21 November 2007 External T.I. 2007-0259631E5 - Art 21(5)(b) Canada Norway Income Tax Convention

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 the remuneration of seafarers aboard a ship which does repair work in respect of a site where activities are carried on in connection with the exploration or exploitation of the seabed and subsoil and their natural resources situated in Canada is exempt from Canadian income tax pursuant to subparagraph 5(b) of the Canada-Norway Income Tax Convention?

Position: No.

Reasons: Pursuant to Paragraph 5(a) of Article 21 of the Canada-Norway Income Tax Convention, the salary and wages of the Norwegian resident seafarers is subject to tax in Canada, unless the employment is carried on in Canada for a period or periods not exceeding in aggregate 30 days in any 12-month period.

XXXXXXXXXX your question regarding the above-mentioned matter was referred to me for consideration.

FACTS:

My understanding of the facts is as follows:

• A Norwegian resident ship-owner is contracted to perform repair work in respect of a drilling site situated in Canada (i.e. a site where activities are carried on in connection with exploration or exploitation of the seabed and subsoil and their natural resources situated in Canada).
• Norwegian resident seafarers are employed by the Norwegian resident ship-owner to perform the repair work.
• The remuneration, salary and wages of the Norwegian resident seafarers is paid by and borne exclusively by the Norwegian resident ship-owner.
• In particular, the ship (on which the seafarers are onboard) travels to the offshore area in Canada; the repair work is performed at the drilling site situated in Canada, then the ship travels back to Norway.

ISSUE:

My understanding is that you would like to know whether the remuneration of such seafarers aboard the above-mentioned ship is exempt from Canadian income tax pursuant to subparagraph 5(b) of Article 21 of the Canada-Norway Income Tax Convention.

OUR POSITION:

The salary and wages derived by the Norwegian resident seafarers is not exempt from Canadian income tax pursuant to subparagraph 5(b) of Article 21 of the Canada-Norway Income Tax Convention because the ship was not engaged in the "transportation of supplies or personnel" to the offshore exploration or exploitation project in Canada. Consequently, pursuant to paragraph 5(a) of Article 21 of the Canada-Norway Income Tax Convention, the salary and wages of the Norwegian resident seafarers is subject to tax in Canada, unless the employment is carried on in Canada for a period or periods not exceeding in aggregate 30 days in any 12-month period.

Reasons:

Paragraph 5(a) of Article 21 of the Canada-Norway Income Tax Convention deals with the taxability of the salary and wages of Norwegian resident employees that would be employed in Canada in activities carried on in connection with the exploration or exploitation of the seabed and subsoil and their natural resources situated in Canada. Those salaries and wages earned by all Norwegian resident employees for those services, which are performed in the offshore area would be taxable in Canada by virtue of this paragraph, unless the aforementioned exception applies.

Paragraph 5(b) of Article 21 of the Canada-Norway Income Tax Convention confirms that remuneration derived by a resident of Norway in respect of employment exercised aboard a ship "engaged in the transportation of supplies or personnel" to Canada, or between locations (i.e. between Canada and Norway) may be taxed in Norway only where the ship is operated in international traffic.

"International Traffic" is defined in Article 3 of the Canada-Norway Income Tax Convention as any voyage by a ship operated by a Norwegian enterprise, except where the ship is operated principally between places within Canada. This determination should be made on a voyage-by-voyage basis. When a vessel is being used to transport passengers or goods from one point in Canada to another point in Canada, that voyage would not come within the meaning of "international traffic".

When the Norwegian ship-owner accepts a contract to do the repair work in the offshore area in Canada, it is contemplated that a ship containing supplies and personnel will travel from Norway to Canada, perform the repair work in Canada and travel back again to Norway. In other words, the Norwegian ship-owner's vessel will transport supplies and personnel across the border and then transport them back again to Norway. The repair work will undoubtedly involve "international traffic".

However, the reason the salary and wages derived by the Norwegian resident seafarers in the above situation are not exempt from Canadian tax under paragraph 5(b) of Article 21 of the Canada-Norway Income Tax Convention is that the ship belonging to the Norwegian enterprise is not "engaged in the transportation of supplies or personnel"; it is engaged to do repair work in respect of a drilling site situated in Canada (i.e. a site where activities are carried on in connection with the exploration and exploitation of the seabed and subsoil and their natural resources situated in Canada). In order for the seafarers to fall under paragraph 5(b) of the Canada-Norway Income Tax Convention, the profits of the Norwegian enterprise that employs them must be derived from the transportation of supplies or personnel. If the profits of the enterprise derive from the performance of repair work, it does not matter that the repair work involves the voyage of a ship that falls into the definition of "international traffic". Consequently, the salary and wages of the Norwegian seafarers is subject to Canadian income tax pursuant to paragraph 5(a) of the Canada-Norway Income Tax Convention, unless the exception in the last sentence thereof applies.

If our understanding of the facts is correct and the seafarers are taxable in Canada as discussed above, you may contact David Hayward by e-mail or by telephone, at 709-772-6360 with respect to the applicable procedures.

If you have any questions regarding the above, please do not hesitate to contact me by telephone at 613 957-2103.

Regards,

Angelina Argento
Senior Rulings Officer
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch