28 October 1998 Internal T.I. 9818357 - 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: whether a XXXXXXXXXX operated by a non-resident employer is entitled to the OETC.

Position: Not likely

Reasons: The non-resident employer does not appear to qualify as a "specified employer". Even if the employer qualified as a "specified employer", it is a question of fact whether the criteria under subsection 122.3(1) are met in any particular case.

									October 28, 1998

	Saint John TSO						Income Tax Rulings
  	International Audit Division					and Interpretations
 				.					Daniel Wong
	Attention :Shrikant Mehta					(613) 954-4949

									981835

Eligibility for Overseas Employment Tax Credit

We are writing in response to your memorandum of July 10, 1998 wherein you requested our opinion with respect to certain issues related to the Overseas Employment Tax Credit (“OETC”) that were raised in a letter dated July 2, 1998 from XXXXXXXXXX (“Inquirer”) to the International Audit Division of the Saint John TSO.

FACTS

One of the Inquirer’s clients, a placement agent (“Placement Agent”), is a Canadian resident corporation. Its core business is locating and placing qualified XXXXXXXXXX operated by non-resident employers.

The non-resident employers are seeking

XXXXXXXXXX.

The non-resident employers’ activities consist of: performing one or more of the following operations:

XXXXXXXXXX

We understand that the non-resident employers are the employers of the XXXXXXXXXX and principals of the Placement Agent.

The Placement Agent is now asked by the non-resident employers to provide payroll services on their behalf with respect to the remuneration paid by them to the XXXXXXXXXX employees, in addition to its normal placement services. The Placement Agent has enquired whether the XXXXXXXXXX employees are entitled to the OETC, and if so, whether it will have an impact on the amount of tax that the Placement Agent will have to withhold on such remuneration.

COMMENTS

In order to qualify for the OETC under subsection 122.3(1) of the Income Tax Act (the “Act”), an individual resident in Canada must, throughout any period of more than 6 consecutive months, have been employed by a specified employer and performed all or substantially all the duties of employment outside Canada in connection with a contract under which the specified employer carried on business outside Canada with respect to any construction, installation, agricultural or engineering activity, or with respect to the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources.

As noted in paragraph 13 of Interpretation Bulletin IT-497R3 a “specified employer” for purposes of the OETC (refer to subsection 122.3(2) of the Act) includes:

(i) a person resident in Canada;

(ii) a partnership, provided that 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; or

(iii) a corporation that is a foreign affiliate, defined in paragraph 95(1)(d), of a person resident in Canada.

Based on the limited information provided it is not clear that any of the non-resident employers will qualify as a specified employer. Therefore, it appears that the XXXXXXXXXX employees will not be entitled to the OETC. In our view the fact that this arrangement may change such that the Placement Agent will provide payroll services will not affect this conclusion. What is relevant is who is the employer of the XXXXXXXXXX employees and whether such employer is a specified employer as described in (i), (ii) or (iii) above.

Even if the employers of the XXXXXXXXXX employees qualified as a “specified employer”, all or substantially all of the XXXXXXXXXX employees’ duties would have to be performed in connection with a contract under which the specified employer carried on business outside Canada with respect to a qualifying activity. Whether or not these conditions are met in any particular case is a question of fact that can only be determined by an examination of all of the relevant facts relating to the particular situation. Paragraphs 6, 7, 8 and 15 of IT-497R3 include some discussion of these factors which might be of assistance to the Inquirer.

Qualifying activities of the employers are described in paragraph 122.3(1)(b) of the Act. In our view, as long as the activities of the employers are in connection with a contract with respect to the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources; any construction, installation, agricultural or engineering activity; or any prescribed activity as described in the Income Tax Regulations (“Regulations”), they qualify as qualifying activities under paragraph 122.3(1)(b). The expressions "in connection with" and "with respect to" are considered to have very broad meanings such that the activities described in (a) to (f) above would appear to be qualifying activities. The activities that are engaged by the employers in connection with the XXXXXXXXXX, as described in (g) above, do not appear to qualify as qualifying activities.

In the event that the employers’ activities consist of both qualifying and non-qualifying activities, it will be necessary to establish that the XXXXXXXXXX employees performed all or substantially all their duties in connection with the qualifying activities for them to be entitled to the OETC. Such a determination involves a question of fact that can be determined only upon an examination of all of the relevant facts surrounding the particular circumstance. It is also the Department’s view that non-operating support personnel, who otherwise meet the criteria set out in section 122.3 of the Act and who were employed by a specified employer in connection with a contract under which the specified employer carried on a business outside Canada in a qualified activity, will be eligible to claim the OETC. Consequently, provided that the criteria are otherwise met, the positions of XXXXXXXXXX would all appear to be eligible for OETC. However, we should once again stress that we believe that the non-resident employers will not likely qualify as specified employers.

As the Placement Agent will become the agent of the non-resident employers with respect to the remuneration paid by the non-resident employers to the XXXXXXXXXX employees, it will be obligated to withhold tax on such remuneration on behalf of the said employers under subsection 153(1) of the Act and subsection 110(1) of the Regulations, and to remit them to the Receiver General in accordance with section 108 of the Regulations. It should be noted that the requirements for withholding premiums under the Canada Pension Plan and the Employment Insurance Act are different. You may wish to consult with your Source Deductions Division with respect to these items.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

We trust that our comments will be of assistance.

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch