18 April 1995 Internal T.I. 9500997 - OVERSEAS EMPLOYMENT TAX CREDIT COMPUTERS

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: - A taxpayer employed to implement a computer system in the XXXXXXXXXX has forwarded claims for the Overseas Employment Tax Credit for 1991, 1992 and 1993?

Position TAKEN: It would appear doubtful in the situation presented, however, the request and our comments were forwarded to the Appropriate Tax Services Office.

Reasons FOR POSITION TAKEN: Question of Fact relating to actual taxpayer.

			April 18, 1995

TORONTO WEST TAX SERVICES OFFICE Income Tax Rulings
Attention: P. Colestock and Interpretations
Assistant Director - Directorate
Client Assistance M.P. Sarazin
(613) 957-2118
950099

XXXXXXXXXX

We have received a request from the above-referenced taxpayer for an amendment to his 1991, 1992 and 1993 personal income tax returns to reflect his claim for the overseas employment tax credit (the "OETC") under subsection 122.3(1) of the Income Tax Act (the "Act"). Since the taxpayer appears to reside in your district, we are forwarding his letter, which includes a completed T626 for each of 1991, 1992 and 1993, to you for whatever action you may consider appropriate under the circumstances.

In a telephone conversation of March 29, 1995 with

XXXXXXXXXX

Section 122.3 of the Act provides, amongst other things, that an individual resident in Canada in a taxation year who, throughout any period of more than six consecutive months that commenced in the year or a previous year, was employed by a specified employer (within the meaning assigned by subsection 122.3(2) of the Act), and performed all or substantially all of his or her duties of employment outside Canada in connection with a contract under which the specified employer carried on a business outside Canada with respect to "any construction, installation, agricultural or engineering activity", the individual will be eligible to claim the OETC under subsection 122.3(1) of the Act.

It is the Department's position that an employer does not carry on business in another country with respect to one of the specified types of activities 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. In this regard, since we understand that XXXXXXXXXX is in the management consulting business, we have some reservations as to whether XXXXXXXXXX could be considered to have carried on a business with respect to a construction, installation, agricultural or engineering activity. However, this determination can only be made following a review of all relevant facts relating to its business including the particular contract performed in the XXXXXXXXXX.

Since the Act does not define the terms "installation" and "engineering" for purposes of the Act, the ordinary or common meaning of each term prevails. The Oxford English Dictionary (Second Edition) defines an installation as "the action of setting up or fixing in position for service or use (machinery, apparatus, or the like); a mechanical apparatus set up or put in position for use". It also defines the term engineering as "the work done by, or the profession of, an engineer".

We are of the view 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 referred to in clause 122.3(1)(b)(i)(B) of the Act. In addition, it is our general view that the modification of existing computer software, the creation of additional computer software to complement existing software and the development of new computer support applications, even where performed by professional engineers, is not generally considered to be engineering activities because engineering knowledge is not being used in these activities.

Where an employer is primarily engaged under a contract to develop computer software and to integrate such software with existing systems, and who may under such contract agree to install the software and additional hardware systems on site, we do not believe that the employer would be considered to be carrying on a business with respect to an installation activity referred to in clause 122.3(1)(b)(i)(B) of the Act.

In summary, based upon the limited facts provided to us, it would appear that XXXXXXXXXX would not be entitled to claim the OETC under subsection 122.3(1) of the Act.

for Director
Reorganizations and Foreign division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch