Locally Engaged Employees of the Canadian Embassy and Consulates in the United States Remission Order: SI/2018-30

Canada Gazette, Part II: Volume 152, Number 8

Registration

April 18, 2018

FINANCIAL ADMINISTRATION ACT

P.C. 2018-345 March 26, 2018

Her Excellency the Governor General in Council, considering that it is in the public interest to do so, on the recommendation of the Minister of Finance, pursuant to subsection 23(2) ^footnotea of the Financial Administration Act ^footnoteb, makes the annexed Locally Engaged Employees of the Canadian Embassy and Consulates in the United States Remission Order.

Locally Engaged Employees of the Canadian Embassy and Consulates in the United States Remission Order

Interpretation

Definitions

1 (1) The following definitions apply in this Order.

• Act means the Income Tax Act. (Loi)
• Canada-US Tax Convention means the convention, as defined in the Canada-United States Tax Convention Act, 1984. (convention fiscale Canada–États-Unis)
• Embassy or Consulate means the Embassy of Canada located in Washington, D.C., United States or any one or more of the offices of the Consulate General of Canada that are located in the United States. (ambassade et consulats)
• locally engaged employee means an individual who during the taxation year
  • (a) is a non-resident of Canada;
  • (b) is a Canadian citizen; and
  • (c) is paid by the government of Canada for services rendered by the individual in the discharge of functions of a governmental nature at an Embassy or Consulate. (employé recruté sur place)

Application of meanings in Act

(2) Unless the context otherwise requires, words and expressions used in this Order have the same meaning as in the Act.

Remission

Remission of Income Tax

2 Subject to sections 3 and 4, remission is granted to each locally engaged employee with respect to tax payable under the Act for taxation years that begin after 2016 of the lesser of, in respect of remuneration that is taxable in Canada, and not in the United States, because of Article XIX of the Canada-US Tax Convention,

• (a) the amount added to the tax payable under Part I of the Act by the employee under subsection 120(1) of the Act for the taxation year, and
• (b) the amount, if any, of United States state-level income tax paid by the employee for the taxation year.
  

Conditions

Amount not otherwise claimed

3 Remission is granted only to the extent the amount remitted has not otherwise been rebated, remitted, credited or refunded to any person under the Act, the Financial Administration Act or any other Act of Parliament.

Timing and Documentation

4 Remission is granted to a locally engaged employee in respect of a taxation year on the condition that

• (a) the locally engaged employee applies for the remission in writing to the Minister on or before the day that is two years after their filing-due date for the taxation year; and
• (b) the application is accompanied by the documentation required to determine both the eligibility for and the amount of the remission.
  

Coming into Force

Coming into force

5 This Order comes into force on the day on which it is made.

EXPLANATORY NOTE

(This note is not part of the Order.)

Proposal

Pursuant to subsection 23(2) of the Financial Administration Act, the Locally Engaged Employees of the Canadian Embassy and Consulates in the United States Remission Order would grant remission to a specified group of individuals (“locally engaged employees” as described below) to alleviate the double taxation, which they are currently subjected to at the sub-national level. Specifically, locally engaged employees would be granted remission of the lesser of the amount of tax that is payable in Canada as “additional tax,” and the amount, if any, that is paid as U.S. state-level income tax.

Objective

The objective of this Order is to relieve double taxation, to the extent that it arises, with respect to the tax liability of Canadian citizens who are locally engaged at the Canadian embassy in Washington, D.C. or at a Canadian consular office in the United States (the “Embassy or Consulate”) on account of U.S. state-level income tax paid in addition to the “additional tax” that is payable in Canada, with respect to taxation years commencing on or after January 1, 2017.

Background

Under Article XIX of the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital signed at Washington on September 26, 1980, as amended by the Protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997, and September 21, 2007 (the “Canada-US Tax Convention”), Canadian citizens who are locally engaged by the Embassy or Consulate are, by virtue of their status as Canadian citizens, taxable exclusively in Canada. This is a departure from the general rule that residence (as opposed to citizenship) is the criterion establishing an individual’s liability for tax in a jurisdiction.

A locally engaged employee is an individual who during a taxation year commencing on or after January 1, 2017 is (i) a non-resident of Canada; (ii) a Canadian citizen; and (iii) paid by the government of Canada for services rendered in the discharge by the individual of functions of a governmental nature to an Embassy or a Consulate.

As a result of the provisions of Article XIX, locally engaged employees of the Embassy or Consulate do not pay U.S. federal tax. They are instead fully liable for Canadian federal tax. Included in their Canadian federal tax liability is an “additional tax” that is levied under subsection 120(1) of the Income Tax Act. Usually, when an individual is not resident in a province or territory, they are not liable for provincial or territorial tax.

In this particular case, the federal additional tax becomes payable. It is calculated to approximate the provincial or territorial tax that would otherwise be payable. The federal additional tax ensures that all individual Canadian taxpayers face a broadly comparable total income tax burden even in the case that they are not a resident of, and hence taxable in, any province or territory. Since locally engaged employees are not residents of any Canadian province or territory, they are not liable for any provincial or territorial tax. However, they are liable for the additional tax.

Some U.S. states levy an income tax against such employees. As a result these locally engaged employees are subject to double taxation because they are liable for both the Canadian federal additional tax and U.S. state-level income tax.

This Order does not apply to any sub-national level of tax liabilities other than state-level income tax.

Implications

The Remission Order applies to the 2017 taxation year and any subsequent taxation year; for 2017, this Order is expected to remit approximately $200,000 in federal income tax. The source of funds for the amounts remitted through this Order is the fiscal framework.

To obtain relief from double taxation under this Remission Order, locally engaged employees must apply in writing to the Minister of National Revenue on or before the day that is two years after their filing-due date for any given taxation year. The application must be accompanied by the documentation needed to determine both the eligibility for and the amount of the remission.

The Canada Revenue Agency will administer this Remission Order.

Consultation

No external consultations have been conducted. Global Affairs Canada will inform locally engaged employees working in the Embassy or Consulate of the implementation of this Remission Order.

Departmental contact