1 March 2000 Income Tax Severed Letter 1999-000941A - Locally engaged staff deemed 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Non-resident persons are hired as locally engaged employees (LES) at Canadian embassies in countries which do not impose an income tax on the wages paid to them and such persons are former residents of Canada. The issue is whether the wages paid to such LES are taxable under paragraph 115(2)(c) of the Act.

Position: no. paragraph 115(2)(c)(iii) does not apply to such LES

Reasons: As a result of the 1999 amendments to paragraph 115(2)(c) of the Act, and in particular the enactment of subparagraph 115(2)(c)(iii), paragraph 115(2)(c) of the Act no longer applies to such LES and the result is that the wages paid to such LES is no longer taxable under part I of the Act.

Department of Foreign Affairs
and International Trade
125 Sussex Drive 1999-000941
Ottawa ON K1A 0G2 G. Middleton
957-2122
Attention: Armande Audet
Acting Director
Locally Engaged Staff

March 1, 2000

Dear Sirs:

This is further to our letter of December 15, 1999, your facsimile of November 10th and our meeting of November 15th in which you requested clarification on the taxation of remuneration paid to Locally-Engaged Staff (LES) employed by Canadian Embassies located in countries which do not impose an income tax on employment income earned by individuals (e.g. Saudi Arabia, United Arab Emigrates, etc.). The particular LES discussed in this letter are spouses ("GC Spouses") of government of Canada employees ("GC Employees") posted abroad to work at a Canadian Embassy located in such a country.

The tax treatment for the remuneration depends primarily on the residency status of the GC Spouses while they are abroad working as LES, that is, whether the GC Spouses remain, or cease to be, resident in Canada when they accompany the GC Employees abroad. The determination of a GC Spouse's residency status is a question of fact which can only be determined after reviewing all of the facts. In this regard, Form NR73 entitled "Determination of Residency Status (Leaving Canada)" should be completed and filed prior to the time that a GC Spouse leaves Canada to determine whether the GC Spouse remains, or ceases to be, a resident of Canada.

Situation 1 - GC Spouses who are residents of Canada

In the first type of situation, GC Spouses continue to be residents of Canada while they accompany the GC Employees abroad; that is, the facts determine that these GC Spouses do not sever their residential ties with Canada. Their residency status does not change and they remain residents of Canada. If such a GC Spouse is subsequently hired to work as a LES employee at any Canadian Embassy, the remuneration paid by a Canadian Embassy to such a GC Spouse for employment services as a LES employee is subject to tax in Canada. As residents of Canada, these GC Spouses/LES are subject to tax on their world income from all sources in accordance with the provisions in the Income Tax Act (the "Act").

Situation 2 - GC Spouses who are non-resident persons

In the second situation, the facts are as follows.

• A GC Spouse ceases to be resident in Canada and is a non-resident person for purposes of the Act while abroad (i.e. the GC Spouse severs all residential ties with Canada).
• While abroad, the GC Spouse is hired to work as a LES employee by a Canadian Embassy located in a foreign country which does not impose an income or profits tax on employment income earned by individuals (e.g. Saudi Arabia, United Arab Emigrates, etc.).

Since such a non-resident person (i.e. GC Spouse/LES) is employed by a Canadian Embassy located in a foreign country, which does not impose an income tax, the provisions of paragraph 250(1)(g) of the Act do not apply to deem this non-resident person to be a resident of Canada. Furthermore, the provisions of paragraph 115(2)(c) of the Act do not apply to the non-resident person (GC Spouse/LES) and, thus, the remuneration paid to the-resident person (GC Spouse/LES) by a Canadian Embassy located in such a foreign country is exempt from tax in Canada under the Act.

It should be noted that, as this GC Spouse ceases to be resident in Canada, this person may have assets which are considered to be disposed of on ceasing to be a resident of Canada and the gains, if any, on such deemed dispositions may be subject to departure tax pursuant to the provisions of section 128.1 of the Act (in particular, subsection 128.1(4) of the Act). In addition, during the time this GC Spouse is a non-resident person, the GC Spouse is liable for non-resident tax in accordance with the provisions of Part XIII of the Act if certain amounts (e.g. payments of interest, dividends, rents, pensions, etc.) are paid or credited to the non-resident person by a resident of Canada. In connection with these payments, such GC Spouses should notify Canadian payors of their non-residence status on or about the time they cease to be resident in Canada to ensure that the Canadian payors withhold the appropriate amount of Part XIII tax on such payments.

It should be noted that the tax treatment described in Situation 2 does not apply to GC Spouses employed as LES at Canadian Embassies in foreign countries where, by virtue of the "Vienna Convention on Diplomatic Relations" (VCDR), the GC Spouses/LES are exempt from income tax otherwise imposed by those countries on the employment income paid by the Canadian Embassies to the GC Spouses/LES. We are in the process of writing a letter to David McNamara of your Department which will provide details of the different tax treatment for such a GC Spouse and we will send you a copy of the letter.

Furthermore, if a foreign country described in Situation 2 above subsequently implements an income tax system which imposes income taxes on employment income received by individuals, the tax treatment described in Situation 2 will no longer apply.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch