9 January 2003 External T.I. 2002-0179155 - 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 CCRA.

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

Principal Issues: purpose of and general comments on the OETC were requested

Position: provided comments from budget supplementary information and general comments on the provision

Reasons:

XXXXXXXXXX D. Yuen
2002-017915
January 9, 2003

Dear XXXXXXXXXX:

Re: Overseas Employment Tax Credit

We are writing in response to your letter dated December 12, 2002, wherein you requested our opinion on the Overseas Employment Tax Credit (the "OETC"). Unless otherwise stated, all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c. 1, as amended.

Your Questions

1. When the OETC was established, was it intended that Canadian companies bidding on contracts in other countries use this credit as an incentive for employees to work outside Canada while maintaining their permanent residence in Canada as well as paying Canadian income taxes?

2. Is the qualified recipient of the OETC the employer or the employee?

3. Can an OETC be confiscated by the employer to offset the employee's taxes payable to other countries while he or she is employed there?

Our Comments

1. The Budget Supplementary Information issued by the Department of Finance relating to the OETC indicates that the OETC is intended to improve the international competitive position of Canadian companies undertaking work outside Canada on specified business activities. It was intended to put Canadians working abroad in a tax position comparable to that provided by other countries. The Budget Supplementary Information relating to a change in the OETC in 1996 stated the following: "The primary purpose of this credit is to ensure that Canadian firms, employing Canadian staff, are in a position to compete against foreign firms in bidding on overseas work. The tax systems of a number of countries other than Canada provide tax relief to their residents working abroad, thus allowing firms from those countries to base their bids for overseas contracts on the reduced salary costs that such tax relief allows. Similarly, the OETC enables Canadian employers to reduce their employment costs with respect to foreign contract work, while maintaining the after-tax value of the remuneration their employees receive in connection with such work."

2. The OETC is a credit allowed against an individual's income tax payable pursuant to section 122.3. The recipient of the credit would be the employee.

3. As stated in paragraph 2 above, the OETC is only available to an individual who meets the conditions of section 122.3, not the employer. However, it is our understanding that many foreign countries have tax systems similar to Canada's which provide for the taxation of income from employment exercised in that country by an individual resident in another country. As the OETC is a provision in Canadian tax law, it would not affect the amount of tax payable by a Canadian taxpayer to a foreign country. Therefore, if the foreign country has tax rates comparable to Canada's and the right to tax the employee (taking into consideration the foreign tax law and any tax treaty between Canada and the particular country), the overall rate of tax the employee pays on his or her income from employment exercised in the foreign country may not be less than the overall rate of tax he or she would pay if the employment had been exercised in Canada. Like Canada, the particular foreign country may also require every employer to withhold an amount in respect of each employee's taxes each payday.

These comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular IC 70-6R5 dated May 17, 2002, issued by the Canada Customs and Revenue Agency (the CCRA) and are not considered binding on the CCRA.

Yours truly,

Olli Laurikainen
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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