27 October 1995 External T.I. 9516265 - EPSP - NON-RESIDENT BENEFICIARIES

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.

Principal Issues:

1.Whether amounts allocated to a non-resident under an EPSP are taxable.

2.Whether there are withholding tax requirements on allocated amounts paid to a non-resident.

Position:

1.Yes if it relates to duties performed in Canada.

2.No withholdings.

Reasons:

1.The Act.

2.The Act. 5-942025 and 921386

									5-951626
XXXXXXXXXX							L. Roy

Attention: XXXXXXXXXX

October 27, 1995

Dear Sirs/Madam:

Re: Taxation of Non-Resident Beneficiaries of Employee Profit Sharing Plans

This is in reply to your letter of June 14, 1995 in which you requested a technical interpretation concerning Employee Profit Sharing Plans ("EPSP") in a situation involving an employee who becomes non-resident.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. Nevertheless, we offer you the following general comments which may not be applicable to the circumstances of your particular situation.

Pursuant to paragraph 6(1)(d) of the Income Tax Act ("Act"), all amounts allocated to a beneficiary under an EPSP as provided in section 144, including investment income other than capital gains and losses and amounts required by subsection 144(7) of the Act to be included in income, must be included in computing the beneficiary's income for a taxation year as income from an office or employment. According to subparagraph 115(1)(a)(i) of the Act, a non-resident beneficiary is required to include any income received from the duties of an office or employment performed in Canada, in the computation of his taxable income earned in Canada.

Therefore, where an employer's contributions allocated to a non-resident employee relate to duties performed in Canada, it is our view that the allocated amount is required to be included in computing the non-resident person's taxable income earned in Canada, by virtue of subsection 2(3), subparagraph 115(1)(a)(i) and paragraph 6(1)(d) of the Act. However, where the employer's contributions allocated under an EPSP relate to duties performed outside Canada by a non-resident employee, it is our view that the allocated amount is not required to be included in computing the non-resident person's taxable income earned in Canada under subsection 2(3) of the Act.

As regards the allocation of the growth in the plan (i.e., interest or dividends), they will be subject to the same tax treatment as the employer's contributions to which they relate. For example, where a contribution is made to an EPSP in respect of duties performed abroad, the subsequent growth in the plan attributable to such contribution is considered to relate to those foreign duties. Therefore, where such growth is allocated to the non-resident, it will not be included in the non-resident person's taxable income earned in Canada.

Pursuant to subsection 144(6) of the Act, an amount received from an EPSP by a beneficiary is not included in computing the beneficiary's income for the year. However, pursuant to paragraph 144(7)(b) of the Act, the amount received will be included in computing the beneficiary's income if it was not previously required to be included in income. Therefore, where allocations that were not required to be included in computing a non-resident's taxable income are received upon the non-resident's return to Canada, it is our view that paragraph 144(7)(b) of the Act will apply to tax the amount received out of the EPSP.

Pursuant to section 212 of the Income Tax Regulations, every trustee governed by an EPSP, or an employer instead of such trustee, is required to file a T4PS Summary and Supplementary forms in order to report amounts allocated, forfeited and paid under section 144 of the Act. Allocations, forfeitures and payments, to the extent they are required to be included in income of the beneficiaries, must be reported on the TPS Summary and Supplementary forms.

With respect to withholdings, paragraph 153(1)(a) of the Act provides that a person paying, at any time in a taxation year "salary or wages or other remuneration", shall withhold therefrom such amount as may be determined in accordance with prescribed rules. Those prescribed rules are set out in sections 102 and 103 of the Income Tax Regulations.

Therefore, since the employer's contributions included in income under paragraph 6(1)(d) of the Act are allocated to the employee and not paid, it is our view that withholding is not required, pursuant to paragraph 153(1)(a) of the Act and the related Income Tax Regulations, when the employer makes the contributions, nor on the allocation by the trustee, and regardless of whether the beneficiary resides or not in Canada.

Also, where a payment is made and not included in the income of the beneficiary pursuant to subsection 144(6) of the Act, subsection 153(1) of the Act would not apply to withhold tax on such amount. However, where a payment is received by a non-resident person who returns to Canada and is included in income pursuant to paragraphs 6(1)(d) and 144(7)(b) of the Act, it is our view that withholdings would be required.

Furthermore, Part XIII tax is not considered to apply to amounts allocated to non-resident beneficiaries. With respect to the deeming provision in subsection 144(8) of the Act (deemed receipt of dividends), it is our view that the deemed receipt under that provision do not constitute the payment or crediting of dividend for the purposes of Part XIII of the Act.

Pursuant to paragraph 128.1(4)(b) of the Act, where a taxpayer ceases to be resident in Canada, he is deemed to have disposed of each property owned at that particular time. Where the taxpayer is an individual, other than a trust, taxable Canadian property is excluded from this deemed disposition. Section 116 of the Act applies where a non-resident proposes to or actually disposes of certain types of taxable Canadian property. You may consult the Information Circular 72-17R4 that provides the procedures concerning the disposition of taxable Canadian property by non-residents of Canada.

The foregoing comments are not rulings and in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch