18 July 2013 External T.I. 2013-0493081E5 - Definition of "Outside Canada" - Water Boundaries

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.

Principal Issues: What is the Canadian boundary for qualifying as "outside Canada" for the purposes of the Overseas Employment Tax Credit?

Position: It depends.

Reasons: If the qualifying activity relates to the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources, and takes place offshore at a location where Canada or a province has the right to grant permission for the employer to exercise the activities, the activity will be considered to take place in Canada as expanded by paragraph 255(b) of the Act.
If the qualifying activities relate to any separate construction, installation, agricultural or engineering activity, or any prescribed activity unrelated to the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources, it is our view that such activities will only be carried on in Canada if carried on up to but not exceeding 12 nautical miles offshore.

XXXXXXXXXX
2013-049308
Henry Leung
(613) 957-2129

July 18, 2013

Dear XXXXXXXXXX:

Re: Meaning of "Outside Canada" for the purposes of the Overseas Employment Tax Credit

This is in response to your e-mail dated June 14, 2013 where you asked what the Canadian boundary is for qualifying as "outside Canada" for the purposes of section 122.3 (Overseas Employment Tax Credit ("OETC")) of the Income Tax Act (the "Act"). You have informed us in a subsequent e-mail that the type of activities ("qualifying activities") generally eligible for the OETC that your company performs are described in both paragraphs 6(a) and (b) of IT-497R4. However, at the moment the company's qualifying activity is limited to activities described in paragraph 6(a) in terms of exploitation of oil and gas. You also noted that your company has engineering capability that could be called upon in terms of the exploitation of oil and gas. In respect of the latter activities, please note that since they are with respect to the exploration for or exploitation of oil and gas, such engineering activities will also be under paragraph 6(a) of IT-497R4. Paragraphs 6(a) and 6(b) of IT-497R are derived from clauses 122.3(1)(b)(i)(A) and (B) of the Act respectively which cover:

(A) the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources,

(B) any construction, installation, agricultural or engineering activity, or …

Section 255 of the Act reads:

For the purposes of this Act, "Canada" is hereby declared to include and to have always included

(a) The sea bed and subsoil of the submarine areas adjacent to the coasts of Canada in respect of which the Government of Canada or of a province grants a right, licence or privilege to explore for, drill for or take any minerals, petroleum, natural gas or any related hydrocarbons; and

(b) The seas and airspace above the submarine areas referred to in paragraph (a) in respect of any activities carried on in connection with the exploration for or exploitation of the minerals, petroleum, natural gas or hydrocarbons referred to in that paragraph.

Qualifying Activities related to the Exploration for or Exploitation of Natural Resources:

By virtue of the definition in section 255 of the Act, where the activities performed by the employer and also by the employees for a period of more than 6 consecutive months, are with respect to the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources, the boundary of Canada is not limited to a specific number of miles offshore. The term "Canada" includes the areas within which Canada or a province has the right to exercise its control with respect to offshore activities. Provided Canada or a province has the right to grant permission for the employer to exercise the offshore activities outlined in paragraph 255(b) of the Act, such activities will be considered to take place in Canada for the purposes of the OETC. For clarity, under section 18 of the Oceans Act:

Canada has sovereign rights over the continental shelf of Canada for the purpose of exploring it and exploiting the mineral and other non-living natural resources of the seabed and subsoil of the continental shelf of Canada, …

In section 17 of the Oceans Act, the continental shelf is defined as follows:

17(1) The continental shelf of Canada is the seabed and subsoil of the submarine areas, including those of the exclusive economic zone of Canada, that extend beyond the territorial sea of Canada throughout the natural prolongation of the land territory of Canada

(a) subject to paragraphs (b) and (c), to the outer edge of the continental margin, determined in the manner under international law that results in the maximum extent of the continental shelf of Canada, the outer edge of the continental margin being the submerged prolongation of the land mass of Canada consisting of the seabed and subsoil of the shelf, the slope and the rise, but not including the deep ocean floor with its oceanic ridges or its subsoil;

(b) to a distance of 200 nautical miles from the baselines of the territorial sea of Canada where the outer edge of the continental margin does not extend up to that distance; or

(c) in respect of a portion of the continental shelf of Canada for which geographical coordinates of points have been prescribed pursuant to subparagraph 25(a)(iii), to lines determined from the geographical coordinates of points so prescribed.

As defined in subsection 17(1) of the Oceans Act above, the continental shelf of Canada can extend beyond 200 nautical miles up to the outer edge of the continental margin, as determined under international law.

In sum, where the activities in question are described in clause 122.3(1)(b)(i)(A), Canada generally includes the seas extending at least 200 nautical miles from the coast of Canada where the continental shelf does not extend that far, and the seas over the continental shelf beyond 200 nautical miles off the coast where the continental shelf extends that far.

Other Qualifying Activities:

Where the qualifying activities performed, for the purposes of the OETC, are not in respect of the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources, but are rather separate construction, installation, agricultural or engineering activities that are not in connection with the exploration for or exploitation of the natural resources mentioned, section 255 of the Act would not apply to the situation. Instead, one should refer to the Interpretation Act to find the meaning of "Canada" for the purposes of Canadian statutes (i.e. including the Act). Under section 35(1) of the Interpretation Act noted above, Canada, for greater certainty, includes the internal waters of Canada and the territorial sea of Canada. The territorial sea, as determined under paragraph 4(a) of the Oceans Act, generally embraces all waters and airspace within what is known as the 12 nautical mile limit. In addition, under section 35(1) of the Interpretations Act, the airspace and the sea bed and subsoil below the territorial sea is included. Thus where the qualifying activities for the purposes of the OETC are not in respect of the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources, if the activities are carried on in the internal waters of Canada or the territorial sea of Canada, they are considered to take place in Canada, otherwise, such activities taking place offshore would be considered to take place outside Canada.

We trust these comments to be of assistance.

Yours truly,

Olli Laurikainen, CPA, CA
For Director
International Division
Income Tax Rulings Directorate