10 December 1992 Income Tax Severed Letter 9209525 - Overeseas 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.

920952
XXXXXXXXXX K.B. Harding
(613) 957-2111
Attention: XXXXXXXXXX

December 10, 1992

Dear Sirs:

Re: Section 122.3 Overseas Employment Tax Credit (OETC)

This is in reply to your letter of February 10, 1992 wherein you requested our opinion concerning the following hypothetical situation.

• 1. XXXXXXXXXX
• 2. Individual Y is an employee of Company A. Company A is considering starting a new operation in Country P. Accordingly, in August 1991 individual Y was sent to Country P to begin negotiations etc. Individual Y is expected to live predominantly in Country P for an 18-month period. Because of the specialized nature of Company A's business, individual Y has certain valuable technical skills and know-how with respect to Company A and its product.
• 3. Company A will enter into a joint venture arrangement with a resident of Country P under the terms of the joint venture arrangement. Company A and the joint venture will agree to split profits from the operation of the XXXXXXXXXX on a 50/50 basis. Company A will establish a wholly-owned subsidiary in the foreign jurisdiction to participate in the joint venture. In addition, Company A will sell a XXXXXXXXXX to the joint venture and enter into a licensing arrangement with the joint venture.
• 4. Under Canadian domestic tax law Individual Y will likely be considered a resident of Canada for the 18-month period he resides outside of Canada. Under the laws of Country P individual Y will likely be considered a resident of that country.
• 5. Individual Y is an employee of Company A and he has the ability to conclude contracts on A's behalf. He will perform substantially all (i.e. > 90%) of his duties of employment in Country P
6. Individual Y is in Country P to carry out the following activities:
• (a) To conclude a joint venture contract with a resident of Country P.
• (b) XXXXXXXXXX
• (c) To conclude a licensing agreement with the joint venture whereby Company A will provide certain future specialized services to the joint venture.
• (d) XXXXXXXXXX
• 7. Company A is not engaged in the business of exploring for petroleum, natural gas, minerals or other resources.
• 8. XXXXXXXXXX
• 9. XXXXXXXXXX
• 10. XXXXXXXXXX

Section 122.3 of the Income Tax Act ( the "Act") provides that where an individual is an employee of a specified employer while working outside Canada for a period exceeding six consecutive months that commenced before the end of the year and performed all or substantially all the duties of employment outside Canada in connection with a contract under which the specified employer carried on business outside Canada with respect to qualified activities, such an individual is entitled to claim the OETC.

As indicated in Information Circular 70-6R2, the Rulings Division is prepared to provide written opinions on the interpretation of specific provisions of the law. However, where the request relates to a proposed transaction the taxpayer should request an advance ruling rather than an opinion. Where the request for opinions relate to completed transactions the matter should be submitted to the appropriate District Office. In the above scenario it would appear that a portion of your request relates to a proposed transaction and the other portion relates to a completed transaction. Accordingly, we cannot respond to your situation directly however, we will provide you with some relevant comments.

It is our view that where an individual is employed by a specified employer and who performed all or substantially all of his duties of employment outside Canada for the purpose of obtaining, on behalf of the specified employer, a contract to undertake "any construction, installation, agricultural or engineering activity" or other activities identified in subparagraph 122.3(1)(b)(i) he will qualify to claim the OETC even when the construction takes place in Canada.

Where a Canadian company carries on business by providing any construction, installation or engineering services in a foreign country its employees will qualify to claim the OETC provided they meet all the other conditions set out in section 122.3 of the Act. In order to determine whether or not the business activities of the company falls within the phrase "any construction, installation, agricultural or engineering activity" in clause 122.3(1)(b)(i)(B) of the Income Tax Act (the "Act") it would be necessary for the Department to review the contracts to determine the exact nature of the activities to be carried out by the company and the qualification of the employees required to carry out such activities.

Without knowing the nature of the joint venture agreement that Mr. Y is arranging, which appears to be a contract with respect to the acquisition and operation of a XXXXXXXXXX, it is not clear that all or substantially all Mr. Y's duties of employment are for the purpose of obtaining a contract to undertake any construction, installation or engineering activity.

In summary, the determination of whether or not Mr. Y qualifies for the OETC can only be made after reviewing all the related contracts.

We trust the above comments will be helpful to you.

Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch