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 Mr. A is entitled to the overseas employment tax credit ("OETC") in subsection 122.3(1) of the Act?
Assuming the CIDA allowance is eligible under subparagraph 6(1)(b)(iii) of the Act, would the employer's allowance also be tax-free?
Position:
No.
No.
Reasons:
The "all or substantially all test" in paragraph 122.3(1)(b) of the Act is not met.
The allowance received by M. A from his employer and relating to the non-CIDA project would not be received by Mr. A "as a person described in paragraph 250(1)(b), (c), (d) or (d.1)". That allowance would be taxable and should be reported on a T4 information slip, unless the exception contained in subsection 6(6) of the Act was applicable.
XXXXXXXXXX Danielle Bouffard
2005-015887
March 7, 2007
Dear XXXXXXXXXX:
Re: Eligibility for overseas employment tax credit and tax-free overseas allowances
This letter is in reply to your letter of November 5, 2005, regarding the above-noted subjects.
An individual ("Mr. A") is working abroad as an employee for a single employer and is engaged in two projects simultaneously. The two projects meet all the criteria under subsection 122.3(1) of the Income Tax Act (the "Act") except that for one project, Mr. A is performing services "under a prescribed international development assistance program of the Government of Canada" (the "CIDA project"). Mr. A spends over 50% his employment time on the CIDA project.
CIDA paid the employer an "overseas allowance for long term assignment" in a set amount for each qualifying employee. In this particular situation, this amount was passed on to the employee and treated as a tax-free representation or special allowance. Because Mr. A is now involved in another project (the non CIDA project), CIDA is no longer paying this allowance. The employer now pays an allowance, in a lesser amount.
Questions
1. You ask whether Mr. A is entitled to the overseas employment tax credit ("OETC") in subsection 122.3(1) of the Act?
2. Assuming the CIDA allowance is eligible under subparagraph 6(1)(b)(iii) of the Act, you ask whether the employer's allowance would also be tax-free?
Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although we are unable to provide any comment with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
OETC
In order to qualify for the OETC, the conditions described in subsection 122.3(1) of the Act have to be satisfied. These conditions are described in Interpretation Bulletin IT-497R4. In particular, for an individual to be eligible to claim the OETC, the individual is required to perform all or substantially all (90%) the duties of his employment in one or more countries outside Canada in connection with a contract under which the specified employer carried on business in such country or countries with respect to the qualified activities set out in subparagraphs 122.3(1)(b)(i) and (ii) of the Act other than for the performance of services under a prescribed international development assistance program of the Government of Canada.
Based on our understanding of the information provided in your letter, it is our view that a taxpayer in Mr. A's situation would not be eligible for the OETC. The CIDA project is considered to be a prescribed international development assistance program of the Government of Canada. As such, and due to the fact that Mr. A spent over 50% of his time on this ineligible contract, he does not meet the all or substantially all test in paragraph 122.3(1)(b) of the Act.
Subparagraph 6(1)(b)(iii) of the Act
An allowance received by an employee from the employer for personal or living expenses is generally taxable under paragraph 6(1)(b) of the Act unless specifically excluded by one of the exceptions under this paragraph. Of particular relevance in the case of Mr. A is subparagraph 6(1)(b)(iii) of the Act which provides an exception for "representation or other special allowances received in respect of a period of absence from Canada as a person described in paragraph 250(1)(b), (c), (d) or (d.1)". A person is deemed to have been resident in Canada throughout a taxation year under paragraph 250(1)(d) of the Act if he "performed services, at any time in the year, in a country other than Canada under a prescribed international program of the Government of Canada and was resident in Canada at any time in the 3 month period preceding the day on which those services commenced." For this purpose, a prescribed international program of the Government of Canada is set out in section 3400 of the Regulations.
Under section 3400 of the Regulations, a prescribed international development assistance program of the Government of Canada is an international development assistance program that is financed with funds (other than loan assistance funds) provided under External Affairs Vote 30a, Appropriation Act No. 3, 1977-78, or another vote providing for such financing. We are of the opinion that any international development assistance program that receives funding (other than loan assistance funds) through CIDA is a prescribed international development assistance program of the Government of Canada.
Since the terms "representation allowance" and "special allowance" are not defined in the Act, reference must be made to their ordinary meaning. We are of the view that a "representation allowance" in the context of subparagraph 6(1)(b)(iii) of the Act, is an allowance paid to a worker having to work outside the country and is intended to lessen the inconveniences arising out of having to move abroad, being subject to different living conditions and, where applicable, having to face a higher cost of living. Amounts that would generally qualify as "special allowances" are those where an employee is transferred or assigned outside of Canada and, as a result, incurs additional expenses. They are allowances designed to compensate, not reimburse, a loss or an additional expense arising out of the employment outside Canada. The employer would provide for the payment of such an allowance to meet, in whole or in part, the additional cost of the employee's expenses in respect of accommodation, food, travel, etc.
In your situation, the employer paid two allowances to Mr. A. The first one, the overseas allowance for long term assignment, was related to the CIDA contract, was financed by CIDA and was passed on by the employer to Mr. A. The second one, related to the non-CIDA project, was financed and paid by the employer only. We understand from your letter that the amounts paid by CIDA were representation or other special allowances for the purposes of subparagraph 6(1)(b)(iii) of the Act and that Mr. A met the conditions described in paragraph 250(1)(d). We would therefore generally consider in these circumstances that the allowance financed by CIDA should be excluded from Mr. A's employment income by virtue of subparagraph 6(1)(b)(iii) of the Act. The allowance received by M. A from his employer and relating to the non-CIDA project, however, would not be received by Mr. A "as a person described in paragraph 250(1)(b), (c), (d) or (d.1)". Accordingly, it is taxable and should be reported on a T4 information slip, unless the exception contained in subsection 6(6) of the Act was applicable.
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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