D.S. Delorey (613) 957-2125
XXXX
September 16, 1986
Dear Sirs:
This is in reply to Your letter of July 8 concerning the tax status of an employee for the calendar year in which he leaves Canada temporarily to perform his duties of employment elsewhere.
You have asked us to base our reply on the assumption that
(a) the conditions set out in Interpretation Bulletin IT-221R2 will be satisfied such that, as of the date of departure, the employee will be considered a non-resident of Canada for the typically two to four year period they are assigned elsewhere, and
(b) throughout the period of time in-the year of departure that he is considered a non-resident of Canada, the employee carries on business in Canada.
We will reply to your questions in the order in which they are set out in the appendix to your letter.
1. As indicated in paragraph 4 of the Special Release to Interpretation Bulletin IT-193 , the provisions of subsection 2(1) of the Income Tax Act (the "Act") will apply to tax the employee on his world income for the entire year of departure.
2. As indicated also in the above mentioned paragraph 4, section 114 of the Act is not applicable. However, the inapplicability of section 114 of the Act simply means, as indicated in 1 above, that the employee is taxed on his world. income for the entire year of departure. It does not deem him to be resident in Canada during the period of non-residency. Thus, if in the year of departure, he disposed of a taxable Canadian property while a non-resident, the provisions of section 116 of the Act are applicable.
3. If on leaving Canada, the employee becomes a resident of a country with which Canada has entered into a reciprocal tax agreement, the provisions of that agreement could affect the amount of tax payable to Canada.
4. If during the period of non-residency in the year of departure it is determined under the provisions of Article IV of the Canada- U.K. Tax Convention (1978) that the employee is a resident of the U.K., employment income earned outside Canada would be exempt from Canadian tax by virtue of part 1 of Article XV of that Convention. In filing his return for the year of departure, the employee should include a letter setting out the income he considers to be exempt from Canadian tax and the reasons therefor.
5. As indicated in 2 above, the fact that the provisions of subsection 2(1) of the Act are applicable has no bearing on the employee's residency status. Accordingly, on becoming a non-resident, the provisions of section 48 of the Act are applicable. If assets which are deemed to be disposed of by virtue of section 48 of the Act are subsequently disposed of during the non-residency part of the departure year, the employee will be taxable on any capital gain resulting from such subsequent dispositions, unless a provision of a reciprocal tax agreement dictates otherwise.
If throughout the year immediately preceding the year of departure or the year immediately following the year of departure the employee was resident in Canada, the capital gains deduction set out in section 110.6 of the Act will be available with respect to any capital gains resulting from the application of section 48 of the Act, as well as to any capital gains from dispositions made during the non-residency part of the departure year. Otherwise, no amount may be deducted under section 110.6 of the Act from either of those gains. In this regard, we refer you to subsections 110.6(3) and (5) of the Act.
6. If during the non-residency part of the departure year the employee receives interest, dividend or rental income (other than business income) from sources in Canada, the withholding provisions of Part XIII of the Act are applicable to such income. However, since he is taxable on his world income pursuant to subsection 2(1) of the Act, his ultimate tax liability will be determined using the graduated rates set out in section 117 of the Act. In determining this liability, applicable deductions (e.g., those allowable under paragraph 20(1)(c) of the Act) are deductible.
7. With respect to Canadian sourced interest and dividend income, if during the non-residency part of the departure year it is determined under the provisions of Article IV of the Canada-U.K. Tax Convention (1978) that the employee is a resident of the U.K., the tax on that income (i.e., gross income less applicable deductions) will not exceed 10% of the gross amount in the case of interest or 15% of the gross amount in the case of dividends. The Canadian sourced interest income, and dividend income from corporations resident in Canada, qualifies for purposes of the "interest and dividend income deductible" provisions of section 110.1 of the Act. The dividend gross-up and tax credit provisions of subsection 82(1) and section 121 of the Act respectively are applicable to such dividend income.
8. If Canadian sourced rental income is received by the employee during the non-residency part of the departure year, the withholding provisions of Part XIII of the Act are applicable thereto. However, since the employee is taxable under subsection 2(1) of the Act on his world income, the provisions of subsection 216(1) are not relevant. If the employee wishes the withholding to be based on the net income only, as provided for in subsection 216(4) of the Act, he should advise the relevant district taxation office by filing an NR-6 form. Unlike dividend and interest income, the U.K. Convention does not provide for a maximum tax on gross rental income.
We trust the above comments will be of assistance.
Yours truly,
Wm. R. McColm for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch