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Canadian Citizen's Unemployment Compensation Not Exempt under Tax Treaty

(Parker Tax Publishing October 2017)

The Tax Court held that a Canadian citizen who worked in the United States and later collected U.S. unemployment compensation was not exempt from U.S. income tax on the unemployment compensation under the tax treaty between the Canada and the United States. The Tax Court found that the compensation did not fall under the treaty exemption for salary, wages or other remuneration derived from employment and was taxable in the United States because it arose there. Guo v. Comm'r, 149 T.C. No. 14 (2017).

Pei Fang Guo is a Canadian citizen. In 2010, she moved to Ohio to work as a postdoctoral fellow at the University of Cincinnati (UC). She worked there from October 2010 through November 2011 on a nonimmigrant professional visa. When Guo's employment contract ended she returned to Canada and reestablished her Canadian residency. She remained a Canadian resident through the end of 2012 and was physically present in the United States for only two days that year.

After Guo's employment contract ended, she applied for unemployment compensation in Ohio. Her application was approved and during 2012, she received unemployment compensation of almost $16,000. She received a Form 1099-G, Certain Government Payments, reporting that no tax had been withheld. On her nonresident income tax return for 2012, Guo took the position that her unemployment compensation was exempt from federal income tax under the Canada - United States tax treaty. She reported the unemployment compensation as taxable on her Canadian income tax return, but no Canadian tax was due because of deductions and credits. In a notice of deficiency, the IRS determined that Guo had failed to report her unemployment compensation as taxable income. Guo petitioned the Tax Court for redetermination.

Guo argued that her unemployment compensation was not subject to U.S. income tax because it fell under the treaty exemption for salaries, wages, and other similar remuneration derived in connection with her employment. Guo further contended that if she were required to pay tax in the United States in addition to Canada, she would be subjected to double taxation in contravention of the treaty. The IRS argued that Guo's unemployment income was "other income" under the treaty, which is taxable in the United States if it arises there. Guo conceded that her unemployment compensation arose in the United States.

The Tax Court held that Guo's unemployment compensation was taxable in the United States because it was not salary, wages, or other remuneration for employment under the tax treaty. It was clear to the Tax Court that unemployment compensation is not salary or wages. In considering whether it was "other remuneration," the Tax Court determined that because that term is not defined in the treaty, it has the same meaning that it has in the Code. Remuneration is also not a defined term in the Code but the Tax Court found that, under Code Sec. 3401 and Code Sec. 3121, remuneration is closely associated with wages and benefits paid by an employer to an employee. The Tax Court reasoned that Guo was not employed by UC when she received her unemployment compensation and she received the compensation not from her former employer but from the State of Ohio. It was therefore not exempt as remuneration from employment under the tax treaty.

Moreover, the Tax Court determined that even if Guo's unemployment compensation qualified as remuneration from employment, it would be still be taxable in the United States because, under the treaty, earnings from employment are taxable in the United States if the employment is "exercised" in the United States. According to the Tax Court, if the compensation were remuneration, then it would have to be regarded as remuneration derived in connection with her former employment with UC. That employment was exercised in the United States, the Tax Court reasoned, and the unemployment compensation would therefore be taxable in the United States.

The Tax Court also found that Guo's unemployment compensation did not fall under either of two exceptions to U.S. taxability. The first exception, for remuneration of $10,000 or less, did not apply because the compensation exceeded that amount. The other exception would apply if (1) Guo was present in the United States for 183 or fewer days in 2012, and (2) her remuneration was from an employer that was not a U.S. resident. The Tax Court found that, although Guo was present in the United States for only two days in 2012, her unemployment compensation was paid by the Ohio unemployment agency, which is a U.S. resident.

Finally, the Tax Court rejected Guo's double taxation argument. It noted that under the tax treaty, double taxation is avoided with respect to a U.S. citizen or resident by allowing a credit for any Canadian income tax paid. The Tax Court found that because Guo was not a U.S. citizen or resident, that treaty provision did not apply. Further, although Canada allows a deduction for U.S. income tax paid, such relief would be granted by Canada, not the United States.

For a discussion of income excludable under a tax treaty, see Parker Tax ¶200,560.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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