23 July 1987 Income Tax Severed Letter 94-0383 F

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.

RE: XXX

This is in reply to your enquiry dated June 23, 1987 submitted by Darlene McLeod concerning whether payments made to an individual resident in the Netherlands are subject to tax in Canada.

It is our understanding that 19(1) was employed in Canada by 19(1) until 1985. In August 1985 he ceased to be a resident of Canada and became a resident of the Netherlands. In 1986 19(1) received a retroactive severance settlement and a retroactive pay and vacation settlement from 19(1). It is our understanding that the retroactive severance settlement is a retiring allowance as defined in subsection 248(1) of the Income Tax Act (the "Act") and that the retroactive pay and vacation settlement is salary and wages as defined in subsection 248(1) of the Act.

In our opinion the retroactive severance settlement would not be subject to tax in Canada. For the payment to be taxable in Canada it must be considered to be "remuneration for labour or for services" within the meaning of those words in Article XI of the Canada-Netherlands Income Tax Convention (1957) (the "Convention"). Because the words "remuneration for labour or services" are not defined in the Convention then, in accordance with paragraph 2 of Article II thereof, we must look to Canadian law to determine whether those words include Canadian sourced retiring allowances received by a resident of the Netherlands. In our view, based on the analysis outlined in the following paragraph, they do not.

Under the Act, retiring allowances are by design taxed separately from income from an office or employment, as witness both the definition of "salary or wages" in subsection 248(1) of the Act which specifically excludes retiring allowances and the existence of subparagraph 56(1)(a)(ii) of the Act which brings said retiring allowances into a taxpayer's income apart from subsections 5(1) and 6(3) of the Act. Accordingly, in our opinion we would have great difficulty in sustaining a position that the retroactive severance pay in question constituted remuneration for labour or services for purposes of Article XI of the Convention. In addition, since in our view none of Articles I through XVI of the Convention apply to such a retiring allowance, then pursuant to Article XVII such an amount received by a resident of the Netherlands would be taxable only in the Netherlands.

With respect to the retroactive pay and vacation settlements, it is our opinion that they do constitute remuneration for labour or for services within the meaning of Article XI of the Convention and therefore are subject to tax in Canada.

If you require any further information, do not hesitate to contact us.