15 January 2001 External T.I. 2000-0058885 - Taxation of Canadian Resident US Citizen

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: Taxation of Canadian resident/U.S. citizen.

Position: Please see letter.

Reasons:

XXXXXXXXXX 		2000-005888
J. Stalker
January 15, 2001

Dear Sirs:

Re: Articles XIV, XXIX and XXIV of the Canada-U.S
Income Tax Convention (the "Convention")

This is in reply to your facsimile transmission of November 27, 2000 and in follow-up to our recent telephone conversations (Stalker/XXXXXXXXXX). You forwarded a letter you received from the Tax Treaty Division of the Department of the Treasury at the U.S. Internal Revenue Service.

We understand that you are a Canadian resident under both the Canadian Income Tax Act and the Convention. You became a U.S. citizen in 1999. You have stated that your income is from self-employment in the U.S. and that you have no fixed base there. We note that the determination of residency and fixed base is a question of fact, and that the following comments are based on the statements in this paragraph.

As a Canadian resident with no fixed base in the U.S., Article XIV (Independent Personal Services) of the Convention states that only Canada can tax your self employment income earned in the U.S. However, Article XXIX (Miscellaneous Rules) states that notwithstanding Article XIV (and certain other articles), the U.S. maintains its right to tax you on that income as you are a U.S. citizen. Nevertheless, Article XXIV of the Convention (Elimination of Double Taxation) provides that even though the U.S. can tax you on that income, the U.S. must provide a foreign tax credit for the Canadian tax paid on that same income.

Subparagraph 4 of Article XXIV states that "Where a United States citizen is a resident of Canada, ...Canada shall allow a deduction from the Canadian tax in respect of income tax paid or accrued in the Unites States in respect of profits, income or gains which arise (within the meaning of paragraph 3) in the United States". Then subparagraph 4(b) states that for the purpose of computing U.S. tax, the U.S. shall grant a credit for Canadian tax paid, after the deduction described in subparagraph 4(a). In order to determine where the income arises for the purpose of subparagraph 4(a), one must refer to paragraph 3 of Article XXIV. It states that income of a resident of Canada which may not be taxed in the U.S. according to the Convention without regard to paragraph 2 of Article XXIX (discussed in the previous paragraph) shall be deemed to arise in Canada and not the U.S. We have already noted that Article XIV provides that only Canada can tax self-employment income where there is no fixed base. Consequently the income arises in Canada not the U.S. and so Canada is not required to give a credit in respect of U.S. tax paid. Instead, the U.S. must give a credit against U.S. tax in respect of Canadian tax paid in accordance with subparagraph 4(b) of Article XXIV.

The above comments represent our general view with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Canada Customs and Revenue Agency.

We trust our comments are helpful.

Yours truly,

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