| 19(1) | 5-901688 |
| A. Seidel | |
| (613) 957-8960 |
November 1, 1990
Dear Sir:
This is in reply to your letters of July 23 and October 13, 1990 in which you requested our views on the application of paragraph 149(1)(a) of the Income Tax Act (the "Act") to an individual earning salary and investment income in Canada as follows:
An individual meeting all seven criteria under paragraph 149(1)(a) of the Act earns a salary income of $25,000, taxed at source in Holland, with investment income in Canada of (say) $8,000. It is your view that:
1. No employment earnings would be taxable in Canada however the employer described or accounted for them.
2. CPP coverage could be obtained either by the employer enrolling the staff en bloc as employees, or by an individual enrolling him or herself as if self-employed; premiums would be calculated on the basis of the real employment income, i.e. $25,000/year.
3. The individual should file a Canadian income tax return. Since the employer declines to provide T4's, a simple declaration of employment income not taxable in Canada would suffice for that requirement.
4. Canadian income tax would be payable only on earnings other than from embassy employment, viz. $8,000. This prompts an important question: would the individual be able to claim the whole personal tax exemption, $6,600 or whatever it is nowadays?
5. The individual would be able to open a Canadian RRSP and make contributions to it on the basis of an earned income of $25,000, even though that income was not taxed in Canada. Interest earned by the RRSP would be sheltered from income tax under the standard rules.
Pursuant to paragraph 250(1)(a) of the Act a person who sojourned in Canada for 183 or more days in the year is a deemed resident of Canada and subject to tax under Part I of the Act. In the situation where a person is an employee described in paragraph 149(1)(a) of the Act, that person would be exempt from Part I tax on all of his taxable income (i.e. his salary and investment income).
As mentioned in our letter dated May 22, 1990, the advice provided by the Department of National Health and Welfare with respect to eligibility of diplomatic employees to contribute to the Canada Pension Plan is correct for employees who are residents of Canada in a year for purposes of the Act. Therefore the person can make the necessary election by filing form CPT20 with their T1 tax return for the year. A copy of the form is available from any District Taxation Office.
For 1988 and subsequent taxation years, the personal tax exemption is no longer a deduction in computing taxable income but a non-refundable tax credit which reduces taxes payable. Any person who has no Part I tax payable, by virtue of the exemption in paragraph 149(1)(a) of the Act, would not be entitled to any personal tax credits.
As mentioned in our May 22, 1990 letter, any individual who has "earned income," as defined in paragraph 146(1)(c) of the Act, may contribute to a Registered Retirement Savings Plan ("RRSP") within the limits described in subsection 146(5) of the Act. However, it would appear to us that since the investment income earned in Canada is not subject to Part I tax pursuant to paragraph 149(1)(a) of the Act, there would be no tax benefits from contributing to an RRSP in Canada. Furthermore, it may lead to a situation where amounts received by a taxpayer as a benefit out of or under a RRSP will be subject to tax if the taxpayer is no longer exempt from tax under paragraph 149(1)(a) of the Act at the time the amounts are received.
While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate