Non-Resident Taxation Division Specialty Rulings
Directorate
Attention: J. Hartwick G. Middleton
A/Chief (613) 957-212919(1)
This is in reply to your memorandum of October l3, 1989 concerning the above taxpayer.
It is our understanding that 24(1)
The main issue to be addressed in this matter is to determine whether the cages paid to 19(1) in 1988 were deductible in computing the income of a taxpayer 24(1) subject to tax under Part I of the Act, as required under paragraph 115(2)(c.1) of the Act.
In our view, the scheme of the Act is as follows:
(i) Pursuant to subsection 2(1) of the Act, a person resident in Canada is liable to pay income tax upon its "taxable income" for a year.
(ii) Pursuant to subsection 2(2) of the Act, a taxpayer's "taxable income" for a year is its "income" for the year plus the additions and minus the deductions permitted under Division C of the Act.
By virtue of the definitions of "person" and "taxpayer" in subsection 248(1) of the Act 24(1) is liable to tax on its taxable income.
(iii) A taxpayer's "income" for a year is determined in accordance with the rules under Division B of the Act. Pursuant to these rules, the 24(1) would be entitled to deduct the amounts paid to 19(1) in computing its income.
(iv) Division C of the Act provides for other deductions which may be deductible in calculating a taxpayer's "taxable income" for a year.
(v) (a) If a taxpayer has a positive amount of taxable income, it would continue to calculate its tax payable under Division E of the Act.
(b) Alternatively, if a taxpayer's taxable income is nil, there would generally be no need to proceed to Division E of the Act. Although such a taxpayer may not have any taxes payable for that particular year, this does not alter the fact that the taxpayer was liable to tax under section 2 of the Act and was required to compute its taxable income in accordance with the rules in Divisions B and 6 of the Act.
Subsection 149(1) of the Act states that no tax is payable under Part I of the Act upon the "taxable income" of a registered charity (i.e. 24(1) referred to in paragraph 149(1)(f) of the Act. In our view.this exemption provision means that no Part I tax is payable for a registered charity even though it was liable to pay tax on its "taxable income" pursuant to section 2 of the Act. In other words, subsection 149(l) of the Actdoes not alter the provisions of section 2 of the Act, it merely provides an exemption for any Part I tax that might otherwise have been payable under Division E of the Act.
Based on our understanding of the scheme of the Act as described above, it is our view 24(1)
We believe that our views are in line with, and supported by, the reasoning given in the court decision of Oceanspan Carriers Limited 87 DTC 5102.
As a matter of interest, the following situation is an example of the circumstances where an amount would not be deductible in computing income of a taxpayer subject to tax under Part I of the Act. A foreign parent company pays a person an amount to come to Canada to work for its Canadian subsidiary and the amount paid is not charged to the Canadian subsidiary.
If 19(1) is considered to be a resident of the United States for the purposes of the Canada-U.S. Income Tax Convention (the "Convention"), Article XV of the Convention permits Canada to tax the employment income provided the employment is exercised in anada. Since the only employment exercised under the contract by 19(1) will be exercised in Canada, it is our view that Canada has the right under the Convention to tax all amounts receiyed by the taxpayer under the contract of employment with
24(1)
Prior to assessing on the basis set out above, we suggest that you consider the following:
(a) If 19(1) was a resident of Canada in a year prior to 1988, the provisions of paragraph 115(2)(c) of the Act will be applicable for 1988.
(b) 24(1)
We trust this is adequate for your purposes.
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