10 March 2011 External T.I. 2011-0395721E5 - 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: Is the "all or substantially all" test in paragraph 122.3(1)(b) of the Act applied to each separate qualifying employment or is it computed on the basis of all employment duties performed during a qualifying period.

Position: The test is applied to each qualifying employment.

Reasons: Consistent with paragraph 3 of IT-497R4.

XXXXXXXXXX
									2011-039572
									A. Seidel, CMA
									(613) 957-2058

March 10, 2011

Dear XXXXXXXXXX :

Re: Overseas Employment Tax Credit

This is in response to your e-mail of February 10, 2011 in which you requested our comments regarding the eligibility of an employee to claim the overseas employment tax credit ("OETC"), as described in section 122.3 of the Income Tax Act (the "Act"), in the situation described below.

Background

• An employer ("ACo") is a foreign affiliate of a corporation resident in Canada and therefore a specified employer, within the meaning thereof in subsection 122.3(2) of the Act, that carries on business outside of Canada providing drilling services in the oil and gas industry.
• An employee of ACo ("Mr. X") has a contract of employment that requires Mr. X to provide directional drilling services to ACo.
• All of Mr. X's employment duties with ACo are exercised outside of Canada.
• Mr. X is the sole shareholder of a corporation formed in Canada ("Canco"). Canco and ACo are not related and deal with each other at arm's length.
• Mr. X's employment contract with ACo includes periods of leave, i.e. vacation and compensatory time off, during which time Mr. X returns to Canada.
• During Mr. X's periods of leave, Mr. X remains an employee of ACo but also has an opportunity for employment with Canco in Canada in connection with a directional drilling contract secured by Canco with a person unrelated to Aco.
• Mr. X queries whether the employment he exercises with Canco, while employed with ACo but on leave from his position with ACo, would jeopardize his qualification for the OETC for his employment with ACo.

Our Comments

The situation outlined in your letter relates to a specific taxpayer. It is 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 a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where a specific query is in respect of a completed transaction, all of the relevant facts and documentation should be submitted to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs 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.

In general, an individual who is resident in Canada may be entitled to claim the OETC for qualifying income from employment exercised outside of Canada where the individual is:

(a) employed by a specified employer;

(b) employed in connection with a contract under which the specified employer carried on business outside Canada with respect to certain specified activities including, among other things, the exploration for or exploitation of petroleum, natural gas or other similar resources (a "qualifying activity"); and

(c) performs 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 (the "qualifying period") of more than six consecutive months

• 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.

As stated in paragraph 11 of IT-497R4, the CRA is of the view that a qualifying period may exist even though the employee is 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 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. However, an individual is only entitled to the OETC where, throughout a qualifying period, all or substantially all of the individual's employment duties (90% or more) are performed outside Canada in connection with a qualifying activity of the specified employer.

Whether or not the "all or substantially all" test can be satisfied where Mr. X has employment outside of Canada with ACo and a second employment in Canada with Canco during any qualifying period can only be determined after a full review of all the relevant facts and documentation relating thereto.

The CRA's views on whether or not the "all or substantially all" test is met are discussed in paragraph 3 of IT-497R4. It states:

"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. ... 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."

Therefore, consistent with this interpretation of the "all or substantially all" test, whenever the aggregate of the qualifying duties performed by Mr. X outside Canada in connection with his employment with ACo is 90% or more of all of his employment duties performed for ACo during a qualifying period, Mr. X will satisfy the "all or substantially all" test in respect of that employment. For greater certainty, the fact that Mr. X has a second, non-qualifying employment with Canco during a qualifying period when he remains employed with ACo does not, in and of itself, result in a denial of Mr. X's claim for an OETC since the employment duties exercised in respect of Mr. X's employment with Canco are not relevant in determining whether his employment with ACo qualifies for the OETC.

We trust these comments will be of assistance.

Yours truly,

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