2 May 1997 External T.I. 9530755 - CANADA-U.S. SOCIAL SECURITY AGREEMENT

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:

Will the Department accept an application for CPP coverage pursuant to subparagraph 2(a) of Article V of the Canada-U.S. Social Security Agreement where the period of work outside Canada is intended to be on a permanent basis once the employee receives his permanent residence status (i.e. green card) in the United States?

Position:

Technically no. However, the competent authorities can make exceptions.

Reasons:

The Department generally only accepts applications for those "temporary" assignments outside Canada.

            953075
XXXXXXXXXX  Jim Wilson
(613) 957-8953

Attention: XXXXXXXXXX

May 1, 1997

Dear Sirs:

Re: Canada - U.S. Social Security Agreement (the "Agreement")

This is in reply to your letter dated November 15, 1995 wherein you requested our comments concerning the application of paragraph 2 of Article V of the Agreement. We apologize for the delay in our response. The facts that you have asked us to consider can be summarized as follows:

1.A Canadian corporation intends to transfer individual employees to the United States to work for an affiliated company located in the United States. It is the intention of the Canadian employer that the move will become a permanent transfer once the employee receives permanent residence status in the United States.

2.Initially, each employee will be working in the United States on temporary work visas (e.g. L1 visas or TN visas (NAFTA)). This work period will be referred to as the "Initial Period".

3.It is expected that each employee will eventually apply for permanent residence status in the United States (ie. "green card"). However, no individual employee has any certainty of receiving a U.S. green card.

You have specifically requested our comments, as they pertain to the above set of facts, on the following questions:

1.The factors that should be considered to determine whether the exceptions as provided in subparagraph (2)(a) and (2)(b) and/or (2)(c) of Article V of the Agreement apply?

2.The meaning of "separate period of work" as found in subparagraph (2)(b) of the Agreement?

3.The importance, under the Agreement, of the Canadian employer's "right" to direct and control the employee while working in the United States.

Our Comments

The starting point for any question concerning an employee's eligibility for coverage under the Canada Pension Plan ("CPP") is the CPP and the Regulations thereto. Once it is determined whether a particular employee is employed by an employer in "pensionable employment", as that term is defined in sections 6 and 7 of the CPP and Part III of the Regulations thereto, then we must look to the Agreement to determine if that employee's right to such coverage is denied or maintained. The general rule, as provided by paragraph (1) of Article V of the Agreement, is that "an employed person who works in the territory of one of the Contracting States shall, in respect of that work, be subject to the laws of only that Contracting State" (hereinafter referred to as the "General Rule"). One of the main exceptions to the General Rule, which is the purpose of your letter, is described in paragraph (2) of Article V of the Agreement and reads as follows:

(2)(a)Where an employed person is covered under the laws of one of the Contracting States in respect of work performed for an employer having a place of business in the territory of that Contracting State and is then required by that employer to work in the territory of the other Contracting State, the person shall be subject to the laws of only the first Contracting State in respect of that work, as if it were performed in the territory of the first Contracting State. The preceding sentence shall apply provided that the period of work in the territory of the other Contracting State does not exceed 60 months.

(b)For the purpose of subparagraph (a), where a person is required to work in the territory of the other Contracting State for intermittent periods of short duration, each such period shall be considered a separate period of work.

(c)With the prior mutual consent of the Competent Authorities of the Contracting States, subparagraph (a) shall also apply:

(i)where the employer does not have a place of business in the territory of the first Contracting State, or

(ii)where the period of work in the other Contracting State exceeds or is expected to exceed 60 months.

In the Supreme Court of Canada decision in Crown Forest Industries Limited (95 DTC 5389) the court recognized that a bilateral income tax convention should be interpreted not simply by looking at the plain meaning of the words but by reference to the purpose of the convention and the intention of the Drafters of the particular convention. We believe the comments made by the Supreme Court of Canada would apply equally to the interpretation of a bilateral social security agreement.

With respect to Question #1 above, you have stated that you "understand that administratively Revenue Canada, Taxation looks to the nature of the assignment (ie., temporary or permanent) to determine whether eligibility for coverage under the Canada Pension Plan can continue". In this regard, you would like us to "clarify the meaning of "temporary" as it is not defined or even mentioned in the wording of the Agreement".

Subparagraph (2)(a) of Article V of the Agreement provides an exception to the General Rule where, among other criteria, the period of work in the other Contracting State does not exceed 60 months. The intention of the "60 month" rule in the Agreement, and other Social Security Agreements where a similar provision is utilized, is to permit continuity of social security coverage when a person is working temporarily in another country, and to prevent situations where a person would have to contribute to two countries' social security programs for the same work. Our Department's position on "temporary or permanent", as it pertains to whether eligibility for coverage under the Canada Pension Plan can continue, is based solely on the "60 month" condition in subparagraph 2(a) of Article V of the Agreement. Accordingly, "temporarily", as that term is used by the Department in paragraph 3 of Information Circular 84-6, means those transfers to a job site in the other Contracting State that are not intended to extend beyond 60 months.

The Department will generally only accept an application for CPP coverage pursuant to subparagraph 2(a) of Article V of the Agreement where the period of work outside Canada is intended not to exceed 60 months from the outset of the transfer. Based on the facts provided above, it would appear that the intentions of the employer is to permanently transfer its employees from Canada to the United States. However, until the employee receives assurance (e.g. green card) from the U.S. government authorities as to whether he can stay in the United States on a permanent basis, the employee/employer relationship will be structured so that the employee remains an employee of the Canadian corporation during the Initial Period. In our opinion, regardless that the Canadian corporation will remain as the employer during the Initial Period, a fact that we would not concede without proper review of the facts, the employees would not meet the conditions described in subparagraph 2(a) of Article V of the Agreement where it is apparent that the Canadian corporation is intending to permanently send its employees to the United States.

You have stated that "Furthermore, the legislation appears to allow an election for CPP coverage with respect to a temporary posting during the Initial Period prior to obtaining permanent residence status in the United States provided that the Initial Period does not exceed 60 months and that the Canadian employer retains a "right" to direct and control the employee even though that "right" does not have to be exercised". We disagree with this statement in that the "Initial Period" should not, in our opinion, be considered a "separate period of work" for purposes of subparagraph (2)(b) of Article V of the Agreement. Furthermore, it is our opinion that the intention of the Agreement is not to permit employees to choose which system they wish to be covered by for the first 60 months.

We disagree with the importance that you have placed on the employer's "right to control the activities of the employee" with respect to whether the employee qualifies for the exception in subparagraph 2(a) of Article V of the Agreement. In our opinion, the right to control the activities of the employee would generally only be relevant to the issue as to who in fact is the actual employer. Where the actual employer is the U.S. affiliate, then the employee may not, depending on the circumstances, be carrying out "pensionable employment" and thus may not be eligible for coverage under the CPP. Where the actual employer is the U.S. affiliate and such services are considered "pensionable employment" under the CPP, then the employee would have to rely on subparagraph 2(c)(i) of Article V of the Agreement to avoid the General Rule.

We should also point out that we have concerns with those situations involving employee transfers to affiliated corporations where the contracts of employment do not necessarily reflect the true working relationship between the relevant parties. In our opinion, the written terms of the contract engaging the worker are instructive but not conclusive as to the employment or non-employment relationship between the parties, and it is the actual working conditions in/during the performance of the work that determine the relationship between the parties.

Competent Authority

We acknowledge that the situation you have described is unique in that an employee may, from the outset, intend to permanently relocate to the United States but, due to circumstances such as his permanent immigration status being denied or revoked, has had to return to Canada within the 60 month period. We would suggest that, with respect to the Initial Period, pursuant to paragraph 11 of Article V of the Agreement, the employer request the Competent Authorities to consider the matter. It is our understanding that the Competent Authorities have addressed similar issues in the past and do have the authority to make exceptions in the application of paragraph 2 of Article V of the Agreement. In this regard, it would generally be preferable for the Department to resolve these matters before the employees leave Canada as opposed to dealing with these issues on a retroactive basis.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3 this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Customs, Excise and Taxation.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch