8 June 1990 Income Tax Severed Letter HBW93892A F - Salaries Paid to Locally-engaged Employees Abroad

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.

June 8, 1990

Dear Mr. Carrière:

We are writing in reply to your letter dated April 18, 1990, concerning the Canadian tax implications on salaries paid to locally-engaged employees abroad.  The following comments may be of some assistance.

1.     Locally-engaged staff aboard are generally considered non-residents of Canada.  Our "deemed resident" provisions, particularly subparagraph 250(1)(c)(i) of the Income Tax Act (pertaining to officer or servant of Canada), do not apply to these individuals because they were not resident in Canada immediately prior to appointment or employment by Canada.

2.     These locally-engaged staff who are non-residents of Canada and who have never been resident in Canada in any previous year are not liable to Canadian tax on their salaries.  The fact that these salaries are paid in Canadian dollars and are deposited to Canadian Bank accounts is irrelevant.

     Paragraph 2(3)(a) of the Income Tax Act establishes Part I tax liability for non-residents who were "employed in Canada".  The term "employed" is defined in section 248 of the Act to mean "performing the duties of an office or employment".  The emphasis is clearly on where the duties are performed and not where and how the salaries are paid.

3.     An exception to the comments in #2 above is where the non-resident (i.e. locally-engaged employee abroad) was in any previous year a resident of Canada.  In these particular cases the salaries may be taxed in Canada (paragraphs 115(2)(c) and (d)) to the extent that they were not subject to tax in the foreign country (clause 115(2)(e)(i)A)).  The taxing rights of Canada and the foreign country would be subject to any double taxation agreement in effect.  Cases of this nature should be referred to us individually.

4.     Where the non-residents (i.e. locally-engaged employees abroad) do have their salaries deposited to an account in Canada, they would be subject to Part XIII withholding tax on any interest paid to them.

We trust you will find this to your satisfaction.  If we can be of further assistance, please feel free to contact us.

Your sincerely,

Christine Savage Acting Director Provincial and International Relations Division

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