Principal Issues: At the 2008 TEI-CRA Liaison Meeting, the CRA stated that whether the word "person" or the word "employer" is used in subparagraph 2(b) of Article XV of the Fifth Protocol to the Canada-United States Convention (the "Treaty"), the intention is to determine who, in fact, is exercising the functions of employer. In making this determination, the CRA generally will refer to principles developed under Canadian jurisprudence and the Quebec Civil Code. Has CRA changed its views?
Position: No change in position.
XXXXXXXXXX 2011-040354 Angelina Argento June 17, 2011
Dear Sir:
Re: Subparagraph 2(b) of Article XV of the Canada-US Treaty
We are responding to your email dated April 18, 2011. At the 2008 TEI-CRA Liaison Meeting, the CRA stated that whether the word "person" or the word "employer" is used in subparagraph 2(b) of Article XV of the Canada-United States Convention (the "Treaty"), the intention is to determine who, in fact, is exercising the functions of employer. In making this determination, the CRA generally will refer to principles developed under Canadian jurisprudence and the Quebec Civil Code. You have asked us whether the CRA has changed its views. You also asked whether the public should expect the CRA field offices/auditors to administer subparagraph 2(b) of Article XV of the Treaty in the same way as they had in the past.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we offer the following general comments regarding subparagraph 2(b) of Article XV of the Treaty.
Paragraphs 1 and 2 of Article XV of the Treaty read as follows:
"1. Subject to the provisions of Articles XVIII (Pensions and Annuities) and XIX (Government Service), salaries, wages and other 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.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) Such remuneration does not exceed ten thousand dollars ($10,000) in the currency of that other State; or
(b) The recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and the remuneration is not paid by, or on behalf of, a person who is a resident of that other State and is not borne by a permanent establishment in that other State".
The relevant paragraph in the Technical Explanation of the 2007 Protocol reads as follows:
"New subparagraph 2(b) refers to remuneration that is paid by or on behalf of a "person" who is a resident of the other Contracting State, as opposed to an "employer." This change is intended only to clarify that both the United States and Canada understand that in certain abusive cases, substance over form principles may be applied to recharacterize an employment relationship, as prescribed in paragraph 8 of the Commentary to Article 15 (Income from Employment) of the OECD Model. Subparagraph 2(b) is intended to have the same meaning as the analogous provisions in the U.S. and OECD Models".
Whether the word "person" or the word "employer" is used in subparagraph 2(b) of Article 15 (Income from Employment) in Canada's income tax conventions, the intention is to determine who, in fact, is exercising the functions of employer. In making this determination, the CRA generally will refer to principles developed under Canadian jurisprudence and the Quebec Civil Code.
Accordingly, the public should expect field offices/auditors of the CRA to administer subparagraph 2(b) of Article XV of the Treaty as amended by the 2007 Protocol in the same way as they had in the past.
We trust our comments will be of assistance.
Yours truly,
Olli Laurikainen
Manager
International Section II
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch