17 March 1990 Income Tax Severed Letter RRRR300 - Whether wages paid to a non-resident are deductible to a Canadian taxpayer

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.

DATE MAR. 17, 1990

TO FROM
A Non-Resident Taxation Division DE Specialty Rulings
Directorate
G. Middleton
Attention: J. Hartwick (613) 957-2129
A/Chief

FILE
DOSSIER 7-4421

SUBJECT:
OBJET: xxxxx

This is in reply to your memorandum of October 13, 1989 concerning the above taxpayer.

It is our understanding that xxxxx

The main issue to be addressed in this matter is to determine whether the wages paid to xxxxx in 1988 were deductible in computing the income of a taxpayer xxxxx subject to tax under Part I of the Act, as required under paragraph 105(2)(c.1) of the Act.

In our view, the scheme of the Act is as follows:

• (i) Pursuant to subsection 2(1) of the Act, a person resident in Canada is liable to pay income tax upon its "taxable income" for a year.
• (ii) Pursuant to subsection 2(2) of the Act, a taxpayer's "taxable income" for a year is its "income" for the year plus the additions and minus the deductions permitted under Division C of the Act.
• By virtue of the definitions of "person" and "taxpayer" in subsection 248(1) of the Act, xxxxx is liable to tax on its taxable income.
• (iii) A taxpayer's "income" for a year is determined in accordance with the rules under Division B of the Act. Pursuant to these rules, the xxxxx would be entitled to deduct the amounts paid to xxxxx in computing its income.
• (iv) Division C of the Act provides for other deductions which may be deductible in calculating a taxpayer's "taxable income" for a year.
(v) (a) If a taxpayer has a positive amount of taxable income, it would continue to calculate its tax payable under Division E of the Act.
• (b) Alternatively, if a taxpayer's taxable income is nil, there would generally be no need to proceed to Division E of the Act. Although such a taxpayer may not have any taxes payable for that particular year, this does not alter the fact that the taxpayer was liable to tax under section 2 of the Act and was required to compute its taxable income in accordance with the rules in Divisions B and C of the Act.

Subsection 149(1) of the Act states that no tax is payable under Part I of the Act upon the "taxable income" of a registered charity (i.e. xxxxx referred to in paragraph 149(1)(f) of the Act. In our view, this exemption provision means that no Part I tax is payable for a registered charity even though it was liable to pay tax on its "taxable income" pursuant to section 2 of the Act. In other words, subsection 149(1) of the Act does not alter the provisions of section 2 of the Act, it merely provides an exemption for any Part 1 tax that might otherwise have been payable under Division E of the Act.

Based on our understanding of the scheme of the Act as described above, it is our view xxxxx. We believe that our views are in line with, and supported by, the reasoning given in the court decision of Oceanspan Carriers Limited [[1987] 1 C.T.C. 210] 1987 DTC 5102.

As a matter of interest, the following situation is an example of the circumstances where an amount would not be deductible in computing income of a taxpayer subject to tax under Part I of the Act. A foreign parent company pays a person an amount to come to Canada to work for its Canadian subsidiary and the amount paid is not charged to the Canadian subsidiary.

If xxxxx is considered to be a resident of the United States for the purposes of the Canada-U.S. Income Tax Convention (the "Convention"), Article XV of the Convention permits Canada to tax the employment income provided the employment is exercised in Canada. Since the only employment exercised under the contract by xxxxx will be exercised in Canada, it is our view that Canada has the right under the Convention to tax all amounts received by the taxpayer under the contract of employment with xxxxx.

Prior to assessing on the basis set out above, we suggest that you consider the following:

• (a) If xxxxx was a resident of Canada in a year prior to 1988, the provisions of paragraph 115(2)(c) of the Act will be applicable for 1988
• (b) xxxxx

We trust this is adequate for your purposes.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch