15 November 2007 External T.I. 2005-0153901E5 - Foreign employment income

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 employment income earned by an individual who is a Canadian resident and a U.S. citizen from a U.S. not-for-profit organization is subject to taxation in Canada.

Position: Yes.

Reasons: The individual is subject to taxation on his worldwide income and the income is not exempt from Canadian taxation by the Canada-U.S. Treaty.

								2005-015390
XXXXXXXXXX 							D. Zhang
(613) 957-2104
November 15, 2007

Dear XXXXXXXXXX :

Re: Employment income earned in the U.S.

We are writing in response to your facsimile transmission to the International Tax Services Office of May 17, 2005, which was forwarded to us for reply on October 4, 2005. You requested in your facsimile our comments on whether remuneration derived from your employment with a U.S. not-for-profit organization ("NPO") is taxable in Canada. We apologize for the delay in replying.

We understand that you are a U.S. citizen, but you have been a resident of Canada since 1993. In 2005 you accepted a position with an NPO in the U.S., which receives funding from a U.S. federal government department. You indicated in your facsimile that you were previously employed with the U.S. Coast Guard, and the income was exempt from Canadian taxation.

You are of the view that, since the work that you currently perform is similar to that performed while employed with the U.S. Coast Guard, the income from your current position should also be exempt from Canadian taxation.

Our Comments

Written confirmation of the 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 submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments. As a resident of Canada, you are subject to Canadian taxation on your worldwide income from all sources, including employment income, subject to any exemptions that may be available to you under the Canada-U.S. Income Tax Convention¹ (the "Treaty") as a citizen of the U.S. In this respect, Article XIX of the Treaty reads, in part, as follows:

Remuneration, other than a pension, paid by a Contracting State or a political subdivision or local authority thereof to a citizen of that State in respect of services rendered in the discharge of functions of a governmental nature shall be taxable only in that State.

Under the terms of this exemption, the remuneration paid to you will be taxable only in the U.S. if it is paid by the U.S. government or by "a political subdivision or local authority" within the U.S. The terms "political subdivision" and "local authority" are not defined in the Treaty but are generally understood to include constituent states, regional governments, provinces, municipalities and groups of municipalities (essentially political bodies empowered to govern or regulate).

Although the NPO that you work for may receive funding from a Contracting State (U.S. government), it would not itself be a "Contracting State or a political subdivision or local authority thereof" for purposes of Article XIX of the Treaty. Accordingly, Article XIX would not apply and, as a result, your remuneration from the NPO is subject to tax in Canada. However, to the extent that you pay income taxes in the U.S. on your employment income, a foreign tax credit may be available to reduce the amount of Canadian income taxes otherwise payable.

We trust that these comments are of assistance.

Yours truly,

Daryl Boychuk
Manager
International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

¹ Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital Signed on September 26, 1980, as Amended by the Protocols Signed on June 14, 1983, March 28, 1984, March 17, 1995 and July 29, 1997.