Principal Issues: [TaxInterpretations translation] Is a taxpayer entitled, in 2002, to the deduction of the tax payable on foreign employment under section 122.3 of the Act in respect of salary and severance pay paid in a particular taxation year?
Position: No, he does not satisfy the conditions for the application of section 122.3 with respect to his employment contract at XXXXXXXXXX since he ceased to be employed in 2001. Employment income received in a taxation year will not be included in the employment income of the previous year. It will also be necessary to determine whether the severance payment is a retirement allowance or income from employment.
Reasons: Employment income for a taxation year is the salary, wages or other remuneration received in the year.
All the facts should be considered because the severance pay could be an amount received in respect of the loss of employment and satisfy the definition of retiring allowance in subsection 248(1).
The deduction from tax payable on foreign employment is only for income from employment.
XXXXXXXXXX Sylvie Labarre, CA
2004-009623
April 18, 2005
Dear Sir,
Subject: Employment abroad
This is further to your email of September 14, 2004 in which you asked for our opinion on the deduction of tax payable on employment abroad. We apologize for the delay in responding to your request.
You worked at XXXXXXXXXX between XXXXXXXXXX for XXXXXXXXXX.
On XXXXXXXXXX, your employer owed you $XXXXXXXXXX for time worked in XXXXXXXXXX that had not been paid at that time. Your employer paid you this amount in 2002. In addition, because your employer no longer had work for you in Canada, you ceased to be employed by your employer in 2001 and your employer paid you a separation allowance of $XXXXXXXXXX in 2002. That separation allowance was not provided for when you left XXXXXXXXXX.
You have attached to your application the Relevé 17s produced for the Ministère du Revenu du Québec for the years 2000 and 2002 to report earnings from employment outside Canada.
You wish to know whether you are entitled to the deduction from your tax payable for employment abroad for the 2002 taxation year.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the CRA's practice not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that 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 not, however, apply to your particular situation in certain circumstances.
We understand that your request is for a deduction under section 122.3 of the Income Tax Act (the "Act") for the 2002 taxation year to reduce your tax rate on income received of XXXXXXXXXX.
To qualify for the deduction of tax payable on foreign employment in 2002, it is necessary, inter alia, that the taxpayer was resident in Canada during 2002 and throughout any period of more than six consecutive months that commenced before the end of the year and included any part of 2002, and that the taxpayer meets certain conditions, including, inter alia, being employed by a specified employer in 2002.
Based on our understanding of your letter, you ceased to be employed by XXXXXXXXXX in 2001. Consequently, you will not be entitled to any deduction from your tax payable by virtue of section 122.3 in 2002 in respect of your employment contract at XXXXXXXXXX.
In addition, you cannot take into account the amount of $XXXXXXXXXX for the purpose of calculating a deduction under section 122.3 in 2001. This is because the deduction for 2001 is calculated using, inter alia, a limit equal to a percentage of employment income for 2001. According to the Act, it is the salary, wages and other remuneration that an individual received during 2001 that form part of the employment income for 2001. Because you received an amount of salary in 2002, that amount of salary would form part of employment income for 2002 and could not be included in employment income for the 2001 taxation year.
Furthermore, the deduction under section 122.3 is only for employment income. If the separation allowance of $XXXXXXXXXX had been received in 2001, it would have been necessary to examine all the facts of your situation to determine whether the separation allowance represented a retiring allowance rather than income from employment. An amount received as a retiring allowance would not have formed part of the employment income limit for the purposes of the deduction under section 122.3.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch