an individual works
for the government does not necessarily mean that the
requirements of Article XIX of the Convention are met and more
particularly, the fact that one works for a government does not
mean that the functions performed are of a governmental nature.
It is further submitted by the respondent that since the income
of the appellant originates from the U.S., the question of
whether her functions are of a governmental nature should be
determined according to their concept. In support of his
submission, counsel for the respondent cited the Technical
Explanation to Article 19 of the U.S. Model Income Tax
Convention which reads:
The phrase "functions of a governmental
nature" is not defined. In general it is understood to
encompass functions traditionally carried on by a government. It
would not include functions that commonly are found in the
private sector (e.g. education, health care, utilities). Rather,
it is limited to functions that generally are carried on solely
by the government (e.g. military, diplomatic service, tax
administrators) and activities that directly support the carrying
out of those functions.
[8] According to
counsel for the respondent, Article XIX of the Convention is not
applicable to the appellant's situation. He concludes by
stating that the income tax liability of the appellant must be
determined in accordance with Article XV of the Convention, which
renders the appellant taxable in Canada on income earned as a
public school teacher.
[9] The provisions of
the Convention that are relevant in the determination of this
appeal are reproduced below. I have also added the Technical
Explanations for some of the sections with the caveat that they
do not constitute authority on a question of law but are simply
an element to be taken into account in the interpretation process
of the Convention (see Kubicek Estate v. The
Queen).
Article I: Personal Scope
This Convention is generally applicable to
persons who are residents of one or both of the Contracting
States.
...
Technical Explanation [1984]
Article 1 provides that the Convention is
generally applicable to persons who are residents of either
Canada or the United States or both Canada and the United States.
The word "generally" is used because certain provisions
of the Convention apply to persons who are residents of neither
Canada nor the United States.
Article III- General Definitions
2. As regards the application of the
Convention by a Contracting State any term not defined therein
shall, unless the context otherwise requires and subject to the
provisions of Article XXVI (Mutual Agreement Procedure),
have the meaning which it has under the law of that State
concerning the taxes to which the Convention applies.
Article IV- Residence
1. For the purposes of this Convention, the
term "resident" of a Contracting State means any person
that, under the laws of that State, is liable to tax therein by
reason of that person's domicile, residence, citizenship,
place of management, place of incorporation ....
2. Where by reason of the provisions of
paragraph 1 an individual is a resident of both Contracting
States, then his status shall be determined as follows:
(a) He shall be deemed to be a resident of
the Contracting State in which he has a permanent home available
to him; if he has a permanent home available to him in both
States or in neither State, he shall be deemed to be a resident
of the Contracting State with which his personal and economic
relations are closer (centre of vital interests);
(b) If the Contracting State in which he has
his centre of vital interests cannot be determined, he shall be
deemed to be a resident of the Contracting State in which he has
a habitual abode;
(c) If he has an habitual abode in both
States or in neither State, he shall be deemed to be a resident
of the Contracting State of which he is a citizen; and
(d) If he is a citizen of both States or of
neither of them, the competent authorities of the Contracting
States shall settle the question by mutual agreement.
...
Technical Explanation [1984]:
...
Paragraphs 2, 3, and 4 provide rules to
determine a single residence for purposes of the Convention for
persons resident in both Contracting States under the rules set
forth in paragraph 1. Paragraph 2 deals with individuals. A
"dual resident" individual is initially deemed to be a
resident of the Contracting State in which he has a permanent
home available to him. If the individual has a permanent home
available to him in both States or in neither, he is deemed to be
a resident of the Contracting State with which his personal and
economic relations are closer. If the personal and economic
relations of an individual are not closer to one Contracting
State than to the other, the individual is deemed to be a
resident of the Contracting State in which he has an habitual
abode. If he has such an abode in both States or in neither
State, he is deemed to be a resident of the Contracting State of
which he is a citizen. If the individual is a citizen of both
States or of neither, the competent authorities are to settle the
status of the individual by mutual agreement.
5. Notwithstanding the provisions of the
preceding paragraphs, an individual shall be deemed to be a
resident of a Contracting State if:
(a) The individual is an employee of that
state or of a political subdivision, local authority or
instrumentality thereof rendering services in the discharge of
functions of a governmental nature in the other Contracting State
or in a third State; and
(b) The individual is subjected in the
first-mentioned State to similar obligations in respect of taxes
on income as are residents of the first-mentioned State.
Article XV- Dependent Personal
Services
1. Subject to the provisions of Articles
XVIII (Pensions and Annuities) and XIX (Government Service),
salaries, wages and other similar remuneration derived by a
resident of a Contracting State in respect of an employment shall
be taxable only in that State unless the employment is
exercised in the other Contracting State. If the employment is so
exercised, such remuneration as is derived therefrom may be taxed
in that other State.
2. Notwithstanding the provisions of
paragraph 1, remuneration derived by a resident of a Contracting
State in respect of an employment exercised in a calendar year in
the other Contracting State shall be taxable only in the
first-mentioned State if:
(a) Such remuneration does not exceed ten
thousand dollars ($10,000) in the currency of that
other State; or
(b) the recipient is present in the other
Contracting State for a period or periods not exceeding in the
aggregate 183 days in that year and the remuneration is not
borne by an employer who is a resident of that other State or by
a permanent establishment or a fixed base which the employer has
in that other State.
Article XIX - Government Service
Remuneration, other than a pension, paid
by a Contracting State or a political subdivision or local
authority thereof to a citizen of that State in respect of
services rendered in the discharge of functions of a governmental
nature shall be taxable only in that State. However, the
provisions of Article XIV (Independent Personal Services), XV
(Dependent Personal Services) or XVI (Artistes and Athletes), as
the case may be, shall apply, and the preceding sentence shall
not apply, to remuneration paid in respect of services rendered
in connection with a trade or business carried on by a
Contracting State or a political subdivision or local authority
thereof.
Technical Explanation [1984]:
Article XIX provides that remuneration, other
than a pension, paid by a Contracting State or political
subdivision or local authority thereof to a citizen of that State
in respect of services rendered in the discharge of governmental
functions shall be taxable only in that State. (Pursuant to
paragraph 5 of Article IV (Residence), other income of such a
citizen may also be exempt from tax, or subject to reduced rates
of tax, in the State in which he is performing services, in
accordance with other provisions of the Convention.) However, if
the services are rendered in connection with a trade or business,
then the provisions of Article XIV (Independent Personal
Services), Article XV (Dependent Personal Services), or Article
XVI (Artistes and Athletes), as the case may be, are controlling.
Whether functions are of a governmental nature may be determined
by a comparison with the concept of a governmental function in
the State in which the income arises.
Pursuant to paragraph 3(a) of Article XXIX
(Miscellaneous Rules), Article XIX is an exception to the
"saving clause." As a result, a U.S. citizen resident
in Canada and performing services in Canada in the discharge of
functions of a governmental nature for the United States is
taxable only in the United States on remuneration for such
services.
Article XXIV - Elimination of double
taxation
...
3. For the purposes of this Article:
(a) Profits, income or gains (other than
gains to which paragraph 5 of Article XIII (Gains) applies) of a
resident of a Contracting State which may be taxed in the other
Contracting State in accordance with the Convention (without
regard to paragraph 2 of Article XXIX (Miscellaneous Rules))
shall be deemed to arise in that other State; and
(b) Profits, income or gains, of a resident
of a Contracting State which may not be taxed in the other
Contracting State in accordance with the Convention (without
regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) or
to which paragraph 5 of Article XIII (Gains) applies shall be
deemed to arise in the first-mentioned State.
4. Where a United States citizen is a
resident of Canada, the following rules shall apply:
(a) Canada shall allow a deduction from the
Canadian tax in respect of income tax paid or accrued to the
United States in respect of profits, income or gains which arise
(within the meaning of paragraph 3) in the United States, except
that such deduction need not exceed the amount of the tax that
would be paid to the United States if the resident were not a
United States citizen; and
(b) For the purposes of computing the United
States tax, the United States shall allow as a credit against
United States tax the income tax paid or accrued to Canada after
the deduction referred to in subparagraph (a). The credit so
allowed shall not reduce that portion of the United States tax
that is deductible from Canadian tax in accordance with
subparagraph (a).
Article XXIX - Miscellaneous Rules
...
2. Except as provided in paragraph 3,
nothing in the Convention shall be construed as preventing a
Contracting State from taxing its residents (as determined under
Article IV (Residence) and, in the case of the United States, its
citizens (including a former citizen...) and companies electing
to be treated as domestic corporations, as if there were no
convention between the United States and Canada with respect to
taxes on income and on capital.
3. The provisions of paragraph 2 shall
not affect the obligations undertaken by a Contracting State:
(a) under...ArticlesXIX (Government
Service) ... XXIV (Elimination of Double Taxation) ... and XXVI
(Mutual Agreement Procedure);
[10] In constructing the
meaning of a provision under an income tax treaty, the leading
authority is found in The Queen v. Crown Forest
Industries Ltd., 95 D.T.C. 5389 (hereinafter Crown
Forest) where Iacobucci J. laid down the governing
principles. At page 5393 he cites:
In interpreting a treaty, the paramount goal
is to find the meaning of the words in question. This process
involves looking to the language used and the intentions of the
parties.
[11] He later pointed to
the intention of the drafters as the guiding factor in the
interpretation and application of a treaty provision. At page
5396, he said:
Reviewing the intentions of the drafters of a
taxation convention is a very important element in delineating
the scope of the application of that treaty. As noted by Addy J.
in J.N. Gladden Estate v. The Queen, [1985] 1
C.T.C. 163 (F.C.T.D.), at pp. 166-67:
Contrary to an ordinary taxing statute a tax
treaty or convention must be given a liberal interpretation with
a view to implementing the true intentions of the parties
[as emphasized]. A literal or legalistic interpretation must be
avoided when the basic object of the treaty might be defeated or
frustrated in so far as the particular item under consideration
is concerned.
[12] He later outlined the
goals and purposes of the Canada-U.S. Convention at page
5396:
"The principle purposes of the proposed
income tax treaty between the United States and Canada are to
reduce or eliminate double taxation of income earned by citizens
and residents of either country from sources within the other
country, and to prevent avoidance or evasion of income taxes of
the two countries."
[13] The Court in Crown
Forest, supra, also referred to other extrinsic materials
that can be used by courts in the interpretation of treaties such
as the O.E.C.D. Model Tax Convention on Income and
Capital, the U.N. Model Conventions, as well as academic
articles and textbooks.
[14] Articles 31 and 32 of
the Vienna Convention on The Law of Treaties to which
Canada acceded in 1970 and which came into force in 1980 also
sets out principles applicable to treaty interpretation. They
read as follows:
Article 31
1. A treaty shall be interpreted in
good faith in accordance with the ordinary meaning to be given
to the terms of the treaty in their context and in light of its
object and purpose.
2. The context for the purpose of the
interpretation of a treaty shall comprise, in addition to the
text, including the preamble and annexes:
(a) any agreement relating to the treaty
which was made between all the parties in connection with the
conclusion of the treaty;
(b) any instrument which was made by one or
more parties in connection with the conclusion of the treaty and
accepted by the other parties as an instrument related to the
treaty;
3. There shall be taken into account,
together with the context:
(a) any subsequent agreement between the
parties regarding the interpretation of the treaty or the
application of its provisions; ...
Article 32
Recourse may be had to supplementary means of
interpretation, including the preparatory work of the treaty and
the circumstances of its conclusion, in order to confirm the
meaning resulting from the application of Article 31, or to
determine the meaning when the interpretation according to
Article 31:
(a) leaves the meaning ambiguous or obscure;
or
(b) leads to a result which is manifestly
absurd or unreasonable.
[15] Paragraph 2 of Article
XIX of the Technical Explanation [1984] reads:
Pursuant to paragraph 3(a) of Article XXIX
(Miscellaneous Rules), Article XIX is an exception to the
"saving clause". As a result, a U.S. citizen resident
in Canada and performing services in Canada in the discharge of
functions of a governmental nature for the United States is
taxable only in the United States on remuneration for such
services.
[16] The respondent relies
on this Technical Explanation to argue that Article XIX was
enacted to deal strictly with citizens working abroad in the
discharge of governmental functions. Although the Technical
Explanation is but one element in the interpretation process, it
has found support in the Crown Forest (supra)
decision where Iacobucci J. made the following comment on the
general scope of the Convention, at page 5396:
At this point in the analysis, it is
important to take a step backwards and isolate exactly whom the
Convention was intended to benefit. The target group are
Canadians working in the United States (or vice versa) and
Canadian companies operating in the United States (again, or
vice versa)....
[17] Although Article XIX
does not specifically refer to citizens employed in the other
Contracting State in the discharge of functions of a governmental
nature, it appears that the primary purpose, if not the only
purpose, for which Article XIX was enacted was to provide
the taxing rule applicable to employees working abroad in the
discharge of governmental functions. Were it not for Article XIX,
these employees would be taxed in the jurisdiction where they
work pursuant to Article XV.
[18] The O.E.C.D. Model
Convention on which the Canada-U.S. Convention was based in part
appears to support that domestically-employed government
workers are not what the drafters had in mind with regard to the
scope of Article XIX. It was designed for employees employed
abroad in the service of their country.
[19] The term
"services of a governmental nature" is not defined
under the Convention. Paragraph 1 of the Technical Explanation
accompanying Article XIX of the Convention provides inter
alia:
Whether functions are of a governmental
nature may be determined by a comparison with the concept of a
governmental function in the State in which the income
arises.
[20] With this in mind,
Article 19 of the U.S. Model Convention along with its Technical
Explanation seems to exclude teaching services for purposes of
Article XIX. Article 19 and the Technical Explanation
provide:
Article 19 GOVERNMENT SERVICE
1. Notwithstanding the provisions of
Articles 14 (Independent Personal Services), 15 (Dependent
Personal Services), 16 (Director's Fees) and 17
(Artistes and Sportsmen):
a) Salaries, wages and other remuneration,
other than a pension, paid from the public funds of a Contracting
State or a political subdivision or a local authority thereof to
an individual in respect of services rendered to that State or
subdivision or authority in the discharge of functions of a
governmental nature shall, subject to the provisions of
subparagraph (b), be taxable only in that State;
b) such remuneration, however, shall be
taxable only in the other Contracting State if the services are
rendered in that State and the individual is a resident of that
State who:
i) is a
national of that State; or
ii) did not
become a resident of that State solely for the purpose of
rendering the services.
2. Notwithstanding the provisions of
paragraph 1 of Article 18 (Pensions, Social Security,
Annuities, Alimony, and Child Support):
a) any pension paid from the public funds of
a Contracting State or a political subdivision or a local
authority thereof to an individual in respect of services
rendered to that State or subdivision or authority in the
discharge of functions of a governmental nature shall, subject to
the provisions of subparagraph (b), be taxable only in that
State;
b) such pension, however, shall be taxable
only in the other Contracting State if the individual is a
resident of, and a national of, that State.
Technical Explanation
The phrase "functions of a
governmental nature" is not defined. In general it is
understood to encompass functions traditionally carried on by a
government. It would not include functions that commonly are
found in the private sector (e.g. education, health care,
utilities). Rather, it is limited to functions that generally are
carried on solely by the government (e.g. military,
diplomatic service, tax administrators) and activities that
directly support the carrying out of these functions."
[21] Article 19 of the
O.E.C.D. Model Convention is almost identical to Article XIX
under the Canada-U.S. Convention. The current amended provision
under the Model Convention no longer includes the phrase
"functions" of a governmental nature.
[22] In a CCRA publication
entitled The Income Tax Treaties Reference Manual referred
to as 94 ITC 301, Revenue Canada's position is that these
functions include executive, legislative and judicial functions
and in particular involve the formulation, determination,
implementation and carrying out of policies of the government.
The former Canada-United States of America Tax Convention
granted an exemption from tax in the host State to professors or
teachers who were resident in the other Contracting State but who
were temporarily residing in the host State for the purposes of
teaching at a University, college, school or other educational
institution (Article VIIIA). This provision is left out under the
current Convention. It would appear that the intention of both
Canada and the U.S. was to tax public school and university
teaching services in accordance with the rules in Article XV.
[23] I therefore conclude
that the appellant was not employed in the discharge of functions
of a governmental nature within the meaning of Article XIX of the
Convention and therefore cannot claim an exemption conferred
under the provision in respect of such services. The appellant is
liable to pay tax in Canada under Article XV of the Convention on
the basis that the remuneration earned did
not exceed $10,000 U.S. in accordance with paragraph 2(a). The
appellant may claim a credit under the Convention in respect of
taxes payable in the United States pursuant to Article XIV of the
Canada-U.S. Convention.
[24] The appeal is
therefore dismissed.
Signed at Edmundston, New Brunswick, this
24th day of February 2003.
J.T.C.C.