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 a non-resident airline corporation acting as a service provider for Canco can be considered as carrying on the business of transporting passengers within the meaning of the term "international traffic" in subsection 248(1) when the passengers are technically Canco's passengers; (2) Whether the non-resident aircraft pilots employed by Forco can be viewed as having been paid indirectly by Canco, as required under subsection 115(3); (3) Whether Forco can be viewed as operating an aircraft in international traffic as per Article 15 of the Canada-UK Convention and if so, whether its crew members must apply for a waiver under section 102 of the Regulations.
Position: (1) Yes. (2) No. (3) Yes, but a waiver under section 102 of the Regulations will only be available if all of the conditions stated in paragraph 2 of Article 15 of the Convention are satisfied.
Reasons: (1) Based on our interpretation of the term "international traffic" in subsection 248(1) and consistent with our positions in previous technical interpretations. (2) Based on our interpretation of subsection 115(3) and consistent with 115(3) explanatory notes; (3) Based on our interpretation of the term "international traffic" in Article 15 of the Canada-UK Convention, the definition of "international traffic" in 248(1) and Regulation 102. Application of the administrative policy related to Regulation 102 waiver provided in IC 75-6R2.
XXXXXXXXXX
Marie-Claude Routhier,
LL.B., D.D.N., M. Fisc.
2013-051543
June 16, 2014
Dear XXXXXXXXXX,
Re: Non-resident corporation carrying on the business of transporting passengers
We are writing in reply to your email received on December 11, 2013 wherein you requested our comments with respect to the application of subsections 81(1) and 115(3) of the Income Tax Act (the "Act"), section 102 of the Income Tax Regulations (the "Regulations") and Article 15 of the Canada-United Kingdom Tax Convention (the "Convention"), where a non-resident corporation provides services to a Canadian airline corporation through non-resident pilots and crew members.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.
Unless otherwise stated, all statutory references in this letter are to the Act.
Background
In the factual situation submitted, we understand that a Canadian corporation ("Canco") is carrying on the business of transporting passengers to various destinations both inside and outside Canada. During peak season, a non-resident corporation ("Forco") is supplying planes, non-resident pilots and non-resident airplane crew members to transport Canco's passengers both within and outside Canada.
Forco is dealing at arm's length with Canco, is a resident of the United Kingdom ("UK") for the purposes of the Convention and is a non-resident of Canada for Canadian tax purposes. Forco does not have a permanent establishment in Canada and has its effective management and control in the UK. It is our understanding that the non-resident pilots and crew members are employed by Forco and are present in Canada for a period or periods not exceeding in the aggregate 183 days in any twelve month period.
Your questions
You requested our opinion with respect to the application of subsections 81(1) and subsection 115(3) of the Act, section 102 of the Regulations and Article 15 of the Convention in the above mentioned situation. More specifically, you asked for our views as to:
1) whether a non-resident airline corporation acting as a service provider for Canco can be considered as carrying on the business of transporting passengers within the meaning of the term "international traffic" in subsection 248(1) when the passengers are technically Canco's passengers;
2) whether the non-resident aircraft pilots employed by Forco can be viewed as having been paid indirectly by Canco, as required under subsection 115(3); and
3) whether Forco can be viewed as operating an aircraft in international traffic as per Article 15 of the Convention and if so, whether its crew members must apply for a waiver under section 102 of the Regulations.
Our comments
1) Application of paragraph 81(1)(c)
Pursuant to paragraph 81(1)(c), the income earned in Canada by a non-resident corporation from the operation of an aircraft in international traffic shall not be included in the computation of its Canadian income for a particular year, if the country where the non-resident corporation resides grants substantially similar relief for the year to a person resident in Canada.
The term "international traffic" used in paragraph 81(1)(c) has the meaning assigned by subsection 248(1). It includes any voyage made in the course of the business of transporting passengers or goods, if the principal purpose of the voyage is to transport passengers or goods from Canada to a place outside Canada, from a place outside Canada to Canada or from a place outside Canada to another place outside Canada. Voyages made for the purpose of principally transporting passengers or goods exclusively between places in Canada are not included in the term "international traffic". Income derived from such type of voyage will generally not be excluded from income by the application of paragraph 81(1)(c). However, such income may be exempt from Canadian tax under the provisions of the Convention when paragraph 2 of Article 8 of the Convention applies.
We are of the view that the income exclusion provided in paragraph 81(1)(c) does not require the passengers to be the non-resident airline corporation's customers or passengers. Provided that the other conditions stated in the definition of "international traffic" are met, Forco could be viewed as earning income in Canada from the operation of an aircraft in international traffic within the meaning of paragraph 81(1)(c), notwithstanding that the tickets held by the passengers on its flights represent contracts for services between the passengers and Canco. Therefore, the income earned in Canada by Forco from such operation would not be required to be included in computing its Canadian income for a particular year, if a relief substantially similar to that provided by paragraph 81(1)(c) is granted for the year to Canadian airlines by the UK.
2) Application of subsection 115(3)
You requested the Directorate to determine if the non-resident aircraft pilots employed by Forco have been paid indirectly by Canco, as required for the application of subsection 115(3).
As mentioned in the explanatory notes issued by the department of Finance in April 2013, new subsection 115(3) has been introduced in order to simplify the determination of taxable income earned in Canada of a non-resident aircraft pilot who is employed by a Canadian airline. It is our view that pilots employed by a non-resident airline corporation will generally not be subject to this measure. Consequently, provided that the non-resident pilots are employed by Forco and not by Canco, subsection 115(3) will not apply. The question of whether an employee/employer relationship exists between the non-resident pilots and Canco is a question of fact that can only be resolved after an examination of all facts and circumstances surrounding the relevant situation.
When subsection 115(3) does not apply, the taxable income earned by a non-resident from an office or employment exercised in Canada must nevertheless be computed for purposes of subsection 2(3) and subparagraph 115(1)(a)(i). The Act does not contain specific rules for determining what portion of the income earned by a non-resident pilot employed by a non-resident airline is attributable to duties performed in Canada. In such a situation, the attribution of income to Canada must be reasonable and may be based on the allocation methods provided in Sutcliffe v. The Queen, 2006 TCC 812 and Price v. The Queen, 2011 TCC 449.
3) Application of Article 15 of the Convention and section 102 of the Regulations
According to paragraph 3 of Article 15 of the Convention, notwithstanding the preceding provisions of Article 15, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the Contracting State in which the place of effective management of the enterprise is situated.
The term "international traffic" is not defined by the Convention. Pursuant to paragraph 2 of Article 3 of the Convention, unless the context otherwise requires, any term not otherwise defined shall have the meaning which it has under the laws of the Contracting State applying the Convention. As the Income Tax Convention Interpretation Act does not define the term "international traffic", the meaning provided in paragraph 248(1) shall prevail.
As previously mentioned, we understand that at least some of Forco's flights constitute the operation of an aircraft in "international traffic" as defined in subsection 248(1). Provided that the principal purpose of the voyage is to transport passengers on such a flight, we are of the view that the employment duties of Forco's crew members can be viewed as being exercised aboard an aircraft operated in international traffic, as per paragraph 3 of Article 15 of the Convention. As a result, the UK is given the right to tax the employees of Forco in respect of remuneration from employment exercised on such flights. However, paragraph 3 of Article 15 has no effect on Canada's right to tax that same remuneration. Only paragraph 2 of Article 15 can exempt a UK resident employee of Forco from tax on income from employment exercised in Canada.
Notwithstanding the fact that Forco may be entitled to the exclusion provided by paragraph 81(1)(c) and notwithstanding that its employees may be exempt from Canadian tax under paragraph 2 of Article 15 of the Convention, the requirement to withhold under paragraph 153(1)(a) and section 102 of the Regulations may still exist. In fact, paragraph 153(1)(a) requires that every person paying at any time in a taxation year salary, wages or other remuneration in respect of an office or employment shall withhold from the payment the amount determined in accordance with prescribed rules and remit that amount to the Receiver General on account of the payee's tax for the year under Part I of the Act. This obligation to withhold extends to non-residents of Canada employing non-residents for services performed in Canada, and therefore to Forco's crew members in such circumstances.
As mentioned in Information Circular 75-6R2, Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada, a non-resident employee can apply for a waiver of withholding under section 102 of the Regulations where it is established that the non-resident employee is not taxable in Canada because of treaty protection. Form R102-J, Regulation 102 waiver Application can be filed by a non-resident employee or an employer, with the employee's authorization, provided that the specific conditions required thereunder are satisfied. In the above situation, Forco's UK resident crew members will only be entitled to obtain a Regulation 102 waiver if all of the conditions stated in paragraph 2 of Article 15 are satisfied, i.e. if the employee is present in Canada for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, the remuneration is paid by or, on behalf of, an employer who is not a resident of Canada and the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Canada. In the given situation, it is our understanding that all of the conditions provided in paragraph 2 of Article 15 of the Convention are met and that Forco's crew members will generally be entitled to obtain a waiver under section 102 of the Regulations. We trust that we have been of some assistance.
Yours truly,
Randy Hewlett
Director
International Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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