27 April 2004 External T.I. 2004-0070551E5 - Taxation of Armed Forces Personnel Aboard Ship

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.

Principal Issues: Could a Canadian Armed Forces person stationed on a ship be exempt from Canadian tax?

Position: No.

Reasons: Either the person retains enough ties to be factually resident in Canada or the person is a deemed resident pursuant to 250(1)(b). Either way he or she is fully liable to tax in Canada. Moreover, tax treaties would not limit Canada's right to tax. Income that qualifies as a "special allowance" under 6(1)(b)(iii) would be tax exempt.

XXXXXXXXXX 	2004-007055
		Eliza Erskine
April 27, 2004

Dear XXXXXXXXXX:

Re: Canadian Taxation of Armed Forces Person ("AFP") Stationed on Ship

This is in reply to your email inquiry of April 7, 2004, asking us to comment on whether an AFP stationed aboard a ship would be exempt from Canadian tax. We also aknowledge our telephone conversation with you of April 20th, 2004 (Erskine/XXXXXXXXXX).

Our Comments

As discussed in our telephone conversation, a member of the armed forces will generally be a resident of Canada and consequently fully liable to tax in Canada on all of his or her worldwide income. In many, if not most, cases, an AFP will be found to be factually resident in Canada based on his or her ties to Canada even while serving abroad. If an AFP is not factually resident in Canada (see our comments below), then he or she will be deemed to be resident in Canada pursuant to paragraph 250(1)(b) of the Income Tax Act (the "Act"). In either case, the AFP is not exempt from Canadian tax while abroad.

Whether or not an individual is resident in Canada during a taxation year and, therefore, subject to Canadian income tax on his worldwide income for that year, is a question of fact to be determined by reference to all of the circumstances of the individual's particular situation. If you have not done so already, we suggest that you refer to Interpretation Bulletin IT-221, Determination of an Individual's Residence Status, which can be found on the CRA website at www.ccra-adrc.gc.ca . It is not the policy of the Income Tax Rulings Directorate to comment on the residency status of a specific individual for a particular taxation year except in the context of an Advance Income Tax Ruling. It is possible, however, to obtain a residency determination from the International Tax Services Office (ITSO). For further information on determining the residence status of a particular individual, please call the ITSO, Enquiries & Adjustments Division, at

1-800-267-5177 (toll free anywhere inside Canada or the United States), (613) 952-3741 (English), or (613) 954-1368 (French), or write to the

International Tax Services Office
Enquiries & Adjustments Division
2204 Walkley Road,
Ottawa, ON
Canada, K1A 1A8

In certain circumstances, an individual is deemed not to be resident in Canada pursuant to subsection 250(5) of the Act. Subsection 250(5) of the Act applies if the individual is found to be resident in a country with which Canada has a tax treaty for purposes of the tax treaty. Our comments on residence for tax treaty purposes can be found toward the end of Interpretation Bulletin IT-221R3, referred to above. An AFP will generally never be a resident of another country for purposes of a tax treaty with that country, primarily because an AFP would rarely (if ever) be taxed on his or her salary in a tax treaty country. Thus, subsection 250(5) would not apply.

Although an AFP is generally not exempt from Canadian tax, an AFP may be in receipt of a tax-free "representation or special" allowance pursuant to subparagraph 6(1)(b)(iii) of the Act. Subparagraph 6(1)(b)(iii) of the Act applies to individuals described in paragraphs 250(1)(b) to (d.1) of the Act, that is, individuals who would be deemed residents of Canada if they severed their residential ties to Canada. Whether an allowance paid to an AFP is a "representation or special" allowance for purposes of the Act is a question of fact. A "representation or special" allowance is most commonly associated with Canada's federal and provincial diplomatic personnel (i.e., individuals who fit into the category set out in paragraph 250(1)(c)), however, the concept of a "special" allowance has also been applied to individuals working under a contract funded by CIDA (i.e., individuals who fit into the category set out in paragraph 250(1)(d)). Very generally, a representation allowance in the context of subparagraph 6(1)(b)(iii) of the Act, is an allowance paid to a worker having to work outside the country and is intended to lessen the inconveniences arising out of having to move abroad, be subject to different living conditions and, when applicable, having to face a higher cost of living. Amounts generally qualify as special allowances, when an employee is transferred or assigned outside of Canada and, as a result, incurs additional expenses. It is an allowance designed to compensate, not reimburse a loss or additional expense arising out of the employment outside Canada. Provided that the amounts paid are allowances and not reimbursements, that the payments are clearly linked to additional living expenses, and the conditions of subparagraph 6(1)(b)(iii) of the Act are otherwise met, these amounts are excluded from income.

We trust that our comments will be of assistance to you.

Yours truly,

Jim Wilson, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate