13 June 2012 External T.I. 2012-0440381E5 - Application of Income Tax Regulation 2602

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.

Principal Issues: Whether a non-resident who earns Canadian employment income in multiple provinces has to allocate his income to each province.

Position: Question of fact. Generally, a non-resident earning employment income from an employer with a permanent establishment in Canada is subject to Part I tax. This employment income would have to be allocated to the provinces in which it was earned.

Reasons: Legislation; Articles V and XV Canada- U.S. Income Tax Convention

								2012-044038
XXXXXXXXXX

June 13, 2012

Attention: XXXXXXXXXX

Dear Mr. XXXXXXXXXX:

Re: Application of Section 2602 of the Income Tax Regulations

We are writing in response to your email query of March 16, 2012 wherein you asked our opinion as to whether a non-resident person who earns Canadian employment income in multiple provinces has to allocate his or her income to each province or would the employment income be considered to be earned solely in the province where his employer has a permanent establishment.

You provided, as an example, the case of a hockey player who is a U.S. resident and not a resident of Canada, who plays for a National Hockey League team based in a Canadian city in Ontario. The hockey player will play at least half his games in Ontario and will also play some games in British Columbia, Alberta, Manitoba and Quebec. His T4 slip issued by the individual’s employer will indicate the individual’s place of employment as Ontario. However, his duties will actually have been performed in many provinces throughout the year.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments. Generally, a person is a non-resident for tax purposes if he or she:

• Normally, customarily, or routinely lives in another country and is not considered a resident of Canada; or
• Does not have significant residential ties to Canada; and lives outside Canada throughout the tax year or stays in Canada for less than 183 days in the tax year.

Subsection 2(3) of the Income Tax Act (the “Act”) entitled “Tax Payable by non-resident persons” states:

“Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada,
(b) carried on a business in Canada, or
(c) disposed of a taxable Canadian property,

at any time in the year or a previous year, an income tax shall be paid, as required by this Act, on the person’s taxable income earned in Canada for the year determined in accordance with Division D.”

A non-resident of Canada is subject to tax under section 115 in Part I of the Act on taxable income earned in Canada. The income to be reported for this purpose includes income from an office or employment in Canada (including director’s fees and employment benefits), income from carrying on a business in Canada, taxable capital gains from the disposition of taxable Canadian property, and certain other Canadian source income.

Employment and business expenses allowed to residents are generally available to the non-resident to the extent that such expenses are applicable to his or her employment income earned in Canada. To the extent that the duties involved are performed in Canada, income from an office or employment is required by subparagraph 115(1)(a)(i) of the Act to be included in a non-resident’s calculation of income earned in Canada. The rules of sections 5 to 8 of the Act are generally applicable.

By virtue of the rules contained in section 4 of the Act, where the duties of a particular office or employment are performed by a non-resident partly inside and outside of Canada, a reasonable allocation of the related income is necessary since only the portion earned in Canada must be reported under subparagraph 115(1)(a)(i) of the Act. The income allocation is usually calculated on a per diem basis.

Employment income earned in Canada by a non-resident is subject to provincial tax in the province in which it is earned. If a taxpayer has only employment income in one province then form 428, which comes with the T1 return for that province, need be completed and filed with the return.

If the non-resident taxpayer earns employment income in more than one province, then Section 2602 of the Income Tax Regulations requires that the employment income be allocated in accordance with the duties performed in each province. In order to do this, allocate employment income using form T2203 entitled “Provincial and Territorial Taxes - Multiple Jurisdictions” to each province in which the duties were performed and then use this form to calculate the appropriate tax for each province. A copy of form T2203 and the guide “Non-Residents and Income Tax” T4058 can be found on the CRA website: www.cra-arc.gc.ca .

Article XV of the 1980 Canada-United States Income Tax Convention (the “Convention”) entitled “Dependent Personal Services” states:

“1. Subject to the provisions of Articles XVIII (Pensions and Annuities) and XIX (Government Service), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other state.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in a calendar year in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) such remuneration does not exceed ten thousand ($10,000) in the currency of that other State; or

(b) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in that year and the remuneration is not borne by an employer who is a resident of that other State or by a permanent establishment or fixed base which the employer has in that other State.”

In the hypothetical scenario that you provided, the non-resident hockey player would be taxed in Canada for the employment income earned playing hockey in Canada. His remuneration is paid by an NHL hockey team resident in Canada through a permanent establishment or fixed base. He would be required to allocate this employment income to the provinces in which he played hockey on a reasonable basis, pursuant to Section 2602 of the Income Tax Regulations.

We trust that our comments will be of assistance to you.

Yours truly,

Doug Watson
for Director
Financial Industries Division
Income Tax Rulings Directorate