7 January 2003 External T.I. 2002-0156535 - Article 18 Canada-France Tax Convention

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 paragraph 1 of Article 18 of the Canada-France Income Tax Convention applies to pensions paid to a resident of Canada in respect of past dentist self-employment?

Position: No.

Reasons: Paragraph 1 Article 18 clearly states that it only applies to pensions paid in respect of past employment.

XXXXXXXXXX 2002-017653
S. Leung
January 8, 2003

Dear XXXXXXXXXX:

Re: Article 18 of the Canada-France Income Tax Convention (the"Convention")

We are writing in response to your letter of November 26, 2002, in which you requested a technical interpretation as to whether pension payments received by a resident of Canada (the taxpayer) as a beneficiary of a self-employed dentist's pension plan situated in France is subject to tax in Canada.

In your letter you drew our attention to paragraph 1 of Article 18 of the Convention which reads as follows:

"Periodic or non-periodic pensions and other similar allowances arising in a Contracting State and paid in respect of past employment to a resident of the other Contracting State shall be taxable only in the Contracting State in which they arise."

You mentioned that the issue then is whether the past dentist self-employment constitutes past employment for the purpose of that paragraph of the Convention.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving an identifiable taxpayer. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.

As you are aware, residents of Canada are taxable on their world-wide income which generally includes pension income arising outside Canada. Accordingly, the issue you have asked us to consider is whether Canada's right to tax under the Income Tax Act (the "Act") is denied or reduced under the Convention.

The word "employment" is not defined in the Convention. With respect to terms not defined in the Convention, paragraph 2 of Article 3 states:

"As regards the application of the Convention by a Contracting State any term not defined thereon shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies, any meaning under the tax laws of that State prevailing over a meaning given to the term under other laws of that State."

The word "employment" under the tax laws of Canada is defined under subsection 248(1) of the Act to mean the position of an individual in the service of some other person. A self-employed dentist providing professional services cannot be said to be holding a position in the service of some other person (who is his employer). Therefore, pensions paid to a person resident in Canada in respect of past self-employment as a dentist providing professional services cannot be said to be pensions paid to him in respect of past employment.

In the case at hand, the context clearly requires that the word "employment" used in paragraph 1 of Article 18 of the Convention be interpreted in such a way as to exclude self-employment. This is evident when the context of Articles 14 (Professional Services) and 15 (Dependent Personal Services) of the Convention is in view. Article 14 deals with the taxation of income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character. It is clear under paragraph 2 of that Article that the term "professional services" includes the independent activities of dentists. On the other hand, Article 15 deals with the taxation of salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment. Therefore, it is clear that income from self-employment of a dentist falls within the jurisdiction of Article 14 as income derived in respect of professional services and is not considered to be income derived in respect of employment to which Article 15 would apply. It thus follows that pensions paid in respect of past professional services do not constitute pensions paid in respect of past employment.

As Article 18 of the Convention (Pensions and Annuities) does not apply in this case, Article 21 (Income not Expressly Mentioned) will apply. Paragraph 1 of the latter Article gives Canada the right to tax the pensions paid to the taxpayer. However, where the pensions arise in France, paragraph 2 of that Article also gives France the right to tax such pensions according to the laws of France. It is a question of fact whether the tax rate imposed by France on such pensions should be restricted to a maximum of 15%, depending on whether the pensions can be said to be income from a trust and, if so, whether the contributions made to the trust are deductible for the purposes of taxation in France. You would have to contact the French tax authorities with respect to this issue. Canada is obliged to provide a foreign tax credit for the income taxes paid to France on such pensions pursuant to paragraph 1 of Article 23 (Elimination of Double Taxation) of the Convention.

We trust you will find the above comments to your satisfaction.

Yours truly,

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

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