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.
Principal Issues: Whether an employee's employment income qualifies for the OETC.
Position: Question of fact.
Reasons: Employee not eligible for OETC if employer is not a specified employer.
July 26, 2011
Dear XXXXXXXXXX :
Re: Overseas Employment Tax Credit
This is in reply to your e-mail of June 13, 2011 wherein you requested our views as to whether, based upon the facts described below, an individual would be entitled to the overseas employment tax credit ("OETC") described in subsection 122.3 of the Income Tax Act (the "Act").
The employer is a non-resident corporation ("ACo") that carries on business in Singapore in the oil and gas industry. An employee ("Mr. X") performs all or substantially all of his duties of employment for ACo outside of Canada for a continuous period of more than six months.
The situation described above does not provide sufficient information to conclusively determine whether or not Mr. X is eligible for the OETC. Notwithstanding our comments below, the determination of whether or not an employee's actual employment income qualifies for the OETC is the responsibility of the local tax services office.
As discussed in Interpretation Bulletin IT-497R4 "Overseas Employment Tax Credit" ("IT-497R4"), an individual who is resident in Canada is entitled to claim the OETC for qualifying income from employment in circumstances where the individual:
(a) was employed by a specified employer (see below), other than for the performance of services under a prescribed international development assistance program of the Government of Canada;
(b) was employed in connection with a contract (or for the purpose of obtaining such a contract) under which the specified employer carried on business outside Canada with respect to the exploration for or exploitation of petroleum, natural gas or other similar resources; and
(c) performed all or substantially all the employment duties (done in connection with a contract described in (b) above) outside Canada.
The conditions described in (a) to (c) must exist for a period of more than six consecutive months within the year, beginning in the year and ending in a subsequent year or beginning in the previous year and ending in the year.
For the purposes of the OETC, a "specified employer" is defined to include an employer that is a person resident in Canada and a corporation that is a foreign affiliate of a person resident in Canada.
In addition, even if the requirements described in (a) to (c) above have been met, an individual's income from employment will not qualify for the OETC if:
(1) 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;
(2) the employee does not deal at arm's length with the employer or is a specified shareholder of the employer; and
(3) but for the existence of the employer, the employee would reasonably be regarded as an employee of a person that is not a specified employer.
Where ACo is not resident in Canada and is not a foreign affiliate of a person resident in Canada (e.g. ACo is a company formed in a foreign jurisdiction that carries on business in Singapore), ACo would not qualify as a specified employer. A Canadian resident employee (e.g. Mr. X) of ACo would not be employed by a specified employer and would therefore not qualify for the OETC.
Where a Canadian resident's employment income is subject to tax in Canada and in a foreign jurisdiction, the Canadian resident may be entitled to claim a foreign tax credit pursuant to subsection 126(1) of the Act. In general, a foreign tax credit is a deduction from a taxpayer's Canadian tax otherwise payable that may be claimed in respect of foreign income taxes paid by the taxpayer for the year. Additional information with respect to foreign tax credits is provided in Interpretation Bulletin IT-270R3 "Foreign Tax Credit" ("IT-270R3").
A list of tax services offices is available on the Canada Revenue Agency's ("CRA") website (www.cra-arc.gc.ca) as are IT-497R4 and IT-270R3.
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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