May 1,1992
Assessment & Accounting K.B. Harding
Programs Section
Attention: Mr. G. Todd
920650
Subject: Section 217 Election
This is in reply to your memorandum of March 2, 1992 wherein you requested our opinion concerning the interpretation of section 217 of the Income Tax Act (the "Act").
A. When determining whether an individual has included one-half of his world income in his taxable income for purposes of paragraph 217(c) of the Act you are concerned whether treaty exempt income (e.g. Old Age Security, Canada or Quebec Pension Plan benefits and alimony paid to a U.S. resident), which is initially included in income but is subsequently deducted in calculating taxable income, will be treated as having been included in the individual's taxable income.
B. In calculating the total amount that would be liable to tax under Part XIII of the Act, you questioned whether treaty exempt income (e.g. Old Age Security, Canada or Quebec Pension Plan benefits and alimony paid to a U.S. resident) would be included in the phrase "... liable to pay tax under Part XIII...".
Paragraph 217(c) of the Act provides for additional tax credits where a non-resident individual makes an election under section 217 of the Act provided more than half of the individual's "income for the year" is included in the "individual's taxable income" earned in Canada in the year.
For the purpose of computing taxable income earned in Canada pursuant to subparagraph 217(b)(i) of the Act, it is our view that amounts which are exempt from withholding tax pursuant to a tax treaty will not be excluded by the words "..which is an amount paid or credited to the non-resident person in the year on which he would...be liable to pay tax under this Part...". Non-residents are liable to pay tax under Part XIII on every amount that a person resident in Canada pays or credits etc. to him. The exemption provided under a tax agreement or convention provides that no tax is payable under Part XIII on particular types of income even though the taxpayer was liable to pay tax under that Part. Accordingly, pensions under the Old Age Security Act, benefits under the Canada or Quebec Pension Plans, alimony and any other amounts which are exempt from tax by virtue of the Canada-U.S.Income Tax Convention (the "Convention") will be considered to fall within the expression "...liable to pay tax under Part XIII of the Act...".
It is our view that any amounts which are exempt from tax in Canada, by virtue of a tax agreement or convention would not be considered as being "...included in the individual's taxable income..." for purposes of paragraph 217(c) of the Act since such amounts are deducted under subparagraph 110(1)(f)(i) of the Act in determining the taxpayer's taxable income for the year. It should be noted that the wording in this paragraph differs from that set out in section 118.94 of the Act which was also amended by Bill C18 (Royal Assent December 17, 1991) and which uses the words "...included in computing the individual's taxable income...". Therefore, in A above, any amounts which are exempt by virtue of a tax agreement or convention will not be considered as having been included in the individual's taxable income for purposes of the fifty percent test in paragraph 217(c) of the Act.
In accordance with the explanation set out in respect to subparagraph 217(b)(i) of the Act above, it is our view that amounts which are exempt from tax in Canada by virtue of a tax agreement or convention must be included in the phrase "...be liable to pay tax under Part XIII..." set out in the postamble in paragraph 217(c) of the Act. Accordingly, in B above, the amounts paid to a U.S. resident, which are exempt from tax in Canada, will be included in the total of all amounts paid or credited to the individual to determine the maximum amount which may be deducted in computing tax payable under paragraph 217(c) of the Act.
21(1)(b)
We trust this is adequate for your purposes.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch