26 October 1989 Administrative Letter 74296 F - Tax Guide for International Teachers and Professors

Subject: Tax Guide for International Teachers and Professors

We have reviewed the above-mentioned tax guide as requested.  Our comments are as follows:

1)     It would add to the clarity of the guide if the term world income were defined in paragraph 1 on page 2. We suggest that the definition of world income you have used in paragraph 2 on Page 8 be inserted in this paragraph.

2)     As there could be a problem related to dual residency a paragraph should be added after paragraph 2 on page 2 to point out the possibility that a person may have dual residency for the purposes of taxation.  Where Canada has a reciprocal tax treaty with the person's country of origin, the person should refer to the "tiebreaker rules" in that treaty to determine in which country he is resident for the purposes of the treaty.  In the case of a person who is deemed to be resident of Canada pursuant to the 183 day rule it is quite likely that the "tiebreaker rule" will go in favour of the other country and such a person will be considered resident of the other country for the purposes of the treaty.  The effect of such a determination will be that Canada will only have the right to tax the person's Canadian source income.  As a deemed resident the person will be required to report his world income but will be entitled to relief from Canadian taxation on that income as provided for in the particular treaty.

     The impact of the "tiebreaker" rule should also be pointed out under the heading "Calculation of Taxable Income".

3)     The example outlined in paragraph 3 on page 2 could be expanded to deal with the dual residency problem and the impact of the Canada-France Income Tax Convention on such a situation.  We suggest the following wording:

"Paul is a teacher from France.  He arrived in Canada in March of 1989 and during the 1989 calendar year spent more than 183 days in Canada.  While in Canada Paul continued to be a factual resident of France.  Paul's 1989 world income consisted of the following amounts all expressed in Canadian currency:

1)     $18,000 salary earned in Canada;

2)     $15,000 salary earned in France; and

3)     $1,000 United States source interest.

     Since Paul spent more than 183 days in Canada he will be deemed to be a resident of Canada and will be subject to tax in Canada on his world income ($18,000 + $15,000 + $1,000 = $34,000).  However, as Canada has a reciprocal tax treaty with France and Paul is a resident of both countries for tax purposes the tiebreaker rules in this treaty would come into play to determine in which country Paul is a resident.  If Paul retained his residential ties to France while in Canada the tiebreaker rules would make him a resident of France for purposes of the treaty. He would be required to report his world income ($34,000) on his Canadian tax return but would be entitled to deduct from this amount items which are exempted from Canadian taxation by virtue of the treaty ($15,000 French source salary and $1,000 United States source interest).  Thus even though Paul is a deemed resident of Canada in this situation because of the 183 day rule he would only be subject to tax in Canada on his Canadian source income."

4)     The reference to Information Circular 77-16A in paragraph 2 on page 4 should read Information Circular 77-16R3.

5)     Page 5 - Paragraph 1 and Page 7 - Paragraphs 1 and 2

     In each of these paragraphs you have discussed whether provincial tax or the federal surtax on income not earned in a province apply to a teacher or professor who is a deemed resident of Canada because he or she sojourned in Canada for 183 days or more during a calendar year. You have indicated that deemed residents who are present in a province or territory on December 31 are subject to either provincial or territorial tax in that particular jurisdiction.  We do not agree with your position on this issue. Individuals who are not actually resident in Canada but who are deemed resident in Canada and who did not carry on business would not fall within the ambit of Part XXVI of the Regulations (and, in particular section 2601 therein) for they would not have actually resided in a particular province on the last day of a taxation year.  Accordingly, such individuals would not have any "income earned in the year in a province" (as defined in Part XXVI of the Regulations) and they would be required to compute their federal tax payable at the non-resident rate pursuant to subsection 120(1) of the Act.  In view of this whether or not a deemed resident is present in a province or territory on December 31 is immaterial. Such an individual is always going to be subject to federal tax payable at the non-resident rate and should file using the General Tax Guide and Return for Individuals Outside Canada.

     These paragraphs should be amended to reflect the above-mentioned discussion.

6)     Page 5 - Example 1

     This example should be amended to indicate that Linda should use the General Tax Guide and Return for Individuals Outside Canada in this situation for the reasons outlined in 6) above.

7)     In paragraph 2 on page 4 you have commented on the "all or substantially all" test that must be met by non- residents before they can claim non-refundable tax credits.  You have indicated that non-residents may not claim any non-refundable tax credits unless they meet this test.

     Section 118.94 of the Act outlines which non-refundable tax credits are subject to the "all or substantially all" limitation.  This provision indicates that sections 118 and 118.2, subsections 118.3(2) and (3) and sections 118.5 to 118.9 are subject to this test.  Section 118.94 does not indicate that the charitable gift credit described in section 118.1 or the credit for mental or physical impairment described in subsection 118.3(1) are subject to the "all or substantially all" limitation when non-residents compute their tax payable.

     This paragraph should be amended accordingly.

We are returning your draft copy and your file.

We trust these comments will be of assistance to you.

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch