7 September 1990 Income Tax Severed Letter - Japanese citizens working and living in Canada

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.

Subject: Japanese Citizens Working and Living in Canada

This is in reply to your memorandum of June 19, 1990 concerning the taxation of citizens of Japan who come to work in Canada and are present in this country for an extended period of time.

Residency

It is a question of fact each year or at any particular time whether a person is a factual resident of Canada, a deemed resident of Canada or a non-resident of Canada. As we mentioned to you in our discussions, we are of the view that a person's intention to return to Japan after an extended stay in Canada should not preclude the person from being considered factually resident in Canada.

A Japanese citizen may be a dual resident of Canada and Japan where the person is liable to tax in each country by virtue of residence or domicile therein. If this situation arises, it will be necessary to refer to the residency tie-breaker rules found in paragraph 2 of the Protocol of the Canada-Japan Income Tax Convention (the "Convention") to determine whether a particular person is a resident of Canada or Japan for purposes of the Convention and for determining the tax treatment for the various types of income.

In order to satisfy the Department that a particular Japanese citizen is a dual resident and subject to the tie-breaker rules, we are of the view that he should be requested to provide documentation which clearly indicates that he is subject to tax in Japan by reason of residence or domicile.

Canadian Interest Income

Where a dual resident is deemed to be a resident of Japan for purposes of the Convention XXX is of the opinion that the gross amount of Canadian sourced interest income earned by such individuals should be excluded from the calculation of "taxable income" under Division C of the Act and taxed separately at the rate of 10%.

In our view, their opinion is incorrect. We feel that the Canadian interest income net of related expenses should be included in calculating the individual's net income and taxable income and the Federal and Provincial taxes payable should then be calculated in the normal manner on the taxable income.

The amount of tax which relates to the Canadian interest income can then be determined by using the following formula:

Net Canadian        Total Federal and   Portion of Tax Relating
Interest Income   X Provincial Taxes Payable-to Canadian 
Interest
Income Taxable Income

If the portion of taxes relating to the Canadian interest income exceeds the limitation in paragraph 2 of Article 11 of the Convention (i.e. 10% of the gross amount of Canadian interest income), the total Federal and Provincial taxes payable will have to be reduced by the amount of the excess.

An example of this tax reduction is as follows:

Canadian Employment Income                        $59,000
Interest Income from Canadian sources    $1,100(A)
Less: Expenses incurred to earn
the Canadian interest income                100     1,000(B)
Net Income                                         $60,000
Deductions in computing taxable income              10,000
Taxable Income                                     $50,000(C)
Total Federal and Provincial Taxes Payable @ 40% Rate
C X 40% = $50,000 X 40% =                          $20,000(D)
Taxes Payable relating to Canadian Interest Income
B X D = $ 1,000 X $20,000=                         $   400(E)
C       $50,000
Limitation under paragraph 2 of Article 11 of the Convention
10% X A = 10% X $1,100                             $   110(F)
Tax Reduction
E - F = $400 - $110 =                                $   290(G)

Note: The tax reduction should be apportioned on a reasonable basis between the Federal and Provincial taxes payable.

Revised Taxes Payable
D - G = $20,000 - $290 = $19,710

Please note that this approach produces the correct net income amount which is used for the purposes of calculating various tax credits.

Subsection 20(12) Deduction

With respect to your query regarding a deduction under subsection 20(12) of the Act, there may be situations where a dual resident who is deemed to be a resident of Japan for purposes of the Convention may be entitled to such a deduction.

An example of this is as follows:

• • A Japanese citizen earns investment income (i.e. interest) arising in Japan and is required to pay tax to the Japanese Government on such income.
• • The tax paid to the Japanese Government would qualify as a non- business income tax as defined in paragraph 126(7)(c) of the Act except for the portion, if any, of the tax that may be deductible under subsection 20(11) of the Act.
• • Such foreign source interest income should be exempt from tax in Canada by virtue of paragraph 1 of Article 20 of the Convention. Therefore, in computing an individual's taxable income for the year, he will be entitled to a deduction under subparagraph 110(1)(f)(i) of the Act in respect of such income.
• • The amount calculated under subparagraph 126(1)(b)(i) of the Act represents the numerator in the foreign tax credit calculation for the foreign source interest income. In most cases, the numerator will be zero since for the purposes of subparagraph 126(1)(b)(i), the subparagraph 110(1)(f)(i) deduction offsets the foreign source income. When the numerator is zero, the foreign tax credit in subsection 126(1) of the Act will also be the zero.
• • Although an individual may not be entitled to a foreign tax credit under subsection 126(1) in respect of the non-business income tax paid by him, he may be able to claim a deduction under subsection 20(12) for such amount of tax.

There are two additional points which we would like to bring to your attention concerning non-business income taxes.

• (i) By virtue of subsection 8(2) of the Act, a deduction under subsection 20(12) of the Act is not permitted where the only source of income is employment income.
• (ii) The proposed amendments to the definition of "non-business income tax" in paragraph 126(7)(c) of the Act, as contained in the "Draft Amendments to the Income Tax Act and Related Statutes" dated July 1990 provide that a non-business income tax will not include foreign taxes paid in respect of amounts that are deductible in computing a taxpayer's taxable income under subparagraph 110(1)(f)(i) of the Act for the 1990 and subsequent taxation years. Therefore, individuals in the situation described above will no longer be entitled to a deduction under subsection 20(12) of the Act if the proposed amendments are passed into law.

Other

During our review of this file, we noted the following points which may be of interest to you.

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