11 February 1987 Income Tax Severed Letter 97-1344 F

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.

RE:     XXX - Retiring Allowance

This is in reply to your memorandum of December 11, 1986 and attachments in regard to the Canadian tax status of a retiring allowance to be paid to the above-noted taxpayer

XXX. You enquire as to whether a waiver can be issued in these circumstances or, whether the severance payment is subject to Part XIII tax under paragraph 212(1)(j.1) of the Income Tax Act (the "Act") since, in your view, the payment originates from employment in Canada. We understand the taxpayer also requests a refund of amounts withheld at source on account of Canadian income tax for the period commencing January 1, 1980. It is our understanding that the taxpayer did not file income tax returns in Canada or in Italy during this period.

Paragraph 212(1)(j.1) of the Act generally requires that a tax of 25% be paid on every amount that a person resident in Canada pays to a non-resident on account of a retiring allowance. In our view the severance payment in question qualifies as a retiring allowance as that term is defined in subsection 248(1) of the Act. Also, assuming the facts stated above are correct, in our view, the taxpayer is a non-resident of Canada.

Article 19(1)(a) of the Canada-Italy Income Tax Convention (1977) (the "Convention") provides that remuneration, other than a pension, paid by a Contracting State to an individual in respect of services rendered to that State shall be taxable only in that State. However, Article 19(1)(b) provides that such remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the recipient is a resident of that State who:

(i) is a national of that State; or

(ii) did not become a resident of that State solely for the purpose of rendering the services.

In order to be exempt from tax in Canada under Article 19(1)(b) on her remuneration from the Canadian Embassy, the taxpayer must meet each prerequisite contained in that article. The taxpayer must first qualify as a "resident of that State" (Italy). The term "resident of a Contracting State" is defined for purposes of the Convention in Article 4(1) to mean any person who, under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature but not including a person who may be taxed in that State in respect only of income derived from sources in that State.

Provided our understanding of the facts is correct, in our view the taxpayer became a resident of Italy within the meaning of Article 4(1) when XXX. At that time, she became liable to tax in Italy by reason of her domicile, residence or other similar criterion used by that State for determining such liability. We are advised that because of the taxpayer's particular circumstances XXX. This fact, however, did not, in our view, affect the status of her liability for tax in Italy, i.e. she continues to be liable as long as she meets the criteria used by Italy for determining liability for tax in that State. The question of whether a person is liable for tax is much broader than the question of whether any tax is payable. The former concerns the right to levy tax; the latter concerns the application of specific rules to particular facts. We also note that the exception afforded the taxpayer by Italy is only for her income from the XXX and does not affect other sources of income. Thus, in our view the taxpayer meets the prerequisite in Article 9(1) of being a resident of Italy for purposes of the convention.

In our view the payment in question meets the requirement of "remuneration other than a pension" described in Article 19(1). The term "pension" is not defined in the Convention and thus takes on the meaning it has for purposes of the Income Tax Act. Under that Act a retiring allowance is not considered to be a pension benefit. Also in our view the prerequisite in Article 19(1)(b)(ii) is met because, considering the time when the taxpayer became a resident of Italy and the time when she commenced employment with the XXX it would appear that she did not become a resident of that State solely for the purpose of rendering the services.

A further prerequisite of Article 19(1)(b) is that the services rendered to Canada by the taxpayer be rendered in Italy. We understand that you view the retiring allowance as originating from employment in Canada. In this respect we note that paragraphs 115(2)(c) and (d) of the Income Tax Act deem the taxpayer to be employed in Canada since she was a locally engaged non-resident who was a former resident of Canada and who was not a deemed resident in Canada under section 250 of the Act. However, the deeming provision in paragraphs 115(2)(c) and (d) applies only for Canadian domestic law and does not apply to deem a taxpayer to perform services in Canada for purposes of the Convention when those services are actually performed outside Canada. We understand that services performed at XXX are considered to be performed in the host country and not in the country of the XXX. In our view all of the requirements of Article 19(1)(b) are met and thus under the Convention the retiring allowance is exempt from tax in Canada.

As provided for in subsection 8(3) of the Canada-Italy Income Tax Convention Act, 1980, in the event of any inconsistency between the provisions of the Convention and the provisions of any other law, the provisions of the Convention prevail to the extent of the inconsistency. Thus, the application of Article 19(1)(b) of the Convention prevails over paragraph 212(1)(j.1) of the Income Tax Act or any other provision of that Act in respect of the retiring allowance. For these reasons it is our view the severance payment or retiring allowance is not taxable in Canada.

With regard to the taxpayer's claim for a refund of Canadian taxes paid commencing on January 1, 1980, in our view, this also depends on the application of Article 19(1)(b) of the Convention. In our view the exception in Article 19(2) concerning the application of Article 15 does not apply because the XXX is not considered to be carrying on business within the meaning of the Convention. Since in our view Article 19(1)(b) applies to remmuneration received by the taxpayer in this case it would appear to us that the taxpayer is exempt from tax in Canada on her remuneration from the XXX from the date of the coming into force of that article, which by Article 27(2)(a)(i) is January 1, 1980.