17 March 2008 External T.I. 2008-0266111E5 - Overseas Employment

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 income earned in Germany by residents of Canada is subject to tax in Canada

Position: Yes

Reasons: Canadian residents are taxed on their worldwide income. Taxpayer may be entitled to a foreign tax credit.

                                                2008-026611
XXXXXXXXXX                                      A. Seidel, CMA
(613) 957-2058
March 17, 2008

Dear XXXXXXXXXX :

Re: Overseas Employment

This is in response to your January 18, 2008 e-mail concerning the application of the Canada-Germany Tax Agreement (the "Treaty") to income earned by a taxable Canadian corporation from a business carried on in Germany. You also requested our views on the income tax implications to you as an employee of that corporation in the circumstances described below.

In your letter you indicated that you are the sole shareholder and employee of a taxable Canadian corporation (Canco) and that Canco is negotiating a contract to provide XXXXXXXXXX services to a corporation resident in Germany. We have assumed that, under the terms of the contract, Canco will be carrying on business in Germany and that, as the sole employee of Canco, your duties of employment would be exercised in Germany. You query whether the income earned by Canco and by you (in your capacity as an employee) will be subject to income tax in Canada or whether the provisions of the Treaty will apply to exempt such income from taxation in Canada.

Our Comments

The situation outlined in your letter relates to a specific taxpayer and proposed transactions. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to 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. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.

A taxable Canadian corporation is subject to Canadian income tax on its worldwide income. In this respect, the Treaty does not relieve a Canadian corporation from the obligation to pay income tax in Canada on income earned while carrying on business in Germany. However, under the Treaty, a taxable Canadian corporation will not be taxable in Germany unless it carries on its business in Germany through a permanent establishment ("PE"). Where a Canadian corporation carries on a business through a PE situated in Germany, its income may be taxed in Germany to the extent that such income is attributable to that PE. The meaning of PE is set out in Article 5 of the Treaty. Very generally, a PE is a fixed place of business through which a business is wholly or partly carried on. The Treaty may also deem a PE to exist in certain circumstances. The Treaty is available on the Internet at the Finance Canada website (http://www.fin.gc.ca) under "International Issues".

Where a Canadian corporation is subject to income tax in Canada and in Germany on income earned while carrying on business in Germany, the Canadian corporation may be eligible for a foreign tax credit. The foreign tax credit is a deduction from the corporation's Canadian tax otherwise payable. In general terms, the credit is limited to the lesser of the actual income tax paid for the year to Germany and the portion of Canadian income tax otherwise payable for the year that relates to the German-source income. For a detailed discussion on the calculation of the foreign tax credit refer to Interpretation Bulletin IT-270R3 "Foreign Tax Credit" which is available on our website under "Forms and Publications".

A Canadian resident individual is subject to tax in Canada on his or her worldwide income. In this respect, the Treaty does not relieve a Canadian resident individual from the obligation to pay income tax in Canada on remuneration derived from employment in Germany. However, under Article 15(2) of the Treaty, a Canadian resident individual is not taxable in Germany on any remuneration derived from employment in Germany if:

(a) the employee is present in Germany for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, and

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident in Germany, and

(c) the remuneration is not borne by a PE or a fixed base which the employer has in Germany.

Whether or not these conditions are satisfied in any situation involving a Canadian resident individual is a question of fact that can only be determined after a review of the actual employment performed in a given fiscal year and after a determination is made regarding the existence of a PE or fixed base in Germany.

Where a Canadian resident individual is subject to income tax in Canada and in Germany on employment income earned in Germany, the individual may be eligible to claim a foreign tax credit. This foreign tax credit is a deduction against the individual's Canadian tax otherwise payable. In general terms, the credit is limited to the lesser of the non-business income tax paid for the year to Germany and the portion of Canadian income tax otherwise payable for the year that relates to the German-source income.

We trust these comments will be of assistance.

Yours truly,

Daryl Boychuk
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch