14 December 1992 Income Tax Severed Letter 9224406 - Benefits Paid from and EBP to a 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.

December 14, 1992

International Tax Programs Rulings Directorate
Directorate K.B. Harding
957-2111

D. Wark

922440

Employee Benefit Plan Benefits

This is in reply to your memorandum of August 17, 1992 wherein you requested our opinion concerning the appropriate rate of withholding tax on payments out of an employee benefit plan (EBP) in the following hypothetical situation.

An employer established an EBP trust for the executives prior to the introduction of salary deferral arrangements. The employer contributed amounts which would otherwise have been paid as salary or wages. None of the amounts contributed by the employer are being paid out of the EBP trust, however, the income earned in the trust in any particular year is paid out to the executives prior to the end of the particular year.

Presently all of the beneficiaries of the EBP trust are residents of Canada and the income of the trust, which is paid out to the beneficiaries, is treated as salary and wages for purposes of Part I withholding since paragraph 6(1)(g) of the Income Tax Act (the "Act") includes such amounts in income from office or employment.

In the future one or more of the executives, who are income beneficiaries of the EBP trust, will cease to be residents of Canada and will become residents of the United States and you are concerned with the withholding rates to be withheld on amounts paid out of the EBP trust to such residents.

The following comments are based on the assumption that the above described EBP qualifies as such for purposes of the Act.

It is our view, as set out below, that payments from an EBP which are taxable under paragraph 6(1)(g) of the Act are salary and wages for the purposes of Article XV of the Canada-U.S. Income Tax Convention (the "Convention") and since they are dealt with in that Article they are not subject to Article XXII of the Convention.

Section 5 of the Act provides that the taxpayer's income for a taxation year from office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year. All amounts paid out of the EBP, except for those amounts described in subparagraphs 6(1)(i), (ii) and (iii) of the Act, will be treated as income from an office or employment (i.e. salary and wages) for purposes of the Act whether or not the recipient is a resident of Canada. Accordingly, when the income of trust is paid out to the non-resident executives, such income will fall within paragraph 6(1)(g) of the Act as income from an office or employment (salary and wages pursuant to subsection 248(1) of the Act).

Non-resident taxpayers in receipt of amounts out of an EBP are required to include such amounts in their income pursuant to subsection 2(3) and subparagraph 115(1)(a)(i) of the Act. Therefore, it is necessary to review the terms of the relevant tax convention or agreement to determine whether or not any relief is provided thereunder.

Since the Convention does not define salary or wages, paragraph 2 of Article III of the Convention provides that any term not defined in the Convention shall, unless the context otherwise requires, have the meaning it has under the Act. Subsection 248(1) of the Act defines salary and wages to mean "...the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I..." and therefore the term would include any benefit provided under sections 6 and 7 of the Act.

The decision in the John Hale case [[1990] 2 C.T.C. 247] (90 DTC 6481) in the Trial Division of the Federal Court is inconsistent with the approach set out in the previous paragraph. We note that the Federal Court of Appeal [[1992] 2 C.T.C. 379] (92 DTC 6473) did not deal with whether the stock option benefit was "remuneration " for purposes of the Canada-U.K. Income Tax Convention. Accordingly, we are of the opinion that the definition of salary and wages in subsection 248(1) of the Act will generally determine the scope of Article XV and that benefits in sections 6 and 7 of the Act will fall within the "Dependent Services" article of Canada's tax conventions or agreements.

[0pParagraph 1 of Article XV (Dependent Personal Services) of the Convention clearly states that salaries, wages and other remuneration derived by a resident of a Contracting State (United States) in respect of an employment shall be taxable only in that State (United States) unless the employment is exercised in the other State (Canada). If the employment is so exercised, such remuneration may be taxed in that other State (Canada).

Pursuant to paragraph 2 of Article XV of the Convention where the amount of income received from the EBP, as a distribution of its income, relates to services rendered in Canada in a particular calendar year and where the total amount received for such services, including the amount received from the EBP, is less than $10,000 (Canadian), the amount received from the EBP will not be subject to tax in Canada. Where the amount received out the income of the EBP relates to a calendar year where the amount received for the services exercised in Canada including the amount received from the EBP exceeds $10,000 (Canadian) and the taxpayer was present in Canada for a period or periods exceeding 183 days in the calendar year, the amount received from the EBP will be subject to tax in Canada. Subject to the $10,000 (Canadian) overall limit described above, payments from the EBP that represent amounts contributed to the Plan by the taxpayer"s employer will be subject to tax in Canada. In summary, it should be noted that while amounts received out of an EBP (whether in the nature of contributions to the plan or income earned by the plan) are taxed in the year received, one must look to the year to which the services were performed to earn the benefits in the EBP for purposes of determining whether Canada has a right to tax such benefits for purposes of the Convention.

Based on the information provided it would appear that payments from the EBP to the future non-resident beneficiaries would be subject to tax in Canada. Prior to granting any exemption pursuant to the Convention to a particular taxpayer it is suggested that he should establish that he is entitled to it.

Where the amounts continue to taxed in Canada because they are income from employment, the amounts paid out of the plan will be subject to withholding tax by virtue of subsection 153(1) of the Act and Part I of the Income Tax Regulations.

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
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