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 payments from a Fund set up by, and fully funded by employees who are assigned to various countries, to help equalize the effect of the differing tax rates, would constitute a taxable employment benefit when paid to an employee working temporarily in Canada.
Position: No taxable benefit
Reasons: The employer does not contribute to the Fund, and is not involved in the management of the Fund. The Fund merely redistributes money among the International Employees who choose to participate, thereby reducing the effect of varying tax rates as these employees move from country to country.
XXXXXXXXXX 2003-002005
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX ("Xco"). We also acknowledge the additional information provided on XXXXXXXXXX, and in our various telephone conversations (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or related persons,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or related persons,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or
(v) the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein are as defined in the Act unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. XCo is a taxable Canadian Corporation as defined in subsection 89(1) of the Act. Xco is wholly owned by XXXXXXXXXX, a corporation incorporated pursuant to the laws of XXXXXXXXXX.
2. XCo is one of many corporations within the XXXXXXXXXX group of companies (the "Group"). The main parent company, XXXXXXXXXX.
3. The various corporations, which are part of the Group, are in the business of, XXXXXXXXXX.
4. Employees of most companies in the Group currently have the option of being relocated internationally. Such employees are classified as having "international staff expatriate status" ("International Employees").
5. The Group remunerates International Employees on the same basis, regardless of where they are currently located, subject only to adjustments based on a local cost-of living index applicable to certain jurisdictions. However, no adjustment to remuneration is made to account for differing income tax rates.
6. Certain employees of the Group have established a XXXXXXXXXX (the "Fund"), for the benefit of International Employees, as a not-for-profit foundation in XXXXXXXXXX. The purpose of the Fund is to help smooth the income tax impact on Participants transferring between assignments in different countries.
7. The Fund received a ruling from the XXXXXXXXXX tax authorities that it will be subject to tax in XXXXXXXXXX on the basis set out in that ruling.
8. The Fund has XXXXXXXXXX directors, XXXXXXXXXX of whom are totally independent of the Group and the XXXXXXXXXX is a senior International Employee. The XXXXXXXXXX independent directors are resident in XXXXXXXXXX.
9. Only International Employees may elect to become members of the Fund, and membership is voluntary. However, application for membership in the Fund must be made within XXXXXXXXXX days of becoming classified as International Employees.
10. Those International Employees who choose to participate in the Fund (the "Participants") are required to contribute a percentage of their salary and bonuses to the Fund, which is not deductible in calculating taxable income or taxable income earned in Canada. The amounts to be contributed vary, depending on the grade or band of the individual. The rates are set by the Fund periodically. However, in all cases the amounts are significant. For example, the current contribution rates vary from XXXXXXXXXX% to XXXXXXXXXX% of gross salary, before any deductions.
11. A participant may not leave the Fund until he or she ceases to be an International Employee or he or she is terminated from the Group. In addition, a participant may elect to terminate membership in the Fund if his/her contribution rate is increased to an amount in excess of XXXXXXXXXX% of gross salary.
12. The Fund pays to each participant an amount equal to the participant's net income tax liability on employment income earned in the country of assignment, less a deductible amount for some countries computed as a percentage of gross salary. Currently, the deductible amount in force for some jurisdictions is in the range of XXXXXXXXXX% to XXXXXXXXXX% of gross salary
13. Participants are not enriched by the Fund. Where their country of residence provides them with a credit or deduction in respect of taxes paid to the country of assignment, payment from the Fund will only be based on the net tax paid to the country of assignment, after accounting for such credits or deductions.
14. It is not expected that International Employees who are continuing residents of Canada would be Participants, since Canada's income tax rate is relatively high, and Participants would therefore not likely benefit from membership in the Fund, regardless of which country of assignment they worked in.
15. Participants are typically International Employees temporarily assigned to Canada, whose home country bases taxation on domicile. These Participants are therefore taxable in Canada on their employment income earned in Canada, either pursuant to subsection 2(3) of the Act, or as deemed residents of Canada pursuant to subsection 250(1) of the Act. In most cases, these Participants will not be subject to tax in their home countries, since they are no longer domiciled there.
16. The effect of these rules for a mid-level management individual who is assigned to Canada temporarily, and is not subject to tax in his home country, is illustrated below. The example assumes that Canada has an average income tax rate of XXXXXXXXXX%, the contribution rate for the country of assignment is XXXXXXXXXX% of gross income, and the deductible is XXXXXXXXXX% of gross income.
XXXXXXXXXX
17. The Fund is fully financed by the Participants. If a deficit should arise between the amounts contributed to the Fund and the Fund's obligations to the Participants, this deficit would be covered by increasing the contribution rates for the members of the Fund.
18. No corporation in the Group has ever made any contributions to the Fund, and is not involved in any aspect of the Fund's management.
Proposed Transactions
19. It is proposed that the current International Employees of XCo and employees who become International Employees in the future, who are temporarily relocated to Canada, will be given the opportunity to participate in and become Participants and will be entitled to receive payments from the Fund.
Purpose of the Proposed Transactions
20. The purpose of extending membership of the Fund to Canada is to ensure that International Employees do not suffer an economic disadvantage by being employed in Canada, and not being able to become Participants in the Fund.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that payments made from the Fund to the Participants who are temporarily relocated to Canada, will not be included in their employment income pursuant to subsection 5(1) or section 6 of the Act.
The ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CCRA provided that membership in the Fund will be offered to International Employees working in Canada before XXXXXXXXXX.
The ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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