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Income tax — income from UN agency was tax-free

My client was on contract in Europe, working for a United Nations agency. The contract, which had been drafted by the UN agency, said that my client was an independent contractor, not an employee. His accountants had advised him that he should report and pay tax on his annual income from the agency, which was about $300,000. The client came to me for advice, asking if the accountants were correct.

I discussed in detail the working relationship that my client had with the UN agency. Despite the fact that the contract said he was an independent contractor, I concluded that he was more likely an employee for Canadian tax law purposes. We reviewed all the relevant factors in determining whether a worker is an employee or an independent contractor, and the balance clearly tipped towards "employee" in my view.

Based on this conclusion, I advised my client that he should report his income from the UN agency as being employment income, which would entitle him to a fully offsetting deduction under Income Tax Act subparagraph 110(1)(f)(iii), a special rule that applies to employment income (but not independent-contractor income) from the UN and its agencies. Thus, he would report $300,000 of income but claim a deduction for the same $300,000, leaving him paying no Canadian tax on that income.

I also prepared a detailed letter for the client to send to the CRA to explain why he was an employee and why his income was tax-free.

The client filed as per my advice, and after some inquiries which were answered by my letter, the CRA accepted this position.

Tax-free income despite the accountant's advice!

(2016)