13 January 2010 External T.I. 2009-0333601E5 - 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: Does an individual qualify for the OETC if they are involved in a traffic accident and hospitalized in Canada during the qualifying period? .

Position: Whether an individual qualifies for the OETC during a period on sick leave is a question of fact.

Reasons: Section 122.3 requires that "all or substantially all" of the duties of employment be performed outside of Canada for the qualifying period of more than six consecutive months. An individual's entitlement to the OETC will not be denied only because the individual was not actually outside of Canada or at the work location outside Canada for the entire qualifying period. The employee will be eligible provided that throughout the qualifying period substantially all of the employment duties are performed outside of Canada.

XXXXXXXXXX 						2009-033360
A. Townsend
January 13, 2010

Dear XXXXXXXXXX :

Subject: Overseas Employment Tax Credit (OETC)

This is in response to your email of July 21, 2009, asking whether certain employment income will qualify for the OETC.

The situation you have described involves an employee that commenced overseas employment in XXXXXXXXXX for a period of two months, returned to Canada for approximately three weeks of training and then commenced a second overseas work assignment in XXXXXXXXXX , scheduled for a six month period. Unfortunately, during the work assignment in XXXXXXXXXX the employee was involved in an accident and medevaced to a hospital in Canada. Currently, the employee is on sick leave in Canada recovering from his injuries.

The particular situation outlined in your email appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

In order to be eligible to claim the OETC, the criteria in paragraphs 122.3(1)(a) and 122.3(1)(b) must be met by an individual throughout any period of more than six consecutive months that commenced before the end of the year and included any part of the year ("qualifying period").

Paragraph 122.3(1)(b) requires that for the qualifying period "all or substantially all" of the duties of the individual's employment must be performed outside Canada in connection with a contract under which the specified employer carried on business outside of Canada with respect to a qualifying activity. This requirement can be satisfied even if the work done relates to more than one contract of the specified employer.

As stated in paragraph 11 of Interpretation Bulletin IT-497R4, Overseas Employment Tax Credit, an individual's entitlement to the OETC will not necessarily be denied because the individual was not actually outside of 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 sick time and still remain eligible for the OETC, provided that throughout the qualifying period substantially all of the employment duties are performed outside Canada in connection with a contract under which the employer carried on business outside Canada with respect to a qualifying activity.

The "all or substantially all" test is considered to be met if 90% of the employment duties are performed outside Canada. The 90% test is made by comparing the actual time an individual spent performing the qualifying duties outside Canada to the total time spent performing all duties of employment during the qualifying period. Generally, an employee on sick leave is not performing any duties of employment. Therefore, sick time taken during the qualifying period should not affect the 90 % test and the employee could be eligible to claim the OETC.

Paragraph 122.3(1)(d) provides that the OETC applies to the income attributable to the duties performed on the days in the qualifying period. It is our view that, any remuneration received during a period of sick leave, when an employee would otherwise be engaged in qualifying activities, may qualify for the OETC. However, a definitive determination of whether compensation received while on sick leave qualifies for the OETC can only be made after the sick leave provisions of the relevant employment contract have been reviewed. Regardless, where compensation received in respect of sick leave does not qualify under paragraph 122.3(1)(d), the remainder of the employment income earned in respect of the qualifying activities in the qualifying period could qualify for the OETC.

In that respect, it should be noted that in a situation where the contract under which the employer carried on business outside Canada is cancelled because of the employee illness, the qualifying period would also terminate and the employee might not be eligible for the OETC. The question of whether a qualifying period ends or includes the sick leave can only be determined after a full review of the relevant facts and documentation.

In the particular situation you have described, assuming that the employee met all other conditions, you will have to determine whether the qualifying period throughout which he met the conditions started with the assignment in XXXXXXXXXX or if it started with the assignment in XXXXXXXXXX . Indeed, if you start the qualifying period with the duties in XXXXXXXXXX for OETC purposes, you would have to meet the "all or substantially all" test during the entire period. As there were 21 days in that period during which the employee was performing duties in Canada, it seems likely that the time spent performing duties in Canada during those days would represent more than 10% of all the employment duties.

We trust these comments will be of some assistance.

Louise J. Roy, CGA
Manager
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

cc. Ryan Paquet

Ottawa Tax Services Office