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 the transportation of refined petroleum products from the refinery to the distribution centres is a qualified activity for the purposes of the credit.
Reasons: Pursuant to the Tax Court of Canada decision in the 2005 case of Gerald Dunbar v. the Queen, it is our view that the refining process signifies the end of the exploitation process.
August 7, 2007
Re: Overseas Employment Tax Credit ("OETC") - Subsection 122.3(1) of the Income Tax Act (the "Act")
This is in reply to your letter of May 22, 2007, wherein you requested our comments in respect of the situation described below. Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
- Your client ("Corp") is a Canadian corporation and a private corporation within the meaning of subsection 89(1).
- Corp is a resident of Canada and is a "specified employer" within the meaning of subsection 122.3(2).
- Corp offers the services of its individual employees to ship owners or ship operators involved in the operation of ships that will be transporting refined petroleum products to various distribution centers offshore.
- The contractual arrangement may be a direct contract with a ship owner or a subcontract with a ship operator who is operating the ship on behalf of its owner. The ship owners normally have contracts with the purchaser of the refined petroleum product or the seller of the said refined petroleum product for the shipment of the product.
- The work being performed by the employees is performed outside "Canada" within the meaning set out in section 255.
You enquire as to whether the transportation of refined petroleum products from the refinery to the various distribution centres by ship is an activity with respect to the "exploration for or exploitation of petroleum, natural gas, minerals or other similar resources" for the purposes of clause 122.3(1)(b)(i)(A).
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.
In order to qualify for the OETC, the conditions described in subsection 122.3(1) 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 qualifying activities which are described in subparagraph 122.3(1)(b)(i). In particular, clause 122.3(1)(b)(i)(A) refers to "the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources".
In the 2005 Tax Court of Canada decision of Gerald Dunbar v. The Queen ("Dunbar"), Miller, J. explored the issue of what is meant by "exploitation" for the purpose of subsection 122.3(1). He said as follows:
"Exploitation means more than simply extracting and selling. Dictionary definitions of exploitation refer to turning into account, or, with respect to natural resources turning to industrial account, or making use of. I conclude that all stages necessary to take the natural resource to its maximum value for the pursuit of profit is part of the exploitation process. Certainly, shipping crude oil to where it can be refined is part of that overall exploitation, especially so where measures have to be taken to ensure the crude arrives safely."
While we have read your submission, we do not believe that the cases referred to therein are relevant to the situation at hand. We disagree with your submission that the exploitation process ends with the sale of the refined petroleum. We believe that the Tax Court of Canada determined, in the case of Dunbar, that the refining process takes the natural resource to its maximum value for the pursuit of profit and, accordingly, signifies the end of the exploitation process. Accordingly, it is our view that the transportation of refined petroleum product from the refinery to the distribution centres does not constitute an activity described in clause 122.3(1)(b)(i)(A).
We trust that our comments will be of assistance to you.
Reorganization and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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