27 October 2003 Internal T.I. 2003-0034157 - Senior Official of the ICAO

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 the gain from the disposition of a house of a senior official of the International Civil Aviation Organization is taxable in Canada.

Position: Yes.

Reasons: However, as a resident of Canada under the Income Tax Act (the "Act"), the individual can benefit from the principal residence exemption of subsection 40(2) of the Act.

October 27, 2003

XXXXXXXXXX 							Pascal Tétrault
XXXXXXXXXX  Tax Services Office				(613) 957-4363
XXXXXXXXXX 				

									2003-003415

Official of the International Civil Aviation Organization

We are writing in response to your emails of July 31 and August 5, 2003 regarding the above captioned matter. We also acknowledge the information provided in subsequent correspondence of September 15 and 22, 2003, and during our various telephone conversations (XXXXXXXXXX/Tétrault). You also requested that this letter be issued in English for the benefit of the concerned individual.

The facts in your situation can be summarized as follows. XXXXXXXXXX (the "Individual") was employed in XXXXXXXXXX as a Senior Official of the International Civil Aviation Organization (the "ICAO"), a Specialized Agency of the United Nations from XXXXXXXXXX (the "Period"). The Individual came to Canada to work for the ICAO and prior to coming to Canada, he appeared to be resident in XXXXXXXXXX. The Individual returned to XXXXXXXXXX at the end of his employment with the ICAO in XXXXXXXXXX.

During his stay in Canada, the Individual had ties in both Canada and XXXXXXXXXX. While in Canada, the Individual owned a home in XXXXXXXXXX in which he lived. His spouse gave birth to his XXXXXXXXXX children in XXXXXXXXXX where they lived during the Period. The Individual had in Canada: furniture, clothing and personal property, an automobile, bank accounts, etc. The Individual also used Canadian credit cards and was a member of a social or fitness club in Canada, namely the XXXXXXXXXX. The Canadian government issued a diplomatic visa to the Individual for the Period.

During the Individual's stay in Canada, he had a dwelling in XXXXXXXXXX from which he derived income. He also kept a valid XXXXXXXXXX passport and driver's license and remained a member of the XXXXXXXXXX during the Period.

Shortly after the termination of his employment with the ICAO, the Individual sold his house in Canada and realized a capital gain, and this is the reason of your inquiry.

If we understand your position correctly, you are of the opinion that the capital gain is taxable in Canada. In your view, Article 16 of the Headquarters Agreement between the Government of Canada and the International Civil Aviation Organization signed at Calgary on October 4 and 9, 1990 (the "Agreement") deems the Individual not to be resident in Canada and accordingly he cannot benefit from the principal residence exemption in subsection 40(2) of the Income Tax Act (the "Act"). Therefore, you have asked us whether the Individual is exempt from being taxed in Canada on the disposition of his house as per paragraph 149(1)(a) of the Act.

COMMENTS

A gain realized from the disposition of real property situated in Canada, like the Individual's house, is generally taxable in Canada whether or not the person is a Canadian resident. However, the principal residence exemption of paragraph 40(2)(b) of the Act can operate to reduce or eliminate such gain. One condition for the principal residence exemption to apply is for the taxpayer to be resident in Canada. From the facts submitted, the Individual was a factual resident of Canada under the Act for the Period.

Having concluded that the Individual is resident in Canada, the Individual will likely be exempt from any gain from the disposition of his principal residence. Notwithstanding this preliminary conclusion, we need to consider two enactments, which may have the effect of deeming the Individual to be non-resident in Canada for the purposes of the Act. Accordingly, our analysis will be twofold: the first part dealing with the Agreement and the second dealing with tax conventions.

1- The Agreement between the Government of Canada and the ICAO

As noted above, if the individual was resident in Canada throughout the Period, no gain will be taxed from the disposition of his house pursuant to paragraph 40(2)(b) of the Act. However, you are relying on Article 16 of the Agreement to conclude that the Individual is not a Canadian resident and that the gain is therefore taxable in Canada. The Agreement was adopted under section 5 of the Foreign Missions and International Organization Act (the FMIO)¹ and implemented under domestic Canadian law by the ICAO Privileges and Immunities Order.² Article 16 of the Agreement is located under the part entitled "Representatives of Member States" and states:

Article 16
Exemption from taxation

Where the incidence of any form of taxation depends upon residence, periods during which a Permanent Representative or Representative is present in Canada for the discharge of his duties shall not be considered as periods of residence.

This Article applies to Permanent Representatives and Representatives. These are defined terms under the Agreement. To have a better understanding of the ICAO, reliance can be made on its constitution, the Convention on International Civil Aviation signed on December 7, 1944 (the "CICA"). A reading of the CICA reveals that the ICAO is made up of an assembly, a council and of personnel. The assembly and the council are composed of contracting states while the personnel of the ICAO are associated to international civil servants. The distinction between civil servant of the ICAO and the representatives of the contracting states can also be found under the Agreement. The defined terms of the Agreement are found under Article 1 which states in part:

Article 1
Definitions

For the purpose of the present Agreement:

[...]

(a) "Organization" means the International Civil Aviation Organization, established under Article 43 of the Convention on International Civil Aviation, signed at Chicago on December 7, 1944;

[...]

(c) "Official of the Organization" means the President of the Council, the Secretary General and internationally recruited staff of the Organization in professional and higher categories and other staff employed by the Organization on the basis of a letter of appointment or a contract;

(d) "Member States" means the States that are parties to the Convention on International Civil Aviation;

(e) "Mission" means a mission of permanent character representing a Member State to the Organization, established in Canada by that State;

(f) "Head of the permanent mission" means the person charged by a Member State with the duty of acting in that capacity;

(g) "Premises of the mission" means the offices occupied by a mission, including the residence of the head of mission;

(h) "Permanent Representative" of a Member State means the head of mission and other officers of a mission, but excluding administrative and service staff;

(i) "Representative" of a Member State means a representative other than a Permanent Representative and shall include all delegates, deputy delegates, advisers and experts;

[...]

It can be inferred from this Article that the "Permanent Representative" and the "Representative" are individuals who are representatives of a specific Member State or to a specific contracting state to use the wording of the CICA. Officials of the Organization are civil servants who are providing personal services to the ICAO. It is our understanding that the Individual is an Official of the Organization. Accordingly, Article 16 of the Agreement, which applies to a "Permanent Representative" and to a "Representative", does not apply to the Individual who is an Official of the Organization. The Individual is a senior official of a designated category who benefits from privileges and immunities granted to diplomatic agents as provided by Article 19 of the Agreement. This was confirmed with representatives of the Department of Foreign Affairs and International Trade. We are therefore unable to rely on Article 16 of the Agreement to deny the benefit of the principal residence exemption.

2- The Canada-XXXXXXXXXX Tax Convention

A tax convention could have the adverse effect of denying the principal residence exemption to a person like the Individual because of the special deeming provision of subsection 250(5) of the Act. Under subsection 250(5), a person who is resident in a country and not of Canada under a treaty is deemed, notwithstanding any provisions of the Act, to be a non-resident in Canada for the purposes of the Act. This means that if you are considered to be a resident of another country under a treaty you cannot be considered to be a resident of Canada under the Act.

Subsection 250(5) of the Act is of primary importance in a case like this one because in order to be considered as a "resident of a Contracting State" under a treaty, a person needs to be taxed not merely on income from sources in the country but the person needs to be subject to as comprehensive a tax liability as is imposed by a state.³

The Individual, like diplomats in general, is subject to a limited taxation in Canada. The Individual is taxable in Canada only on part of his income from sources in Canada as a result of the operation of paragraph 81(1)(a) and subparagraph 110(1)(f)(iii) of the Act. Firstly, the Individual's employment income received from the ICAO will not be taxed in Canada by virtue of paragraph 110(1)(f)(iii) of the Act. Secondly, the Individual benefits from fiscal privileges enjoyed by diplomatic agents and as such only limited taxation may be imposed by Canada. These fiscal privileges are stated, inter alia, in the Vienna Convention on Diplomatic Relations (the "VCDR") incorporated, in part, into domestic law by the Foreign Missions and International Organizations Act⁴ and are said to apply to the Individual by reason of Article 19 of the Agreement. Article 34 of the VCDR provides in part that the fiscal privileges are not extended to taxes that may arise from "private income" having its source in Canada nor to capital gains arising from the disposition of private immovable property like the Individual's house. Accordingly, it can be concluded because of the limited taxation to which the Individual is subject in Canada, that he cannot be considered as a resident of Canada for the purposes of the Convention Between the Government of Canada and the Government of XXXXXXXXXX.⁵

The question that needs to be answered is whether the Individual remained a resident of XXXXXXXXXX subject to tax on his world income in that country during the Period. As stated above, the Individual has ties in XXXXXXXXXX, but more facts are needed to come to the conclusion that he is a factual resident of XXXXXXXXXX taxable on his world income in XXXXXXXXXX.

If it was determined that the Individual was a resident of XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Tax Convention, subsection 250(5) would generally deem him to be non-resident for the purposes of the Act denying him the full relief available to Canadian resident disposing of their principal residence. In such a case, Article 34 of the VCDR would not limit Canada's power to tax the gain.

It is to be noted in the Individual's scenario that subsection 250(5) would have no effect until the first time after February 24, 1998 that he becomes, under the Canada-XXXXXXXXXX Tax Convention, resident in XXXXXXXXXX . Because the individual became resident in Canada in XXXXXXXXXX, he would not be deemed to be a non-resident of Canada by virtue of subsection 250(5) of the Act during the Period. Accordingly, since the Individual is a resident in Canada under the Act, he can benefit from the principal residence exemption, which will completely exonerate the gain in his situation.

We would like to stress that Article XXXXXXXXXX of the Canada-XXXXXXXXXX Tax Convention has no impact on the gain not being taxed in Canada from the disposition of the Individual's principal residence.

We are concluding our analysis in answering the question in your email as to whether paragraph 149(1)(a) of the Act could apply to exempt the Individual from being taxable in Canada as a result of the disposition of his house. It is clear from a reading of paragraph 149(1)(a) that this provision operates when "an officer or servant of the government of a country other than Canada" is required to be resident in Canada. In the present situation, the Individual is an officer or servant of the ICAO and was not said to be a representative of a member state. Accordingly, paragraph 149(1)(a) of the Act is not applicable.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Yours truly,

Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ S.C. 1991, c. 41.

² P.C. 1994-1364, August 16, 1994.

³ Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802, 834 (S.C.C).

⁴ 1991, c. 41.

⁵ See also paragraph 8 of the Commentary on Article 4 of the OECD Model Tax Convention on Income and on Capital.