24 July 2002 Internal T.I. 2002-0137407 - 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 personnel agency carries on business outside Canada when it assigns its employees to perform services outside Canada for its client?

Position: Probably no.

Reasons: In the case of a personnel agency, the place where it carries on business may be different from the place where its employees are assigned to perform the employment duties.

July 29, 2002

	Marcel Querry	International Section
	Policies & Publications - Unit II	S. Leung
	Policy & Business Management Division	952-4666
	International Tax Directorate
	344, Slater Street, 6th Floor
		2002-013740

Overseas Employment Tax Credit ("OETC")

We are writing in response to your e-mail correspondence of April 29, 2002 in which you requested our comments on whether the employer in the situation outlined below would be considered to be carrying on business outside Canada for the purposes of subparagraph 122.3(1)(b)(i) of the Income Tax Act (the "Act").

The situation outlined in your e-mail is as follows:

1) AgencyCo is a corporation resident in Canada that operates as a placement agency which provides personnel services to its clients through its employees (unlike a head hunter type agency in which the agency is only responsible to find a person qualified for the job for its client and no more).

2) AgencyCo entered into a contract with CanOpco, a corporation resident in Canada which carried on business outside Canada under a contract with respect to activities ("qualifying activities") described in clauses A and B of subparagraph 122.3(1)(b)(i) of the Act, to provide qualified personnel services to CanOpco.

3) AgencyCo deals at arm's length with CanOpco.

4) Mr. X is an employee of AgencyCo who is assigned by AgencyCo to work for CanOpco. Mr. X remains an employee of AgencyCo during the period of such assignment.

5) Mr. X performed all or substantially all the duties of his employment outside Canada while on assignment to CanOpco in connection with CanoOpco's business carried on outside Canada with respect to qualifying activities.

You noted in your e-mail that we issued a memorandum on September 29, 1995 (file E9516517) (the "XXXXXXXXXX File") in which we opined that "[i]t is also a question of fact whether XXXXXXXXXX carries on business outside Canada by carrying out the terms of the Agreement. Again from the information we have at our disposal, it appears that XXXXXXXXXX carries on business in XXXXXXXXXX through the provision of services of its employees". In that case, XXXXXXXXXX is a placement agency resident in Canada which entered into a contract with a XXXXXXXXXX corporation (which is a foreign affiliate of a Canadian corporation not related to XXXXXXXXXX ) to provide qualified personnel (employees) to work for a third party in XXXXXXXXXX with respect to qualifying activities.

You also noted that "[t]o some degree, it reaches the intent under subsection 122.3(1.1) because, if we would ignore AgencyCo, Mr. X could be considered as an employee of CanOpco". We will discuss our understanding of the policy behind subsection 122.3(1.1) of the Act below.

Our Comments

Subsequent to the issuance of the XXXXXXXXXX File, we note that several court cases have been decided on the issue of "carrying on business outside Canada" in connection with the OETC, namely, Lopata (96 DTC 3272, TCC (informal procedure)), Godin (98 DTC 3396, TCC (informal procedure)), Betteridge (99 DTC 3486, TCC (informal procedure)), Timmins (99 DTC 5494, FCA), Gonsalves (2000 DTC 1491, TCC), Brown (2000 DTC 6410, FCA), and Fonta ([2001]FTR 47574). As a result of these court cases, we have reconsidered our position set out in the XXXXXXXXXX File in respect of the phrase "in connection with a contract under which the specified employer carried on business outside Canada" used in subparagraph 122.3(1)(b)(i) of the Act. Specifically, we now take the position that, in the case of a personnel agency, the place where it carries on business may be different from the place where its employees are assigned to perform their employment duties.

You may recall that our view expressed in the XXXXXXXXXX File was largely based on the general proposition that if the business is the provision of services, the business is carried on in the place where those services are performed. This general proposition is noted in paragraph 26 of IT-270R2, Foreign Tax Credit. However, some of the court cases noted above seem to suggest that this general proposition may not be true in certain situations. For example, in Betteridge, Judge Rip stated:

"[E]ven if I had found the University of Guelph did carry on business, I am satisfied that the University was not carrying on business in France. The mere fact that Dr. Betteridge went to France in furtherance of a contract between Canadian corporations, Semex and the University, does not mean that his employer, the University, was carrying on business in France. Subsection 122.3(1) requires that the business of the employer, not the employment of the employee, be carried on abroad. The research activity by Dr. Betteridge in France was in connection with a contract the University had with Semex in respect of a business, if any, carried on in Canada and not abroad. The mere fact that a business entity may send an employee abroad to do research or investigate a matter that concerns the employer does not necessarily lead to the conclusion that the employer is carrying on business abroad." (Emphasis added)

The underlined sentences above seem to suggest that, in certain situations, in answering the question where a business is carried on, there may be a difference between where the business of the employer is carried on and where the employment of the employee is performed.

By making this distinction, Judge Rip was able to conclude that the University of Guelph did not carry on business in France even though Dr. Betteridge performed services for the university (his employer) in France. However, as Dr. Betteridge went to France only to do research for his employer (a Canadian university), it is not clear whether the reasoning in that case would apply to the personnel agency situation outlined in your e-mail where the employees of the personnel agency perform all or substantially all of their duties outside Canada on behalf of a company that carries on qualifying activities.

This particular issue now seems to be resolved by the decision of the Tax Court of Canada in Fonta. (It is interesting to note that the judge, Lamarre Proulx, J., who decided Fonta is the same judge that concluded that Mr. Hinkley was an employee of Technican International, an employment agency, in Hinkley (91 DTC 1336, TCC). Judge Proulx was also aware of Betteridge because he cited certain sentences from Betteridge in Fonta.) In Fonta, the Appellant, Mr. Christian Fonta, was an employee of ATS Reliance, a personnel agency, who provided engineering services to Siemens Transportation System Inc. in the United States. In dismissing the appeal, Judge Proulx stated:

"The evidence showed that ATS acted as a specialized personnel agency for Siemens. It is questionable that such a business was carried on outside Canada. Moreover, it seems in law that such services are not services pertaining to subcontracting under an engineering contract. ATS did not perform part of Siemens' engineering contract outside Canada as a subcontractor."

Not only did Judge Proulx call into question whether ATS carried on business outside Canada, he also denied that ATS carried on business under a contract with respect to qualifying activities on the basis that ATS was not a subcontractor of Siemen's engineering contract. In other words, he seemed to put some restriction on the meaning of "with respect to [qualifying activities]" by insisting that ATS must be a real subcontractor of Siemens (i.e., the company that actually carried out the qualifying activities outside Canada), in order for ATS to be considered to be itself carrying on business outside Canada with respect to qualifying activities.

In Fonta, Judge Proulx also quoted from Annex 5 of the 1996 Budget, Supplementary Information, at pages 178-79, where it stated that the purpose of section 122.3 of the Act is to ensure that Canadian firms, employing Canadian staff, are in a position to compete against foreign firms in bidding on overseas work. It further stated that the OETC enables Canadian employers to reduce their employment costs with respect to foreign contract work, while maintaining the after-tax value of the remuneration their employees receive in connection with such work. It appears that Judge Proulx did not feel that this purpose was served in the Fonta case.

We understand that both Betteridge and Fonta are only lower court decisions (also, Betteridge was decided under informal procedure in the lower court) and may not carry too much weight, however, in our view the decisions are well-reasoned and are consistent with the underlying policy of section 122.3. XXXXXXXXXX

XXXXXXXXXX

Finally, we feel that subsection 122.3(1.1) of the Act has little relevance to the placement agency situation discussed in this memorandum. Our understanding is that that subsection was enacted specifically to deal with "incorporated employees", that is, where an individual who would otherwise be an employee of a person who is not a specified employer incorporates himself and has his company assign him to work for his former employer in order to qualify for the OETC. By so doing, the requirement of the "specified employer" is met. Subsection 122.3(1.1) of the Act was thus enacted to deny such an individual the OETC. In a situation like the placement agency situation described in your e-mail, just because subsection 122.3(1.1) of the Act may not apply, it does not mean that the employee is eligible for the OETC.

Furthermore, as we stated in the XXXXXXXXXX File, there is no provision in the Act to allow us to look through a placement agency to ascertain if there would be a specified employer where the workers are actually employees of the placement agency. Since in this case Mr. X is an employee of AgencyCo, we cannot simply ignore AgencyCo (by looking through it) for the purpose of the OETC and apply section 122.3 as if Mr. X were an employee of CanOpco.

This position is supported by the result of the Fonta case, which clearly indicates that it would have made a difference if the appellant in that case were an employee of Siemens rather than ATS. Had the appellant been considered an employee of Siemens (by looking through ATS), he would clearly not be eligible for the OETC because Siemens was not a specified employer. There would not be any need to consider whether ATS carried on business outside Canada and whether ATS was a subcontractor of Siemens and participated in Siemens' engineering contract outside Canada. The fact that Judge Proulx did consider those issues indicates that, generally, one cannot simply ignore or look through the placement agency in determining whether a person is or is not eligible for the OETC.

Summary

In summary, regarding the situation mentioned in your e-mail, we do not have enough information to make a determination as to whether AgencyCo carried on business outside Canada under a contract with respect to qualifying activities. However, based on the limited information provided, we are inclined to believe that AgencyCo did not carry on business outside Canada and thus Mr. X would not be eligible for the OETC. The contract that AgencyCo had with CanOpco under which AgencyCo agreed to provide personnel services to CanOpco's business carried on outside Canada, in and by itself, would not provide sufficient evidence to conclude that AgencyCo carried on or did not carry on business outside Canada. This is so whether the employment contract that Mr. X had with AgencyCo did or did not make reference to the contract that AgencyCo had with CanOpco with regard to Mr. X's foreign assignment. Based on the decision in Fonta, it also does not matter whether AgencyCo contracted with a Canadian corporation (CanOpco in this case) or with a foreign person (like that in the XXXXXXXXXX File or in Fonta) to provide personnel services. We feel that, based on the limited information provided, it would be difficult to say that AgencyCo carried on business outside Canada under a contract with respect to qualifying activities.

If you have any question regarding the above, please do not hesitate to contact us.

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 CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their database. 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. Request for this latter version should be made by you to Jackie Page at (819) 994-2898. The severed copy will be sent to you for delivery to the client.

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

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