18 June 1993 External T.I. 9311585 F - Overseas Employment Tax Credit-Computer Services(7970-1)

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Overseas Employment Tax Credit (OETC)-Computer Services

This is in reply to your letter of April 21, 1993 wherein you requested our opinion in the following situation.

The taxpayer installed a base computer software system in computer hardware owned by a XXXXXXXXXX After analysing the customer's specific needs, the taxpayer then modified the software to suit the customer's specific needs. Such modifications were also installed by the taxpayer.

You requested our opinion as to whether the activities provided by the taxpayer would constitute an "installation or engineering " activity within the meaning of clause 122.3(1)(b)(i)(B) of the Canadian Income Tax Act (the "Act").

In your letter you outlined what appears to be an actual fact situation related to completed transactions and events which have taken place. The review of such situations is the responsibility of the District Taxation Offices and it is generally our practice not to comment thereon. However, we are prepared to provide the following general comments which may be of assistance to you.

It is the Department's position that generally where the activities of developing computer software, analysing information or consulting with respect thereto do not use engineering knowledge, such activities do not fall within the nature of an engineering activity in clause 122.3(1)(b)(i)(B) of the Act. The taxpayer may also be involved with the provision of instruction and advice on computer programs and routine maintenance of existing programs. These latter activities, even where performed by professional engineers, are not in our view generally considered to be engineering activities because engineering knowledge is not being used in these activities.

In addition, 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 activities (i.e. installation) set out in clause 122.3(1)(b)(i)(B) of the Act 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.

Generally where an employer is primarily engaged under a contract to develop computer software and systems integration, and who may under such a contract agree to install these systems on site, he would not be considered carrying on business with respect to "any ... installation ...or engineering activity". Therefore any person employed under such a contract would not qualify for the OETC.

However, it is a question of fact whether or not particular individuals would qualify to claim the OETC. The District Taxation Office should be supplied with sufficient information in order that they can determine whether the employer had a contract to perform qualified activities, whether such activities were the principal activities of the employer, whether such activities by the employer constituted carrying on business outside Canada and whether the employee also met all the conditions set out in section 122.3 of the Act.

We would suggest you contact the appropriate District Taxation Office to finalize this matter.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch