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 ISSUE:
Whether an individual is entitled to claim the overseas employment tax credit ("OETC") pursuant to section 122.3 of the Act in a situation where the individual is related to the specified employer (employee's spouse controls the employer).
Position TAKEN:
Yes. Employee is eligible for the OETC.
Owing to the limited information provided in the request, we were unable to determine whether the limitation to access the OETC set out in the new subsection 122.3(1.1) (enacted by the passage of Bill C-92 which was given Royal Assent on Friday, April 25, 1997) was inapplicable. Accordingly, reference was made to new subsection (1.1).
Reasons FOR POSITION TAKEN:
Prior to 1997, nothing in the Act imposed a restriction on the availability of the OETC in a situation where the employee claiming the OETC otherwise qualifies for the OETC but is related to the specified employer.
5-970003
XXXXXXXXXX P. Diguer
(613) 957-8953
Attention: XXXXXXXXXX
September 10, 1997
Dear Sirs:
Re: Section 122.3 of the Income Tax Act (Canada)
This is in reply to your facsimile dated December 23, 1996 and transmitted to our office on December 30, 1996 in which you requested our opinion concerning the following situation.
Situation
A Canadian resident individual (the "Taxpayer") is employed by a "Canadian-controlled private corporation" (as defined in subsection 125(7) of the Income Tax Act (Canada) ("the Act") ("Canadaco")). Canadaco is controlled by the Taxpayer's wife. Canadaco performs subcontract work for Polandco, a Polish company that conducts business in Poland and is controlled by the Taxpayer's son. Polandco has entered into contracts to provide services in the area of construction, installation and engineering. The Taxpayer has, for more than six consecutive months, performed all or substantially all of his employment duties in Poland in connection with a contract under which Canadaco carries on business in Poland with respect to engineering activities. The taxpayer also performs some marketing activities in Poland on behalf of Canadaco.
Opinion requested
You indicate that you understand that the Department cannot provide a ruling on the particulars of the situation described in your facsimile and ask that the Department confirm your understanding of section 122.3 of the Act and its application to the situation outlined above.
The situation outlined in your letter appears to relate to a specific taxpayer and may involve completed transactions. As you have mentioned, the Department does not offer advance tax rulings on the application of section 122.3 of the Act on the eligibility of an employee to the overseas employment tax credit. Moreover, we do not offer opinions on the prospective application of this provision in any specific fact situation. As stated in paragraph 20 of IT-497R3, you may wish to apply with your local tax services office for reduced withholding of income tax at source if you expect that the employee will be entitled to the OETC. Such application should be accompanied by the supporting documentation. In any event, we would like to offer the following general comments on the application of section 122.3 which may be relevant to your particular fact situation and we would be pleased to offer general comments on any particular interpretative issue that you may wish to raise.
Prior to 1997, nothing in the Act imposed a restriction on the availability of the OETC in a situation where the employee (who otherwise qualified for the OETC) was related to the specified employer.
A restriction on the availability of the OETC under certain circumstances was recently enacted with the passage of Bill C-92 into law (Royal Assent given on April 25, 1997). Included in Bill C-92 is new subsection 122.3(1.1) which provides the following:
(1.1) No amount may be included under paragraph (122.3)(1)(d) in respect of an individual's income for a taxation year from the individual's employment by an employer where
(a) the employer carries on a business of providing services and does not employ in the business throughout the year more than 5 full-time employees;
(b) the individual
(i) does not deal at arm's length with the employer, or is a specified shareholder of the employer, or
(ii) where the employer is a partnership, does not deal at arm's length with a member of the partnership, or is a specified shareholder of a member of the partnership; and
(c) but for the existence of the employer, the individual would reasonably be regarded as an employee of a person or partnership that is not a specified employer.
Subsection 122.3(1.1) applies to the 1997 and subsequent taxation years.
Thus subsection 122.3(1.1) imposes a limitation on the availability of the OETC. Where the conditions described in (a), (b) and (c) above are all present, the individual may not claim a tax credit in respect of his income from employment.
Owing to the limited information provided in your facsimile we are unable to ascertain whether the limitation imposed by subsection 122.3(1.1) would apply to your particular situation. Moreover, as we have not been given much information on the nature or extent of the marketing activities of the taxpayer in Poland, we are unsure whether the marketing activities would meet the requirement of paragraph 122.3(1)(b). That provision provides that the taxpayer must perform all or substantially all of his duties of employment, either in connection with a contract under which the specified employer carried on business outside Canada or for the purpose of obtaining on behalf of the specified employer a contract for any of the activities specified in subparagraph 122.3(1)(b)(i).
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 70-6R3 dated December 30, 1996 they are not binding on Revenue Canada, Customs, Excise and Taxation.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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