28 September 2004 External T.I. 2004-0090901E5 - Employees working abroad

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: Whether employee working in Malaysia temporarily would only be taxable in Malaysia on Malaysian source income.

Position: Insufficient facts to resolve these issues. General comments provided.

Reasons: General comments.

XXXXXXXXXX 	2004-009090
		Eliza Erskine
September 28, 2004

Dear XXXXXXXXXX:

Re: Employees Working in Malaysia

This is in reply to your letter of August 4, 2004, requesting our comments with respect to the income tax status of certain employees who will be working in Malaysia.

Our Comments

The circumstances outlined in your letter appear to relate to a specific fact situation. We note that written confirmation of the tax implications arising out of a particular fact situation are given by this Directorate only where the circumstances or events are the subject matter of an advance income tax ruling request. Please consult the current version of Information Circular IC 70-6, Advance Income Tax Rulings, which can be found on the Canada Revenue Agency website at www.cra.gc.ca under Forms and Publications, for information regarding obtaining an advance income tax ruling. We can, however, offer the following general comments.

Canada taxes individuals on the basis of residence. This means that an individual is fully liable for Canadian tax on a worldwide basis if the individual is resident in Canada. For a detailed discussion of what factors make an individual resident in Canada for income tax purposes, please refer to Interpretation Bulletin IT-221R3, Determination of an Individual's Residence Status ("IT-221R3"), which can be obtained from our website at www.cra.gc.ca under Forms and Publications. With respect to your particular situation, it will be a question of fact whether or not the employees you refer to will remain residents of Canada for income tax purposes while living abroad. Generally, an individual who is resident in Canada will remain resident in Canada while temporarily living abroad. An individual can obtain a residence status determination by completing Form NR73 (also available through our web site) and sending it to the International Tax Services Office ("ITSO"). Full contact information for ITSO can be found toward the end of IT-221R3.

An income tax treaty between Canada and another country can affect an individual's residence for Canadian income tax purposes. If an individual is resident in another country for purposes of an income tax treaty with that country, then he or she will be deemed to be a non-resident of Canada for income tax purposes under subsection 250(5) of the Income Tax Act. Under such circumstances, Canada would generally only be entitled to tax the individual on income sourced in Canada, such as Canadian investment income or employment income from employment performed in Canada.

The Canada-Malaysia Income Tax Agreement (the "Treaty") applies to persons who are residents of either Canada or Malaysia or of both Canada and Malaysia. If the Treaty applies to an individual, only one of Canada or Malaysia will have primary taxing jurisdiction. The other country will generally only be entitled to tax the individual on income sourced in that country and that tax may be limited by the Treaty. If an individual is resident in both Canada and Malaysia under the applicable domestic laws, then the individual's residence status for purposes of the Treaty will be determined by the "tie-breaker rules" found in Article IV of the Treaty. For a general discussion of the standard "tie-breaker rules" found in Article IV of most of Canada's income tax treaties with other countries (including Malaysia), please refer to IT-221R3.

With respect to your particular situation, if the employees you mention are found to be resident in Canada pursuant to the Treaty, then, generally, only income earned in Malaysia will be taxable in Malaysia. A Canadian foreign tax credit would be available for Malaysian tax on income earned in Malaysia. However, we are not in a position to tell you whether the employees will be resident in Canada for purposes of the Treaty during the time that they are living in Malaysia. We strongly advise you to read IT-221R3 and then contact ITSO. It will be necessary to determine what the employees' residence status is for Malaysian income tax purposes before coming to a final conclusion regarding the employees' residence status for purposes of the Treaty. If the employees are resident in Malaysia for purposes of the Treaty, they will be deemed non-residents of Canada.

An employee's residence status will affect whether or not he or she is eligible to make CPP and EI contributions. The nature of the employment and the employer may also make a difference. Please contact you local tax services office to discuss what CPP and EI payroll deductions will be required while the employees are in Malaysia.

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

Yours truly,

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