Principal Issues: [TaxInterpretations translation] Is the individual eligible for the Overseas Employment Tax Credit?
Position: No position. General comments.
Reasons: Question of fact.
XXXXXXXXXX 2007-024876 Sylvie Labarre, CA April 28, 2008
Dear Sir,
Subject: Overseas Employment Tax Credit
This is in response to your e-mail of 10 August 2007 in which you requested our opinion regarding your eligibility for the overseas employment tax credit ("OETC").
You are an employee of a corporation in which you are a shareholder. Your corporation provides project operations management services in the industrial sector. You are an engineer. Your corporation has received an offer from a XXXXXXXXXX engineering corporation to organize and participate in all stages of the commissioning of a new plant that XXXXXXXXXX corporation (or the US division of that Montreal corporation) is building in XXXXXXXXXX. In order to fulfill the contract it has received from the XXXXXXXXXX corporation, your corporation would send you to XXXXXXXXXX as an employee for approximately XXXXXXXXXX weeks. You anticipate that there will be some periods of return home for rest during those XXXXXXXXXX weeks.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that 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 we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
In a situation such as yours, you would have to determine whether subsection 122.3(1.1) of the Income Tax Act (the "Act") prevents you from claiming the OETC.
Under subsection 122.3(1.1), an individual is not entitled to an OETC in respect of employment income if all of the following conditions are satisfied
(a) the employer carries on a business of providing services and does not employ in the business throughout the year more than 5 full-time employees;
(b) the individual
(i) does not deal at arm’s length with the employer, or is a specified shareholder [(as defined in subsection 248(1))] of the employer, or
(ii) where the employer is a partnership, does not deal at arm’s length with a member of the partnership, or is a specified shareholder of a member of the partnership; and
(c) but for the existence of the employer, the individual would reasonably be regarded as an employee of a person or partnership that is not a specified employer.
Generally, a specified shareholder of a corporation in a taxation year means a person who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation. The definition "specified shareholder" in subsection 248(1) contains certain specific deeming rules regarding the ownership of shares, such as deeming a taxpayer to own each share of the capital stock of a corporation owned at that time by a person with whom the taxpayer does not deal at arm's length.
Once the proposed amendments to subsection 122.3(1.1) are enacted and receive Royal Assent, it will also be necessary to consider whether the individual is in the following situation:
- the individual's services are provided to a corporation, partnership or trust with which the employer does not deal at arm's length; and
- less than 10% of the fair market value of all issued shares of the corporation or interests in the partnership or trust, as the case may be, are held by persons resident in Canada.
We have assumed that you are a specified shareholder of your corporation or that you do not deal at arm's length with it. Also, according to what you have informed us, your corporation does not have more than five full-time employees. In addition, as we understand from the description of your corporation's activities, your corporation carries on a service business. Consequently, in order for subsection 122.3(1.1) not to apply to prevent you from claiming an OETC to which you would otherwise be entitled, you would need to establish that it would not be reasonable to consider you to be an employee of a person or partnership that is not a specified employer, but for the existence of your corporation.
As explained in paragraph 13 of Interpretation Bulletin IT-497R4, a specified employer, for OETC purposes, includes a person resident in Canada, a corporation that is a foreign affiliate of a person resident in Canada, or a partnership in which persons resident in Canada or corporations controlled by persons resident in Canada own more than 10% of the aggregate fair market value of all interests in the partnership.
If the XXXXXXXXXX engineering corporation to which you refer is a person resident in Canada, it could qualify as a specified employer. In this case, even if it were reasonable to consider you to be an employee of XXXXXXXXXX engineering corporation but for the existence of your corporation, subsection 122.3(1.1) would not apply any more than if it were not reasonable to consider you to be an employee of a person or partnership other than your corporation.
In addition to not being precluded by subsection 122.3(1.1), an individual must satisfy the following conditions to qualify for the OETC:
(a) be employed by a specified employer, other than for the performance of services under a prescribed international development assistance program of the Government of Canada;
(b) be employed in connection with a contract under which the specified employer carried on business outside Canada with respect to a resource, construction, installation, agricultural, engineering or prescribed activity (or for the purpose of obtaining such a contract); and
(c) have performed all or substantially all the employment duties (in connection with a contract described in (b) above) outside Canada.
The conditions described in (a) to (c) above must exist for a period of more than six consecutive months
- within the year,
- beginning in the year and ending in a subsequent year, or
- ending in the year and that began in a previous year.
The OETC will not necessarily be denied because the individual has not actually been outside Canada or at workplaces outside Canada for the entire qualifying period. During a period of absence from a work location outside Canada, an employee may take a holiday, consult with the specified employer in Canada, or perform the duties of employment in Canada and still qualify for the OETC, provided that throughout the qualifying period, the employee performs substantially all (90% or more) of the duties of employment outside Canada.
Determining whether the "all or substantially all" test is satisfied is a question of fact that can only be established after an examination of all the circumstances of a particular situation. However, generally the determination is made by comparing the time spent performing the qualifying activities with the total time spent performing all the duties of the employment during the same period.
In terms of qualifying activities, the information you have provided suggests that this could be a construction or installation project or an engineering project. Those terms are not defined in the Act and the ordinary meaning of those words must be used to determine whether the condition is satisfied. A review of the contract between the parties and additional information on the project may be required to definitively conclude whether the employer's activities qualify.
Typically, the specified employer itself directly carries on the qualifying activities described above, which permits its employees to claim the OETC. However, assuming all other requirements of section 122.3 are satisfied, employees of a specified employer who performs an activity outside Canada other than a qualifying activity are also permitted to deduct an OETC. Often referred to as a subcontractor, a specified employer of this type is one that has a contract or subcontract to provide its services through its employees to another person in respect of a qualifying activity that that person carries on outside Canada or in respect of a qualifying activity that that person has subcontracted to a third party.
As you can see, your eligibility for the OETC will depend on the assessment of the facts of your particular situation. However, we hope you find these comments helpful. If, after reading the above general comments and Interpretation Bulletin IT-497R4, you are unable to determine whether you are entitled to claim the OETC, you may wish to contact the Tax Services Office serving your area so that it can analyze all the documents and facts related to your particular situation.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
Encl.