5 September 1990 Internal T.I. EACC9679 F - Non-resident Withholding Tax - Sourcing of Pension Income

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.

SOURCING OF PENSION INCOME

A U.S. citizen who never was a Canadian resident receives a lump sum pension income amount from a Canadian pension fund which will be subject to a 25% Canadian withholding tax on the entire pension amount by virtue of paragraph 212(1)(h) of the Income Tax Act, unless both of the conditions under subparagraphs 212(1)(h)(v) and (vi) are satisfied.  For U.S. income tax purposes, it is understood that only a portion of the pension income would be considered to arise from a Canadian source where a person's employment activities to which the pension relates were in respect of services rendered in both Canada and the U.S.  Since the entire pension amount is subject to Canadian tax and only a portion of such amount is sourced to Canada for U.S. foreign tax credit purposes, double taxation may arise.

1.     Where the U.S. citizen was never a resident of Canada but, throughout his employment with a Canadian entity, 60% of his duties were performed inside Canada and 40% in the U.S., would he meet the condition in subparagraph 212(1)(h)(vi) of the Act - "only occasionally employed in Canada".

2.     If the lump sum pension amount results in double taxation due to the different treatment of sourcing the pension income in Canada and the U.S., could subparagraph 3(a) of Article XXIV of the Canada-U.S. Income Tax Convention (1980) (the "Convention") apply to deem the entire pension amount to arise in Canada?

3.     Assume that a lump sum retiring allowance is paid by a Canadian employer to the employee described above in respect of the 60%/40% employment services performed throughout his career.

(a)     Would this person meet the condition in clause 212(1)(j.1)(i)(B) of the Act - "only occasionally employed in Canada"?

(b)     Could subparagraph 3(a) of Article XXIV of the Convention apply to deem the entire retiring allowance to arise in Canada?

REVENUE CANADA'S POSITION

1.     The Department's interpretation of the phrase "only occasionally employed in Canada" is set out in paragraph 2 of Interpretation Bulletin IT-76R2 and is considered to mean that, throughout a particular taxation year, the    taxpayer's regular place of employment was outside Canada and his duties in Canada were limited to a few brief visits to carry out the duties of his employment. 

     Since the employee described above performed a significant portion of his employment duties in Canada, it is our view that he would not satisfy the condition in subparagraph 212(1)(h)(vi) of the Act.

2.     No.  In our view, subparagraph 3(a) of Article XXIV of the Convention is not intended to resolve the type of sourcing problem described above.

     However, in accordance with Article XXVI of the Convention, the U.S. citizen could present his case in writing to the U.S. competent authorities.

3(a)     No, for the same reason as 1. above.

  (b)     No, for the same reason as 2. above.

Prepared by:  G. MiddletonSeptember 5, 1990