14 December 2011 Internal T.I. 2011-0422561I7 - XXXXXXXXXX : Treaty exemption for non-resident employees

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 individual who is a Canadian citizen and works in Canada for less than 183 days is eligible for exemption from Canadian tax pursuant to paragraph 2 of Article 15 of the Canada-Switzerland Income Tax Convention ("Convention")?

Position: No. (The non-resident employee's income earned in Canada is not exempt from Canadian tax).

Reasons: The employer is XXXXXXXXXX which is a resident of Canada for the purposes of the Convention, thus the conditions for exemption in subparagraph (b) of Article 15(2) of the Convention are not satisfied. The Swiss branch of XXXXXXXXXX is not the employer, since it is not a separate legal entity.

Janet Schermann
Non-Resident Policy Advisor
112 Kent St., room 1929				2011-042256
Place de Ville, Tower B				Angelina Argento
Ottawa ON  K1A 0L5

December 14, 2011

Non-Resident Employees of XXXXXXXXXX working in Canada

This is further to your email request of September 13, 2011 with respect to whether non-resident employees of XXXXXXXXXX , who are Canadian citizens and who are present in Canada to perform employment duties for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, are exempt from Canadian taxation.

Facts

Our understanding of the facts is as follows:

1. XXXXXXXXXX

2. XXXXXXXXXX states that it has offices XXXXXXXXXX in XXXXXXXXXX and XXXXXXXXXX Switzerland.

3. The XXXXXXXXXX office in Switzerland constitutes a branch of XXXXXXXXXX and is not a separate legal entity.

4. A non-resident individual (the "Employee") who is a Canadian citizen but who is a resident of Switzerland for the purposes of the Canada- Switzerland Income Tax Convention (the "Convention"), works for the Switzerland office of XXXXXXXXXX but occasionally performs employment duties in Canada for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned.

5. In respect of the services rendered in Canada, the Employee is paid by the Switzerland office of XXXXXXXXXX . There is no charge back to the Canadian office of XXXXXXXXXX for this remuneration.

6. XXXXXXXXXX

Issue:

Whether the Employee's income earned in Canada is exempt from Canadian taxation pursuant to Article 15 of the Convention?

Analysis

The income from the Employee's duties performed in Canada is included in his taxable income earned in Canada ("TIEC") by virtue of subparagraph 115(1)(a)(i) of the Canadian Income Tax ("Act"). Since the Employee is a Canadian citizen, the Employee cannot make a deduction in respect of such income received from XXXXXXXXXX in computing TIEC under the provisions of subparagraph 110(1)(f)(iv) and paragraph 115(1)(d) of the Act (footnote 2) .

The Employee wishes to claim an exemption from Canadian income taxation (for the employment income earned in Canada) pursuant to paragraph 2 of Article 15 of the Convention which states as follows:

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

(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.

It is clear that the condition in subparagraph 2(a) of Article 15 is satisfied. However, it is our view that the condition in subparagraph 2(b) is not satisfied. In particular, it is our view that the Switzerland branch cannot be the employer since it is not a separate legal entity (footnote 3). Thus, at all times, XXXXXXXXXX (being the only legal entity) is the employer. In order to satisfy the condition in subparagraph 2(b) of Article 15, XXXXXXXXXX must not be a resident of Canada for the purposes of the Convention.

Paragraph 1 of Article 4 of the Convention defines a "Resident of a Contracting State", in part, as follows:

"For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature..."

Pursuant to the Supreme Court decision in The Queen v. Crown Forest Industries Ltd et al (95 DTC 5389), the CRA considers a person to be a resident of a contracting state for the purposes of an income tax convention, if that person is liable to tax in that contracting state on their worldwide income.

Prior to 2007, it was our position that entities that are subject to taxation on a worldwide income basis in a Contracting State, but that benefit from special rules which either exempt them from taxation or tax them at a very low rate may not be subject to the most comprehensive form of taxation and therefore, would not be "liable to tax" in that Contracting State. XXXXXXXXXX .

Following a review of our positions, we concluded in 2007 (footnote 4) that to be considered "liable to tax" for the purposes of the residence article of Canada's tax treaties, a person must generally be subject to the most comprehensive form of taxation as exists in the relevant country. This, however, does not necessarily mean that a person must pay tax to a particular jurisdiction. There may be situations where a person's worldwide income is subject to a contracting state's full taxing jurisdiction but that state's domestic law does not levy tax on a person's taxable income or taxes it at low rates. In these cases, the CRA will generally accept that the person is a resident of the other Contracting State unless the arrangement is abusive (e.g. treaty shopping where the person is in fact only a "resident of convenience"). Consequently, it is our current position that if XXXXXXXXXX is liable to tax in Canada on its worldwide income, it will be considered to be a resident of Canada for the purposes of the Convention despite the fact that it may qualify for exemption from Canadian income tax by virtue of paragraph 149(1)(l) of the Act (footnote 5) .

A corporation which is resident in Canada for the purposes of the Act is liable to tax in Canada on its worldwide income. As noted above, XXXXXXXXXX is an association which was incorporated on XXXXXXXXXX . The term "corporation" is defined in subsection 248(1) of the Act to include "an incorporated company" and it is our view that this definition is broad enough to include XXXXXXXXXX . The residency of a corporation is determined by a combination of statutory provisions and the common law. The Act sets out certain deeming provisions in subsections 250(4) to 250(6) of the Act. Pursuant to subsection 250(4)(c) of the Act, a corporation incorporated before April 27, 1965 is deemed resident in Canada throughout a taxation year pursuant to paragraph 250(4)(c) if the following conditions are satisfied:

• it was incorporated in Canada and,
• at any time in the taxation year or at any time in any preceding taxation year of the corporation ending after April 26, 1965,

• it was resident in Canada or
• carried on business in Canada.

As noted above, XXXXXXXXXX was incorporated in Canada and it is our understanding that XXXXXXXXXX carried on business in Canada at times in or throughout preceding taxations year ending after April 26, 1965. Thus, XXXXXXXXXX is a corporation which is deemed resident in Canada for purposes of the Act and is taxable in Canada on its worldwide income.

However, subsection 250(4) is subject to subsection 250(5) which confirms that residence under a tax treaty will prevail. It provides specifically that notwithstanding any other provision of this Act (other than 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.

Due to the potential application of subsection 250(5) of the Act, it is necessary to look at Article 4 of the Convention in order to determine if under the Convention, XXXXXXXXXX may be resident in Switzerland.

Since XXXXXXXXXX is liable to worldwide taxation in Canada by reason of its residence in Canada under the Act, XXXXXXXXXX will be a resident of Canada for purposes of paragraph 1 of Article 4 of the Convention. However, by virtue of some other criterion referred to in paragraph 1 of Article 4 of the Convention, such as the place of management, it may be possible that XXXXXXXXXX is also considered resident in Switzerland.

Paragraph 3 of Article 4 is a tie breaker rule that provides that if a company is a resident of Canada and Switzerland, by reason of paragraph 1 of Article 4, then its status shall be determined as follows:

(a) it shall be deemed to be a resident of the State of which it is a national;
(b) if it is a national of neither of the States, the competent authorities of the Contracting States shall settle the question by mutual agreement.

The term "national" is defined in subparagraph (1)(h) of Article 3 of the Convention as "any legal person, partnership and association deriving its status as such from the laws in force in a Contracting State."

If XXXXXXXXXX is resident in Canada and Switzerland, by reason of paragraph 1 of Article 4 of the Convention, it would be deemed to be resident in the state in which it acquired its status as a legal person. Since XXXXXXXXXX was incorporated in Canada, if it would otherwise be resident in Switzerland under paragraph 1 of Article 4 of the Convention, paragraph 3 of Article 4 would nevertheless deem XXXXXXXXXX to be resident in Canada for the purposes of the Convention. Consequently, it would appear that subsection 250(5) would not override subsection 250(4) in this case and XXXXXXXXXX would be resident in Canada for the purposes of the Act.

Conclusion

Since XXXXXXXXXX is a resident of Canada for the purposes of the Convention, the condition in subparagraph 2(b) of Article 15 is not satisfied and as a result it is our opinion that the Employee does not benefit from exemption from Canadian income tax pursuant to paragraph 2 of Article 15 of the Treaty.

We trust that this is the information you require.

Yours truly,

Olli Laurikainen
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 XXXXXXXXXX
2 In Document 2009-0313101E5 dated January 28, 2010 we specifically stated that an employee of a prescribed international non-governmental organization is not entitled to a deduction under 110(10(f)(iv) in the year in which the employee becomes a citizen of Canada because the condition in 110(1)(f)(iv)(A) is not satisfied.
3 Klauss Vogel states that "from the context of Art 15(2)(a)-(c ) (of the OECD Model Convention) it may be derived that neither a PE nor a fixed place of business may be an employer".
4 See also Income Tax Technical News Issue No. 35 dated February 26, 2007.
5 See CRA document E 9308365 dated April 5, 1993; Income Tax Technical News No. 35 dated February 26, 2007; The Queen v. Crown Forest Industries Ltd et al (95 DTC 5389); and paragraphs 8 to 8.8 of the Commentary on Article 4 of the OECD Model Tax Convention.