23 June 1997 External T.I. 9715445 - Taxation of a disability pension received by a U.S. RESIDENT

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:

Taxation of Disability Pension Paid from Canada to a U.S. Resident Individual

Position:

Taxable but rate restricted by Canada-U.S. treaty

Reasons:

Taxable pursuant to s. 2(3), 6(1)(f), 115(1)(a) & 115(2) of the Act but rate restricted 15% of Gross Amount of Payments Pursuant to Article XVIII of Canada-U.S. Convention.

971544
XXXXXXXXXX David R. Senécal

June 23, 1997

Dear XXXXXXXXXX:

This is in reply to your letter of May 31, 1997, wherein you question the position taken by this department with respect to a U.S. resident individual's Canadian income tax liability. In this regard, we have been informed by Mr. D. Byrne of our International Tax Services Office that the taxpayer in question is yourself.

We understand from your letter and our discussions with Mr. Byrne that you were formally a resident of Canada and that, on XXXXXXXXXX, you were certified as being totally and permanently disabled requiring you to retire from your employment in Canada XXXXXXXXXX. For medical reasons, you became a resident of the U.S. on XXXXXXXXXX. In complying with a request from our department to file Canadian income tax returns for the XXXXXXXXXX taxation years, you claimed a deduction on your XXXXXXXXXX Canadian tax return for certain losses you suffered as the result of natural disaster which took place in that year. As a resident of the U.S., you question the basis on which we are taxing your income and, in particular, our refusal to allow a deduction for the losses you incurred.

Comments

Contrary to the statement made in your letter, you were not requested to file income tax returns for the taxation years in question on the basis that you were a resident of Canada for the purposes of the Canadian Income Tax Act (the "Act"). Rather you were considered as being a non-resident of Canada with certain Canadian source income which was taxable in Canada.

Pursuant to subsection 2(3) of the Act, a non-resident of Canada, who is employed in Canada is taxable under Part I of the Act with respect to that person's taxable income earned in Canada as determined in accordance with Division D of the Act. Subsection 115(2) of the Act, states that, for the purposes of subsection 2(3), an individual, who had, in any previous year, ceased to be resident in Canada and who was, in the taxation year, in receipt of remuneration in respect of an office or employment that was paid to the individual directly or indirectly by a person resident in Canada, will be "deemed" to have been employed in Canada. As indicated to you by Mr. Byrne in his letter of May 1, 1997, your disability income is considered to be income from a Wage Loss Replacement Plan for the purposes of the Act and is taxable pursuant to paragraph 6(1)(f) of the Act as income from an office or employment. Consequently, the disability payments you received resulted in your being considered, for the purposes of the Act, as having received income from being employed in Canada

As also indicated to you by Mr. Byrne, unlike the U.S. Internal Revenue Code (the "Code"), there is no provision in the Act which allows a taxpayer to deduct an amount for losses incurred as a result of a natural disaster. This is true, whether the taxpayer is a resident or a non-resident of Canada. As the Act is not denying you a deduction which would otherwise be available under the Act to a resident of Canada or to a resident of a third State, you are not being subject to "any taxation which is other or more burdensome". Consequently, we are of the opinion that the provisions of Article XXV (Non-Discrimination) of the Canada-U.S. Income Tax Convention (the "Convention") have no application to your situation.

As this department does not consider you as being a resident of Canada for tax purposes and the facts would indicate that you are considered to be a resident of the U.S. for purposes of the Code, we agree with your position that you are a resident of the U.S. for purposes of the Convention. However, the opening words "For the purposes of this Convention" of paragraph 1 of Article IV (Residence) clearly indicate that Article IV only determines the State of residence of a taxpayer for the purposes of reading and applying the provisions of the Convention. While it is true that a particular provision of the Convention may have the effect, as illustrated below, of restricting either Canada's or the U.S.'s right to tax a person who is considered by either State or both as being a resident under the provisions of the Act or the Code, a taxpayer's residence status as determined for the purposes of the Convention has no bearing on the taxpayer's residency status for purposes of the Act or the Code. In other words, Article IV does not, as indicated by yourself and Mr. Byrne, determine which country has the right to tax the individual as a resident.

As to how the provisions of the Convention apply to your situation, Mr. Byrne has indicated to you that, while income from a wage loss replacement plan is taxable as income from employment for purposes of the Act, such income is considered as being pension income for the purposes of applying the provisions of the Convention. This is due to the fact that paragraph 3 of Article XVIII (Pensions and Annuities) of the Convention defines the term "pensions" as including any payment under a sickness, accident or disability plan. Consequently, one must refer to the provisions of Article XVIII of the Convention rather than those of Article XV (Dependent Personal Services) in determining whether Canada is restricted in any manner from taxing your income in accordance with the provisions of the Act as discussed above. As indicated by Mr. Byrne, sub-paragraph 2(a) of Article XVIII restricts Canada's right to tax pension payments arising in Canada (in your case, disability payments) and paid to a resident of the U.S. (as determined for purposes of the Convention) to an amount not exceeding 15% of the gross amount of the pension payments. It is for this reason that your Canadian tax liability has been limited to 15% of the gross amount of the disability payments received by you from XXXXXXXXXX.

We trust that the above comments explain our department's position in this matter.

Yours truly,

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

c.c. D. Byrne
International Tax Services Office