Larter v. The Queen, docket 1999-4012-IT-I (Informal Procedure)

Date: 20001101

Docket: 1999-4012-IT-I

BETWEEN:

NORMAN P. LARTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Mogan J.T.C.C.

[1] The Appellant is a ship's captain. When filing his income tax return for the 1993 taxation year, the Appellant deducted the overseas employment tax credit (OETC) with respect to income he earned on a ship in the period September 1992 to November 1993. By notice of reassessment dated March 1997, the Appellant's claim to the OETC was denied by Revenue Canada on the basis that he did not qualify under section 122.3 of the Income Tax Act. The Appellant has appealed from that reassessment and has elected the informal procedure. The only issue in this appeal is whether the Appellant qualifies for the OETC under section 122.3 of the Act.

[2] For the period September 1992 to November 1993, the Appellant was employed on the ship "JOIDES Resolution". His employer was Sedco Forex Schlumberger, the registered owner of the ship. The Appellant described in some detail the nature of the work performed by the ship.

[3] JOIDES Resolution is part of the ocean drilling program operated by Texas A & M University in the USA. There are apparently 19 different countries which provide funding so that the ship can retrieve cores of sediment and rock and obtain geophysical data from holes drilled into the floor of the ocean. The ship has the capacity to drill in water depths up to 27,000 feet; and can drill another 2,000 feet into the ocean floor below water of that depth. The ship can suspend as much as 30,000 feet of drill pipe in order to obtain its core sample. According to an article from a journal filed as Exhibit R-1 describing the ocean drilling program, the ship contains a seven-story laboratory occupying 12,000 square feet. The ship is at sea for approximately eight weeks at a time on a particular drilling program. Each program is planned more than two years in advance.

[4] The Appellant joined the ship at Victoria, BC on September 22, 1992 and they set sail the next day. He was at sea approximately eight weeks from late September to late November on a voyage which went south from Victoria to San Diego. The primary purpose of this particular voyage was to drill on the Juan de Fuca fault line in order to determine when the next earthquake might happen. On that voyage, they drilled 20 cores. Before drilling in any area, they did seismic testing of the ocean floor immediately around the proposed drilling area. According to the Appellant, seismic testing consists of sending a shock wave through the ocean floor by compressed air. The purpose of the seismic testing was to determine the possible presence of oil or gas under the proposed drilling area. The ship did not want to blow out an oil or gas well when they were interested only in obtaining cores of the ocean floor. When they did locate an area which indicated the presence of oil and gas, they noted the area; avoided drilling there; and informed the particular nation which had jurisdiction over that area of the ocean floor as to the possible presence of oil or gas. Another precaution employed by the ship before drilling was to lower a television camera to make sure that there were no torpedoes, mines or other explosive devises near the drilling area.

[5] When the crew had determined that it was safe to drill, the ship would deploy 12 powerful thrusters which had the capacity to maintain the ship in a stable position over the drilling area. The ship could stay in the same position for a long period of time moving no more than 3% over the site of the drill. In the process of this particular voyage (Victoria to San Diego), they discovered a large gas field off the coast of Oregon and avoided drilling in that area. Also off the coast of Oregon, they found many small volcanoes about 200 meters high. When they completed drilling 20 cores in that two-month period from late September to late November, the ship put into San Diego.

[6] There was a general policy to alternate crews every two months. Therefore, the Appellant came home to Canada from San Diego at the end of November and remained here until sometime in January when he rejoined the ship in Ecuador on the Pacific coast. From Ecuador, they sailed down the Pacific coast studying magnetism. Some of the cores drilled were more than 50% iron. According to the Appellant, this was the fourth year the ship had gone to drill in this particular area. He said that the equipment was so sophisticated that they could find the same hole which had been drilled the prior year. On this particular voyage, the ship went south from Ecuador and then north to Panama. At that point, the Appellant left the ship for his two-month leave. While he was away, the ship proceeded directly through the Panama Canal to Lisbon in Portugal. He later joined the ship in Lisbon and proceeded on a drilling program north into the Bay of Biscay. They spent the whole 60-day drilling program in the spring of 1993 in the Bay of Biscay before returning to Lisbon. At that point, the Appellant again returned to Canada for a two-month leave.

[7] In late summer, the Appellant rejoined the ship at St. John's, Newfoundland. They proceeded at first south off the coast of New Hampshire and then north up along the east coast of Greenland. The Appellant described a remarkable fluctuation in temperature when the crew experienced temperatures of +80 degrees Fahrenheit off the coast of New Hampshire and –11 degrees Fahrenheit off the coast of Greenland in a relatively short period of time. The drilling program off the east coast of Greenland was an attempt to determine whether Greenland had been at one time part of Europe. Similar to its experience off the coast of Oregon, the ship found a large gas field just east of Greenland and so had to avoid drilling in that area. After the voyage along the east coast of Greenland, the ship returned to port and the Appellant took permanent leave in November 1993.

[8] The relevant part of subsection 122.3(1) states:

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, ... 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 that proportion of the tax otherwise payable under this Part for the year ...

The purpose of section 122.3 is to provide a tax credit for individuals resident in Canada but working abroad (for at least six months) in connection with certain activities so that it will be easier for Canadian employers to hire Canadian residents for such activities. The activities are described in clauses 122.3(1)(b)(i)(A), (B) and (C) above. With respect to clause (C), the prescribed activity is identified in Regulation 6000 as an activity performed under contract with the United Nations.

[9] The Respondent challenges the Appellant's entitlement to the OETC on the basis that the Appellant for 1993 does not satisfy the conditions in subparagraph 122.3(1)(b)(i). Specifically, the Respondent argued that, with respect to the work performed by the Appellant while on board JOIDES Resolution, the Appellant did not perform all or substantially all the duties of his employment in connection with a contract under which his employer carried on a business concerning: (A) exploring for petroleum, natural gas or minerals, (B) a construction, installation, agricultural or engineering activity, or (C) an activity performed under contract with the United Nations. Having regard to the Appellant's description of the work performed on board JOIDES Resolution, that work does not fit within any of the activities described in clauses 122.3(1)(b)(i)(A), (B) or (C).

[10] Clearly, the work of JOIDES Resolution was not exploring for petroleum, natural gas or minerals. In fact, they avoided drilling if the seismic testing indicated that there might be oil or gas under the ocean floor. Similarly, the ship's work was not concerned with construction, agriculture or engineering. And lastly, there was no evidence that the ship's work was performed under contract with the United Nations. Exhibit R-1 indicates that the work performed by JOIDES Resolution was funded by 19 countries only for the purpose of scientific research.

[11] Although scientific research is important by any standard, it is not one of the activities listed in subparagraph 122.3(1)(b)(i). Therefore, the work performed by JOIDES Resolution does not qualify the Appellant to receive the OETC. The appeal is dismissed. I regret having to dismiss this appeal because the Appellant gave such a good description of the ship's work and he demonstrated a real interest in and knowledge of that work.

Signed at Ottawa, Canada, this 1st day of November, 2000.

"M.A. Mogan"

J.T.C.C.