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: 1. When is an employer committed, or considered to have committed to an eligible project for OETC purposes?
2. Will the phase-out rules in section 122.3 apply to a contract extension or renewal exercised after March 29, 2012, where the original contract was committed in writing by the employer before March 29, 2012?
3. Is the application of the OETC phase-out rules dependent on whether the original contract is materially modified after March 29, 2012?
Position: 1. The employer is committed at the time the written contract is signed, or when an irrevocable bid in writing has been tendered.
2. Question of fact.
3. Yes.
Reasons: 1. October 2012 Explanatory Notes to section 122.3.
2. Dependent on whether the extension or renewal period is considered to be in connection with the original commitment made by the employer.
3. The OETC phase-out rules apply to contracts committed to after March 29, 2012. A new contract commitment is established at the time the original contract is materially changed.
XXXXXXXXXX
2013-051431
J.Ouimet, CPA, CA
July 23, 2014
Subject: Application of the OETC phase-out
Dear XXXXXXXXXX:
We are writing in response to your email of December 3, 2013, requesting our views on the phase-out application of the Overseas Employment Tax Credit ("OETC") under section 122.3 of the Income Tax Act (the "Act"). You have requested our comments on when an employer is committed, or considered to have committed to an eligible project. We apologize for the delay in responding.
In your email, you describe a situation where an employer originally committed to an eligible project before March 29, 2012, and subsequently extended or renewed such contract in writing after March 29, 2012. You ask whether the qualifying foreign employment income ("QFEI") earned by an employee in connection with the eligible project will be subject to the reduced factor in the application of the OETC phase-out rules for the extension or renewal period. You also ask if the application of the phase-out rules is dependent on the fact that the extension or renewal right exists in or modifies the original contract.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
The March 2012 Federal Budget introduced amendments to section 122.3 of the Act to phase out the OETC. Subsection 122.3(1.01) of the Act provides that:
"For the purposes of paragraph (1)(c), the specified amount for a taxation year of an individual is
(a) for the 2013 to 2015 taxation years, the amount determined by the formula
[$80,000 x A/(A + B)] + [C x B/(A + B)]
where
A is the individual's income described in paragraph (1)(d) for the taxation year that is earned in connection with a contract that was committed to in writing before March 29, 2012 by a specified employer of the individual,
B is the individual's income described in paragraph (1)(d) for the taxation year, other than income included in the description of A, and
C is
(i) for the 2013 taxation year, $60,000,
(ii) for the 2014 taxation year, $40,000, and
(iii) for the 2015 taxation year, $20,000; and
(b) for the 2016 and subsequent taxation years, nil."
The application of the amendments is explained in the October 2012 Finance Explanatory Notes, which state:
"During the phase-out period, the factor (currently 80%) applied to an employee's qualifying foreign employment income in determining the employee's OETC will be reduced to 60% for the 2013 taxation year, 40% for the 2014 taxation year and 20% for the 2015 taxation year. At the same time, the maximum qualifying foreign employment income eligible for the OETC (currently $80,000) will be correspondingly reduced. The OETC will be eliminated for the 2016 and subsequent taxation years.
The phase-out rules will not apply with respect to qualifying foreign employment income earned by an employee in connection with a project or activity to which the employee's employer had committed in writing before March 29, 2012. For example, if an employer has tendered an irrevocable bid in writing for a project before March 29, 2012, the employer will be considered to have committed in writing to the project irrespective of whether the bid has been accepted before March 29, 2012."
In our view, for the purposes of the OETC, an employer is committed, or considered to have committed to an eligible project or activity at the time the employer signs the written contract, or has tendered an irrevocable bid in writing.
Whether the QFEI is earned in connection with a contract that was committed to in writing before March 29, 2012, is one of fact that can only be determined on a case-by-case basis. However, where the contract or irrevocable written bid provides for an extension or renewal at the sole option of the other contracting party, we would consider any extended period or renewal to be part of the original commitment. In addition, we note that the phase-out rules would not apply where the employer's original commitment made prior to March 29, 2012, is not yet fulfilled and an employee's contract is extended in order to enable the employer to meet the original commitment.
Notwithstanding the above, it is our view that if the original contract is materially changed after March 29, 2012, a new commitment is established at that time. As a result, the QFEI earned by an employee in connection with the eligible project would be subject to the reduced factor in the application of the OETC phase-out rules as the employer's commitment to the project in these circumstances would have been established after March 29, 2012.
We trust our comments will be of assistance.
Yours truly,
Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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