4 June 1998 External T.I. 9709535 - 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:

(A) Whether the installation of units to the drilling rigs is a qualifying activity described in paragraph 122.3(1)(b) of the Act; and

(B) whether such installation activity amounts to a business carried on by Canco outside Canada?

Position:

No position is taken in respect of both issues.

Reasons:

(A) It is a question of fact.

(B) It is a question of fact. Factors to be considered include: the objects of Canco’s business; the nature of the activities Canco is carrying on outside Canada; and whether Canco is considered under the foreign jurisdictions in which the installation services are to be performed, to be carrying on business in those jurisdictions.

				                                                        970953
XXXXXXXXXX 		                                                        Daniel Wong
(613) 954-4949

Attention: XXXXXXXXXX 

June 4, 1998

Dear Sir:

Re: Overseas Employment Tax Credit

This is in reply to your letter of April 8, 1997, wherein you requested our opinion on section 122.3 of the Income Tax Act (the “Act”). More specifically, you asked us to confirm that the employees of Canco would, in the situation described below, be eligible for the overseas employment tax credit (“OETC”).

Canco sells certain units that it manufactures to related non-resident corporations to be installed on drilling rigs. The drilling rigs are under contract or, once the units are installed, are expected to be used for a qualifying activity. These units are sold, on a F.O.B. customer site basis, i.e. the selling price charged by Canco includes the installation of the units on the rigs by the employees of Canco. The employees of Canco are residents of Canada and spend more than 90% of their time installing the units on rigs in various foreign countries.

COMMENTS

In your letter, you outlined what appears to be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R3, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact.

Nevertheless, we are prepared to provide the following comments which we hope will be of assistance to you.

Whether the activity carried on by Canco outside Canada is a qualifying activity described in paragraph 122.3(1)(b) of the Act is a question of fact, and a determination can only be made after consideration of all the relevant facts surrounding the particular circumstances. Even if the installation of the units to the drilling rigs is a qualifying activity referred to in subparagraph 122.3(1)(b)(i), one would have to consider whether such installation activity amounts to a business carried on by Canco outside Canada. The term “carrying on business” is not defined in the Act. Section 253 of the Act provides an extended meaning of “carrying on business in Canada” but the Act does not contain a definition of the term “carrying on business outside Canada”. The jurisprudence in the Canadian courts concerning “carrying on business” or “has carried on business” seems to indicate that each case is judged according to its own facts. Paragraph 15 of Interpretation Bulletin IT-497R3 describes certain criteria that the Department uses to determine whether a specified employer is carrying on business outside Canada and they are as follows:

(a) the objects of the employer’s business; and

(b) the nature of the activities the employer is carrying on outside Canada.

Another factor to be considered is whether Canco is considered under the taxation laws of the various foreign jurisdictions to be carrying on business in those jurisdictions. In our view, it is a question of fact whether by performing the installation services outside Canada, Canco can be viewed as carrying on business outside Canada.

The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.

Yours truly,

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