Principal Issues: [TaxInterpretations translation] 1. Does an amount exempt from tax by virtue of paragraph 81(1)(a) of the Act form part of earned income for the purposes of section 146?
2. Depending on the residence and place of employment of the NATO employee, what will be the impact of section 19 of the Agreement on the status of the North Atlantic Treaty Organization, National Representatives and International Staff on the taxation in Canada of employment income?
Position: 1. No.
2. General comments on the residence of an individual and on Article 19 of the Agreement.
Reasons: 1. The amount is not part of income.
December 4, 2007 Lise Gélinas Policy and Validation Procedures Section Income Tax Rulings Directorate Room 550 Sylvie Labarre 25 McArthur, Tower C, 5th Floor Vanier ON 2007-025504
This is in response to your email of September 26, 2007 in which you asked for our opinion on the taxation of a NATO employee in Canada.
Your questions relate to two distinct aspects of a situation where a NATO employee is working outside Canada. On the one hand, you asked about the impact of Article 19 of the Agreement on the status of the North Atlantic Treaty Organization, National Representatives and International Staff (the "Agreement") with respect to the taxation of income received by a Canadian citizen, residing outside Canada and occupying a position outside Canada or with respect to the taxation of employment income for services rendered in Canada.
You also questioned whether an amount exempt from tax by virtue of paragraph 81(1)(a) of the Income Tax Act (the "Act") forms part of earned income for the purposes of section 146 of the Act.
Our Comments
An individual who is a resident of Canada or is deemed to be a resident of Canada by virtue of section 250 will be taxed in Canada on the individual’s worldwide income from all sources regardless of nationality. In certain circumstances, amounts received in respect of employment may be exempt from tax by virtue of section 81 or may qualify for deductions or credits.
However, if the individual is not a resident of Canada or is not deemed to be a resident of Canada, the individual will be subject to Canadian tax only on the individual’s taxable income earned in Canada, determined in accordance with Division D of the Act, if the individual was employed in Canada, carried on business in Canada, or disposed of taxable Canadian property.
Thus, an individual who is not resident in Canada, who is not deemed to be resident in Canada, who does not carry on business in Canada and who has not disposed of taxable Canadian property will not be taxable in Canada if the individual was not employed in Canada. If the non-resident individual is not taxable in respect of the individual’s employment income pursuant to subsection 2(3) and Division D of the Act, it is not Article 19 of the Agreement that will subject the individual to Canadian tax. The first element to be determined in a particular situation is the residence of the individual. The factors to be considered in determining whether or not an individual is factually resident in Canada are set out in Interpretation Bulletin IT-221R3. The Bulletin also explains situations where an individual who is not considered to be factually resident in Canada is still deemed to be resident in Canada pursuant to subsection 250(1). Those situations include that of an individual who is a representative or official of Canada or a province at any time in the year and who receives representation allowances or is a factual or deemed resident of Canada immediately before the individual’s appointment or employment by Canada or the province.
However, subject to a transitional rule referred to in paragraph 24 of Interpretation Bulletin IT-221R3, an individual who is otherwise resident in Canada for purposes of the Act (whether factual or deemed resident) and who, at a given time, is resident in another country for purposes of a tax treaty between Canada and that country, is deemed not to be resident in Canada at that time, pursuant to subsection 250(5).
Assuming that the individual is a resident of Canada (regardless of nationality), we must then consider whether paragraph 81(1)(a) of the Act applies. Paragraph 81(1)(a) of the Act provides that an amount will not be included in computing an individual's income if it is an amount that is declared to be exempt from income tax by any other enactment of Parliament, other than an amount received or receivable by an individual that is exempt by virtue of a provision contained in a tax convention or agreement with another country that has the force of law in Canada.
In a situation where the employment is with NATO, it is the Privileges and Immunities (North Atlantic Treaty Organization) Act that approves and confirms the Agreement. Thus, an amount exempt from tax under the Agreement will be considered to be an amount exempt from tax under another Act of Parliament to which paragraph 81(1)(a) of the Act applies. Thus, we must consider whether Article 19 of the Agreement may allow the individual to be exempt from Canadian tax on income that would otherwise be subject to Canadian tax.
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. Furthermore, we are of the view that the amount exempt from tax by virtue of paragraph 81(1)(a) does not form part of "earned income" for the purposes of section 146.
We hope that these comments are of assistance. Should you require further information on the content of this letter, please do not hesitate to contact us.
Alain Godin,
Manager
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate.