13 May 1996 External T.I. 9616535 - OVERSEAS EMPLOYMENT TAX 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: general comments re OETC in 122.3 of the Act.

Position: n/a

Reasons: n/a

		961653
XXXXXXXXXX	G. Middleton
		957-2122
May, 13, 1996

Dear XXXXXXXXXX:

This is in response to your fax of May 2, 1996 and further to your recent telephone conversation with Ken Major concerning the Overseas Employment Tax Credit ("OETC") provisions found in section 122.3 of the Income Tax Act (the "Act").

As explained to you, we are unable to discuss the affairs of a particular taxpayer due to the confidentiality provisions contained in the Act. With respect to the newspaper articles you sent us, the action taken by Revenue Canada therein was the result of an audit project which was undertaken to determine whether certain claims for the OETC were in accordance with the law in section 122.3 of the Act. This audit project was conducted in the same manner as other audit projects under which Revenue Canada attempts to verify various claims made by taxpayers on their tax returns. The audit project was not started as the result of a change in Revenue Canada's policy regarding claims for the OETC.

The purpose of the OETC is reflected in the "Tax Measures: Supplementary Information and Notices of Ways and Means Motion" released by the Department of Finance on March 6, 1996 as part of the Budget Papers.

"The primary purpose of this credit (the OETC) is to ensure that Canadian firms, employing Canadian staff, are in a position to compete against foreign firms in bidding on overseas work. The tax systems of a number of countries other than Canada provide tax relief to their residents working abroad, thus allowing firms from those countries to base their bids for overseas contracts on the reduced salary costs that such tax relief allows. Similarly, the OETC enables Canadian employers to reduce their employment costs with respect to foreign contract work, while maintaining the after-tax value of the remuneration their employees receive in connection with such work.

Since the substantial benefits that the OETC provides are intended to enhance the competitiveness of Canadian firms through lower wage bills, rather than to serve as an incentive for individuals resident in Canada to work offshore, the credit is limited to income from an employer that is resident in Canada or a foreign affiliate of a Canadian resident."

As you can see, the main purpose of the OETC is to assist Canadian companies in competing with foreign companies for work outside of Canada. This purpose has never changed as indicated in the Budget Papers of December 11, 1979 when a deduction for overseas employment was first introduced and in the Budget Papers of April 19, 1983 when the deduction was replaced with the OETC in section 122.3 of the Act.

Mr. Major also explained that there are several requirements which must be satisfied in order to be eligible to claim an OETC and that many of these requirements are based on questions of fact. Some of the key requirements in the legislation for the OETC in section 122.3 of the Act are:

-The "specified employer" must be resident in Canada or a corporation that is "foreign affiliate" of a person resident in Canada.

-An individual employee who wishes to claim an OETC must be resident in Canada and he must be an employee of a "specified employer".

-The "specified employer" must be carrying on business outside Canada in connection with resource, construction, installation, agricultural or engineering contracts.

We are enclosing a copy of the legislation for section 122.3 of the Act and copies of the Budget Papers referred to above for your information.

We trust our comments will be of assistance to you; however, if you should have any further questions in this matter, we would be pleased to answer them.

Yours truly,

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