Timmins v. The Queen, 96 DTC 6378, [1996] 3 CTC 175 (FCTD)

Wetston J.: - This is an appeal by way of trial de novo from a decision of the Tax Court of Canada, dated August 21, 1989, which dismissed the plaintiff’s appeal from income tax reassessments for the taxation years 1982, 1983, and 1984.

During the period between November 15, 1982, and November 30, 1984, the plaintiff was employed in Malawi, Africa, by the province of New Brunswick (the “province’’), in its Department of Agriculture and Rural Development (the “Department”). The plaintiff performed his duties in connection with a contract (the “contract”) made between the province, as executing agency, and the Canadian International Development Agency (“CIDA”), an agency of the government of Canada’s Department of External Affairs. Under this contract, which was entered into on September 23, 1980, the Department agreed to provide services for the purpose of establishing and administering several dairy farms in Malawi, in return for a fee and reimbursement of certain expenses. As executing agency, the province was required to provide the goods and services necessary for the performance of the contract in Malawi. The plaintiff was one of the persons employed by the province for this purpose; he therefore worked in Malawi during the taxation years in question.

For the taxation years 1982 and 1983, the plaintiff sought to deduct from his income the sums of $1,986.00 and $14,943.00, respectively, as deductions for overseas employment, pursuant to subsection 8(10) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63, section 1, and subsequently. The relevant provision reads, in part, as follows:

8(10) Where any individual is resident in Canada in a taxation year and, throughout a period of more than six consecutive months that commenced in the year or a previous year (in this subsection referred to as the “qualifying period”),

(a) was employed by a person who was a specified employer, and

(b) performed all or substantially all of the duties of his employment in one or more countries other than Canada

(i) in connection with a contract under which the specified employer carried on business in such country or countries....

For the 1984 taxation year, the plaintiff claimed a credit of $4,403.94 as an overseas employment tax credit, pursuant to subsection 122.3(1) of the Act, which replaced subsection 8(10) in 1984. By Notices of Reassessment, dated December 9, 1986, the Minister of National Revenue (the “Minister”) disallowed the plaintiffs claims for the overseas employment tax deductions for 1982 and 1983, and the credit for 1984. By Notices of Objection, dated January 23, 1987, the plaintiff objected to the income tax reassessments for the years 1982 to 1984. The Minister confirmed all of the said reassessments by Notification of Confirmation, dated November 20, 1987, on the basis that the plaintiff was not employed by an employer who carried on business outside of Canada within the meaning of subsection 8(10) of the Act in 1982 and 1983, or within the meaning of subsection 122.3(1) of the Actin 1984.

The plaintiff submits that the Minister erred in reassessing the tax and interest payable by him for the taxation years 1982, 1983, and 1984, as his employer carried on business with respect to an agricultural activity in Malawi, during the period in question. In particular, the plaintiff argues that the Department carried on the business of providing “professional, technical and related services required to supervise and administer Canadian professional, administrative and technical staff’ needed to develop two dairy farms in Malawi pursuant to the contract. The plaintiff further argues that there is no ambiguity in the phrase “carried on business” as it is found in subsections 8(10) and 122.3(1) of the Act; rather, the plaintiff submits that it is clear that the Department’s activities in Malawi constituted an “undertaking of any kind whatever” within the meaning of “business” in subsection 248(1) of the Act. In the plaintiff’s view, the ordinary meaning of the word “business” requires that the term be given its broad meaning, according to which it is immaterial whether or not the purpose of the operation in question was to make a profit. The plaintiff argues that there is nothing in the language or context of the provisions at issue which would suggest an intention to restrict the benefit of the deduction or credit to employees of entities whose object was profit. Alternatively, the plaintiff argues that the Department had a reasonable expectation of profit when it entered into the contract.

In reassessing the plaintiff for the 1982, 1983, and 1984 taxation years, the Minister relied, inter alia, on the assumption that, during this period, the Department did not carry on business in Malawi, for profit or with a reasonable expectation of profit. The defendant reiterates this view, and submits that the plaintiff was not entitled to claim the deductions or credit in question because, during the taxation years 1982 to 1984, the plaintiff’s employer did not carry on business in Malawi within the meaning of subsections 8(10), 122.3(1), and 248(1) of the Act.

The only issue in this case is whether the plaintiff’s employer carried on business in Malawi, within the meaning of subsections 8(10) and 122.3(1) of the Act, during the period from November 15, 1982, to November 30, 1984. It is not disputed by the defendant that the Department was the plaintiffs employer during the relevant period. No argument was raised as to whether or not the Department was a “specified employer” within the definitions provided in subsection 8(11) and paragraph 122.3(2)(a) of the Act. If the Department was not carrying on business under the contract during the relevant period, the plaintiff will be disentitled to claim the overseas employment tax deductions for 1982 and 1983, and the overseas employment tax credit for 1984. The entitlement of the plaintiff to the claimed deductions or credit does not depend upon his own status and activities, but upon those of his employer.

Statutory Interpretation

The purposive, or teleological, approach to the interpretation of taxing statutes was originally set out in Stubart Investments Ltd. v. R., (sub nom. Stubart Investments Ltd. v. The Queen) [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305. It has since been considered by the Supreme Court of Canada on a number of occasions. For example, in the case of Québec (Communauté urbaine) v. Corp. Notre-Dame de BonSecours, [1994] 3 S.C.R. 3 (sub nom. Notre-Dame de Bon-Secours (Corp.) v. Québec (Communauté urbaine)) [1995] 1 C.T.C. 241, (sub nom. Corp. Notre-Dame de Bon-Secours (Corp.) v. Québec (Communauté urbaine)) 95 D.T.C. 5017, Gonthier J., for the majority, stated, at page 17 (C.T.C. 249-50), that the interpretation of tax legislation should follow the ordinary rules of construction. In this regard, Gonthier J. relied upon the following comments of E.A. Driedger, in Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983), at page 87:

[T]he words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

The teleological approach to interpreting taxing legislation is completely consistent with the plain meaning rule referred to by Major J., in Friesen v. R., (sub nom. Friesen v. Canada) [1995] 3 S.C.R. 103, [1995] 2 C.T.C. 369, 95 D.T.C. 5551, at pages 112-14 (C.T.C. 372-74).

According to Gonthier J., in Bon-Secours, supra, the recent trend away from the strict construction of taxation statutes was prompted by the realization that the purpose of tax legislation is no longer simply to raise revenue to cover government expenditures; rather, such legislation is now also used as a tool of social and economic policy. As Gonthier J. stated, at page 18 (C.T.C. 251):

By submitting tax legislation to a teleological interpretation it can be seen that there is nothing to prevent a general policy of raising funds from being subject to a secondary policy of exempting social works. Both are legitimate purposes which equally embody the legislative intent and it is thus hard to see why one should take precedence over the other.

Justice Gonthier also indicated that, in light of the teleological approach, it is no longer possible in tax matters to reduce the rules of interpretation to presumptions in favour of, or against, the taxpayer.

In Antosko v. Minister of National Revenue, (sub nom. Canada v. Antosko) [1994] 2 S.C.R. 312 (sub nom. Antosko v. R.) [1994] 2 C.T.C. 25, 94 D.T.C. 6314, Iacobucci J. stated the following, at pages 326-27 (C.T.C. 31-2):

While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, at page 194; see also Symes v. Canada, [1993] 4 S.C.R. 695.

With respect to this approach, Professors Hogg and Magee, in their new text Principles of Canadian Income Tax Law (Scarborough, Ontario: Carswell, 1995), noted at page 454:

[The Antosko case] is simply a recognition that “object and purpose” can play only a limited role in the interpretation of a statute that is as precise and detailed as the Income Tax Act. When a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, then the provision must be applied regardless of its object and purpose. Only when the statutory language admits of some doubt or ambiguity in its application to the facts is it useful to resort to the object and purpose of the provision.

Thus, where there is ambiguity, the plain meaning of a provision becomes even more consequential in attempting to interpret the language in question.

The comments of Professors Hogg and Magee were cited by Cory J. in the recent case of Pigott Project Management Ltd. v. Land- Rock Resources Ltd., (sub nom. Pigott Project Management Ltd. v. Canada) [1994] 1 C.T.C. 108, 9 Alta. L.R. (3d) 349 (Q.B.); affirmed (sub nom. Country Inns Inc., Re) [1995] 1 C.T.C. 75, 94 D.T.C. 6650 (Alta C.A.); reversed Alberta (Treasury Branches) v. Minister of National Revenue 133 D.L.R. (4th) 609, [1996] 5 W.W.R. 153 (S.C.C.); Toronto-Dominion Bank v. Minister of National Revenue (April 25, 1996), Doc. 24056 (S.C.C.). In that case, Cory J., at page 8, referred to the appropriate principles to be considered in interpreting taxation legislation, as set out in Friesen v. Canada, supra. He held, at page 9, that “when there is neither any doubt as to the meaning of the legislation nor any ambiguity in its application to the facts then the statutory provision must be applied regardless of its object or purpose”. Justice Cory noted that neither the meaning of the legislation at issue, nor its application to the facts of the case, was clear. As a result, he went on to consider the object and purpose of the legislation, by examining the scheme of the Act, the object of the Act, and the intention of Parliament in enacting the legislation, in order to determine the clear and plain meaning of the statutory words in question.

In the present case, the plaintiff submitted diverse arguments in support of his position regarding the interpretation of the provisions in question. The plaintiff begins with the following definition of “business”, in subsection 248(1) of the Act:

“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade but does not include an office or employment;

[Emphasis added.]

The plaintiff contends that the Department was carrying on an “undertaking of any kind whatever”. However, the above provision does not define “business”; rather, it lists a number of examples which are

included in the term: Canadian Marconi Co. v. R., (sub nom. Canadian Marconi Co. v. The Queen) [1984] C.T.C. 319, 84 D.T.C. 6267 (F.C.A.); reversed on other grounds, [1986] 2 S.C.R. 522, [1986] 2 C.T.C. 465, 86 D.T.C. 6526.

Furthermore, the plaintiff asserts that the ordinary meaning of the word “business” does not necessarily invoke a concept of profit. The plaintiff argues that there are two approaches to the interpretation of the term: a narrow definition that imports a profit motive, and a broad definition that does not. According to the plaintiff, if the statutory context in which the word “business” is employed does not suggest a profit motive, then the ordinary meaning of the term should be employed. This broad approach means that the term “business” refers to an activity that occupies time, attention, and labour, regardless of profit objectives. The plaintiff relies upon the following cases: Rolls v. Miller (1883), 53 L.J. Ch. 98; Shaw v. McNay [1939] O.R. 368, [1939] 3 D.L.R. 656; and Samson v. Minister of National Revenue, [1943] Ex. C.R. 17, [1943] 2 D.L.R. 349. None of these decisions involved an interpretation of income tax legislation, or other taxation statutes. As noted above, however, the phrase “carried on business” must be considered in the income tax context, within the scheme of the Act.

The plaintiff further asserts that there is no ambiguity in the meaning of the word “business” as it is used in the provisions in question. In the plaintiffs view, there is nothing in the language or the context of subsections 8(10) and 122.3(1) of the Act to suggest that there was any intention to restrict the benefit of the overseas employment tax deduction or credit to employees of entities whose object was profit. Interpreting the word “business” broadly, the plaintiff submits, does not detract from that position.

The plaintiff points to a number of provisions in the Act which expressly refer to businesses carried on “for profit or with a reasonable expectation of profit”. In particular, according to the plaintiff, the definition of “personal or living expenses” in subsection 248(1) suggests that the Act, as a whole, assumes that the word “business” includes activities not motivated by profit. If there can be no business without a profit motive or a reasonable expectation of profit, there would be no reason to explicitly restrict the term “business”, in the definition of “personal or living expenses”. Thus, in the plaintiffs submission, the scheme of the Act uses “business” in the broad sense, unless it is expressly restricted. There is no expressed restriction in subsections 8(10) and 122.3(1) of the Act; therefore, the plaintiff asserts that the defendant is trying to impose an unexpressed limitation on the words “carried on business”.

Upon examining the scheme of the Act, however, I am unable to accept this argument. Paragraph 149.1(3)(a) of the Act states that the Minister may revoke the registration of a charitable public foundation where the foundation “carries on a business that is not a related business of that charity”. In regard to this provision, Heald J.A., in Alta. Institute on Mental Retardation v. R., (sub nom. Alberta Institute on Mental Retardation v. The Queen) [1987] 2 C.T.C. 70, 87 D.T.C. 5306 (F.C.A.); leave to appeal refused (sub nom. Alta. Institute on Mental Retardation v. Minister of National Revenue) 87 N.R. 397 (note) (S.C.C.) considered the definition of “business” in subsection 248(1). Because the business aspect of the Institute’s operation was merely incidental to the attainment of its charitable objectives, Heald J.A. found that the appellant was operating exclusively for charitable purposes.

Similarly, subsection 149(1 )(j) of the Act defines a non-profit corporation for scientific research and experimental development to be a corporation that was constituted exclusively for the purpose of carrying on or promoting scientific research and experimental development, and that, inter alia, “did not carry on any business”. Furthermore, prior to 1977, subsection 149(l)(g) stated that no tax was payable under Part I of the Act upon the taxable income of a non-profit corporation, which was defined to be a corporation that was constituted exclusively for charitable purposes and which, inter alia, “did not carry on any business”. According to these provisions, a charitable or non-profit organization is one that does not carry on business. This would suggest, then, that the word “business” connotes an activity or operation carried on for the purpose of profit or gain.

The plaintiff submits that the narrowest meaning that the phrase “carried on business”, as it is used in the overseas employment tax deduction or credit, can bear is “carry on activities akin to commercial activities”. According to the plaintiff, the commercial activities test is routinely applied by the courts in determining whether a governmental agency is entitled to sovereign immunity in respect of its activities in a foreign country. The plaintiff asserts that governments, such as the New Brunswick provincial government, frequently engage in commercial activities. The plaintiff therefore submits that it is well recognized in law and policy that governments, including the government of New Brunswick, carry on businesses, including businesses of a commercial or for-profit nature, along with their customary government services.

The plaintiff asserts that the commercial activity test has been adopted by the Minister in Interpretation Bulletin IT-497, dated August 17, 1983, and IT-497R, dated August 30, 1985. Both versions of the IT Bulletin state the following:

It is always a question of fact as to whether a specified employer is or is not carrying on business in a country or countries outside Canada. In making this determination the objects of the employer’s business and the nature of the activities that it is carrying on in a foreign country will be the major factors to be taken into consideration. In any case, where the nature of the specified employer’s activities is akin to commercial activities it will be considered, for the purposes of subsection 8(10) [or subsection 122.3(1)], to be “carrying on business” in the foreign country in which it is carrying out those activities.

According to the plaintiff, the departmental interpretation makes no reference to profit or reasonable expectation of profit. However, I cannot accept this argument. The bulletin is simply noting that the overseas employment tax deduction or credit will not apply if the commercial-like activities of an employer are not being carried out in a foreign country.

In further support of his position, the plaintiff argues that the decision of the Tax Court of Canada, in Elm Ridge Country Club Inc. v. Minister of National Revenue [1995] 2 C.T.C. 2810, (sub nom. Elm Ridge Counrty Club Inc. v. R.) 95 D.T.C. 715 (T.C.C.), to the extent that the term “business” must be read as “business carried on for profit”, was wrongly decided. The plaintiff notes that there were essentially three sources of authority that the Tax Court in Elm Ridge relied upon for its interpretation of the word “business”: (i) the property tax assessment cases, such as Ontario Regional Assessment Commissioner v. Caisse populaire de Hearst Ltée, (sub nom. Regional Assessment Commissioner v. Caisse populaire de Hearst Ltée) [1983] 1 S.C.R. 57, 46 N.R. 285; (ii) the case of Smith v. Anderson (1880), 15 Ch. D. 247 (U.K. C.A.); and (iii) the expense deductibility cases such as Moldowan v. R., (sub nom. Moldowan v. The Queen) [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213.

The Elm Ridge case, supra, was concerned with subsection 149(5) of the Act, which deals with charities, and the interest income of non- profit organizations. The decision was based, in part, on the fact that the plaintiff golf club was a non-profit organization within paragraph 149(1)(1) of the Act. As noted by Archambault J., that paragraph provides, as a general principle, that a non-profit organization is not required to pay tax on its income. To qualify for this exemption, the organization in question must satisfy certain conditions, one of which is that the entity must be operated exclusively for a purpose other than profit. While a non-profit organization must be operated exclusively for a non- profit purpose, it can, according to Archambault J., still earn some income. I do not consider the Elm Ridge decision to be helpful in the present case, since it dealt with a provision which specifically excluded operations carried on for the purpose of profit.

While I have considered a number of the plaintiffs arguments, there is clearly some doubt as to the meaning of the word “business” in subsections 8(10) and 122.3(1) of the Act. As such, I must resort to the purpose of the provision. According to the Department of Finance’s Technical Notes, 4th ed., Consolidated to 1992, the 1979 Budget Supplementary Information, which proposed the overseas employment tax deduction, stated as follows:

To maintain Canadian competitiveness in overseas contracts, the budget proposes that employees of taxable Canadian corporations, working overseas in prescribed countries for more than six months, be partially exempt from Canadian tax. This measure will apply to persons working on construction, installation, agricultural or engineering projects, in resource exploration and development, or other prescribed activities in most developing countries and certain other countries. The exemption will be one-half of the employee’s overseas remuneration to a maximum exemption of $50,000 on an annual basis.

The question of when a person moving abroad becomes a non- resident is, in practice, a difficult matter of fact. Employees of Canadian companies who work overseas for a period of time on particular projects may be residents for purposes of Canadian taxation, and if so are liable to Canadian tax on their world-wide income. This can have undesirable effects on the ability of Canadian firms to compete in bidding for overseas contracts. Tax legislation applying to most of Canada’s foreign competitors contains some degree of tax relief for their residents employed abroad. The partial exemption will permit Canadian employers to reduce costs while maintaining the after-tax value of remuneration to employees.

It is clear, then, that the overseas employment tax deduction or credit was established to ease the burden imposed upon Canadian employers by the application of Canadian tax rules. These rules were considered to have discouraged Canadian employers from using Canadian residents to perform certain foreign contracts. It is apparent, then, that subsections 8(10) and 122.3(1) of the Act have, as an objective, a goal of increasing the competitiveness of Canadian employers bidding on foreign contracts.

In 1985, subsection 122.3(1) of the Act was amended to specifically exclude any contract carried on with CIDA. The amended version of the provision now reads “was employed by a person who was a specified employer other than for the performance of services under a prescribed international development assistance program of the Government of Canada”. According to Ms. Brito, who appeared on behalf of the defendant, Parliament decided to exclude CIDA contracts because persons or organizations bidding on contracts in the public sector were not bidding in the international market, in competition with foreign companies; rather, they were bidding against each other, within Canada. The overseas employment tax deduction or credit provision, in Ms. Brito’s view, was designed to benefit an employer who bids on international contracts; it was not intended to benefit the persons employed under such contracts.

I find that the phrase “carried on business”, in subsection 8(10) and subsection 122.3(1) of the Act, means those activities of an employer which are carried on for profit. The provisions in question were intended to assist specified employers in competing for foreign contracts, by reducing their overall costs and, therefore, their contract bids. Because the costs of competing for a contract are influenced by the operation of the provisions, the deduction or credit was obviously intended to improve the financial positions of specified employers. The notions of decreasing costs and increasing competitiveness, envisaged by these provisions, suggest that employers who are fulfilling contracts in foreign countries must be involved in commercial activity, for the purpose of earning a profit. It must now be determined how the provisions, as interpreted, should be applied to the case at bar.

The Application of the Provisions

There is a clear difference of opinion between the plaintiff and the defendant regarding the proper test to be used in applying subsections 8(10) and 122.3(1) of the Act to the facts of the present case. The defendant argues that the preponderant purpose test, as set out in Hearst, supra, should be adopted. In the defendant’s view, a government department does not generally carry on activities in a business sense; therefore, there must be a clear intention that the Department’s predominant reason for entering into the contract was the making of a profit, before it can be considered to be carrying on a business. The defendant further submits that the reasonable expectation of profit test, as described in Moldowan, supra, and more recently in Tonn v. R., (sub nom. Tonn v. Canada) [1996] 1 C.T.C. 205, 96 D.T.C. 6001 (F.C.A.), is inappropriate in the present case. It is only where there is no actual profit, according to the defendant, that the reasonable expectation of profit test should operate. This, however, is not the case here. Thus, the defendant asserts that it is irrelevant, in the application of the preponderant purpose test, whether or not an actual profit was made.

In contrast, the plaintiff asserts that the preponderant purpose test should not be employed under subsections 8(10) and 122.3(1) of the Act. The plaintiff argues that such a test is applied in cases where the government, or the taxing authority, seeks to gather taxpayers into the tax net. According to the plaintiff, that is not the purpose of subsections 8(10) and 122.3(1); rather, as the plaintiff notes, the provisions provide a type of incentive. The plaintiff contends that this incentive operates through the employees, whatever its effect may be on the employers.

In the Hearst case, supra, an Ontario municipality assessed a credit union for business tax under paragraph 7(1 )(b) of the Ontario Assessment Act, R.S.O. 1970, c. 32. That paragraph provides:

7(1) Irrespective of any assessment of land under this Act, every person occupying or using land for the purpose of, or in connection with, any business mentioned or described in this section, shall be assessed for a sum to be called “business assessment” to be computed by reference to the assessed value of the land so occupied or used by him as follows:

...(b) Every person carrying on the business of a...bank, banker or any other financial business for a sum equal to 75 per cent of the assessed value.

[Emphasis added.]

The most significant issue raised in Hearst, supra, was whether the respondent was carrying on a business as a “banker or any other financial business”; however, the question largely depended upon a determination as to whether the activities of the taxpayer, which had been assessed as a bank, amounted to carrying on business.

The Supreme Court of Canada adopted the preponderant purpose test, as described by McIntyre J., at page 64 (N.R. 291-92), in the following manner:

The preponderant purpose test is based upon a determination of the purpose for which an activity is carried on. If the preponderant purpose is the making of a profit, then the activity may be classified as a business. However, if there is another preponderant purpose to which any profit earned is merely incidental, then it will not be classified as a business. ...This test has been followed in Ontario and applied in cases where the incidence of assessment or taxation depended on the question of whether a certain activity was or was not a business.

[Emphasis added. ]

Justice McIntyre then continued, at page 71 (N.R. 297-98):

If the preponderant purpose was other than to make a profit, then even if there were other characteristics of the organization, including an intent in some cases to make a profit... it would not be classed as a business.

According to McIntyre J., then, this test applies in cases where the incidence of assessment or taxation depends on whether or not an organization is a business.

In his decision, McIntyre J. rejected the commercial activity test, as expressed by Evans J.A. in Re Windsor-Essex County Real Estate Board v. Windsor (City) (1974), 6 O.R. (2d) 21 (C.A.). That test requires a consideration and evaluation of all factors in order to determine whether, in reality, a corporation is of a true commercial nature. At page 70 (N.R. 297), McIntyre J. stated:

Many community and charitable organizations, relying from time to time on what would be termed commercial activity to raise funds for the fulfilment of their objectives, could be classed as businesses by such a test. To attach primary importance to the commercial aspect of an operation in question will offer, in my opinion, no sure or helpful guide. In my view, the commercial activity test is too indefinite to allow consistent application. I agree that, in deciding whether or not any activity may be classed as a business under the provisions of section 7(1 )(b) of The Assessment Act, all relevant factors regarding an operation must be considered and weighed. However, they must be considered and weighed in order to determine not whether in some general sense the operation is of a commercial nature or has certain commercial attributes, but whether it has as its preponderant purpose the making of a profit. If it has, it is a business; if it has not, it is not a business.

The preponderant purpose of the credit union in question was to provide loans to its members for provident and productive purposes at low cost, and not to make a profit. Therefore, McIntyre J. concluded that the respondent was not carrying on a business for the purposes of the provision at issue.

The plaintiff contends that Hearst, supra, interpreted the Ontario Assessment Act, which contains a list of the “businesses” sought to be taxed. In the plaintiff’s view, there was no equivalent to the definition of “business” as found in subsection 248(1) of the Act. However, as noted earlier, subsection 248(1) does not define “business”. Consequently, the provisions in the two statutes are more similar than the plaintiff suggests.

In Canadian Marconi, supra, which dealt with an income tax issue, Ryan J.A. discussed the preponderant purpose test. At page 329 (D.T.C.

6275), he stated: “I would note that, even for the purposes of the provincial Assessment Act, the test of whether the taxpayer is in business is not merely whether profit is being sought, but whether that is the predominant purpose”. In light of these remarks, the defendant argues that the preponderant purpose test should apply under the Act, though not for the purpose of determining source of income. The plaintiff disputes this interpretation of Canadian Marconi, however, and refers to the conclusion of the Court, at pages 329-31 (D.T.C. 6275-76), wherein Ryan J.A. stated the following: “I am of the view, however, that for purposes of the Income Tax Act, the fact that an activity is engaged in for the purpose of making a profit cannot be decisive of the question whether income from it has its source in “business” on the one hand, or in “property” on the other.” According to the plaintiff, this indicates that the preponderant purpose test has not been adopted in the income tax context.

Ryan J.A. decided the Canadian Marconi, supra case by referring to subsection 9(1) of the Act, and determining the source of the company’s profit. He concluded that the profit was best viewed as income from property, and not income from business. Clearly, Ryan J.A. did not explicitly reject or adopt the preponderant purpose test in the income tax context; rather, he merely indicated that the test cannot be used to determine source of income, which is not at issue in the present case.

The case of Tonn, supra, considers the reasonable expectation of profit test in assessing whether a claimed business expense is an allowable deduction under the Act. In that case, Linden J.A. determined that there are at least five possible tests for expense deductibility: four of a statutory nature, and one of a common law origin. Each of the relevant statutory provisions makes either an explicit or implicit reference to profit.

After summarizing the four statutory approaches to expense deductibility, Linden J.A. went on to consider the common law test, as set out in Moldowan, supra. The Moldowan case is frequently cited as an authority for the proposition that a taxpayer must have a profit or a reasonable expectation of profit in order to be carrying on a business. In the opinion of Linden J.A., Dickson J.’s reference to reasonable expectation of profit in Moldowan has evolved into a benchmark test according to which issues of business expense deductibility are normally determined.

Justice Linden noted that the common law reasonable expectation of profit test, described in Moldowan, resembles the business intention tests in subsection 9(1) and paragraph 18(l)(a) of the Act, in that the taxpayer must be subjectively motivated by profit when carrying out the activities in question. The common law test goes further than the statutory tests, however, in that it also requires that the taxpayer’s profit motive be objectively reasonable. The reasonable expectation of profit test is stricter than the business intention test, due to its objective nature. Justice Linden indicated, at page 17, that the objective aspect of the Moldowan test is the most significant feature distinguishing it from the general deductibility tests in the Act.

According to Linden J.A., the application of the reasonable expectation of profit test is not restricted to farm loss cases, personal and business expense cases, or source of income cases. At page 21, Linden J.A. made the following comments:

The Moldowan test, therefore is a useful tool by which the taxinappropriateness of an activity may be reasonably inferred when other, more direct forms of evidence are lacking. Consequently, when the circumstances do not admit of any suspicion that a business loss was made for a personal or non-business motive, the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgment may have been less than competent.

Although not expressly stated, I am of the view that these comments were intended to apply only to expense deductibility cases.

In my opinion, there are a number of reasons why the preponderant purpose test should prevail over the reasonable expectation of profit test in the application of subsections 8(10) and 122.3(1) of the Act in the present case. Firstly, the particular phrase which must be construed herein is “carried on business” under a contract. The phrase “carried on business”, which was interpreted in the assessment cases such as Hearst, supra, does not necessarily have the same meaning as the word “business”, as it is used in the Act: Smith v. Anderson, supra, at page 277; Friesen v. Canada, supra, at pages 134-35 (C.T.C. 386-87). As seen above, the expense deductibility cases which have interpreted the single term “business” frequently apply the reasonable expectation of profit test.

Furthermore, the preponderant purpose test has been applied in business tax and assessment cases, not for the purpose of determining source of income, but to determine whether certain entities carry on business. As noted by Vern Krishna, in The Fundamentals of Canadian Income Tax, 5th ed. (Scarborough, Ontario: Carswell, 1995), at page 1, a tax is “a compulsory contribution levied on individuals, firms, or property in order to transfer resources from the private to the public sector”. From this perspective, I see no difference between a provincial business tax or an assessment tax. A principal objective underpinning income tax is similar: to generate revenue which will fund government programs and services.

As indicated previously, the main issue in the assessment cases, including Hearst, supra, has been whether or not a particular entity is carrying on business. In contrast, the business loss and expense deductibility cases have focussed on a number of different issues, including the proper characterization of a source of income (property income vs. business income), or the characterization of a type of expense (personal expense vs. business expense). The provisions at issue in this case require the Court to ascertain the nature of the activities of the taxpayer’s employer. The Court need not consider the source of income, or expense deductibility; rather, it must assess the types of activities or operations in which a particular organization is engaged. In the case at bar, if the employer is not carrying on business, the provision has no application.

In Zonn, supra, the Court clearly limited its comments regarding reasonable expectation of profit to expense deductibility tests. The reasonable expectation of profit test is also appropriate in cases, such as Moldowan, where an operation which resembles a business has nonetheless been unsuccessful at earning a profit. By applying the reasonable expectation of profit test, the courts are able to identify businesses which would otherwise be overlooked solely because of the fact that they have not been able to achieve the objective for which they were created, i.e.,the realization of a profit. In the present case, however, there is no issue of expense deductibility or source of income. In addition, there is no suggestion of suspicious circumstances or the manipulation of a taxpayer’s affairs in order to achieve a patina of compliance with the Act, as referred to by Linden J.A. in Tonn. In fact, it is the affairs or transactions of the taxpayer’s employer, and not of the taxpayer himself, which must be assessed in the case at bar. In my opinion, these distinctions support the view that the reasonable expectation of profit test is inappropriate with respect to subsections 8(10) and 122.3(1) of the Act.

In conclusion, the preponderant purpose test, as described in Hearst, supra, is appropriate for determining whether or not a specified employer is carrying on business under a contract, in the context of subsections 8(10) and 122.3(1) of the Act. I must now determine if the Department had, as its predominant purpose, a profit motive when it entered into the contract in question.

Mr. Tim Andrew testified on behalf of the plaintiff. Mr. Andrew was Assistant Deputy Minister in the Department of Agriculture and Rural Development in New Brunswick in 1979 and 1980, and later became Deputy Minister. According to Mr. Andrew, CIDA had initially consulted the private sector to work on its Malawi project; however, there was a shortage of private sector interest and skills necessary to take on such a project. Ms. Brito, who appeared on behalf of the Minister, suggested otherwise.

CIDA is involved in development assistance, which is one aspect of Canada’s foreign policy. The most significant reason for such development aid is obviously to help troubled and impoverished nations. According to Mr. Andrew, one of the province’s objectives in entering into the contract was to make Malawi self-sufficient in dairy products so that it would no longer depend upon South Africa for its source of supply. In addition, the province hoped to impact positively upon the New Brunswick economy, and to create jobs for Canadians in Malawi. Mr. Andrew also appeared to have two other objectives: (a) he wanted to move the Department into a new and interesting area; and (b) he considered his involvement in this project to be career-enhancing. Mr. Andrew further indicated that one of the province’s goals in carrying out the contract was to make a profit, so as to ensure that the province would not lose money. It appears that Mr. Andrew intended that the Department would make a profit, regardless of how large, which would act as a safety net in the event that some of its calculations or assumptions had not been correct. Mr. Andrew also testified that a private consultant would not have agreed to the terms of the contract, because he would have wanted more money than the province had contracted for.

In light of the evidence, I find that there were three main reasons why the province entered into the contract: humanitarian reasons; increased employment opportunities for residents of New Brunswick; and economic stimulation. With respect to the potential for making profit, I find that the province did not enter into the contract for the main purpose of making money; rather, the province entered into the CID A contract to achieve the three main objectives, as noted above, without losing money in the process. Mr. Andrew clearly wanted to have a safety net, as part of the contract terms, in case the Department’s estimates or assumptions were inaccurate. If a small profit was eventually produced, that would merely augment the province’s accomplishments.

Unlike typical business ventures, as the plaintiff noted, the contract in question was a costs-plus contract with minimal financial risk. Furthermore, as noted by Ms. Brito, who has been employed with CID A for twenty-five years, this is not a case of a competitive contract; a private sector firm would have put much more capital at risk than did the province, and would have required more generous terms. In addition, the Department’s full-time employees carried out the work under the contract, so that additional staff was not necessary.

The Department also did not undergo any significant reorganization in order to fulfil its requirements under the contract. No new entity was created to provide the services for which the Department contracted; rather, the evidence suggests that the contract was merely considered to be an additional activity within the Department. There is no evidence that the Department formulated a business plan that would reveal what the expected profit from the contract might be. There was also no change in the Department’s mandate brought about by statute, regulation, or otherwise. All that occurred was a grant of Ministerial or Cabinet authority allowing the contract to proceed.

Regardless of how it is perceived, the entire contract was funded by public money transferred from one level of government to another. Obviously, tight fiscal environments, both federally and provincially, have forced governments to seek out new revenue sources. Similarly, Mr. Andrew had an obligation to ascertain his costs in order to minimize the burden on the public and to account for the use of public funds. However, this is not to say that profit motive can be escalated to the foremost position in these circumstances. While the generation of profit, as a safety net, was One motive, it was certainly not the predominant purpose for which the contract was entered into. In my view, even if a profit was earned, it was merely incidental to other, more significant, purposes.

Reasonable Expectation of Profit

The plaintiff argued, in the alternative, that his employer carried on business with a reasonable expectation of profit. As indicated previously, the reasonable expectation of profit test consists of both subjective and objective elements. According to Mr. Andrew, the contract in question would earn a profit because it covered virtually all of the Department’s costs, and also provided a $25,000 annual fee along with a 25% markup on actual salaries paid to employees. The annual fee was intended to cover the costs of employing a Canadian-based Project Co-ordinator and staff needed to supervise and administer the project. In Mr. Andrew’s view, the additional costs and administrative overhead would not be significant. New employees were not hired for the Malawi project; rather, additional activities were added to the duties of existing employees, such as Mr. Andrew, Mr. Lister, and Ms. Johnson. Mr. Lister confirmed that no additional personnel or office space was required for the project.

Ms. Valerie Johnson of the Administrative Services Branch of the Department was responsible for paying bills and reconciling the accounts, including contract-related travel and salaries. She performed these financial services as an additional duty. While she testified that the services she performed were somewhat black-and-white, she did say there was invariably a fair amount of work involved.

Ms. Brito testified that the contract was entered into in the not- for- profit sector, and was described as an administrative agreement. As indicated previously, she stated that both the overhead mark-up and the profit margin would have been higher if the contract had been entered into with the private sector. It is the Treasury Board which determines the profit margin on contracts entered into by the federal government.

The plaintiff called one expert witness, Mr. John Gorill, who is a chartered accountant. He was asked to determine net profit, and to provide an opinion on the Department’s expectation of profit upon entering the contract. The defendant objected to Mr. Gorill’s testimony. I allowed Mr. Gorill’s evidence on the basis that he could appreciably assist the Court in coming to a conclusion of law, based on the facts in this case. Of course, the Court is often only able to determine the usefulness of certain evidence after cross-examination has been completed.

It is indisputable that no witness can be conclusive on a question of law. The evidence of any expert is invariably a question of weight, and the Court is not bound by it. A reasonable expectation of profit should be examined on the basis of sound accounting principles. This, of course, does not mean that expert accountancy evidence is always required or necessary; rather, it is helpful insofar as it discloses in what manner accountants, in practice, deal with a particular subject. Nevertheless, it is for the Court to decide whether such practice is sound.

Mr. Gorill has no special expertise in cost accounting or in the allocation of costs, including overhead; however, he testified that he had experience with cost allocation at his firm. He also testified that this was the first time he extracted figures from the public accounts. Mr. Gorill relied on a witness statement and a written opinion of other witnesses of the plaintiff, which I did not allow. After hearing the oral testimony of these other witnesses, Mr. Gorill testified that he would not change the opinion he provided with respect to overhead.

Mr. Gorill described the contract in question as being a costs-plus contract with minimal risk. He testified that the figure of approximately 15 per cent for overhead was conservative. In addition, he agreed that there would be an actual loss, not a net profit, over the ten-year life of the contract, if overhead were 20 per cent, not 15 per cent. According to Mr. Gorill, if the public accounts, along with the financial documents prepared by Ms. Johnson, are accurate, then his opinion regarding overhead was within a range of reasonableness. While he agreed that the major portion of government activities would not be for profit, Mr. Gorill felt that his considerations relating to the costs under the contract were reasonably presented.

Mr. Wilson, a chartered accountant with the provincial government, who had experience in Malawi, testified, on behalf of the plaintiff, that the public accounts did not allocate costs as between departments. Specifically, Mr. Wilson indicated that there were costs that were not allocated to the Department which were also not reflected in the public accounts. For example, there was a series of fixed costs relating to the contract that would not be evident in the public accounts. Accordingly, Mr. Wilson stated that the public accounts provided a picture of the direct costs of the contract, and apparently not the indirect costs. Mr. Gorill, nevertheless, felt that his overhead calculation was reasonable, and that his method for allocating indirect costs was sound. He described how the head office of his accounting firm generally allocates overhead to the regions; however, he felt it was unnecessary to do so in the present case because most of the employees under the contract were in Malawi.

The defendant called no expert evidence and, indeed, did not, to any extent, fully argue the reasonable expectation of profit issue. The defendant preferred to rely on the preponderant purpose test. Nevertheless, I feel it is appropriate to consider the issue of reasonable expectation of profit. The operations of government departments are, for the most part, directed towards the provision of goods and services to the public, rather than the making of a profit. Normally, as Mr. Gorill agreed, government services are funded out of general tax revenues. In essence, then, there is generally no market mechanism for assessing the demand for government services.

A question, of course, arises as to whether commercial accountancy practices and principles can apply fully to government accountancy. I need not answer that question in this case. However, it is necessary to point out that the unique feature of government services may not be fully captured in a reasonable expectation of profit analysis, or in a net profit statement, particularly as presented in this case. In other words, what is done in commercial accountancy may not fully reflect the difference between the public and private sectors. In this case, Mr. Gorill determined profits in relation to what appears to be ordinary principles. I am not suggesting that, for the most part, generally- accepted commercial cost accounting prin ciples do not apply. However, the estimate of the cost base and the required cost allocation procedures is more problematic in government. This is so because of government infrastructure, which is often blended and, accordingly, somewhat more imprecise from a costing perspective.

According to Dickson J., in Moldowan,. supra, at page 486 (C.T.C. 313-14), whether a taxpayer had a reasonable expectation of profit is an objective determination to be made from all of the facts. In Lorentz v. Minister of National Revenue, [1985] 1 C.T.C. 2144, 85 D.T.C. 131 (T.C.C.), at page 2145 (D.T.C. 132), Christie A.C.J. summarized the onus as follows:

[The taxpayer] must place evidence before the court from which it can be objectively concluded that his conduct was that which could be expected of a reasonably prudent person becoming involved in a commercial undertaking designed to extract a profit.

In this regard, Dickson J., in Moldowan, listed certain criteria; however, he noted that they were not intended to be exhaustive, and were dependent upon the nature and extent of the undertaking.

Mr. Gorill testified that a small net profit of $136,289.00 was made over the ten-year life of the contract. I am not concerned with the amount of the profit as determined, nor am I expressing an opinion on the commercial viability of the project. If the project had been a failure, the public coffers would still likely have funded the loss. As I indicated previously, I am mindful that public funds from general tax revenues flowed from the federal government to the provincial government, in this case, in order to provide developmental aid to Malawi. However, profits were assessed by the plaintiff in relation to ordinary commercial accountancy principles. The accounting evidence of Mr. Gorill is helpful, since all governments in Canada are accountable for the expenditure of public funds. Nevertheless, there are aspects of the cost allocation with which I am not satisfied. It is necessary to determine the full costs of the services, which would include both direct and indirect costs. Mr. Gorill attempted to do this. I am unable, though, to determine the costs of products and services that may have been incurred by other departments. For example, I have in mind the central service departments, including the Management Board, Supply and Services, and the Comptroller’s Office. The plaintiff also argued that no capital cost allowance (depreciation) charge was necessary since the venture did not have significant capitalization requirements. Unless otherwise accounted for, however, these costs, if material, should be considered and allocated accordingly.

There is little doubt that the Department recovered a fair share of its costs of the services provided in connection with the contract.

However, I am not satisfied that, on the evidence before me, the Department objectively had a reasonable expectation of profit.

In conclusion, on the basis of either test, the Department was not carrying on business under a contract during the taxation years in question, as required by subsections 8(10) and 122.3(1) of the Act.

Accordingly, the plaintiff is not eligible to claim the overseas employment tax deductions for the taxation years 1982 and 1983; he is also unable to claim the overseas employment tax credit in 1984.

The appeal shall therefore be dismissed. There shall be no order as to costs.

Appeal dismissed.