31 October 1989 Ministerial Correspondence 58344 F - Income Earned in Jamaica

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.

October 31, 1989

Dear 19(1)

Re:  19(1)

We are writing in reply to your letter of July 4, 1989 in which you indicate that 19(1) requires an explanation as to why his income earned in Jamaica should attract tax in Canada. You have referred specifically to his 1986 and 1987 tax returns and requested us to review the requirements of the Income Tax Act (Canada) (the "Act") to ensure that the foreign tax credits thereunder are being correctly applied.

This division of Revenue Canada, Taxation does not review taxpayer returns to determine if they were correctly assessed. For a review of your client's returns we suggest that you direct your request to the appropriate District Office.  Although we are unable to comment on the assessments of your client's 1986 and 1987 taxation years, we have set out below some general observations concerning the taxation in Canada of foreign source income.

A person who is, or is deemed by the Act to be, resident in Canada is taxable in Canada on his world income.  An individual resident in Canada who earns income from employment outside Canada may qualify for a foreign tax credit ("Foreign Tax Credit") under section 126 of the Act or an overseas employment tax credit ("OET Credit") under Section 122.3 of the Act in respect of that employment income.

In order for the individual to qualify for the OET Credit, he must perform certain services throughout a qualifying period in a country other than Canada for a specified employer.  We refer you to Interpretation Bulletin IT-497R and the Special Release re IT-497R dated March 20, 1987, copies of which are enclosed, for an explanation of the criteria for eligibility for the OET Credit.  A taxpayer would not qualify for the OET Credit in respect of a taxation year if he was not employed throughout a qualifying period by a "specified employer" as that term is defined in paragraph 122.3(2)(a) of the Act.

The Foreign Tax Credit consists of a deduction from Canadian tax otherwise payable ("CTOP") under Part I of the Act by a taxpayer resident in Canada.  The deduction is calculated separately in respect of each foreign country and is limited, in the case of non-business income, to an amount which, in general terms, is the lesser of:

(a)     the amount of non-business-income tax paid for the year to the particular foreign country; and

(b)      the CTOP for the year calculated in the manner described in paragraph l26(7)(d) of the Act, on non-business income from a source or sources in that country.

To the extent that any employment income earned in a foreign country renders the employee eligible for an OET Credit, such employment income is excluded from non-business income that is used in determining CTOP for the purposes of the Foreign Tax Credit.  This ensures that the employee will not be entitled to both the OET Credit and Foreign Tax Credit in respect of the same employment income.

We refer you to Interpretation Bulletin IT-270R, a copy of which is enclosed, for an explanation of the provisions relating to the Foreign Tax Credit.

You enquired whether a taxpayer could elect to report his income as a non-resident of Canada.  A taxpayer who is, or who is deemed by the Act to be, resident in Canada cannot choose to be taxed as a non-resident.  In order to become a non-resident of Canada, an individual must sever his ties with Canada that determine his residency in Canada.  We refer you to Interpretation Bulletin IT-221R2, a copy of which is enclosed, for a discussion of the factors that we consider relevant in determining an individual's residence status for tax purposes.

Subject to the provisions of any tax treaty in force between Canada and a foreign country, tax may be payable by a resident of Canada in respect of foreign employment income despite the fact that foreign taxes are paid in respect of that income. Paragraph 1 of Article XVI of the Canada-Jamaica Income Tax Agreement (the "Treaty"), a copy of which is enclosed for your reference, specifically provides that employment income of a resident of one Contracting State earned in the other Contracting State may be taxed in that other State.  Paragraph 2 provides two exceptions to the rule in paragraph 1, namely:

(a)     where the remuneration earned in the other Contracting State does not exceed a specified amount; and

(b)     where the taxpayer is present in the other State for not more than 183 days in the year, his remuneration is paid by an employer who is not resident in that other State and such remuneration is not borne by a permanent establishment of the employer in that other State.

     In a case where a resident of Canada earns employment income in Jamaica and qualifies for one of these exceptions, the taxpayer's employment income earned in Jamaica would be exempt from taxation in Jamaica but would not be exempt from taxation in Canada.

Article XXIII of the Treaty provides relief from double taxation by ensuring, in the case of Canada, that tax payable in Jamaica on profits, income or gains arising in Jamaica shall be deducted from any Canadian tax payable in respect thereof.  The Foreign Tax Credit under section 126 of the Act, subject to the specific limitations therein set out, is designed to ensure that any tax paid by a resident of Canada to a foreign jurisdiction in respect of his income from employment in that other country is deductible, from his Canadian tax otherwise payable in respect of such income.

The foregoing comments are provided in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R published by Revenue Canada, Taxation dated December 18, 1978.

Yours truly,

J.C. Clark for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c.:      F. WebsterChief of AuditNorth York District Office