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Citation: 2009 TCC 486
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Date: 20090930
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Docket: 2007-2819(IT)G
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BETWEEN:
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ROMAN HERCHAK,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A.
FACTS
[1] In the 2005 taxation year, the Appellant was employed by Chemonics
International Incorporated (“Chemonics”).
[2] The issue before the Court is whether the Appellant qualifies
for a deduction in the amount of $108,687.00 pursuant to subparagraph
110(1)(f)(iii) of the Income Tax Act (the “Act”).
[3] At the commencement of the hearing the parties filed an Agreed
Statement of Facts (Exhibit A-1, Tab 1). The Agreed Statement of Facts reads as
follows:
AGREED
STATEMENT OF FACTS
1. In 1999, after Kosovo had been separated from Yugoslavia, the United Nations Security Council passed
Resolution 1244 authorizing the UN to assume governance of Kosovo.
2. From January 10, 2005 through November 2005 (with
the relevant taxation period being the 2005 calendar year), the taxpayer Roman
Herchak was the full‑time Senior Sales and Marketing Specialist for the
Cluster and Business Support Project in Kosovo under a contract with Chemonics
International Incorporated, an international, for-profit development company in
the United States.
3. In turn, Chemonics had a contract with USAID (the
United States Agency for International Development, an independent US federal
government agency), which in turn had a contract with UNMIK (the United Nations
Interim Administration Mission in Kosovo) to administer the KCBS (Kosovo
Cluster and Business Support program), a program designed by USAID to meet the
objectives (in the areas of justice, the military, humanitarian concerns and
economic development) of the UN in Kosovo.
4. UNMIK was under the direct control of the Assistant
Secretary General of the United Nations.
5. The three clusters identified for Kosovo’s
development included fruit and vegetables, livestock and construction
materials.
6. During this period, Kosovo was being administered
by the United Nations.
7. The KCBS economic development project had been
proposed by USAID to the United Nations and accepted by the United Nations.
8. Herchak’s role was in the economic development area
and his services were donated by USAID to the United Nations.
9. Herchak was an advisor to municipalities in Kosovo
(the lowest level of government) with respect to recycling of waste and the use
of waste material for infrastructure and road reconstruction, but these
municipalities had no control over Herchak’s actions – only Chemonics had this
control.
10. Herchak also worked with the five regional
governments in Kosovo.
11. There were many people in Kosovo during 2005 who
were paid directly by (that is, they were employees of) the United Nations.
12. Herchak was paid only by Chemonics and reported to
his supervisor, another employee of Chemonics. While working on projects in
Kosovo for other agencies in years prior to 2005, Herchak had been issued
United Nations identification, but in 2005 he had only USAID identification.
13. Herchak’s supervisor in Chemonics reported to
USAID.
14. The UN could request that USAID require Chemonics
to terminate Herchak if he failed to conduct himself in a manner appropriate to
UNMIK/Kosovo.
15. UNMIK did not directly supervise Herchak, nor did
USAID; UNMIK merely watched for the final or interim (staged) results of any
activities Herchak engaged in.
16. Herchak was paid $108,687 directly by Chemonics
for the relevant period.
17. Within the program, Herchak worked on agri
business, construction and association development and to identify markets and
production capability to create jobs for Kosovars.
18. During the relevant period, everyone in Kosovo,
even volunteers, were subject to UNMIK’s guidelines; one did not have to be an
employee of the UN or a contract employee to be subject to the guidelines and
structures of UNMIK.
19. Herchak claimed a deduction equal to the amount
paid to him by Chemonics for the relevant period, which deduction was denied by
the Canada Revenue Agency.
20. Neither Chemonics nor USAID are divisions or parts
of the United Nations nor are they specialized agencies as the terms are used
in Income Tax Regulation 8900(1). Both Chemonics and USAID are independent
international development organizations based in the United States.
21. During the relevant period, the United Nations
performed its work in Kosovo partly through people directly employed by the
United Nations and partly through people contracted out by others, such as
USAID and, through USAID, Chemonics. The United Nations mandate to rebuild Kosovo
required the United Nations to employ workers directly as well as to accept the
help of independent agencies which donated projects employing third party
workers.
…
B. ISSUE
[4] The parties agree that the sole issue in this appeal is whether
the Appellant is entitled to deduct $108,687.00 from his income for the
relevant period pursuant to sections 3, 5 and 164, subsection 248(1) and
subparagraph 110(1)(f)(iii) of the Act and Regulations.
C. ANALYSIS
AND DECISION
[5] Subsection 110(1) of the Act states:
Deductions permitted
110(1)
For the purpose of computing the taxable income of a taxpayer for a taxation
year, there may be deducted such of the following amounts as are applicable
…
[6] Subparagraph 110(1)(f)(iii) of the Act reads as follows:
110.(1)(f) any social assistance payment
made on the basis of a means, needs or income test and included because of
clause 56(1)(a)(i)(A) or paragraph 56(1)(u) in computing the taxpayer's income
for the year or any amount that is
…
(iii) income from employment with a prescribed
international organization, or
…
[7] Regulation 8900 reads as follows:
8900.
For the purposes of paragraph 110(1)(f) of the Act,
(a)
the United Nations, and any specialized agency that is brought into
relationship with the United Nations in accordance with Article 63 of the
Charter of the United Nations, are prescribed international organizations; and
…
[8] The Appellant was hired by Chemonics pursuant to an Employment
Agreement (the “Agreement”) that he signed on December 15, 2004 (Exhibit A‑1,
Tab 3). The Agreement provides, in part, as follows:
11: The employee [i.e. the Appellant] will provide
professional services to Chemonics and other contract parties/clients as
specified for the position title in the job description attached to this
agreement… The employee further agrees to perform his duties faithfully and to
the best of his ability, to comply with local laws and customs, and to conduct
himself in a manner appropriate to UNMIK Kosovo.
[9] In order to succeed in his appeal the Appellant must establish
that the $108,687.00 that he claims as a deduction under subparagraph
110(1)(f)(iii) was an amount that he received from employment with the United
Nations.
[10] A somewhat similar issue has been considered by the Tax Court on
a number of occasions.
[11] The Tax Court considered a similar issue in the decision of Creagh
v. Canada, [1997] 1 C.T.C. 2392. In that case, the Appellant had argued
that he was entitled to the exemption from tax provided in subparagraph
110(1)(f)(iii) because he was employed by the United Nations. The facts
indicated the Appellant was an employee of Canadian Helicopter who earned
income while participating in a peacekeeping mission in Cambodia. The Court reviewed the relevant
provisions and stated that, to succeed in a claim of the type being made by the
Appellant, there has to be a contractual relationship between the taxpayer and
the United Nations. It is not enough that a taxpayer works on a peacekeeping
mission, the worker has to be employed by the United Nations. The Court found
that the exemption did not apply.
[12] In Godin v. The Queen, [1998] 2 C.T.C. 2853, the Tax
Court reviewed the same provisions and clearly stated that, to obtain an
exemption under paragraph 110(1)(f), a taxpayer has to be employed by the
United Nations.
[13] Counsel for the Respondent suggested that the Godin
decision is directly on point with the matter before this Court. In that case,
the taxpayer worked in Yugoslavia under the direction of the United Nations. The taxpayer in that
appeal was contracted with an organization, CARE Canada, which provided
services to Canadian Commercial Corporation which, in turn, had a contract with
the United Nations. In the end, the Court found that clearly there was no
contract between the taxpayer and the United Nations, therefore there could be
no deduction pursuant to paragraph 110(1)(f).
[14] Counsel for the Respondent said this is precisely the situation
before the Court today. Mr. Herchak contracted with Chemonics who was his employer
and Chemonics contracted with USAID who had a contract with the United Nations
in Kosovo. There is no evidence to suggest that the Appellant had a contractual
relationship with the United Nations. Unlike the situation in Godin,
here the Appellant was not subject to the day-to-day direction of the United
Nations. Counsel for the Respondent said that Mr. Herchak’s circumstances weigh
against the finding that he was employed by the United Nations even more
strongly than the facts in the Godin decision.
[15] In Lalancette v. The Queen, 2001 D.T.C. 352, the Tax
Court dealt with a taxpayer who was a police officer “on loan” to the United
Nations for a mission in Haiti.
The taxpayer in that case was apparently subject to United Nations authority
and daily supervision. The taxpayer was also apparently granted rights and
immunities as a representative of the United Nations. The Court in Lalancette
stated that a taxpayer cannot unilaterally declare himself to be an employee of
the United Nations, and evidence from the United Nations is necessary for a
successful claim.
[16] The Tax Court’s decision in Lalancette was confirmed by
the Federal Court of Appeal, 2002 FCA 335. The Federal Court of
Appeal stated that the taxpayer was not an employee of the United Nations, as
ultimate control of the taxpayer remained with the R.C.M.P. Although daily
control of the Appellant may have rested with the United Nations in Haiti, ultimately the Appellant was
controlled by the R.C.M.P. In this situation, the Appellant may have been
operating in a country subject to governance by the United Nations, but it is
clear that ultimately control of the Appellant lay with Chemonics who hired,
supervised and was responsible for any termination of the Appellant’s contract.
[17] In Smyth v. The Queen, 2007 D.T.C. 1129, the Tax Court
dealt with the appeal of a taxpayer who was a police officer working in Kosovo
during 2001 and 2002. The Appellant argued that he was employed by the United
Nations, however, the Tax Court found that the taxpayer received his pay from
the Edmonton Police Service (“EPS”), was covered by the EPS benefit plan and
the EPS retained control over the taxpayer in the event that United Nations’
guidelines were breached.
[18] In this situation, the Appellant was hired by Chemonics under
terms and conditions represented by the Agreement that he signed with Chemonics
on December 15, 2004. The Agreement clearly states that the Appellant is an
employee of Chemonics.
[19] The Appellant worked on a project that was in support of the
United Nations’ mandate in Kosovo. The United Nations entered into a
contract with USAID, who then contracted with Chemonics to provide services in
support of a project proposed by USAID. USAID donated the Appellant’s services
to the United Nations, but there is no evidence of the employer/employee
relationship between the Appellant and the United Nations.
[20] There is no evidence before this Court to suggest that the
United Nations considered the Appellant to be an employee. In fact, the opposite
is true in that the Appellant was issued United Nations identification in prior
years, but in 2005 he had only USAID identification.
[21] All of the evidence before the Tax Court in the current matter
points to the fact that the Appellant was employed by Chemonics.
[22] In the court decisions referred to above, the Tax Court has held
that when a person is hired by a company, which contracts with a corporation
which, in turn, has a contract with the United Nations, there is no deduction
pursuant to paragraph 110(1)(f) of the Act. The Appellant remained the
employee of Chemonics despite working in the course of a project in a United
Nations controlled country.
[23] As stated by the Federal Court of Appeal in Lalancette,
the relevant enquiry for determining whether a taxpayer is an employee of the
United Nations is determining who controls the employee. In this appeal, the
evidence is clear that the United Nations did not control the Appellant, either
directly on a day‑to‑day basis or ultimately in terms of discipline
or termination.
[24] Before closing, I wish to state that I was very impressed with
the evidence provided by the Appellant. It is apparent that he made a very
significant contribution to assist in the economic development of Kosovo. He is
to be commended for his efforts in assisting the people of Kosovo.
[25] The appeal is dismissed, with costs to
the Respondent.
Signed at Vancouver, British Columbia, this 30th day of September 2009.
Little
J.
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