Principal Issues: [TaxInterpretations translation] Are salaries paid for preparatory tasks carried out on Canadian soil, such as the preparation and shipment of equipment required for work that will eventually take place abroad, eligible salaries for the OETC?
Position: Question of fact. But it is very likely that it will if the conditions set out are satisfied and the activities on Canadian soil represent less than 10% of the total activities in order to satisfy the "all or substantially all" rule.
Reasons: ITA
XXXXXXXXXX 2010-038387 Nancy Turgeon, CGA
November 5, 2010
Dear Madam,
Subject: Overseas employment tax credit
This is further to your fax of October 1, 2010, in which you requested our opinion as to the eligibility of certain salaries for the overseas employment tax credit (the "OETC").
You described a situation where an employer will carry out a XXXXXXXX contract abroad and, before employees can go there, they must work in Quebec to prepare and ship the equipment needed for the work to be performed overseas. You wish to know if those employees will be eligible for the OETC while they are still on Canadian soil and performing preparatory work under that contract.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act ("the Act").
The situation you provided in your letter appears to relate to an actual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, when it comes to determining whether a completed transaction has received adequate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Our Comments
As stated in Interpretation Bulletin IT-497R4, Overseas Employment Tax Credit, in order to qualify for the OETC, an individual must satisfy certain conditions:
- have performed all or substantially all of the duties of employment outside Canada in connection with a contract that qualifies under subsection 122.3(1).
The OETC is not necessarily denied because an individual has not performed all the duties of employment outside Canada during the qualifying period of six or more consecutive months, provided that during the qualifying period, the employee performed all or substantially all of the duties of employment outside Canada. The "all or substantially all" test is generally considered to have been met if 90% of the employment duties were performed outside Canada. An employee may therefore perform some employment duties in Canada, but generally cannot perform more than 10% of the duties of employment in Canada during the qualifying period of six months or more. For example, if the qualifying period is 14 continuous months, and assuming that the employment duties are performed consistently over the period, the employee would not normally be expected to spend more than 1.4 months (10% of 14) in Canada performing the duties of employment that would otherwise qualify for the OETC. As you can see, whether an employee has performed all or substantially all of the duties of employment outside Canada under a qualifying contract is essentially a question of fact.
Additional information on the OETC is available in Interpretation Bulletin IT-497R4. That Bulletin is available on the Canada Revenue Agency's website at http://www.cra-arc.gc.ca/menu-eng.html.
These opinions are not advance rulings and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, are not binding on us.
Best regards,
Alain Godin, Manager
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.