A portion of the employment duties of a cross-border employee (with a hybrid work arrangement) is exercised from Canada in the year but the individual makes contributions under the U.S. Federal Insurance Contributions Act (the “FICA contributions”). In finding that the FICA contributions made in respect of the duties exercised in Canada would not be eligible for a foreign tax credit, the Directorate referenced the rule in Art. XXI:2(a) of the Canada-U.S. Treaty requiring that the tax be paid on income “arising” in the U.S. and stated:
Employment income is generally considered sourced (“arisen”) in the country where the cross-border employee performs the duties of employment giving rise to such income. Where such duties are performed partly when the cross-border employee is physically present in Canada and partly when the employee is physically present in the U.S., in determining the amount of employment income that “arose” in the U.S. in a given year, an apportionment of the total employment income of the year received from an employer based on the ratio of total working days of the year performing the duties of employment for that employer while physically present in the U.S. is generally reasonable.
Only the FICA contributions made on employment income relating to the duties of employment performed by the cross-border employee while physically present in the U.S. would qualify for a foreign tax credit.