CRA finds that employment income does not arise in the U.S. for Treaty purposes to the extent the duties are performed in a Canadian home office

A portion of the employment duties of a cross-border employee (with a hybrid work arrangement) was exercised from Canada in the year but the individual made contributions under the U.S. Federal Insurance Contributions Act (“FICA contributions”). In finding that the FICA contributions made in respect of the duties exercised in Canada would not be eligible for a foreign tax credit, the Directorate referenced the rule in Art. XXI:2(a) requiring that the tax be paid on income “arising” in the U.S. and indicated that generally it would regard only that proportion of the employment income that corresponded to the days in which the employee was performing duties of employment while “physically present” in the U.S. as compared to the days of physical presence in both jurisdictions while performing those duties, would satisfy this “arising” test.

The Directorate took the same approach to the deductibility of contributions made to a 401(k) plan by such an employee having regard to a requirement under Art. VIII:10 that the contributions be attributable to services “performed” by the individual in the U.S., so that the deductible amount of the 401(k) contributions for a year generally would be the proportion thereof based on the relative number of working days the individual was physically present in the U.S. The Directorate also noted that Art. VIII:11 essentially limited the 401(k) deduction to the individual’s RRSP contribution room.

Neal Armstrong. Summaries of 11 April 2023 Internal T.I. 2023-0964101I7 under Treaties – Income Tax Conventions – Art. 24, Art. 8.