Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether tax equalization payments for correspondents in Canada of foreign newspapers are taxable
Position: Yes
Reasons: Longstanding department position confirmed in Sarah Gernhart v. the Queen
Mr. Hugh Stevens
Assistant Deputy Minister
Communications, Culture
and Policy Planning
Department of Foreign Affairs
and International Trade
125 Sussex Drive
Tower A, Room 139
Ottawa, Ontario
K1A 0G2
Dear Mr. Stevens:
I am responding to your letter concerning the taxation of certain payments made to employees of United States XXXXXXXXXX who are based in Canada as foreign XXXXXXXXXX. The difference between the amount of Canadian income taxes that employees pay on their salary and the amount of United States income tax that they would have had to pay if they had been residing in the United States, instead of Canada, is reimbursed by their employer who consider it to be excessive. I am surprised that the foreign exchange gain from U.S. to Canadian dollars would not be sufficient to offset any additional tax cost.
The Income Tax Act (the “Act”) provides that allowances received by an employee for personal or living expenses or as an allowance for any other purpose are taxable unless the allowance is specifically excluded from income. An allowance paid by an employer to an employee to compensate for additional tax in Canada compared to the tax that would otherwise have been payable in the employee’s usual country of residence (a “tax equalization payment”) is an allowance for personal or living expenses. The Tax Court of Canada confirmed this position in Sandra E. Gernhart v. Her Majesty the Queen 96 DTC 1672.
In that case, the taxpayer was employed by General Motors in the United States. She accepted a temporary assignment in Canada at the request of the employer. Pursuant to the company’s tax equalization policy, her employer paid the additional income taxes resulting from her move to Canada. The Tax Court of Canada found that the tax equalization payment is taxable for the following reasons:
- The payment was made pursuant to the taxpayer’s overall on-going compensation package and was designed to induce her to serve outside the United States. Therefore, the payment constitutes part of her remuneration for services.
- The benefit is obvious when the taxpayer’s position is compared with that of other residents of Canada in receipt of the same income but not in receipt of tax equalization.
The Federal Court of Appeal dismissed the taxpayer’s appeal and the Supreme Court of Canada dismissed the taxpayer’s application for leave to appeal the Federal Court of Appeal decision.
I note from the example you submitted that the tax liability appears to be increasing each year. The likely reason for such a situation would be that the equalization payment was made, and hence taxable, in the subsequent year. As the payment is taxable income it would, in turn, increase the amount of tax equalization required in the following year.
There are currently no provisions in the Act which would exclude tax equalization payments from taxation.
I trust that the above information explains the Department’s position.
Yours sincerely,
Bill McCloskey
Assistant Deputy Minister
Policy and Legislation Branch
Roxane Brazeau-LeBlond
957-2136
November 25, 1998
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