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 a lump sum payment in respect of a loss of employment, made by a resident of Canada to a non-resident of Canada who had been seconded to the payer's non-resident subsidiary, is subject to Canadian tax pursuant to Part I and Part XIII?
Position: Part I - No; Part XIII - Yes.
Reasons: Part I - A retiring allowance, as defined in subsection 248(1), would not be considered remuneration described in subparagraph 115(2)(e)(i) of the Act; Part XIII - 212(1)(j.1) would apply, however, the Convention with France would give relief.
March 20, 2015
Re: Canadian Withholding Tax on Retiring Allowance
We are writing in reply to your email of June 2, 2014, and further to our conversation on November 5, 2014 (Carruthers/XXXXXXXXXX) during which you described a scenario which can be summarized as a lump sum payment in respect of a loss of employment made by a resident of Canada ("Canco") to a non-resident of Canada (the "Taxpayer") who had been seconded to a wholly-owned French subsidiary of Canco ("Franceco").
You asked for our views as to whether such a lump sum payment would be subject to Canadian tax pursuant to:
- paragraph 115(1)[(a)](v) and subparagraph 115(2)(e)(i) of Part I of the Income Tax Act (the "Act"); and
- paragraph 212(1)(j.1) of Part XIII of the Act.
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 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
Nature of the Payment
Prior to responding to your questions, we must consider what such a lump sum payment would be. This would be a question of fact that could only be determined after reviewing all of the facts and relevant information regarding a particular termination of a particular employee's employment. As such, and for the purposes of this letter, we have had to make a number of assumptions regarding the scenario you described in order to provide general comments about the provisions of the Act relevant to your questions.
In your email, you indicated that the Taxpayer was seconded to Franceco and that prior to the termination date of the Taxpayer's contract with Franceco, the Taxpayer would, pursuant to a severance agreement and in lieu of notice, receive a lump sum severance amount from Canco. You also indicated that the lump sum payment would represent compensation for salary lost which would have otherwise been received by the Taxpayer if the contract with Franceco had not been terminated early.
For the purposes of this letter we will further assume that:
- the lump sum payment would be a cost for the early termination of the contract between the Taxpayer and Franceco for which Franceco would be responsible. As such, we would expect that Franceco would reimburse Canco for the lump sum payment and, therefore, it would not be deductible in computing the income of Canco subject to tax under Part I of the Act;
- the lump sum payment would be made subject to the terms of the severance agreement and not the Taxpayer's employment contract, because of the Taxpayer's loss of employment, and to compensate the Taxpayer for that loss. As such, the lump sum payment would be a retiring allowance as that term is defined in subsection 248(1) of the Act. More specifically, as that term is described in paragraph (b) of the definition of retiring allowance in subsection 248(1); and
- the lump sum payment would not be received out of or under an employee benefit plan, a retirement compensation arrangement or a salary deferral arrangement. As such, the lump sum payment would be a retiring allowance described in subparagraph 56(1)(a)(ii) of the Act.
Subparagraph 115(2)(e)(i) of Part I
It is our view that paragraph 212(1)(j.i), and not subparagraph 115(2)(e)(i), applies to a retiring allowance as that term is defined in subsection 248(1). As such, a lump sum payment such as that described above would not be subject to Canadian tax pursuant to paragraph 115(1)[(a)](v) and subparagraph 115(2)(e)(i).
Paragraph 212(1)(j.1) of Part XIII
A lump sum payment such as that described above would, pursuant to paragraph 212(1)(j.1), be subject to 25% withholding tax unless it could reasonably be regarded as a payment attributable to services rendered by the non-resident recipient to, or in respect of, the Canadian resident payer in taxation years during which the recipient was not at any time resident in Canada, and throughout which the recipient was not employed, or was only occasionally employed, in Canada.
In our view, the exception in 212(1)(j.1) would not be met by a lump sum payment such as that described above because it would not be reasonable to regard such a lump sum payment as being attributable to services rendered to, or in respect of, the payer (i.e, Canco in this hypothetical scenario). Rather, it would be reasonable to regard such a lump sum payment as being attributable to services to be rendered to Franceco. As such, absent relief under the Convention between Canada and France for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (the "Convention"), a 25% withholding tax would, pursuant to paragraph 212(1)(j.1), apply to such a lump sum payment.
Whether Article XV or XXI of the Convention were to apply to a lump sum payment such as that described above, the payment would be exempt from Canadian tax by virtue of the Convention because:
a. if Article XV were to apply such a lump sum payment would not be in respect of employment exercised in Canada; or
b. if Article XXI were to apply such a lump sum payment would not be derived from sources in Canada.
We trust that these comments will be of assistance.
Lori M. Carruthers CPA, CA
For Division Director
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch
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