5 October 2004 External T.I. 2004-0090911E5 - Canadian Employee working in US

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 US would be fully liable for US tax.

Position: If employee severs ties to Canada and is a non-resident of Canada then could be fully liable for US taxes, however, we cannot confirm the US tax implications. The Presence test is a US test and beyond our scope to discuss. Generally, an employee is only eligible to contribute funds to the CPP or any RRSP if he or she is resident in Canada.

Reasons: General comments. See the Canada Pension Plan Act.

XXXXXXXXXX 	2004-009091
		Eliza Erskine
October 5, 2004

Dear XXXXXXXXXX:

Re: Employee Transferring from Canadian Company to U.S. Company

This is in reply to your letter of August 12, 2004, requesting our comments with respect to the income tax status of an employee who will be moving from Canada to the United States in connection with a transfer of employment. You have also asked whether the employee will be eligible to make CPP or RRSP contributions after leaving Canada. We also acknowledge our conversation with you of September 21, 2004 (Erskine/XXXXXXXXXX).

Our Comments

The circumstances outlined in your letter 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.

As you may be aware, Canada taxes individuals on the basis of residence. An individual must sever his or her residential ties with Canada in order to become a non-resident for income tax purposes. 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 employee you refer to will remain a resident of Canada for income tax purposes while living in the United States. Generally, an individual who is resident in Canada prior to leaving 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-United States Income Tax Convention (the "Treaty") applies to persons who are residents of either Canada or the United States or of both Canada and the United States. If the Treaty applies to an individual, only one of Canada or the United States 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 the United States under the applicable domestic laws (which may be the case in the situation you describe in your letter, unless the employee severs all residential ties to Canada), 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 the United States), please refer to IT-221R3. If the employee referred to in your letter is found to be a resident of the United States for purposes of the Treaty then he will be deemed to be a non-resident of Canada even if he has not severed his residential ties to Canada.

We are unable to provide you with comments regarding the employee's tax status in the United States. Similarly, we cannot comment on the impact of the Presence Test on how he will be taxed in the United States. As we explained in our telephone conversation with you, commenting on U.S. tax rules and practices is outside the mandate of the Canada Revenue Agency; we would advise you to contact either the Internal Revenue Service or a tax practitioner who is familiar with cross-border employment issues.

An employee's residence status affects whether or not he or she is eligible to make CPP contributions. The nature of the employment and the employer may also make a difference. Generally, for employment outside Canada to be pensionable employment for purposes of the Canada Pension Plan Act, it must be employment described in paragraph 7(1)(a) of the Canada Pension Plan Act and subsections 16(1) and (2) of the Canada Pension Plan Regulations. Please contact the Canadian company's local tax services office for further information regarding this and similar payroll issues.

A non-resident of Canada is entitled to make contributions to a Canadian RRSP, however, only income from employment in Canada or a business carried on in Canada qualifies as "earned income" of the non-resident for purposes of the RRSP rules. Thus, while a non-resident can contribute to a Canadian RRSP, his or her RRSP contribution limit for a particular year will generally be restricted to the amount of "room" he or she had available upon leaving Canada plus any "room" generated by Canadian-source employment or business income. We note that employment or business income earned in Canada that is not taxable in Canada by virtue of a tax treaty is excluded from being "earned income" for RRSP purposes. For example, where a non-resident is resident in a treaty country and does not earn his or her business income through a permanent establishment in Canada, the business income will not be taxable in Canada and is not "earned income" for RRSP purposes.

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