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: Scenarios 1 & 2:
What is the number of days of eligibility for the OETC?
Scenario 3:Would the calculation of the OETC include the period that involved the sea-trials?
Scenario 4:Would the employee onboard Vessel A qualify for the OETC by virtue of the fact that his employer was carrying on qualifying activity for greater than 6 months even though the vessel he worked on board was not specifically engaged in a qualifying activity for 6 months?
Position: Scenario 1:The qualifying period would exclude the first period of the contract when the employee was off. Thus the qualifying period should be 166 days, thereby denying the employee to be eligible for the OETC.
Scenario 2:The qualifying period would cover the entire term of the contract, and therefore include all the time-off periods during the contract term.
Scenario 3:No. The sea trials should not be included as part of the qualifying period.
Scenario 4:No. The employee would not qualify for the OETC.
Reasons: Scenario 1:
The employee did not actually start working on the foreign contract yet during the first period of the contract term, and accordingly that period is not attributable to the offshore contract.
Scenario 2:A period of absence from a work location outside of Canada will generally not interrupt the eligibility for the OETC, provided that throughout the qualifying period, substantially all of the employment duties as provided for in 122.3(1)(b)(i) are performed outside Canada.
Scenario 3:Notwithstanding the fact that the successful completion of the contract may be necessary before the 3rd-party charterer agrees to contract the vessel, the sea trials are too remotely connected to the "purpose of obtaining, on behalf of the specified employer a contract" to undertake any of the activities listed in 122.3(1)(b)(i). This is because the sea trials would have to be conducted regardless of whether or not the contract was entered into with the 3rd-party charterer.
Scenario 4:The employee was not outside of Canada for more than 6 months. After the project for Vessel A was completed, he was not assigned to the project involving Vessel B, nor was he assigned to any other foreign project. Since the qualifying period is less than 6 months and the criteria under subsection 122.3(1)(b)(i) is not met, the qualifying period for the employee should not be increased to include the time period covered by the contract with Vessel B.
March 2, 2011
Mr. Jim Dunphy IT Rulings Directorate
International Auditor Henry Leung
Newfoundland and Labrador Tax Services Office 613-957-9232
Sir Humphrey Gilbert Bldg
P.O. Box 12075
St. John's, Newfoundland A1B 4R5
2011-039200
Qualifying Period for the Overseas Employment Tax Credit (OETC) under Subsection 122.3(1)
This is in response to your e-mails dated January 5th and 7th, 2011 requesting our views on what the qualifying period should consist of, in the following scenarios described below, as it applies for the purposes of the determination of the Overseas Employment Tax Credit (OETC) under subsection 122.3(1) of the Income Tax Act.
FACTS:
Scenario 1:
A non-resident contractor has a contract to time-charter a vessel to transport crude oil outside Canada. The contract runs for a total of 211 days, from April 1st to October 28th. The sub-contractor for the crew, a specified employer, supplies permanent employees on a 6 weeks on and 6 weeks off rotation. Apart from the contract period, the employees work in Canada on the same rotational basis for the remainder of the year. In this scenario, the employees are working away from Canada on qualified activities for a total of 92 days out of the total 211 days of the contract. The employees are off during the remaining period of the contract.
Scenario 2:
The facts are the same as Scenario 1, however, the rotational periods result in a different number of total days worked during the qualifying period. In this scenario, the employees are working away from Canada on qualified activities for a total of 119 days out of the 211 days of the contract. The employees are off during the remaining period of the contract.
The 2 scenarios are summarized in the chart below:
DATES SCENARIO 1 SCENARIO 2
Jan. 1 - Feb. 15 Off Working in Canada
Feb. 15 - Mar. 31 Working in Canada Off
Contract Period (Total of 211 days)
Apr. 1 - May 15 (45 days) Off Working on Qualified
Activity outside of Canada
May 16 - Jun. 30 (46 days) Working on Qualified Off
Activity outside of
Canada
Jul. 1 - Aug. 15 (46 days) Off Working on Qualified
Activity outside of Canada
Aug. 16 - Sep. 30 (46 days) Working on Qualified Off
Activity outside of
Canada
Oct. 1 - Oct. 28 (28 days) Off Working on Qualified
Activity outside of Canada
Oct. 31 - Dec. 15 Working in Canada Working in Canada
Scenario 3:
A non-resident has a new vessel built for time-charter in Canada. The original agreement was to have the vessel contracted to Canadian companies to transport crude oil in Canadian waters. The non-resident owner is not a foreign affiliate of the Canadian charterer. Upon completion of the construction of the vessel and prior to the delivery of the vessel to the Canadian timecharterer, the vessel would undergo sea trials, at the expense of the non-resident owner, to ensure the vessel was sea-worthy. The sea-trials were expected to take approximately 2 weeks.
When the construction of the vessel was completed, the Canadian charterer was not ready to take the vessel. The Canadian charterer, who is the specified employer, then agreed with the non-resident owner to charter the vessel to a non-resident third-party who would use the vessel to transport crude oil outside Canada. The third party would accept the vessel once the sea trials were completed and signed off by the Master (Captain) of the vessel. The Master is employed by the Canadian charterer. The sea trials are in themselves not a qualified activity, but the contract with the third party was contingent upon receipt of the Master's attestation to the seaworthiness of the vessel. If the sea trials were unsuccessful or the contract was not entered into with the third-party, the vessel would sit idle for six months while waiting for the Canadian time-charterer.
Scenario 4:
A company has two distinct and separate contracts, signed the same day, to supply 2 vessels to the same contractor. The first contract involves Vessel A, which is contracted to perform qualified activities from May 22nd to November 11th, a total of 174 days. The second contract involves Vessel B, which is contracted to perform qualified activities from April 1st to November 26th, a total of 240 days.
An employee, employed for the whole year, is assigned to Vessel A on a 30-day on and 30-day off basis. Over a 6-month period the employee performed more than 90% of his employment duties outside Canada, however, Vessel A, was not engaged in a qualifying activity for 6 months. Vessel A was only engaged in qualifying activity for 174 days. When the project was completed, the employee returned to Canada and was not assigned to any other projects outside of Canada. The company however, was engaged in qualifying activity for more than 6 months based on both contracts.
ISSUES:
Based on the scenarios presented above, you ask the following questions:
Scenarios 1 & 2:
What is the number of days of eligibility for the OETC?
Scenario 3:
Would the calculation of the OETC include the period that involved the sea-trials?
Scenario 4:
Would the employee onboard Vessel A qualify for the OETC by virtue of the fact that his employer was carrying on qualifying activity for greater than 6 months even though the vessel he worked on board was not specifically engaged in a qualifying activity for 6 months?
In general, subsection 122.3(1) of the Act applies where in a period of more than 6 months that commenced before the end of the year and included any part of the year (the "qualifying period"), all or substantially all of an individual's duties of employment are performed outside of Canada in respect of a "qualifying activity".
Scenario 1:
In both Scenario 1 and Scenario 2, the 211 days in the contract period are interrupted by the time-off periods caused by the rotational cycles that the employees are on. In Scenario 1 though, the employee happens to be off during the first period (April 1 - May 15), the third period (July 1 - August 15), and last period (October 1 - October 28) of the contract term. As explained below in Scenario 2, breaks during a contract will not necessarily deny the eligibility for the OETC, provided that throughout the qualifying period, substantially all the employment duties are performed outside Canada. In our view, however, a qualifying period is only considered to commence on the first day an employee performs his duties of employment outside Canada.
Since the employee did not actually start working on the contract yet in the first period of the contract, and since the period immediately follows a period of work performed in Canada, the time off during the first period cannot be said to be attributable to the offshore contract and thus, the first period should not be included as part of the qualifying period. On the other hand, the last period of the contract term when the employee is also off can be seen as being attributable to the offshore contract, and should therefore be included as part of the qualifying period. Thus, if the first period (45 days) of the contract is excluded, the qualifying period for the OETC under this scenario is reduced to 166 days, therefore disqualifying the individual from the OETC, as the individual would not have been working throughout any period of more than 6 consecutive months as required in the preamble to subsection 122.3(1).
Scenario 2:
In this scenario, the employee was off during the second (May 16 - Jun 30) and fourth (Aug 16 - Sep 30) periods of the contract term, and worked the other periods. CRA has stated in paragraph 11 of IT-497R4:
... an individual's entitlement will not necessarily be denied because the individual was not actually outside Canada or at the work location(s) outside Canada for the entire qualifying period. During a period of absence from a work location outside Canada, an employee may take vacation time, consult with the specified employer in Canada or perform duties of employment in Canada and still remain eligible for the OETC, provided that throughout the qualifying period substantially all of the employment duties, as referred to in ¶3, are performed outside Canada.
In this scenario, it is CRA's position that the qualifying period would cover the entire term of the contract, and include the time-off periods during the contract, provided that the employee is remains employed by the specified employer. The more important question that should be asked in such instances, is whether the "all or substantially all" test found in paragraph 122.3(1)(b) is met. One will need to consider whether the employee worked on other contracts for the employer during his time-off from the foreign contract in question, and will need to compare the time actually worked in Canada for the individual's employer during the qualifying period as compared with the total time the individual actually worked in the same qualifying period. Where the employee performs more than 10% of his duties of employment while he is in Canada, the employee would not meet the "all or substantially all" (90% or greater) test.
Scenario 3:
Under 122.3(1)(b)(ii), an individual resident in Canada may qualify for the OETC, where throughout any period of more than 6 months, the individual was employed by a specified employer, and performed all or substantially all of the duties of the individual's employment outside of Canada for the purpose of obtaining, on behalf of the specified employer, a contract to undertake any of the activities referred to in clause (i)(A), (B), or (C).
Although the attestation that the sea-trials are successful is necessary before the non-resident 3rd-party charterer agrees to contract the vessel, the sea-trials would not meet the ambit of subparagraph 122.3(1)(b)(ii). The provision is aimed more at a specified employer sending an employee outside of Canada to assist in securing a contract to undertake one of the activities described in 122.3(1)(b)(i). Notwithstanding the fact that the sea trials were necessary in obtaining the contract with the 3rd-party charterer, and are being conducted by Canadian resident individuals who are employed by a specified employer, the sea trials are too remotely connected to the "purpose of obtaining, on behalf of the specified employer a contract" to undertake any of the activities listed in 122.3(1)(b)(i). If the contract with the 3rd-party was not entered into, the Canadian charterer would still need to conduct the sea trials for the non-resident ship-owner before the Canadian charterer could use the vessel.
Accordingly, the time taken to conduct the sea-trials should not be included as part of the qualifying period.
Scenario 4:
If Vessel A was not engaged in qualifying activities for more than 6 months, the employee who worked on-board Vessel A would not qualify for the OETC, notwithstanding the fact that over a 6 month period, the employee in question may have spent more than 90% of his time on qualifying activities.
Unlike the situation in Rooke v. R., [2003] 1 C.T.C. 208 (F.C.A.), the employee in this case was not outside of Canada for more than 6 months on various projects. After the project for Vessel A was completed, he was not assigned to the project involving the same client on Vessel B, nor was he assigned to any other foreign project. Subsection 122.3(1) is applied to the specific facts of each individual employee. The employee in this case did not satisfy the requirements of 122.3(1)(b)(i) because he never performed any duties of employment in connection with the contract for Vessel B under which the employer carried on business outside Canada with respect to a qualifying activity. Accordingly, the qualifying period for the employee should not be increased to include the time period covered by the contract which the employer has with Vessel B. Since the contract for Vessel A did not last for a sufficient period of time, any employee who worked only in connection with that contract would therefore not qualify for the OETC.
We trust that these comments will be of assistance.
Yours truly,
Olli Laurikainen
Section Manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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