Date: 20010518
Docket: 2000-1011-IT-I
BETWEEN:
RODNEY R.E. TROY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Watson, D.J.T.C.C.
[1]
This appeal was heard under the Informal Procedure at
Montréal, Quebec, on March 30, 2001.
[2]
In computing his income tax for the 1997 taxation year, the
Appellant claimed the amount of $7,855.30 as overseas employment
tax credit ("OETC"). By notice of reassessment, the
Minister of National Revenue (the "Minister")
disallowed the OETC claimed by the Appellant.
[3]
In so reassessing and maintaining this reassessment, the Minister
made the following assumptions of fact:
"a)
the Appellant is a qualified hydrographer and was the sole
full-time employee of "Hydrographic, Marine Services
Inc." (hereinafter, "HMSI");
b)
HMSI was incorporated in 1990 and its shareholders were for the
year in litigation, Rodney Troy (51%) and his wife,
Lyne E. Girard-Troy (49%);
c)
the Appellant was the president of HMSI and his wife was the V.P.
Administration;
d)
the Appellant did not deal at arm's length with his employer
and was a specified shareholder of HMSI;
e)
during the 1997 taxation year, HMSI has received most of its
income from an international recruitment company "Dutch
Onshore Offshore Recruitment Co." (hereinafter,
"DOOR");
f)
the only other business income declared by HMSI for the 1997
taxation year, was an amount of $1,500.00 collected as a
finder's commission for recruiting one person;
g)
during the 1997 taxation year, HMSI dealt with DOOR to obtain
consulting/working contracts for the Appellant. DOOR clients are
non-resident companies specializing in supervision of
hydrographic survey. These companies, in turn, were contracting
out services with offshore construction companies or oil
companies;
h)
the payments for those contracts came from the offshore
construction companies or oil companies to the survey companies
to the foreign recruitment company DOOR to finally reach the
Canadian company HMSI;
i)
during the 1997 taxation year, the invoicing was always done
between HMSI and the Dutch recruitment company DOOR and no
invoicing was done by the Appellant himself;
j)
the Appellant did not receive a regular salary from HMSI and was
dependent upon foreign payments made to HMSI to collect any
money;
k)
the Appellant supervised the team who did the hydrographic survey
and both the team and the Appellant, through HMSI, were hired by
DOOR;
l)
the Appellant did not have a written contract with his own
company HMSI and HMSI did not have any written contract with
DOOR;
m)
if HMSI is deemed to be the Appellant's employer, it is not a
specified employer since the nature of its activities was
throughout the 1997 taxation year, the onshore/offshore personnel
recruitment and HMSI did not carry on business in the country in
which the Appellant performed his duties;
n)
HMSI carries on a business of providing services and does not
employ in the business throughout the year more than 5
full-time employees;
o)
HMSI and even DOOR did not have any contracts with the companies
who were performing qualifying activities during the 1997
taxation year;
p)
but for the existence of HMSI, the Appellant would reasonably be
regarded as an employee of DOOR that is a non-resident company,
carrying business of providing services as a recruitment company
and was therefore not a specified employer;
q)
moreover, the Appellant entered in an employee/employer
relationship with DOOR customer, the survey company which was
also a foreign company and therefore could not be considered a
specified employer. This relationship was based on the following
facts:
i)
the Appellant was working under the supervision of DOOR customer
and was reporting to that customer every day to give him a full
report of the day activities;
ii)
the Appellant's remuneration was based on a daily rate for
the duration of the contract, independently if he was working or
not;
iii)
the Appellant was using the equipment and the material of the
survey company;
iv)
the Appellant was living aboard the ship which belongs to the oil
company, for the duration of the contract without paying anything
for his room and board;
v)
the Appellant was reimbursed for his transportation to the
ship;
vi)
the Appellant did not work within a budget and there was no
specific date to end the contract;
vii)
when the Appellant was hired, he only knew approximately how long
will be the contract and the task to be done might change
accordingly to the client's needs (the survey company) and
his employment might cease at any time without any notice and he
could be replaced by somebody else for whatever reason;
viii) the
Appellant was working exclusively for the survey company and
could not work for anybody else during the duration of the
contract since he was on call 24h/24h;
r)
since the Appellant was employed on an "on demand"
basis for various periods in the year and was paid only for those
periods, with no commitment for indeterminate employment or for a
minimum number of days of employment in the year, he was then
considered to commence and cease employment at the beginning and
end of each such period;
s)
throughout the 1997 taxation year, HMSI concluded an agreement
with DOOR to hire the Appellant for the following periods:
15/02/97 to 03/06/97: with the oil company "Katar Gas and
Petroleum Co.";
03/07/97 to 23/08/97: with "Inter Connector
Alliance";
22/09/97 to 20/11/97: for the "Norfra Pipeline
Project";
t)
the Appellant did not qualify for the OETC since none of the
periods of employment exceeded six consecutive months."
[4]
At the hearing the Appellant admitted paragraphs b) to d), f) to
j), l), n) and o) and denied paragraphs a), e), k), m) and p) to
t).
[5]
The Appellant has the onus of establishing, on a balance of
probabilities, that the Minister's reassessment was
ill-founded in fact and in law and that he was entitled to the
OETC for the 1997 taxation year. Each case stands on its own
merits.
[6]
The Appellant is a qualified hydrographer and was a full-time
employee of HMSI during the 1997 taxation year. HMSI was
incorporated in 1990 and the only other full-time employee at
this time was the Appellant's wife who looked after the
administrative side of the business. The Appellant owned 51% of
the shares of HMSI and his wife owned the remaining 49%. The
Appellant was not paid on a regular basis but only with the
amounts received by HMSI for the Appellant's work overseas,
mostly from DOOR, the international recruitment company. DOOR
obtained consulting/working contracts for HMSI with its clients
who were non-resident companies specializing in supervision of
hydrographic surveys; these companies, in turn, were contracting
out services with offshore construction companies which were
subcontractors of various oil companies. The Appellant explained
that in a typical situation, the work would come from an offshore
oil company, which would contract with an offshore construction
company, which, in turn, would contract with an offshore survey
company; the offshore survey company would finally contract with
smaller companies such as HMSI. Under these contracts, HMSI would
provide hydrographic services through its employee, the
Appellant.
[7]
During the 1997 taxation year, most of the amounts received by
HMSI came from DOOR; in fact, the monies came from the offshore
oil companies through the offshore construction companies and
through the survey companies to DOOR to reach HMSI and finally
paid to the Appellant. The Appellant testified that HMSI was not
a subcontractor of DOOR; as a recruitment company, DOOR was
nothing but a contact or intermediary between the survey
companies and HMSI. He stated that HMSI did not conclude any
agreement with DOOR to hire him, rather HMSI hired DOOR in order
to get DOOR's contacts with the survey companies and DOOR
received a percentage on the contracts for its contacts. The
Appellant went on to explain that using DOOR's contacts was
very important in HMSI area of work because the worldwide demand
for such services was extremely hard to find; when the survey
companies contacted HMSI directly, HMSI would ask the survey
companies to contact DOOR and to go through DOOR to contract with
HMSI so that HMSI could maintain its good relationship with DOOR;
if it was not possible for HMSI to provide the services of its
employee, the Appellant, HMSI, would refer qualified personnel to
the requesting company.
[8]
During the 1997 taxation year, HMSI entered into contracts with
three different companies for the following periods: from
February 15 to June 3 with Katar Gas and Petroleum Co., from July
3 to August 23 with Inter Connector Alliance and from September
22 to November 20 with Norfra Pipeline Project.
[9]
The applicable provisions of the Income Tax Act read in
part as follows:
"Section 122.3: Deduction from tax payable where
employment out of Canada.
(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),
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 ...
122.3(1.1) Excluded Income. No amount may be included
under paragraph (1)(d) in respect of an individual's
income for a taxation year from the individual's employment
by an employer where
(a) the employer carried on a business of providing
services and does not employ in the business throughout the year
more than 5 full-time employees;
(b) the individual
(i) does not deal at arm's length with the employer, or is
a specified shareholder of the employer, or
(ii) where the employer is a partnership, does not deal at
arm's length with a member of the partnership, or is a
specified shareholder of a member of the partnership; and
(c) but for the existence of the employer, the
individual would reasonably be regarded as an employee of a
person or partnership that is not a specified employer.
248(1) Definitions. In this Act,
...
"specified shareholder" of a corporation in a
taxation year means a taxpayer who owns, directly or indirectly,
at any time in the year, not less than 10% of the issued shares
of any class of the capital stock of the corporation or of any
other corporation that is related to the corporation..."
[10] It is
clear from his testimony that the Appellant acted in good faith
when he claimed the OETC for the 1997 taxation year. However,
taking into consideration all of the circumstances of this appeal
including the testimony of the witnesses, the admissions and the
documentary evidence, the Court is satisfied that the Appellant
has failed in his onus of establishing, on a balance of
probabilities, that he was entitled to the OETC for the 1997
taxation year pursuant to subsection 122.3(1.1) of the Income
Tax Act. There is no question that during the relevant period
HMSI was engaged in the business of providing services and did
not employ in the business more than five full-time employees
throughout the year and that the Appellant was not dealing at
arm's length with HMSI. As for paragraph 122.3(1.1)(c)
of the Income Tax Act, the Court is satisfied that but for
the existence of HMSI, the Appellant would be reasonably regarded
as an employee of the survey companies which are not specified
employers. Having concluded that the income was excluded, the
Court need not resolve the issues raised by the Minister whether
the Appellant was an employee of a specified employer during the
1997 taxation year, whether this specified employer was carrying
on business outside of Canada with respect to a qualifying
activity during this year or whether the Appellant worked long
enough to meet the qualifying period to be entitled to the OETC
during this taxation year.
[11] The
appeal is accordingly dismissed.
Signed at Ottawa, Canada, this 18th day of May 2001.
"D.R. Watson"
D.J.T.C.C.
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