Principal Issues: [TaxInterpretations translation] Are certain payroll taxes and other deductions made by France from the salary paid to an individual resident in Canada deductible as pension fund contributions and/or allowable as a non-business income tax for the purposes of section 126 of the Income Tax Act?
Position: General comments.
XXXXXXXXXX 2009-031651 Danielle Bouffard June 12, 2009
Dear Madam,
Subject: Social security charges and other deductions in France
This is in response to your fax dated March 31, 2009 in which you asked our opinion regarding the tax treatment of certain deductions made by France from the salary of an individual who has been resident in Canada for less than 60 months. These deductions are as follows:
- CSG ("contribution sociale généralisée" ["general social contribution"])
- CRDS ("contribution pour le remboursement de la dette sociale " [contribution for the repayment of the social debt])
- Sécurité sociale vieillesse [old age social security] (retirement)
- Pole emploi (similar, in your opinion, to Employment Insurance)
- Retraite complémentaire [supplementary pension] (according to you, mandatory)
In light of the positions expressed by the CRA in Income Tax Technical News No. 31R2 and the provisions of paragraph 5 of Article XXIX of the Canada-France Income Tax Convention (the "Convention"), for the various types of withholding referred to above, you wish to know whether such withholding qualifies as contributions to a pension fund or as non-business income tax for the purposes of section 126 of the Income Tax Act (the "Act").
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Paragraph 5 of Article XXIX of the Convention provides as follows:
Contributions in a year in respect of services rendered in that year paid by, or on behalf of, an individual who is a resident of one of the Contracting States or who is temporarily present in that State, to a pension plan that is recognized for tax purposes in the other Contracting State shall, during a period not exceeding in the aggregate sixty months, be treated in the same way for tax purposes in the first-mentioned State as a contribution paid to a pension plan that is recognized for tax purposes in the first-mentioned State, provided that:
(a) such individual was regularly contributing to the pension plan (or to another pension plan for which that plan has been substituted) over a period ending immediately before he became a resident of or temporarily present in the first-mentioned State; and
(b) the competent authority of the first-mentioned State agrees that the pension plan corresponds generally to a pension plan recognized for tax purposes by that State.
For the purposes of this paragraph, the term “pension plan” includes especially a pension plan created under a public social security system.
As stated in Technical Interpretation 9820787, our understanding of the purpose of this provision of the Convention is to oblige a contracting country (in your example, Canada) to grant relief during the first 60 months of residence to an individual who contributes to a pension fund in his or her country of origin (France) while working in the country where he or she resides (Canada) and continues during this period to contribute to the pension fund in his or her country of origin.
For the purposes of paragraph 5 of Article XXIX of the Convention, the French authorities have confirmed to the CRA that the pension plans recognized for French tax purposes are the following (the "List"):
- Régime général de la sécurité sociale[General social security system];
- Régimes des salariés cadres [Executive employee plans] (plans grouped within the Association Générale des Institutions de Retraite des Cadres (AGIRC) [General Association of Retirement Commissions for Executives and Managerial Staff], including in particular the Institution de Retraite des Cadres et Assimilés de France et de l'Extérieur (IRCAFEX)) (Retirement Commission for Executives and Managerial Staff in France and Abroad).
- Non-management employee plans (plans grouped within the Association Générale des Régimes de Retraite Complémentaire (ARRCO)[General Association of Supplementary Pension Plans], including in particular the Caisse de Retraite pour la France et l'Extérieur (CRE) [ Retirement Fund for France and abroad]);
- Voluntary insurance plan of the general social security system designed to enable expatriate employees to remain in a social security plan (Caisse des Français à l'étranger)[Fund for French Abroad]; and
- Supplementary retirement plans provided by a company or a professional association which the employee is required to join.
Please note that the above list is subject to change by the French and Canadian tax authorities. Consequently, if, in the context of a particular situation, you wish to validate whether a pension plan to which a taxpayer contributes is recognized for the purposes of paragraph 5 of Article XXIX of the Convention, you may contact the International, Provincial and Strategic Policy Division 20th Floor, Tower A, Place de Ville, 320 Queen Street, Ottawa ON K1A 0L5. If some of the deductions described in your letter (and included above) were made under one of the above-described plans recognized by France, for a period not exceeding 60 months, the individual may deduct such deductions in computing income in Canada within the Canadian pension deduction limits.
By virtue of paragraph 1 of Article XV of the Convention, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. If an employee who is a resident of Canada has had French deductions withheld from the employee’s income derived from an office or employment in Canada, the employee may apply to the Government of France in connection with any claim for a refund of tax paid to France.
If the employee performs employment in France while resident in Canada, France may tax the employee to the extent provided in Article XV of the Convention and Canada may allow a foreign tax credit for non-business income taxes paid by the employee to France. To this end, Technical Interpretation 2002-0169607 states that the "contribution sociale généralisée" and the "contribution pour le remboursement de la dette sociale" qualify as a non-business income tax for the purposes of calculating the foreign tax credit in section 126 of the Act, since these contributions have the legal characteristics of a tax (levied without direct consideration) as opposed to social contributions which, in turn, confer on those who pay them a right to benefits. As stated in Income Tax Technical News No. 31R2 of May 16, 2006, social security contributions generally do not qualify as income or profits taxes because they are not really taxes at all, within the judicially accepted meaning of that term. However, as an exception, the CRA will agree to treat a contribution to a public pension plan of a foreign country by a Canadian resident employee as a non-business-income tax for the purposes of section 126 of the Act where the employee is required to make the contribution under the foreign law and it is reasonable to conclude that the employee will not derive any pecuniary benefit from the contributions given the short and temporary nature of the individual’s employment in the foreign country. This exception, however, does not seem to apply in the situation presented in your letter.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.