Principal Issues: Whether paragraph 104(2)(b) of Regulations is relevant for lump sum payment of a retiring allowance?
Position: No
Reasons: No amount withheld under sections 102 and 103 for lump sum payment of a retiring allowance.
May 3, 2005
Montreal TSO Income Tax Rulings Directorate
International and non-residents audit
Attention: Réjean Roberge Robert Gagnon
(613) 957-21082005-012071
Subsection 104(2) of the Income Tax Regulations
This is in response to your email of March 11, 2005 in which you asked the following questions regarding subsection 104(2) of the Income Tax Regulations ("Regulations").
Your Questions
1. What is the purpose of Regulation 104(2)(b) and what type of situations does it cover?
2. Would paragraph 104(2)(b) of the Regulations apply to a lump sum payment of a retiring allowance by a Canadian employer to a former employee who is not resident in Canada for the purposes of the Income Tax Act (the "Act") and the Regulations at the time of payment, if the retiring allowance is attributable to the duties of employment that were performed exclusively by the person outside Canada during a period in which the person was not at any time resident in Canada?
3. Would paragraph 104(2)(b) of the Regulations apply to a lump sum payment of a retiring allowance by a Canadian employer to a former employee who is not resident in Canada for the purposes of the Act and Regulations at the time of payment, if the retiring allowance is attributable to employment duties that were performed by the person partly (1/3) in Canada and partly (2/3) outside Canada during a period when the person was at no time resident in Canada?
Our Comments
The preamble to subsection 104(2) of the Regulations provides a general rule that no amount shall be deducted or withheld from a payment in accordance with section 102 or 103 in respect of an employee who was neither employed nor resident in Canada at the time of payment. This general rule is intended to exclude payments of remuneration to such employees because the employees are not ordinarily subject to tax in Canada in respect of their remuneration in those circumstances.
However, there are two exceptions to that general rule. Those two exceptions are set out in paragraphs 104(2)(a) and (b) of the Regulation. The exception in paragraph 104(2)(b) provides that subsection 104(2) does not apply to remuneration reasonably attributable to the duties of any office or employment performed or to be performed in Canada by a non-resident person.
Paragraph 104(2)(b) is intended to preserve the obligation to withhold on a payment to a non-resident person where the remuneration is reasonably attributable to the duties of an office or employment performed or to be performed in Canada by the non-resident person. This could be the case, for example, in respect of a payment resulting from an increase in remuneration with retroactive effect, after the non-resident person's employment has ceased.
There is no provision in sections 102 and 103 of the Regulations requiring an employer to make deductions in respect of the lump sum payment of a retiring allowance to a non-resident person. Consequently, subsection 104(2) is not relevant in this situation.
However, paragraph 212(1)(j.1) could apply to the payment of a retiring allowance to a non-resident person.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch