10 November 1999 External T.I. 9804705 - 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.

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: 1) Whether CIDA contribution was a loan assistance funds as a result of being repayable contingent upon the occurrence of an event.

2) Whether a right to a commission was deemed disposed of pursuant to 128.1 on emigration.

Position: 1) A contingently repayable contribution is not loan assistance funds.

2) A right to receive a commission is only deemed disposed of if it relates to a sale that has already been made.

Reasons: 1) The definition of the term "loan" does not include a contribution that may or may not have to be repaid.

2) A right to receive an amount in respect of future sales is not possible to quantify and may turn out to be nil.

XXXXXXXXXX 980470
Olli Laurikainen
Attention: XXXXXXXXXX

November 10, 1999

Dear Sirs:

Re: Overseas Employment Tax Credit and Deemed Disposition on Emigration

This is in reply to your letter requesting our views concerning certain cross-border issues.

Issue 1 - Overseas Employment Tax Credit

You provide the following facts.

1) A company signs a Contribution Agreement (the "Agreement") with the Canadian International Development Agency ("CIDA") in 1995 under which CIDA will reimburse the company for a portion of its operating expenses relating to a project undertaken in Malaysia.

2) The company may be required to repay CIDA's contribution if the company receives revenue directly relating to that contribution.

3) The Agreement qualifies as a "prescribed international development assistance program" under section 3400 of the Regulations to the Act.

4) The company hires an employee and sends him to Malaysia to work on the project.

5) The employee files a tax return as a deemed resident under paragraph 250(1)(d) of the Act.

6) It is later determined that the company would be required to repay the CIDA contribution.

You request our view whether the CIDA financing could be viewed as "loan assistance funds" for the purposes of Section 3400 of the Regulations once it is determined that the CIDA financing would have to be repaid and whether the employee could then refile his tax return on the basis that he was a non-resident of Canada not subject to the deeming provisions of paragraph 250(1)(d) of the Act.

Our Comments

In our view, the CIDA financing received by the Company would not qualify as "loan assistance funds" notwithstanding that the financing was repayable by the Company in the event of the occurrence of a future contingency. In addition, the fact that the CIDA financing was later repaid by the Company would not retroactively change the fact that the activities of the Company under the Agreement had been financed by "...funds provided under External Affairs Vote 30a, Appropriation Act No. 3, 1977-78, or another vote providing for such financing" for the purposes of section 3400 of the Regulations. Therefore the Agreement would remain a prescribed international development assistance program of the Government of Canada after the assistance funds had been repaid.

Issue 2 - Deemed Disposition on Emigration

You provide the following hypothetical facts.

1) An individual resident in Canada is engaged in activities whereby he sells products and recruits others to sell the same products.

2) The individual receives commissions for the sales made by him directly and a residual commission for products sold by persons that have been recruited by him to sell the products.

3) The individual emigrates from Canada and will continue to receive a residual commission for sales made by persons recruited by him while resident in Canada.

4) The taxpayer will continue to report the residual commissions referred to in paragraph 3 above, in a Canadian tax return pursuant to section 115 of the Act.

You request our view whether the right to receive the residual commissions would be deemed to be disposed of under the provisions of paragraph 128.1(4)(b) of the Act on emigration.

Our Comments

In the above circumstances, the Department takes the view that the individual would have no income inclusion as a consequence of the application of paragraph 128.1(4)(b) of the Act in respect of future sales of product by persons recruited by the individual that would have been anticipated, but had not occurred, prior to the time of emigration. Therefore residual commission income arising as a consequence of sales occurring subsequent to the emigration would only be taxable pursuant to the provisions of section 115 of the Act. However, any rights to residual commissions in respect of sales taking place prior to emigration would be deemed to have been disposed of at the time of emigration. Income arising as a result of such deemed disposition would not be included in income a second time under section 115 of the Act as a consequence of the application of subsection 248(28) of the Act.

We trust this is the information you require.

The foregoing comments are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 and are not binding on Canada Customs and Revenue Agency.

Yours Truly,

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