Citation: 2005TCC769
Date: 20051129
Docket: 2002-223(IT)G
BETWEEN:
GERALD DUNBAR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1] In 1998, Gerald Dunbar was the captain of a supertanker (referred to in the industry as a "VLCC" - very large crude carrier), transporting crude oil from the Arabian Gulf to Saint John, New Brunswick. Mr. Dunbar claimed the overseas employment tax credit (OETC), the common name for the credit described in section 122.3 of the Income Tax Act (the Act). The Minister of National Revenue (the Minister) denied his claim on the basis that:
(i) the business of Mr. Dunbar's employer, Ocean Services Limited (OSL) was supplying personnel, which was not a business carried on outside Canada; and
(ii) transporting crude oil from Saudi Arabiato Canada was not in connection with the exploitation of petroleum.
I find OSL was a specified employer and that it did carry on business outside Canada with respect to the exploitation of petroleum. Mr. Dunbar therefore qualifies for the OETC.
Facts
[2] Mr. Dunbar received his Master Mariner certificate in 1992, qualifying him to sail as Master (for those of us less maritime-minded one can equate Master with Captain) on any vessel, including VLCCs. The Irving Galloway and the Irving Primrose were VLCCs registered as Barbadian ships owned by non-Canadian companies, Tanker "G" Limited and Tanker "P" Limited, respectively. Irving Oil Limited (Irving) chartered these VLCCs to transport crude oil from Saudi Arabia to Saint John, where the crude oil was to be refined at an Irving Oil Limited refinery. Irvingacquired the raw crude oil from a foreign company, ARAMCO.
[3] Norbulk Shipping Company Limited (Norbulk), headquartered out of the United Kingdom, contracted with Tanker G and Tanker P to provide operational and technical management of the VLCCs by arranging for all fuelling, supplies and manpower for the VLCCs. Norbulk, in turn, contracted with OSL to obtain the services of officers to operate the VLCCs, though clearly stipulating that such officers remain employees of OSL. The rest of the crew (up to approximately 22) were provided by a Philippinesorganization, again contracting through Norbulk.
[4] Some of the key provisions of the agreement between Norbulk and OSL are as follows:[1]
1.1 The Manager hereby appoints the Manning Company and the Manning Company hereby accepts such appointment, to act as manning agent for Masters and officers only for the Vessel upon the terms hereinafter set forth.
3.1 The Manning Company shall, during the currency of this Agreement, provide all Personnel requested by the Manager for employment in connection with the operation of the Vessel. All Personnel so provided shall hold such certificates and qualifications as are required under the laws of the Vessel's Port of Registry and such other laws, treaties, rules and regulations as may be relevant from time to time to permit them to hold the positions filled by them on the Vessel including, without limiting the generality of the foregoing, the United States Oil Pollution Act of 1990 and any United States Coast Guard requirements applicable at any ports the Vessel may visit. Without limiting the generality of the foregoing, the master of the Vessel shall, unless otherwise agreed by the Managers, be required to hold a Saint John, New Brunswick, Canada Harbour Pilotage Certificate.
5.3 The insurance described in sections 5.1(i) and 5.1(ii) shall name the Manning Company as co-insured, as its respective rights and interests may appear, and shall include a waiver of subrogation clause in favour of the Manning Company. The Manning Company shall not be under any liability with respect to any premiums or calls arising in connection with such insurance's nor shall the Manning Company be liable for any loss of or damage to the vessel or arising therefrom except as explicitly provided in such insurance, and then always subject to the provisions of this Agreement.
8.1 The Manning Company acknowledges and confirms that the Personnel shall at all times, while engaged in the provision of the services contracted for hereunder or otherwise, be and remain the employees and/or contract personnel of the Manning Company and shall be entitled to look only to the Manning Company in respect of wages, salaries, benefits or any other claims, indebtedness or liability arising out of their employment on or about the Vessel.
[5] After serving a brief stint in 1997 as Chief Officer of one of the VLCCs, Mr. Dunbar took over as Master in 1998. He had been led to believe by representatives of both Norbulk and Irving that he would be entitled to the OETC. He testified this was a relevant factor in deciding to take on the job, which would entail considerable time away from home. Mr. Dunbar had previously worked for OSL from 1983 to 1992 on smaller ships, sailing both in and outside of Canada.
[6] As Master of a VLCC, Mr. Dunbar had overall responsibility for the two million plus barrels of crude oil getting from Saudi Arabia to Canada. This required monitoring pressure and ensuring ongoing safety of the cargo, as well as actively sailing the supertanker under less than favourable conditions, due to weather or military activity. It was also critical that Mr. Dunbar oversaw the loading and discharging of the VLCC on a timely basis; loading was done offshore through a pipeline so that the VLCC did not actually have to go into the Saudi port. It was up to Mr. Dunbar to determine the optimal route for delivering the cargo and for returning to pick up the next cargo. He understood that Irvingwould not pay for the crude oil until it had left the Saudi port and was nearing its destination.
[7] Mr. Dunbar's application for the OETC was initially granted, but subsequently reassessed to be denied.
Analysis
[8] Section 122.3 reads, in part:
122.3(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
(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),
While there are a number of conditions to be met for an individual to successfully claim the OETC, the only words of the provision at issue before me are "carried on business outside Canadawith respect to the exploitation of petroleum". If I find OSL carried on business outside Canadawith respect to the exploitation of petroleum, Mr. Dunbar is entitled to the OETC. If I find that either OSL did not carry on business outside Canada, or if it did, it was not in connection with the exploitation of petroleum, Mr. Dunbar's claim fails.
[9] Both parties addressed the issue of what is meant by "exploitation". The Respondent argued that exploitation ends when the crude oil is sold by the original owner to Irving, as at that stage the resource has been turned to account. Not so, says the Appellant, as there is a continuation of the exploitation by transporting the crude to the refinery. Only once refined is the value of the crude oil optimized, and it is only then that it is fully turned to account. The VLCC should be viewed as a floating pipeline integral to the ongoing exploitation of petroleum.
[10] I agree with the Appellant on this point. Exploitation means more than simply extracting and selling. Dictionary definitions of exploitation refer to turning to account, or, with respect to natural resources turning to industrial account, or making use of. I conclude that all stages necessary to take the natural resource to its maximum value for the pursuit of profit is part of the exploitation process. Certainly, shipping crude oil to where it can be refined is part of that overall exploitation, especially so where measures have to be taken to ensure the crude arrives safely.
[11] The Respondent raised Larter v. The Queen[2] to provide some guidance as to what activities qualify pursuant to clause 122.3(1)(b)(i)(A)(B) and (C). Justice Mogan did not address the issue of exploitation specifically, simply finding that a university-sponsored scientific research ocean drilling program did not qualify. I do not find this case precludes a finding that the transport of crude oil to a refinery for commercial purposes is part of the exploitation of petroleum.
[12] It is interesting to note that the purchaser of the oil, Irving, did not pay for the crude until it neared the Canadian destination. Even taking the Respondent's narrower view that exploitation ceases once the oil is extracted and sold, it appears that the sale transaction itself was not concluded until some time after the oil had been en route in the VLCC; in effect, exploitation was ongoing until ARAMCO was paid.
[13] Having determined that transporting crude oil is in connection with the exploitation of petroleum, I now turn to the second branch of the inquiry. Did OSL carry on business outside Canada?
[14] Mr. Dunbar's activities, as captain of a VLCC, can readily be viewed as activities carried on outside Canadawith respect to the exploitation of petroleum. Can Mr. Dunbar's activities, however, be considered OSL's activities, such that it is OSL who is carrying on business outside Canadawith respect to the exploitation of petroleum? Clearly, OSL is in the business of supplying officers, including captains, to sail VLCCs around the world. OSL also provides officers for national shipping purposes. OSL's employees sail ships: that is its business. Norbulk is a contractor in the business of operating VLCCs. OSL is a subcontractor to Norbulk in furtherance of its business.
[15] It is instructive to review some of the case law to which I was referred. The Respondent referred me to the cases of Betteridge v. R.[3] and Fonta v. R.[4]
[16] In Betteridge, the taxpayer was a university professor carrying on work in Franceon an agricultural project. The Court found that the Appellant's university employer was not conducting work abroad. Justice Rip stated at paragraph 23:
Even if I had found the University of Guelph did carry on business, I am satisfied that the University was not carrying on business in France. The mere fact that Dr. Betteridge went to France in furtherance of a contract between two Canadian corporations, Semex and the University, does not mean that his employer, the University, was carrying on business in France. Subsection 122.3(1) requires that the business of the employer, not the employment of the employee, be carried on abroad. The research activity by Dr. Betteridge in France was in connection with a contract the University had with Semex in respect of a business, if any, it carried on in Canada and not abroad. The mere fact that a business entity may send an employee abroad to do research or investigate a matter that concerns the employer does not necessarily lead to the conclusion that the employer is carrying on business abroad.
[17] In Fonta, the Appellant had been hired by a staffing agency in Canadato do engineering work with Siemens Transportation Services in the United States. The Court stated at paragraph 22:
The evidence showed that ATS acted as a specialized personnel agency for Siemens. It is questionable that such a business was carried on outside Canada. Moreover, it seems certain in law that such services are not services pertaining to subcontracting under an engineering contract. ATS did not perform part of Siemens' engineering contract outside Canadaas a subcontractor.
[18] The Appellant referred me to the recent cases of Purves v. The Queen[5] and Surprenant v. The Queen.[6]
[19] The Appellant in Purves was a qualified engineer in the automotive industry. Justice Bowie stated in paragraph 11:
So far as it is relevant to this appeal, the business of Comtech was supplying the Appellant's services to GMC through the intermediary, Kelly; those services were supplied by Comtech under its contract with Kelly, and they were supplied in Detroit at the premises of GMC, where he performed his duties. The only question that remains, then, is whether Comtech's business of supplying engineers to Kelly's clients can be said to be "with respect to any engineering activity". In my view this question must be answered in the affirmative.
[20] In Surprenant the Appellants were engineers specializing in informatics, employed by the Canadian company MCI Canada Inc., an investment and computer specialist recruiting company. The Appellants, as employees of MCI Canada Inc., worked on projects in Franceoperated by the French company MCI SA France. Having found MCI Canada Inc. was a specified employer, Justice Dussault identified the second issue as whether MCI Canada Inc. operated the business overseas in connection with computer engineering projects. He concluded that it did, relying on words in the agreement between MCI Canada and MCI SA France that:[7]
MCI Canada Inc. is a computer consultation and technical assistance company. It offers its clients computer competency based on the quality of its professional recruitments in this field.
MCI S.A. is a computer engineering services company whose clients, large French companies, expect the best service quality for development and implementation of projects and applications.
MCI Inc. and MCI S.A. indicate their mutual interest in establishing an ongoing business relationship to ensure their mutual development.
[21] Justice Dussault stated:
I am thus of the opinion that, given the service agreement between it and MCI SA France and having provided the latter with the services of its employees, MCI Canada participated in carrying out contracts related to computer engineering projects in France and that such participating can be qualified as subcontracting according to the generally accepted definition of the term, i.e. the full or partial completion by one person of a contract obtained by another person.
Before drawing on these cases, I refer to the Interpretation Bulletin 497R4, which outlines the applicability of the OETC to subcontractors of firms involved in qualifying activities:
... Often referred to as a sub-contractor, such a specified employer would be one who has a contract or subcontract to provide its services through its employees to another person in respect of a qualifying activity carried on by that person outside Canada, or in respect of such a qualifying activity which that person has subcontracted to a third party. For example, assume that a specified employer (A Ltd.) has contracted to carry on business outside Canada by providing data processing services to a non-resident company (B Ltd.) whose any business is the exploration for natural gas. Assuming the other requirements of subsection 122.3(1) are met, the employees of A Ltd. providing the data processing services would qualify for the OETC, since their employment is in connection with a contract under which the specified employer carried on business outside Canada with respect to qualifying activities.
[22] What I draw from these cases and the Interpretation Bulletin is that if the Canadian company's business is solely that of a placement agency, the business is not being carried on outside Canada simply by virtue that the personnel placed, conduct their activities outside Canada. If, however, the business is providing services by way of subcontracting to a contractor, which services must necessarily be provided outside Canada, then the business can be considered to be carried on outside Canada. It is a fine distinction, which in this case is particularly fine. Yet, this difference explains how a computer consulting company providing a computer specialist to a project in France can qualify as operating outside Canada (Surprenant), as can an engineer working for a Canadian engineering company on a project outside of the country (Purves and Gonsalves v. The Queen[8]).
[23] Norbulk, as the main contractor to operate VLCCs around the world, subcontracted for the officer crew. The officers had to be well-qualified, and, indeed, Mr. Dunbar was. Sailing a VLCC, filled with crude oil halfway around the world requires specialized talent. OSL provided such services. The fact that the owners of the VLCCs went through a primary contractor to OSL to obtain the leadership to sail the VLCCs, does not detract from the nature of the business OSL operated. I find that it was more akin to a subcontractor providing services of specialized personnel to sail VLCCs as opposed to simply a placement agency. It is not unlike the computer or engineering companies providing highly trained professionals for offshore projects. As such, I conclude that OSL was in a business that was carried on outside Canada. I acknowledge that the agreement between OSL and Norbulk is not as definitive as the agreement in the Surprenant case, but it does refer to services provided by OSL, and it is of particular note that OSL is a co-insured with Norbulk. This arrangement may not have been necessary if OSL was simply an employment agency.
[24] On balance, I conclude OSL carried on business outside of Canadawith respect to the exploitation of petroleum. I allow the appeal and refer the matter back to the Minister for reconsideration on the basis that Mr. Dunbar does qualify for the OETC in accordance with section 122.3 of the Act. Costs to the Appellant.
Signed at Ottawa, Canada, this 29th day of November, 2005.
"Campbell J. Miller"
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