16 May 1990 Income Tax Severed Letter HBW 8744-1 HBW 8771-5 HBW 4137-3

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.

May 16, 1990 Mr. K. Hillier Provincial and International Director Relations Division Relations Division Non-resident Taxation Division B. Fioravanti 957-2073

Attention: Mr. P. Murray HBW 8744-1 HBW 8771-5 HBW 4137-3 CIVILIAN EMPLOYEES IN GERMANY

This is in reply to your memorandum of April 15, requesting our comments with respect to the income tax status of certain "locally-engaged"

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We agree that the first group are deemed residents of Canada by virtue of paragraph 250(1)(c) of the Income Tax Act (the "Act") because they were resident in Canada immediately prior to their employment on the base. If is the Department's position that the term "resident" in section 250 of the Act includes "deemed resident". Accordingly, members of this group are taxed in Canada on their world income by virtue of section 2 of the Act.

However, for purposes of the Canada-Germany Income Tax Convention, these deemed residents of Canada are also considered residents of Germany by virtue of Article 4 of the Convention (because their center of vital interest is in Germany). Article 19 (Government Service) of the Convention provides that remuneration received from Canada in these circumstances is taxable only in Canada. In this regard pension income (dividends and interest, if any) are subject to tax in Canada under Part I of the Act but the rate of tax can not exceed those stipulated in the Convention since the amounts are paid to residents of Germany.

As deemed residents this group is entitled to any tax credits that they may otherwise qualify for. They are also entitled to deduct their non- Canadian sourced income in computing their taxable income pursuant to paragraph 110(1)(f) of the Income Tax Act.

The latter group are deemed to be resident of Canada throughout the part of the year preceding the time they cease to be members of the Canadian Forces by virtue of subsection 250(2) of the Act. As a result they become non-residents on their retirement. Provided their employment was not pre- arranged (while still in the military), this latter group is subject to tax as non-residents by virtue of paragraph 15(2)(c) of the Act. Their employment income received from Canada is taxable in Canada pursuant to paragraph 115(2)(e) of the Act except where the duties are performed outside Canada and the remuneration is subject to tax in Germany. Since Article 19 of the Canada-Germany Income Tax Convention provides that remuneration paid by Canada to an individual for services rendered to Canada are taxable only in Canada, the exception in paragraph 115(2)(e) is not available.

We have reviewed the Agreement Between The Parties To The North Atlantic Treaty Regarding The Status of Their Forces (the "Nato Agreement") and are of the opinion that it does not apply to the locally-engaged civilians described above.

Paragraph (c) of Article 1 of the Nato Agreement defines "civilian component" to mean "civilian personnel accompanying a force....". The locally-engaged civilians did not accompany the Canadian Forces in that capacity.

As far as the elusive Article 75 of the Nato Agreement is concerned, we cannot comment on what we have not seen.

We trust these will be of assistance.

Christine Savage Acting Director Provincial and International Relations Division

c.c.: Mr. Ken Major Foreign Section Reorganization and Non-Resident Division