October 29, 2021
doorDavid Rotfleisch
Rotfleisch & Samulovitch P.C.
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Introduction: Policy-Based Tax Deductions, Section C of theIncome tax law& tax-free income for UN employees
Canada'sIncome tax lawrequires every Canadian tax resident to pay taxes on "taxable income". To calculate your taxable income, first determine your "income for the year" and then subtract the available deductions in Section C of theIncome tax law.
Your "income for the year" includesbusiness income, investment income,capital gainsand labor income. Basically, it includes all standard means by which one generates wealth. After all, income tax is a tax on income.
Canada's Income Tax Act serves not only to increase revenue from government spending, but also to implement various campaign promises and tax policy decisions that serve to reduce certain tax burdens. To that end, Division C of CanadaIncome tax lawcontains a number of tax subsidies, tax relief provisions, and policy-based deductions, such as the loss carry-forward rules, the lifetime capital gains exemption, or LCGE, the part-year rule, which ensures that offshore income is not taxable as earned while the taxpayer was not a resident of Canada, and tax treaty exemptions.
Section C also contains deductions that effectively exempt certain types of income from taxation. This article focuses on the Division C tax deduction for United Nations employees. We first analyze the tax deduction rule in subsection 110(1)(f)(iii) of the CanadianIncome tax law.Then, after discussing the tax deductions for UN employees, this article provides professional tax tips from our top Canadian tax attorneys.
Canadian Income Tax Deduction for United Nations Employees: Subsection 110(1)(f)(iii) of Canada'sIncome tax law
Subparagraph 110(1)(f)(iii) of CanadaIncome tax lawallows a taxpayer to "deduct any amount arising from employment with a prescribed international organization."
Regulation 8900(1) of theIncome tax regulationsthen lists the following "prescribed international organizations":
- the United Nations; And
- any international organization that is a specialized agency associated with the United Nations in accordance with Article 63 of the Charter of the United Nations.
The UN's "specialized agencies" include, for example, the International Monetary Fund (IMF), the World Bank, the World Health Organization (WHO), the International Criminal Court and the Food and Agriculture Organization of the United Nations. an exhaustive list.)
So if you receive income from employment from the United Nations or from one of the UN's specialized agencies, you can deduct that income when calculating your 'taxable income' for Canadian income tax purposes. The deduction essentially means that this income is tax free in Canada.
However, the tax deduction for UN employees has some caveats.
First, if you qualify for the UN worker tax deduction, you can't simply omit UN earned income from your Canadian tax return. You must still report your UN earned income as part of your income for the year (that is, under the section called "Total Income" in Canada's T1 Income Tax and Benefit Return). You then deduct the assessment amount when calculating your taxable income.
Second, the tax deduction for UN employees only applies to earned income. It does not apply to business income, retirement income or investment income, including capital gains on cryptocurrency transactions. So if you earned income while working as an independent contractor for the United Nations or while working as an independent contractor for one of the specialized UN agencies, this income constitutes business income and not employment income. Thus, it is not eligible for the tax deduction for UN employees under sub-paragraph 110(1)(f)(iii). Similarly, the tax deduction for UN employees under subsection 110(1)(f)(iii) shall not apply to retirement income of the United Nations or any of its specialized agencies. This still applies even if the pension arose from your employment with the UN or one of the specialized UN agencies (see for example:Grenade against the Queen, 2009TCC 547).
Finally, in order to claim the tax deduction for UN employees under sub-paragraph 110(1)(f)(iii), you must have been employed directly by the United Nations or by one of the specialized agencies of the UN. The UN employee tax deduction does not apply if you worked for the UN or its specialized agency as part of your service to another employer or as part of an agreement between your employer and the United Nations. For example, insideCreagh vCanada, [1997] 1 CTC 2392, the Tax Court of Canada denied the deduction because, although the taxpayer worked on peacekeeping missions in Cambodia, he did so as an employee of Canadian Helicopter, not the United Nations. In the same way, insideGoddess against the Queen, [1998] 2 CTC 2852, the tax court rejected the deduction. The taxpayer's employer provided services to a company which in turn provided services to the United Nations. Because no employment contract existed between the taxpayer and the UN, the court concluded that the taxpayer was not eligible for the tax deduction for UN employees under subsection 110(1)(f)(iii).Lalancette v Canada, 2002 FCA 335, atSmyth to the Queen, 2007 DTC 1129, each involving Canadian police officers operating in countries subject to United Nations administration. In any event, the court ruled that the taxpayer was ineligible for the tax deduction for UN employees, because the taxpayer continued to receive a salary from his police department, and because the police – not the UN – dictated whether the UN order of the taxpayer had to be terminated.
Pro Tax Tips: Qualify for the UN Employee Tax Deduction, Challenge the CRA's Denial of Your UN Employee Tax Deductions, and Correct Falsely Claimed UN Employee Tax Deductions
The tax deduction in subsection 110(1)(f)(iii) of the IncomeTax Act effectively means that income from employment of the United Nations or of one of the specialized agencies of the UN is tax-free in Canada. But, as noted above, you are not eligible for the UN employee tax deduction unless (1) you were directly employed by the United Nations or one of its specialized UN agencies and (2) the disputed amount is an income from employment (as opposed to business income or retirement income). Therefore, if you intend to claim the tax deduction for UN employees, you should keep a copy of your employment contract with the United Nations (or with a UN-related specialized agency). You should also keep your UN salary statements to show that the amount withheld relates to active employment income and that you received the benefit in the relevant tax year. (The latter may be useful if the CRA claims that you received retirement benefits that do not qualify for the UN employee tax deduction, or that you did not receive the payment in the correct tax year.)
If the CRA claims you don't qualify for the deduction, you bear the burden of proving that you do. Under the Canadian tax system, the Canada Revenue Agency may even assume that you are not eligible. It is your responsibility to rebut the unfavorable assumptions of the CRA. If you are a United Nations employee or an employee of one of the UN's specialized agencies, and the CRA claims that you are not eligible for the UN employee tax deduction, please contact one of our expert Canadian tax lawyers. We can review your case and help you prepare a response designed to counter negative assumptions made by the Canada Revenue Agency.
If a Canada Revenue Agency tax inspector has already reassessed you and denied your tax deduction for UN employees, you can challenge the tax inspector's decision by filing an appeal. An appeal will initiate the CRA's administrative dispute resolution process, and the Canada Revenue Agency's Appeals Department will designate an appeals officer to review the merits of your tax appeal. If the CRA appeals officer makes an unfavorable decision, you can continue the dispute by having your experienced Canadian tax lawyer file an appeal with the Tax Court of Canada. (Alternatively, you can effectively bypass the CRA's appeals department and appeal directly to the tax court if the appeals department has not made a decision within 90 days of the date you filed your appeal.)
However, you only have a limited time to object to a (re)assessment. In general, you must object within 90 days of the date of the assessment or reassessment, and you must appeal to the Tax Court of Canada within 90 days of the date of confirmation by the Appeals Division of the CRA. However, you may be eligible for a term extension, provided you request the extension within one year and 90 days from the date of the review or confirmation. If you do not object within these statutory time limits, your appeal rights will lapse and you will therefore remain liable for any taxes, interest and penalties arising from the CRA's decision to deny your UN employee tax deductions.
So if the Canada Revenue Agency has already issued a review denying tax deductions for your UN employees, contact our Certified Specialist in Taxation Canadian tax attorney today. Our experienced Canadian tax attorneys thoroughly understand this area of law, and we can ensure that you file a strong, thorough and persuasive appeal with the Canada Revenue Agency or appeal to the Tax Court of Canada.
On the other hand, you may have discovered that you were claiming the tax deduction for UN employees, but were not eligible for it. If you falsely claimed the tax deduction for UN employees, you may be able to correct your income tax return — with a minimal penalty — under the CRA's Voluntary Disclosures Program. If your VDP application qualifies, the CRA will waive criminal charges, waive penalties for gross negligence, and reduce interest. But your voluntary disclosure request is time sensitive. The CRA's Voluntary Disclosures Program will deny an application—and therefore deny any form of relief—unless the application is "voluntary." This essentially means that the Voluntary Disclosures Program must receive your voluntary disclosure request before the Canada Revenue Agency contacts you about the non-compliance you wish to disclose.
Our expert Certified Specialist in Taxation Canadian tax attorney has assisted countless Canadian taxpayers who have falsely claimed tax deductions on their Canadian returns. We can carefully plan and quickly prepare your request for voluntary disclosure. A well-prepared disclosure request not only increases the likelihood that the CRA will grant a tax amnesty, but also lays the groundwork for a request for judicial review in the Federal Court should the Canada Revenue Agency erroneously deny your request for voluntary disclosure. To determine your eligibility to apply for the Canada Revenue Agency Voluntary Disclosures Program, schedule a confidential and privileged consultation with one of our expert Canadian tax attorneys.
The content of this article is intended as a general guide to the topic. Specialist advice should be sought regarding your specific circumstances.
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