26 May 1994 Internal T.I. 9333317 F - Crown Corp. Employees Working Outside Canada (T2 File)

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. Employee of Crown Corporation  —  "officer or servant" of Province?

2. Does the Government Article apply to government instrumentalities?

3. So-Called Independent Contractor —  Employee/Employer Relationship?

POSITION TAKEN:

1. No

2. Yes

3. Employee

REASONS FOR POSITION TAKEN:

1. Employee of agent and not the crown.

2. State of the Fund Principle.

3. Meets the "Control", Entrepreneur and Integration Test

May 26, 1994

Attention:  XXXXXXXXXX

XXXXXXXXXX

This is in reply to your memorandum of November 8, 1993, in which you requested our comments concerning the status of certain employees of XXXXXXXXXX  You have provided copies of two employment contracts and one independent services contract and have asked for our opinion on whether such individuals would be considered deemed residents of Canada pursuant to subparagraph 250(1)(c)(ii) of the Income Tax Act ("Act").

An individual will be considered a resident of Canada when he is either a factual resident or a deemed resident of Canada. Where the taxpayer is factually resident in Canada the deemed resident rules do not apply. It remains a question of fact whether an individual would maintain factual residence status while working outside Canada even for terms of 2 to 3 years.

Section 5 of the Trade Development Corporations Act ("TDC Act") reads as follows:

(1)     The president, to the extent authorized by the directors, may appoint the officers and employees considered necessary to carry on the business and operations of the corporation, and may define their duties, determine their remuneration and provide a system of organization to establish responsibility and promote efficiency.

(2)     The Public Service Act and the Public Service Labour Relations Act do not apply to the corporation or to a director, officer or employee of the corporation.

                    XXXXXXXXX

                    XXXXXXXXX

Employment Contracts for Assignments in Singapore and Japan

Pursuant to subsection 3(1) of the TDC Act, the XXXXXXXXX is an agent of the Crown. In our opinion paragraph 1(a) of Article 18 of both the Canada- Japan Income Tax Convention and the Canada-Singapore Income Tax Convention (the "treaties"), subject to the exceptions described in subparagraphs 1(b) of Article 18 of the treaties, would apply. In this regard, since the agent is providing services of a governmental nature on behalf of the Crown and since the remuneration has been paid by such agent from amounts funded by the Crown, regardless of the individuals status under paragraph 250(1)(c)(ii) of the Act, such remuneration is taxable only in Canada.

Where the employees have severed their factual residence status in Canada, such remuneration would still be taxable in Canada pursuant to paragraphs 115(2)(c), (d) and (e) of the Act. The exception referred to in clause 115(2)(e)(i)(A) of the Act cannot apply since Japan or Singapore, as the case may be, has been denied the right to tax such remuneration pursuant to Article 18 of the treaties.

Independent Contractor vs. Employee

Based on the contract provided, we are not satisfied that the relationship between the so-called independent contractor and XXXXXXXXX is not one of employee/employer.

Upon comparison of the employment contract and the independent services contract, we note that the services to be carried out by both individuals are almost the same if not the same. We also note that both individuals are compensated on a fixed or ascertainable stipend or remuneration and are both entitled to 4 weeks vacation. Both individuals have to account for their time and all expenses, up to a $XXXXXXXXX limit for the independent contractor, are reimbursed by the XXXXXXXXX  Both individuals are subject to performance reviews in which unsatisfactory performance can result in the termination of the contract.

We have concerns with those situations where two individuals, for all intents and purposes, will provide almost the same if not the same services under the same conditions to an employer but will have different employment status. In considering this issue it may be helpful to determine the individual's employment status immediately before and after the foreign assignment with the XXXXXXXXX or any other employer. That is, if the so-called independent contractor was an employee immediately before the assignment and will continue to be an employee upon his return to Canada, this would support the position that the contract was one of employment and not of independent service. If you take the position that the independent contractor is in fact an employee, our comments above regarding the application of paragraph 250(1)(c) of the Act and Article 18 of the treaty apply equally to that individual.

The following judicial tests offer additional support of our view that the so-called independent contractor is in fact an employee of XXXXXXXXX

Control Test

Historically the most important test in the determination of such a relationship is that of control. This test was first set down by Baron Bramwell in R. v. Walker ((1858), 27 LJMC 207, 208):

     "It seems to me that the difference between the relations of master and servant and of principal and agent is this:  A principal has the right to direct what the agent has to do; but a master has not only that right, but also the right to say how it is to be done."

                    XXXXXXXXX

Based on the above facts, it would appear that the contractor is still very much under the control of XXXXXXXXX with respect to how he can go about providing his services. However, because of the nature of this service, like the service to be performed under the employment contract, on-the-job direction to the individual is minimal and some flexibility as to how the service will be performed remains in the individual's control. This is the reason the control test can generally not stand alone when making an employee/employer determination. We must therefore look at other tests.

Entrepreneur Test

Even though the control test is still fundamental in such determinations (see decision of the Supreme Court of Canada in Hopital Notre-Dame de l'Esperance and Theoret v. Laurent et al., (1978) 1 S.C.R. 605, 613), the courts have concluded that the test is generally too simple given the complexities of modern industry and have developed a four-in-one test ("entrepreneur test") that examines several major elements constituting the relationship between the parties  —  control (see comments above), ownership of the tools used, chance of profit and risk of loss. The definitive authority is the Federal Court of Appeal decision in Wiebe Door Services Ltd. v. the Minister of National Revenue, 87 DTC 5025.

Ownership of Tools Used

                   XXXXXXXXX

Chance of Profit

                   XXXXXXXXX

Risk of Loss

Again, since the contractor is compensated by a fixed monthly annual stipend, he is not exposed to any risk of loss.

Integration Test

The "organization" or "integration" test has also been used often in Canadian courts. However, its appropriateness is unclear in light of the Wiebe Door Services Ltd. decision. This test examines whether the service is performed as an integral part of the business, or whether it is only accessory to the business. If it is integral, the individual providing the service is considered an employee.

             XXXXXXXXXX

             XXXXXXXXXX

Independent Services Contract for Assignment in Japan

Should you decide not to treat the relationship between the so-called independent contractor and     XXXXXXXXXX    as one of employee/employer, regardless of the individual's residence status under the treaty, Japan will maintain its right to tax all profits from services performed in Japan pursuant to either Article 7 or 14 of the treaty. Where the individual has severed his factual residence status in Canada, subsection 115(2) of the Act does not apply in respect of compensation paid to an independent contractor for services performed outside Canada.

Where the individual has remained factually resident in Canada while temporarily absent herefrom, he is liable for Canadian tax on his world income. The treaty would have to be considered to determine if Canada's right to tax the foreign source income has been maintained or denied. If the individual is liable for tax in Japan on his worldincome while on assignment in Japan, he will be considered a resident of both Japan and Canada for purposes of paragraph 1 of Article 4 of the treaty. If the Canadian and Japanese competent authority, by mutual agreement, resolve the tie in favour of Japan, Article 7 or 14 of the treaty, as the case may be, would deny Canada the right to tax such income. Canada would then provide a deduction for such income under paragraph 110(1)(f) of the Act. Where the tie-breaker rules are settled in favour of Canada, Canada's right to tax would not be affected by the treaty and Canada would provide a foreign tax credit for any Japanese taxes paid in respect to that contract.

We should emphasize that the individual must be liable for tax in Japan on his world income in order for him to be considered a resident of Japan for purposes of paragraph 1 of Article 4 of the treaty. It is possible that the individual on assignment in Japan will not be subject to Japanese income tax on his Canadian government earnings. We would also suggest that you contact the international taxation office if you require some assistance in making a factual residency determination for these individuals who may in fact not be severing their residential ties with Canada.

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental  Affairs Branch