12 July 2013 External T.I. 2013-0492491E5 - 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 employees are eligible for OETC.

Position: No.

Reasons: The employer is not engaged in a qualifying activity.

XXXXXXXXXX
2013-049249
D. Basso
905-721-5199

July 12, 2013

Dear XXXXXXXXXX:

Re: Overseas Employment Tax Credit

This is in response to your letter dated October 10, 2012, regarding the eligibility of an individual to claim the Overseas Employment Tax Credit ("OETC") provided in section 122.3 of the Income Tax Act ("the Act").

In particular, you have described a situation in which a corporation resident in the U.S. ("USco") entered into a contract with the Government of the United States of America ("U.S.") to recruit, train, and deploy XXXXXXXXXX support for military personnel serving abroad as part of the North Atlantic Treaty Organization's ("NATO") International Security Assistance Force ("ISAF"). To fulfil its role in support of the ISAF operation, USco formed a subsidiary Unlimited Liability Company in Canada ("Canco") to recruit Canadian resident individuals for employment abroad, providing XXXXXXXXXX services similar to USco. You have asked whether a Canadian resident individual (‘Taxpayer") employed by Canco would qualify for the OETC for work abroad in support of the ISAF operation.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Our Comments

As you have noted in your letter, the Canada Revenue Agency ("CRA") provides guidance on the OETC in our Interpretation Bulletin IT-497R4, Overseas Employment Tax Credit, dated May 14, 2004. As outlined in the bulletin, the OETC is generally available to an individual who is resident in Canada for any part of a taxation year, where the individual has:

• earned qualifying income in a taxation year throughout a qualifying period while employed by a specified employer; and
• performed all or substantially all the duties of employment outside Canada with respect to a qualifying activity of the employer.

Considering the situation that you have described, and assuming that all other requirements of the provision are met, the OETC would be available to the Taxpayer where the duties of the Taxpayer are performed with respect to a qualifying activity of the employer. Further, as noted in paragraph 6 of IT-497R4, a qualifying activity of an employer for OETC purposes includes a prescribed activity, which is defined in section 6000 of the Income Tax Regulations as an activity performed under contract with the United Nations ("UN").

While you have made reference to paragraph 8 of IT-497R4, it is not apparent from the situation that you have described whether Canco has agreed to provide its services under a direct contract with the U.S. Government, or indirectly through a sub-contract with USco. In this regard, the CRA has previously stated that where the specified employer itself does not carry on the qualifying activities, but the specified employer has a contract or sub-contract with a third party to provide its services through its employees to another person in respect of a qualifying activity carried on by that person outside of Canada, or in respect of a qualifying activity which that person has sub-contracted to a third party, then its employees providing such services under its own contract carried on outside Canada will also qualify for the OETC.

Regardless, from your description, it is not apparent whether the services to be provided outside of Canada by employees of Canco are ultimately in relation to a contract for service with the UN. In fact, on the basis that the ISAF is a NATO-led operation, rather than an activity performed under contract with the UN, we are of the view that the Taxpayer would not be entitled to claim the OETC in respect of employment with Canco as the employment was not in respect of a qualifying activity of the employer.

We trust our comments are of assistance.

Yours truly,

Robert Demeter, CPA, CGA
Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch