20 December 1996 External T.I. 9608915 - 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.

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 employees seconded to the foreign affiliate in
respect of mining activities qualify for the OETC

Position:

No definite answer offered.

Reasons:

Depending on whether the employer carries on business

outside Canada under a contract, etc.

960891
XXXXXXXXXX S. Leung

Attention: XXXXXXXXXX

December 20, 1996

Dear Sirs:

Re: Overseas Employment Tax Credit

We are writing in response to your letter of March 4, 1996 in which you requested our confirmation of your interpretation of paragraph 122.3(1) of the Income Tax Act (the "Act") with respect to the following situation.

1. A Canadian public mining company ("Publico") has a wholly-owned subsidiary incorporated in a foreign country ("Foreign Subco").

2. Foreign Subco purchases certain mining property from the government of that foreign country. The purchase contract requires Foreign Subco to develop a new mine and refurbish several existing mines on the purchased property in the foreign country.

3. Publico will second some of its employees to Foreign Subco so that the latter can carry out its obligations under the purchase contract. The employees will work in the foreign country for this purpose on short-term assignments ranging from 6 months to 2 years approximately. These employees include not only mining personnel but also support personnel such as senior purchasing and administrative staff. Their duties will all be performed on the mine sites in the foreign country.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers.

Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.

It is a question of fact whether the personnel who will work in the foreign country are employees of Publico or Foreign Subco. From the limited facts that you provided us in your letter, it is not clear whose employees the personnel will be. It is our view that an employer is not necessarily the person who pays the salaries if that person is not the person to whom an individual reports on a daily basis.

Accordingly, where an individual remains on the payroll of one company and works for another company it is necessary to ascertain with which company the individual has an employer-employee relationship for purposes of determining whether or not he or she is employed by a specified employer and to some extent whether the employer carries on business outside Canada under a contract. In the situation described in your letter, it appears that either Publico or Foreign Subco qualifies to be a specified employer because Publico is a person resident in Canada and Foreign Subco is a foreign affiliate of a person resident in Canada.

If Publico is the employer of the personnel, it is a question of fact whether Publico carries on business outside Canada under a contract with Foreign Subco in respect of which its employees perform their duties outside Canada with respect to qualifying activities. If Publico is merely reimbursed from Foreign Subco for the costs of seconding its employees, it may not be reasonable to say that Publico carries on business outside Canada.

If Foreign Subco is the employer, it is a question of fact whether Foreign Subco carries on business outside Canada under a contract with the government of the foreign country in respect of which its employees perform their duties outside Canada with respect to qualifying activities. It appears difficult to say that Foreign Subco has a contract with the government of the foreign country under which it carries on business outside Canada when the contract in question is merely a purchase contract to acquire mining
property in the foreign country and as conditions subsequent of the contract it is required to develop and refurbish certain mines in the foreign country. The business carried on outside Canada by Foreign Subco (namely, the exploration of minerals) is not carried on under the purchase contract.

It is also a question of fact whether the personnel seconded by Publico to Foreign Subco working in the foreign country to develop a new mine and to refurbish existing mines are residents of Canada. However, unless all significant ties with Canada have been severed, individuals who work on short-term foreign assignments and who are residents of Canada immediately before the assignments would generally be considered residents of Canada for purposes of the Income Tax Act.

Since to resolve the above-noted queries requires an examination and review of all the facts and circumstances of the situation in question, we suggest that you submit all the facts and circumstances (including the contracts with the foreign government, the contracts between Publico and Foreign Subco and the employer-employee contracts) to the appropriate Tax Services Office so that they could provide you with more specific guidance in this area.

Yours truly,

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