Principal Issues: Whether activity in question is "engineering activity" within the meaning of section 122.3 of the Income Tax Act, such that the employees in question would qualify for the Overseas Employment Tax Credit.
Position: A question of fact. File transferred to Audit Division of XXXXXXXXXX Tax Services Office.
Reasons: Requires factual determination based on ongoing facts and circumstances.
May 17, 2011
XXXXXXXXXX HEADQUARTERS XXXXXXXXXX , Audit S. Sivarulrasa XXXXXXXXXX Tax Services Office (613) 957-2104 Canada Revenue Agency XXXXXXXXXX 2011-039435
Overseas Employment Tax Credit (OETC)
As discussed with you by telephone on May 10, 2011 (St-Amand/Sivarulrasa), we are transferring the attached file to your office. The employer in question is XXXXXXXXXX , a company located in the XXXXXXXXXX area ("the company"). We are transferring the file as the matter requires a factual determination as to whether the employees of this company would, based on the ongoing facts and circumstances, qualify for the Overseas Employment Tax Credit ("OETC") provided in section 122.3 of the Income Tax Act.
The company first wrote to the Income Tax Rulings Directorate by letter and email dated October 5, 2009 requesting a technical interpretation regarding eligibility for the OETC. We provided a technical interpretation on January 21, 2010 (Document 2009-034322 - copy attached for your convenience) indicating that, in the circumstances described, the OETC would be unavailable. In that interpretation, we noted that Interpretation Bulletin IT-497R4 dated May 14, 2004, explains the requirements to qualify for the OETC. In particular, we noted that all or substantially all of the individual's employment duties must be performed outside Canada for a specified employer for a specified period of time in connection with a contract under which the employer carried on business outside Canada with respect to a qualifying activity. The meaning of "qualifying activity" is explained in paragraph 6 of IT-497R4:
For OETC purposes, a qualifying activity refers to the qualifying activity of the specified employer and not that of the employee. A qualifying activity includes:
(a) the exploration for or the exploitation of petroleum, natural gas, minerals or similar resources;
(b) a construction, installation, agricultural or engineering activity; or
(c) any prescribed activity.
Our interpretation of January 21, 2010 was based on the understanding that the activities to be performed in this case did not involve any of the activities described in paragraphs (a) or (b). Accordingly, the interpretation was based on whether paragraph (c) would be met. A "prescribed activity" is defined in section 6000 of the Income Tax Regulations as an activity performed under contract with the United Nations. In the circumstances described, we concluded that there was no contract with the United Nations and that the employees in question would therefore not be eligible for the OETC.
The company wrote to us again by letter dated January 20, 2011 requesting that we reconsider our position and that we provide an advance income tax ruling in respect of the employees in question. To this end, the company provided additional information to make the case that the activity in question is "engineering activity". The company also cited a previous income tax ruling, provided to another taxpayer, where the activity in question was an engineering activity. However, advance income tax rulings are provided in respect of proposed transactions only, whereas this situation relates to completed or largely completed transactions. Moreover, it is a question of fact whether the activity described in this case qualifies as an "engineering activity" for OETC purposes. Accordingly, we have advised the company that the file will be transferred to an audit division of the CRA.
We trust that your office will follow-up with the company as appropriate.
Yours truly,
Sherry Thomson
Manager, International Section I
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch