5 April 2011 Internal T.I. 2009-0342481I7 - Canada-France Tax Treaty, Article XX

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 allowances received by taxpayer are exempt from Canadian taxation pursuant to Article XX of the Canada-France Tax Treaty.

Position: Part of the allowances could be exempted under Article XX of the Treaty provided the conditions of that Article are met.

Reasons: See below.

XXXXXXXXXX
T1 Reassessments
XXXXXXXXXX  Tax Centre					2009-034248
XXXXXXXXXX 							S. Sivarulrasa

April 5, 2011

Dear XXXXXXXXXX ,

RE: Article XX of the Canada-France Tax Treaty

This is in response to the letter dated Sept 10, 2009 from XXXXXXXXXX
("the taxpayer's representative") that you forwarded to us relating to the taxation in Canada of certain "allowances" received by XXXXXXXXXX ("the taxpayer") during taxation year 2007. We apologize for the delay in responding.

Facts

For her 2007 taxation year, the taxpayer filed a tax return under Part I of the Income Tax Act ("the Act") and reported approximately $XXXXXXXXXX of income as "other employment income". The taxpayer is seeking a reassessment on the basis that this income is exempt from Canadian taxation pursuant to Article XX of the Canada-France Tax Convention ("the Treaty").

According to the letter from the taxpayer's representative, the taxpayer is a French citizen who was resident in France immediately before she came to Canada to work as "an apprentice and business trainee" of XXXXXXXXXX . The taxpayer's representative states that the income in question was paid to the taxpayer as monthly allowances by XXXXXXXXXX "solely for the purpose of her maintenance, relocation and training in Canada" and that the amounts should be exempt from Canadian tax under Article XX of the Treaty.

According to information on the internet (XXXXXXXXXX ), XXXXXXXXXX is XXXXXXXXXX . According to the taxpayer's terms and conditions of work (footnote 1) ("terms of work"), her assignment is referred to as "voluntary service" and was to take place for a 12-month period in XXXXXXXXXX , with XXXXXXXXXX , starting on XXXXXXXXXX , 2006. The terms of work state that she would be responsible at XXXXXXXXXX for XXXXXXXXXX . For this work, she would be paid monthly allowances, as well as a return trip between her place of residence and the location of the assignment abroad.

We do not have all of the facts necessary for determining whether the allowances received by the taxpayer are exempt under the Treaty. In our comments below, we have noted additional information that the TSO may need to obtain from the taxpayer.

Comments

In general, when considering whether an amount is exempt from Canadian taxation by virtue of one of Canada's tax treaties, the first step is to consider whether the amount is taxable under the Act. If so, the second step is to determine whether the amount is exempt from Canadian taxation by virtue of a provision in the relevant tax treaty.

In the present case, even though the taxpayer is referred to as a "volunteer" under her terms of work, if an employment relationship exists, the income would be treated as income from employment under the Act. It is unclear to us whether the taxpayer became resident in Canada during her stay in Canada. In the case of a resident of Canada, the income inclusion for employment income would be under subsection 5(1) of the Act and, in the case of a non-resident, the income inclusion is under subsection 115(1) of the Act. (footnote 2)

Ultimately, whether or not an employment relationship exists is a question of fact that must be determined by the TSO based on all the facts and circumstances. In the present case, a number of factors suggest that the taxpayer's income is income from employment. For example, the taxpayer's terms of work appear to set out a high degree of control over the taxpayer's activities during her assignment. The terms of work state that her service is a full-time activity, to the exclusion of all other paid public or private work, and that she must not leave the country or area of assignment without permission. The terms of work also contain provisions for annual leave - the volunteer is entitled to two and a half days of leave per month of service. These aspects suggest that the income is income from employment in Canada. However, it is unclear from the facts provided whether her employer was XXXXXXXXXX or XXXXXXXXXX - this may be relevant in determining the source of the payments she received.

The next step is to consider whether the Treaty provides an exemption from Canadian tax. Article XX of the Treaty provides as follows:

Payments which a student, apprentice or business trainee who is, or was immediately before visiting one of the Contracting States, a resident of the other Contracting State and who is present in the first-mentioned Contracting State solely for the purpose of his education or training receives for the purpose of his maintenance, education or training shall not be taxed in that first-mentioned State, provided that such payments are made to him from sources outside that State.

There are five requirements that must be met in order for a taxpayer to benefit from the exemption provided in Article XX:

(1) The taxpayer must be a student, apprentice or business trainee;

(2) The taxpayer must either be, or have been immediately before visiting Canada, a resident of France;

(3) The taxpayer must be present in Canada (i.e. physically present) solely for the purpose of his or her education or training;

(4) The payment must be received by the taxpayer for the purpose of his or her maintenance, education or training; and

(5) The payment must be from a source outside Canada.

Each of the five requirements above is a question of fact that must be determined based on all the facts and circumstances. In the present case, the terms of work appear to suggest that the taxpayer was indeed a business trainee and thus likely to satisfy the first requirement. With regard to the second requirement, the taxpayer's representative asserts that the taxpayer was a resident of France immediately before taking up her work assignment in Canada - if this is true, the second requirement would be met.

With regard to the third requirement, it is our view that an individual may be considered to be present in Canada solely for the purpose of his or her education or training even if the individual is employed in Canada. However, the employment must be an integral part of the individual's training - in other words, the employment must be directly connected to, and in furtherance of, the individual's education and training.

With respect to the fourth requirement, the income in question would be exempt under Article XX of the Treaty only to the extent that it is received by an individual for the purpose of his or her maintenance, education or training. Article XX of the Treaty is modelled on Article 20 (Students) of the OECD Model Tax Convention. Paragraph 3 of the OECD Commentary to Article 20 states:

The Article covers only payments received for the purpose of the recipient's maintenance, education or training. It does not, therefore, apply to a payment, or any part thereof, that is remuneration for services rendered by the recipient and which is covered by Article 15 (or by Article 7 in the case of independent services). Where the recipient's training involves work experience, however, there is a need to distinguish between a payment for services and a payment for the recipient's maintenance, education or training. The fact that the amount paid is similar to that paid to persons who provide similar services and are not students or business apprentices would generally indicate that the payment is a remuneration for services. Also, payments for maintenance, education or training should not exceed the level of expenses that are likely to be incurred to ensure the recipient's maintenance, education or training.

The OECD Commentary cited above recognizes that a business apprentice can receive payments that are a combination of remuneration for services rendered as well as payments for the purpose of his or her maintenance, education or training - however, only the latter are exempt under the Article. In the present case, the TSO will need to determine whether the approximately $XXXXXXXXXX received by the taxpayer is similar to remuneration received by persons performing similar services in the XXXXXXXXXX area, and if so, the extent to which part of this amount, based on all the facts and circumstances, can be considered to have been received by the taxpayer for the purpose of her maintenance, education or training. In this regard, it will be relevant to consider the cost of living in the area during the period in question. The portion of the payment that was received for the purpose of the taxpayer's maintenance, education or training would qualify under Article XX, assuming the other conditions of the Article are met, while the remainder would remain taxable by Canada as income from employment.

Even if an amount received by the taxpayer is determined to have been received for the purpose of her maintenance, education or training, the fifth requirement - that the source of the payment be outside Canada - must be met for the exemption under Article XX of the Treaty to apply. It is question of fact whether some or all of the payments received by the taxpayer are sourced in Canada. In this regard, paragraph 4 of the OECD Commentary to Article 20 of the OECD Model Tax Convention states:

For the purpose of the Article, payments that are made by or on behalf of a resident of a Contracting State or that are borne by a permanent establishment which a person has in that State are not considered to arise from sources outside that State.

In the present case, the terms of work indicate that at least part of the allowances, benefits and lodging were to be borne by the "host organization", which appears to be XXXXXXXXXX . It is not clear to us whether this is a corporation resident in Canada or a non-resident corporation that has a permanent establishment ("PE") in Canada - a payment sourced to either a corporation resident in Canada or a PE in Canada would not fall within the exemption provided by Article XX of the Treaty. Thus only those payments that you determine to be sourced from outside Canada would, assuming the other conditions discussed above are met, qualify for the exemption under Article XX of the Treaty.

With respect to the taxpayer's reporting obligations in this case, the total amount of the allowances would be included as income from employment on her Canadian tax return. To the extent that the allowances are exempt from Canadian tax because of Article XX of the Treaty, subparagraph 110(1)(f)(i) of the Act allows the exempted amount to be deducted when calculating the taxable income for Canadian income tax purposes.

We trust our comments are of assistance.

Yours truly,

Sherry Thomson
for Director
International Section I
International & Trusts 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 We have attached an English translation of the terms of work for your reference.

2 Alternatively, in some situations, income paid to a student could be considered "a scholarship, fellowship or bursary" within the meaning of paragraph 56(1)(n) of the Act. Interpretation Bulletin IT-75R4 "Scholarships, Fellowships, Bursaries, Prizes, Research Grants and Financial Assistance", dated June 18, 2003 provides guidance on how the CRA applies paragraph 56(1)(n) and related provisions. Based on the information provided, these provisions do not appear applicable in this case.