12 September 2007 External T.I. 2007-0219991E5 - Overseas employment tax credit

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: Eligibility to the overseas employment tax credit.

Position: General comments.

Reasons: Insufficient information given by the taxpayer. A detailed analysis would be necessary.

XXXXXXXXXX 	2007-021999
		Sylvie Labarre, CA
September 12, 2007

Dear Sir:

Re: Overseas employment tax credit

This is in reply to your electronic message of January 9, 2007 in which you requested our opinion on your eligibility to the overseas employment tax credit (OETC). We apologize for the delay in responding.

You are an employee of a corporation that has operations in Canada and in the United States. You have been asked by your employer to relocate to the United States for an eighteen month period but you will remain a Canadian employee and will be paid in Canadian dollars.

The corporation is installing a software upgrade and is requiring your assistance with the building and testing of certain functions. After that building and testing stage, you will train people to complete tasks using the new system.

You have not decided if you will keep your Canadian residence but your family will be moving to the United States while you work there.

Our comments

Your request relates to a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5. However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's views must be made to a Tax Services Office. We can, however, provide the following general comments.

In order to qualify for the OETC, the conditions described in subsection 122.3(1) of the Income Tax Act (the "Act") have to be satisfied. These conditions are described in Interpretation Bulletin IT-497R4 that is enclosed.

The OETC is only available to individuals who are resident or deemed resident in Canada for any part of a taxation year.

To qualify for the OETC, an individual must:

(a) be employed by a specified employer (generally, a resident of Canada), 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 on a resource, construction, installation, agricultural, engineering or prescribed activity (or for the purpose of obtaining such a contract);

(c) have performed all or substantially all the employment duties (done 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 that six consecutive months.

A specified employer, for OETC purposes, is described in subsection 122.3(2) of the Act and a corporation is a specified employer only if it is a person resident in Canada or if it is a foreign affiliate of a person resident in Canada. If your employer is not a resident in Canada and none of the shares of your employer are held directly or indirectly by a person resident in Canada, your employer is not a specified employer (the employer is not a foreign affiliate of a person resident in Canada). You will not be entitled to claim the OETC if you are not employed by a specified employer. Paragraphs 13 to 16 of IT-497R4 provide information on the meaning of "specified employer".

Except as provided in paragraph 8 of IT-497R4, the qualifying activities mentioned in paragraph (b) above must be those of the specified employer and not that of the employee. It is the CRA's position that an employer does not carry on business in another country with respect to one of the specified types of qualifying activities unless such activity is the primary (that is more than 50%) and most important activity of the employer in connection with the particular contract. Generally, such a determination would entail an assessment of the relative weight of each activity of the project. The amount of time spent on specified activities as opposed to other types of activities, as well as the portion of the income generated by the project that is attributable to the specified activities, can be looked at to determine whether the specified activities are the primary and main activity of a particular project. In the field of computer software, it is possible that the contract includes engineering or installation activities but it may also include other activities.

As you may have noted, the information that you provided in your letter is insufficient to determine whether you have the right to claim the OETC and a detailed analysis of all the relevant facts would have to be done by a Tax Services Office.

We trust the above comments will be of some assistance.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

Encl.