7 October 1997 Internal T.I. 9718637 - RESIDENCY - LOCALLY ENGAGED EMPLOYEES

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.

			October 7, 1997

	International Tax		International Section
	Ottawa Tax Services Office		David R. Senécal
(613) 957-9796
	Attention:Phil Fortier
	          Team Leader
				971863

Locally Engaged Employees - Canadian Embassy, Stockholm, Sweden

This is in reply to your memorandum of June 24, 1997, wherein you request our views regarding the taxation of locally engaged employees, particularly those hired by the Canadian Embassy in Stockholm.

To begin with, we believe that one must first determine whether the locally engaged employee ("LEE") is a factual or deemed resident of Canada for purposes of the Income Tax Act (the "Act"). If the LEE previously resided in Canada, it is important to ascertain whether the LEE, although absent from Canada, continues to have sufficient residential ties with this country to be considered as remaining a factual resident (i.e. ordinarily resident of Canada). Even if the LEE can show that he or she is not a factual resident, paragraph 250(1)(c) or paragraph 250(1)(e) of the Act may, nevertheless, deem that person to be resident here.

For instance, in the case mentioned in your memorandum of a LEE who is a resident of Canada immediately prior to obtaining employment with a Canadian embassy, we would consider that the LEE would, nevertheless, continue to be a resident of Canada either on a factual or a deemed basis. As such, paragraph 115(2)(c) of the Act, which applies to non-residents, would not be applicable as suggested in your memorandum. In other words, only a true non-resident (i.e., a person having no residential ties with Canada) who was not a resident immediately prior to appointment or employment by Canada or, if previously a resident in Canada in any previous year, was not a spouse of a person described in paragraph 250(1)(b), (c), (d) or (d.1) of the Act, would be subject to the provisions of paragraphs 115(2)(c) and (e) and subparagraph 115(1)(a)(v) of the Act with respect to any remuneration received as a LEE.

Although there is often a tendency to consider LEEs as being non-residents of Canada because they are hired locally (i.e. in the receiving State), we believe that a careful examination of a LEE's residency status may often result in our concluding otherwise. We say this as it has been our experience that, in spite of the fact that the particular embassy may not be permitted to hire individuals directly from Canada, a number of LEEs, are not truly nationals or permanent residents of the receiving State. In some instances these LEEs are, in fact, either a) Canadian residents who have become aware of an employment opportunity at a particular embassy prior to leaving Canada or while visiting the receiving State or b) are the spouse of a member of the mission or, even more likely, are the spouse of someone already in the sending State working in some capacity for Canada although not for the embassy.

With respect to situation a), the words "resident in Canada immediately prior to appointment or employment by Canada" found in paragraph 250(1)(c) of the Act" do not, in our view, necessarily mean physical presence in Canada but rather mean that the individual has not severed his or her residential ties with Canada. Therefore, a Canadian citizen hired by a Canada embassy while travelling outside Canada should, at least until established otherwise, be assumed to be a resident of Canada immediately before being hired. "Resident in Canada" covers both factual and deemed residents.

In our view, if an LEE is found to be a factual or deemed resident of Canada, it becomes important to determine whether that person is considered to be a "member of the diplomatic mission" as defined in Article 1 of the Vienna Convention on Consular Relations (the "Vienna Convention"). The possibility exists as the Vienna Convention defines members of a diplomatic or consular mission to include technical and administrative staff in the service of the mission. This is important in determining the residency of the LEE for the purposes of reading the provisions of the applicable income tax convention. This is because the Diplomatic Agents and Consular Officers Article (e.g. Article 27 in the Canada-Sweden treaty) normally provides that an individual who is a member of a diplomatic mission of a Contracting State shall be deemed for the purposes of the Convention to be a resident of the sending State if the individual is liable in the sending State to the same tax obligations as are residents of the sending State. Where this is the case, subparagraph 1(b) of the Government Services Article cannot apply to grant sole taxing rights to the receiving State and the LEE will be taxable only in Canada.

Where the LEE is a resident of Canada for the purposes of the Act, but is not a member of the mission, reference will have to be made to the Residence Article and the tie-breaker rules therein, in order to determine the LEE's residence for purposes of the particular treaty and consequently whether the subparagraph 1(b) of the Government Services Article will to grant exclusive taxing rights to the receiving State (assuming that the other requirements of the provision are met). With respect to the application of subparagraph 1(b), it should be noted that a person who went to the particular Contracting State from a third State, in order to take a job with the Canadian embassy would not meet the test in clause (ii) of that subparagraph which means that the receiving State will not be granted sole taxing rights. Consequently, if the person was a former resident of Canada, the provisions of section 115 of the Act would apply to tax the income in Canada.

From the above comments, it can be seen that, in almost all cases, the exclusive right to tax will go to the receiving State only where the LEE is truly a non-resident of Canada and is a national of the receiving State or permanent resident of that State.

We do not agree with the suggestion that the premises of a Canadian embassy is regarded, under international law, as Canadian soil. Articles 21 and 22 of the Vienna Convention provide that the receiving State shall facilitate the acquisition on its territory by the sending State of premises necessary for its mission and that the premises of the mission shall be inviolable and that agents of the receiving State may not enter them without consent. Article 23 also provides that the sending State shall be exempt from all taxes in respect to the premises. However, there is no provision which would suggest that the premises of the mission form part of the territory of the sending State. Furthermore, the suggested interpretation would render subparagraph 1(b) of the Government Services Article meaningless.

You have also mentioned in your memorandum that Sweden has a special arrangement regarding its taxation of LEEs. You indicate that foreign diplomatic missions are required to reduce a LEE's remuneration by an amount roughly equivalent to the average amount of Swedish income tax paid by Swedish employees who do not work for a diplomatic mission and who receive similar remuneration. In return, the LEE does not have to report this remuneration nor file a tax return with respect to this income.

In the absence of any actual documentation or other background information regarding the above arrangement, we are unable to provide a definitive opinion regarding whether or not a Swedish LEE, who is the subject of this arrangement, would be a resident of Sweden as defined in paragraph 1 of Article 4 of our treaty with that country. Having said this, if the LEE is otherwise taxable in Sweden on his or her world income other than any remuneration received from a diplomatic mission, we would think that the LEE should be considered as being liable to tax in Sweden.

We trust that our comments will be of assistance.

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