30 May 2000 External T.I. 1999-0009785 - Section 122.3 vacation

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:

1) Whether vacation time is included in the qualifying period for purposes of section 122.3.

2) Whether vacation pay can be considered as attributable to activities performed during the qualifying period.

Position:

1) Normal vacation taken after the commencement and prior to the completion of the foreign assignment would generally be included in the qualifying period.

2) Vacation pay that is reasonably attributable to vacation leave earned during the qualifying period would generally qualify.

Reasons:

1) Existing position.

2) It is reasonable to view vacation pay in respect of vacation earned during the course of the overseas contract to be income attributable thereto.

XXXXXXXXXX 								1999-000978
								Olli Laurikainen
Attention:  XXXXXXXXXX 

May 30, 2000

Dear Sirs:

Re: Section 122.3 of the Income Tax Act (the "Act")

This is in response to your letter dated August 24, 1999 wherein you request our views in reference to various issues associated with the above referenced provision. As agreed during our telephone conversation (XXXXXXXXXX-Laurikainen) May 18, 2000, we will respond to your letter in two parts. This letter will address your questions in reference to the issue of vacation.

You set out the following issues.

1) Where vacation time is taken by a particular employee during the course of a foreign assignment that otherwise satisfies the requirements of subsection 122.3(1) of the Act, will the vacation interrupt the foreign assignment for the purpose determining whether the foreign assignment qualifies as a period of "more than 6 consecutive months" as referred to in the preamble to section 122.3? If not, then will the vacation time be considered as part of the foreign assignment so that it would be included in determining whether the assignment lasted for "more than 6 consecutive months"? You request our view whether our answer would be different if the employee took a vacation upon the completion of the assignment as opposed to some time during the foreign assignment.

2) Where on the job demands on an employee prevent him from taking a vacation during a particular foreign assignment and he is immediately deployed in his employer's domestic operations upon his return from abroad, could the equivalent of the vacation time earned while he was employed abroad be added to the duration of the foreign assignment to determine whether the more than 6 month requirement in subsection 122.3(1) was satisfied?

3) Will vacation pay qualify as foreign income eligible for the deduction from tax under subsection 122.3(1) of the Act.

4) Can vacation cause an individual not to have performed all or substantially all of his duties employment outside Canada for the purposes of the test in paragraph 122.3(1)(b)?

Our Comments

It is our view that reasonable vacation taken during the course employment outside Canada will not interrupt a foreign assignment and will be included as part thereof, for the purposes of the more than 6 month test in the preamble to section 122.3 of the Act. Whether or not vacation can be considered to be reasonable will depend on industry practice, the nature of the work performed and the remoteness of the job site. Only vacation taken during the course of the assignment will qualify for inclusion as part of the foreign assignment. In other words, if the vacation is taken prior to the commencement, or after the completion, of the foreign assignment, it will not be considered as part of the foreign assignment in assessing whether the assignment lasted the requisite period of more than 6 consecutive months. It does not matter whether the employee spends his vacation in Canada or abroad.

The amount of vacation time earned during the foreign assignment is not relevant to the determination of whether the assignment lasted for more than 6 consecutive months. However, where the foreign assignment otherwise qualifies, remuneration received in respect of vacation leave that was earned over the course of the qualifying period would be considered part of the individual's income reasonably attributable to duties performed during the foreign assignment. Therefore, where it is reasonable to conclude that the remuneration is in respect of vacation earned during the foreign assignment and the remuneration falls into the appropriate year referred to in paragraph 122.3(1)(d) of the Act, it will qualify for inclusion in the computation of the deduction.

Vacation will generally not impact the issue of whether the individual would be considered to have "performed substantially all of the duties of the individual's employment outside Canada in connection with a contract" for the purposes of the test in paragraph 122.3(1)(b) of the Act. This is so because an employee, does not perform any duties of his employment while on vacation either in Canada or abroad. Therefore, it is our opinion that the measure of the "all or substantially" test is based on a comparison of the time actually worked outside Canada in connection with the contract for the individual's employer during the qualifying period as compared to the total time the individual actually worked (i.e. excluding vacation time off) in that same period.

We trust that this is the information you require.

Yours truly,

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

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