2014-0531441E5 Unfunded LTD plan payment to non-resident employee

Principal Issues: Are the LTD payments subject to withholding under Part XIII of the Act?

Position: No.

Reasons: The LTD payments are subject to tax under Part I and subject to withholding under section 153.

Author: Moore, Eli Kae
Section: 5, 6(1)(a), 153(1)(a), 248 "salary or wages", Reg 102, Reg 200

XXXXXXXXXX
                                                                                                                                                         2014-053144
                                                                                                                                                         Eli Kae Moore

September 26, 2014

Dear XXXXXXXXXX,

Re:  Withholding Amounts on Long Term Disability Payments Made to a
Non-resident Employee  

We are responding to your letter of November 12, 2013, addressed to International Taxation Services. In your letter, you requested the CRA’s views concerning Part XIII withholding requirements in respect of long term disability payments made to an employee who is a non-resident of Canada.  As described in your letter and in our phone conversations of May 28, and August 12, 2014 (XXXXXXXXXX/Moore) you outlined the following situation:

*     A Canadian resident employer maintains a long term disability plan for its employees (the “LTD Plan”). 

*     The LTD Plan is unfunded and the employer bears the costs of any LTD Plan payments as they become due. 

*     Receiving benefits from the LTD Plan does not affect the employment status of any individual receiving such benefits. 

*     An employee receiving benefits under the LTD Plan is not required to report to work and is not required to fulfill any duties of employment. 

*     An employee receiving benefits under the LTD Plan would continue to receive them until the earlier of their rehabilitation and ability to return to work, or the time the employee qualifies for retirement benefits under the pension plan established for the employer’s employees. 

You asked us what, if any, the Part XIII withholding requirements would be in respect of any LTD Plan payments made to an employee who, after qualifying for benefits under the LTD Plan, becomes a non-resident of Canada and a resident of the United States of America.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Unless otherwise stated, all statutory references in this letter are to the Income Tax Act, as amended.

It is our view that the LTD Plan payments would be salary, wages or other remuneration for the purposes of the Act because they would be amounts arising out of the employment relationship.  Therefore, the LTD payments would be income from an office or employment under Part I of the Act. As such, the amount of LTD Plan payments that would be taxable as income earned by a non-resident employee would be determined in accordance with subsection 115(2) and withholdings under Part XIII would not be applicable.  Being salary, wages or other remuneration, the LTD Plan payments would be subject to withholding under paragraph 153(1)(a) of the Act and sections 102 through 104 of the Income Tax Regulations.  Additionally, the employer would be required to make information returns in accordance with subsection 200(1) of the Regulations in respect of any LTD Plan payments.

It is also our view that the LTD Plan payments would remain taxable by Canada under the Canada-U.S. Tax Convention (the “Convention”).  While the LTD plan payments would be taxable as income from employment for purposes of the Act, such income would be considered as being pension income for the purposes of applying the provisions of the Convention.  This is due to the fact that paragraph 3 of Article XVIII (Pensions and Annuities) of the Convention defines the term “pensions” as including any payment under a sickness, accident or disability plan (i.e., the LTD Plan).  Consequently, one must refer to the provisions of Article XVIII of the Convention rather than those of Article XV (Income from Employment) in determining whether Canada would be restricted in any manner from taxing the LTD plan payments in accordance with the provisions of the Act as discussed above. As such, a U.S. resident employee receiving LTD Plan payments could file a Canadian income tax return in order to obtain a refund of any withholdings made in excess of the 15% amount specified in paragraph 2 of Article XVIII of the Convention.

We trust our comments will be of assistance.

Yours truly,

Lori M. Carruthers CPA, CA
International Section III
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch

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