2014-0521751E5 overseas employment tax credit

Principal Issues: The overseas employment tax credit is in the process of being phased out. During the phase-out period (2013-2015) the amount of qualifying foreign income that can qualify for the credit will be decreased every year and finally the credit will no longer exist for the 2016 and subsequent taxation years. During the phase-out period, an individual’s income described in paragraph 122.3(1)(d) for a taxation year “that is earned in connection with a contract that was committed to in writing before March 29, 2012, by a specified employer of the individual” will not be subject to the decreasing amounts (although the credit will still disappear in 2016). Will a contract entered into before March 29, 2012 but extended after that date be considered to have been entered into prior to March 29, 2012 in respect of the extended period?

Position: Depends on the facts; where extension has occurred after initial contract has expired the extended contract could be considered to be a new contract.

Reasons: Previous Rulings position

Author: Friedlander, Lara G.
Section: 122.3(1), 122.3(1.01), 122.3(2)

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                                                                                                                                                                         2014-052175
                                                                                                                                                                          L. Friedlander
January 30, 2015

Dear XXXXXXXXXX:

Re:  Grandfathering for purposes of the overseas employment tax credit

This is in response to your letter of February 20, 2014, concerning the application of subsection 122.3(1.01) of the Income Tax Act (Canada) (the “Act”) to a particular contract. 

In particular, you describe a situation where an individual resident in Canada has earned income described in paragraph 122.3(1)(d) of the Act in connection with a written contract with a “specified employer” as defined in subsection 122.3(2) of the Act.  The original contract was entered into prior to March 29, 2012, and expired at the end of 2012.  However, on January 1, 2013, the parties agreed to extend the original contract for another year.  You have asked whether the extended contract would be considered to be contract “committed to in writing before March 29, 2012” for purposes of element A of subsection 122.3(1.01).

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R6, Advance Income Tax Rulings, dated August 29, 2014.  Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we have provided some general comments below.  

Our Comments

Section 122.3 of the Act provides for an overseas employment tax credit (the “OETC”), which generally provides a capped tax credit for residents of Canada employed outside of Canada for more than six consecutive months by certain employers where the foreign employment income is derived from certain activities. The OETC is in the process of being phased out.  During the phase-out period (2013-2015) the amount of qualifying foreign income that can qualify for the credit will be decreased every year. The credit will no longer exist for the 2016 and subsequent taxation years.  However, during the phase-out period, an individual’s income described in paragraph 122.3(1)(d) for a taxation year “that is earned in connection with a contract that was committed to in writing before March 29, 2012 by a specified employer of the individual” will not be subject to the decreasing amounts (although the credit relating thereto will still disappear in 2016).

The question of whether a contract entered into prior to March 29, 2012 that has been extended will qualify for the exemption from the phase-out period was addressed in Rulings document 2013-051431.  In this document, we state the following:

“Whether the QFEI is earned in connection with a contract that was committed to in writing before March 29, 2012, is one of fact that can only be determined on a case-by-case basis.  However, where the contract or irrevocable written bid provides for an extension or renewal at the sole option of the other contracting party, we would consider any extended period or renewal to be part of the original commitment.  In addition, we note that the phase-out rules would not apply where the employer’s original commitment made prior to March 29, 2012, is not yet fulfilled and an employee’s contract is extended in order to enable the employer to meet the original commitment.

Notwithstanding the above, it is our view that if the original contract is materially changed after March 29, 2012, a new commitment is established at that time.  As a result, the QFEI earned by an employee in connection with the eligible project would be subject to the reduced factor in the application of the OETC phase-out rules as the employer’s commitment to the project in these circumstances would have been established after March 29, 2012.”

In this case, we do not have sufficient facts to determine whether a new contract has come into existence.  We do note that one potential difference between the facts under consideration and Rulings document 2013-051431 is that in this situation, it appears that the extension of the original contract was agreed to one day after the original contract expired.  Where the extension of a contract is agreed to on a date that occurs after the original contract has already expired, for purposes of the OETC, we would generally be of the view that the parties have entered into a new contract rather than merely extending the old contract unless the taxpayer can demonstrate otherwise under the governing private law.

We trust that these comments will be of assistance.

Yours truly,

G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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