15 March 1994 External T.I. 9401155 - INCORPORATE COMPANY-OVERSEAS EMPLOYMENT CREDIT (7970-7)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Whether self-employment income qualifies for OETC.

2. Whether a corporation can be set up to convert self-employment income into employment income in order to claim an OETC

Position TAKEN:

1. Self-employment income does not qualify for an OETC.

2. Setting up a corporation for the purpose of qualifying for an OETC could be an a misuse of section 122.3 and an abuse of the Act.

Reasons FOR POSITION TAKEN:

1. Paragraph 9 of IT-497R2 and the law under 122.3.

2. Object, spirit and intent of the legislation under section 122.3.

		940115
XXXXXXXXXX	G. Middleton

March 15, 1994

Dear Sir:

This is in reply to your letter of January 17, 1994 wherein you requested our views on the eligibility requirements for the overseas employment tax credit ("OETC"). Unless as otherwise stated all references to statute are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act"). You described the facts as follows:

XXXXXXXXXX
you have negotiated a four year contract to provide your services to a foreign company (XXXXXXXXXX) and the commencement of the contract is XXXXXXXXXX All of the services performed for XXXXXXXXXX throughout the contract period will take place outside Canada. At the present time, you intend to remain a resident of Canada throughout the term of the contract with XXXXXXXXXX

You specifically asked us the following questions:

1.Whether you could claim an OETC as a Canadian citizen working outside Canada under the above mentioned personal services contract.

2.Whether a "personal services" corporation, which entered into a services contract such as described above, needed to be set up by you to be eligible for the OETC.

As indicated in paragraph 21 of Information Circular 70-6R2 (copy enclosed), when a requested interpretation relates to contemplated transactions, a taxpayer should request an advance income tax ruling rather than an opinion.

Although we cannot provide you with a specific answer to your proposed transactions, we are prepared to offer the following general comments which may be of assistance to you.

With respect to your first question, it would appear that you would be earning self-employment income under the above mentioned services contract with XXXXXXXXXX As indicated in paragraph 9 of Interpretation Bulletin IT-497R2 (copy enclosed), individuals are not eligible for an OETC in respect of self-employed income.

In connection with your second question, we would like to explain that the OETC authorized under section 122.3 of the Act is intended to assist Canadian based employers to compete internationally using Canadian resident employees by permitting their Canadian resident employees a reduction in Canadian tax in respect of their income from employment performed outside of Canada. Therefore, the OETC is only available to individuals who are employees of Canadian based employers.

In the situation described by you, you appear to be, in substance, a self-employed person performing services for a foreign-based company. Any proposed new corporation set up by you would appear to be simply a device to alter the form (but not the substance) of that relationship. Accordingly, this would not appear to be a situation in respect of which it was intended that you should be entitled to an OETC and the transactions proposed to be undertaken, in an attempt to permit you to avail yourself of the OETC, would appear to result in a misuse of section 122.3 and an abuse of the Act. Thus, a transaction undertaken to convert, what is in substance self-employment income (i.e. business income) to employment income in form, in an attempt to permit an individual to avail himself of an OETC, may not be recognized for the purposes of the Act.

We trust that our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch