21 October 2008 External T.I. 2008-0292471E5 - 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: Whether employment income earned by an individual through a Canadian resident corporation in which the individual is the sole shareholder and its only employee qualifies for the OETC.

Position: Depends on whether the individual would, but for the existence of the corporation, reasonably be regarded as an employee of a person or partnership that is not a specified employer.

Reasons: Subsection 122.3(1.1)

									2008-029247
XXXXXXXXXX 								A. Seidel
(613) 957-2058
October 21, 2008

Dear XXXXXXXXXX :

Re: Overseas Employment Tax Credit

This is in reply to your e-mail of September 9, 2008 wherein you requested our views as to whether an individual would be entitled to the overseas employment tax credit ("OETC") in the following circumstances:

• The individual is employed by a Canadian resident corporation that carries on a business of providing XXXXXXXXXX services.
• The individual is the corporation's only employee and its only shareholder.
• The individual performs all or substantially all of his/her duties of employment outside Canada.
• The corporation has entered into contracts with other corporations with which it deals at arm's length, that carry on business outside of Canada and that are engaged in XXXXXXXXXX

Our Comments

This Directorate does not provide assurances regarding the tax consequences relating to specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Although we cannot comment on your specific situation, we are prepared to provide the following general comments which we trust will be of some assistance.

An individual who is resident in Canada is entitled to claim the OETC for qualifying income from employment in circumstances where the individual:

(a) was employed by a specified employer (see definition below), other than for the performance of services under a prescribed international development assistance program of the Government of Canada;

(b) was employed in connection with a contract (or for the purpose of obtaining such a contract) under which the specified employer carried on business outside Canada with respect to the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources, with respect to any construction, installation, agricultural or engineering project or with respect to an activity performed under contract with the United Nations; and

(c) 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) 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.

For the purposes of the OETC, a "specified employer" is defined as:

• a person resident in Canada;
• a corporation that is a foreign affiliate of a person resident in Canada; or
• a partnership in which interests that exceed in total value 10% of the fair market value of all interests in the partnership are owned by persons resident in Canada or corporations controlled by persons resident in Canada.

Even if the requirements described in (a) to (c) above have been met, an individual's income from employment will not qualify for the OETC if:

(1) 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;
(2) the individual does not deal at arm's length with the employer or is a specified shareholder of the employer; and
(3) but for the existence of the employer, the individual would reasonably be regarded as an employee of a person that is not a specified employer.

In the situation described in your email, the employer (the corporation) carries on a business of providing services and does not employ in the business throughout the year more than 5 full-time employees. In addition, the individual is the only shareholder of the corporation and therefore does not deal at arm's length with the employer. The individual is also a specified shareholder of the corporation (i.e., a person who directly or indirectly owns not less than 10% of the issued shares of any class). Thus, the first two conditions are met.

It is a question of fact as to whether the third condition would be met in any particular case. In determining whether an individual would, but for the existence of the employer, reasonably be regarded as an employee of another person or partnership, the CRA will take into consideration all the facts and circumstances including:

• the level of control the payer has over the individual;
• whether the individual provides his or her equipment;
• whether the individual can subcontract the work or hire assistants;
• the degree of financial risk taken by the individual;
• the degree of responsibility for investment and management assumed by the individual;
• the individual's opportunity for profit;
• whether the payer is the only source of funds from which the individual is remunerated or whether individual has a number of customers; and
• any other relevant factors including contracts and supporting documentation.

For assistance in making this determination, we would refer you to our Guide RC4110, "Employee or Self-employed?" which is available on or website under "Forms and Publications".

We trust our comments have been of some assistance.

Yours truly,

Daryl Boychuk
Manager, International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch