Section 81

Respecting a question on the possibility of reducing income tax source deductions where payment is made to a member of a pooled registered pension plan ( "PRPP"), the participant is an Indian under the Indian Act, and the contributions came from exempt earned income, CRA first stated:

Section 147.5 does not include a provision which would ensure that distributions from a PRPP will not be included in computing income under paragraph 56(1)(z.3), where they come within paragraph 81(1)(a). Thus, distributions from a PRPP will first be included in the participant's income under paragraph 56(1)(z.3) and they will then be excluded, where applicable, from income when applying paragraph 81(1)(a).

A Canadian citizen and resident is working with an organization that provides services with an unidentified relationship with the mandate of the United Nations. Under the terms of an international agreement, the individual’s salary is subject to domestic taxation including source deduction in the country where the individual is working.

After finding that the individual’s income could not be excluded from income through a deduction under s. 110(1)(f)(iii), CRA stated:

[T]he Foreign Missions and International Organizations Act (the "FMIOA") is one of the federal statutes under which an amount may be exempt from income tax in Canada within the meaning of paragraph 81(1)(a).

The XXXXXXXXXX Order was issued pursuant to paragraph 5(1)(g) of the FMIOA and provides that XXXXXXXXXX officials have in Canada the privileges and immunities set out in Article V of the UN Convention. According to this provision, United Nations officials are exempt from all taxation on the salaries and emoluments paid to them by the United Nations. An official of an organization, according to IT-397R, is a person named and agreed on between the organization in question and its member states and designated as such by the Governor in Council.

Subsection 5(3) of the FMIOA states that nothing in any order made under subsection 5(1) of the FMIOA exempts a Canadian citizen, residing or ordinarily resident in Canada, from liability for any taxes or duties imposed by a law in Canada. . Therefore, since you are a Canadian citizen and reside in Canada, you cannot benefit from an exemption from Canadian taxation on the salaries and emoluments paid by XXXXXXXXXX under paragraph 81(1)(a), even if you meet the definition of "official" above.

Regarding whether a NATO employee working outside Canada would be exempted having regard to Article 19 of the Agreement on the status of the North Atlantic Treaty Organization, National Representatives and International Staff (the "Agreement"), the Directorate stated:

Article 19 of the Agreement provides that certain officials of NATO (consisting of the Council and subsidiary bodies) shall be exempt from taxation on the salaries and emoluments paid to them by NATO or any of its bodies in their capacity as officials of that organization. The category of officials who may benefit from this exemption shall be a category agreed between the Chairman of the Council Deputies and each of the governments of the member states concerned.

However, as noted in paragraph 4 of IT-397R, where Canada employs and pays an individual and then seconds or lends that person to act as an official of the organization, Canada retains the right to tax the individual when he or she is resident in Canada or is deemed to be resident in Canada (factually or deemed). Furthermore, the exemption described in the previous paragraph does not apply in the case of an official of Canada or a member of the Canadian Forces who represents Canada at NATO or one of its subsidiary bodies.

Where a non-resident corporation derives income or a capital gain which is exempted from tax under Part I by a treaty, s. 81(1)(a) provides that such amount shall not be included in income of the corporation for the taxation year. No deduction under s. 110(1)(f)(i) may be claimed in respect of an amount that is exempt under s. 81(1)(a).

Regarding a retirement annuity received by a Canadian resident from a French corporation that was exempted under Article 18 of the Canada-France Tax Convention, CCRA indicated that, by virtue of s. 81(1)(a) (and as confirmed by Swantje) the taxpayer was required to include the retirement annuity in income under s. 56, before taking a deduction under s. 110(1)(f).

The Taxpayer is a non-resident corporation that carries on business in many countries, including Canada. The activities of the non-resident Taxpayer in Canada help satisfy the shipping requirements of related companies (the “Related Party Customers”), who generally are residents of Canada or non-residents carrying on business in Canada and who are not themselves in the shipping business. Would the Taxpayer’s activities carried on in Canada be considered “the operation of a ship in international traffic” under the previous version of s. 81(1)(c), or as “international shipping” under the current version (so that various chartering arrangements could be considered “leases” under the new “international shipping” definition?

Respecting the former version, CRA stated:

[T]he Taxpayer never has management of the ships’ operations, in that it is not responsible for the crew nor the service and maintenance of the ships…[so that it] does not have the “Technical Management” of the ships. However…this requirement could also be met where the Taxpayer has the so-called “Commercial Management” of the ships…[which] means the right to exploit the earning capacity of the ship…[which] right does not necessarily go hand in hand with the responsibility for the crewing and maintenance of the ship. … [T]he Taxpayer would need to demonstrate that the ship owner is operating the ship under the Taxpayer’s direction and not, in effect, under the direction of the Related Party Customers.

Respecting the post-amendment version, CRA stated:

[T]hese amendments were not intended to effect any significant scope limitations. …[T[]he term “lease” as used in the specific context of the international shipping rules would include chartering arrangements whereby taxpayers do not have the Technical Management of the ship but do have the Commercial Management of the ship. As such, we are of the view that the Taxpayer may continue to qualify for the international shipping exemption in taxation years that begin after July 12, 2013 on the same basis as for taxation years beginning before that time, that is, provided that the Taxpayer has the Commercial Management of the ship.

During peak season, Canco, which transports passengers to destinations inside and outside Canada, is supplied planes, and non-resident pilots and crew by an arm's length U.K. resident ("Forco") who is the pilots' and crew's employer, to transport Canco's passengers. In finding that Forco qualified under s. 81(1)(c) provided similar relief was provided in the U.K., CRA stated:

Forco could be viewed as earning income in Canada from the operation of an aircraft in international traffic within the meaning of paragraph 81(1)(c), notwithstanding that the tickets held by the passengers on its flights represent contracts for services between the passengers and Canco.

General discussion.

"As it is our understanding that Greece continues to exempt residents of Canada from its Freight Tax on the basis of the bilateral arrangement between Canada and Greece agreed to in the above-mentioned exchange of diplomatic notes [in September 1929], paragraph 81(1)(c) of the Act will operate to exempt the income for the year of a resident of Greece earned in Canada from the operation of a ship in international traffic."

The foreign country will be considered to grant substantially similar relief if it does not impose an income tax, or if the income from the operation of the ship or aircraft in international traffic is exempt from tax in that country.

The exemption does not apply to income from a dry lease or bare boat charter because such income is not income from the operation of a vessel.

After quoting from IT-397R, CRA concluded that a disability pension to be received pursuant to the Royal Canadian Mounted Police Superannuation Act would not be exempted under s. 81(1)(d).

Under a recent change in the Veterans Independence Program, recipients would get lump sums to pay vendor invoices rather than sending the invoices to Veterans Affairs Canada. These lump sums are not taxable (the same as before), because the are received pursuant to the Pension Act.

Respecting the treatment of a Hong Kong War Memorial Pension received by a resident of Canada, CRA stated: we would consider a pension received from Hong Kong SAR to be a pension received from a country that was an ally of Canada at the time of the Second World War.

The child of parents killed in an accident receives an award as a consequence. Is the income from the award exempted under ss. 81(1)(g.1) and (g.2), and if the proceeds of the award were used to purchase an annuity, must the income element of the annuity be reported as interest income? CRA indicated that where the amount received is not awarded as damages in respect of mental injury suffered by the child, ss. 81(1)(g.1) and (g.2) would not apply and the investment income would be taxable.

Where an annuity contract was purchased by a taxpayer or taxpayer’s representative with the proceeds of a lump-sum award received for damages for personal injury or death, the income component could be exempted under ss. 81(1)(g.1) and (g.2) only on the basis described above.

The lump-sum award could also be organized as a structured settlement, which would entail the casualty insurer being the owner of an annuity contract and reporting the interest element inherent in the annuity contract in its income. Provided the conditions in IT-365R2, para. 5 were met, the payments received by the claimant would represent non-taxable payments for damages.

Following the death of their mother in a road accident, two minor children each received a lump sum payment from the Quebec Automobile Insurance Company (the "SAAQ") pursuant to a statutory provision which provided that following the death of a parent, a surviving minor child was entitled to a lump sum determined according to the child’s age.

In finding that the interest generated by the investments made with the amounts received by the children from the SAAQ were taxable to them rather than exempted pursuant to s. 81(1)(g.1), the Directorate noted that the amounts paid (which reduced pro tanto with the years remaining to the attainment of the age of majority) were implicitly compensation for loss of financial support rather than compensation for injury.

The Taxpayer received funding from a Regional Board of Health and Social Services pursuant to a Quebec provincial non-institutional resources program under s. 301 of the Act respecting Health Services and Social Services (the ARHSSS) to provide accommodation, support, continuous monitoring and assistance services to patients (having severe and persistent psychiatric disorders) referred to it by their care institution and needing to attend a day hospital.

In finding that the amounts so received by the Taxpayer and charges made by it to such users, including amounts received by it from the Reginal Board for places that were reserved for use by the users but not so used from time to time, quailed under s. 81(1)(h), the Directorate first indicated as a preliminary matter that the term social assistance benefit as used in French may means payment since the English version uses the expression "social assistance payment". The Directorate then stated:

“[T]he amounts are paid for accommodation, support, continuous supervision and assistance services for users who must attend the psychiatric day hospital and cannot be maintained in their environment for the duration of the treatment and for clients with severe and persistent disorders who require temporary accommodation to resolve a psychosocial crisis. In our view, this resource constitutes a relief provided by the State to people in need because of their state of health. Consequently, the amounts paid for these services represent social assistance benefits.”

[A]mounts paid when a space reserved by the public facility is not occupied by a user … are paid based on a review of the users' needs because the amount is calculated based on what the users would have needed if they had occupied the spaces.

As regards the contribution of users … it could also constitute a social assistance benefit …. This would be the case, for example, for any part of a user's contribution that comes from the guaranteed income supplement or spouse's allowance paid in accordance with the Old Age Security Act, or that comes from amounts of last-resort financial assistance paid under the Employment Assistance Program in accordance with the Quebec Act respecting Income Support, Employment Assistance and Social Solidarity.

The Ministère de la Santé et des Services sociaux du Québec (the "MSSS"), which through MSSS, through public institutions ("PIs"), may directly fund all of the compensation to individuals respecting users with assessed needs. However, a resource may receive may also receive an amount directly from the user. The Directorate stated:

If an Individual receives an amount directly from a resource user, that amount will be excluded from the Individual's income only if the Individual can demonstrate that the amount received is a social assistance benefit received indirectly by the Individual under a federally or provincially legislated program, based on a means, needs and income test. We understand that in some situations it may be difficult to obtain the information necessary to make this determination.

In the case of child placements, the PI will generally be entitled to a special allowance for a child, in the care of an institution licensed or otherwise authorized under provincial legislation to provide care or custody of the child, under the federal Canada Child Tax Benefit ("CCTB") program, with the parent thereby no longer being entitled to the CCTB because the child no longer meets the condition in para. (c) of the definition of "qualified dependant" in s. 122.6.

In finding that the entitlement to such allowance under the CSAA does not affect the otherwise non-taxable status of the compensation that the individual responsible to the resource receives from the PI for that child, the Directorate stated:

Subparagraph 81(1)(h)(i) provides that in order for an amount of social assistance received directly or indirectly by the Individual to be exempt from income tax pursuant to paragraph 81(1)(h), no family allowance under the Loi sur les allocations familiales ("LAF") must be payable in respect of the child in the Individual's care and custody for the period during which the social assistance is paid to the Individual. For the purposes of subparagraph 81(1)(h)(i), we are of the view that the children's special allowance [so] paid … is not an amount of family allowance under the LAF and the payment of such an allowance would not preclude the exemption from the social assistance benefit that would otherwise qualify pursuant to paragraph 81(1)(h).

CCRA noted:

[W]e have determined in the past that a contribution paid by an institution to a family-type resource or an intermediate resource under the Act respecting health services and social services was usually a social assistance benefit paid to an individual under a provincially legislated program, on the basis of a means, needs and income test. In addition, where a user has been referred to a family-type resource or an intermediate resource by a "public institution" under [such] Act … part of the user’s contribution may also constitute such a benefit. This would be the case, for example, for any portion of a user's contribution that comes from the guaranteed income supplement or spouse's allowance paid in accordance with the Old Age Security Act or that comes from amounts of last-resort financial assistance paid under the [Quebec] Employment Assistance Program … .

An individual employed by a Quebec public institution received compensation pursuant to the Act respecting health services and social services for accommodating up to nine individuals with mental disabilities (“beneficiaries”) at his apartment (which was owned or rented by him). CCRA indicated that such amounts were exempted under s. 81(1)(h). Reimbursements for expenses received by him were not so exempted, but they were not benefits under s. 6 since the reimbursed expenses were not of a personal nature.

In the situation where a contract worker is engaged by a social services facility to supervise foster families in order to verify the quality of the services the users receive, the s. 81(1)(h) exemption would not be available since the users do not live in the worker’s principal place of residence.

Regarding the situation where, after signing a contract with the Facility, the contract worker engages a host family with whom he also signs a contract containing the terms of the agreement relating to the user's accommodation, so that the host family undertakes to provide the user with a private or double room, furniture, bedding and use of the common areas of the house, in keeping with the rest of the residence, CCRA discussed the requirements for the s. 81(1)(h) exemption to be available to such foster families.

In finding that the owner of a residence must live in the residence in order to benefit from s. 81(1)(h), the Directorate stated:

[S]ubparagraph 81(1)(h)(ii) specifically provides that this exemption applies only if the beneficiary lives at the taxpayer's principal place of residence (i.e., the owner of the foster home, the foster family or the intermediate resource) or that place, i.e., the taxpayer's principal place of residence, is maintained for use by the beneficiary as a place of residence. A taxpayer's "principal place of residence" is the place where the taxpayer regularly, ordinarily or customarily lives. The word "principal" is relevant only if the taxpayer has more than one place of residence.

Regarding the meaning of "or the taxpayer’s principal place of residence is maintained for use as the residence of that other individual,” the Directorate stated:

The phrase … refers to specific situations, such as where a taxpayer receives amounts because the taxpayer’s principal place of residence is available to host beneficiaries at any time for various periods. It is possible for a taxpayer to receive amounts when no beneficiaries reside with the taxpayer. The taxpayer must, however, regularly, ordinarily or customarily live in that residence.

Taxpayers managed residences (governed by the Quebec Act respecting health services and social services) for the disabled or the elderly who wished to have their income exempted under s. 81(1)(h). The Directorate indicated:

• provided that the program made payments on the basis of a means, needs or income test, there was no need to perform a separate calculation of the needs of each beneficiary under the program;
• the “principal place of residence” test would not be satisfied if the program beneficiaries stayed in an adjoining residence, for example, the second unit in a duplex;
• an amount paid that was called an honorarium to a foster home could constitute a social assistance benefit; and
• it was permissible for the homeowner to generate a profit, which would be viewed as compensating the homeowner for the care and services provided to those beneficiaries and, therefore, as amounts received for the benefit of those beneficiaries.

Regarding whether a disability pension to be received pursuant to the Royal Canadian Mounted Police Superannuation Act ("RCMPSA") would not be exempted under s. 81(1)(i), CRA stated:

[P]aragraph 81(1)(i) … exempts from tax any pension or compensation received solely by virtue of section 32 or 33 of the RCMPSA (former section 27 of the RCMPSA) in respect of an injury, disability or death. … Based on the documents you have provided, it is difficult to determine whether you are receiving your pension by virtue of sections 32 or 33 of the RCMPSA or whether you are receiving it by virtue of subsection 11(2) of the RCMPSA (formerly subsection 10(2) of the RCMPSA), the latter not being tax-exempt.