4 November 2002 External T.I. 2002-0148385 - OETC, Commuters

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 CCRA.

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

Principal Issues: (1) Is an employee of a specified employer who worked at a work site outside Canada for a period of more than 6 consecutive months, commuting to the work site each day for 5 days a week, working at such site for the full day, and returning to his or her home each evening eligible for the overseas employment tax credit ("OETC")? (2) Other general questions on the OETC.

Position: (1) Yes, assuming that throughout that "qualifying period" the employee performed all or substantially all (that is, at least 90%) the duties of his or her employment: (i) outside Canada; and (ii) in connection with a contract under which Canco carried on business in the U.S. with respect to a "qualifying activity". However, it is not clear whether this conclusion is consistent with the policy intent of section 122.3 of the ITA. (2) See attached letter.

Reasons: (1) All the requirements for the OETC under section 122.3 of the ITA appear to be satisfied; the daily commute from Canada to the work site outside Canada and then back to Canada each evening does not appear to preclude the employee from having a "qualifying period". (2) See attached letter.

XXXXXXXXXX 2002-014838
S. Wong
November 4, 2002

Dear XXXXXXXXXX:

Re: Overseas Employment Tax Credit

We are writing in reply to your letter of June 13, 2002 requesting our views on the following questions.

Question 1

You have asked for our views as to whether certain employees of XXXXXXXXXX ("Canco"), a Canadian-resident corporation located near XXXXXXXXXX, Ontario which provides XXXXXXXXXX and related services to clients in Canada and in New York state are eligible for the overseas employment tax credit (the "OETC") under section 122.3 of the Income Tax Act (the "Act"). We understand that these employees provide contractual services to clients in New York state on Canco's behalf. These employees work for a period of more than 6 consecutive months in New York state but they commute to their New York state work site each day for 5 days a week, work at such site for the full day and return to their homes in Canada each evening after work.

Question 2

You have asked us what is considered to be a break in the "qualifying period" for purposes of section 122.3 of the Act. Specifically, you described a situation where an employee described in Question 1 above worked at the New York state work site for 5 months, returned to Canco's office in Canada to work for a period of at least one week and then returned to the New York state work site for the remainder of the year.

Question 3

You referred to paragraph 19 of Interpretation Bulletin IT-497R3, "Overseas Employment Tax Credit" in which it is stated that the tax credits provided under section 122.3, the OETC, and subsection 126(1), the foreign tax credit for non-business income, are optional. You have asked us to confirm that claiming the OETC is optional to an individual even if the individual's employment meets all the criteria for the OETC.

Question 4

Finally, you have asked us to confirm that if Canco were to contract with an independent consultant to perform services in New York state on Canco's behalf, such an independent consultant would not be eligible to claim the OETC, even if the work otherwise meets the criteria for the OETC.

Our Comments

The particular situations outlined in your letter appear to be factual situations, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve specific taxpayers and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Section 122.3 of the Act provides that there may be deducted from the amount that would otherwise be an individual's tax payable for a taxation year, the OETC as calculated under that section, provided that the individual:

1. is resident in Canada in the year;

2. was employed by a "specified employer" (generally a person resident in Canada or a corporation that is a foreign affiliate of a person resident in Canada) throughout any period of more than six consecutive months (the "qualifying period") that commenced before the end of the year and included any part of the year, other than for the performance of services under a prescribed international development assistance program of the Government of Canada; and

3. throughout that "qualifying period" performed all or substantially all (i.e., more that 90%) the duties of his or her employment outside Canada in connection with a contract under which the specified employer carries on business outside Canada with respect to:

a) the exploration for or exploitation of petroleum, natural gas or other similar resources,

b) any construction, installation, agricultural or engineering activity, or

c) any prescribed activity (i.e., an activity performed under contract with the United Nations), or

for the purpose of obtaining, on behalf of the specified employer a contract to undertake any of these activities ("qualifying activities").

Question 1

Based on the information you have provided, it appears that an employee of Canco who commutes to work at a New York state work site every day for 5 days every week and return to his or her home in Canada each evening would meet the following criteria for the OETC:

1. While the residence status of an individual can only be determined on a case by case basis after taking into consideration all of the relevant facts (please refer to Interpretation Bulletin IT-221R3, "Determination of an Individual's Residence Status" which is available on our website at www.ccra-adrc.gc.ca for a detailed discussion of such facts), it appears that an employee who commutes to work in New York state but returns to his or her home in Canada each night after work would most likely be considered factually resident in Canada.

2. The employee was employed by Canco, a corporation resident in Canada and therefore a specified employer.

3. Assuming that the employee worked for a period of more than 6 consecutive months in New York state, it appears that the employee would have a "qualifying period". Under section 122.3 of the Act, the fact that the employee commuted to the New York state work site on a daily basis would not preclude the employee from having a "qualifying period".

Thus, assuming that throughout that "qualifying period" the employee performed all or substantially all (that is, at least 90%) the duties of his or her employment: (i) outside Canada; and (ii) in connection with a contract under which Canco carried on business in the U.S. with respect to a "qualifying activity", it appears that the employee would be eligible to claim the OETC under the current provisions of section 122.3 of the Act.

Question 2

As stated in paragraph 11 of IT-497R3, an individual's entitlement to the OETC will not necessarily be denied because the individual was not actually outside Canada or at the work location(s) for the entire "qualifying period". Periods of vacation or consultation with the employer will not be considered to interrupt the "qualifying period", provided they are reasonable. This will depend on the facts of each case, including the relevant industry practice, the nature of the work performed and the remoteness from any established community.

During a period of absence from the work location, an employee may perform duties of employment in Canada and still remain eligible for the OETC provided that throughout the "qualifying period" substantially all (i.e., at least 90%) of the employment duties are performed outside Canada and in connection with a contract under which the employer carried on business outside Canada with respect to a "qualifying activity". The measure of the substantially all test should be based on the comparison of the time actually worked outside Canada for the specified employer during the "qualifying period" as compared with the total time the employee actually worked (that is, excluding reasonable vacation and days off that are considered part of the "qualifying period) in the same "qualifying period".

In the situation you have described, assuming that the employee's return to Canco's office in Canada to work for at least a week is reasonable in light of industry practice, the nature of the employee's duties and the close proximity of Canco's office in Canada to the New York state work site, such return would not be considered to interrupt the "qualifying period".

However, as indicated above, the employee still has to meet the substantially all (i.e., at least 90%) test in order to be eligible for the OETC. That is, the total amount of time actually spent in Canada by the employee performing the duties of employment for Canco (including the fulfillment of temporary tasks unrelated to the foreign project) during the "qualifying period" cannot exceed 10% of the total time the employee actually spent in the performance of employment duties in the same "qualifying period". It appears that this substantially all test would be met if the employee were to work at a New York state work site for five months in connection with a contract under which Canco carried on business outside Canada with respect to a "qualifying activity", return to work at Canco's office in Canada for a week and then return to the New York state work site to work on that contract for the remainder of the year.

Question 3

As indicated above, section 122.3 of the Act provides that an individual may deduct from tax otherwise payable for a year the OETC calculated under that section, provided that the individual meets all the criteria set out above. We confirm that, due to the permissive language used in that section, an individual may choose not to claim the OETC, even if the individual meets all the criteria for the OETC.

Where the individual pays tax to a foreign government on foreign employment income, the individual may also claim a foreign tax credit for non-business income tax under subsection 126(1) of the Act. (Please refer to Interpretation Bulletin, IT-270R2, "Foreign Tax Credit" which is available on our website at www.ccra-adrc.gc.ca for a detailed discussion of the criteria for and the calculation of the foreign tax credit.) However, to the extent that a portion of the individual's qualifying foreign employment income is used to calculate an OETC claimed by the individual, it may not be used to determine a foreign tax credit. Thus, where it is more beneficial for an individual to claim the foreign tax credit, the individual may choose not to claim the OETC.

Question 4

We confirm that, as stated in paragraph 5 of IT-497R3, individuals are not eligible for the OETC in respect of self-employed income. Accordingly, an independent consultant contracted by Canco to perform services in New York state earning self-employment income would not be eligible for the OETC. We note that the question of whether an individual is an employee earning employment income or an independent contractor earning self-employed income is a question of fact which would require a review of all the relevant facts, including the relevant contract and facts concerning the actual performance of the individual's duties.

We trust that our comments will be of assistance to you.

Yours truly,

Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch