1 May 2003 External T.I. 2002-0172925 - Non-Profit Organization - Business - OETC

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 the fact that two of the members of a partnership are non-profit organizations prevents an employee from claiming the benefit of section 122.3 of the Act.

Position: No

Reasons: Based on the Timmins case, it is our view that a non-profit organization can sometimes be said to carry on business with respect to certain of its activities, depending on the nature of those activities.

XXXXXXXXXX 2002-017292
Sophie Chatel
May 1, 2003

Re: Oversea Employment Tax Credit ("OETC") - Section 122.3 of the Income Tax Act (the "Act")

Dear XXXXXXXXXX:

We are writing in response to your email sent on November 7, 2002, and in follow-up to our telephone discussions (Chatel/XXXXXXXXXX). In your email, you requested our comments on the application of section 122.3 of the Act to a situation where an employee works overseas for a partnership, the interests in which are mainly owned by two not-for-profit organizations.

You referred to the following hypothetical situation:

1. Mr. X is employed by a partnership to work overseas for more than six consecutive months on an engineering project.

2. Mr. X is a Canadian resident and an arm's length person in respect of the partnership and the members of the partnership, and is not a specified shareholder of any of the members.

3. The engineering project is being carried on overseas by the partnership for a foreign government.

4. The members of the partnership are three entities - two of which are non-profit organizations and the third is a for-profit commercial corporation.

5. All three partners reside in Canada.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. 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 a specific taxpayer 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.

In your example, all the interests in the partnership are owned by persons resident in Canada, and thus the partnership qualifies as a "specified employer", as defined in subsection 122.3(2) of the Act, for the purposes of the OETC. Your concern, however, is whether the requirement under subparagraph 122.3(1)(b)(i) of the Act, that the specified employer has to carry on a business outside Canada, is satisfied where the specified employer is a non-profit organization or, in your case, a partnership where 2/3 of the interests are owned by non-profit organizations. For the purpose of our comments below, we assume that all the other requirements to obtain a deduction under section 122.3 of the Act are met.

In Timmins v. The Queen, 99 DTC 5494, [1999] 2 C.T.C. 133, it was held that the New Brunswick Department of Agriculture and Rural Development was carrying on business in Malawi for purposes of the individual taxpayer's entitlement to income tax deductions and credits claimed with respect to his overseas employment. The Federal Court of Appeal states:

[12] [I]t seems clear that even if it could be said that the Department was not carrying on a business in the ordinary sense, it was at least engaged in an "undertaking of any kind whatever," namely the provision of services under a contract for a fee. As such it was carrying on business under a contract as contemplated by ss. 8(10) and 122.3(1).

[13] ... Although the word "business" when used in the Act must generally envisage an activity capable of giving rise to profits, it does not require that this activity be undertaken or carried on for the "predominant" purpose of earning a profit. To incorporate such a requirement into the Act would severely curtail its reach insofar as the taxation of business profits is concerned.

Based on this case, it is our view that a non-profit organization can sometimes be said to carry on business with respect to certain of its activities, depending on the nature of those activities. If these activities are carried out regularly over a period of time, then the entity may be considered to carry on business with respect to those activities.

In your situation, we are of the view that it is possible for the partnership to be carrying on a business, even though the interests in the partnership are mainly owned by non-profit organizations. Whether or not the partnership carries on activities that are business activities is a question of fact that must be determined in each case.

We trust our comments are helpful.

Yours truly,

Jane Stalker
Section Manager
for Division Director
International Section
Income Tax Rulings Directorate
Policy and Legislation Branch