10 December 2008 External T.I. 2008-0303191E5 - Prescribed International Organization

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: (1) Under Canadian income tax law, what is the tax treatment of salary received by Canadian employees from the XXXXXXXXXX ?

(2) Does the reimbursement by XXXXXXXXXX of any Canadian income taxes paid by these employees constitute a taxable benefit for purposes of Canadian income tax law?

Position: (1) The salary is taxable pursuant to section 5 of the Income Tax Act and no offsetting deduction at 110(1)(f)(iii) is available.

(2) Yes.

Reasons: (1) A resident of Canada must pay income tax on his/her worldwide income. Since the XXXXXXXXXX is not a prescribed international organization pursuant to section 8900 of the Income Tax Regulations, no offsetting deduction is available.

(2) This constitutes Rulings' long-standing position.

XXXXXXXXXX 2008-030319

December 10, 2008

Dear XXXXXXXXXX :

This is in reply to your email of November 21, 2008 addressed to Jake Blair of the Canada Revenue Agency's legal services. Mr. Blair has forwarded your email to us for reply.

You indicate that the XXXXXXXXXX is seeking confirmation of the tax treatment, under Canadian income tax law, of income received by employees of the XXXXXXXXXX The XXXXXXXXXX is also inquiring whether the reimbursement by the XXXXXXXXXX of any Canadian income taxes paid by these employees would constitute a taxable benefit for purposes of Canadian income tax law.

Unless otherwise noted, all references herein are references to the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, (the "Act") as amended from time to time and consolidated to the date of this letter.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

The starting point in determining whether employees must include employment income received from the XXXXXXXXXX in computing their Canadian income tax liability is the concept of residency. Pursuant to subsection 2(1), every person resident in Canada must pay an income tax pursuant to the Income Tax Act on his or her worldwide income earned for each taxation year.

While the residence status of an individual can only be determined on a case by case basis after taking into consideration all of the relevant facts, generally, unless an individual severs all significant residential ties with Canada upon leaving Canada, the individual will continue to be a factual resident of Canada and subject to Canadian tax on his or her worldwide income.

The residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual's

(a) dwelling place (or places),
(b) spouse or common-law partner, and
(c) dependants.

There is the possibility that an individual might simultaneously be considered a resident of Canada and of another country. In many cases, this raises the possibility of double taxation of all or part of the individual's income. In these situations, the presence of a tax treaty is paramount as they usually contain tie-breaker rules that are designed to provide relief from this potential double taxation. The application of the tie-breaker rules may result in an individual being deemed a non-resident in situations where he or she would otherwise be a factual or deemed resident.

If employees are resident in Canada and subject to subsection 2(1) they must, in calculating their income for each taxation year, include the employment income received from the XXXXXXXXXX . As a relieving provision, subparagraph 110(1)(f)(iii) provides that, for the purpose of calculating the taxable income of a person resident in Canada, employment income received from a prescribed international organization can be deducted.

Under subsection 8900(1) of the Income Tax Regulations, a prescribed international organization refers to either the United Nations or a specialized agency brought into relationship with the United Nations in accordance with Article 63 of the Charter of the United Nations.

In a previous technical interpretation, this Directorate opined that the XXXXXXXXXX was not a prescribed organization for purposes of 110(1)(f)(iii) and that the employment income received from this organization was not eligible for the deduction at subparagraph 110(1)(f)(iii). Hence, assuming that the XXXXXXXXXX is of a similar nature as the XXXXXXXXXX in the current situation, we believe that the full amount of the salary received from the XXXXXXXXXX must be included in the income of the Canadian employees for the taxation year in which the income is received. Likewise, no offsetting deduction is available to reduce the amount of their taxable income.

Paragraph 6(1)(a) requires that the value of benefits received by an employee in the course of employment is to be included in the computation of the employee's income. Except where the Income Tax Act provides otherwise, employees are generally taxable on the value of all benefits they receive by virtue of their employment. In the situation described above, the XXXXXXXXXX reimbursement of the income tax paid by the employees would be required to be included in their income as a taxable benefit.

We trust that we have been of some assistance.

Yours truly,

François Bordeleau, LL.B.

Manager
Individual, Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate