25 March 1999 External T.I. 9821565 - FTC OR DEDUCTION FOR U.S. STATE TAXES

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: Whether U.S. state tax is creditable or deductible where the taxpayer is a citizen of Canada and not a citizen of the U.S. working for the Canadian Embassy in the U.S.

Position: No

Reasons: There is no provision in the Income Tax Act to provide for a foreign tax credit or a deduction from income for such U.S. state taxes.

XXXXXXXXXX 982156
S. Leung
March 25, 1999

Dear Madam:

Re: Foreign Tax Credit or Deduction for Maryland State Income Tax

We are writing in reply to your letter of August 18, 1998 regarding your request for tax relief for the Maryland State income tax you paid for the year XXXXXXXXXX on employment income earned while working at the Canadian Embassy in Washington, D.C.

Facts

From the information provided by you and by Mr. Michel LaRoche of International Tax Section of Ottawa Tax Services Office, the facts of the case are that in XXXXXXXXXX

1. you were a non-resident of Canada locally engaged by the Canadian Embassy in Washington, D.C.;

2. you were not deemed to be a resident of Canada by virtue of the application of paragraphs 250(1)(a) to (e) of the Income Tax Act (the “Act”);

3. you were a Canadian citizen but not a U.S. citizen;

4. you were not required to pay U.S. social security contributions (“FICA”) pursuant to the Canada-United States Social Security Agreement; and

5. you were required to pay Maryland State income tax on your employment income earned while working at the Canadian Embassy in Washington, D.C. because of the fact that you resided at the State of Maryland.

Our Comments

We have given your request careful consideration. However, as explained below, as a result of the application of the provisions of the Canada Income Tax Act (the “Act”) in conjunction with the provisions of the Canada-United States Income Tax Convention (the “Convention”), you are subject to tax in Canada on your employment income earned while working at the Canadian Embassy and the provisions of the Act do not provide for a foreign tax credit or a deduction from income for Maryland State income taxes paid on such employment income.

The employment income you earned while working at the Canadian Embassy in XXXXXXXXXX was not subject to an income or profits tax imposed by the government of a country other than Canada. Under Article XIX of the Canada-United States Income Tax Convention, such income was only taxable in Canada and not taxable in the U.S. for U.S. federal income tax purposes. In this regard, as stated in Mr. LaRoche’s letter of April 14, 1998, the Maryland State income tax you paid does not constitute a tax paid to the government of a country other than Canada. As a result, the exception contained in clause 115(2)(e)(i)(A) of the Act does not apply. Since the government of Canada is not considered to be carrying on business in the U.S. through the Canadian Embassy in Washington, the exception contained in clause 115(2)(e)(i)(B) of the Act also does not apply. The result is that the employment income would be required to be included in computing your taxable income earned in Canada in XXXXXXXXXX.

Under the provisions of the Act, as you were a non-resident of Canada in XXXXXXXXXX, you would not be entitled to any foreign tax credit in Canada on your foreign source employment income even though it was fully taxable in Canada. The provisions of the Act which provide for deductions for foreign income taxes in the computation of income only apply if the income is income from property or income from a business but do not apply if the income is from an employment.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
.../cont'd

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