Section 81

Respecting a question on the possibility of reducing income tax source deductions where payment is made to a member of a pooled registered pension plan ( "PRPP"), the participant is an Indian under the Indian Act, and the contributions came from exempt earned income, CRA first stated:

Section 147.5 does not include a provision which would ensure that distributions from a PRPP will not be included in computing income under paragraph 56(1)(z.3), where they come within paragraph 81(1)(a). Thus, distributions from a PRPP will first be included in the participant's income under paragraph 56(1)(z.3) and they will then be excluded, where applicable, from income when applying paragraph 81(1)(a).

A Canadian citizen and resident is working with an organization that provides services with an unidentified relationship with the mandate of the United Nations. Under the terms of an international agreement, the individual’s salary is subject to domestic taxation including source deduction in the country where the individual is working.

After finding that the individual’s income could not be excluded from income through a deduction under s. 110(1)(f)(iii), CRA stated:

[T]he Foreign Missions and International Organizations Act (the "FMIOA") is one of the federal statutes under which an amount may be exempt from income tax in Canada within the meaning of paragraph 81(1)(a).

The XXXXXXXXXX Order was issued pursuant to paragraph 5(1)(g) of the FMIOA and provides that XXXXXXXXXX officials have in Canada the privileges and immunities set out in Article V of the UN Convention. According to this provision, United Nations officials are exempt from all taxation on the salaries and emoluments paid to them by the United Nations. An official of an organization, according to IT-397R, is a person named and agreed on between the organization in question and its member states and designated as such by the Governor in Council.

Subsection 5(3) of the FMIOA states that nothing in any order made under subsection 5(1) of the FMIOA exempts a Canadian citizen, residing or ordinarily resident in Canada, from liability for any taxes or duties imposed by a law in Canada. . Therefore, since you are a Canadian citizen and reside in Canada, you cannot benefit from an exemption from Canadian taxation on the salaries and emoluments paid by XXXXXXXXXX under paragraph 81(1)(a), even if you meet the definition of "official" above.

Where a non-resident corporation derives income or a capital gain which is exempted from tax under Part I by a treaty, s. 81(1)(a) provides that such amount shall not be included in income of the corporation for the taxation year. No deduction under s. 110(1)(f)(i) may be claimed in respect of an amount that is exempt under s. 81(1)(a).

The Taxpayer is a non-resident corporation that carries on business in many countries, including Canada. The activities of the non-resident Taxpayer in Canada help satisfy the shipping requirements of related companies (the “Related Party Customers”), who generally are residents of Canada or non-residents carrying on business in Canada and who are not themselves in the shipping business. Would the Taxpayer’s activities carried on in Canada be considered “the operation of a ship in international traffic” under the previous version of s. 81(1)(c), or as “international shipping” under the current version (so that various chartering arrangements could be considered “leases” under the new “international shipping” definition?

Respecting the former version, CRA stated:

[T]he Taxpayer never has management of the ships’ operations, in that it is not responsible for the crew nor the service and maintenance of the ships…[so that it] does not have the “Technical Management” of the ships. However…this requirement could also be met where the Taxpayer has the so-called “Commercial Management” of the ships…[which] means the right to exploit the earning capacity of the ship…[which] right does not necessarily go hand in hand with the responsibility for the crewing and maintenance of the ship. … [T]he Taxpayer would need to demonstrate that the ship owner is operating the ship under the Taxpayer’s direction and not, in effect, under the direction of the Related Party Customers.

Respecting the post-amendment version, CRA stated:

[T]hese amendments were not intended to effect any significant scope limitations. …[T[]he term “lease” as used in the specific context of the international shipping rules would include chartering arrangements whereby taxpayers do not have the Technical Management of the ship but do have the Commercial Management of the ship. As such, we are of the view that the Taxpayer may continue to qualify for the international shipping exemption in taxation years that begin after July 12, 2013 on the same basis as for taxation years beginning before that time, that is, provided that the Taxpayer has the Commercial Management of the ship.

During peak season, Canco, which transports passengers to destinations inside and outside Canada, is supplied planes, and non-resident pilots and crew by an arm's length U.K. resident ("Forco") who is the pilots' and crew's employer, to transport Canco's passengers. In finding that Forco qualified under s. 81(1)(c) provided similar relief was provided in the U.K., CRA stated:

Forco could be viewed as earning income in Canada from the operation of an aircraft in international traffic within the meaning of paragraph 81(1)(c), notwithstanding that the tickets held by the passengers on its flights represent contracts for services between the passengers and Canco.

General discussion.

"As it is our understanding that Greece continues to exempt residents of Canada from its Freight Tax on the basis of the bilateral arrangement between Canada and Greece agreed to in the above-mentioned exchange of diplomatic notes [in September 1929], paragraph 81(1)(c) of the Act will operate to exempt the income for the year of a resident of Greece earned in Canada from the operation of a ship in international traffic."

The foreign country will be considered to grant substantially similar relief if it does not impose an income tax, or if the income from the operation of the ship or aircraft in international traffic is exempt from tax in that country.

The exemption does not apply to income from a dry lease or bare boat charter because such income is not income from the operation of a vessel.

Under a recent change in the Veterans Independence Program, recipients would get lump sums to pay vendor invoices rather than sending the invoices to Veterans Affairs Canada. These lump sums are not taxable (the same as before), because the are received pursuant to the Pension Act.

Respecting the treatment of a Hong Kong War Memorial Pension received by a resident of Canada, CRA stated: we would consider a pension received from Hong Kong SAR to be a pension received from a country that was an ally of Canada at the time of the Second World War.