Date: 19981207
Docket: 97-2908-IT-I
BETWEEN:
KEITH JAMES BETTERIDGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
RIP, J.T.C.C.
[1] Keith James Betteridge, the appellant, appeals from an
income tax assessment for 1993 that denied him an overseas
employment tax credit ("OETC") on the basis that he was
not employed by a specified employer carrying on business
activities outside Canada as required by the provisions of
subsection 122.3(1) of the Income Tax Act
("Act").
FACTS
[2] Dr. Betteridge is a Professor emeritus at the
University of Guelph ("University"). He is a veterinary
surgeon and research scientist. At all relevant times he was
employed by the University of Guelph and was paid by the
University. Dr. Betteridge retired from the University in April
1996.
[3] In 1993 Dr. Betteridge held an Industrial Research Chair
in Animal Biotechnology which was funded by the Natural Sciences
and Engineering Research Council ("NSERC") and Semex
Canada ("Semex"). NSERC is a federal government agency
financing research in natural sciences. Semex is based at Guelph
and represents all artificial breeding organizations in Canada,
specifically for exporting frozen cattle semen and embryos of
livestock. Semex carries on business in various countries. Its
agents receive the frozen product and distribute it to
inseminators in those countries. Dr. Betteridge's activities
and those of the laboratory in which he worked related directly
to the international trade of cattle semen and embryos.
[4] Starting in December 1989 until autumn 1993, Dr.
Betteridge worked for the University on a Semex project that was
financed by the Ontario Premier's Council Technology Fund for
the purpose of providing sexed frozen embryos for export. The
work involved contacts between the University and Semex and the
Ontario government. Dr. Betteridge stated his work was to advance
techniques to help business. The overall objective of his
research program was to understand and manipulate the development
of mammalian embryos in ways that would benefit the animal
production industry.
[5] The contract between the University and Semex is dated
December 19, 1989.
The contract provided for Semex and the University to combine
their expertise and equipment to carry out certain of the
obligations of an agreement between the Ontario Technology Fund
and Semex and to achieve each of the Semex's and the
University's aims and objectives in the area of sexing,
cryopreservation and the duplication (cloning) of manipulated
bovine embryos. The University was to perform the various tasks
under the contract and Semex was to pay for the price of the work
so performed. Dr. Betteridge was responsible for the overall
supervision of the work. The University was free to publish the
data and results of the research. The intellectual property
resulting from the research was the property of the University
but the University was to grant to Semex a licence to use and
sub-licence the intellectual property, royalty free at first, and
later, if Semex exercised an option to acquire the intellectual
property, at a fee to be negotiated.
[6] However, the agreement between Semex and the University
was subject to the agreement between Semex and the Province of
Ontario. Under the latter agreement, all intellectual property
must be used exclusively for production by Semex or its
members.
[7] During the period August 20, 1992 to August 31, 1993, Dr.
Betteridge was on "study leave" but continued to
receive his full salary from the University. Dr. Betteridge
spent this time in Paris, France, he said "to carry
out" the terms of the agreement between the University and
Semex. Dr. Betteridge worked in the laboratory of Dr. Jean-Paul
Renard. Dr. Betteridge declared that Dr. Renard's
laboratory was "uniquely" equipped to facilitate a
particular phase of his research program of direct relevance to
the contract between Semex and the University. His research in
France included cloning and produced scientific results, he
submitted. Dr. Betteridge also stated his work had favourable
financial implications for the University.[1]
[8] There is no dispute that Dr. Betteridge was a resident of
Canada in 1993, that he was outside of Canada for more than six
months commencing in 1992 and that his work in France constituted
agricultural activity within the meaning of clause
122.3(1)(b)(i)(B) of the Act.[2] The dispute between the parties is whether
he performed all or substantially all of his duties of employment
with the University of Guelph in France in connection with a
contract under which the University carried on business outside
Canada, as required by subparagraph 122.3(1)(b)(i).
Parties' Submissions:
[9] The Minister of National Revenue ("Minister"),
in assessing, assumed that in 1992 and 1993, the appellant was
employed by the University of Guelph and that he received
employment income from the University during the time he was in
France. Furthermore, during his leave in France, the appellant
was "involved" in Semex's research activities and
he was not an employee of Semex. The work performed by Dr.
Betteridge in France was not in connection with a contract by his
employer, the University of Guelph, to carry on agricultural
activities outside of Canada. The University was not carrying on
business outside Canada and Semex was not the appellant's
employer carrying on business outside of Canada.
[10] Dr. Betteridge acknowledged that the overall activities
of the University are to advance knowledge and understanding, and
to educate its students. However, he does not concede that the
preponderant purpose of the University's contract with Semex
was for these purposes. In the field of applied research in which
Dr. Betteridge was employed by the University, he declared,
the generation of alternative sources of revenue to the
university has become extremely important. Thus the University of
Guelph has incorporated Guard Inc. to commercialize inventions
and new technology resulting from research at the university, the
type of research undertaken by Dr. Betteridge. The University
earns revenue from this source to augment its other sources of
revenue, government grants and tuition, for example. Dr.
Betteridge is of the view the University has a commercial
interest in his working in France to invent a profitable
technology.
[11] Therefore, Dr. Betteridge submitted, the University of
Guelph was in the business of making inventions through his work
in France. And because his work took place in France in 1993, the
University was carrying on business in France. He referred me to
The Queen vs Gurd's Products Company Limited, 85 DTC,
5314 (FCA).
ANALYSIS:
[12] Subsection 248(1) of the Act describes
"business" to include a wide range of activities.
However, the definition in subsection 248(1) is not exhaustive
and would generally include an activity engaged in for the
pursuit of profit.
[13] In The Fundamentals of Canadian Income Tax, 5th
ed. (Scarborough: Carswell, 1995) at 260, Prof. Krishna
writes:
“Business” implies economic activity. But economic
activity by itself is not enough to establish a
“business”: The activity must be undertaken for the
purpose of realizing a profit. The taxpayer must have profit
motive. It is profit motive that differentiates a trade or
business from a hobby or pastime.
[14] Hogg and Magee write in Principles of Canadian Income
Tax (Scarborough: Carswell, 1995), at 193 that:
"... a business is an organized activity that is
carried on with a reasonable expectation of profit."
[15] Thorson, P. stated in Samson v. M.N.R. (1943), 2
DTC 610 at 618 :
In my view, the term "trade or business" as it is
used in section 5(f) [of the Income War Tax Act]
contemplates an activity in which the prospect of gain or profit
is involved and "the pursuit of a trade or business"
involves the pursuit of gain or profit.... .
[16] Similarly, in Halbegewachs v. Canada, 93 DTC 5037
at 5039 (F.C.T.D.), Strayer J. wrote that a "business"
implies some reasonable prospect for net income. In Varma v.
M.N.R., 86 DTC 1342 at 1344 (T.C.C.), it was held that the
word "business" is indicative of a commercial intent
and that a business is a source of income from which there must
be a reasonable expectation of income.
[17] It is possible, of course, for an entity to have more
than one purpose. For example, a university may be organized to
educate students but it could also be said to be organized to
provide income for itself. And when an institution like a
university provides income for itself, the income is used to
fulfill its raison d'être. In order to determine
if an entity carries on business, the courts have looked to what
is the "preponderant purpose" of the entity. In
Ontario Regional Assessment Commissioner v. Caisse populaire
de Hearst Ltee, [1983] 1 S.C.R. 57, McIntyre J. wrote at p.
64:
The preponderant purpose test is based upon a determination of
the purpose for which an activity is carried on. If the
preponderant purpose is the making of a profit, then the activity
may be classified as a business. However, if there is another
predominant purpose to which any profit earned is merely
incidental, then it will not be classified as a business.
[18] To determine the preponderant purpose of an organization,
the courts have looked to a variety of factors. These include the
stated purposes of the corporation[3], its charitable status[4] and the particular
activities at issue in the case[5]. In Rideau Club vs City of Ottawa, (1908)
[15] O.L.R. 118, Osler J. looked at various organizational
aspects of the enterprise to determine whether the Club was a
business. These factors included the purpose of incorporation,
whether there was capital stock, whether profits or earnings were
made, whether dividends were paid, and whether there were
proprietary interests which could be sold or assigned. These
organizational indicia may be helpful to determine if the
predominant purpose of an organization was to earn profits.
[19] The University of Guelph was created by the University
of Guelph Act, S.O. 1964, c. 120. In section 3 the objects
and purposes of the University include the advancement of
learning and the dissemination of knowledge, the intellectual,
social, moral and physical development of its members and the
betterment of society.[6] Section 23 states that the property, income, revenues,
issues and profits of all University property shall be applied
solely to achieving the objects and purposes of the
University.
[20] There is no evidence Canadian universities are organized
in a manner consistent with business enterprise. They are
corporations without the capital, for example. The University of
Guelph itself is precluded from using or alienating its
proprietary interests except for the advancement of its stated
objects. Canadian universities are not organized and operated in
a fashion that it can be said that their preponderant purpose is
the earning of profits. I do not believe Parliament contemplated
that universities carry on a business for profit.
[21] However, while a university may not be "in
business", it is possible for a university to engage in
commercial activities. All Canadian universities do in fact
engage in business activities, like operating bookstores, parking
lots, residences and cafeterias.[7] While the revenues from such activities may not
be taxable since universities are exempt from tax, this does not
alter the fact that universities earn revenue by commercial
means. Or, like the University of Guelph, the University may
incorporate a corporation like Guard Inc. to carry on business.
In such a case it is that corporate entity and not the University
who carries on business.
[22] In Timmins v. The Queen, 96 DTC 6378, Wetston, J.
held that to determine whether or not a taxpayer's employer
was carrying on business under a contract in the context of
subsection 122.3 (1) (as well as subsection 8(10)) of the
Act, the preponderant purpose test, as opposed to the
reasonable expectation of profit test was appropriate. Under the
preponderant purpose test, the issue is whether the employer had
as its predominant purpose a profit motive when it entered into
the particular contract. In Timmins, the Department of
Agriculture of the Province of New Brunswick entered into the
contract with the Canadian International Development Agency to
provide for the purpose of establishing and administering dairy
farms in Malawi. The taxpayer, an employee of the province,
worked in Malawi during 1982 and 1983 in connection with the
contract. Wetston, J., held the province entered into the
contract for three main reasons: humanitarian, increased
employment opportunities for residents of that province and
economic stimulation. Wetston, J. looked at the Department's
particular purpose in participating in the development project
and held that the province (i.e., the Department) did not enter
the contract to make money, and if it made a profit, it was
merely incidental to the purpose cited.
[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[8], 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.
[24] The appeal is dismissed.
Signed at Ottawa, Canada, this 7th day of December 1998.
"Gerald J. Rip"
J.T.C.C.
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