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 compensation received by an employee on sick leave can qualify for the OETC.
Position: Question of fact.
Reasons: Where all of the other requirements of subsection 122.3(1) of the Act are otherwise satisfied, the sick leave will be part of the "qualifying period".
2005-012399
XXXXXXXXXX A. Seidel, CMA
(613) 957-2058
February 9, 2005
Dear XXXXXXXXXX:
Re: Overseas Employment Tax Credit
This is in response to your letter dated August 25, 2005 concerning the application of subsection 122.3(1) of the Income Tax Act (the "Act") to compensation received during a period of sick leave.
The particular circumstance on which you have asked for our views relates to a factual situation and completed transactions. The details of the completed transactions, including all relevant facts and documentation, should be submitted to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.
In general, subsection 122.3(1) of the Act applies where in a period of more than 6 months that commenced before the end of the year and included any part of the year (the "qualifying period"), all or substantially all of an individual's duties of employment are performed outside of Canada in respect of a "qualifying activity" and provides in paragraph 122.3(1)(d) of the Act that the overseas employment tax credit ("OETC") applies to the income attributable to the duties performed on the days in the qualifying period.
As stated in paragraph 11 of Interpretation Bulletin IT-497R4 ("IT-497R4"), "an individual's entitlement (to the OETC) will not necessarily be denied because the individual was not actually outside Canada or at the work location(s) outside Canada for the entire qualifying period. During a period of absence from a work location outside Canada, an employee may take vacation time, consult with the specified employer in Canada or perform duties of employment in Canada and still remain eligible for the OETC, provided that throughout the qualifying period substantially all of the employment duties ... are performed outside Canada". In the situation where all of the requirements of subsection 122.3(1) of the Act are otherwise satisfied, which requirements are discussed in detail in IT-497R4, there is a reasonable argument that any sick leave taken during a period when an employee would otherwise be engaged in qualifying activities would be considered to be part of the qualifying period. Therefore, any compensation received by an employee during such sick leave would be "income for the year from that employment that is reasonably attributable to duties performed on the days referred to in paragraph (c)", as required by paragraph 122.3(1)(d) of the Act, in those situations where such compensation can be attributed to the duties of employment performed during the qualifying period on some reasonable basis. However, where the compensation received by an employee is in respect of sick leave that cannot be attributed to duties performed during the "qualifying period", such compensation received during a period of sick leave, even though received during a period that is otherwise a qualifying period, would not be eligible for the OETC.
In any case where compensation received in respect of sick leave does not qualify under paragraph 122.3(1)(d) of the Act, the remainder of the employment income earned in respect of qualifying activities in the qualifying period may nevertheless qualify for the OETC.
Where any of the requirements in subsection 122.3(1) of the Act are not satisfied, such as a specified employer does not have a contract to carry on business outside of Canada while the employee is unable to work due to a period of extended sick leave, any compensation received by an employee during such sick leave would not qualify for the OETC.
A definitive determination of whether an employee is entitled to the OETC for compensation received while on sick leave can only be made after the sick leave provisions of the relevant employment contract have been reviewed.
A copy of IT-497R4 can be found on our website at www.cra-arc.gc.ca.
Yours truly,
Olli Laurikainen, CA
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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