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The Mechanics of the Overseas Employment Tax Credit
By: Wayne Bewick CA, CFP, CPA (II)

Working abroad can be a great experience both personally and professionally.  There are also some potentially large financial benefits that come from working in a foreign country, and for some individuals these financial benefits, and specifically the tax savings, are the biggest factor leading them abroad.

In our previous article we discussed Canadian residency and the tax savings that can benefit those individuals that move abroad and are able to cease Canadian residency for tax purposes. For those that are not eligible to become non-residents of Canada, the overseas employment tax credit (OETC) is another way for Canadians to lower their worldwide tax burden while working outside of Canada.

What exactly is the OETC?

The overseas employment tax credit is a tax credit provided by the Canadian government for qualifying individuals that work abroad and can result in significant tax savings. The tax savings, depending on the circumstances of the situation, can be as high as CDN$35,000. Although the calculation is complex, the basic premise that is an individual may be able to get a tax credit on up to CDN$80,000 of income (which is pro-rated for qualifying periods of less than one year).   

Who Can Qualify for the OETC?

Unlike the U.S. tax system, where all individuals who work abroad and meet the requirements can exclude up to US$82,400 (2006) from their income, only certain Canadian individuals, working on qualified projects can benefit from the OETC.

It is not always easy to qualify for the overseas employment tax credit, and the reason is simple; it costs the Canadian government personal income tax dollars.  So why then does the government support this credit? Since the requirement is to work for a qualified Canadian company, the Canadian companies generate income and pay corporate tax on this income to the Canadian government. Therefore, it can be expected that the government recoups the losses in personal income tax from the OETC by the corporate taxes it generates from the profits these companies earn. The official reason given by the CRA is that it helps make Canadian companies competitive with companies from other countries where individuals face much lower income tax rates. Either way, whatever the reason for this tax credit is, the savings can be quite significant to individuals that qualify.

How does someone qualify for the OETC?

To qualify there are specific tests that must be met:

Qualifying Activity

For OETC purposes, a qualifying activity refers to the activities performed by the specified employer and not that of the employee. The fact that it is the activities of the employer, and not that of the employee, is often a misunderstood part of the OETC.

A qualifying activity includes the exploration for or the exploitation of petroleum, natural gas, minerals or similar resources; a construction, installation, agricultural or engineering activity; or a range of other similar prescribed activities.  Support and other individuals assisting in the qualified activities may also qualify. For example, if all of the required conditions are met, the following employees carrying on a qualifying activity would meet the requirements for the OETC: instructors or administrative staff providing supporting services to fellow employees; staff who train the personnel of the foreign customer; and staff providing computer hardware and software services.

Qualifying Income

As long as all or substantially all of the duties performed by the employee are in connection with a contract under which the specified employer carries on in a business outside Canada, the employee should qualify for the OETC provided that the other conditions are met. Substantially all is taken to be 90% or more of the time spent working on the project should be outside of Canada. Therefore, individuals working on these projects can come back to Canada for short periods of time to work or vacation and still meet the requirement.

Specified Employer

A specified employer, for OETC purposes, generally speaking, is a person, partnership, or corporation resident in Canada.

Qualifying Period

A qualifying period, for OETC purposes, means a period of more than six consecutive months that began in the year or a previous year. The qualifying period must include part of the taxation year for which the OETC claim is made.

The overseas employment tax credit is a complex area of the Income Tax Act. Given the complexities, and the potential tax savings that can be incurred, it is important that individuals or companies that may qualify seek competent professional help with the OETC.

Wayne is a Tax Advisor with Trowbridge Professional Corporation, Chartered
Accountants | Tax Advisors.  The firm focuses on international tax services for Canadians around the world. For further information on the firm and the services provided, you can contact Wayne at his Toronto office at (416) 214-7833, visit the website at www.trowbridgepc.ca or email Wayne at wayne.bewick@trowbridgepc.ca

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