15 December 1999 External T.I. 1999-0009415 - Locally engaged staff deemed resident

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

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: Non-resident persons are hired as locally engaged employees (LES) at Canadian embassies in countries which do not impose an income tax on the wages paid to them and such persons are former residents of Canada. The issue is whether the wages paid to such LES are taxable under paragraph 115(2)(c) of the Act.

Position: no. paragraph 115(2)(c)(iii) does not apply to such LES

Reasons: As a result of the 1999 amendments to paragraph 115(2)(c) of the Act, and in particular the enactment of subparagraph 115(2)(c)(iii), paragraph 115(2)(c) of the Act no longer applies to such LES and the result is that the wages paid to such LES is no longer taxable under part I of the Act.

Department of Foreign Affairs
and International Trade
125 Sussex Drive 992995
Ottawa ON K1A 0G2 G. Middleton
957-2122
Attention: Armande Audet
Acting Director
Locally Engaged Staff

December 15, 1999

Dear Sirs:

This is further to your facsimile of November 10th and further to our meeting of November 15th in which you requested clarification on the taxation of remuneration paid to Locally-Engaged Staff (LES) who are non-resident persons at the time they are employed by Canadian Embassies located in countries which do not impose an income tax on employment income earned by individuals such as Saudi Arabia, United Arab Emigrates, etc.

Our understanding of the situation in which you request clarification is as follows:

1. The LES in question are Canadian citizens who were in fact non-residents of Canada at the time they were hired at a Canadian Embassy. (At the time of their hiring, such LES are not resident in Canada under the Income Tax Act (the "Act"). That is, the LES are not in fact resident in Canada, or ordinarily resident in Canada and section 250 of the Act does not deem the LES to be residents of Canada.)

2. Such LES were residents of Canada in a prior year.

3. The Canadian Embassies in question are located in countries which do not impose an income or profits tax on the employment remuneration paid to such LES.

4. Such LES are not spouses of Canadian diplomats who are sent to work at the Canadian Embassies.

The remuneration paid to the above described LES persons by the Canadian Embassies would not be subject to tax in Canada as the provisions of paragraph 115(2)(c) of the Act would not apply to such LES.

As we explained in our meeting, this tax treatment is different than the tax treatment described for such LES in our previous letter of October 31, 1995. The reason for the different tax treatment is due to the recent 1999 amendment to paragraph 115(2)(c) of the Act which is effective for 1998 and later taxation years. In particular, the new provision in subparagraph 115(2)(c)(iii) of the Act reads:

"who was, under an agreement or a convention with one or more countries that has the force of law in Canada, entitled to an exemption from an income tax otherwise payable in any of those countries in respect of the salary or wages or other remuneration".

Since such LES are not entitled to an exemption from income tax on their remuneration as a result of an agreement or a convention with those countries that has the force of law in Canada, subparagraph 115(2)(c)(iii) of the Act does not apply to the above described LES and, accordingly, the remuneration received by the LES is not required to be included in their income under paragraph 115(2)(c) of the Act.

We would also like to mention that the LES persons described in our previous letter of October 31, 1995 did not include LES who are spouses of Canadian diplomats sent to work at the Canadian Embassies. We will summarize our views in respect of the tax treatment for such spouses in a subsequent letter.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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