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: 1. Whether the meaning of "salary or wages" provided by subsection 248(1) of the Income Tax Act (the "Act") is applicable to the term "salaries and wages paid in the year by the corporation" for the purposes of subsection 402(3) of the Regulations. 2. Whether the employment income of a non-resident employee, performing duties at a permanent establishment of a Canadian corporation in Canada, is included in the definition of "salary or wages" in subsection 248(1) of the Income Tax Act, and in the calculation of "salaries and wages paid in the year" within the meaning of subsection 402(3) of the Income Tax Regulations. 3. Whether the employment income of a non-resident employee paid by a corporation resident in Canada and attached to a permanent establishment of the corporation outside of Canada is included in the calculation of "salary or wages" for the purposes of subsection 402(3) of the Regulations.
Position: 1. Yes; 2. Yes; 3. Yes
Reasons: 1. The expression "salaries and wages paid by the corporation in the year" incorporates all remuneration paid or payable in respect of services rendered by an employee that is required to be included in to income under subdivision a of Division B of Part 1 of the Act. 2. The definition of "salary or wages" in subsection 248(1) of the Act is not limited to those individuals who earn income from office or employment who are resident in Canada. The definition provides that the computation of salary and wages is the amount as computed under the rules in subdivision a of Division B of Part 1 of the Act, which includes the amount paid by the Canadian corporation to the non-resident employee whose income is exercised in Canada. 3. Whether a non-resident employee, paid by a corporation resident in Canada and attached to a permanent establishment of the corporation outside of Canada, is liable to tax in Canada is not relevant for the purposes of the income allocation rules provided in subsection 402(3) of the Regulations.
March 11, 2014
Provincial Legislative Affairs HEADQUARTERS
Legislative Policy and Regulatory Affairs Branch Income Tax Rulings
Directorate
Attention: Robin Maley Gillian Godson
2013-050680
Definition of "salaries and wages" in Part IV of the Regulations
We are writing in reply to your email of September 30, 2013, in which you requested our views on the meaning of the term "salaries and wages" for the purposes of the provincial income allocation calculation provided in Part IV of the Income Tax Regulations (the "Regulations").
Specifically, in your inquiry you have asked us to consider the following questions. Our comments follow each question.
1. Whether the definition of "salary or wages" provided in subsection 248(1) of the Income Tax Act (the "Act") is applicable to the term "salaries and wages paid in the year by the corporation" for the purposes of subsection 402(3) of the Regulations.
Our Comments
It has been historically our view, and it remains our view, that the definition of "salary or wages" provided in subsection 248(1) of the Act generally applies to the phrase "salaries and wages paid in the year by the corporation" for the purposes of subsection 402(3) of the Regulations.
It is also our view that subsection 402(3) of the Regulations contemplates only the salaries and wages paid by the corporation to the employees, which precludes consideration of the deductions available to an employee under section 8 of the Act. Consequently, as noted in Rulings document XXXXXXXXXX, the expression "salaries and wages paid by the corporation in the year" incorporates all remuneration paid or payable in respect of services rendered by an employee that is required to be included in to income under subdivision a of Division B of Part 1 of the Act.
2. Whether the employment income of a non-resident employee, performing employment duties at a permanent establishment of a Canadian corporation in Canada, is included in the definition of "salary or wages" in subsection 248(1) of the Act, and in the calculation of "salaries and wages" for the purposes of subsection 402(3) of the Regulations.
Our comments
The definition of "salary or wages" provided by subsection 248(1) of the Act refers to the income "as computed under subdivision a of Division B of Part I" of the Act. This refers to the rules in the Act for the computation of income or loss from an office or employment, and includes sections 5, 6, and 7.
A non-resident's income from employment exercised in Canada is subject to taxation under Part I (pursuant to subsection 2(3) and subparagraph 115(1)(a)(i) of the Act) unless that income is for some reason exempt under a tax treaty. Subsection 115(1) refers to the amount that would be the non-resident's income for the year under section 3 of the Act. Section 3 of the Act, which is in Division B of Part I of the Act, provides the basic rules for the determination of a taxpayer's income for a taxation year for the purposes of Part I of the Act. The rules in sections 5 to 7 of the Act are generally applicable. Accordingly, income from an office or employment in Canada includes employment benefits (e.g., stock option benefits and deferred amounts under salary deferral arrangements), living and personal allowances, and director's fees, to the extent that these amounts are attributable to services rendered in Canada.
Accordingly, the definition of "salary or wages" in subsection 248(1) of the Act is not limited to those individuals who earn income from office or employment who are resident in Canada. It simply provides that the computation of the "salary or wages" is the amount as computed under the rules in subdivision a of Division B of Part 1, which includes the amount paid by the Canadian corporation to the non-resident employee, whose income is from employment exercised in Canada.
3. Whether the employment income of a non-resident employee paid by a corporation resident in Canada and attached to a permanent establishment of the corporation outside of Canada is included in the calculation of "salary or wages" for the purposes of the income allocation rules provided in subsection 402(3) of the Regulations.
Our comments
The definition in subsection 248(1) of the Act of "salary or wages" refers to the income of a "taxpayer". The term "taxpayer" is defined in the Act to mean "any person whether or not liable to pay tax". The Federal Court of Appeal in Oceanspan Carriers Ltd. v The Queen, 87 DTC 5102 (F.C.A.), provided a view of the term "taxpayer" in the context of whether a corporation that was not resident in Canada could have a "taxation year" for the purposes of the Act. It is our view that these comments by the court do not extend to the meaning of the term "salaries and wages" in Part IV of the Regulations. It is also our view that the definition of "salary or wages" and of a "taxpayer", in the context of these Regulations and the principles of allocating income to the provinces, would include the employment income of a non-resident regardless of whether they were liable for tax.
We would also note that the definition of "salary or wages" in subsection 248(1) provides a computation of the salary or wages based on the applicable sections of the Act (those that refer to income from office or employment). In particular, the definition states "as computed" under subdivision a of Division B of Part 1. The definition does not state the taxpayer's income from office or employment must also be taxable in Canada.
Furthermore, within Part IV of the Regulations are provisions (for example Regulation 402(4.1)(e) and 413) that address situations where the salaries and wages of employees of permanent establishments outside of Canada would not be included in the "salaries and wages" calculation or would be deemed to be nil. These provisions would be redundant if a view was taken that the employment income of a non-resident employee paid by a corporation resident in Canada and attached to a permanent establishment of the corporation outside of Canada is not included in the calculation of "salary or wages" for the purposes of the income allocation rules.
We trust these comments will be of assistance.
Yours truly,
Terry Young, CA, CPA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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