19 September 1997 External T.I. 9713535 - 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:

a) Application of subsection 122.3(1.1) in various factual situations

b) Qualifying period test in industry where norm is to work 12 hr days 7 days a week for 6 to 10 weeks with equivalent time off in Canada.

Position:

a) While intent is to prevent self employed individuals from incorporating in order to claim credit, it is a question of fact in any given case whether or not 122.3(1.1) would apply to deny the credit.

b) If industry norm and reasonable, then individual should not be denied the OETC.

Reasons:

a) Whether can reasonably be considered an employee is a question of fact.

b) Previously established position

971353
XXXXXXXXXX David R. Senécal

Attention: XXXXXXXXXX

September 19, 1997

Dear Sirs:

Re: The Overseas Employment Tax Credit

This is in reply to your letter of May 21, 1997, wherein you request our opinion with respect to two issues regarding the application of the Overseas Employment Tax Credit (the "OETC").

The first issue of concern involves the application of subsection 122.3(1.1) of the Income Tax Act (the "Act"), in particular, paragraph (c) thereof. In this regard, the Department of Finance has publicly indicated that the benefits of the OETC are intended to enhance the competitiveness of Canadian firms through lower wage bills, rather than to serve as an incentive for individuals resident in Canada to incorporate and work offshore. To ensure that the OETC does not serve the latter purpose, subsection 122.3(1.1) was added to the Act effective for 1997 and subsequent taxation years.

As indicated by David Senécal of this directorate in a recent telephone conversation with XXXXXXXXXX of your firm, for the purposes of applying paragraph 122.3(1.1)(c) of the Act, it is a question of fact as to whether or not, given the above context, a particular individual, who has chosen to incorporate a company and provide his or her services via that company, would reasonably, but for the existence of that company, be regarded as an employee of a person or partnership that is not a specified employer. This determination can only be made once all of the relevant facts have been examined. For this reason we are not in a position to comment on the various cases described by XXXXXXXXXX during her telephone conversations with Mr. Senécal. However, as agreed with XXXXXXXXXX, we are forwarding your enquiry with respect to this first issue to the Policy and Procedures Section of our International Audit Division along with the request that they contact XXXXXXXXXX regarding certain concerns your firm has as to the procedures adopted by certain of our Tax Services Offices, in particular, regarding the issuance of tax waivers in the case of individuals working for firms employing less than six employees.

Your second enquiry relates to the application of the six consecutive month test called for in the preamble to subsection 122.3(1) of the Act in a situation such as the one found in your industry, where employees, when working on contracts outside Canada, are required to work 12 hour shifts 7 days a week for 6 to 10 consecutive weeks with up to an equivalent time off period.

As with the first issue, it is a question of fact as to whether or not a particular employee meets the "qualifying period test" in subsection 122.3(1). However, it is our general position that an individual's entitlement to the OETC should not necessarily be denied simply because the individual was not actually outside Canada at the work location(s) for the entire qualifying period. Periods of vacation or consultation with the employer will not be considered to interrupt the qualifying period, provided that they are reasonable in light of the relevant industrial practice, the nature of the work performed and the remoteness from any established community.

Having said this, it is our view that, if an employee returns to Canada upon the termination of a particular overseas contract and his or her employer is not in a position to demonstrate that another overseas contract is in place at that time which will require that the employee in question work outside Canada at the end of the normal rotational or vacation period, the qualifying period will be considered to have ended with the termination of the particular contract. However, even if an overseas contract is in place, the qualifying period will be considered to have been interrupted if the employee returns to Canada at the end of a particular rotational period and the employee does not know with any certainty whether or not he or she will be returning to work offshore at the end of the vacation/consultation period in Canada. In our view, the fact that an employee's particular stay in Canada exceeds the normal rotational days off/consultation period is likely to be an indication that the employee was not certain upon returning to Canada that he or she would be returning offshore to work at the commencement of the next work cycle.

We trust that our comments will be of assistance.

Yours truly,

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

c.c. International Audit Division