17 February 1995 External T.I. 9400545 - RESIDENCE & SOURCE DEDUCTIONS (HAA7576-1)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		940054
XXXXXXXXXX	S. Leung
(613) 957-2115

Attention: XXXXXXXXXX

February 17, 1995

Dear Sirs:

Re: Paragraph 250(1)(a) of the Income Tax Act (the "Act") and Articles IV and XV of the Canada-United States Income Tax Convention (the "Convention")

We are writing in response to your letter of January 3, 1994 in which you requested our views on certain matters in connection with paragraph 250(1)(a) of the Act and Articles IV and XV of the Convention. We apologize for the delay in replying.

It is our opinion that if by virtue of paragraph 250(1)(a) of the Act a taxpayer is deemed to be a resident of Canada, subsection 2(1) of the Act would be applicable. Our interpretation of the word "day" as used in paragraph 250(1)(a) of the Act and paragraph 2 of Article XV of the Convention includes part of a day. This interpretation is consistent with one of the definitions for the word "day" in Black's Law Dictionary which indicates that the whole or any part of a period of 24 hours from midnight to midnight constitutes a day. Such interpretation is also in line with paragraph 5 of the Commentary on Article XV of the OECD Model Convention wherein it states that part of a day is included in the calculation of the days of physical presence. In this regard, reference can also be made to paragraph 1 of IT-298.

We are not able to find any references in the case of R & L Food Distributors Ltd.¹ ("R & L") described in your letter that a "day" refers to each 24 hour period. Rather, the judge in that case stated that it "has been established beyond any doubt that both shareholders have spent more than 183 days in 1973 in Canada in the employ of the appellant".² In our view, the case was decided on whether the "mode of activity or life style (of the two shareholders) amounted to sojourning in Canada in the year for a period or periods, the aggregate of which is 183 days or more, within the meaning of (sub)section 250(1) of the said Act".³ After finding the meaning of "sojourn" is "to make a temporary stay in a place; to remain or reside for a time", the judge came to the conclusion that "coming from one country to work for the day at a place of business in another country and thereafter returning to one's permanent residence in the evening, is not tantamount to making a temporary stay in the sense of establishing even a temporary residence in the country where the business enterprise is situate".⁴ In this regard, it appears that the word "sojourn" used in paragraph 250(1)(a) of the Act is different from the word "present" used in subparagraph 2(b) of Article XV of the Convention.

Consequently, it is a question of fact whether a taxpayer, who is a resident of a foreign country and who is present in Canada for more than 182 days in a year, sojourns in Canada for more than 182 days in that year. It is the Department's view that generally if a taxpayer commutes to work in Canada for more than 182 days in a year and returns to his home daily to a country outside Canada, he will not be considered to sojourn in Canada for more than 182 days in that year to cause paragraph 250(1)(a) of the Act to be applicable. However, depending on the facts, there are instances that such a taxpayer may be considered to be ordinarily resident in Canada under subsection 250(3) of the Act. Where a taxpayer is considered to be ordinarily resident in Canada, the provisions of paragraph 250(1)(a) of the Act would not be applicable.

Notwithstanding that an individual may be considered to be a resident of Canada for purposes of the Act and be subject to taxation in Canada under subsection 2(1) thereof, by virtue of Article IV of the Convention (the tie-breaker rules) he may be deemed to be a resident of U.S. for purposes of the Convention. We do not feel that such an interpretation would lead to any conflict or inconsistency between the Act and the Convention. As a resident of Canada, an individual would be taxable under subsection 2(1) of the Act. For income which Canada does not have a right to tax because of the Convention, the individual may claim a deduction under subparagraph 110(1)(f)(i) of the Act. For income that Canada has a right to tax, he may find relief in the manner of a reduced tax rate under the Convention. He is also eligible to the personal tax credits described in subsection 118(1) of the Act despite the fact that certain of his income may not be subject to taxation in Canada by virtue of the deduction under subparagraph 110(1)(f)(i) of the Act.

If the individual is considered to be a non-resident of Canada taxable under subsection 2(3) of the Act, he may claim personal tax credits for a particular year under subsection 118(1) of the Act only if all or substantially all of his income for the year is included in computing his taxable income earned in Canada for the year pursuant to section 118.94 of the Act. In this regard, please refer to paragraphs 20 to 28 of IT-171R2, dated March 30, 1992.

Where a U.S. resident who is not a factual or deemed resident of Canada exercises his employment in Canada, his employer (whether a Canadian or a non-resident) is required to withhold source deductions in respect of the employment under subsection 153(1) of the Act even if the remuneration received by such an individual is exempt from Canadian taxation by virtue of paragraph 2 of Article XV of the Convention. However, pursuant to paragraph 2 of Article XVII of the Convention, the individual may apply to the competent authority of Canada for a waiver from, or reduction of, the withholding tax otherwise exigible. Such an application, however, would not be applicable to Canada Pension Plan ("CPP") and Unemployment Insurance ("UI") contributions because Article XVII of the Convention is not applicable to CPP and UI withholdings. It is our understanding that an employment would not be a pensionable employment referred to in the CPP legislation and would thus be exempt from CPP withholding if the employer is not a resident of Canada and does not have a permanent establishment in Canada by virtue of section 22 of the CPP Regulations. Also, CPP contributions are not required where a certificate of coverage under Article 5 of the Social Security Agreement between Canada and U.S. is provided to the Department for proof of social security coverage in U.S.

In the situation where a U.S. citizen carries out employment activities in Canada and a U.S. company is reimbursed by a Canadian resident for the employment costs, it is always a question of fact whether an employer/employee relationship exists between the U.S. citizen and the Canadian resident. If an individual comes to Canada and exercises his duties of employment for a Canadian company and the costs, whether directly or indirectly, are borne by the Canadian company, the presumption is that the Canadian company is an employer and the individual is taxed in Canada unless there are other facts which dictate the contrary. Even though the individual may be paid by a non-resident of Canada, but when he is performing his duties under the direction of the Canadian operation, the Canadian company will be considered to be the employer of the individual for purposes of the Act and the Convention. In such a case, the provisions of subsection 105(1) of the Income Tax Regulations ("ITR") would not be applicable by virtue of subsection 105(2) thereof. The Canadian company is required under subsection 153(1) of the Act and section 102 of the ITR to withhold and remit source deductions in respect of the remuneration paid indirectly to the individual through the non-resident.

In the event that the individual remains an employee of the non-resident employer, the Canadian company must withhold 15% of any payments made to the non-resident employer for the services of its employee and must report the payments and the withholdings on a T4A-NR Supplementary. Where the non-resident employer can demonstrate that it will not be subject to tax in Canada pursuant to the provisions of an income tax convention (e.g. the non-resident employer is not carrying on business in Canada through a permanent establishment in Canada), the withholding otherwise required by subsection 105(1) of the ITR may be waived. In this regard, reference should be made to paragraphs 10 to 16 of Information Circular 75-6R which pertain to the application for a waiver or a reduction of Regulation 105 withholding tax. If the payments made by the Canadian company to the non-resident employer constitute management fees (see IT-468 for the Department's views on what constitutes a management fee), please refer to paragraph 9 of Information Circular 76-12R4 with respect to withholding requirements.

Where it is determined that a U.S. company is carrying on business in Canada, it remains a question of fact whether the U.S. company has a permanent establishment in Canada under Article V of the Convention. Such a determination can only be made on a case by case basis. In the case concerning the provision of consulting or management services to a Canadian company, the Department would consider whether the U.S. company's place of business in Canada is situated in the business premises of the Canadian company. With respect to this point, it should be noted that paragraph 4 of the Commentary on Article 5 of the OECD Model Tax Convention supports the view that a "place of business" may exist where the Canadian company makes space available for the U.S. company to perform services. If such space is provided on a lengthy, continuous or recurring basis, the U.S. company may be considered to have a fixed place of business (i.e. a permanent establishment) in Canada. A U.S. company which carries on a business through a permanent establishment in Canada is subject to the provisions of Article V of the Convention and section 115 of the Act. The company will be required to file tax returns and will be liable to tax under Part I of the Act.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch

¹ R & L Food Distributors Ltd. v. M.N.R., 77 DTC 411 (TRB).

² Supra, at 412.

³ Ibid.

⁴ Supra, at 413
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