12 October 1990 External T.I. 901350 F - 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.

SUBJECT:  Overseas Employment Tax Credit

This is in reply to your memorandum dated June 21, 1990 concerning the entitlement of certain employees of a subsidiary of 24(1) to the overseas employment tax credit (OETC).

In order for an individual to be entitled to the OETC under subclause 122.3(1)(b)(i)(B), the individual must have performed all or substantially all the duties of his employment in one or more countries other than Canada in connection with a contract under which the individual's employer carried on business in such country or countries with respect to any construction, installation, agricultural or engineering activity.

It is our position that the employer is not carrying on business in the other country with respect to one of the specified types of activity unless such activity is the principal activity of the employer. This requirement is not satisfied if the specified type of activity is merely incidental or ancillary to the employer's business.

The reason we were of the opinion that the OETC was not available in the two cases involving the development of computer software cited by you is that in those cases the employer was not carrying on business in the other country with respect to one of the activities specified in subclause 122.3(1)(b)(i)(B). In particular, the employer either was not carrying on business at all in the other country or, if it was, installation activity was not its principal activity but was only incidental or ancillary to the employer's principal activity of developing computer software. Generally, we do not consider development of computer software to be engineering and thus the employer was not carrying on an eligible activity as its principal activity.

In the case now under consideration by you it is essentially a question of fact as to whether the employer carried on one of the specified kinds of businesses in the United States and as to whether the employee performed all or substantially all the duties of his employment in the United States in connection with a contract under which his employer carried on such business. To assist in resolving such questions we recommend that you determine:

(a)     whether the employer had a contract under which it performed activities of the kind specified in subclause 122.3(1)(b)(i)(B);

(b)     whether such activities were the principal activities of the employer;

(c)     whether such activities of the employer constituted the carrying on of business by it in the United States;

(d)     whether the employee performed all or substantially all of his duties of employment in the United States, and

(e)     whether the duties of the employee performed in the United States were in connection with the above mentioned contract of the employer.

In the case under consideration there may also be some question as to whether the individuals are employees of 24(1) We are uncertain what is meant by your reference to "The individuals are transferred to the 24(1) payroll." If the individuals are employees of 24(1) and not 24(1) they presumably would not be entitled to the OETC. A determination of which company is the employer cannot be based solely on which company pays the salary and indeed in making this determination considerations such as who controls and directs the employee and who the employee reports to are generally more important.

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch