2014-0559751E5 Subsection 115(3)

Principal Issues: Whether Article XV of the Treaty takes precedence over subsection 115(3) of the Act where the Treaty provides a more advantageous tax regime for a non-resident pilot.

Position: Yes. Where the pilot is eligible for benefits under the Treaty and the Treaty is more advantageous than the domestic law, Article XV of the Treaty would take precedence over subsection 115(3).

Reasons: The relieving provisions of the treaties generally override the domestic legislation.

Author: Hikspoors, Maryann
Section: 2(3); 115

XXXXXXXXXX                                                                                                                       2014-055975
                                                                                                                                               M. Hikspoors
                                                                                                                                              (613) 670-9003
September 7, 2016

Dear Mr. XXXXXXXXXX:

Re:   Subsection 115(3)

We are writing in response to your email in which you requested our view as to whether Article XV of the Canada-United States Income Tax Convention (1980) (“Treaty”) would take precedence over subsection 115(3) of the Income Tax Act (the “Act”) in a situation where the Treaty provides more advantageous tax results for a non-resident pilot employed by a Canadian resident employer (under the assumption that a non-resident pilot is otherwise eligible for benefits under the Treaty). We apologize for the delay in responding to your request.

Our comments

This technical interpretation provides general comments about the provisions of the Act, 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

A non-resident person who is employed in Canada at any time in a taxation year is taxed in Canada pursuant to subsection 2(3) of the Act. To the extent that the duties are performed by the non-resident person in Canada in a taxation year (which is generally a question of fact), any employment income from those duties is required by subparagraph 115(1)(a)(i) of the Act to be included in the non-resident’s calculation of taxable income earned in Canada for the year. However, with respect to a non-resident pilot who is employed by a Canadian resident airline, subsection 115(3) (effective for 2013 and subsequent taxation years) provides special rules for determining the taxable income earned in Canada based on the origin and destination of a flight.

Further, Article XV of the Treaty also establishes rules regarding the taxation of income from employment in a situation where the Treaty applies. Paragraph 1 of Article XV indicates that income derived by a resident of one state from employment exercised in the other state may be taxed in that other state.

Article 3(2) of the Canada – United States Tax Convention Act, 1984 (“Implementation Act”) provides that the Implementation Act and the Treaty prevail to the extent of any inconsistencies between the Implementation Act, or the Treaty, or the provisions of any other law.

Therefore, in a situation where the application of subsection 115(3) of the Act would result in an amount of taxable income earned in Canada for the pilot that is higher than the amount of income earned in Canada based on the employment exercised in Canada, the Treaty (by virtue of the Implementation Act) would limit Canada’s taxing rights to the amount earned from the employment exercised in Canada.

As a result, if the application of the Treaty provides a more advantageous tax result than the domestic law in respect of the income of the pilot, Article XV of the Treaty would take precedence over subsection 115(3) of the Act.

It should be noted, however, that the choice of the tax regime used by the non-resident pilot (whether it is pursuant to the Treaty or the domestic tax law) must be consistent throughout a particular taxation year. In other words, a non-resident pilot must use either subsection 115(3) of the Act or the treaty methodology to allocate income from all of the flights occurring in a particular taxation year. The lower of the two amounts thereby determined would be taxable in Canada under the Act.

We trust that these comments will be of assistance.

Yours truly,

Vitaliy Anissimov
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch

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