Principal Issues: [TaxInterpretations translation] (1) Can a taxpayer, who receives an allowance from the taxpayer’s employer while on a XXXXXXXXXX posting, claim the overseas employment tax credit?
(2) Alternatively, what is the tax treatment of the allowance so received?
Position: (1) No, since the allowance was received while the taxpayer was providing services under a prescribed international development assistance program of the Government of Canada.
(2) The allowance will not be taxable to the extent that the requirements of paragraph 250(1)(d) are satisfied.
Reasons: Income Tax Act.
XXXXXXXXXX 2010-036156 June 28, 2010
Dear Sir,
Subject: International development assistance program
This is in response to your email of March 23, 2010, in which you requested our opinion regarding your eligibility for the overseas employment tax credit regarding an allowance of $XXXXXXXXXX that you received while posted abroad.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you indicated that you are an employee of a firm in XXXXXXXXXX that provides XXXXXXXXXX management services for the XXXXXXXXXX Project. You are stationed full-time in XXXXXXXXXX and receive an allowance of $XXXXXXXXXX. According to the information you received, although this allowance would be taxable, you would not be entitled to the overseas employment tax credit.
You wish to confirm your eligibility for the overseas employment tax credit and, if applicable, the tax treatment of the allowance you receive.
Our Comments
It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful.
The overseas employment tax credit, which is discussed in Interpretation Bulletin IT-497R4, is provided under section 122.3. Paragraph 122.3(1)(a) provides that the credit is not available to an employee who renders services under a prescribed international development assistance program of the Government of Canada.
A prescribed international development assistance program of the Government of Canada is a program described in section 3400 of the Income Tax Regulations (the "Regulations"). Section 3400 of the Regulations reads as follows:
For the purposes of paragraphs 122.3(1)(a) and 250(1)(d) of the Act, each international development assistance program of the Canadian International Development Agency that is financed with funds (other than loan assistance funds) provided under External Affairs Vote 30a, Appropriation Act No. 3, 1977-78, or another vote providing for such financing, is hereby prescribed as an international development assistance program of the Government of Canada.
Section 3400 of the Regulations provides that a program will be an international development assistance program of the Government of Canada if the following two conditions are satisfied:
(1) it is an international development assistance program of the Canadian International Development Agency; and
(2) the program is financed by funds (other than development assistance loans) provided through External Affairs Vote No. 30a under Appropriation Act No. 3 of 1977-78 or by another appropriation providing for such financing.
XXXXXXXXXX, we are of the view that the XXXXXXXXXX Project is an international development assistance program of the Government of Canada referred to in section 3400 of the Regulations. Consequently, you are not eligible for the overseas employment tax credit.
However, subparagraph 6(1)(b)(iii) provides that representation or other special allowances received by a person in respect of a period of absence from Canada will not be included in computing the person's income if, among other things, paragraph 250(1)(d) applies to the person.
Paragraph 250(1)(d) reads as follows:
250 (1) For the purposes of this Act, a person shall, subject to subsection 250(2), be deemed to have been resident in Canada throughout a taxation year if the person
[...]
(d) performed services, at any time in the year, in a country other than Canada under a prescribed international development assistance program of the Government of Canada and was resident in Canada at any time in the 3 month period preceding the day on which those services commenced;
Consequently, to the extent that you resided in Canada at any time during the 3-month period before your start date with the XXXXXXXXXX firm, we are of the view that the allowance of $XXXXXXXXXX that you receive while posted in that country is not required to be included in computing your income for the year in which you receive it.
For a discussion of residency for tax purposes, see Interpretation Bulletin IT221R3 - CONSOLID, Determination of an Individual's Residence Status. This Bulletin can be viewed by clicking on the following Internet link: http://www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/READ-ME.html.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.