28 September 1990 External T.I. 901575 F - Canada-U.S. Income Tax Convention - Employee's Salary Reimbursed by Registered Charity

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.

September 28, 1990

Dear Sirs:

This is in reply to your letter of July 13, 1990 in which you requested our comments concerning the application of Article XV, paragraph 2(b) of the Canada-U.S. Tax Convention (1980) (the Convention).

You described the hypothetical fact situation as follows:

1.     Company A is a U.S. charitable organization and is not subject to U.S. income taxes.

2.     Company B is a Canadian resident corporation which qualifies as a registered charity and qualifies for exemption under Part 1 pursuant to section 149(1)(f) of the Income Tax Act.

3.     An employee of Company A is assigned to work temporarily in Canada for Company B.

4.     For purposes of the Treaty, the employee is a resident of the United States.

5.     The employee is present in Canada for less than 183 days during the calendar year.

6.     The employee's salary, while working in Canada, is paid by Company A and is reimbursed by Company B.

7.     The employee's remuneration earned in Canada exceeds $10,000 Cdn.

With respect to the foregoing situation, you query whether the employee would qualify for the exemption from Canadian tax on his income earned in Canada in accordance with paragraph 2(b) of Article XV of the Convention.  You point out that due to the non taxable status of the charitable organization, there is no loss of tax revenue to Canada as a result of the reimbursement and consequently, Revenue Canada should not disallow the exemption under the Convention.

In our view, the scheme of the Income Tax Act (the Act) is as follows:

(i)     Pursuant to subsection 2(1) of the Act, a person resident in  Canada is liable to pay income tax upon his "taxable income" for a year.

(ii)     Pursuant to subsection 2(2) of the Act, a taxpayer's "taxable  income" for a year is his "income" for the year plus the additions and minus the deductions permitted under Division C of the Act.

     By virtue of the definitions of "person" and "taxpayer"  in subsection 248(1) of the Act, the registered charity is liable to tax on its taxable income.

(ii)     A taxpayer's "income" for a year is determined in accordance with the rules under Division B of the Act.  Pursuant to these rules, the registered charity would be entitled to deduct the amounts paid to Company A with respect to the services provided by the employee in computing its income.

(iii)     Division C of the Act provides for other deductions which may be deductible in calculating a taxpayer's "taxable income" for a year.

(iv)     (a)  If a taxpayer has a positive amount of taxable income, he would continue to calculate his tax payable under Division E of the Act.

     (b)  Alternatively, if a taxpayer's taxable income is nil, there would generally be no need to proceed to Division E of the Act.  Although such a taxpayer may not have any taxes payable for that particular year, this does not alter the fact that the taxpayer was liable to tax under section 2 of  the Act and was required to compute his taxable income in  accordance with the rules in Divisions B and C of the Act. 

Subsection 149(1) of the Act states that no tax is payable under Part I of the Act upon the "taxable income" of a registered charity referred to in paragraph 149(1)(f) of the  Act.  In our view, this exemption provision means that no Part I tax is payable for a registered charity even though it was liable to pay tax on its "taxable income" pursuant to section 2 of the Act.  In other words, subsection 149(1) of  the Act does not alter the provisions of section 2 of the Act, it merely provides an exemption for any Part I tax that might otherwise have been payable under Division E of the Act.

Based on our understanding of the scheme of the Act as described above, it is our view that the employee's salary reimbursed by the registered charity, Company B, would be allowable as a deduction in computing the company's taxable income.  As such the remuneration would be borne by an employer resident in Canada for purposes of paragraph 2(b) of Article XV of the Convention and the exemption therein would not extend to the employee in question.

We hope our comments will be of assistance to you.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch