26 July 1995 External T.I. 9505005 - OVERSEA 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether a company which seconds employees to its Canadian affiliate to work outside Canada in another affiliate is considered carrying on business out Canada

Position TAKEN:

No

Reasons FOR POSITION TAKEN:

The company merely seconds its employees and the Canadian affiliate merely reimpbuses the company for the cost.

		950500
XXXXXXXXXX	S. Leung

Attention: XXXXXXXXXX

July 26, 1995

Dear Sirs:

Re: Overseas Employment Tax Credit

We are writing in response to your letter of February 17, 1995 in which you requested a technical interpretation with respect to the application of the provisions of section 122.3 of the Income Tax Act (the "Act") to the following hypothetical situation outlined in your letter.

Hypothetical Situation

• Aco is a corporation resident in Canada which owns two Canadian subsidiary wholly-owned corporations, Bco and Cco. Dco is a U.S. subsidiary wholly-owned corporation of Cco and, therefore, is a foreign affiliate of both Aco and Cco. Dco carries on a plastics and petrochemical business with manufacturing facilities in several states in the U.S.
• Bco will second numerous employees to Dco on short term (6 to 18 months) work assignments. These employees will assist in the introduction of and transition to a new computer system which will affect the majority of the applications required by Dco to conduct its business effectively.
• The computer system being installed uses software developed by an unrelated third party which has been made available to Aco and any of its affiliates through a licensing agreement. This computer system will eventually be introduced to Aco, Bco, Cco and their other affiliates.
• The seconded employees will remain members of Aco's registered pension plan and savings plan as it is a common plan for all employees of Aco and its affiliate companies. While the employees will continue to be on the payroll of Bco, any compensation and benefits earned by the seconded employees during their assignments will be borne by Dco through intercompany charges. During their assignments, the seconded employees' activities will be directed by Dco.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax consequences of actual transactions. However, we can offer the following general comments.

It is a question of fact whether the seconded employees (the "Workers") are employees of Bco or Dco. It is our view that the employer may not necessarily be the person who pays the salaries if that person is not the person to whom the Workers report on a daily basis. A review of the arrangement between Bco and Dco and the employment contracts between the Workers and Bco/Dco have to be made as well as the facts concerning the actual performance of duties by the Workers have to be examined in order to ascertain with which company the Workers have an employer-employee relationship for purposes of determining whether they are employed by Bco or Dco. Since Bco is a resident of Canada and Dco is a foreign affiliate of a resident of Canada, either of them qualifies as a specified employer pursuant to subsection 122.3(2) of the Act.

However, in either case, it does not appear that the Workers qualify for any deduction under section 122.3 of the Act. If the Workers remain as employees of Bco, it would appear that they would not qualify on the basis that Bco does not carry on business outside Canada. Bco merely seconds its employees to Dco and is reimbursed for the remuneration it pays in respect of such employees while they are rendering services to Dco. Moreover, it is our view that the installation of a computer system as an add-on where there is already one in place or as a modification of or alternation to an existing system may not qualify as an "installation" activity referred to in clause 122.3(1)(b)(i)(B) of the Act.

If the Workers are in fact employees of Dco, they would not qualify on the basis that they would not be considered to be employed in connection with a contract under which Dco carries on business outside Canada with respect to qualifying activities. Dco may have a contract with an unrelated party that relates to the installation of a new computer system for its own use but it cannot be said that Dco carries on business outside Canada under that contract. Furthermore, as was mentioned above, it is a question of fact whether the installation of a computer system is an "installation" activity referred to in clause 122.3(1)(b)(i)(B) of the Act. We also have serious doubt that Dco's activities in carrying out manufacturing and processing functions of the plastics and petrochemicals business can be categorized as "engineering" activities referred to in that clause of the Act. Even if Dco did have certain contracts under which it carried on business outside Canada with respect to a qualifying activity, it is unlikely that substantially all the Workers' duties associated with the installation of a computer system designed to enhance Dco's general business operations could be viewed as having been performed in connection with such contracts.

We hope the above information is of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch