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Overseas Employment Tax Credit: Putting Assignee Eligibility Angst to Rest

CompassGUIDES - June 2006

By Diana Matwichuk, Assignment Planning Specialist

As many assignment managers will attest, the Overseas Employment Tax Credit (“OETC”) is a hotly-discussed topic within their international rotational workforce. Am I eligible for the OETC? If some assignees are eligible, then why not others? Is there anything I should be doing to remain eligible?

Rotational assignees also often question whether they would still be eligible for the OETC if they were to be contracted by the company, rather than employed, and if so, whether they could be self-employed, rather than sub-contracted. With their skills in demand, rotational assignees are looking for the personally most financially-appealing way of receiving their paycheque. Often, without this tax credit, employees feel that it is not worth working overseas.

Specified Employer

OETC eligibility guidelines specify that the individual applying for the tax credit have received the qualifying income during the tax year as a result of employment with a specified employer. By definition, this specified employer must be one of:

(a) a person resident in Canada;

(b) a partnership in which those persons resident in Canada or corporations controlled by persons resident in Canada own more than 10% of the aggregate fair market value of all interests in the partnership; or

(c) a corporation that is a foreign affiliate of a person resident in Canada.

Eligibility in this regard is fairly straightforward for the usual employee / employer arrangement with a foreign contract in place, but what response does an assignment manager provide to requests for unique employment structures in the context of continued OETC eligibility?

The “ Adams vs. The Queen” Case

In an interesting decision by the Tax Court of Canada, taxpayer Mr. Adams, a resident of Alberta working in the Algerian oilfields, was in April 2005 granted eligibility for the OETC despite a previous dispute with the Minister of National Revenue over determination of who his “employer” was during the qualifying period.

Mr. Adams claimed that he was employed by a Saskatchewan-based employer which had a contract to provide drilling supervision services to an Algerian-based company. However, the Crown argued that Mr. Adams was actually employed by his own Alberta-based corporation and was contracted to the Saskatchewan company through the Alberta company, making him ineligible for the OETC. Essentially at question was whether self-employed consultants operating their own corporations are eligible for the OETC if contracted to render services toward a qualifying activity.

While this case might formally set a precedent, in that Mr. Adams was actually granted the OETC, what is important to glean from it is the fact that a thorough evaluation of OETC eligibility should be conducted prior to promising the OETC to overseas rotational workers in employment contracts, for instance.

Reduction of Withholdings Applications based on the OETC

Canadian corporations with rotational (and therefore Canadian-resident) assignees to international locations to perform services related to a qualifying activity, during a qualifying period and in conjunction with a business arrangement that satisfies the conditions of “specified employer” can apply for permission to reduce their assignees’ tax withholding at source, on the grounds that they are eligible for the OETC.

The benefits of this pre-established payroll arrangement are twofold. OETC eligibility is determined and confirmed by the CRA up-front, thus alleviating assignee debate. And assignees can pocket their OETC claims throughout the tax year, rather than waiting for a refund.

At CompassGUIDES, we help Canadian corporations to determine whether their assignees are likely eligible for the OETC, advise on ways to ensure their continued eligibility, and prepare applications on behalf of the corporation for reduction of withholdings on this basis.

International Assignment Tax Plans

Corporations are often motivated to investigate OETC eligibility as a direct result of questions from their assignees. Word travels quickly when signifi cant tax savings are at stake, and it is important that corporations plan their assignments bearing in mind the availability of the OETC, in order to maximize their workers’ net compensation.

Individual assignees must meet “qualifying period” criteria in order to be eligible for the OETC, and contractual structures must adhere to OETC eligibility guidelines. All too often, individuals miss out on claiming the OETC because they have missed criteria by a small margin, which some pre-planning could have averted.

At CompassGUIDES, we advise corporations on all aspects of assignment tax planning in order to take advantage of tax savings and minimize both corporate and personal tax. The Assignment Tax Programs that we assist corporations in developing begin with a review of assignment tax policy and preparation of cross-border tax projections to assist in compensation-setting. Our Assignment Tax Programs address social security tax and expatriate tax credit planning, individual pre-departure tax counseling, preparation of Canadian and US tax returns, and advice on withholdings regulations.

Summary

With OETC eligibility criteria as complex as they are, it is important that corporations plan in advance for this tax credit on behalf of their assignees, and provide assignee communication to this effect, in order to quash misconceptions and allow assignees to do what they were employed to do (rather than doing personal tax research!).

At CompassGUIDES ™ , we develop cost-effective assignment tax programs for Canadian companies sending employees around the world and bringing international consultant expertise to their Canadian projects. These Assignment Tax Programs provide detailed advanced tax planning, including policies, procedures and employment contracts, which serve to minimize costs and mitigate any risk of litigation.

In concert with this strategic assignment tax planning, we assist multi-national employers with their preparation and provision of assignment documentation, including the possibility of offering these guides online to employees anywhere in the world with internet access. Visit our International Assignment Planning Help Desk for more information about international assignment planning.

The author wishes to thank Peter Simpson, CA, for his contribution to this article .

 


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compasstax.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compassguides.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6