2021-0893981I7 CERB received by non-residents

Principal Issues: How are CERB Payments received in the 2020 and 2021 years by an individual that is a non-resident of Canada for purposes of the Act taxed in Canada?

Position: The CERB Payments are subject to Part I tax (including federal surtax). If the Non-Resident is resident in a country with which Canada has an income tax Convention, Canada will maintain its right to tax by virtue of the Other Income Article of the relevant Income Tax Convention and the Non-Resident's country of residence will be required to provide relief for double taxation.

Reasons: Pursuant to new subparagraphs 56(1)(r)(iv.1) and 115(1)(a)(iii.22) (which are deemed to have into force on January 1, 2020), CERB Payments are required to be included in computing the taxable income earned in Canada of a Non-Resident recipient of such CERB Payments. Since Regulation 2602 does not refer to amounts included in income pursuant to new subparagraph 115(1)(a)(iii.22), CERB Payments are subject to the federal surtax pursuant to subsection 120(1). If a Non-Resident recipient of CERB Payments is resident in a country with which Canada has a Treaty, in our view, the CERB Payments are analogous to employment insurance compensation and the “Other Income” Article of the relevant Treaty will apply to determine whether Canada can maintain its right to tax the CERB Payments. On that basis, Canada will generally have the right to tax CERB Payments without restriction. Pursuant to the Elimination from Double Taxation Article of the relevant Treaty, the Non-Resident’s country of residence as determined under the Residence Article of the relevant Treaty will be required to provide relief from double taxation either in the form of a credit or of a deduction for the Canadian income taxes paid or accrued in respect of CERB Payments in accordance with the “Other Income” Article of the relevant Treaty.

Author: Argento, Angelina
Section: 56(1)(r)(iv.1), 115(1)(a)(iii.22), 120(1) and Other Income Article and Elimination of Double Taxation Article of Canada's Income Tax Conventions.

July 9, 2021

Hanna Barysenka,                                                         HEADQUARTERS
Senior Programs Officer                                                Income Tax Rulings
Legislation Section/IRD/ABSB                                      Directorate
750 Herron Road, 6th floor                                           Angelina Argento
Ottawa, ON 514-277-5798
K1V 1A7

                                                                                    2021-089398

Canadian taxation of Canada Emergency Response Benefit (“CERB”) payments made to non-resident individuals during the 2020 taxation year

This is in reply to your email of May 11, 2021 regarding the Canadian taxation of payments (“CERB Payments”) made by the Canadian federal government pursuant to the Canada Emergency Response Benefit Act (footnote 1) (“CERB Act”) to an individual (“Non-Resident”) who is a non-resident of Canada for purposes of the Canada Income Tax Act (footnote 2) (“Act”) and Article IV of Canada’s Income Tax Conventions (“Treaty”).

Unless otherwise indicated, all references herein to sections or components thereof are references to the Act.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We understand your question involves individuals that are eligible to receive CERB Payments but do not reside in Canada within the meaning of the Act. The definition of “worker” in the CERB Act provides that an individual must be resident in Canada to be eligible to receive CERB Payments.   An interpretation of that provision posted on the Government of Canada website (footnote 3) indicates that a person who is not a Canadian citizen or permanent resident of Canada is eligible to receive CERB Payments as long as they meet the eligibility requirements, which includes living in Canada (with legal status to do so) and having a valid Canadian social insurance number. We note that the Act was amended on June 29, 2021 to provide that effective January 1, 2020 an individual that is a non-resident for purposes of the Act will be subject to Canadian taxation on the CERB Payments received.

Pursuant to new subparagraphs 56(1)(r)(iv.1) and 115(1)(a)(iii.22) which are both deemed to have come into force on January 1, 2020 (footnote 4) , CERB Payments are required to be included in computing the taxable income earned in Canada of a Non-Resident recipient of such CERB Payments (footnote 5).

Section 2602 of the Income Tax Regulations (“Regulations”) defines what constitutes a non-resident’s income earned in a province for purposes of determining federal surtax in subsection 120(4). Since Regulation 2602 does not refer to amounts included in income pursuant to new subparagraph 115(1)(a)(iii.22), CERB Payments are subject to the federal surtax pursuant to subsection 120(1).

If a Non-Resident recipient of CERB Payments is resident in a country with which Canada has a Treaty, it is our view that Article 15 (Employment Income) of the relevant Treaty does not govern the CERB Payments. In particular, as there is no employer-employee relationship between the payor (the Federal Government of Canada) and the payee (Non-Resident recipient), the CERB Payments do not constitute income from employment or for dependent services within the meaning of Article 15 of the Treaty.

Instead, in our view, the CERB Payments are analogous to employment insurance compensation and the “Other Income” Article of the relevant Treaty will apply to determine whether Canada can maintain its right to tax the CERB Payments.

The “Other Income” Article of Canada’s treaties is generally modeled on the “Other Income” Article of the UN Model Treaty (footnote 6) . Canada has made a reservation to the “Other Income” Article of the OECD Model Treaty (footnote 7) to reserve its right to tax income arising in Canada.

Similar to employment insurance compensation paid by the Federal Government of Canada, it is our understanding that the CERB Payments constitute income arising in Canada. On that basis, Canada will generally have the right to tax CERB Payments without restriction.

Pursuant to the Elimination from Double Taxation Article of the relevant Treaty, the Non-Resident’s country of residence as determined under the Residence Article of the relevant Treaty will be required to provide relief from double taxation either in the form of a credit or of a deduction for the Canadian income taxes paid or accrued in respect of CERB Payments in accordance with the “Other Income” Article of the relevant Treaty.

We trust that these comments will be of assistance.

Yours truly,

Marie-Claude Routhier
Manager
for Division Director
International Tax Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 S.C. 2020, c. 5, s. 8; in force on assent on March 25, 2020.
2 R.S.C., 1985, c.1 (5th Supp.).
3 https://www.canada.ca/en/servi...: Can you receive the CERB if you are not a citizen or permanent resident?
4 Which are deemed to come have come into force on January 1, 2020. See subsections 7(3) and 17(3) of The Budget Implementation Act, 2020 No. 1, 2021, c. 23 - Bill C-30 which received Royal Assent on June 29, 2021. Available at
https://www.parl.ca/LegisInfo/...
5 See The Budget Implementation Act, 2020 No. 1, 2021, c. 23 - Bill C-30 which received Royal Assent on June 29, 2021. Available at https://www.parl.ca/LegisInfo/...
6 United Nations Model Double Taxation Convention Between Developed and Developing Countries, 2017 (“UN Model Treaty”).
7 Organisation for Economic Co-operation and Development Model Double Taxation Convention on Income and on Capital, 2017 (“OECD Model Treaty”).

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