1 September 1999 Internal T.I. 9907167 - OETC - XXXXXXXXXX

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 all or substantially all of the employment duties are in respect of qualifying activities for purposes of subsection 122.3(1)

Position: No

Reasons: It is because most of the work performed by the employees is relating tp XXXXXXXXXX which are not qualifying activities

September 1, 1999

	XXXXXXXXXX Tax Services Office	International
	  Section

S. Leung
957-2115
990716

Attention: XXXXXXXXXX

Overseas Employment Tax Credit ("OETC")
XXXXXXXXXX

We are writing in response to your memorandum of March 17, 1999 in which you requested our view as to whether the employees of XXXXXXXXXX who are resident in Canada are eligible for the OETC in the following situation.

xxxxxxxxxx

You requested our view as to whether XXXXXXXXXX was engaged in qualifying activities ("Qualifying Activities") referred to in subparagraph 122.3(1)(b)(i) of the Income Tax Act (the “Act") for the period from XXXXXXXXXX and, if the answer is positive, whether all of substantially all of the duties performed by the employees at issue were in connection with a contract under which XXXXXXXXXX carried on business outside Canada in respect of such Qualifying Activities.

Our Comments

For its employees to be eligible for the OETC a specified employer does not need to be engaged directly in Qualifying Activities. It is suffice as long as the specified employer carries on business outside Canada under a contract in respect of Qualifying Activities carried out by another person (see paragraph 8 of IT-497R3). However, since in this case it does not appear that XXXXXXXXXX carried on business in Qualifying Activities, XXXXXXXXXX had to be engaged in Qualifying Activities itself. In this case it appears that under a contract with XXXXXXXXXX, XXXXXXXXXX was engaged in both Qualifying Activities and activities which were not qualifying. In such a case, the Qualifying Activities must be all or substantially all of the employment duties rendered by an employee of XXXXXXXXXX in order for that employee to be eligible for the OETC. Interpreting the provisions of subsection 122.3(1) of the Act otherwise could render the provisions meaningless. For example, a specified employer could enter into a contract to carry out mainly non-qualifying activities and in an attempt to make sure its employees qualify for the OETC, the contract could require that a nominal amount of Qualifying Activities be carried out comprising, say, 1% of all the activities that it carried out outside Canada. In such a case if an employee of this employer was sent to work overseas mainly in respect of non-qualifying activities and qualified for the OETC, it would be useless to include the qualifying activity restrictions in subparagraph 122.3(1)(b)(i) of the Act.

In the case at hand, it appears that not all or substantially all of the duties of employment performed outside Canada by the employees at issue were in connection with a contract under which XXXXXXXXXX carried on business outside Canada in respect of Qualifying Activities. Most of the work done by the employees of XXXXXXXXXX related to XXXXXXXXXX which are not Qualifying Activities. We do not agree with the taxpayer's representative that Qualifying Activities were the primary activities of XXXXXXXXXX under its contract with XXXXXXXXXX and non-qualifying activities were merely incidental. We also do not agree that in determining whether an employer carries on business outside Canada in respect of qualifying activities, either the whole contract qualifies or does not qualify without examining under the contract what activities constitute Qualifying Activities and what activities do not. A contract may consist of both qualifying and non-qualifying activities and Qualifying Activities must represent all or substantially all of the employee's duties in order for him to qualify for the OETC.

If you have any questions regarding the above, please do not hesitate to contact us.

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

P.S.: For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their database. The severing process will remove all material that is not subject

to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Request for this latter version should be made by you to Jackie Page at (819)994-2898. The severed copy will be sent to you for delivery to the client.