10 December 2002 External T.I. 2002-0170495 - OETC - eligibility of wholly-owned sub

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: Whether employees transferred from a Canadian employer to an XXXXXXXXXX subsidiary of a Canadian corporation are eligible for the overseas employment tax credit.

Position:     		Yes, provided all other requirements are met.

Reasons: The definition of "specified employer" includes foreign affiliates. Employees appear to have a qualifying period with each employer.

XXXXXXXXXX 2002-017049
T. Cook
December 10, 2002

Dear XXXXXXXXXX:

Re: Overseas Employment Tax Credit ("OETC")

We are writing in reply to your letter of October 25, 2002, in which you requested our opinion regarding the availability of the OETC in the following circumstances. XXXXXXXXXX a corporation that we understand is resident in Canada for purposes of the Income Tax Act (the "Act"), has a number of wholly-owned subsidiaries. These include XXXXXXXXXX a corporation that we understand is resident in Canada for purposes of the Act, and XXXXXXXXXX, a corporation that we understand is not resident in Canada for purposes of the Act.

XXXXXXXXXX. These crews will continue to work from the operating base for more than six consecutive months during each calendar year. The members of these XXXXXXXXXX crews are all residents of Canada for purposes of the Act.

In particular, you have asked us:

1. Does XXXXXXXXXX qualify as a "specified employer" for OETC purposes?

2. Will the XXXXXXXXXX crews still qualify for the OETC credit?

Our Comments

Your letter describes factual situations involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on the tax consequences applicable to a specific taxpayer in respect of particular circumstances other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.

Definition of Specified Employer

Subsection 122.3(2) of the Act provides that "specified employer" means, among other things, "a corporation that is a foreign affiliate of a person resident in Canada". Subsection 248(1) of the Act provides that for purposes of the Act, "foreign affiliate" has meaning assigned by subsection 95(1) of the Act. A non-resident corporation in which a resident of Canada holds more than 10% of any class of shares will satisfy the definition of foreign affiliate in subsection 95(1). Therefore, where a corporation resident of Canada holds 100% of the shares of a foreign subsidiary, that subsidiary will be a foreign affiliate for purposes of subsection 95(1). The foreign subsidiary will also be a specified employer for purposes of section 122.3.

Change in Employer

In Rooke v. The Queen, 2002 FCA 393, the Federal Court of Appeal recently held that in order to be eligible for the OETC, an individual must meet all of the following conditions:

1. The individual was resident in Canada in the tax year in question.

2. The individual was employed by a "specified employer".

3. The individual's employment for that specified employer was for something other than the performance of services under a prescribed international development assistance program of the Government of Canada.

4. The individual performed substantially all of the duties of his or her employment (a) outside Canada; and (b) in connection with one or more activities described in subparagraph 122.3(1)(b)(i) or (ii) of the Act.

5. Conditions 2, 3 and 4 above were met for a period of more than six consecutive months commencing any time before the end of, and including any part of, the tax year.

In particular, the Federal Court of Appeal held that it was not necessary for an employee to be employed abroad for a period of six consecutive months, but rather only that the employee be employed for six consecutive months in a position for which "all or substantially all" of the duties are performed outside Canada. Consequently, where an employee ceases employment with one specified employer and immediately begins an employment with another specified employer, the employee will have a separate qualifying period with each employer if the employee is employed for six consecutive months with each employer and "all or substantially all" of the employee's duties for each employer are performed abroad. There is no requirement in section 122.3 for the employee to be physically abroad performing employment duties for six consecutive months for each employer.

Therefore, it is our view that as long as all the requirements of section 122.3 as described above are met, a change of employer alone should not affect the eligibility of an individual for the OETC. 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