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.
SEPT 4, 1990
Non-Resident Taxation Division Rulings Directorate
J. Hartwick G.D. Middleton
Chief 957-2127 FILE 901304
EACC 9726
SUBJECT: Japanese Citizens Working and Living in Canada
This is in reply to your memorandum of June 19, 1990 concerning the taxation of citizens of Japan who come to work in Canada and are present in this country for an extended period of time.
Residency
It is a question of fact each year or at any particular time whether a person is a factual resident of Canada, a deemed resident of Canada or a non-resident of Canada. As we mentioned to you in our discussions, we are of the view that a person's intention to return to Japan after an extended stay in Canada should not preclude the person from being considered factually resident in Canada.
A Japanese citizen.may be a dual resident of Canada and Japan where the person is liable to tax in each country by virtue of residence or domicile therein. If this situation arises, it will be necessary to refer to the residency tie-breaker rules found in paragraph 2 of the Protocol of the Canada-Japan Income Tax Convention (the "Convention") to determine whether a particular person is a resident of Canada or Japan for purposes of the Convention and for determining the tax treatment for the various types of income.
In order to satisfy the Department that a particular Japanese citizen is a dual resident and subject to the tie-breaker rules, we are of the view that he should be requested to provide documentation which clearly indicates that he is subject to tax in Japan by reason of residence or domicile.
Canadian Interest Income
Where a dual resident is deemed to be a resident of Japan for
purposes of the Convention, 24(1) is of the
opinion "that the gross a amount Canadian source interest income
earned by such individuals should be excluded from the calculation
of "taxable income" under Division C of the Act and taxed
separately at the rate of 10%.
In our view, their opinion is incorrect. We feel that the Canadian interest income net of related expenses should be included in calculating the individual's net income and taxable income and the Federal and Provincial taxes payable should then be calculated in the normal manner on the taxable income.
The amount of tax which relates to the Canadian interest income can then be determined by using the following formula:
Net Canadian Total Federal and Portion of Tax
Interest Income X Provincial Taxes - Relating to
Canadian
Taxable Income Income Interest Income
If the portion of taxes relating to the Canadian interest income exceeds the limitation in paragraph 2 of Article Il of the Convention (i.e. 10% of the gross amount of Canadian interest income), the total Federal and Provincial taxes payable will have to be reduced by the amount of the excess.
An example of this tax reduction is as follows:
Canadian Employment Income $59,000
Interest Income from Canadian sources $1,100(A)
Less: Expenses incurred to earn
the Canadian interest income 100
1,000(B)
Net Income $60,000
Deductions in computing taxable income 10,000
Taxable Income $50,000(C)
Total Federal and Provincial Taxes Payable 40- Rate
C X 40% - $50,000 X 40% = $20,000(D)
Taxes Payable relating to Canadian Interest Income
B/C X D - $ 1,000/$50,000 X $20,000 = $
400(E)
Limitation under paragraph 2 of Article 11 of the Convention
10% X A - 10% X $1,100 = $
110(F)Tax Reduction
E - F $400 - $110 = $
290(G)Note: The tax reduction should be apportioned on a reasonable
basis between the Federal and Provincial taxes payable.
Revised Taxes Payable
D - G $20,000 - $290 = $19.710
Please note that this approach produces the correct net income amount which is used for the purposes of calculating various tax credits.
Subsection 20(12) Deduction
With respect to your query regarding a deduction under subsection 20(12) of the Act, there may be situations where a dual resident who is deemed to be a resident of Japan for purposes of the Convention may be entitled to such a deduction.
An example of this is as follows:
- A Japanese citizen earns investment income (i.e.
interest) arising in Japan and is required to pay tax to
the Japanese Government on such income.- The tax paid to the Japanese Government would qualify as
a non-business income tax as defined in paragraph
126(7)(c) of the Act except for the portion, if any, of
the tax that may be deductible under subsection 20(11) of
the Act. - Such foreign source interest income should be exempt from
tax in Canada by virtue of paragraph 1 of Article 20 of
the Convention. Therefore, in computing an individual's
taxable income for the year, he will be entitled to a
deduction under subparagraph 110(1)(f)(i) of the Act in
respect of such income.- The amount calculated under subparagraph 126(l)(b)(i) of
the Act represents the numerator in the foreign tax
credit calculation for the foreign source interest
income. In most cases, the numerator will be zero since
for the purposes of subparagraph 126(l)(b)(i), the
subparagraph 110(1)(f)(i) deduction offsets the foreign
source income. When the numerator is zero, the foreign
tax credit in subsection 126(1) of the Act will also be
zero.- Although an individual may not be entitled to a foreign
tax credit under subsection 126(1) in respect of the
non-business income tax paid by him, he may be able to
claim a deduction under subsection 20(12) for such amount
of tax.
There are two additional points which we would like to bring to your attention concerning non-business income taxes.
(i) By virtue of subsection 8(2) of the Act, a deduction
under subsection 20(12) of the Act is not permitted where
the only source of income is employment income.(ii) The proposed amendments to the definition of
"non-business income tax" in paragraph 126(7)(c) of the
Act, as contained in the "Draft Amendments to the Income
Tax Act and Related Statutes" dated July 1990 provide
that a non-business income tax will not include foreign
taxes paid in respect of amounts that are deductible in
computing a taxpayer's taxable income under subparagraph
110(l)(f)(i) of the Act for the 1990 and subsequent
taxation years. Therefore, individuals in the situation
described above will no longer be entitled to a deduction
under subsection 20(12) of the Act if the proposed
amendments are passed into law.
Other
During our review of this file, we noted the following points which may be of interest to you.
24(1)
Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
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