10 May 2007 External T.I. 2007-0228561E5 - Withholding

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 subsection 102(1) of the Regulations applies to salary continuation payments paid to a non-resident when it relates to employment that was entirely performed in Canada while the employee was a resident of Canada.

Position: Yes.

Reasons: Salary and wages paid to a former employee are included in paragraph 153(1)(a) of the Act and in the definition of remuneration in subsection 100(1) of the Regulations. Therefore the amounts paid are subject to withholding under subsection 102(1) of the Act.

A. Seidel
XXXXXXXXXX 								(613) 957-2058
									2007-022856
May 10, 2007

Dear XXXXXXXXXX:

Re: Withholding of Source Deductions

We are writing in response to your letter dated March 20, 2007 wherein you requested our comments regarding the appropriate withholding of source deductions in respect of salary continuation payments to a former employee.

You describe the following sequence of events. The employer terminated the employment of Mr. X. Mr. X entered into a separation agreement with his former employer and such agreement included a provision that the former employer is required to pay periodic salary continuation payments to Mr. X for a period of two years. The former employer deducted or withheld the amounts required by subsection 102(1) of the Income Tax Regulations (the "Regulations") from such periodic salary continuation payments. However, seven months after entering into the separation agreement, Mr. X claims to have ceased to be a resident of Canada and submits that subsection 102(1) of the Regulations is no longer applicable to the salary continuation payments. You query whether subsection 102(1) of the Regulations continues to apply to the salary continuation payments made to Mr. X if he is, in fact, considered to be a non-resident of Canada.

The particular circumstances in your letter, on which you have asked for our views, relate to a factual situation involving specific taxpayers and completed transactions. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. The review of completed transactions is the responsibility of the local tax services offices. Although we cannot provide any specific comments with respect to the situation described in your letter, the following general comments may be of assistance.

Salary continuation payments are "incomes from the duties of offices and employments performed by a non-resident person in Canada" for purposes of subparagraph 115(1)(a)(i) of the Income Tax Act (the "Act") and are therefore "salary, wages or other remuneration" for purposes of paragraph 153(1)(a) of the Act. A former employer making such salary continuation payments is therefore required to deduct or withhold from such payment the amount determined in accordance with the rules prescribed in the Regulations. The following provisions of the Regulations are applicable:

(a) Section 101 of the Regulations requires every person who makes a payment described in subsection 153(1) of the Act to deduct or withhold from such payment the amount determined in accordance with the prescribed rules in Part I of the Regulations.

(b) Subject to subsection 104(2) of the Regulations, the amount to be deducted or withheld from periodic salary continuation payments is determined in accordance with the rules in subsection 102(1) of the Regulations.

(c) Subsection 102(1) of the Regulations applies to any payment of "remuneration", which is defined in subsection 100(1) of the Regulations to include salary continuation payments.

(d) Subsection 105(1) of the Regulations require every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, to deduct or withhold 15 per cent of such payment. However, subsection 105(2) of the Regulations provides that subsection 105(1) does not apply to a payment described in the definition "remuneration" in subsection 100(1) of the Regulations.

(e) Subsection 104(2) of the Regulations provides that no amount shall be deducted or withheld from a payment in accordance with section 102 of the Regulations in respect of an employee who was neither employed nor resident in Canada at the time of payment except in respect of remuneration described in subparagraph 115(2)(e)(i) of the Act that is paid to a non-resident person who has in the year, or had in any previous year, ceased to be resident in Canada or remuneration reasonably attributable to the duties of any office or employment performed or to be performed in Canada by the non-resident person.

(f) Subsection 200(1) of the Regulations requires every person making a payment described in subsection 153(1) of the Act (other than an annuity payment in respect of an interest in an annuity contract to which subsection 201(5) applies) to make an information return in prescribed form in respect of such payment unless an information return in respect of such payment has been made under sections 202, 214, 237 or 238 of the Regulations.

Since salary continuation payments are amounts described in subparagraph 115(1)(a)(i) and paragraph 153(1)(a) of the Act and paragraph 104(2)(b) of the Regulations, the subsection 104(2) exception to subsection 102(1) of the Regulations does not apply to salary continuation payments. Therefore, regardless of whether or not a former employee is, in fact, a resident of Canada, it is our view that an employer would be required to deduct or withhold the amount computed in accordance with subsection 102(1) of the Regulations from any salary continuation payments made to a former employee. In addition, the employer would be required to make an information return in accordance with subsection 200(1) of the Regulations in respect of such salary continuation payments.

Yours truly,

Olli Laurikainen, CA
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch