17 June 2011 External T.I. 2011-0402901E5 - OETC - Qualifying Period

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: Determination of "qualifying period" with respect to vacation times that is attributable to the time worked out side of Canada.

Position: General Comment

Reasons: General Comment

XXXXXXXXXX
									Bing Zhang
									(613) 957-2095
									2011-040290
June 17, 2011

Re: Overseas Employment Tax Credit (OETC) - Qualifying Period

This is in reply to your email of April 13, 2011 wherein you requested our views with respect to your entitlement to the OETC as described in section 122.3 of the Income Tax Act (the "Act").

Background

You describe the situation as follows. In 2009 you went overseas for the construction of a new ship. You departed Canada on May 18, 2009. You then sailed the ship to Canada and arrived on Sept 09, 2009. You worked 12 hours a day 7 days a week, so your company actually gave you 1 day vacation for 1 day work. Since it was impractical to send you for vacation on regular 6 weeks work, 6 weeks off, you remained onboard for the full duration of the project. Since you were gone for 114 days, you were entitled 114 days of holidays. You also then sailed for another month in Canada and the US before returning home for vacation.

Our Comments

The determination of whether or not a taxpayer's employment income qualifies for the OETC is the responsibility of the local tax services office. It is generally not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain an advance ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the CRA website at http://www.cra-arc.gc.ca. A list of tax services offices also is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.

The OETC is available to individuals who are resident or deemed resident in Canada for any part of a taxation year. To qualify for the OETC, an individual must meet the following conditions:

1. be employed by a "specified employer" (generally a person resident in Canada or a corporation that is a foreign affiliate of a person resident in Canada) other than for the performance of services under a prescribed international development assistance program of the Government of Canada;

2. be employed in connection with a contract under which the specified employer carried on business outside Canada with respect to certain specified activities:

a) the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources,
b) any construction, installation, agricultural or engineering activity,
c) any prescribed activity, or

for the purpose of obtaining, on behalf of the specified employer, a contract to undertake any of the activities referred to in a), b) and c).

3. have performed all or substantially all (i.e., more that 90%) of the employment duties (in connection with a contract described in 2 above) outside Canada.

The conditions described in 1 to 3 must exist for a period more than six consecutive months (the "qualifying period") that commenced before the end of the year and included any part of the year.

Whether or not a qualifying period exists is a question of fact and can only be determined after a full review of all the relevant facts and documentation relating thereto.

CRA's view is that a contract must continue for a period of more than six full months before a qualifying period can exist. If the vacation is taken prior to the commencement, or after the completion of the contract, it will not be considered as part of the contract in assessing whether the contract lasted the requisite period of more than 6 consecutive months. The amount of vacation time earned during the contract is not relevant to the determination of whether the contract lasted for more than 6 consecutive months. Where pursuant to the contract, eligible activities are carried out outside of Canada for a period more than six consecutive months, it will then be a question of fact whether or not the vacation attributable to the work done while outside of Canada will form part of a qualifying period.

This is consistent with CRA's view on qualifying period 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 are performed outside Canada.

Another question is whether the "all or substantially all" test found in paragraph 122.3(1)(b) is met.

Paragraph 3 of IT-497R4 states that the "all or substantially all" test is considered to be met if 90% of the employment duties are performed outside Canada. The duties performed by an individual outside Canada during a qualifying period in connection with a qualifying activity of a specified employer (qualifying duties) are compared to all of the duties that the individual performed for that employer during that same period. The determination as to whether the "all or substantially all" test has been met is a question of fact that can only be determined after reviewing all the circumstances of a particular situation. However, generally, it will be made by comparing the actual time an individual spent performing the qualifying duties to the total time spent performing all duties during that same period. When the aggregate of the employment duties performed outside Canada in connection with ineligible activities and those performed in Canada in connection with any activity represent more than 10% of all the employment duties, the individual will not meet the "all or substantially all" test.

You stated in your email that after you came back you also sailed for one month in Canada and the US before returning home for vacation. Assuming that the month in Canada and the US is within the qualifying period and other conditions are met, if the activities during the month are ineligible when compared with the prior four months, the duties of employment performed over the course of the one month in Canada and US would disqualify the period for the purposes of subsection 122.3(1) of the Act.

If you would like to discuss the above conclusions, please call the author of this letter at the number indicated above.

We trust the above comments will be of assistance.

Yours truly,

Alain Godin, Manager
for Director
International and trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch