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: If a resident alien of Switzerland chooses to be taxed under the lump-sum basis of taxation, whether the CRA will consider the individual to be a resident of Switzerland for purposes of the Canada-Switzerland Convention
Reasons: Article 4(5) would be applicable
July 25, 2005
Re: Residence Under the Canada - Switzerland Tax Convention
We are writing in response to your letter of February 18, 2005 wherein you requested our comments regarding the interpretation of paragraph 5 of Article 4 of the Canada - Switzerland Tax Convention (the "Convention").
You have described a situation where an individual is a non-Swiss national who is a factual resident of Switzerland (a "resident alien") and who elected to pay tax under the Swiss lump-sum basis of taxation. In addition, the lump-sum taxation that the individual negotiates with the Swiss authorities would allow the individual to avoid any Swiss tax that would otherwise be payable in respect of the individual's Canadian source income. You have requested our opinion as to whether paragraph 5 of Article 4 of the Convention would be applicable such that the individual would not be considered a resident of Switzerland for purposes of the Convention.
You have also queried the manner in which the Canada Revenue Agency (the "CRA") determines which items of Canadian source income are "generally taxable" in Switzerland for the purposes of paragraph 5 of Article 4 of the Convention.
Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular IC 70-6R5 ("IC-70-6R5") dated May 17, 2002 issued by the CRA. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we can provide the following general comments that may be of assistance.
Our understanding of the Swiss lump-sum basis of taxation (Article 14 of Loi fédérale sur l'impôt fédéral direct) is that a resident alien of Switzerland who has not exercised any income-producing activity, such as an employment or profession, in Switzerland may choose to pay a flat tax instead of paying tax on world income at progressive rates. The base for this flat tax is generally the greater of a) a multiple of certain expenditures incurred by the taxpayer and his or her family in Switzerland, or b) tax at progressive rates on certain Swiss-sourced income and income from sources in treaty countries that benefits from a reduction of tax under Swiss income tax conventions. Income from sources in non-treaty countries would not be taxed. Under the lump-sum basis of taxation, a taxpayer may also negotiate to pay a tax that is different than the amount determined under the formula described above.
The following comments are restricted to a consideration of paragraph 5 of Article 4 of the Convention and should not be construed as signifying that the CRA has accepted that an individual who chooses to pay tax under the Swiss lump-sum basis of taxation would be considered a resident of Switzerland pursuant to paragraph 1 of Article 4 of the Convention.
In the case of an individual who:
a) is a resident alien of Switzerland;
b) elects to pay tax under the Swiss lump-sum basis of taxation; and
c) negotiates with the Swiss authorities to avoid any Swiss tax that would otherwise be payable in respect of the individual's Canadian source income;
it is our view that such individual would not be considered a resident of Switzerland for purposes of the Convention by virtue of paragraph 5 of Article 4 thereof.
With respect to your query regarding the manner in which the CRA determines which items of Canadian source income are "generally taxable" in Switzerland for the purposes of paragraph 5 of Article 4 of the Convention, we have not developed any guidelines for making such a determination. Consequently, such determination will need to be made based on the facts of a particular situation.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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