5 February 1999 External T.I. 9819795 - TAX EQUALIZATION= WAGES IN CANADA (8913-1)

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.

							981979
XXXXXXXXXX 						Greg Middleton
(613) 957-2122
Attention:  XXXXXXXXXX 

February 5, 1999

Dear Sirs:

Re: Tax Equalization Payments

This is in reply to your letter of July 28, 1998 regarding the source and tax treatment of a tax equalization payment in the following hypothetical situation.

• A non-resident of Canada, who is an employee of a foreign corporation, works in Canada and in the foreign (“home”) country.
• The employment income attributable to the duties performed by the employee in Canada (i.e. employment income sourced to Canada) is included in the non-resident employee’s “taxable income earned in Canada (“TIEC”) under subparagraph 115(1)(a)(i) of the Income Tax Act (the “Act”) and is subject to Part I tax in Canada. (This employment income is neither reduced nor exempt from tax in Canada by virtue of an income tax convention between Canada and the employee’s home country and the employee has no other income from a Canadian source.)
• The effective income tax rate in the employee’s home country is lower than Canada’s effective income tax rate.
• The foreign corporation pays the employee a tax equalization payment equal to the difference between the employee’s home country effective income tax rate on the employment income sourced to Canada and the Canadian Part I tax payable on such employment income.

In our opinion, the tax equalization payment is income from employment and it is considered to be wholly attributable to the employee’s duties performed in Canada. Accordingly, the tax equalization payment should be included in the employee’s TIEC and subject to Part I tax in Canada pursuant to subparagraph 115(1)(a)(i) of the Act on the same basis as the above-mentioned employment income sourced to Canada.

In a situation where the employee’s employer is a Canadian company and the other facts are basically the same, our views would be the same.

We trust our comments will be of some assistance to you.

Yours truly,

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