2008 Ruling 2008-0282451R3 - Overseas Employment Tax Credit

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 taxpayer carries on business outside Canada under a contract in respect of qualifying activities?

Position: Yes

Reasons: The activities that will be carried out by the taxpayer outside Canada under the terms of the contract with the taxpayer's client and more than 50% of these activities will be considered XXXXXXXXXX activities.

XXXXXXXXXX 								2008-028245

Attention: XXXXXXXXXX

XXXXXXXXXX , 2008

Dear Sirs or Madam:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling. We acknowledge the receipt of additional information provided in your various email correspondences, including the Statement of Work and its appendices.

The tax affairs of XXXXXXXXXX . are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Business Number XXXXXXXXXX .

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Unless otherwise stated, all references to a statute are references to the provisions of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof (the "Act"), and every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.

Definitions

In this letter the following terms have the meanings specified:

(a) "Aco" means XXXXXXXXXX .;

(b) "Client" means the XXXXXXXXXX ;

(c) "Contract" means the XXXXXXXXXX -year lease contract for the Product as described in paragraph 3 below;

(d) "Country 1" means XXXXXXXXXX ;

(e) "Country 2" means XXXXXXXXXX ;

(f) "CRA" means the Canada Revenue Agency;

(g) "Overseas Employees" means the employees of Aco who will perform their employment duties in Country 1 in connection with the Contract;

(h) "OETC" means the overseas employment tax credit in section 122.3 of the Act;

(i) "Product" means the XXXXXXXXXX ;

(j) "Subcontractor" means XXXXXXXXXX ; and

(k) "Subcontractor Supervisor" means the employee of Aco who will carry out certain activities in Country 2 in connection with the Contract.

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

1. Aco is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1). Its shares are listed on the XXXXXXXXXX Stock Exchange. The fiscal period of Aco within the meaning of subsection 249.1(1) is XXXXXXXXXX

2. XXXXXXXXXX

3. Aco has bid on the Contract under which Aco will be required to provide a leased Product and all the necessary support to enable the Client's operations for an initial XXXXXXXXXX The Contract is not part of a prescribed international development assistance program of the Government of Canada as defined in section 3400 of the Income Tax Regulations.

4. The Contract will involve activities carried on by Aco in Canada and overseas. The Canadian activities will include:

(a) delivering and installing some of the Product in a location in Canada to provide training to technician, operators, and personnel destined for Country 1;
(b) performing XXXXXXXXXX activities; and
(c) preparing a facility in a location in Canada, including the design, procurement and construction of offices, XXXXXXXXXX facilities, training facilities, XXXXXXXXXX facilities.

5. Aco is required to employ XXXXXXXXXX procedures that will ensure the Product meets the requirements of the Contract and Aco is required to execute the required XXXXXXXXXX tasks to certify, maintain and sustain the Product in accordance with the XXXXXXXXXX requirements. The Contract also requires Aco to send an XXXXXXXXXX team to Country 1 for the duration of the lease, with potential for extension, to perform the duties that are required under the Contract as described in paragraph 9 below and an XXXXXXXXXX to Country 1 for a period of XXXXXXXXXX .

Proposed Transactions

6. If the bid for the Contract is successful, Aco will employ new staff and, together with certain existing employees, relocate them to Country 1 and Country 2 in order to undertake various activities required under the Contract.

7. The Product will be produced and tested in Country 2 and then leased to Aco by the Subcontractor which deals at arm's length with Aco. The salvage value of the Product is estimated to be XXXXXXXXXX % of the value of the Product after the term of the lease. XXXXXXXXXX will be shipped to XXXXXXXXXX , tested, integrated with some additional equipment and then shipped to XXXXXXXXXX . XXXXXXXXXX will be shipped directly to XXXXXXXXXX . The last XXXXXXXXXX will be shipped to XXXXXXXXXX and will remain there.

8. The team stationed in Country 1 will consist of approximately XXXXXXXXXX employees: XXXXXXXXXX (collectively, "Overseas Employees").

9. The activities that will be carried out by this team in Country 1 include:

(a) deploying the Product in Country 1 (including installation, set-to-work and testing of the Product) - comprising approximately XXXXXXXXXX % of all the activities carried out in Country 1;
(b) XXXXXXXXXX
(c) XXXXXXXXXX
(d) XXXXXXXXXX and
(e) XXXXXXXXXX

10. The Overseas Employees will be required to have an XXXXXXXXXX background. XXXXXXXXXX

11. XXXXXXXXXX

12. The Overseas Employees will not spend more than XXXXXXXXXX % of their working hours in Canada compared to their total working hours during the time they are assigned to the project.

13. In connection with its obligations under the Contract, Aco will send an XXXXXXXXXX ("Subcontractor Supervisor") to Country 2 for a continuous period of XXXXXXXXXX to supervise the Subcontractor. The Subcontractor is responsible for designing and building the Product. The activities that will be carried out by the Subcontractor Supervisor will include:

(a) monitoring production status;
(b) XXXXXXXXXX ;
(c) XXXXXXXXXX ;
(d) XXXXXXXXXX ; and
(e) participating in design changes/reviews with the subcontractor and its subcontractors.

14. The Subcontractor Supervisor will not spend more than XXXXXXXXXX % of his/her working hours in Canada during the time he/she is assigned to the project.

15. The activities described in 9(a) to 9(d) and 13(a) to 13(e) above will represent more than 50% of all activities that will be undertaken by Aco in Country 1 and Country 2 in connection with the Contract.

16. The Overseas Employees and the Subcontractor Supervisor will remain Canadian residents for the purposes of the Act.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to fulfill the terms of the Contract between Aco and the Client.

Other Information

To the best of your knowledge, none of the issues involved with this request:

(i) is involved in an earlier return of any of the Overseas Employees or the Subcontractor Supervisor;
(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by any of them;
(iii) is under objection; or
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above:

A. An individual who is an Overseas Employee will be entitled to the OETC in a taxation year, as computed under subsection 122.3(1), if the individual performs the activities described in paragraph 9 above, throughout a period of more than six consecutive months (such period to include the vacation time referred to in paragraph 11 that is earned through activities in Country 1 and that is taken between work rotation periods in Country 1) that commenced before the end of the taxation year and included part of that year.

B. The Subcontractor Supervisor will be entitled to the OETC in a taxation year, as computed under subsection 122.3(1), if he or she performs the activities described in paragraph 13 above, throughout a period of more than six consecutive months that commenced before the end of the taxation year and included part of that year.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the Overseas Employees and the Subcontractor Supervisor are deployed to Country 1 and Country 2, respectively, by XXXXXXXXXX .

This ruling is based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

Yours truly,

for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch