Lopata v. R., [1997] 1 CTC 2162 (Informal Procedure)

Rowe D.J.T.C.C.: — The appellant appealed from an assessment of income tax with respect to his 1991 taxation year in which he had claimed an overseas employment tax credit which the Minister of National Revenue (the “Minister”) denied. The appellant then filed an Amended Notice of Appeal in which he purported to claim an entitlement to a Registered Retirement Savings Plan (RRSP) and a business loss pertaining to a certain amount flowing from a bad debt to him in 1991. However, these items had never been included in the appellant’s returns of income for 1990 and/or 1991 and the Minister, for obvious reasons, had never issued any assessment pertaining to these deductions. The Notice of Objection filed by the Appellant was only in relation to the overseas employment tax credit and the Notification of Confirmation was issued as follows:

You are not entitled to the “overseas employment tax credit” as you have not been employed by a specified employer for a period of more than six consecutive months outside Canada in accordance with the provisions of section 122.3 of the Income Tax Act.

As a result, the only issue to be decided on the appeal was the matter of the appellant’s entitlement to the overseas employment tax credit for the 1991 taxation year.

The appellant testified that he is a Professional Engineer, having graduated with a B. Sc. degree in Chemical Engineering, in 1976, from the University of Alberta. He resides in Edmonton. Following graduation, he moved to Calgary and worked for Pan-Canadian Oil and then returned to Edmonton where he was employed at Dow Chemical for six years. He started his own consulting practice in 1981. A Book of Documents, tabs 1-27, inclusive, was filed as Exhibit A-l (reference hereafter to a Tab number will always pertain to Exhibit A-1). At Tab 7, there is a Certificate of Incorporation, dated June 24, 1988, for Construction Consulting Services Ltd., incorporated under The Business Corporations Act of Alberta. The appellant was the sole shareholder. On May 28, 1990, a Certificate of Amendment was filed with the Alberta Corporate Registry and the name of the corporation was changed to W.W. Engineering & Technical Services Ltd. Then, on April 3, 1991, another name change was undertaken to Walter Lopata Ltd. The original corporation, Construction Consulting Services Ltd., had registered as an employer with the Workers’ Compensation Board - Alberta and it obtained personal coverage for the appellant as an employee. At Tab 10, the appellant referred to a document indicating that the registration with the Board and personal coverage for himself had been maintained in the new name of the corporation, Walter Lopata Ltd. He filed the appropriate annual returns and the Board issued assessments in the name of the corporation. At Tab 11, the appellant referred to a document issued by The Prudential Assurance Company indicating that a policy, including Comprehensive General Liability and replacement coverage on equipment had been issued to W.W. Engineering Technical Services Ltd. (sic) This corporation, on December 10, 1990, also registered (Tab 12) with Revenue Canada with respect to the Goods and Services Tax, commencing January 1, 1991. The appellant stated that a company, Tekxel Limited, (hereinafter referred to as “Tekxel”) had advertised in the newspapers for engineers and other specialists in the oil and gas industry for a project in Tripoli, Libya. A Professional Engineer (P. Eng.) designation was mandatory. He sent a resume to Tekxel but a job offer did not materialize. In early March, 1991, he was contacted by Tekxel and he received a proposed contract - Tab 4 - pertaining to work in Libya. He went through the draft contract and changed the first page of the document which was entitled Employment Agreement by drawing a line through the words “W. Lopata (EMPLOYEE)” and inserting, in his handwriting, this phrase: Walter Lopata Ltd. (Company) hereinafter referred to as “the employee”. He made other changes in the document, including a reference to United Kingdom Income Taxes, instead of Canadian, and compensation from Sterling to U.S. funds. He executed the contract by signing his name, Walter Lopata, For Walter Lopata Ltd. Written beneath the signature line was the printed word: Employee.

He explained that he was aware the contract had been drafted with a view to it being entered into by an individual who would be an employee but did not want to waste time by re-writing the entire contract and believed that he had made sufficient changes in the text and had signed it on behalf of Walter Lopata Ltd., which would indicate that the contract was between Tekxel and Walter Lopata Ltd. He returned the contract to a Vice-president at Tekxel. The compensation was US $85,000 per annum and he did not concern himself with references in the contract to sick leave or similar provisions as he did not consider himself to be an employee. For example, he was never included in the employee group insurance coverage. He went to Tripoli, Libya and began work on a project which was being undertaken by a Libyan corporation called Agip which had Libyan and Italian nationals as employees. He worked six days a week and employees of Agip worked five. No performance review was done with respect to his work and he was aware that if Agip cancelled the contract it had with Tekxel that he would no longer be needed and would not receive any severance pay from either Agip or Tekxel. In fact, when his services were terminated abruptly, he requested that Tekxel compensate him but it did not do so. He stated he was never requested to obtain an international driver’s license, referred to in Article 12 of the agreement at Tab 4. He never submitted to a physical examination and did not provide references from past employers nor was he required to sign any release upon termination of his services. He did not adhere to the Rest and Recreation schedule attached to the contract. At Tab 13, the appellant referred to a calendar he had marked indicating the days he worked in Libya, commencing April 5, 1991.

After 82 days, he returned to Edmonton and stayed there for 26 days, until December 6, 1991. He returned to Libya for 56 days and then came back to Edmonton on September 16. Tekxel paid for the tickets. After 19 days in Edmonton he returned to Libya and worked there for 63 days. His remuneration began on April 5, 1991 even though he did not depart Edmonton for Tripoli until April 8, 1991. No one from Agip or Tekxel approved his leave periods and Tekxel did not concern itself with his schedule as long as the Agip people were happy with his work. Tekxel had no employees or representatives in Libya at the time and operated out of London, England. The appellant dealt with a local contact person, Mr. Khalifa, who was an employee of Agip. He kept Mr. Khalifa advised of progress pertaining to a particular phase of the project or any requirements he had in order to carry out some aspect of his work. He worked on specific problems as they arose, an example of which was the presence of too much water in the crude oil. Mr. Khalifa had come to him with this matter and it was important that the problem be rectified as excessive water content lowers the price of the oil. The appellant explained that he obtained all of the production records, inspected the equipment, analyzed data and examined the entire process.

In the end, he discovered that the equipment manufacturer’s specifications had not been met with the result that the equipment did not function properly and could not remove enough of the water from the crude oil. During the process of resolving this matter, he was not supervised at all. In 1993, he again provided professional services to Tekxel, which had changed its name to Teknica (U.K.) Ltd. (referred to as “Teknica”) and entered into a contract - Tab 6 - in which Walter Lopata Ltd. was the contracting party. The agreement clearly indicated that it was a contract for services, which he would provide on behalf of Walter Lopata Ltd. He referred to a letter at Tab 14 which was provided to him by Ron Smith, General Manager of Teknica - successor to Tekxel - indicating it had been the understanding of Tekxel that the contract of March, 1991 was between it and Walter Lopata Ltd. The appellant stated that Walter Lopata Ltd. maintained coverage with the Workers’ Compensation Board - Alberta while he was in Libya and he filed a 1991 return of income for the corporation which included the money earned from Tekxel and he filed his personal return of income showing income earned by him from Walter Lopata Ltd. and included a T4 issued by the corporation.

In cross-examination, the appellant stated that Walter Lopata Ltd. did not invoice Tekxel for his services. The annual remuneration of US $85,000 was divided by 12 and each month that amount was deposited by Tekxel into the corporate U.S. $ account of Walter Lopata Ltd. in Edmonton. He stated he did not see the contract entered into between Tekxel and Agip - Tab 5 - until after he had arrived in Libya and was working in the Agip office. He made a copy for himself. He assumes that the reference therein to the Bu-Attifel Oilfield means that this contract was the one which then caused Tekxel to contract with Walter Lopata Ltd. for provision of his services as a professional engineer. He stated that in November, 1990 he had sent his personal resume to Tekxel’s contact in Calgary and had remitted it on personal, as opposed to corporate, letterhead. He had indicated that he was interested in a position overseas. When he did go to Libya in 1991, he used the library owned by Agip or the one at the Petroleum Institute. He had taken some of his own handbooks and texts and basic office supplies which he replenished upon his return visits to Edmonton. The secretary employed by Agip typed his reports and he used the photocopier owned by Agip. In the event he had to travel into the desert to visit a facility, Mr. Khalifa would make all the arrangements as it was necessary to book an internal aircraft flight and obtain a “desert pass” prior to departure. After April 3, 1991 - the date of the name change from

W. W. Engineering & Technical Services Ltd. to Walter Lopata Ltd. - no other income was earned other than from Tekxel but, prior to April, the corporation had done work for the City of Edmonton and other companies in Alberta. In 1991, he was the sole employee of Walter Lopata Ltd. and there was no corporate office in Libya nor was it registered with Libyan authorities and it did not pay any taxes to Libya. His personal accommodation in Tripoli was provided by Agip. The only office Walter Lopata Ltd. maintained was in Edmonton.

Counsel for the appellant submitted that Walter Lopata Ltd. was a specified employer within the meaning of the Income Tax Act (the “Act”) and that there was no provision in place which would exclude the appellant from qualifying as an employee of that corporation, as is sometimes the case such as in a specified investment business or with respect to personal services corporations. Counsel submitted that there was no requirement for Walter Lopata Ltd. to have any fixed place of business in Libya or any permanent establishment as those were considerations relevant in the circumstance where it was necessary to refer to a tax treaty between countries but not in the within appeal.

Counsel for the respondent agreed, reluctantly, that the contract of March 18, 1991 was between Tekxel and Walter Lopata Ltd., despite the inadequacy of the language in the contract which was clearly designed to apply to an individual as an employee. Counsel submitted that the evidence indicated Walter Lopata Ltd. was not carrying on business outside Canada with respect to petroleum exploration but was merely a vehicle for the appellant’s employment and should be regarded, realistically, as nothing more than an employee of Tekxel.

First, while a corporation can be an employer, it cannot be an employee. Apart from the historical perspective flowing from the concept of master and servant, section 248 of the Act defines “employed” as “performing the duties of an office or employment” and “employment” as “the position of an individual in the service of some other person ...” (emphasis added). Only a human being can be an “individual”, defined in section 248 as “a person other than a corporation” although a corporation is defined as a “person” in that section. The position of the Minister, as set out at subparagraph 6(k) of the Reply to Notice of Appeal, was that “the contract entered into between Tekxel and Walter Lopata Ltd. was a contract of service”.

In the Reply to Notice of Appeal at subparagraph 6(1), the respondent admitted that Walter Lopata Ltd. was a “specified employer” pursuant to section 122.3 of the Act. The issue, then, is whether or not Walter Lopata Ltd,, the appellant’s employer, carried on business in Libya within the meaning of subsection 122.3(1) of the Act. The evidence supports the conclusion that the appellant performed all or substantially all of the duties of his employment outside Canada but the question is whether Walter Lopata Ltd. meets the requirements of paragraph 122.3(l)(i) and clause (A) as follows:

(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 ...

Certainly, the work done by the appellant in Libya was with respect to the exploration or exploitation of petroleum. The sole issue is whether it can be said that Walter Lopata Ltd. carried on business outside Canada. In the case of Timmins v. R. (sub nom. Timmins v. Minister of National Revenue) (1996), 114 F.T.R. 81, 96 D.T.C. 6378, Wetston J., Federal Court of Canada - Trial Division - considered the appeal of a taxpayer who was employed by the Province of New Brunswick which had entered into a contract with the Canadian International Development Agency to provide services for the purpose of establishing and administering dairy farms in Malawi in return for a fee and reimbursement of certain expenses. The taxpayer sought deduction for overseas employment on the basis that his employer, the Province of New Brunswick, had carried on business in Malawi within the meaning of the Income Tax Act. Wetston J. decided that the Province’s main or preponderant purpose for entering into the contract was not profit nor did it have any reasonable expectation of profit therefrom but in the course of his analysis, Wetston J. at page D.T.C. 6382

stated:

While I have considered a number of the plaintiffs arguments, there is clearly some doubt as to the meaning of the word “business” in subsections 8(10) and 122.3(1) of the Act. As such, I must resort to the purpose of the provision. According to the Department of Finance’s Technical Notes, 4th ed., Consolidated to 1992, the 1979 Budget Supplementary Information, which proposed the overseas employment tax deduction, stated as follows:

To maintain Canadian competitiveness in overseas contracts, the budget proposes that employees of taxable Canadian corporations, working overseas in prescribed countries for more than six months, be partially exempt from Canadian tax. This measure will apply to persons working on construction, installation, agricultural or engineering projects, in resource exploration and development, or other prescribed activities in most developing countries and certain other countries. The exemption will be one-half of the employee’s overseas remuneration to a maximum exemption of $50,000 on an annual basis.

The question of when a person moving abroad becomes a non-resident is, in practice, a difficult matter of fact. Employees of Canadian companies who work overseas for a period of time on particular projects may be residents for purposes of Canadian taxation, and if so are liable to Canadian tax on their world-wide income. This can have undesirable effects on the ability of Canadian firms to compete in bidding for overseas contracts. Tax legislation applying to most of Canada’s foreign competitors contains some degree of tax relief for their residents employee abroad. The partial exemption will permit Canadian employers to reduce costs while maintaining the after-tax value of remuneration to employees.

It is clear, then, that the overseas employment tax deduction or credit was established to ease the burden imposed upon Canadian employers by the application of Canadian tax rules. These rules were considered to have discouraged Canadian employers from using Canadian residents to perform certain foreign contracts. It is apparent, then, that subsections 8(10) and 122.3(1) of the Act have, as an objective, a goal of increasing the competitiveness of Canadian employers bidding on foreign contracts.

In 1985, subsection 122.3(1) of the Act was amended to specifically exclude any contract carried on with CIDA. The amended version of the provision now reads “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”. According to Ms. Brito, who appeared on behalf of the defendant, Parliament decided to exclude CIDA contracts because persons or organizations bidding on contracts in the public sector were not bidding in the international market, in competition with foreign companies; rather, they were bidding against each other, within Canada. The overseas employment tax deduction or credit provision, in Ms. Brito’s view, was designed to benefit an employer who bids on international contracts; it was not intended to benefit the persons employed under such contracts.

I find that the phrase “carried on business”, in subsection 8(10) and subsection 122.3(1) of the Act, means those activities of an employer which are carried on for profit. The provisions in question were intended to assist specified employers in competing for foreign contracts, by reducing their overall costs and, therefore, their contract bids. Because the costs of competing for a contract are influenced by the operation of the provisions, the deduction or credit was obviously intended to improve the financial positions of specified employers. The notions of decreasing costs and increasing competitiveness, envisaged by these provisions, suggest that employers who are fulfilling contracts in foreign countries must be involved in commercial activity, for the purpose of earning a profit. It must now be determined how the provisions, as interpreted, should be applied to the case at bar.

It is apparent on the evidence that Walter Lopata Ltd. was an employer who was carrying out an activity in Libya with a view to profit. It did not dispatch its employee, the appellant, to Tripoli for any purpose other than to carry on the business of the corporation which, since 1988, had been to provide engineering and technical services to clients. There is nothing in the legislation which requires a specified number of employees to be engaged in the qualifying business activity nor is there any limitation placed on the appellant merely because he was the sole shareholder and employee of Walter Lopata Ltd. It is also clear that the appellant was resident in Canada during the 1991 taxation year and was employed for more than six consecutive months by Walter Lopata Ltd, the specified employer. There is no requirement in the legislation other than the specified employer carry on business within the meaning given to that term by the relevant jurisprudence. The Minister never took the position that Walter Lopata Ltd. had no reasonable expectation of profit from the activities undertaken by it through the efforts of its employee, the appellant, except to plead in the Reply to Notice of Appeal that the corporation did not carry on a business outside Canada for the 1991 taxation year.

The appeal with respect to the 1991 taxation year is allowed with costs and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the appellant is entitled to the overseas employment tax credit as claimed.

The appellant is entitled to no further relief.

Appeal allowed.