13 January 2012 External T.I. 2010-0389831E5 - US Workers'

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 amounts received from a United States Workers' Compensation Program are taxable in Canada.

Position: No

Reasons: The amounts received are exempt under paragraph 1 of Article XVIII - Pensions and Annuities of the Canada-U.S. Tax Convention.

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				2010-038983
				J. Nichols
January 13, 2012

Dear XXXXXXXXXX :

RE: United States Workers' Compensation

We are writing in reply to your letter dated October 15, 2010 requesting our view whether payments received from the United States Office of Workers' Compensation Programs (OWCP) are exempt from tax in Canada pursuant to paragraph 1 of Article XVIII of the Canada-US Tax Convention (the "Convention"). You describe the following set of facts:

1) The taxpayer is Canadian citizen resident in Canada for the purposes of Article IV of the Convention.
2) The taxpayer was born in the USA and is also a citizen of the USA.
3) The taxpayer was formerly a member of the United States Federal Government Peace Corps and was injured performing her duties.
4) The injury is chronic and as a result, the taxpayer has been receiving monthly payments (the "Payments") from the United States Department of Labour, a Division of Federal Employees' Compensation under the OWCP since prior to 1992. The Payments will continue indefinitely.
5) The Payments would be excluded from taxable income in the United States under the provisions of the Internal Revenue Code if the taxpayer were a resident of the United States.

Our comments

The Payments are required to be included income under paragraph 56(1)(d) of the Income Tax Act (the "Act"). However, in our view the Payments qualify as "pensions" as defined in subparagraph 3(a) of Article XVIII of the Convention as they are paid "under a sickness, accident or disability plan" as referred to in that definition. Therefore provided that the Payments would be excluded from taxable income in the United States under the provisions of the Internal Revenue Code if the taxpayer were a resident of the United States, they would be exempt from taxation in Canada pursuant to paragraph 1 of Article XVIII of the Convention. As a result, in such circumstances an amount equal to the total Payments included in income pursuant to paragraph 56(1)(d) of the Act is deductible under subparagraph 110(1)(f)(i) of the Act.

Where the taxpayer has paid taxes under the Act in respect of the Payments in previous taxation years, the Minister may, pursuant to subsections 152(4) and 152(4.2) of the Act reassess tax, interest or penalties payable by the taxpayer in any such taxation year provided that the application is made by the taxpayer on or before the day that is ten calendar years after end of that taxation year. In this respect, a letter by the taxpayer to a Canada Revenue Agency Tax Centre inquiring whether amounts reported by the taxpayer in his or her tax return are deductible, in our view qualifies as an "application" for the purposes of subsection 152(4.2) of the Act. A refund of any overpayment made in a taxation year that is reassessed, may be made by the Minister pursuant to subsection 164(1.5) of the Act.

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We trust our comments will be of assistance.

Yours truly,

Olli Laurikainen CA
Manager
International Section II
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch

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