12 June 2002 External T.I. 2002-0124965 - Tax Status, Embassy Staff Immigrating

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a member of the XXXXXXXXXX staff of the XXXXXXXXXX Embassy will be taxed in Canada on his salary if he immigrates to Canada

Position: Depends on specific facts

Reasons: Article XIX of the Canada XXXXXXXXXX Tax Convention provides that a person who becomes resident in Canada "solely" to provide services to XXXXXXXXXX is not taxable in Canada on the related remuneration

XXXXXXXXXX 2002-012496
T. Cook
June 12, 2002

Re: Taxation Status Upon Immigration to Canada

Dear XXXXXXXXXX:

We are writing in reply to your letter of February 20, 2002, in which you requested our views regarding your residence for income tax purposes. Your situation can be summarized as follows:

? you are a XXXXXXXXXX national;

? you were sent to Canada to serve as XXXXXXXXXX staff of the XXXXXXXXXX Embassy in Ottawa and have done so continuously since your arrival; and

? you are considering immigrating to Canada, but would continue to work at the XXXXXXXXXX Embassy.

You query whether immigrating to Canada would change your residence for income tax purposes. You have indicated that you are currently filing your tax returns in XXXXXXXXXX based on Article XXVII of the Canada XXXXXXXXXX Tax Convention (the "Tax Convention") and paragraph 2 of Article 37 of the Vienna Convention on Diplomatic Relations (the "Diplomatic Convention"); and that as long as you continue to serve as XXXXXXXXXX staff of the XXXXXXXXXX Embassy you will be a fiscal resident of XXXXXXXXXX pursuant to Article XIX of the Tax Convention.

Our Comments

Your letter describes the factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on the tax consequences applicable to a specific taxpayer in respect of particular circumstances other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.

Part I of the Income Tax Act (the "Act") levies an income tax on the worldwide income of residents of Canada, and on certain Canadian-source income earned by non-residents. The circumstances under which an individual will be a resident of Canada for purposes of the Act are set out in Interpretation Bulletin IT-221R3, Determination of an Individual's Residence Status. For the discussion below it is assumed that the individual is resident in Canada and is, prima facie, subject to Canadian income tax. However, the tax status of a XXXXXXXXXX staff member of the XXXXXXXXXX Embassy, resident in Canada, would also depend on whether the individual is:

? exempt from tax under specific provisions of the Act;

? exempt from tax under the Foreign Missions and International Organizations Act (the "FMIOA"); or

? deemed to be a resident of XXXXXXXXXX, or exempt from tax, under the Tax Convention.

If the individual is exempt from tax under either the Act or the FMIOA, there is no need to consider the impact of the Tax Convention.

The Act

An officer or servant of a country other than Canada whose duties require him or her to reside in Canada (the "Employee") is exempted from Part I tax by paragraph 149(1)(a) of the Act, during any period throughout which certain conditions are met. The term "officer or servant of a country other than Canada" would include XXXXXXXXXX staff of a diplomatic mission or consulate. In order for the exemption to apply, the Employee:

? must have resided in another country immediately before assuming the duties that required him or her to reside in Canada;

? must work for a foreign government that grants similar relief to employees of the Government of Canada;

? cannot at any time in the period engage in any business or employment, or hold any office, in Canada other than his or her duties as the employee of the foreign government; and

? cannot be a Canadian citizen.

An individual who otherwise met the requirements of paragraph 149(1)(a) would be exempt from Part I tax until such time as he or she became a Canadian citizen. A person who is exempt from Part I tax may still be liable for other amounts levied under the Act (e.g., the withholding tax levied under Part XIII of the Act on payments to non-residents).

The FMIOA

Although a person might not be able to meet the requirements for exemption under section 149 of the Act, part or all of that individual's income may be exempt from tax by virtue of the interaction of paragraph 81(1)(a) of the Act and the FMIOA. The FMIOA gives certain articles of the Diplomatic Convention and the Vienna Convention on Consular Relations (the "Consular Convention") the force of law in Canada. Among those articles incorporated into Canadian law are Articles 1, 34 and 37 of the Diplomatic Convention.

Article 34 provides that members of the diplomatic staff of a mission are exempt from Canadian taxes, with some exceptions (e.g., tax on Canadian source private income). XXXXXXXXXX Similar articles in the Consular Convention are also incorporated into Canadian law. As a result, a XXXXXXXXXX staff member of an embassy would normally be exempt from Part I tax until he or she became either a permanent resident or citizen of Canada. Once an individual has received landed immigrant status in Canada, he or she would be considered a "permanent resident" of Canada and the FMIOA would not apply to exempt that person's income from tax in Canada.

The Tax Convention

An individual resident in Canada may be subject to Part I tax because he or she does not satisfy the conditions in either paragraph 149(1)(a) of the Act or the FMIOA. The Tax Convention is then considered as it could affect the individual's Canadian tax status by either deeming the individual to be resident in XXXXXXXXXX, or by exempting certain income from tax in Canada. We note that subsection 250(5) of the Act deems that individuals resident in another country by virtue of a tax convention are non-residents of Canada for purposes of the Act.

Residency for purposes of the Tax Convention is generally determined under Article IV of the Tax Convention. An individual is resident in the country in which he or she is liable to tax because of his or her domicile, residency or similar criteria. Where an individual is resident in both countries under domestic tax law, residency for purposes of the Tax Convention will be determined using a series of tiebreaker rules. They are, in order of application:

? in which country is a permanent home available to the individual?

? in which country does the individual's centre of vital interests lie?

? in which country is the individual's habitual abode?

? is the individual a national of either country?

If the tiebreaker rules do not produce a result, the Canadian and XXXXXXXXXX competent authorities will settle the question. The nationality of an individual will only affect his or her residence at the fourth level of the tiebreaker rules. For purposes of this discussion, it is assumed that the individual is a resident of Canada under Article IV.

Article XXVII

Article XXVII provides that nothing in the Tax Convention shall affect the fiscal privileges of members of diplomatic or consular missions available under the general rules of international law. The general rules of international law contained in the Diplomatic Convention and Consular Convention are already codified in the FMIOA, which would apply as discussed above.

The Article also provides that a "member of a diplomatic, consular or permanent mission" of XXXXXXXXXX that is situated in Canada is deemed to be resident in XXXXXXXXXX if he or she is liable to the same tax on his or her worldwide income as are residents of XXXXXXXXXX. But if the individual is not subject to the same tax in XXXXXXXXXX on worldwide income as are residents of XXXXXXXXXX, Article XXVII of the Tax Convention does not apply. In this regard, we note that the definition of "members of the mission" as used in Article 1 of the Diplomatic Convention includes members of the XXXXXXXXXX staff.

An individual who meets the conditions in Article XXVII will be deemed to be a resident of XXXXXXXXXX for purposes of the Tax Convention regardless of his or her citizenship or residence under Article IV. However, where an individual has applied for landed immigrant status in Canada and as a consequence is no longer taxed in XXXXXXXXXX on worldwide income like other residents of XXXXXXXXXX, Article XXVII will not apply and the individual's residency status under the Tax Convention will be determined under Article IV.

Article XIX

XXXXXXXXXX of Article XIX of the Tax Convention provides, in part, that remuneration, other than a pension, paid by the Government of XXXXXXXXXX to an individual for services rendered to the Government of XXXXXXXXXX is generally only taxable in XXXXXXXXXX. However, under XXXXXXXXXX of the Article, this remuneration is taxable in Canada instead if:

? the individual is resident in Canada;

? the services are rendered in Canada; and

? the individual did not become a resident of Canada "solely for the purpose" of performing those services.

Therefore, an individual who became resident, for purposes of the Tax Convention, in Canada solely in order to render services to the Government of XXXXXXXXXX would not be subject to Part I tax on remuneration received for performing those services, even if the individual is a Canadian citizen. This remuneration would be only taxable by XXXXXXXXXX.

However the interaction of Articles XIX and XXVII of the Tax Convention needs to be considered as it may affect the tax result. Take the example of an individual coming to live in Canada as a member of Embassy staff. Pursuant to Article IV he or she would be a resident of Canada, but the individual is instead deemed to be a resident of XXXXXXXXXX for purposes of the Tax Convention by Article XXVII. Under XXXXXXXXXX, of Article XIX the individual is only taxable in XXXXXXXXXX does not apply because the individual is not a resident of Canada for purposes of the Tax Convention.

If, at some later date, the individual stopped being taxable on his or her worldwide income under XXXXXXXXXX domestic tax law as required by Article XXVII, he or she would no longer be deemed to be a resident of XXXXXXXXXX for purposes of the Tax Convention. Under the general residency rules in Article IV, the individual would then be a resident of Canada. Note that in this example, the individual becomes resident in Canada for purposes of the Tax Convention when he or she is no longer taxed in XXXXXXXXXX, not when he or she first arrives in Canada.

The exemption in Article XIX only applies if an individual became a resident of Canada "solely for the purpose" of rendering services to XXXXXXXXXX. This is a question of fact that depends on all the relevant circumstances. However, we would probably find it difficult to accept in this example that the individual became resident in Canada solely for that purpose. The individual was already in Canada rendering services to XXXXXXXXXX prior to becoming a resident of Canada, which strongly suggests that there was likely some other reason for taking up residency in Canada. Therefore, care needs to be taken in assessing whether an individual meets the test set out in Article XIX where Article XXVII may also have application. In particular, the Canada Customs and Revenue Agency (the "CCRA") would need to know the affect, if any, that applying for landed immigrant status in Canada would have on the individual's tax treatment in XXXXXXXXXX.

In summary, the CCRA would require all the relevant facts before a definitive response could be given with respect to Canadian tax implications. However, as explained above, if an individual continues to meet the conditions described in paragraph 149(1)(a) of the Act, even after he or she has applied for landed immigrant status, that individual will continue to be exempt from Part I tax in Canada regardless of the FMIOA or the Tax Convention. As these issues are very complicated, we would invite you to contact Ted Cook at 946-4165 should you need clarification of any of the technical matters discussed herein.

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CCRA.

Yours truly,

Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch