Hewitt v. MNR, 89 DTC 451, [1989] 2 CTC 2278 (TCC)

Mogan, T.C.J.: —The appellant was employed by the Oasis Oil Company of Libya, Inc. (“Oasis Oil”) from April 21, 1980 until May 31, 1984. The appellant was resident in Canada prior to April 21, 1980; and he flew from London U.K. to Toronto on May 28, 1984 when he resumed his residence in Canada. The parties are in agreement that the appellant was a non-resident of Canada from April 21, 1980 until May 27, 1984 although he returned to visit in Canada many times within that period. The issue in this appeal is whether certain amounts received by the appellant in July 1984 with respect to his employment by Oasis Oil are subject to income tax in Canada.

The appellant's duties as an employee of Oasis Oil were performed only in Libya and primarily in the desert. The appellant is an instrument mechanic and a member of the pipefitters' union. By North American standards, the appellant had an extraordinary schedule comprising seven work terms of 52 or 53 days in each calendar year with the days allocated as follows:

Apparently, the seven work terms were offered as an incentive to persuade qualified persons to accept employment by Oasis Oil in the desert. The appellant also participated in the Oasis Oil Service and Thrift Plan which provided, in part, as follows:

— each active member of the Plan could designate that either five per cent or ten per cent of his benefits base salary be withheld from his compensation and transferred to the trustee of the Plan;

— Oasis Oil (the "Company") would make a contribution to the Plan with respect to each active member depending upon the member's age and the number of his complete years of service;

— the appellant in fact designated that 10 per cent of his Benefits Base Salary be withheld from his compensation and the Company contributed $1.50 to the Plan for each $1 that the appellant contributed;

— upon termination, for any reason except death, a member would be entitled to receive from the Plan the aggregate of his contributions and the Company's contributions but, if the member had completed less than three years of service, he would receive only his own contributions;

— during the course of employment, a member could request a partial withdrawal from the Plan but the amount of his partial withdrawal could not exceed his own contributions plus (if he had completed more than three years of service) 50 per cent of the Company's contributions;

— upon termination, a member could request (a) a single cash payment;

(b) a deferred cash payment provided the deferral did not exceed one

year; or (c) that the trustee of the Plan purchase an annuity.

In summary, the only way that a member could recover all of his contributions plus all of the Company's contributions was on the termination of employment after three years of service. Also, upon such termination, if the employee did not ask the trustee to purchase an annuity, then his cash payment had to be taken out of the Plan within one year of termination.

The appellant came out of the desert and went to Tripoli (Libya) on or about May 25, 1984. At that time, he signed all of the documents connected with the amicable termination of his employment by Oasis Oil and requested a single cash payment out of the Service and Thrift Plan. He told his employer that he would later provide details as to where the single cash payment should be made. On May 27, 1984, he flew from Tripoli to London U.K. on the first leg of his journey returning to Canada. In June 1984, after he had resumed his residence in Canada, the appellant informed Oasis Oil that the single cash payment out of the Plan should be sent to his account at the Royal Bank of Canada in Sarnia, Ontario.

In July 1984, the appellant received his payment out of the Plan comprising the following amounts (all in U.S. funds):

When reassessing the appellant for 1984, the Minister of National Revenue included in the appellant's income the amount of $49,675.64 (Canadian funds) representing the sum of $24,660.30 (U.S.) and $13,705.19 (U.S.) received by the appellant in July 1984 as the Company's contributions plus interest earned. The Minister did not include in the appellant's 1984 income any amount representing a refund of the appellant’s contributions to the Plan. The only issue in this appeal is whether the appellant is required to pay income tax in Canada for 1984 on the said amount of $49,675.64.

In my opinion, the amount of $49,675.64 received by the appellant 1984 is not subject to income tax in Canada. The source of this amount was the appellant’s employment outside Canada at a time when he was a nonresident of Canada. Under section 2 of the Income Tax Act, a person resident in Canada is liable for tax in Canada in respect of his world income. When a person is not resident in Canada, he is liable for tax in Canada only if

(a) he was employed in Canada; (b) he carried on business in Canada; or (c) he disposed of taxable Canadian property. During the period from April 21, 1980 until May 27, 1984, the appellant was not resident in Canada; he was not employed in Canada; and there was no evidence that he carried on business in Canada or disposed of any taxable Canadian property. Therefore, within that period, the appellant did nothing which would give rise to liability for income tax in Canada.

Soon after the appellant's return to Canada on May 28, 1984 when he resumed his status as a resident of Canada, he received the amounts question. These amounts, however, were not earned and did not accrue when the appellant was resident in Canada. Indeed, they were derived from a source which is exempt from income tax in Canada: the employment out- side Canada of a person not resident in Canada. The fact that those amounts were received soon after the appellant's return to Canada and the resumption of his residence in Canada does not disconnect those amounts with their tax exempt source (i.e.: the appellant's employment outside Canada when he did not reside in Canada). If the appellant had asked the trustee of the Plan to purchase an annuity, the result of this appeal might have been different but, on the facts, that question was not relevant and was not argued.

Counsel for the respondent argued forcefully that income from employment is taxable at the time when it is received and he cited subsection 5(1) of the Income Tax Act and the recent decision of this Court in Markman v. M.N.R., [1989] 1 C.T.C. 2381; 89 D.T.C. 253. There is no question that income from employment is taxable in Canada when received assuming, of course, that the employment itself, as an income source, is liable for tax in Canada.

For the reasons set out above, I have concluded that the appellant's employment by Oasis Oil did not result in employment income which was liable for tax in Canada. Therefore, the receipt of the amounts in dispute soon after the appellant returned to Canada does not change a tax exempt source into a taxable source. Counsel also cited the decisions in Capital Trust v. M.N.R., [1937] S.C.R. 192; [1937] 1 D.L.R. 617 and M.N.R. v. Rousseau, [1961] Ex. C.R. 45; [1960] C.T.C. 336; 60 D.T.C. 1236 but they do not affect the conclusion I have reached because, in both cases, the source of income was taxable in Canada.

If the single cash payment out of the Plan had been long delayed, or the amount payable had been spread out over a period of time in a series of payments, other considerations would arise as to (i) whether a portion of the amount received accrued or was earned while the appellant was resident in Canada; or (ii) whether the payments were a "superannuation or pension benefit" within the meaning of the Income Tax Act. On the facts, however, those questions do not arise and were not argued.

On the evidence, the appellant was in fact paid as an employee of Oasis Oil to May 31, 1984, the third day after his return to Canada. I do not regard that fact as material in determining this appeal. It appears that Oasis Oil merely gave the appellant a few extra days of vacation at the end of May. He did not perform any employee duties Oasis Oil after he left Tripoli on May 27, 1984.

The appeal is allowed with costs.

Appeal allowed.