26 August 2008 External T.I. 2008-0285901E5 - 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: Whether employee's duties were in connection with a contract under which the specified employer carried on business outside Canada with respect of any engineering activity for the purposes of the OETC?

Position: No.

Reasons: Interpretation of the Act.

XXXXXXXXXX 								2008-028590
S. Leung, CA
August 26, 2008

Dear XXXXXXXXXX :

Re: Overseas Employment Tax Credit ("OETC")

We are writing in reply to your letter of June 25, 2008 in which you requested our view as to whether your employer's activities described below would be considered to be carrying on business outside Canada under a contract in respect of those activities described in clause 122.3(1)(b)(i)(B) of the Income Tax Act (the "Act") ("Qualifying Activities").

Your employer is a taxable Canadian corporation engaged in the business of marine transportation in both local and international markets with ships owned by it. Your employer has entered into a contract to purchase two ships from a foreign shipbuilder. Under the contract your employer is entitled to send to and maintain at the shipbuilder's yard site representatives or supervisors throughout the construction period to ensure ships are built to contract specifications and to provide technical (engineering) advice as required by the shipbuilder. A site office has been established in the shipyard with a site project manager and a number of site representatives. You are a marine engineer and are one of the site representatives assigned to the job. The assignment requires that you perform substantially all your employment duties overseas with respect to engineering activities for approximately one year.

Our Comments

The particular circumstances outlined in your letter relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments which may be of assistance. It is a question of fact whether for the purposes of the OETC a specified employer (within the meaning assigned by subsection 122.3(2) of the Act) carries on business outside Canada under a contract with respect to Qualifying Activities. In interpreting the expression "in connection with a contract under which the specified employer carried on business outside Canada with respect to...", one should be mindful of the ordinary rule of statute interpretation stated succinctly by Elmer A. Driedger at page 87 of his text "Construction of Statutes" (2nd ed. 1983): "...the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament".

Although the word "business" as defined in subsection 248(1) of the Act has a broad meaning and includes "undertaking of any kind whatever", the expression "carried on business outside Canada" in subparagraph 122.3(1)(b)(i) of the Act must be read in its context in connection with the categories of activities described in clauses (A), (B) and (C) of that subparagraph. In this regard, it should be noted that a manufacturing or purchasing activity is not one of the Qualifying Activities listed. Moreover, with respect to the purpose of that section, it is stated in the 1996 Budget Supplementary Information:

"Section 122.3 of the Income Tax Act provides a tax credit to Canadian residents who are employed outside Canada by a specified employer for at least six months in connection with resource, construction, installation, agricultural or engineering contracts or for the purpose of obtaining those contracts...The primary purpose of this credit is to ensure the Canadian firms, employing Canadian staff, are in a position to compete against foreign firms in bidding on overseas work. The tax systems of a number of countries other than Canada provide tax relief to their residents working abroad, thus allowing firms from those countries to base their bids for overseas contracts on the reduced salary costs that such tax relief allows. Similarly, the OETC enables Canadian employers to reduce their employment costs with respect to foreign contract work, while maintaining the after-tax value of the remuneration their employees receive in connection with such work." (Emphasis added)

Based on the above, we are of the view that a specified employer would not be considered to be carrying on business outside Canada under a contract with respect to one or more of the Qualifying Activities where the specified employer merely sends its employees to a foreign manufacturer to supervise the production of goods that the employer has committed to purchase, regardless of whether engineering knowledge is or is not applied by such employees in performing their employment duties in supervising the production of goods.

Yours truly,

Olli Laurikainen, CA
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch