22 May 1990 Ruling 59771 F - Foreign Embassy Employees

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.

May 22, 1990

Dear Sir:

This is in reply to your letter of March 14, 1990, further to our reply to you of February 19, 1990.

Your present letter requests our clarification of the following three issues:

(a)     whether or not a Canadian resident citizen or landed Immigrant can participate in the Canada Pension Plan (CPP) when he is employed in Canada by a foreign embassy such as the Netherlands's Embassy,

(b)     the taxation of such employment income and

(c)     the eligibility of such an employee to contribute to an RRSP.

Before we address your first query, we must first clarify the Department's position on the taxation of foreign embassy employees under the provisions of the Income Tax Act (the "Act") and the Canada-Netherlands Income Tax Convention (1986) the ("Convention").

Generally an individual is taxable by Canada on any income earned in Canada, including any remuneration paid by a foreign country.  Under the Act, a person may, however, be fully or partially exempted from taxation under various provisions.  In particular, paragraph 149(1)(a) of the Act provides that an employee of a foreign country will be fully exempt from the taxation of his "taxable income", as calculated under the Act, if he meets all of these conditions:

(a)     he is resident in Canada;

(b)       his duties required him to reside in Canada;

(c)       he resided outside of Canada immediately before he assumed his duties;

(d)       he is not a Canadian citizen;

(e)       he was not employed by anyone other than the foreign country;

(f)      he did not engage in any business in Canada; and

(g)      the foreign country grants similar exemptions to Canadian government employees working in that country.

It should be noted that this provision exempts persons who are either residents or non-residents of Canada from paying "Part I" Canadian Tax.  It, however, does not apply to exempt non-residents from Canadian non-resident withholding tax on income such as Interest, Dividends or Royalties earned from Canadian sources.

If an individual is not exempt from taxation under the Act, reference can then be made to the provisions of the applicable foreign tax treaty to determine if an exemption is available there.  Under the Canada-Netherlands convention, the broadest exemption is provided if an international law or a special agreement will apply to exempt the individual.  It is our understanding that no such "overall" exempting legislation exists except to the extent that it mirrors the detailed provisions set out in the remaining provisions of the convention and in particular articles 27(2) and 19 thereof.

Article 27(2) is, in fact, not an "exempting" provision but sets out a deemed residency rule when certain conditions are met. This deemed residency Is then applicable in applying the other provisions of the convention to determine if an employee is taxable by either Canada, the Netherlands, or both countries.  A Netherlands' employee will be deemed to be a Netherlands resident if:

(a)     the person is a member of a "Diplomatic or Consular mission" to Canada;

(b)     the person is a Netherlands's national; and

(c)     the person is subject to tax by the Netherlands on his employment income to the same extent as would a Netherlands's resident.

If the individual is or is deemed to be a non-resident of Canada (or a resident of the Netherlands), Article 19(1) of the convention provides that his employment income paid by the Netherlands may be taxed by the Netherlands.  The provision does not, however, exempt the income from taxation by Canada and it may be so taxed in accordance with Article 15 of the treaty unless it is further exempted from Canadian taxation under article 15(2) of the convention.  For our present purposes, article 15(2) will basically exempt a person from tax on his employment income if he is not present in Canada for more than 183 days in a calendar year.

If a non-resident of Canada is taxable in both Canada and the Netherlands, the Netherlands is required to provide the individual with a tax credit for Canadian taxes paid as detailed in article 22(2) of the convention.

If the individual is a resident of Canada, article 19(2) provides a further series of tests to apply in determining taxability.  If the resident individual:

(a)     is a Canadian national; or

(b)     did not become a resident solely to render services to the Netherlands Government,

he is subject only to Canadian taxation of his employment income. If, however, the resident does not meet these tests, he will be subject to taxation of the income by both Canada and the Netherlands.  In this latter case, Canada will provide a tax credit as required by Articles 22(4) and 22(5)(a) of the convention for any Netherlands' taxes paid.

Under this topic we also note that In our opinion the "Dutch civil service pay" and the "pay equity allowance" are both amounts of employment remuneration which must be included in calculating income from employment for Canadian taxation purposes.

Turning to the eligibility of diplomatic employees to contribute to the CPP we can advise that the advice provided by the Department of National Health and Welfare is correct for employees who are residents of Canada in a year, for purposes of the Income Tax Act, and you can make the necessary election by filing form CPT20 with your T1 tax return for the year.  A copy of this form is enclosed and may also be obtained from any District Taxation Office.

With respect to your last query, as explained in our previous letter, an individual may contribute amounts out of his "earned income" to an RRSP within the limits discussed in the RRSP Tax Guide previously provided to you.  "Earned income" will include any salary, wages, or other remuneration included in income reportable for Canadian tax purposes even though a deduction may be available in respect of that income when calculating "taxable income for Canadian tax purposes.  In our opinion the relevant provisions of the Canada-Netherlands convention as discussed above do not apply to exclude any amount from income but do apply to allow deductions in calculating taxable income.

We hope these comments clarify this matter to your satisfaction.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate