3 December 1997 External T.I. 9729205 - 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:

Application of subsection 122.3(1.1) in various factual situations

Position:

While intent is to prevent self employed individuals from incorporating in order to claim credit, it is a question of fact in any given case whether or not 122.3(1.1) would apply to deny the credit.

Reasons:

Whether can reasonably be considered an employee is a question of fact.

972920
XXXXXXXXXX David R. Senécal

December 3, 1997

Dear Sirs:

Re: Overseas Employment Tax Credit

This is in reply to your letter of October 27, 1997, wherein you request our opinion with respect to the application of the Overseas Employment Tax Credit (the "OETC").

More specifically, your concern involves the application of subsection 122.3(1.1) of the Income Tax Act (the "Act"). In this regard, the Department of Finance has publicly indicated that the benefits of the OETC 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 incorporate and work offshore. To ensure that the OETC does not serve the latter purpose, subsection 122.3(1.1) was added to the Act effective for 1997 and subsequent taxation years.

Given the intent of this provision, it is our view that the words "reasonably regarded as an employee" in paragraph 122.3(1.1)(c) of the Act are meant to deny the OETC to those individuals who could just as easily provide their services to the foreign firm as an employee of that firm and, in essence, on a factual basis, are doing so. Consequently, for the purposes of applying paragraph 122.3(1.1)(c) of the Act, it is a question of fact as to whether or not, given the above context, a particular individual, who has chosen to incorporate a company and provide his or her services via that company, would reasonably, but for the existence of that company, be regarded as an employee of a person or partnership that is not a specified employer. This determination can only be made once all of the relevant facts have been examined.

In this regard, the Department will take into consideration certain factors which may indicate that, in the absence of an individual's personal services corporation, the individual would be regarded as an employee of a foreign firm rather than a contractor to that firm. These factors, for example, may include:

-the corporate history and background of the individual's employer;

-whether the employer has other contracts both in or outside Canada or whether the overseas contract represents the only source of income of the employer;

-whether the overseas contract is the only source of funds from which the individual is remunerated; and

-how the employer obtained the overseas contract (i.e., through advertising in trade journals or newspapers or through direct contact with the foreign firm).

Most importantly, the Department will carefully examine any contracts and other supporting documentation in light of the common law factors used to judge whether the individual is, in fact, an employee of the foreign firm. However, as we believe that what really happens in practice is determinative of whether or not an employer/employee relationship exists, if there is any doubt after taking into consideration the above factors, that the actual practice will not reflect the relationship that is set out in those contracts or other supporting documentation, the issue may have to be resolved retrospectively rather than prospectively and, therefore, preclude the issuance of waivers by the Department to reduce the withholding at source.

We trust that our comments will be of assistance.

Yours truly,

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