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.
Principal Issues: Whether a Canadian corporation would be considered to carry on business outside Canada with respect to a construction, installation or engineering activity in a particular situation.
Position: No definitive answer.
Reasons: Question of fact. Some of the activities undertaken under a contract seems to qualify as construction, installation or engineering activities while others may not qualify. Where a contract encompasses "construction, installation and engineering activities" as well as other types of activities that are not qualifying activities for the purpose of subparagraph 122.3(1)(b)(i) of the Act, it is our opinion that such a contract should be regarded as qualifying under clause 122.3(1)(b)(i)(B) of the Act only if construction, installation and engineering are the primary and most important activities of the contract.
XXXXXXXXXX 2005-014492
Sylvie Labarre, CA
February 6, 2008
Dear Madam:
Re: Overseas Employment Tax Credit ("OETC")
This is in reply to your letter of July 29, 2005 in which you requested our views on whether a Canadian corporation would be considered to carry on business outside Canada with respect to a construction, installation or engineering activity in a particular situation. We apologize for the delay in responding.
In the particular situation, the corporation resident in Canada would bid for contracts that could include any one or all of the following activities: the construction of a specialized building or of part of such a building; the provision of assistance in the selection of the equipment for the building and in the use and installation of the new equipment; the development and installation of software; the creation of an IT link for a specific purpose related to the field of activity of the client; the assessment, modification or development of management models for the management of the facilities in the field of activity of the client, the provision of training in respect of the management models.
Professionals in the field of activity of the client (which is not the construction, installation or engineering field) and management professionals may have to remain in the foreign country for five to eight years after the initial construction and installation has taken place, until local professionals can take over. Such services would generally be part of the initial contract to build the specialized building or develop a management model, as the case may be.
Your request relates to a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5. However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's views must be made to the International Tax Services Office. We can, however, provide the following general comments.
In order to qualify for the OETC, the conditions described in subsection 122.3(1) of the Income Tax Act (the "Act") have to be satisfied. One of the conditions is that all or substantially all of the individual's employment duties must be performed outside Canada in connection with a contract under which the employer carried on business outside Canada with respect to a qualifying activity or for the purpose of obtaining a contract for the specified employer to undertake a qualifying activity. The qualifying activities are described in subparagraph 122.3(1)(b)(i) of the Act.
In your particular situation, it seems that the issue centers on whether the activities undertaken under a particular contract would be considered a construction, installation or engineering activity for purposes of clause 122.3(1)(b)(i)(B) of the Act.
Since the Act does not define the expressions used in clause 122.3(1)(b)(i)(B) of the Act, it follows that their ordinary or common meaning should prevail.
The Gage Canadian Dictionary defines engineering as "the application of science to such practical uses as the design and building of structures and machines, and the making of many products of modern technology" and defines install as "put in position for use" or "put in a place or position; settle".
The Canadian Oxford Dictionary (Second Edition) defines engineering as "the application of science for directly useful purposes, as construction, propulsion, communication, or manufacture" and defines install as "place (equipment, machinery, etc.) in position ready for use".
The Merriam Webster's Collegiate Dictionary (Tenth Edition) defines engineering as "the application of science and mathematics by which the properties of matter and the sources of energy in nature are made useful to people" and defines install as" to set up for use or service".
In City of Winnipeg v. Brian Investments Ltd., (1952) 60 Man R. 416 (C.A.), at 439, Coyne JA made the following comments regarding the meaning of the term "install":
"it would seem that "install" cannot properly be used where a chair or desk or rug is brought into a room and left there; nor does it apply to a portable electric heater or radio or to a stove, whether electric or other, which a tenant brings in and is entitled to take away again with him, or to any other thing that remains personal property in the general acceptance of that term. "Install" would seem to connote the doing of something of some complexity, difficulty and importance, probably requiring some skill, involving the integration of an article or articles into the building, or machine in which the installing takes place, and causing a change of some importance in the building or machine."
In Shane C. Gabie v. The Queen (TCC), 98 DTC 2207, Justice Rip made the following comment regarding the meaning of engineering:
"Engineering today includes more than a "hands-on" type of activity resulting in a physical attribute, as submitted by counsel for the respondent. The increasing flow of information and the commercial reality of the modern world has made the development of "databanks" and "integrated systems" important in the construction of bridges, sanitation systems, buildings, roads, hydro, hydraulic and other projects that are traditionally thought of as engineering projects and their development, as explained by Mr. Gabie, constitutes an independent engineering activity."
In the situation mentioned above, some of the activities undertaken under a contract would certainly qualify as construction, installation or engineering activities such as the construction of the building, the selection and installation of the equipment, the development and the installation of the software. A review of all the relevant facts would be required to determine the qualification of other activities such as the assessment and the development of the management models.
Furthermore, with respect to the situation outlined in your request, it appears that, sometimes, a contract could be viewed as requiring both types of activities: construction, installation or engineering activities and other types of activities.
Where a contract encompasses "construction, installation and engineering activities" as well as other types of activities that are not qualifying activities for the purposes of subparagraph 122.3(1)(b)(i) of the Act, it is our opinion that such a contract should be regarded as qualifying under clause 122.3(1)(b)(i)(B) of the Act only if construction, installation and engineering are the primary and most important activities of the contract. Generally, such a determination would entail an assessment of the relative weight of each activity of the contract. The amount of time spent on construction, installation and engineering activities as opposed to other types of activities, as well as the portion of the income generated by the contract that is attributable to construction, installation and engineering activities, can be looked at to determine whether construction, installation and engineering are the primary and main activities (more than 50%) of a particular contract.
If the construction, installation or engineering activities are not the primary and most important activities of the Canadian corporation in connection with the particular contract, the employees performing the duties outside Canada cannot claim the OETC provided for in section 122.3 of the Act as at least one of the requirements of section 122.3 of the Act is not met.
We trust the above comments will be of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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