Citation: 2007TCC736
Date: 20071206
Docket: 2006-1373(IT)G
BETWEEN:
JOSEPH MYS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, A.C.J.
[1] Joseph Mys appeals
his income tax assessments for 2001, 2002 and 2003 in which the Minister of
National Revenue ("Minister") did not permit him to deduct from tax otherwise
payable as an overseas employment tax credit in accordance with section 122.3
of the Income Tax Act ("Act").
[2] The relevant
portions of section 122.3 read as follows:
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(1) 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
. . .
(B) any construction, installation,
agricultural or engineering activity, or
. . .
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, . . .
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(1) Lorsqu'un particulier réside au Canada au cours d'une
année d'imposition et que, tout au long d'une période de plus de 6 mois consécutifs
ayant commencé avant la fin de l'année et comprenant une fraction de l'année
(appelée la « période admissible » au présent paragraphe) :
a) d'une part, il a été
employé par une personne qui était un employeur déterminé, dans un but autre
que celui de fournir des services en vertu d'un programme, visé par
règlement, d'aide au développement international du gouvernement du Canada;
b) d'autre part, il a
exercé la totalité, ou presque, des fonctions de son emploi à l'étranger :
(i) dans le cadre d'un contrat en vertu duquel
l'employeur déterminé exploitait une entreprise à l'étranger se rapportant à,
selon le cas :
[...]
(B) un projet de construction ou d'installation, ou un
projet agricole ou d'ingénierie,
[...]
peut être déduite du montant qui serait, sans le présent article,
l'impôt à payer par le contribuable pour l'année en vertu de la présente
partie [...]
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[3] The parties agreed
that Mr. Mys was resident in Canada during the "qualifying period" and during that
period was employed by Noramtec Consultants Inc. ("Noramtec"), who
was a specified employer,
other than for the performance of services under a prescribed international
development assistance program of the Canadian government.
[4] During the relevant
qualifying period Mr. Mys performed all or substantially all of his employment
duties outside of Canada, more specifically at the Kvaerner Philadelphia
Shipyard ("Kvaerner") in Philadelphia, Pennsylvania, U.S.A., in connection
with a contract between Noramtec and Kvaerner. The appellant's employment
duties during the qualifying period were engineering activities as provided in
paragraph 122.3(1)(b) of the Act consisting of computer assisted
design and layout of structural steel drawings plus coordination with vendors
and construction personnel for the shipbuilding industry. At the time, Kvaerner
was in the business of shipbuilding, engineering and construction services. All
of these facts were agreed to by the appellant and respondent.
[5] The appellant
submits that Noramtec carried on business outside of Canada, specifically the United States, with respect to
engineering activity.
[6] Noramtec, according
to its president Glenn Holland, provides teams of engineering personnel to
clients who are undertaking engineering projects. Noramtec's business operates
in three main areas: marine, oil and gas and aerospace. The Marine Division is
managed by Terry Logue who works for Noramtec in Richmond, Virginia. The oil and gas and the
aerospace divisions are headed by management located in Calgary and New York, respectively.
[7] Mr. Mys worked for
Noramtec's marine branch which is primarily concerned with "anything that
floats", according to Mr. Holland. Mr. Logue's responsibilities as manager
were to assess each contract and determine Noramtec's ability to fulfill the
contract. He authorizes all orders and he secures the personnel for the work,
arranges visas and all things necessary for the contract to begin on time.
During a contract, Noramtec's employees are in weekly contact with Mr. Logue.
He visits the worksite at least once every three months to discuss any problems
or issues. He is also in contact with the client, in the case at bar, Kvaerner.
Mr. Logue is also in charge of hiring and firing. Persons with similar
authority manage the other two divisions of Noramtec.
[8] Mr. Holland
declared that Noramtec undertakes risk whenever it undertakes a contract. If
there is poor workmanship by its employees, Noramtec risks not being paid. He
recalled that some clients did refuse to pay invoices "of six
figures".
[9] Under the contract
with Kvaerner — and others, Mr. Holland added — Noramtec had to secure
insurance coverage for the full replacement value of the work to be performed
as well as comprehensive general liability insurance with a combined simple
limit of $5,000,000. Noramtec warranted its work and was liable to either
repair or replace any goods and services failing to conform to the requirements
of the Purchase Order. The Purchase Order with Kvaerner was for three Tribon
designers and set out the hours each designer was expected to work, the standard
and premium hourly rates and travel expenses for the designers, among other
things.
[10] The contracts by
Noramtec were on a "cost plus" basis, the same, Mr. Holland
stated, as what SNC Lavolin as well as Cadco Design, its main competitor, enter
into.
[11] Noramtec employs
about 300 to 350 personnel, about 25 per cent of whom work in the United
States; the Virginia office is responsible for about 50 employees.
[12] All work is done
"on site", at the contractor's facilities. It is, explained
Mr. Holland, an engineering requirement that the designer be at a specific
location. The client wants people on its premises.
[13] The Minister's
assessments are based on his assumption that Noramtec is a placement agency
that sends employees to work on different contracts to provide specific
services both in Canada and other countries. Noramtec does not carry on the business of
professional engineer and was not executing any part of Kvaerner's engineering
contracts.
[14] Respondent's counsel
referred Mr. Holland to letters dated January 5, 2000 and January 1, 2001 from
Noramtec to Mr. Mys setting out the terms of employment of Mr. Mys. The letter
dated in 2001 contains the following paragraph which the Crown believed was an
essential element to the assessments:
By signing this agreement, you agree not
to contract your services directly to THE CLIENT, or to the CLIENT as an
employee or representative of an agency other than Noramtec Consultants,
Inc., until a period of six (6) months has elapsed from the time this
assignment ceased to be in effect.
[Emphasis added.]
[15] Mr. Holland denied that
his company is a placement agency. He declared that Noramtec provides
specialized engineering personnel to third parties. Clients "ask us to
provide specific individuals", specifically Tribon designers and the names of such individuals are
set out in the Purchase Order with the client, in this case Kvaerner. In the
Kvaerner contract Mr. Mys was responsible for the conversion of vessels to
conform to North American standards. Noramtec was obliged to provide Tribon
designers, of which Mr. Mys was one, for the project.
[16] Mr. Mys was
described by Mr. Holland as a specialist who was hired to lead the team. When Mr.
Mys found solutions to problems he would advise the project manager who would
decide whether or not to accept the advice. Mr. Mys did not require any
significant supervision, although he did have a supervisor. He would be in
touch with Mr. Logue. The latter would provide him with support, if
necessary, and be in contact with Kvaerner's supervisor at the site.
[17] Mr. Mys described
himself as a ship designer. He was trained in Scotland as a shipbuilding technician. He
is an associate member of the Royal Institution of Naval Architects. Mr. Mys
immigrated to Canada in 1987 and has worked in Saint John, N.B.; Baltimore, MD;
Ottawa, ON; Montreal, QC; Coquitlam, B.C.; Scotland, Ireland and Durban, South
Africa and elsewhere in the United States.
[18] As a Tribon designer
in Philadelphia, Mr. Mys worked on
outfitting rudders and cellguides, a guidance system to bring containers onto
vessels. In his view, if he "messed up", Noramtec was liable. Mr. Mys
testified that he spoke to Mr. Logue at least once a week on matters as diverse
as work problems in Philadelphia to personal matters.
[19] The appellant's
position is that he clearly met the requirements of paragraph 122.3(1)(b)
of the Act for the relevant period. In his view, he performed during
that period all or substantially all the duties of his employment outside Canada in connection with
contracts under which Noramtec carried on business outside Canada with respect to an
engineering activity, namely the designing and building of vessels by the
Philadelphia Kvaerner Shipyard. This is admitted by the parties in their Agreed
Statement of Facts.
[20] The contracts,
according to the appellant, are ones under which Noramtec carried on business
in the U.S. with respect to an
engineering activity. The appellant states that the meaning of "carried on
business" for the purpose of the overseas employment tax credit has been
interpreted by the courts by reference to the definition of
"business" and its ordinary sense. The appellant referred to Timmins
v. R., a
decision of the Federal Court of Appeal, in which Noël J.A. stated that:
The expressions "carry
on business," "carrying on business" or "carried on
business," while undefined must, when regard is had to the ordinary
meaning of the words refer to the ongoing conduct or carriage of a business. It
would seem to follow that where one "carries on" a business in the
ordinary sense or by pursuing one or more of the included activities under ss.
248(1) over time, one is "carrying on business" under the Act.
[21] Noël J.A. explained,
at paragraph 11, that even though subsection 122.3(1) does not impose a tax but
extends a benefit, it cannot be seriously argued that on that account only, the
word business should be construed differently. There is nothing in the language
of subsection 122.3(1) which excludes from its application the defined meaning
of the word "business".
[22] See also Surprenant et al. v. The Queen, where at
paragraph 36, 37 and 38 my former colleague Dussault J. adopted the reasons of Noël
J.A. In Surprenant, MCI Canada, a resident corporation, and MCI
SA France, a non-resident corporation, were both owned by a non-resident
corporation. MCI Canada recruited information technology specialists. These
specialists, including the appellant taxpayers, rendered services in France to MCI SA France's clients. They were paid by MCI
Canada, although MCI Canada was reimbursed, in part, by MCI SA France. In
assessing the taxpayers the Minister disallowed the overseas employment tax
credits claimed. Dussault J. held that the Minister's argument that the
taxpayers were not MCI Canada's employees was untenable. This is not the issue
in this appeal; the parties agreed that Mr. Mys was an employee of Noramtec.
Dussault J. found that MCI Canada was a specified employer within the meaning
of subsection 122.3(2) of the Act. He also held that the contract with
MCI Canada and MCI SA France was concerned with projects involving
"engineering activity". By making its employees available to MCI SA
France, MCI Canada was assisting MCI SA France to carry out the principles set
out in Timmins, supra. MCI Canada, as a
"specified employer", was "carrying on business outside Canada with respect to . . . any . . .
engineering activity", within the meaning of clause 122.3(1)(b)(i)(B)
of the Act.
[23] Subparagraph
122.3(1)(b)(i) refers to a taxpayer's duties of employment outside
Canada where the taxpayer's specified employer carries on business outside
Canada "with respect to" any engineering activity. In Nowegijick
v. The Queen,
Dickson J. (as he then was) declared that:
The words "in respect
of" are, in my opinion, words of the widest possible scope. They import
such meanings as "in relation to", "with reference to" or
"in connection with". The phrase "in respect of" is probably
the widest of any expression intended to convey some connection between two
related subject matters.
[24] The Supreme Court of
Canada has confirmed its interpretation of the words "in respect of"
in Markevich v. Canada, Sarvanis
v. Canada, and
Slattery (Trustee of) v. Slattery.
[25] There is no dispute
that Kvaerner was in the business of shipbuilding, engineering and construction
services and the appellant's employment duties were engineering activities as
described in paragraph 122.3(1)(b) of the Act.
[26] As I stated in Gabie
v. R., it
does not matter that the appellant himself was or was not a professional
engineer as long as his employer carried on business outside Canada with
respect to an engineering activity outside Canada. The respondent's basis for the
assessment is that Noramtec was only an agent and did not carry on any business
as an engineer. It was not an engineering firm. The only obligation of Noramtec
to Kvaerner, according to the Crown, was to provide employees of a certain
skill. The purpose of section 122.3 is to help Canadian companies, more
specifically specified employers, to carry on business outside Canada with respect to the
qualifying activity such as engineering. The contract between Kvaerner and
Noramtec is not for the design of a ship or anything relating to Noramtec
performing engineering functions; it was only a contract for Noramtec to
provide skilled employees. Indeed, in its letter of January 1, 2001 to Mr. Mys,
Noramtec alludes to a possible agency other than itself.
[27] The Crown submits
that Mr. Mys finds himself in a situation similar to that of Christian Fonta who appealed from a dismissal of his
claim for an overseas employment tax credit. Mr. Fonta had been paid by a Canadian
employment agency for engineering services provided to Siemens Transportation
Systems ("Siemens") at his California location. Mr. Fonta had argued that he was entitled
to an overseas employment tax credit because he was being paid by the Canadian
employment agency acting as a subcontractor in a provision of engineering
services overseas. This Court held that the employment agency was not a
subcontractor carrying on a qualifying activity. The trial judge was influenced
by the fact that the evidence showed that the employment agency acted as a specialized
personnel agency for Siemens. She found it questionable that such a business
was carried on outside Canada. Moreover, it seemed certain in law that such services
were not services pertaining to subcontracting under an engineering contract. Mr. Fonta
was therefore not eligible for the overseas employment tax credit.
[28] The facts in these
appeals are quite different from those in Fonta. Mr. Mys was located in Philadelphia, he performed the
services in Philadelphia for Noramtec under a contract that the latter had with Kvaerner. There is
no suggestion that Noramtec acted as a specialized personnel agency for
Kvaerner; Noramtec had other clients as well. Noramtec carried on business not
only in Canada but also in the United States. It had a business location in the State of Virginia through Terry Logue,
who solicited potential clients, concluded contracts on behalf of Noramtec's
shipbuilding division and monitored the performance of those contracts. It also
had another U.S.
business location in New York. Mr. Mys was performing all of the duties of
his employment with Noramtec outside Canada in connection with a contract
Noramtec carried on business outside of Canada with respect to any engineering
activity, all as required by subsection 122.3(1) of the Act.
[29] The appeals are
allowed with costs.
Signed at Ottawa, Canada, this 6th day of December 2007.
"Gerald J. Rip"
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