Introduction: Policy-Based Tax Deductions, Division C of the Income Tax Act & Tax-Free Income for UN Employees
Canada's Income Tax Act requires every Canadian tax resident to pay tax on "taxable income." To calculate your taxable income, you first determine your "income for the year," and you then subtract any available deductions in Division C of the Income Tax Act.
Your "income for the year" includes business income, investment income, capital gains, and employment income. Basically, it captures all standard means by which a person generates wealth. And income tax is, after all, a tax on income.
Canada's income-tax law serves to not only raise revenue for government spending but also implement various campaign promises and tax-policy decisions that function to reduce certain tax burdens. To that end, Division C of Canada's Income Tax Act contains a number of tax subsidies, tax-relief provisions, and policy-based deductions, such as the loss-carryover rules, the lifetime-capital-gains exemption or LCGE, the part-year-resident rule, which renders offshore income non-taxable if earned while a taxpayer was a non-resident of Canada, and tax-treaty exemptions.
Division C also contains deductions that effectively exempt certain types of income from tax. This article focuses on the Division C tax deduction for United Nations employees. We first analyze the tax-deduction rule in subparagraph 110(1)(f)(iii) of Canada's Income Tax Act. Then, after discussing the UN-employee tax deduction, this article gives pro tax tips from our top Canadian tax lawyers.
Canadian Income-Tax Deduction for United Nations Employees: Subparagraph 110(1)(f)(iii) of Canada's Income Tax Act
Subparagraph 110(1)(f)(iii) of Canada's Income Tax Act allows a taxpayer to deduct "any amount that is income from employment with a prescribed international organization."
Regulation 8900(1) of the Income Tax Regulations then lists the following "prescribed international organizations":
- the United Nations; and
- each international organization that is a specialized agency brought into relationship 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 Feed and Agriculture Organization of the United Nations. (This isn't an exhaustive list.)
Hence, if you earn employment income from the United Nations or from one of the UN's specialized agencies, you may 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.
The UN-employee tax deduction comes with a few caveats, however.
First, if you qualify for the UN-employee tax deduction, you can't simply omit the UN employment income from your Canadian tax return. You must still report your UN employment income as part of your income for the year (i.e., under the section called "Total income" on the Canadian T1 Income Tax and Benefit Return). You then deduct the qualifying amount when calculating your taxable income.
Second, the UN-employee tax deduction applies only to employment income. It doesn't apply to business income or pension 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 UN's specialized agencies, this income constitutes business income, not employment income. So, it fails to qualify for the UN-employee tax deduction under subparagraph 110(1)(f)(iii). Likewise, the UN-employee tax deduction under subparagraph 110(1)(f)(iii) doesn't apply to pension income from the United Nations or from one of the UN's specialized agencies. This is still true even if the pension stemmed from your employment with the UN or one of the UN's specialized agencies (e.g., see: Granaas v The Queen, 2009 TCC 547).
Finally, to claim the UN-employee tax deduction under subparagraph 110(1)(f)(iii), you must have been directly employed by the United Nations or by one of the UN's specialized agencies. The UN-employee tax deduction doesn't apply if you worked for the UN or the specialized agency as a part of your services to another employer or as a part of an agreement between your employer and the United Nations. For example, in Creagh v Canada,  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 of the United Nations. Similarly, in Godin v The Queen,  2 CTC 2852, the Tax Court denied the deduction. The taxpayer's employer provided services to a corporation that in turn rendered services for the United Nations. Because there was no employment contract between the taxpayer and the UN, the court concluded that the taxpayer didn't qualify for the UN-employee tax deduction under subparagraph 110(1)(f)(iii). Lalancette v Canada, 2002 FCA 335, and Smyth v The Queen, 2007 DTC 1129, each involved Canadian police officers who operated in countries subject to governance by the United Nations. Yet in each case, the court held that the taxpayer failed to qualify for the UN-employee tax deduction because the taxpayer continued to receive a salary from his police department, and because the police department—not the UN—dictated whether to end the taxpayer's UN assignment.
Pro Tax Tips: Qualifying for the UN-Employee Tax Deduction, Challenging the CRA's Denial of Your UN-Employee Tax Deduction & Correcting Incorrectly Claimed UN-Employee Tax Deductions
The tax deduction in subparagraph 110(1)(f)(iii) of the Income Tax Act basically means that employment income from the United Nations or from one of the UN's specialized agencies is tax-free in Canada. But, as mentioned above, you won't qualify for the UN-employee tax deduction unless (1) you were directly employed by the United Nations or by one of the UN's specialized agencies and (2) the impugned amount constitutes employment income (as opposed to business income or pension income). Hence, if you plan on claiming the UN-employee tax deduction, you should retain a copy of your employment agreement with the United Nations (or with a UN-related specialized agency). You should also retain your UN salary statements to show that the deducted amount relates to income from active employment, and that you received the payment during the relevant taxation year. (The latter may prove useful should the CRA allege that you received pension payments, which don't qualify for the UN-employee tax deduction, or that you didn't receive the payment in the correct tax year.)
If the CRA alleges that you don't qualify for the deduction, you bear the burden of proving that you do. In fact, under the Canadian tax system, the Canada Revenue Agency can assume that you don't qualify. It's your responsibility to disprove the CRA's unfavourable assumptions. If you're a United Nations employee or an employee of one of the UN's specialized agencies, and the CRA alleges that you don't qualify for the UN-employee tax deduction, reach out to one of our expert Canadian tax lawyers. We can review your case and assist you with preparing a response designed to demolish the Canada Revenue Agency's adverse assumptions.
If a Canada Revenue Agency tax auditor has already reassessed you and denied your UN-employee tax deduction, you may dispute the tax auditor's decision by filing a notice of objection. A notice of objection initiates the CRA's administrative dispute-resolution process, and the Canada Revenue Agency's Appeals Division will assign an appeals officer to review the merits of your tax objection. If the CRA's appeals officer renders an unfavourable decision, you may continue the dispute by having your experienced Canadian tax-litigation lawyer file a notice of appeal to the Tax Court of Canada. (In the alternative, you may effectively bypass the CRA's Appeals Division and appeal directly to Tax Court if the Appeals Division hasn't rendered a decision within 90 days from the date that you filed your objection.)
That said, you have only a limited amount of time to object to an assessment or reassessment. Generally, you must object within 90 days from the date on the assessment or reassessment, and you must appeal to the Tax Court of Canada within 90 days from the date of a notice of confirmation from the CRA's Appeals Division. You may, however, qualify for a deadline extension, given that you apply for the extension within one year and 90 days from the date on the assessment or confirmation. If you fail to object within these statutory deadlines, your appeal rights will expire, and you'll thereby remain liable for any tax, interest, and penalties resulting from the CRA's decision to deny your UN-employee tax deduction.
So, if the Canada Revenue Agency has already issued a reassessment denying your UN-employee tax deduction, speak to our Certified Specialist in Taxation Canadian tax lawyer today. Our experienced Canadian tax lawyers thoroughly understand this area of law, and we can ensure that you deliver a forceful, thorough, and cogent objection to the Canada Revenue Agency or appeal to the Tax Court of Canada.
On the other hand, you may have discovered that you claimed the UN-employee tax deduction yet didn't qualify. If you incorrectly claimed the UN-employee tax deduction, you might be able to correct your income-tax filings—with minimal penalty—under the CRA's Voluntary Disclosures Program. If your VDP application qualifies, the CRA will renounce criminal prosecution, waive gross-negligence penalties, and reduce interest. But your voluntary-disclosure application is time-sensitive. The CRA's Voluntary Disclosures Program will reject an application—therefore denying any relief—unless the application is "voluntary." This essentially means that the Voluntary Disclosures Program must receive your voluntary-disclosure application before the Canada Revenue Agency contacts you about the non-compliance you seek to disclose.
Our expert Certified Specialist in Taxation Canadian tax lawyer has assisted numerous Canadian taxpayers who incorrectly claimed tax deductions on their Canadian returns. We can carefully plan and promptly prepare your voluntary-disclosure application. A properly prepared disclosure application not only increases the odds that the CRA will grant tax amnesty but also lays the groundwork for a judicial-review application to the Federal Court should the Canada Revenue Agency unfairly deny your voluntary-disclosure application. To determine whether you qualify for the Canada Revenue Agency's Voluntary Disclosures Program, schedule a confidential and privileged consultation with one of our expert Canadian tax lawyers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.