13 December 2006 External T.I. 2006-0211341E5 - Subsection 126(3) of the Income Tax Act

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the OECD remuneration paid to a Canadian resident is eligible for the credit provided for under subsection 126(3) of the Income Tax Act?

Position: No position taken.

Reasons: More information needed.

XXXXXXXXXX

December 13, 2006

Dear XXXXXXXXXX:

Subject: Application of subsection 126(3) of the Income Tax Act (the "Act") to remuneration received from the Organization of Economic Cooperation and Development ("OECD")

This is in reply to your letter of October 23, 2006 regarding the eligibility of OECD remuneration paid to Canadian resident for the credit provided for under subsection 126(3) of the Act.

As you are aware, subsection 126(3) of the Act provides a tax credit to Canadian-resident employees of international governmental organizations other than prescribed international governmental organizations. The amount of the credit is limited to the amount of any levy in lieu of taxes charged to the employee by the organization on the employee's remuneration.

The Canada Revenue Agency's longstanding position has always been that since OECD employees were not subject to a tax-like levy, the OECD remuneration paid to Canadian residents did not qualify for a tax credit under subsection 126(3) of the Act.

However, in light of the Department of Finance's letter to the OECD, dated April 4, 2005, the intended scope of the credit's intended application appears to be somewhat broad. Indeed, in the context of a particular case, the Department of Finance suggests that a levy need not, in order to be creditable, to be actually paid by the employee, as long as it is demonstrable that the organization is withholding a portion of what it would otherwise pay as a salary. The Department of Finance expressed the view that the eligibility for the credit might be established by showing that the employee's pensionable earnings were greater than their net salary.

This intended flexibility might allow OECD employees to use the credit provided for in subsection 126(3) of the Act. In that sense, you did some research and you are confirming in your letter to us that OECD's pension entitlements are computed on a pre-tax basis since OECD pensions are increased to offset the tax payable. You also expressed the view that by doing so, the OECD seeks to compensate the tax imposed on the pension by giving an adjustment equal to the additional tax, as provided for in article 42 of the Rules and Regulations of the OECD.

While we are not yet prepared to confirm that OECD remuneration is eligible for the subsection 126(3) credit, we are prepared to reconsider our views regarding the eligibility of OECD remuneration to the subsection 126(3) credit in light of this new information. We will need more information before we can take a definitive position on this matter. In particular, we would like to receive a written confirmation from the Inter-Organisations Study Section on Salaries and Prices (" ISO ") that salaries of the OECD are computed on an after-tax basis. We would also like to obtain more information on the equivalence tables prepared and used by ISO to determine the pre-tax equivalent amounts for pension purposes as well as a confirmation of your amount of pre-tax remuneration.

Yours truly,

Olli Laurikainen, C.A.

Manager
For Director
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch