30 April 1996 External T.I. 9614165 - APPLICATION OF SECTION 80.5 TO NON-RESIDENTS

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:

Resident of Canada was reporting a benefit under 80.4(1) and an offsetting deduction under 20(1)(c) pursuant to section 80.5 of the Act. He subsequently severs his residential ties. Does he loose his future 20(1)(c) deduction?

Position:

Yes.

Reasons:

The loss of the deduction is solely a consequence of our Part XIII tax system to non-residents. That is, expenses incurred by a non-resident in earning income that is subject to Part XIII tax, with the exceptions of income that is eligible for an election under sections 216 or 217 of the Act, are not taken into consideration in the computation of the Part XIII tax.

								961416
XXXXXXXXXX						Jim Wilson
(613) 957-2123

April 30, 1996

Dear Madam:

Re: Section 80.5 of the Income Tax Act (the "Act")

We are writing in response to your letter, which was not dated, wherein you asked for our comments concerning the tax treatment of a non-resident of Canada under the following circumstances.

An individual was a resident of Canada and employed by Company A, a Canadian corporation. The individual was granted a loan from Company A to purchase common shares of Company A. The interest rate on the loan was lower than the rate prescribed for purposes of subsection 80.4(1) of the Act. While the individual was resident in Canada, he reported a taxable benefit each year in accordance with subsections 80.4(1) and 6(9) of the Act and, deducted each year, in computing his income from the shares, the deemed interest benefit in accordance with subsection 80.5 and paragraph 20(1)(c) of the Act.

Subsequently, the individual ceased to be employed by Company A and ceased to be a resident of Canada. The loan remained outstanding and a benefit still arose in accordance with the provisions of subsection 80.4(1), 6(9) and 115(1)(a)(i) of the Act. The individual continues to own the shares of Company A, however, because the dividends on the shares will be taxable under Part XIII rather that Part I of the Act, the individual will not be able to take advantage of the deduction that would have been available under paragraph 20(1)(c) of the Act had he been a resident of Canada.

You are asking if the above results are correct and, if so, are such results appropriate or unintended.

Our Comments

We agree that the results discussed above are correct. Subject to the application of any bilateral income tax treaty, the application of paragraph 115(1)(a)(i) of the Act with respect to the taxable benefit received by the non-resident under subsections 80.4(1) and 6(9) of the Act is consistent with the Department's treatment of stock options where such options were exercised after the Canadian resident employee became a non-resident of Canada (see Hurd vs. the Queen, 1981 DTC 5140 (F.C.A.)).

We disagree, however, that the loss of the paragraph 20(1)(c) deduction is unintended. The loss of the deduction in the above circumstances is solely a consequence of the Canadian tax system with respect to non-residents. Under Part XIII of the Act, non-residents are taxed on their gross income at a fixed rate of 25%, subject to a bilateral income tax treaty. Expenses incurred by a non-resident in earning income that is subject to Part XIII tax, with the exception of income that is eligible for an election under sections 216 or 217 of the Act, are not taken into consideration in the computation of the Part XIII tax.

Enquiries as to whether such results are appropriate from a tax policy perspective should be directed to the Department of Finance. However, we would like to point out that the loss of the paragraph 20(1)(c) deduction in the above scenario with respect to the deemed interest expense (i.e. section 80.5) is consistent with the loss of the paragraph 20(1)(c) deduction with respect to the non-resident's actual interest expense (the interest paid on the loan). The loss of the deduction in the latter case where an individual severs his residential ties with Canada is, relatively speaking, a common occurrence.

With respect to how you would go about applying for a remission order under the Financial Administration Act, you should forward such a request to your local tax services office with a description of all the pertinent facts and circumstances of the case. We have attached a copy of the Department's "Remission Guidelines" for your reference.

We trust you will find the above comments of some assistance.

Yours truly,

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