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.
Interaction of section 216 election and "all or substantially all" test in section 118.94
Section 216 provides that election cannot affect Part I tax otherwise payable and what constitutes world income and a non-resident's taxable income earned in Canada
November 8, 1996
International Tax Services Office International Section
David R. Senécal
Attention: Robert Allen (613)957-9796
Section 216 Election
This is in reply to your facsimile of October 24, 1996, wherein you requested our views as to the interaction between section 216 of the Income Tax Act (the "Act") and the "all or substantially all" rule described in section 118.94 of the Act.
You describe a situation where a non-resident individual's only sources of income are rent from real property situated in Canada, which is subject to Part XIII tax, and income from employment which is taxable under under Part I of the Act pursuant to sub-paragraph 115(1)(a)(v) and paragraph 115(2) thereof. Should the non-resident elect to file a separate return pursuant to section 216 of the Act and pay Part I tax with respect to the rental income net of expenses, you question the effect, if any, this would have on the non-resident's ability to claim non-refundable tax credits against the Part I tax payable with respect to the employment income given the "all or substantially all" test in section 118.94 of the Act.
As you have indicated, the "all or substantially all" test is considered to be met when 90% or more of the non-resident's world income for the year (the "denominator") is included in computing the non-resident taxable income earned in Canada for that year (the "numerator"). In our view, world income means income from all sources in and outside Canada including income subject to Part XIII tax. However, even though Part III tax is levied on the gross amount of a particular payment, we believe this is only a measure of the Part XIII tax payable and that, for the purposes of calculating a non-resident's world income on a quantative basis, income subject to Part XIII refers to net income (i.e., after applicable expenses, if any) although being of the type or category of income which is subject to Part XIII tax. In our view, the example of the computation of the 90% rule you submitted to us should be revised accordingly.
On the numerator side, however, we do not consider income, which is subject to Part XIII tax, as being "included in computing the non-resident's taxable income earned in Canada for the year". While, pursuant to subsection 115(1) of the Act, a non-resident's taxable income earned in Canada for a taxation year is determined under section 3 of the Act, only certain specific components or sources of income among the many sources of income which are otherwise taken into account in section 3 are to be included. Income, which is subject to Part XIII tax, is not one of those components or sources of income.
While section 216 of the Act allows a non-resident in receipt of rent on real property in Canada to file a return of income under Part I of the Act with respect to that income in lieu of paying Part XIII, this comes with the important caveat that this shall be done "without affecting the liability of the non-resident for tax otherwise payable under Part I". We believe that as a result of this caveat, the filing of a return of income pursuant to section 216 cannot have any impact on whether or not an individual meets the "all or substantially all test in section 118.94. Consequently, the income which has been reported on a return of income pursuant to section 216 is not included in the non-resident's taxable income earned in Canada.
We trust that our comments will be of assistance.
Reorganizations and International Division
Income Tax Rulings and
Policy and Legislation Branch
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