29 March 1996 External T.I. 9601725 - OETC WHERE DUTIES NOT IN CONNECTION WITH QUAL. ACT.

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:

Whether an individual would be entitled to claim the overseas employment tax credit ("OETC") pursuant to section 122.3 of the Act in a situation where the individual performs all or substantially all of the duties of employment outside Canada but where all or substantially all of the offshore employment duties are not in connection with a contract with respect to a qualifying activity.

Position TAKEN:

No. Employee would be ineligible for the OETC.

Reasons FOR POSITION TAKEN:

Paragraph 122.3(1)(b) requires that the individual perform "all or substantially all of the duties (90% or greater) of the individual's employment outside Canada in connection with a contract ... with respect to " a qualified activity. In the antithetical situation, where the individual performs more than 10% of the duties of the individual's employment outside Canada in connection with a contract with respect to an ineligible activity, the individuals' eligibility for the OETC would be denied. Moreover, it is indicated in paragraph 7 of IT-497R3 that an individual may claim the OETC as long as all or substantially all of the duties performed by the employee are in connection with a contract under which the specified employer carries on a business with respect to a qualifying activity.

5-960172
XXXXXXXXXXP. Diguer
(613) 957-8953

Attention: XXXXXXXXXX

March 29, 1996

Dear Sirs:

Re: Section 122.3 of the Income Tax Act (Canada)

This is in reply to your letter dated January 3, 1996 in which you requested our opinion concerning the following situation.

Situation

XXXXXXXXXX

In your view, the transport of XXXXXXXXXX in the present case, constitute an activity performed in connection with a contract with respect to the "exploration for or exploitation of... minerals or other similar resources" for purposes of Clause 122.3(1)(b)(i)(A) of the Act. Accordingly, the Canadian employees on board would, provided the other conditions in section 122.3 are met, be entitled to claim the "Overseas employment tax credit" or "OETC" by virtue of subsection 122.3(1) of the Act. However, you are concerned that the fact that the Vessel also serves to transport the Additional cargo may taint the otherwise eligible activities performed on the Vessel such that the Canadian employees on board would be denied the OETC.

Opinion requested

You ask whether the carrying of this Additional cargo would cause the operation of the vessel to become an ineligible activity with regards to the OETC claim by the Canadian employees on board with respect to their respective income tax returns for the 1995 taxation year.

Our comments

The situation outlined in your letter relates to a specific taxpayer and involves completed transactions. As explained in Information Circular 70-6R2 dated September 28, 1990 ("IC-70-6R2"), responsibility for the determination of the income tax implications of completed transactions rests with the relevant district tax services office. Nevertheless, we can offer the following general comments.

The OETC may be claimed by an individual resident in Canada who works for six consecutive months or longer for a "specified employer" (generally a person resident in Canada) and performed all or substantially all of the duties of employment outside Canada in connection with a contract whereby the employer carried on business outside Canada with respect to the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources, construction, installation, agricultural or engineering activity, or any prescribed activity as well as all activities relating to the obtaining of a contract to perform any of the qualifying activities (the "Qualifying activity" or collectively, "Qualifying activities").

The question of whether an individual performs all or substantially all of the duties of his employment outside of Canada in connection with a contract with respect to a Qualifying activity is a question of fact, and it is not possible to make a clear determination based on the limited facts provided in your letter.

Generally, where the duties of employment relate to more than one contract, a reasonable basis should be used to allocate the part of the duties that relate to a qualifying activity and those that relate to a non-qualifying activity. We are unable to say what a reasonable basis would be in your situation without more facts, although we expect that the value or cost of shipping would be a relevant factor in this determination. In any event, it is apparent that the allocation of an individual's employment duties to contracts for non-qualifying activities could adversely affect the prospect of meeting the all or substantially all test referred to in paragraph 122.3(1)(b) of the Act.

You have stated that the transport of XXXXXXXXXX constitutes a Qualified activity for purposes of section 122.3 of the Act and you have not solicited our opinion on this question. Nevertheless, we would like to mention that it is not entirely clear to us that a specified employer who enters into a contract for the transportation of XXXXXXXXXX would be said to be carrying on a business with respect to the exploration for or exploitation of minerals. The shipment of extracted minerals does not appear to be directly related to the exploitation of the minerals as it occurs after the extraction of the minerals (exploitation of the mine). This should not be regarded as a definitive position on the matter as we have not had the opportunity to consider all of the facts.

Furthermore, in order to qualify for the OETC an individual must, inter alia, earn the income throughout a qualifying period. A qualifying period, for OETC purposes, means a period of more than 6 consecutive months. The qualifying period of an employee aboard a vessel, generally would commence from the date upon which the vessel departed Canada by entering international waters and would end on the date of reentry into Canadian coastal waters. The situation described in your letter relates to the transportation of goods, by vessel, between Canada and XXXXXXXXXX We would generally expect that a return trip involving the transportation of goods by vessel from Canada to XXXXXXXXXX would require much less than 6 months such that an employee of the Vessel would not have earned the income throughout a period of more than 6 consecutive months outside Canada and accordingly would not be entitled to the OETC.

A taxpayer may have the amount of taxes withheld at source reduced pursuant to subsection 153(1.1) of the Act where it can be established that he will be entitled to the OETC. In order to obtain a reduction of the amount of taxes withheld at source pursuant to subsection 153(1.1) of the Act, the employer can apply in writing to the local tax services office outlining the facts on which the request is based and attaching supporting documents (i.e. receipts, agreements).

The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990 and the Special Release dated September 30, 1992, they are not binding on Revenue Canada, Customs, Excise and Taxation.

Yours truly,

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