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.
Dear Sirs:
Re: Overseas Employment Tax Credit - Subsection 122.2
This is in reply to your letter dated February 11, 1991 whereby you submitted an enquiry as to how the Department would regard a certain type of transaction proposed to be undertaken to permit an individual to avail himself of the overseas employment tax credit pursuant to section 122.3 of the Canadian Income Tax Act (the "Act"). Specifically, you submitted for our consideration the following situation:
Your inquiry appears to relate to a specific transaction actually proposed to be undertaken by an identifiable taxpayer and thus more properly should have been submitted as a request for an advance income tax ruling in accordance with the requirements of Information Circular 70-6R2 dated September 28, 1990. However, while you have not provided sufficient information to permit us to formulate a conclusive, binding opinion, we can offer the following general comments which hopefully will be of assistance to you.
The overseas employment tax credit authorized pursuant to section 122.3 of the Act is intended to assist Canadian based employers to compete internationally using Canadian resident employees by permitting their Canadian resident employees a reduction in Canadian tax in respect of their income from employment performed outside of Canada. The tax credit is only available to individuals who are employees of Canadian based employers.
In the situation submitted by you, the Canadian individual appears to be in substance an employee of a U.S. based employer and the proposed new Canadian based corporation would appear to be simply a device to alter the form (but not the substance) of that relationship. Accordingly, it would not appear to be a situation in respect of which it was intended that the Canadian individual should be entitled to the overseas employment tax credit and the transactions proposed to be undertaken in an attempt to permit the individual to avail himself of the tax credit would appear to result in a misuse of section 122.3 and an abuse of the Act.
We also confirm that, as indicated by paragraph 9 of Interpretation Bulletin IT-497R2, individuals are not eligible for a deduction from tax under section 122.3 in respect of self-employed income. A transaction undertaken to convert what is in substance self-employment income (i.e. business income) to employment income in form in an attempt to permit an individual to avail himself of the overseas employment tax credit could also result in a misuse of section 122.3 and an abuse of the Act.
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© Her Majesty the Queen in Right of Canada, 1991
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© Sa Majesté la Reine du Chef du Canada, 1991
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