24 June 2008 External T.I. 2007-0259671E5 - Overseas Employment Tax Credit

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 OETC is available in the circumstances described

Position: The OETC is not available

									2007-025967
XXXXXXXXXX 								A. Seidel, CMA
(613) 957-2058
June 24, 2008

Dear XXXXXXXXXX :

Re: Overseas Employment Tax Credit

This is in response to your November 13, 2007 letter in which you requested our opinion as to whether the overseas employment tax credit ("OETC") described in section 122.3 of the Income Tax Act (the "Act") would be available in the circumstances described below.

Background

1. The employer (hereinafter referred to as the "Employer") is a Canadian corporation XXXXXXXXXX

2. XXXXXXXXXX

3. XXXXXXXXXX

4. XXXXXXXXXX

5. XXXXXXXXXX

Issue

Having regard to the situation described above, you query whether the employees of the Employer are entitled to claim the OETC in respect of their employment income earned outside of Canada. Of particular concern is whether the duties of their employment outside of Canada are performed in connection with a contract under which the Employer carries on business outside Canada with respect to a qualifying activity (i.e., the exploration for, or exploitation of, petroleum, natural gas, minerals or other similar resources or with respect to any construction, installation or engineering activity as described in subparagraph 122.3(1)(b)(i) of the Act).

Our Comments

It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. The determination of the tax consequences involving a specific taxpayer in the circumstances described above is the responsibility of the local Tax Services Office ("TSO"). A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on transactions involving specific taxpayers, we are prepared to provide the following general comments, which we trust will be of some assistance.

To qualify for the OETC, an individual must, throughout a period of more than 6 consecutive months,

(a) be employed by a specified employer;

(b) be employed in connection with a contract (or for the purpose of obtaining such a contract) under which the specified employer carried on business outside Canada with respect to

(i) the exploration or exploitation of petroleum, natural gas, minerals or similar resources,
(ii) any construction, installation, agricultural or engineering activity, or
(iii) a prescribed activity; and

(c) have performed all or substantially all the employment duties (done in connection with a contract described in (b) above) outside Canada.

Paragraph 7 of Interpretation Bulletin IT-497R4 provides examples where, if all of the above conditions are met, an employee of a specified employer carrying on a qualifying activity (as described in (b)(i) to (iii) above) would qualify for the OETC, including:

• instructors or administrative staff providing supporting services to fellow employees; and
• staff who train the personnel of the foreign customer.

Paragraph 7 of the above-noted Interpretation Bulletin deals specifically with the situation where the employer carries on a qualifying activity. In that situation, we would consider an employee providing supporting services or training to meet the requirements of subparagraph 122.3(1)(b)(i). However, in the circumstances described in your letter, the Employer is not carrying on a qualifying activity. In addition, we would not consider the Employer to be carrying on a qualified activity because XXXXXXXXXX are employed by organizations that carry on business outside Canada with respect to a qualifying activity.

It is our practice, however, to allow a claim for the OETC to an employee of a specified employer that does not carry on a qualifying activity if the employer is a subcontractor that provides its services to another person in respect of a qualifying activity carried on by that other person outside Canada. However, we would allow a claim for the OETC only if the subcontract involves work in respect of a specific project (e.g., providing data processing services provided to a non-resident company whose business is the exploration for natural gas). In our view, the services provided by the Employer XXXXXXXXXX are not being provided as a subcontractor in respect of a specific project and, therefore, the employees would not, in the circumstances described in your letter, be considered to be performing their duties of employment in connection with a contract under which the Employer carried on business outside Canada with respect to a qualifying activity.

We hope our comments are of assistance.

Yours truly,

Daryl Boychuk
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch