2016-0655681E5 Entitlement to OETC

Principal Issues: The taxpayer would like to know if he is entitled to claim the Overseas Employment Tax Credit in XXXXXXXXXX and XXXXXXXXXX.

Position: Inconclusive

Reasons: The employer has not issued a T626, and we are not able to determine whether his duties of employment are in connection with a contract under which the specified employer carried on business outside Canada.

Author: Thomson, Sherry
Section: 122.3

XXXXXXXXXX                                                                                                                      2016-065568
                                                                                                                                              S.E. Thomson
                                                                                                                                             (613) 670-9002
April 11, 2017

Dear XXXXXXXXXX

Re: Entitlement to Overseas Employment Tax Credit

This is in reply to your letter to the XXXXXXXXXX Tax Centre on February 17, 2016, which was forwarded to the Income Tax Rulings Directorate on June 28, 2016. In your letter, you ask whether you are entitled to claim the overseas employment tax credit for the XXXXXXXXXX and XXXXXXXXXX taxation years, even though your employer has not provided you with a T626, Overseas Employment Tax Credit form for those years.

You explain that your employer (“ACo”), a Canadian corporation, was hired to provide drilling rig operations to BCo, another Canadian corporation. The drilling rig was to be used in the exploration or exploitation of petroleum in Canada and in another country.

ACo in turn hired CCo, a non-resident corporation, to build the drilling rig in CCo’s country of residence (“Country C”). In XXXXXXXXXX and XXXXXXXXXX, you were sent by your employer to Country C to assist with the building of the drilling rig, and that once built, you would work on the drilling rig in Canada.  However, the contract for the drilling rig was cancelled in the fall of XXXXXXXXXX, and the drilling rig was never shipped to Canada or the other country.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R7, Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016. We are, however, prepared to offer the following general comments, which may be of assistance.

The T626 form is not a prescribed form; therefore, you would be entitled to claim the overseas employment tax credit if you meet all of the conditions set out in section 122.3 of the Act even though your employer has not provided you with a T626. One of the conditions for claiming the credit is that for a qualifying period you must have performed all or substantially all of your duties of employment outside Canada in connection with a contract under which your employer carried on business outside Canada.

In our view, the relevant contract for this purpose is the contract between ACo and BCo.  The federal government’s 1996 Budget Plan states that the primary purpose of the overseas employment tax credit is to ensure that Canadian firms, employing Canadian staff, are in a position to compete against foreign firms in bidding on overseas contracts.  We believe that the “contract” referred to in section 122.3 is meant to refer to the contract between the Canadian employer (i.e., ACo) and the employer’s customer (i.e., BCo).

You have not provided CRA with the contract between ACo and BCo.  Without this evidence, we cannot conclude that all of the conditions in section 122.3 have been met. In particular, we cannot conclude that the contract between ACo and BCo was for business to be carried on by ACo outside of Canada. As such, we cannot conclude that you are entitled to claim the overseas employment tax credit for the XXXXXXXXXX and XXXXXXXXXX taxation years.

Since you have already filed and been assessed for the XXXXXXXXXX and XXXXXXXXXX years, if you choose to pursue this issue, your options now are to file either a Notice of Objection for XXXXXXXXXX (you are too late for XXXXXXXXXX), or a T1-Adjustment for XXXXXXXXXX and XXXXXXXXXX. If you decide to file either of these, we strongly recommend that you include the contract between your employer and the customer so that the relevant branch in CRA can ensure that the conditions in section 122.3 have been met.

As previously discussed with both you and your accountant, a Notice of Objection must be filed no later than one year from the filing-due date for the relevant taxation year (subsection 165(1) of the Act). A T1-Adjustment must be filed no later than ten years after the end of the relevant taxation year (subsection 152(4.2) of the Act). We note, however, that under subsection 152(4.2) the Minister has the discretion to reassess in certain specific situations but there is no obligation upon the Minister to do so. This is distinguishable from subsection 165(3) of the Act under which the Minister shall reconsider an assessment upon receipt of a Notice of Objection, and either vacate, confirm or vary the assessment or reassess. You also mention that for the first few months of XXXXXXXXXX, you worked for a recruiting company that was hired by ACo. If you intend to claim the overseas employment tax credit on any of your employment income from the recruiting company, we recommend that you also provide the contracts between ACo and the recruiting company, and the recruiting company and yourself.

We trust that we have been of assistance.

Yours truly,

Lori M Carruthers, CPA, CA
Manager
For Director
International Division
Income Tax Rulings Directorate

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2017

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2017