2014-0539571I7 NL tax vs Non-Res Surtax

Principal Issues: Is employment income earned by a non-resident individual working in the Newfoundland offshore area (NOA) subject to (a) tax by the province of Newfoundland and Labrador (NL) because it is income earned in a province; or (b) the surtax in subsection 120(1) because it is not income earned in a province?

Position: Employment income earned by a non-resident working in the NOA is subject to the surtax set out in subsection 120(1) and is not subject to NL provincial tax.

Reasons: The NOA is not part of NL such that the employment income is not reasonably attributable to duties performed by the taxpayer in the province. Also, unlike for the purposes of section 124 and the determination of taxable income earned in the year in a province by a corporation, the NOA is not itself a province for the purposes of determining an individual's tax liability under the Act.

Author: Skulski, Katharine
Section: 115(1)(a)(i), 120 and 124 of the Act; 2602 of the Regulations; s. 35 of the Interpretation Act; and The Canada-Newfoundland Atlantic Accord Implementation Act, S.C. 1987, c. 3.

                                                                                                                            October 8, 2014

      Legislative Section                                                                                        HEADQUARTERS
      Headquarters – Assessment                                                                         Katharine Skulski
        & Benefit Services Branch                                                                           Income Tax Rulings
      Individual Returns                                                                                          Directorate
        & Payment Processing Directorate                                                              (613) 957-8585
      750 Heron Road   
      Ottawa ON  K1A 0L5                                                                                     2014-053957

      Attention:  Stephanie Melin              

      Meaning of province in section 120 of the Income Tax Act

We are writing in reply to your email of July 10, 2014.  You have asked for our comments as to whether employment income earned by a non-resident working in the Newfoundland offshore area (“NOA”) is subject to the surtax under subsection 120(1) of the Income Tax Act (the “Act”) or is “income earned in the year in a province” pursuant to section 2602 of the Income Tax Regulations (the “Regulations”).  You have also asked if the NOA is or forms part of a province for the purposes of the term “income earned in the year in a province” as the term is used in each of those provisions.

You have explained that tax returns were filed on behalf of employees who are not resident in Canada, but who earned employment income in the NOA.  Some of the employees were assessed the surtax in subsection 120(1) of the Act on the basis that they had not earned income in a province, while others were assessed Newfoundland and Labrador (“NL”) provincial income tax on the basis that their income was earned in that province pursuant to paragraph 2602(1)(a) of the Regulations.

Our Comments

Subsection 120(1) of the Act provides that where an individual has earned income in Canada, but the income has not been earned in a province, then an amount that is 48% of the tax otherwise payable under that Part by the individual for the year will be added to the individual’s tax.

Section 2602 of the Income Tax Regulations provides the rules for determining a non-resident’s income earned in a province in a year.  In particular, paragraph 2602(1)(a) provides that the non-resident individual’s income earned in the taxation year in a province is the total of the portion of the income from an office or employment included under subparagraph 115(1)(a)(i) that may be reasonably attributable to duties performed in the province and income from carrying on business earned in the province.

The NOA is not specifically defined in the Act.  Rather, subsection 248(1) of the Act provides that the term has the meaning given to the expression “offshore area” in The Canada-Newfoundland Atlantic Accord Implementation Act, S.C. 1987, c. 3. Generally speaking, the “offshore area” described in that act is an area off the coast of NL no part of which is within the province itself. Accordingly, the employment income earned in the NOA by the non-resident employees is not income earned in the year in the province of NL and is not subject to NL provincial income tax.

Section 35 of the Interpretation Act, R.S.C., 1985, c. I-21 provides that “province” means a province of Canada, and includes Yukon, the Northwest Territories and Nunavut.  As you noted in your email, subsection 124(4) of the Act defines “province” to also include the NOA and the Nova Scotia offshore area. However, as you noted, that definition only applies for the purposes of section 124, which only applies to corporations. As such, the NOA is not a province for the purposes of determining an individual’s tax liability under the Act. Further, in our view, the need to specifically include the NOA as a separate province in section 124 for purposes of determining a corporation’s tax liability further supports the conclusion that, for the purpose of determining an individual’s tax liability, the NOA does not fall within any province.

On the basis of the foregoing, employment income earned by the non-resident employees in the NOA is not income earned in the year in a province. Therefore, the income is subject to the surtax in subsection 120(1) and is not subject to NL provincial tax. This has been the view of our Directorate for some time.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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