8 February 2011 External T.I. 2011-0393431E5 - 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.

Principal Issues: Determination of "throughout any period of more than 6 consecutive months" (a qualifying period) in subsection 122.3(1) of the Act.

Position: Question of fact whether a qualifying period exists.

Reasons: Employer's contract to carry on business outside of Canada and employee's duties of employment performed outside of Canada are both relevant to the determination of whether or not a qualifying period exists.

XXXXXXXXXX
									2011-039343
									A. Seidel
									(613) 957-2058

February 8, 2011

Dear XXXXXXXXXX :

Re: Overseas Employment Tax Credit

This is in reply to your e-mail of January 21, 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(1) of the Income Tax Act (the "Act").

Background

• The employer is a corporation ("ACo") whose only business is the provision of engineering services.
• An employee ("Mr. X") performs all or substantially all of his duties of employment outside of Canada for a continuous period of five months during the year in connection with a contract under which ACo carried on business outside of Canada with respect to an engineering activity.
• During the five month period, Mr. X was required to work a substantial amount of overtime such that, upon his return to Canada, Mr. X is entitled to one month of paid compensatory leave in respect of such overtime. The total amount paid to Mr. X while on compensatory leave is the equivalent of what Mr. X would otherwise have received for the overtime worked.

Legislation

An individual who is resident in Canada may be entitled to claim the OETC for qualifying income from employment outside Canada. Qualifying income arises where the individual:

(a) is employed by a specified employer, defined in subsection 122.3(2) of the Act to include a corporation that is resident in Canada;

(b) is employed in connection with a contract under which the specified employer carries on business outside Canada with respect to any engineering project; and

(c) performs all or substantially all of 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 (the "qualifying period") within the year, beginning in the year and ending in a subsequent year, or ending in the year and that began in a previous year.

Subsection 122.3(1.1) of the Act excludes certain employment income from qualifying for the OETC. Employment income does not qualify for the OETC where all of the following conditions are met:

• 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;
• the employee does not deal at arm's length with the employer or is a specified shareholder of the employer; and
• 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.

Issue

Is Mr. X's month of paid compensatory leave included in the more than six consecutive month test in subsection 122.3(1) of the Act such that Mr. X would have a qualifying period and be eligible for the OETC?

Our Comments

Where proposed transactions relate to a specific taxpayer, the taxpayer can request an advance income tax ruling. For more information about how to obtain an advance income tax ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular can be accessed on the Canada Revenue Agency's ("CRA") website at http://www.cra-arc.gc.ca. Although we cannot comment on any specific situation, we are prepared to provide the following general comments.

The situation described above does not provide sufficient information to conclusively determine whether or not the qualifying period test in subsection 122.3(1) of the Act is met.

Where ACo enters into only one five month contract to provide engineering services outside of Canada, ACo will not carry on business outside of Canada for a qualifying period and no OETC would be available to Mr.X. It is our view that ACo's contract must continue for a period of more than six full months before a qualifying period can exist.

Where ACo enters into a contract to provide engineering services outside of Canada for a period that lasts more than six consecutive months, it will then be a question of fact whether or not the month of paid compensatory leave attributable to overtime worked by Mr. X while outside of Canada for the previous five months will form part of a qualifying period.

In our view, an individual's entitlement to the OETC will not necessarily be denied just because the individual was not actually outside Canada or at the work location(s) outside Canada for the entire time. During a period of absence from a work location outside Canada an individual 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 a period or more than six consecutive months, substantially all of the individuals employment duties (90% or more) are performed outside Canada in connection with a qualifying activity of the employer. The period of absence could, depending on the facts, include paid compensatory leave, as in the example described above, provided the compensatory leave clearly relates to the overtime worked outside of Canada and Mr. X continues to be employed by ACo when such leave is taken.

The determination of whether or not a taxpayer's employment income qualifies for the OETC is the responsibility of the local tax services office. A list of tax services offices is available on the CRA's website as is Interpretation Bulletin IT-497R4, which provides additional information on the OETC.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch