15 May 1978 Income Tax Severed Letter

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.

K.W. Yee (613) 995-0051

XXXX

May 15, 1978

Dear Sirs:

Re: Canada-U.K. Teacher Exchange

This is in reply to your letter of May 4, 1978 concerning a proposed exchange of faculty members between United Kingdom XXXX

XXXX

In your first question, it is assumed that the Canadian teacher visiting the U.K. under the exchange arrangement will continue to receive salary payments from his Canadian institution during the period of his stay and teaching in the U.K.

Because this Department is only permitted to interpret and administer the Canadian Income Tax Act, we are not in a position to provide as much information as you would require on the treatment of the Canadian teacher (or the U.K. exchange teacher) by the U.K. Inland Revenue authorities.

However, assuming that the Canadian exchange teacher is a resident of Canada immediately before he visits in the U.K. and the period of his visit and teaching there does not exceed two years, it is our belief that Article 18 of the Canada-U.K. Tax Agreement ("Agreement") will apply to exempt from U.K. income tax the remuneration he received for teaching in the U.K.

Whether the Canadian teacher was a resident of Canada immediately before he left for the U.K. is a question of fact and law. You might wish to consult Article 3 of the Agreement on this point. We might also refer you to Interpretation Bulletin IT-221 entitled "Determination of Residence for Individuals Leaving Canada".

If, during the Canadian teacher's stay in the U.K., he remained a resident of Canada, he will be subject to tax in Canada on his world income under section 3 of the Act, including the remuneration he receives for his teaching in the U.K.

On the other hand, if he is not a Canadian resident during this period, he will not be taxed by Canada on the basis of his world income. Instead, he will be subject to tax as a non-resident under Division D of the Act by virtue of subsection 2(3) with respect to certain types of Canadian-source income and gains. In this connection, you may wish to consult our Information Circular 77-16 entitled "Non-Resident Income Tax".

Concerning his remuneration for teaching in the U.K., it is our view that it will be subject to tax under subparagraph 115(1)(a)(c) of Division D by reason of paragraphs 115(2)(c) and (e). You will find a discussion on the application of these provisions in Interpretation Bulletin IT-151R entitled "Non-Residents - Exemption from tax Deductions at Source on Employment Income".

Please pay particular attention to the third sentence in the second paragraph of this Bulletin. This sentence states that the exclusion under clause 115(2)(e)(i)(A) does not apply to permit any exemption to the taxpayer where the remuneration attributable to the duties of his office or employment in a foreign country is not subject to tax in the foreign country because of a provision contained in a tax treaty between that country and Canada.

Regarding the U.K. teacher visiting and teaching in Canada, it is our understanding that he will continue to receive his regular remuneration from the U.K. institution.

Here again, the tax treatment of the U.K. teacher in Canada will depend on his residence status immediately before he left the U.K. for Canada and during his visit in Canada.

If he was a resident of the U.K. immediately before he came to visit and teach in Canada, he will be exempt from Canadian income tax by virtue of Article 18 of the Agreement in respect of his remuneration from teaching in Canada, provided that his visit in Canada does not exceed a period of two years.

Article 3 of the Agreement defines the meaning of the term "resident of the U.K.". Any requirement to confirm that the U.K. teacher was a resident of the U.K. before he left the U.K. for Canada should be addressed to the U.K. Inland Revenue authorities.

If, during his stay in Canada, the U.K. teacher remains a resident of the U.K., Division D of the Act will apply or continue to apply in respect of any Canadian-source income and gains to him, subject to the provisions of the Agreement. We again refer you to Information Circular 77-16.

On the other hand, should he become a resident of Canada during this period, he will be subject to tax on his world income in accordance with section 3 of the Act, except for the remuneration he receives for teaching in Canada, which is tax-exempt by virtue of Article 18 of the Agreement, as mentioned earlier.

At this point, we would like to caution that he will lose the exemption under Article 18 should his visit exceed a period of two years.

In the above comments, we believe we have answered your first question.

For the purpose of replying to your second question, we shall firstly assume that Article 18 of the Agreement applies to both the Canadian and U.K. exchange teachers.

Secondly, on the basis of the assumption that the teacher exchange arrangement requires the Canadian employer to continue making salary payments to the Canadian teacher in the U.K., we believe that it might be safe to make a further assumption that the teacher continues to be an employee of the Canadian institution after he left Canada and his salary remains at the same $20,000 per annum level after he left Canada.

Therefore, the $5,000 special remuneration received by the U.K. teacher is considered a payment by the Canadian teacher whether he pays it directly to the U.K. teacher himself or indirectly via his employer in Canada.

The next issue to be clarified concerns the applicability of the deduction under subparagraph 8(1)(i)(ii) of the Act regarding the payment of an amount by a taxpayer as salary to an assistant or substitute. This provision is discussed in paragraphs 1 and 6 of Interpretation Bulletin IT-352 entitled "Employees' Expenses Incurred in Performing Duties of office or Employment".

Referring to the situation you have described, we are unable to provide a definite opinion as to whether or not the U.K. teacher is an eligible assistant or substitute for the Canadian teacher for the purposes of permitting the Canadian teacher to claim a deduction for the payment of the proposed $5,000 to the U.K. teacher. Such a determination would require a review of all relevant facts, including a close examination of the terms and conditions of the employment contract between the Canadian teacher and his employer.

In order for subparagraph 8(1)(i)(ii) to apply, the assistant or substitute must have been hired at the request of the taxpayer's employer to assist the employee in the performance of his employment duties. Furthermore, it most have been the responsibility of the employee rather than that of the employer to pay the assistant or substitute.

Our reply to your second question must therefore be given on the basis of a whole set of assumptions as discussed above.

1. Assume Canadian teacher in U.K. remains Resident in Canada and subparagraph 8(1) (i) (ii) applies

a) The U.K. teacher's tax position is not affected by the receipt of the $5,000 special remuneration because of Article 18 of the Agreement, regardless of whether he remains a U.K. resident or has become a Canadian resident.

b) The Canadian teacher is subject to tax in Canada on his gross salary of $20,000 less a deduction of $5,000 for the payment under subparagraph 8(1)(i)(ii).

2. Assume Canadian teacher in U.K. remains Resident in Canada but subparagraph 8(1)(i)(ii) does not apply

a) Same as 1(a) above.

b) The Canadian teacher will be subject to tax in Canada on his gross salary of $20,000 without any deduction for the payment of $5,000 to the U.K. teacher. In our view, subsection 56(2) applies to the $5,000 where it is paid by the Canadian institution to the U.K. teacher on behalf of the Canadian teacher.

3. Assume Canadian teacher in U.K. has become Non-Resident of Canada and subparagraph 8(1)(i)(ii) applies

a) same as 1(a) above. b) Same as 1(b) above.

4. Assume Canadian teacher in U.K. has become Non-Resident of Canada but subparagraph 8(1)(i)(ii) does not apply

a) Same as 1(a) above.

b) Same as 2(b) above.

In the second complete paragraph on the second page of your letter, you asked the question of whether or not the Canadian teacher in the U.K. would only be subject to tax on $15,000 if in fact only $15,000 in cash salary was paid to him, with the remaining $5,000 being paid by the employer to the U.K. teacher.

As mentioned earlier, the relevant facts in the situation must be carefully examined in order to determine whether the Canadian teacher's salary is in fact $20,000 or $15,000. The fact that only $15,000 was paid to the Canadian teacher because $5,000 was withheld by the employer from the Canadian teacher's pay in order to pay the U.K. teacher does not necessarily mean that the Canadian teacher's salary is $15,000 rather than $20,000. On the contrary, we have made an. assumption that the Canadian teacher's pay is $20,000 for the purpose of our reply above to your second question.

Regarding the third complete paragraph on page 2 of your letter, this Department is not permitted to provide tax counselling service. We are therefore unable to fulfill your request. However, in the comments above, we believe that we have provided you with the necessary information for your purposes.

We trust the foregoing will be of assistance to you.

Yours truly,

for Director Technical Interpretations Division AWY/ jr

s. 250(1) s. 8(1) (i) s. 115(2) s. 5(1) Canada-U.K. Agreement