22 November 2000 External T.I. 2000-0030765 - 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 the 6 consecutive month test in section 122.3 could be satisfied notwithstanding that the employee performed services in connection with two contracts and returned to Canada in the interim.

Position: Yes provided that it was anticipated at the completion of the first assignment that the employee would participate in the second and provided the requisites of subsection 122.3(1) are otherwise satisfied.

Reasons: The application of subsection 122.3(1) to such case would primarily be limited by the requirement that during the relevant period the employee performed all or substantially all of his duties of employment outside Canada in connection with a qualifying contract.

XXXXXXXXXX 								2000-003076
						Olli Laurikainen
Attention:  XXXXXXXXXX 

November 22, 2000

Dear Sirs:

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

This is the second part of our response to your September 20, 1999 letter wherein you request our views on various issues associated with the above referenced provision. In addition, your second letter of June 15, 2000 requests that we reconsider a position taken in our first letter to you dated May 30, 2000.

You request our view in reference to the following issues not considered in our May 30, 2000 letter.

1) An employee works abroad in country A for a period of four months at the end of which he is immediately assigned to work abroad on another foreign project in country B for a period of three months. The employee returns to Canada for a short time between the two foreign assignments to perform preparatory work and co-ordination on the second project. Will the two assignments combine to meet the more than six consecutive month minimum requirement of foreign employment to qualify for overseas employment tax credit (the "OETC")? You also request advice on the completion of the form T626 in a case involving two contracts.

2) In the event that an employer is granted permission to reduce deductions at source for employees with foreign assignments of more than six consecutive months, is it possible that the employer may have a tax liability if the assignment ends early (i.e. before the more than six consecutive month minimum) or if the employee is denied a part or all of the estimated OETC?

3) Will the CCRA allow an employee's federal income tax deduction at source to be reduced taking into account the foreign taxes as well as the estimated OETC where an employee works on qualifying projects abroad and the employer is required to remit income taxes to the foreign country on behalf of the employee.

In addition to the above queries you request that we reconsider a position set out in our letter to you dated May 30, 2000 that vacation taken after the completion or prior to the commencement of a foreign assignment would not be included in the qualifying period for the purposes of the OETC.

Our Comments

1) The fact that the employee performs his duties of employment in connection with more than one contract does not in and of itself disqualify an OETC claim under the provisions of subsection 122.3(1) of the Act. However, in order to qualify, the time period in question (including the time period in between contracts) has to be "more than 6 consecutive months" and all or substantially all of the employee's duties of employment during the period under consideration, including the period in between contracts must be performed both outside Canada and in connection with a contract referred to in subparagraph 122.3(1)(b)(i) of the Act. The reference to "all or substantially all" is interpreted to mean that 90% or more of the employee's duties of employment must qualify. Therefore provided that the duties performed in Canada, whether in connection with a qualifying contract or not, do not make up more than 10% of the employee's total duties of employment during the relevant period and the period is more than 6 consecutive months in length, the period will qualify under subsection 122.3(1) of the Act. We would note that if the total period under consideration is only marginally more than 6 months (e.g. 27 weeks), duties of employment performed over the course of only 3 weeks in Canada would disqualify the period for the purposes of subsection 122.3(1) of the Act.

In the event that the second overseas contract is not in place at the time the first contract ends or if such a contract is in place but the particular employee does not know with any certainty at that time whether he will be returning to work offshore on the second contract, the qualifying period would be considered to have been interrupted on the employee's return to Canada following the completion of his duties on the first contract.

As indicated during our telephone conversation (XXXXXXXXXX/Major), questions concerning the completion of the form T626 should be directed to the Montreal Tax Services Office. We suggest that you contact Monique Lecompte at (514)283-2158.

2) As indicated during our telephone conversation (XXXXXXXXXX/Major), permission to reduce withholding is granted on an administrative basis. Therefore the consequences of the employment later failing to qualify under subsection 122.3(1), would also be dealt with administratively. Again we suggest that you contact Monique Lecompte at the Montreal Tax Services Office.

3) As a result of the application of subclause 126(1)(b)(i)(E)(II) of the Act, an employee is generally not entitled to a foreign tax credit under subsection 126(1) in respect of foreign tax on income that qualifies for a credit under subsection 122.3(1) of the Act. A reduced foreign tax credit and an OETC may nevertheless be available to a particular individual due to the limits placed on the OETC by paragraphs 122.3(1)(c) and (d) of the Act. However, since reduced withholdings is an administrative matter, we would defer to the Montreal Tax Services Office for a response to your question whether both credits would be taken into account in determining the employer's withholding obligations.

Finally, in reference to your request that we reconsider a position taken in our letter of May 30, 2000, we remain of the view that only reasonable vacation taken during the course employment outside Canada will not interrupt a foreign assignment for the purposes of the more than 6 consecutive month test in the preamble to section 122.3 of the Act. It does not matter whether the employee spends his vacation time in Canada or abroad. However, 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.

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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