Principal Issues: Will salary paid by a non-resident employer to a non-resident employee be subject to Canadian tax if the employment is exercised in a foreign country?
Position: No, as long as the employee is not resident in Canada, and the employee is not deemed to have been employed in Canada.
Reasons: Not taxable under subsection 2(3). The fact that the employee is not resident in the foreign country under the income tax convention with Canada is not relevant.
2008-029522 XXXXXXXXXX S.E. Thomson (613) 957-2122 October 30, 2008
Dear XXXXXXXXXX :
Re: Employees working in the XXXXXXXXXX
This is in response to your email of August 22, 2008 to The Honourable James M. Flaherty, Minister of Finance. Mr. Flaherty has forwarded your request to the Canada Revenue Agency ("CRA") for response.
In your email, and in subsequent telephone conversations (Thomson - XXXXXXXXXX ), you explain that your company wishes to transfer several of its Canadian employees to the XXXXXXXXXX to work for one of the company's affiliates located there. The employees will sever all residential ties with Canada, and each will receive a resident permit in the XXXXXXXXXX . You have received conflicting information from the CRA about whether or not the employees will be required to pay income tax in Canada on the salary they receive from the XXXXXXXXXX company while working in the XXXXXXXXXX . The employees will not pay income tax in the XXXXXXXXXX on the salary. You have asked us to provide a response to you in writing to clarify the matter.
OUR COMMENTS
Whether or not the employees will be residents of Canada for tax purposes is a question of fact, and each case must be examined separately. As you know, IT-221R3 Determination of an Individual's Residence Status explains the position of the CRA concerning the determination of an individual's residence status for income tax purposes, and the factors to be taken into account in making that determination. The employees may obtain a non-binding opinion from the CRA regarding their residence status by filing form NR-73 Determination of Residency Status (Leaving Canada), or may obtain a binding advance income tax ruling. See IT-221R3 for more information.
If the employees have sufficient residential ties to Canada, they will be resident in Canada under common law (i.e., factual residents), and will be taxed in Canada on their world income (assuming they are not deemed non-resident under subsection 250(5)). If the employees are not factual residents, they may still be deemed to be resident in Canada by section 250 of the Income Tax Act (the "Act").
If the employees are neither factual nor deemed residents of Canada, they will not be resident in Canada for tax purposes, and will be taxable in Canada only on certain Canadian source income. Non-resident employees who are employed in Canada are taxable in Canada under subsection 2(3) on their Canadian-source employment income, as computed under section 115 of the Act. Where the employment is exercised in the XXXXXXXXXX , subsection 115(2) of the Act may still deem the employee to have been employed in Canada, so that the employment income is taxable in Canada under subsection 2(3) of the Act.
You have explained that the employees will sever all residential ties with Canada so that they will not be factual residents of Canada, nor will they meet any of the conditions in section 250 of the Act that would deem them to be resident in Canada. If that is the case, then the employees will be considered to be non-residents of Canada. If the employment is exercised in the XXXXXXXXXX , and the employees are not deemed to have been employed in Canada by subsection 115(2), then the non-resident employees will not be taxable in Canada under subsection 2(3) of the Act on their income from the employment in the XXXXXXXXXX .
Article 4 of the Canada-XXXXXXXXXX Income Tax Convention
(the "Convention") provides that an individual must be a national of the XXXXXXXXXX in order to be a resident of the XXXXXXXXXX for purposes of the Convention. As a result, the employees will generally not qualify as residents of the XXXXXXXXXX for purposes of the Convention. However, the employees will not need to rely on the Convention to relieve them from Canadian income taxes in this case if the income from employment exercised in the XXXXXXXXXX is not taxable in Canada under the Act in the first place. The fact that the employment income is not taxable in the XXXXXXXXXX does not alter this result.
We would like to stress that since the information in this letter is general in nature, and may or may not apply to your employees, this letter is not binding on the CRA. As we said in the opening paragraph, each case must be examined individually. We trust, however, that we have been of some assistance.
Yours truly,
Olli Laurikainen, C.A.
For Director
International & Trusts Division
Income Tax Rulings Directorate