4 August 2004 Internal T.I. 2004-0086531I7 - Taxation of Diplomats

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: 1) Is a diplomatic agent taxable in Canada on the earnings from his diplomatic post?

2) Does the diplomatic agent remain a resident of Canada for purposes of the Income Tax Act?

Position: 1) No. 2) Maybe.

Reasons: 1) Subsection 3(1) of the Foreign Missions and International Organizations Act.

2) Depends on whether the person is a resident of XXXXXXXXXX under the Canada-XXXXXXXXXX Tax Agreement.

 									August 4, 2004

Maureen McKenny						T. Cook
Senior Program Officer					(613) 946-4165
International Tax Directorate
Canada Building
344 Slater Street, 5th Floor
Ottawa ON
									2004-008653

Tax Status of XXXXXXXXXX ("Mr. A")

We are writing in response to your email query dated July 21, 2004 regarding the tax status of Mr. A.

Facts

It is accepted that Mr. A arrived in Canada in XXXXXXXXXX and became a resident of Canada for purposes of the Income Tax Act (the "Act") at that time owing to the residential ties he established with Canada (i.e., Mr. A became factually resident). Mr. A also gained landed immigrant status in Canada. Sometime later, Mr. A accepted the position of XXXXXXXXXX. In order to permit his accreditation as a diplomatic agent, Mr. A surrendered his landed immigrant status on XXXXXXXXXX.

Issues

? Is Mr. A taxable under the Act on his earnings as XXXXXXXXXX?

? Is Mr. A a resident of Canada for purposes of the Act?

Analysis

Paragraph 81(1)(a) of the Act states that there shall not be included in computing the income of a taxpayer, "an amount that is declared to be exempt from income tax by any other enactment of Parliament" other than amounts exempt under one of Canada's tax treaties. As a result, even if Mr. A continues to be factually resident in Canada for purposes of the Act he may still be exempt from tax on specified amounts pursuant to another federal act. The Foreign Missions and International Organizations Act (the "FMIOA") grants various immunities and privileges to members of foreign diplomatic missions. In particular subsection 3(1) of the FMIOA provides that the following provisions have the force of law in Canada:

? Articles 1, 22 to 24 and 27 to 40 of the Vienna Convention on Diplomatic Relations (the "Diplomatic Convention"); and

? Articles 1, 5, 15, 17, 31 to 33, 35, 39 and 40, paragraphs 1 and 2 of Article 41, Articles 43 to 45 and 48 to 54, paragraphs 2 and 3 of Article 55, paragraph 2 of Article 57, paragraphs 1 to 3 of Article 58, Articles 59 to 62, 64, 66 and 67, paragraphs 1 and 4 of Article 70 and Article 71 of the Vienna Convention on Consular Relations.

Article 34 of the Diplomatic Convention states that:

A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except:

(a) indirect taxes of a kind which are normally incorporated in the price of goods or services;

(b) dues and taxes on private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for the purposes of the mission;

(c) estate, succession or inheritance duties levied by the receiving State, subject to the provisions of paragraph 4 of Article 39;

(d) dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State;

(e) charges levied for specific services rendered;

(f) registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of Article 23.

Consequently, a diplomatic agent is exempt from all duties (dues) and taxes except for the listed exceptions, such as private income having its source in the receiving state (in this case Canada). We normally interpret "private income" to mean income earned outside of the diplomatic agent's diplomatic activities (e.g., from personal investments or external employment). Under the FMIOA, the Governor in Council may also pass regulations extending additional duty and tax relief privileges, or withdrawing any duty and tax relief privileges granted by section 3 of the FMIOA or by regulation.

We understand that Mr. A is a "diplomatic agent" as defined in Article 1 of the Diplomatic Convention based on the letter dated June 28, 2004 from the Office of Protocol of the Department of Foreign Affairs. We have also reviewed the portions of the Diplomatic Convention enacted by the FMIOA and the regulations to the FMIOA, and we found nothing that would reduce or deny the duty and tax privileges accorded to Mr. A by Article 34 of the Diplomatic Convention. For example, there is nothing in Article 34 of the Diplomatic Convention that is dependent on the residency status of the diplomatic agent for purposes of the Act. Therefore, it is our view that Mr. A's earnings as diplomatic agent (i.e., commercial attaché) are not included in computing Mr. A's income for purposes of the Act, by virtue of paragraph 81(1)(a).

The second issue is whether Mr. A is still a resident of Canada for purposes of the Act. The fact Mr. A has surrendered his landed immigrant status is not determinative of his residency status. Mr. A is likely still factually resident in Canada since we have no evidence that he has severed his residential ties with Canada. Mr. A's residency status, however, is subject to the potential application of subsection 250(5) of the Act. If a person is a resident of another country under one of Canada's tax treaties, that person will then be deemed to be a non-resident of Canada for purposes of the Act pursuant to subsection 250(5).

XXXXXXXXXX (the "Tax Treaty") determines residency for purposes of the Tax Treaty. XXXXXXXXXX provides that a "resident of a Contracting State" is any person who is liable to taxation in one of the contracting states by reason of domicile, residence, place of management or any other criteria of a similar nature. It is our view that Mr. A is not "liable to tax" in Canada for purposes of XXXXXXXXXX of the Tax Treaty. Pursuant to Article 34 of the Diplomatic Convention, Mr. A is subject to tax in Canada on a limited basis; and in particular, under paragraph 34(d) of the Diplomatic Convention, Mr. A is only subject to tax on income and gains with a Canadian source. In order to be "liable to tax" in Canada, Mr. A would have to be subject to comprehensive taxation in Canada, which is clearly not the case (see The Queen v. Crown Forest Industries Ltd., 95 DTC 5389 (S.C.C.), and paragraph 8 of the OECD Commentary on Article 4 of the OECD Model Tax Convention).

Based on the information we have we can offer no specific comment as to whether Mr. A is a resident of XXXXXXXXXX for purposes of the Tax Treaty; however, Mr. A would have to be "liable to tax" in XXXXXXXXXX in order to be a resident of XXXXXXXXXX. If Mr. A were a resident of XXXXXXXXXX for purposes of the Tax Treaty, he would be deemed by subsection 250(5) to be a non-resident of Canada for purposes of the Act. On the other hand, if Mr. A were not a resident of XXXXXXXXXX for purposes of the Tax Treaty, neither the Tax Treaty nor subsection 250(5) would apply to him. In this case, Mr. A would remain a resident of Canada for purposes of the Act if he were factually resident in Canada. But regardless of Mr. A's residency status for purposes of the Act, Canada's right to tax him is limited to those bases set out in Article 34 of the Diplomatic Convention, discussed above.

Conclusion

It is our view that Mr. A is exempt from tax on his earnings as a diplomatic agent pursuant to paragraph 81(1)(a) of the Act, subsection 3(1) of the FMIOA and Article 34 of the Diplomatic Convention. Mr. A is probably still a factual resident of Canada, but his residency for purposes of the Act is subject to the potential application of the Tax Treaty and subsection 250(5). We do not have the information needed to determine whether or not the Tax Treaty applies to Mr. A. We trust these comments are of help. Should you require any further assistance with respect to this matter, please do not hesitate to contact the writer.

Yours truly,

Eliza Erskine
Acting Manager
International Section I
International Tax & Trusts Division
Policy and Planning Branch