17 July 2003 External T.I. 2003-0003125 - Professional Divers - UK 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 CCRA.

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

MAIL TYPE: External Queries

Principal Issues: Whether remuneration of a UK professional diver working in an area which is included as a part of Canada under section 255 of the Income Tax Act (the "Act") is taxable in Canada?

Position: Yes.

Reasons: Interpretation of the provisions of the Act and Articles 3, 15 and 27A of the Canada-United Kingdom Income Tax Convention ("UK Convention").

XXXXXXXXXX 2003-000312
S. Leung
July 17, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

We are writing in response to your facsimile correspondence of February 13, 2003, in which you enclosed a letter you wrote to the International Tax Service Office ("ITSO") of Canada Customs and Revenue Agency (the "CCRA") on June 3, 2002, regarding the taxation in Canada of the remuneration of XXXXXXXXXX for his XXXXXXXXXX taxation year.

In your letter to the ITSO, you indicated that XXXXXXXXXX was a resident of the United Kingdom (UK) in XXXXXXXXXX while he worked XXXXXXXXXX as a professional diver for a company not resident in Canada XXXXXXXXXX. You did not indicate what activities this company carried on at that time. We assume that this company carried on the business of exploring for or exploiting minerals, petroleum, natural gas or any related hydrocarbons in the submarine areas adjacent to XXXXXXXXXX of Canada in respect of which the Government of Canada or a province granted a right, licence or privilege to explore for, drill for or take any such natural resources. We also assume that as an employee of this company, XXXXXXXXXX ' work was related to the above-noted offshore activities of his employer.

Our Comments

The situation outlined in your letter to the ITSO relates to an actual situation involving an identifiable taxpayer and it is more appropriate for you to consult the ITSO with respect to the income tax liabilities of such a taxpayer. As noted above, we notice that you have written a letter to the ITSO and we do not know whether you have received any reply from them. As a matter of practice, we do not interfere with the decision or interpretation of the ITSO or any Tax Services Office regarding the taxation of a taxpayer. In the following, we merely offer some general comments regarding the situation outlined above.

Under section 255 of the Income Tax Act (the "Act"), the word "Canada" includes and has always included for the purposes of the Act (a) the sea bed and subsoil of the submarine areas adjacent to the coasts of Canada in respect of which the Government of Canada or a province grants a right, licence or privilege to explore for, drill for or take any minerals, petroleum, natural gas or any related hydrocarbons; and (b) the sea and airspace above the submarine areas referred to in (a) in respect of any activities carried on in connection with the exploration for or exploitation of the minerals, petroleum, natural gas or hydrocarbons referred to in (a). Therefore, where the services of a taxpayer are performed in connection with the activities described above in an area described in paragraphs 255(a) and (b) of the Act, the taxpayer is considered to have performed services in Canada for the purposes of the Act. As a result, the income of a non-resident of Canada from such employment would be subject to tax in Canada under subparagraph 115(1)(a)(i) of the Act.

Where the income of a non-resident is subject to tax in Canada, it is necessary to examine the relevant tax treaty (if any) to see if there is relief from taxation in Canada. In the situation set out above, there is no relief from taxation in Canada under the Canada-United Kingdom Income Tax Convention (the "UK Convention"). Our analysis of the relevant provisions of that convention is as follows.

Under subparagraph 1(a)(i) of Article 3 of the UK Convention, the term "Canada", used in a geographical sense, means the territory of Canada, including any area beyond the territorial waters of Canada which is an area where Canada may, in accordance with its national legislation¹ and international law², exercise sovereign rights with respect to the sea-bed and sub-soil and their natural resources. This definition is very similar to the extended definition of "Canada" in section 255 of the Act as described above although it does not specifically mention the seas and airspace above the submarine areas as in paragraph 255(b) of the Act. Hence, if the area where a non-resident taxpayer, who is resident in the U.K., works falls into the definition of "Canada" as described in subparagraph 1(a)(i) of Article 3 of the UK Convention, then the remuneration derived from the taxpayer's employment in that area will be considered to be earned in Canada for purposes of the UK Convention because the area is in Canada.

It is our view that in the situation described in your letter, both Article 15(1) and Article 27A(4) of the UK Convention allow Canada to tax remuneration earned from exercising employment in Canada.³ While Article 15 is a general provision regarding dependent personal services, Article 27A(4) appears to deal specifically with the situation outlined in your letter. The latter Article reads as follows:

"Salaries, wages and similar remuneration derived by a resident of a Contracting State (U.K.) in respect of an employment connected with the exploration or exploitation of the sea-bed and sub-soil and their natural resources situated in the other Contracting State (Canada) may, to the extent that the duties are performed offshore in that other Contracting State (Canada), be taxed in that other Contracting State (Canada)." (Notes in parentheses are added.)

It is apparent that the intention of the drafters of the UK Convention was to allow the "other Contracting State" (Canada) to tax the remuneration of persons resident in "the Contracting State" (U.K.) in all cases where the employment was conducted offshore in the "other Contracting State" (Canada) and was connected with the exploration or exploitation of the sea-bed and sub-soil and their natural resources. It appears to us that Article 27A(4) of the UK Convention could apply in XXXXXXXXXX ' situation. We note that this Article would apply regardless of whether or not Canada or the U.K. actually taxes the remuneration. In our view, the intention was not that this remuneration should be free from tax in both Contracting States, but rather to give the "other Contracting State" (Canada) the right to tax such remuneration.

Although the U.K. allows a deduction (the "Seafarers Foreign Earnings Deduction" ("FTD")) which appears to exempt the remuneration from tax in the U.K., this does not mean that the remuneration should also be exempt from tax in Canada. Also, we note that the value of the FTD has not been eliminated as a result of the taxation of such remuneration in Canada as claimed by you in your letter. Rather, it is our understanding that the FTD is there so that the taxpayer's remuneration will not be double taxed or taxed at the U.K tax rate if the U.K. rate is higher than that of the other Contracting State (Canada, in this case). Even if the U.K. taxed the remuneration, they would have to provide a foreign tax credit for the Canadian tax paid on such remuneration under paragraph 2 of Article 21 of the UK Convention.

We are not aware of any agreement between the CCRA and the community of international professional divers with respect to the taxation of the type of remuneration described above. In this regard, you may want to consult the ITSO or the Non-Resident Operations Division of the International Tax Directorate (5th floor, Canada Building, 344 Slate Street, Ottawa, Ontario, K1A 0L5) for information.

With respect to the tax policy behind why Canada taxes the remuneration of professional divers like XXXXXXXXXX for services performed off the coast of Canada, this is a matter that you should refer to the Department of Finance. The Department of Finance is responsible for formulating and dealing with concerns regarding tax policy in Canada. This would include matters such as your concern that taxing professional divers like XXXXXXXXXX could prevent such individuals from seeking or agreeing to employment in Canada. The role of the CCRA is to administer the Act, which may involve the interpretation of the Act but does not involve the formulation of tax policy.

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the CCRA.

Yours truly,

Eliza Erskine
A/Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ See, for example, section 255 of the Act and section 5 of the Income Tax Convention Interpretation Act.

² See, for example, Articles 56(1)(a), 56(3) and 57 of Part V of the United Nations Convention on the Law of the Sea of 1982.

³ In the present situation, it appears that the remuneration would not be exempt under Article 15(2) because it might be borne by a permanent establishment or fixed base which the employer has in the other Contracting State (Canada) XXXXXXXXXX.

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