26 September 2011 External T.I. 2011-0411711E5 - Source deduction non-resident

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 source deductions are applicable for an "employee" who is a non-resident of Canada.

Position: Depends on the facts

Reasons: Generally, if the non-resident "employee" performed their duties outside Canada, no source deductions are required.

XXXXXXXXXX
									J. Nichols
									2011-041171

September 26, 2011

Dear XXXXXXXXXX :

RE: Source deductions for non-resident employees

We are writing in reply to your letter dated June 25, 2011 requesting our view whether source deductions for an employee are applicable if the employee is a non-resident. You present the following hypothetical facts:

1. The employee/shareholder works for a Canadian-controlled private corporation ("CCPC") within the meaning assigned by subsection 125(7) of the Income Tax Act (the "Act"), which has real estate holdings in Canada.
2. The employee was a resident of Canada in a previous year.
3. The employee is a resident of Korea and is considered a non-resident of Canada for the purposes of the Act.
4. All work by the employee is performed in Korea.
5. The employee is paid an annual salary based on the corporation's profitability.

Our comments

Subject to the specific exceptions set out therein, subsection 104(2) of the Income Tax Regulations provides that source deductions are not required where the employee was neither employed nor resident in Canada at the time of the payment. Based on the facts of this case source deductions would be required and subsection 104(2) would not be applicable, if the employee's salary is not subject to an income tax imposed by the government of Korea and the employee's work for the CCPC is not performed in connection with the selling of property, the negotiation of contracts or the rendering of services for the CCPC.

If it is determined that the remuneration paid exceeds what would be a reasonable amount for the services performed, the excess may be a shareholder benefit as described in subsection 15(1) of the Act. Moreover, if subsection 15(1) of the Act would if Part I were applicable, require an amount to be included in computing the taxpayer's income, then paragraph 214(3)(a) of the Act, would deem that amount for the purposes of Part XIII of the Act to have been paid to the taxpayer as a dividend from a corporation resident in Canada. Subsection 212(2) of the Act provides for a Part XIII tax of 25% on such a deemed dividend subject to any relief under the Canada-Korea Income Tax Convention.

We trust our comments will be of assistance.

Yours truly,

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