13 November 2007 External T.I. 2007-0230991E5 - Qualifying period - 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.

Principal Issues: After an assignment of more than six months in another country, an individual (who is a regular employee of a company) spent time in Canada followed by another assignment outside Canada of six weeks. For purposes of the overseas employment tax credit, does the qualifying period include the first and the second assignments (assuming that all other conditions are met)?

Position: To include the second assignment in the qualifying period, we would have to consider that the individual met the all and substantially all test throughout the period (all or substantially all of the duties of employment must be performed outside Canada). Therefore, it depends on whether the time spent performing duties in Canada represents more than 10% of all the employment duties.

Reasons: Paragraph 122.3(1)(b) of the Act. Paragraphs 3, 10 and 11 of IT-497R4. John Rooke v. Her Majesty the Queen (FCA) 2002 DTC 7442

XXXXXXXXXX 							2007-023099
								Sylvie Labarre, CA
November 13, 2007 

Dear Sir:

Re: Overseas employment tax credit

This is in reply to your electronic message of March 25, 2007 in which you requested our views with respect to your entitlement to the overseas employment tax credit (OETC).

You are working as a regular employee of a Canadian company that is engaged in XXXXXXXXXX activities in different projects all around the world. You are usually required to work outside Canada for different periods of time.

In 2006, you were assigned to a XXXXXXXXXX project in XXXXXXXXXX where you spent roughly seven months (206 days from February 23 to September 16, 2006). The employer gave you a T626 form duly completed for this period.

On XXXXXXXXXX, 2006, you were sent to XXXXXXXXXX for 47 days to work on XXXXXXXXXX project. Your employer did not provide you with a T626 in respect of that assignment because in its view, the assignment was not a continuation of the assignment to XXXXXXXXXX and in order to provide you with a T626 for that assignment, a new qualifying period was necessary.

You do not agree with that view and you believe that the two periods are additive and that a T626 covering the assignment in XXXXXXXXXX should be issued.

You are asking our view on that particular matter.

Our comments

Although you have asked for a technical interpretation, the situation presented is a factual one involving a specific taxpayer. Requests for confirmation of the tax consequences of this type of situation are handled by the local tax services office. We are, however, prepared to provide some general comments. The OETC is provided for in section 122.3 of the Income Tax Act (the "Act") and Interpretation Bulletin IT-497R4 (hereinafter "IT-497R4") explains various terms and conditions relating to the OETC.

Paragraph 122.3(1)(b) of the Act states that throughout the qualifying period all or substantially all of the duties of employment must be performed outside Canada and the work must be done in connection with a contract under which the employer carries on business outside Canada.

However, even if the expression "a contract" (which is singular) is used in that paragraph, the expression must be read to include the plural pursuant to section 33(2) of the Interpretation Act. That was the decision taken by the Federal Court of Appeal in John Rooke v. Her Majesty the Queen (2002 DTC 7442). In that case, the individual had only one specified employer but performed his duties of employment outside Canada in connection with a number of contracts, rather than a single contract and the Federal Court of Appeal stated that the conditions in section 122.3 of the Act could be met even if the work done in the qualifying period related to more than one contract.

The explanations of IT-497R4 take into account the decision rendered in the Rooke case. When you mention that you are a regular employee of your employer, we understand that you are not employed on an "on demand" basis for only certain periods. Therefore, paragraph 12 of IT-497R4 does not apply and paragraphs 3, 10 and 11 of IT-497R4 are relevant to your particular situation.

Paragraph 10 of IT-497R4 states that all or substantially all of an employee's duties throughout a qualifying period must be performed outside Canada. This may consist of different periods of time spent by an individual in one or more locations anywhere outside Canada, including the land and territorial waters of a foreign country, in international waters or Antarctica.

Paragraph 11 of IT-497R4 states that an individual's entitlement will not necessarily be denied because the individual was not actually outside Canada or at the work location (s) outside Canada for the entire qualifying period. During a period of absence from a work location outside Canada, an employee may take vacation time, consult with the specified employer in Canada or perform duties of employment in Canada and still remain eligible for the OETC, provided that throughout the qualifying period substantially all of the employment duties, as referred to in ¶ 3, are performed outside Canada.

Our interpretation of "all or substantially all" which you will find in paragraph 3 of IT-497R4 reads as follows:

The "all or substantially all" test referred to above is considered to be met if 90% of the employment duties are performed outside Canada. The duties performed by an individual outside Canada during a qualifying period in connection with a qualifying activity of a specified employer (qualifying duties) are compared to all of the duties that the individual performed for that employer during the same period. The determination as to whether the "all or substantially all" test has been met is a question of fact that can only be determined after reviewing all the circumstances of a particular situation. However, generally, it will be made by comparing the actual time an individual spent performing that qualifying duties to the total time spent performing all duties during the same period. When the aggregate of the employment duties performed outside Canada in connection with ineligible activities and those performed in Canada in connection with any activity represent more than 10% of all the employment duties, the individual will not meet the "all or substantially all" test.

In your particular situation, assuming that you met all other conditions, you will have to apply that test to determine whether the qualifying period throughout which you met the conditions included only the 206 days in XXXXXXXXXX or ended on December 17. Indeed, if you end the qualifying period on December 17 and consider the duties in XXXXXXXXXX for OETC purposes, you would have to meet the "all or substantially all" test during the entire period from February 23 to December 17. As there were 45 days out of 298 days during which you were not outside Canada, it seems likely that the time spent performing duties in Canada during those days represented more than 10% of all the employment duties. We do not have sufficient information to give you a definitive answer.

We trust the above comments will be of some assistance. We apologize for the delay required in responding.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch