Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] Are payroll taxes and social security contributions under the French social security system included in computing the foreign tax credit (FTC)?
Position: In this case, yes.
Reasons:
Because the payroll and social security charges for the 2001 taxation year are final, mandatory, and paid by a Canadian resident under the French social security system which is similar to that of the US (FICA) and Germany. XXXXXXXXXX.
June 26, 2003
XXXXXXXXXX Tax Centre Headquarters
XXXXXXXXXX Client Services International Operations and Trusts Section
XXXXXXXXXX
XXXXXXXXXX Fouad Daaboul
(613) 957-2053
Attention: XXXXXXXXXX
2002-016960Eligibility of costs incurred in France
This is in response to your memo of October 18, 2002 and our telephone conversations (XXXXXXXXXX/Daaboul) regarding the situation of the two individuals referred to below. In this regard, you have provided us with a copy of the following documents:
For XXXXXXXXXX (Mr. A):
Doc-1 A pay slip issued by XXXXXXXXXX for XXXXXXXXXX;
Doc-2 A pay slip issued by XXXXXXXXXX for XXXXXXXXXX; and
Doc-3 An accountant's working paper.
For XXXXXXXXXX (Ms. B):
Doc-4 A pay slip issued by XXXXXXXXXX for XXXXXXXXXX;
Doc-5 A pay slip issued by XXXXXXXXXX for XXXXXXXXXX;
Doc-6 A pay slip issued by XXXXXXXXXX for XXXXXXXXXX;
Doc-7 A pay slip issued by XXXXXXXXXX for XXXXXXXXXX;
Doc-8 A pay slip issued by XXXXXXXXXX for XXXXXXXXXX; and
Doc-9 An accountant's working paper.
Our understanding of the facts is based on the information contained in the documents described above.
FACTS
Mr. A and Ms. B XXXXXXXXXX and are Canadian residents. During the 2001 taxation year, they worked in France as employees (XXXXXXXXXX, respectively) of XXXXXXXXXX. The pay slips issued by those XXXXXXXXXX to Mr. A and Ms. B refer to a salary based on a certain number of markers, weeks or days.
The following Table-1 summarizes the relevant data from the pay slips as expressed in French francs (FF):
Income Deductions
Salary Other Charges Payroll Taxes Total Social security deductions
For Mr. A
Doc-1 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX
Doc-2 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX
For Ms. B
Doc-4 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Doc-5 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX
Doc-6 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX
Doc-7 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Doc-8 XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
From this data, the accountant prepares his working papers, Doc-3 and Doc-9. The following Table-2 summarizes the contents of these working papers:
Income declared Deductions claimed
Salary Other Charges Payroll Taxes Total Salary
For Mr. A - Doc-3
Doc-1 XXXXXXXXXX ---- ---- XXXXXXXXXX XXXXXXXXXX
Doc-2 XXXXXXXXXX ---- ---- XXXXXXXXXX XXXXXXXXXX
For Ms. B - Doc-9
Doc-4 XXXXXXXXXX XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX
Doc-5 XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Doc-6 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Doc-7 XXXXXXXXXX XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX
Doc-8 XXXXXXXXXX ---- XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
QUESTION
You consider that the income of Mr. A and Ms. B comes within Article 14 of the Canada-France Income Tax Convention (the "Convention"). You wish to know what amounts of salaries earned in France by the above persons are taxable in Canada and what amounts are eligible for the foreign tax credit. In particular, you wish to know, for the year 2001, whether the items in Table-1, i.e. "Payroll Taxes", "Social Security Contributions" and "Taxes", are deductible in the computation of income or form part of the computation of the foreign tax credit.
We have assumed that, since Mr. A and Ms. B are residents of Canada for the purposes of the Act, they are probably also residents of Canada under Article 4 of the Convention.
Earnings
It appears to us that, as employees, Mr. A's and Ms. B's employment income earned in France is taxable in Canada pursuant to subsection 2(1) of the Income Tax Act (the "Act") since they are Canadian residents. However, France may also tax such income pursuant to paragraph 1 of Article 15 of the Convention. Under paragraph 1 of Article 17 - Artists and Sportsmen - of the Convention, and notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a Contracting State (Canada) from personal activities as an entertainer, such as theatre, motion picture, radio or television artiste, or a musician, in the other Contracting State (France) may be taxed in that other State (France). Thus, Mr. A and Ms. B would be taxable in France, under Articles 15 and 17, on their income earned in France.
Before discussing the deductions, we would like to point out that the amounts of $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX under "Income - Other" in Table-1 above that were paid or allocated to Mr. A or Ms. B, as the case may be, were not included in the income of the individuals according to the accountant's working papers, as summarized in Table-2 above. You may wish to ask the taxpayers or their representative to justify those exclusions from income.
Deductions in computing income - section 8 of the Act
As the income earned by Mr. A and Ms. B in France is office or employment income for the purposes of the Act, the rules in subdivision a of Division B of Part I of the Act are generally applicable in computing their respective incomes. In computing a taxpayer's income from an office or employment, subsection 8(2) provides that only amounts provided under section 8 are deductible in computing a taxpayer's income from an office or employment.
“Payroll taxes", "Social security contributions" (i.e. the general social tax, the contribution to the reimbursement of the social debt and the solidarity tax) and "Taxes" described in the pay slips are not, by their description, amounts referred to in section 8 and consequently, they are not deductible under the Act. In this regard, we note that in the section "Employment Income Earned Abroad" on page 17 of the "General Income Tax and Benefit Guide 2001", taxpayers are asked to add back non-deductible contributions that were deducted, precisely to avoid deduction of similar amounts. Consequently, the expenses claimed by Ms. B, according to Table-2 above, namely the amounts of FF XXXXXXXXXX, FF XXXXXXXXXX and FF XXXXXXXXXX, must be disallowed as deductions in computing income.
Foreign tax credit - section 126 of the Act
For the purposes of the Convention, double taxation is avoided by the application of Article 23, which provides that a deduction shall be allowed from Canadian tax for French tax paid.
A tax paid to the government of a foreign country in respect of employment income is generally included as "non-business income tax", as that term is defined in subsection 126(7) of the Act, for the purpose of computing the foreign tax credit.
To the extent that the "Taxes" that were paid by Mr. A and Ms. B in France are not refundable by France (see paragraph 13 of Interpretation Bulletin IT-270R2), they must be treated as "non-business income tax" for purposes of computing the foreign tax deduction in subsection 126(1).
Regarding "Charges salariales" [Payroll taxes] and "Prélèvements sociaux" [Social security taxes], since Mr. A and Ms. B were employed by French employers, their "Revenus - Salaire" [Income - Salary] and the portion of their "Revenus - Autre" [Income-other] are subject to taxes under the French Social Security Code. For the 2001 taxation year in question, we consider that the mandatory and final payments that are made under the French social security system by a resident of Canada constitute "income or profits tax". Thus, the "Payroll Taxes" and "Social Security Taxes" in this situation must be considered "non-business income taxes" within the meaning of subsection 126(7), for the purpose of computing the foreign tax deduction in subsection 126(1).
XXXXXXXXXX.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the CRA library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
Should you require any additional information regarding the above, please do not hesitate to contact us.
Alain Godin
For the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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