Citation: 2011 TCC 413
Date: 20110906
Docket: 2010-1802(IT)G
BETWEEN:
DAVID WAYNE LEGGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Campbell J.
Facts:
[1]
The Appellant, David
Wayne Legge, claimed an overseas employment tax credit (the “OETC”) pursuant to
section 122.3 of the Income Tax Act (the “Act”) in respect to his
employment in the State of Qatar. The issue before me is whether Mr. Legge is
entitled to the OETC in respect to his 2007 taxation year.
[2]
The Appellant was
employed by the College of the North Atlantic (the “CNA”) as an instructor in
the Engineering Technology department at its branch campus (the “CNA-Q”)
located in Doha in the State of Qatar. The Appellant’s
evidence was that he is an instructor of Electronics and Telecommunications
Engineering Technology.
[3]
The CNA is a
post-secondary educational institution based in the Province of Newfoundland and Labrador. It operates a number of campuses
throughout Newfoundland and Labrador as well as its Qatar
campus. The overseas campus was established pursuant to a ten-year
Comprehensive Agreement (the “Agreement”) entered into in September, 2001
between the CNA and Qatar. In accordance with the Agreement, CNA was
to establish a public post-secondary college of technology offering students in
Qatar both Canadian and international accreditation in various technological
programs, including health sciences, information technology, engineering
technology, business studies, banking and security. The CNA-Q is a fully-operational
campus with programs that are designed in consultation with industry and State
officials in Qatar. The programs are based on current and projected
employment prospects.
[4]
The engineering
technology program at CNA-Q, where the Appellant was a faculty member, was
designed to prepare students for maintenance and operator positions at the
technician and technologist levels. The primary obligations, of the State of
Qatar under this Agreement, were to ensure that the campus operated in
accordance with the State’s laws, to provide funding and facilities and to compensate
CNA for establishing and operating the campus. The compensation details were
contained in Article 4 of a lengthy and comprehensive Business Plan attached to
and forming part of the Agreement. It is clear from the Agreement and Business
Plan that CNA intended to make a profit from operating this campus in Qatar. The oral and documentary evidence support that this
was a lucrative contract for the college.
[5]
One of the objectives
of this Agreement was that CNA deliver high-quality graduates to work in the
oil and gas industry in Qatar because many of those positions had been
previously staffed by non-Qataris. Consequently, CNA-Q was designed to be
responsive to the social and economic requirements of industry and community
interests in the State of Qatar. In fact, one of the Guiding Principles listed
in the Business Plan states that the “core task…for CNA is to bring the same
flexibility and experience to designing systems that work in the unique social
and cultural environment of Qatar” (Business Plan, page 1).
[6]
Three of the witnesses,
who were senior officials with CNA and who had spent time at the campuses in
both Qatar and Newfoundland, provided corroborating evidence of the close ties
that CNA-Q had with industries in Qatar, particularly the oil and gas sector.
[7]
Pursuant to the
Business Plan, at Article 5.2, the Master Program Plan, specific reference is
made to the requirement for CNA to respond to the specific needs of Qatar industry. In addition, Article 5.3 outlines the
importance of the “partnership” arrangement between CNA and the Qatar oil and gas industry sector together with the
considerable interaction and collaboration that was intended: “…industry will
play an integral role in the development of curriculum, definition of required
accreditation standards and in the delivery of training.” It is clear from the
Business Plan that Qatar industry is intended to have direct input
into course content and delivery modes offered at CNA-Q. Although student
enrolment was not limited to Qatari nationals, the objective of Qatar was to maximize the enrolment of Qatari nationals in
these programs (Article 10.4) and for eventual employment in the Qatar business and industry sector.
[8]
Prior to the
establishment of CNA-Q, technical engineering training had been handled on a
limited basis by Qatar Petroleum Co. (“QP”), a wholly State-owned and operated
company in the oil and gas sector. A Memorandum of Understanding (the “MOU”)
dated July 1, 2005 between the Board of Governors of CNA and QP transferred a
corporate training program, which included the Technical Preparatory Program
(“TPP”) from QP to the college in Qatar. The
Appellant’s duties, however, were not pursuant to this MOU. The TPP grants different certificates than those
granted under the Engineering Technology program. The purpose of the TPP was to
prepare students for entry into a process operations environment. The MOU also
established a close working relationship between CNA-Q and QP for purposes of
the TPP. For instance, the MOU provided that QP would pay for tuition fees,
textbooks and supplies for a minimum of 240 students in the TPP for each
academic year. Although QP acts as a sponsor to all students enrolled in the
TPP, other Qatari and non-Qatari employers recruit from the TPP.
[9]
Although the campus was
governed overall by the CNA Board of Governors, the Agreement established a
Joint Oversight Board (“JOB”) to perform specific governance functions at the
campus. The JOB included appointees from the State of Qatar, the CNA and local
industry, with the State of Qatar maintaining the power to appoint the Chair of
this Board.
[10]
Many of the students in
the Engineering Technology program, as well as the other programs offered at
CNA-Q, are sponsored by Qatari companies. In fact, QP acts as a state-owned
umbrella company for many Qatari oil and gas companies, as well as a liaison
vehicle for dealings with non-Qatari companies involved in the oil and gas
industry. It maintains a full-time office on the CNA-Q campus to deal with
those sponsored students. Other corporate entities, such as Qatar Gas and
RasGas, Exxon Mobil, Dolphin Energy, Occidental Petroleum, Shell and Petrotec,
also have a significant presence on campus and provide considerable support to
the college. That support includes providing facilities for workplace training,
sponsoring students, providing scholarships and contracting with the college
for the provision of specific individualized training to sponsored
students/employees (Respondent’s Written Submissions, paragraphs 24 and 25).
However, the evidence suggests that QP, as the umbrella company and
intermediary between CNA-Q and the oil and gas sector, maintains the most significant
presence on campus.
[11]
More than half of all
students at CNA-Q are sponsored by local businesses, which pay the students’ costs,
including tuition. Sponsored students are either already employed by these
companies or will be employed upon graduation. Each sponsored student can
obtain a program from CNA-Q that is specifically designed to his or her individual
needs. This type of sponsorship is unique to the Qatar college and is very
different from the type of sponsorship program available at the Newfoundland campuses, where the sponsorship money is sourced from
public funds with minimal private industry involvement. Gregory Chaytor, Vice‑President
of the Qatar project, described the sponsorship program
as being akin to a “parent” relationship to a student. If sponsored students
had issues, the Appellant would communicate with the students’ sponsor.
The Appellant’s Position:
[12]
The Appellant contends
that he is entitled to the OETC because the requirements set out in section 122.3
are satisfied based on two arguments:
(1)
The degree of connection
required between CNA’s contract with Qatar (the specified employer) and “the exploration
for or exploitation of petroleum, natural gas, minerals or other similar
resources” (the qualifying activity) is established through the significant
involvement of the oil and gas industry in Qatar with the management and
day-to-day administration of the Qatar campus. This connection between the
contract and the qualifying activity satisfies the broadest scope
interpretation which the Appellant argues should be given to the phrase “with
respect to” contained in subparagraph 122.3(1)(b)(i).
(2)
Teaching engineering
constitutes an “engineering activity” [clause 122.3(1)(b)(i)(B)].
The Appellant bases this argument on the engineering statutes of four Canadian
jurisdictions that include teaching as an aspect of the practice of
engineering, the reference in IT-497R4 [May 14, 2004] to
teaching as a qualifying activity and the decision in Gabie v The Queen, 98 D.T.C. 2207, which interpreted
“engineering activity” broadly and allowed a non‑engineer to claim an
OETC.
The Respondent’s Position:
[13]
The Respondent argues
that CNA was not carrying on a business with respect to a qualifying activity
pursuant to subparagraph 122.3(1)(b)(i). The Respondent relied on the
decision in Humber v The Queen, 2010
TCC 253, [2010] T.C.J. No. 176, to support its position that neither the
operation of the CNA-Q campus nor the offering of engineering technology and
technical certificate programs in close partnership with QP constitute
“engineering activities”. The plain meaning of the phrase “engineering
activities” should not be interpreted to include the business of offering
educational programs as CNA does. The college does not compete with other
overseas companies in making bids on engineering or oil and gas projects and it
is not reducing its salary costs in order to compete with other engineering
companies because the Appellant was paid more than his colleagues teaching in Newfoundland. Neither is the CNA a subcontractor of the State of Qatar
with respect to a qualifying activity carried on by the State simply because Qatar wants to implement educational programs to support
its local industries. Finally, the Respondent argued that, since the
Appellant’s employment at the CNA was in connection with the Agreement and
since this Agreement is not with respect to an engineering activity of the
State, the Appellant’s duties were not in connection with a contract under
which the CNA carried on business outside Canada
with respect to an “engineering activity”.
Analysis:
[14]
The relevant portion of
section 122.3 of the Act provides that:
122.3 (1) Deduction from tax payable where employment out of Canada. Where an
individual is resident in Canada in a
taxation year and, throughout any period of more than 6 consecutive months that
commenced before the end of the year and included any part of the year (in this
subsection referred to as the "qualifying period")
(a) 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, and
(b) performed all or
substantially all the duties of the
individual's employment outside Canada
(i) in connection with a contract under which the specified employer
carried on business outside Canada
with respect to
(A) the exploration for or exploitation of petroleum, natural gas,
minerals or other similar resources,
(B) any construction,
installation, agricultural or engineering activity, or
(C)
any prescribed activity, or
(ii) for the purpose of obtaining,
on behalf of the specified employer, a contract to undertake any of the
activities referred to in clause (i)(A), (B) or (C),
there may be deducted, from the amount that
would, but for this section, be the individual's tax payable under this Part for
the year, an amount equal to that proportion of the tax otherwise payable under
this Part for the year by the individual that the lesser of
(c) an amount equal to that proportion of $80,000 that the
number of days
(i) in that portion of the
qualifying period that is in the year, and
(ii) on which the
individual was resident in Canada is
of 365, and
(d) 80% of the
individual's income for the year from that employment that is reasonably
attributable to duties performed on the days referred to in paragraph (c)
is of
(e) the amount, if any, by which
(i) if the individual is
resident in Canada throughout the
year, the individual's income for the year, and
(ii) if the individual is
non-resident at any time in the year, the amount determined under paragraph
114(a) in respect of the taxpayer for the year
exceeds
(iii) the total of all
amounts each of which is an amount deducted under section 110.6 or paragraph
111(1)(b), or deductible under paragraph 110(1)(d.2), (d.3),
(f), (g) or (j), in computing the individual's taxable
income for the year.
[…]
(2) Definitions --
In subsection (1),
"specified employer" means
(a)
a person resident in Canada,
(b) a
partnership in which interests that exceed in total value 10% of the fair
market value of all interests in the partnership are owned by persons resident
in Canada or corporations controlled by persons resident in Canada, or
(c) a corporation that is a foreign
affiliate of a person resident in Canada;
"tax
otherwise payable under this Part for the year" means the amount that, but for this section, sections 120 and 120.2,
subsection 120.4(2) and sections 121, 126, 127 and 127.4, would be the tax
payable under this Part for the year.
[15]
This provision provides
a tax credit to individuals who are residents of Canada
but who work for a Canadian employer outside the country. The credit aims to
encourage Canadian employers that employ Canadians in overseas jurisdictions to
compete in obtaining overseas contracts by allowing such Canadian employers to
reduce overhead in respect to salary costs.
[16]
At paragraph 14 of the
decision in Rooke v The Queen, 2002 FCA 393, 2002 D.T.C. 7442, the
Federal Court of Appeal summarized the conditions that must be satisfied in
order for an individual to successfully claim the OETC in a particular year:
14.
[…]
(1) The
individual was resident in Canada.
(2) The
individual was employed by a person who was a "specified employer" as
defined in subsection 122.3(2).
(3) The
individual's employment for that "specified employer" was for
something other than the performance of services under a prescribed
international development assistance program of the Government of Canada.
(4) The
individual performed all or substantially all of the duties of his employment
(a) outside Canada, and (b) in connection with one or more of the activities
described in subparagraph 122.3(1)(b)(i) or (ii).
(5)
Conditions (2), (3) and (4) subsisted for a period of more than six consecutive
months within the year, or beginning or ending in the year. That period is
referred to as the "qualifying period" for the year.
[17]
In respect to the
conditions that must be satisfied in order to successfully claim an OETC, there
is no dispute that the CNA is a specified employer, that the Appellant
performed all his duties as an employee of the CNA outside of Canada for a
period of more than six consecutive months and that the CNA, despite being a
publicly-owned, post-secondary educational institution, carried on a business
in Qatar. Consequently, the issue focuses on the kind of business that the CNA
carried on in Qatar and, more specifically, whether it was carrying on business
with respect to a “qualifying activity” within the meaning of clauses 122.3(1)(b)(i)(A)
and 122.3(1)(b)(i)(B).
[18]
The same two arguments
that the Appellant presented in this appeal were also before Justice Woods in Humber
v The Queen, 2010 TCC 253, 2010 D.T.C. 1170. In that case, the taxpayer was
also employed as an engineering instructor at CNA-Q. The issues and facts were
similar to those before me. Justice Woods dismissed the appeal because first,
the connection, between the training offered by a college such as CNA-Q and the
engineering activities, was too “remote” and second, the taxpayer failed to
prove that CNA carried on a business with respect to an “engineering activity”.
The Court held that interpreting “engineering activity” to include the activity
of teaching engineering would extend the ordinary meaning of the expression
beyond its normal meaning because there is a distinction between “teaching” and
“doing”. At paragraph 16 of Humber, Justice Woods observed that there may be
“…a stronger connection in
this case between CNA’s business and the state-owned petroleum companies.
However, the evidence was insufficient to establish this.” This statement
implies that such a connection may have been established had the evidence been
presented. Although not clear, it would appear that the only evidence that was presented
in Humber was that of the taxpayer because she noted again, at paragraph
16, that “… no one from the administration of CNA testified at the hearing.”
[19]
The Appellant argued
that sufficient evidence was adduced in the present appeal to establish the
necessary connection even without resorting to the argument based on an
analysis of the phrase “with respect to” (which is equivalent to the section
222.3 phrase “with respect to”) (Appellant’s Written Submissions, paragraph
25).
[20]
Unlike Humber,
where Justice Woods commented that the connection was not described as clearly
as she would have liked, the Appellant presented evidence from three senior
officials of CNA: Norris Eaton, Dean of Industrial Trades, Gregory Chaytor,
Vice-President of the Qatar Project and Gary Tulk, Dean of Engineering
Technologies and Industrial Trades at the Qatar campus. They described in
detail the close connection and dealings between the Qatar
campus and the Qatar industry sector, particularly the oil and
gas sector. The evidence before me clearly supports the close association that
exists between the teaching activities at the Qatar
campus and the oil and gas industry. The terms of the Agreement, together with
the attached Business Plan, support the extensive involvement of the Qatar oil and gas industry sector with the campus
activities. This is also evidenced by QP’s close working relationship with
CNA-Q in the running of the TPP pursuant to the MOU, the student sponsorship
program, the corporate “parenting” of students, the presence of a permanent QP
office on campus together with other corporate offices, industry participation
on the Board of Governors for the campus, QP’s right to appoint a Chair to the
Board, programs modified to suit sponsored student requirements and the regular
consultation and interaction with Qatar industries in ascertaining and
supporting their needs.
[21]
A driving force of the
CNA-Q program was to meet the needs of Qatar
industries and businesses in respect to projected employability opportunities,
especially in the oil and gas sector. The Business Plan refers to the integral
role that industry would play in the development of campus programs, curriculum
and training. One of the options outlined in the Engineering Technology program
specifically references that the input of petroleum and gas operations and industry
is to be considerable at this campus. The Agreement and Business Plan are
intimately linked to “the exploration for or exploitation of petroleum, natural
gas, minerals or other similar resources” (as referenced in clause 122.3(1)(b)(i)(A)).
It is clear from the testimony of the witnesses and the documentary evidence
that the mutual understanding of the CNA-Q, the State and the Qatari oil and
gas companies is that the ultimate success of this industry is dependent upon
the skill, talent and knowledge of its present and future workforce. There is
an acknowledgment of the dynamics of this inter-relationship reflected through
the corporate involvement in the management, administrative and governance of
the Qatari campus. In addition, QP enjoys a close working relationship with
CNA-Q in the running of the TPP pursuant to the MOU.
[22]
The Appellant contends
that the significant connection between the campus and the Qatari oil and gas
industry is supported by the terms of the Agreement because it is “with respect
to” the exploration for or exploitation of petroleum and natural gas. Even if
the phrase “with respect to” contained in subparagraph 122.3(1)(b)(i) is
to be given a restricted meaning for purposes of the OETC, as the Respondent
submits, I conclude that the intent of the parties to the Agreement is nevertheless
“with respect to” the exploration for or exploitation of petroleum, natural
gas, minerals or other similar resources. However, the interpretation that
should be given to the phrase “with respect to” is broad enough to include
Canadian employers, like CNA, that can establish the high degree of connection
to a qualifying activity, as occurred in the present appeal. The Respondent
suggested that the leading cases of Markevich v The Queen, [2003]
1 S.C.R. 94, and Nowegejick v The Queen, 83 D.T.C. 5041, adopted a
wide interpretation of the phrase “in respect of” rather than “with respect to”
as contained in section 122.3 but that the Courts did so only because they were
dealing with the Indian Act, where the widest interpretation must be
applied. I do not agree with this limited view. Both of these decisions, as
well as a long line of subsequent cases, have clearly adopted the view that the
phrase should generally be given a broad interpretation in scope which is not
limited to the Indian Act. The phrase is meant to convey some link
between two related subject matters and include other similar phrases such as
“with reference to” and “in connection with”. Similarly, the phrase “with
respect to” should also be interpreted broadly.
[23]
Parliament could have
used different language in drafting section 122.3 to convey a stronger
connection to qualifying activities. However, it did not do so. The purpose
underlying the OETC is to encourage Canadian companies and provide incentive to
them to carry on qualifying activities in a foreign jurisdiction. It is clearly
contrary to the policy for allowing an OETC to apply an interpretation of the
phrase “with respect to” in a way that would limit the provision to exclude
Canadian employers where they can establish this degree of connection to a
qualifying activity, as the Appellant has done in this appeal. When Justice
Woods in Humber concluded that the connection, between the training
offered by the CNA-Q campus and the engineering activities of the Qatar oil and
gas sector, was too remote, it appeared to be because there was insufficient
evidence before the Court in that appeal to establish this connection, unlike
the oral and documentary evidence that sufficiently established such a connection
in the present appeal.
[24]
I am supported
in my conclusion by the decision in Dunbar v The Queen, 2005 TCC 769, 2005 D.T.C. 1807, where, at
paragraph 10, Justice Miller stated that “… all stages necessary to take the
natural resource to its maximum value for the pursuit of profit is part of the
exploitation process.” It could be argued that the first stage in the
exploitation process must begin with the teaching stage because, unless the
relevant skills and knowledge are taught to the professionals that will work in
these industries, natural resources could not be extracted and eventually sold
for profit. The teaching phase for future engineers and technicians is an integral
and necessary stage which is preliminary to their involvement in the actual exploration
or exploitation process. The CRA administrative position, contained in
Interpretation Bulletin IT-497R4, also supports the view that teaching
specialized skills and knowledge is part and parcel of the process of carrying
out qualifying activities such as the exploitation of gas and oil. That
Bulletin adopts the view, at paragraph 7, that, provided all other conditions
under section 122.3 are met, “(a) instructors or administrative staff providing
supporting services to fallen employees and (b) staff who train the personnel of
the foreign customer” can claim the OETC. Clearly, CNA was not hired to
undertake the full gamut of activities associated with the exploitation of oil
and gas in Qatar. This does not prevent the Appellant, however, from successfully
claiming the OETC where the focus of the Agreement and Business Plan encompasses
the initial teaching stage of the exploration or exploitation process and
establishes a solid connection between the terms of the CNA Agreement and the
exploration or exploitation process.
[25]
OETCs may also be
claimed where the specified employer is hired as a subcontractor and provides
employees to a third party carrying on a qualifying activity abroad. The
Respondent submits that CNA is not a subcontractor of the State of Qatar with
respect to the qualifying activity of the exploitation of oil and gas carried
on by the State. Since QP is a State-owned company, it could be argued,
however, that the Agreement is a subcontract pursuant to which CNA undertakes
to perform portions of the main contract to carry on a business in respect of
the exploration for or exploitation of oil and gas. Such an argument has some
support because CNA cannot be characterized as a mere placement agency.
However, there are several flaws in the argument that CNA is a subcontractor.
QP and its subsidiaries are not the only corporate partners of CNA-Q, yet the
only parties to the Agreement are CNA and the State of Qatar. Overall, the
subcontracting argument is not strongly supportive of the Appellant’s position.
[26]
The only remaining
question to be addressed is whether CNA’s business of teaching engineering
could also be characterized as being “with respect to an engineering activity”
pursuant to clause 122.3(1)(b)(i)(B). I conclude that it can be. Given
the broad interpretation that the Courts have given the phrase “with respect
to”, the Agreement can also be characterized as being with respect to
engineering activities. Following the argument in clause 122.3(1)(b)(i)(A),
the training provided by CNA-Q is sufficiently linked or connected to the
engineering activities by virtue of the degree of industry’s involvement with
CNA-Q in Qatar.
[27]
The decision in Gabie
v The Queen, 98 D.T.C. 2207, expanded the meaning of engineering beyond
actual “hand-on” activities or physical construction to include the development
of databanks and other software designed to control the flow of information.
The claim for an OETC was allowed in Gabie on the basis that the
taxpayer performed engineering activities of software engineering as a computer
scientist. Based on the broad interpretation given to the term “engineering
activity” by Chief Justice Rip in Gabie, I conclude that the teaching of
engineering also constitutes an engineering activity where, as in this appeal,
the evidence sufficiently meets the requirements of section 122.3. For
instance, training an engineer would be similar to the creation of a database
in that third parties, in order to make informed decisions, could then draw on
the information held by these final products, that is, trained engineers and
precise databases. The teaching of skills and knowledge to students who are
already working or who will be working in the engineering field is crucial for
the proper implementation of other engineering activities.
[28]
The proper training of
those who work in such activities and the application of their specialized
knowledge are conditions precedent to the successful development of engineering
activities. This conclusion is also supported first, by CRA’s view in IT‑497R4
that recognizes teaching as a qualifying activity and second, by the
legislation in four provinces which explicitly includes teaching or instructing
in engineering in their engineering statutes as an acceptable aspect of the
practice of engineering. The remaining provincial jurisdictions do not
explicitly exclude teaching from their engineering statutes.
[29]
Based on the evidence
before me, the Appellant has satisfied the requirements set out in section
122.3 of the Act. The appeal is therefore allowed, with costs, to permit
the Appellant to claim the OETC in respect to his 2007 taxation year.
Signed at Summerside, Prince Edward Island, this 6th day of September 2011.
“Diane Campbell”
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