Creagh v. R., [1997] 1 CTC 2392 (Informal Procedure)

Lamarre Proulx J.T.C.C.: — These appeals, brought by way of the informal procedure, were heard on common evidence. The taxation years under appeal are: for Stephen James Creagh, George Hodorowski and Ajit Thomas, the years 1992 and 1993; for William Crowe, Daniel Cloutier, Roy S. Carmichael, Tim Bain, Rick Hearnden, Lawrence N. Hepple, Richard Johnstone, James Neill, Tim Simmons, and Timothy Burril, 1993; and for Harry Alex Laird, 1992.

The question at issue is whether the employment income earned by the Appellants as employees of Canadian Helicopter, with respect to a United Nations peacekeeping mission, was income from employment with a prescribed international organization within the meaning of subparagraph 110(l)(f)(iii) of the Income Tax Act (the “Act”). Alternatively, for the Appellants who were aircraft maintenance engineers, whether they were employed by an employer who carried on business outside Canada with respect to an engineering activity within the meaning of clause 122.3(l)(b)(i)(B) of the Act.

Some of the Appellants, for some part of the year or years under appeal, earned income from employment outside Canada with an employer who carried on business outside Canada in support of natural resource exploration being done in Burma or some other foreign country. Counsel for the Respondent stated that the Respondent did not dispute that the Appellants were entitled to the deduction from tax payable as provided for in section 122.3 of the Act. Consequently, as regards that deduction, where applicable, the appeals will be allowed.

Respecting the first question at issue, Mr. Stephen James Creagh was the only Appellant to testify, the other Appellants having agreed through their representative, at the hearing, that the facts of their appeal were similar.

Respecting the alternative question at issue, it was Mr. Ajit Thomas who testified.

Applicable Legislative Provisions

Subparagraph 110( 1 )(f)(iii) of the Act reads as follows:

110(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such of the following amounts as are applicable:

(f) ... or any amount that is

(iii) income from employment with a prescribed international organization, or

(iv) ... [1]

to the extent that it is included in computing the taxpayer’s income for the year.

Section 8900 of the Income Tax Regulations, (the “Regulations”) reads as follows:

8900 For the purposes of paragraph 110( 1 )(f) of the Act,

(a) the United Nations, and any specialized agency that is brought into relationship with the United Nations in accordance with article 63 of the Charter of the United Nations, are prescribed international organizations;

and

(b) ...

Clause 122.3(1 )(b)(i)(B) of the Act reads as follows:

(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

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 by him that the lesser of....

In reassessing the Appellant Stephen James Creagh, the Minister of National Revenue (the “Minister”) made the assumptions of fact described in paragraph 5 of the Reply to the Notice of Appeal (the “Reply”) as follows:

a) in the 1992 and 1993 taxation years the Appellant was employed by Canadian Helicopters Ltd., (“CHL”) as a helicopter pilot;

b) CHL had a contract with the United Nations whereby it was required to send pilots to the nation of Cambodia;

c) in carrying out the duties of his employment in the 1992 and 1993 taxation year the Appellant was required to work for the period November 22, 1992 to June 30, 1993 in support of the United Nations Transitional Authority in Cambodia (UNTAC);

d) the said duties were carried on outside of Canada and were in the nature of supporting the United Nations peacekeeping mission in the nation of Cambodia;

e) in carrying out the duties described in subparagraph c) above, the Appellant received employment income of $16,795.70 and $33,916.34 for the 1992 and 1993 taxation years, respectively;

f) in the 1993 taxation year, the Appellant was also employed by Northern Mountain Helicopters Inc. and received employment income of $15,435.16;

g) CHL is not a prescribed international organization within the meaning of subparagraph 110(1 )(f)(iii) of the Act;

h) Northern Mountain Helicopters Inc. is not a prescribed international organization within the meaning of subparagraph 110(l)(f)(iii) of the Act;

i) the Appellant is not entitled to deductions of $16,795.70 and $49,214.51 in respect of employment with a prescribed international organization for the 1992 and 1993 taxation years, respectively;

j) the duties described in subparagraph 5(d) herein are not duties of employment included in subparagraph 122.3(1 )(b) of the Act in respect of the 1992 and 1993 taxation years of the Appellant;

k) the Appellant is not entitled to a deduction in the said taxation years, in computing tax payable, in respect of employment outside of Canada pursuant to section 122.3 of the Act.

At the outset of the hearing, the parties filed the following Agreed Statement of Facts:

1. S.A.T.S. Inc. (“Skylink”) had an aircraft lease agreement with the United Nations (the “UN”) dated November 18, 1992 (the “Skylink-UN Lease”) wherein Skylink agreed to provide six Bell 212 Helicopters, six Bell 206 Helicopters and at least one pilot and co-pilot for each aircraft for use in support of the UN mission in Cambodia;

2. Pursuant to Article C of the Skylink-UN Lease, the agreement would expire for six of the aircraft 1 1/2 months after positioning of the aircraft in Cambodia and would expire for the remainder of the aircraft 2 1/2 months after positioning;

3. The Skylink-UN Lease was extended by various amendments through August 31, 1993 with respect to the six Bell 212 Helicopters and through July 15, 1993 for the six Bell 206 Helicopters;

4. CHL had an aircraft lease agreement with Skylink dated November 20, 1992 (the “Skylink-CHL Lease”) wherein CHL would lease to Skylink six Bell 212 Helicopters and six Bell 206 Helicopters and provide a pilot and co-pilot for each aircraft for use by the UN in accord with the Skylink-UN Lease;

5. In the 1992 and 1993 taxation years the Appellant was employed at various times by Canadian Helicopters Ltd. (“CHL”) as a helicopter pilot;

6. In carrying out the duties of his employment with CHL for the period November 22, 1992 to June 30, 1993, the Appellant was required to work outside Canada in support of the UN mission in Cambodia in accord with the Skylink- CHL Lease;

7. CHL had an aircraft charter agreement with the UN to provide air transportation services between September 1, 1993 and November 30, 1993 for the UN mission in Cambodia (the “CHL-UN Charter”);

8. In carrying out the duties of his employment with CHL for the period September 1, 1993 to November 30, 1993 the appellant was required to work for CHL outside Canada in support of the UN mission in Cambodia in accord with the CHL-UN Charter;

9. CHL is not a prescribed international organization within the meaning of subparagraph 110(1 )(f)(iii) of the Income Tax Act;

10. Other than the alleged employment with the UN, the Appellant was not employed by a prescribed international organization during 1992 or 1993;

11. No special levy or withholding, other than Canadian source deductions which were made by CHL, was made by the UN from the salary or wages earned by the Appellant in either 1992 or 1993 from their duties with CHL.

As previously mentioned, the evidence in the appeal of Mr. Stephen James Creagh will serve to determine the issue as regards the other appellants because the facts are identical. Mr. Creagh was a pilot during the years in question. Not all of the Appellants were pilots. Some were aircraft maintenance engineers and for them their representative raises an alternative argument, but all the Appellants were involved in a United Nations peacekeeping mission in Cambodia or in Kuwait.

In the fall of 1992 and the following year, Mr. Creagh worked as an aircraft captain for Canadian Helicopters. Canadian Helicopters supplied 12 helicopters with pilots and maintenance engineers to the United Nations in Cambodia. The aircrafts were painted white with a large UN insignia on either side of the fuselage and the words United Nations on either side of the tail boom. The pilots were advised by the United Nations that they were to use the UN aircraft call signs instead of the Canadian registration letters. They received their instructions as to flight routes from the UN air operations officer. The Appellants were issued UN identification cards on the back of which appeared the following:

The bearer of this card is a member of the United Nations Transitional Authority in Cambodia. All civilian and military personnel are requested to extend him/her free passage and afford him/her all privileges necessary in the execution of his/her duties.

They were taken to the UN field hospital where they received the required vaccinations. The meals were served in a common mess area and they ate with UN personnel. The communications equipment at the base was supplied by the UN Some of the pilots were issued a UN driver’s licence to operate UN vehicles. Room and board was provided by the UN

Mr. Creagh stated that he did not have a contract of employment in writing with Canadian Helicopters. He believed that the other Appellants did not have one either.

Counsel for the Respondent produced as Exhibit R-l a book containing four documents:

1. Aircraft Lease Agreement CPTS/CON/214/92 between the United Nations and Skylink;

2. Amendment No. 1 to Aircraft Lease Agreement CPTS/CON/214/92 between the United Nations and Skylink;

3. Aircraft Lease Agreement between Skylink and Canadian Helicopters Limited dated November 20, 1992;

4. Aircraft Charter Agreement No. PTS/CON/237/93 between the United Nations and Canadian Helicopters Limited.

On November 18, 1992, the United Nations signed with Skylink an Aircraft Lease Agreement (Tab 1 of Exhibit R-1). On November 20, 1992, Skylink subcontracted with Canadian Helicopters (Tab 3 of Exhibit R-1). Effective September 1, 1993, the United Nations concluded directly with Canadian Helicopters an Aircraft Charter Agreement (Tab 4 of the same Exhibit).

As to the services to be rendered by Canadian Helicopters Limited, counsel for the Respondent referred the Court to clauses 4.1 and 4.2 of the latter agreement which read as follows:

4.1 The Carrier recognizes that the UN requires air transportation services to be performed in connection with the United Nations peacekeeping activities mandated by the Security Council. Those services may include cargo resupply, troop movements, VIP transport, medical transport and reconnaissance flights. Due to the nature of peacekeeping missions, such air transportation services may involve operation into hostile areas or fields where there is no ground support or where airfield security cannot be guaranteed.

4.2 The Carrier agrees to provide to the UN the air transportation services, as set forth herein. In particular, the Carrier shall provide to the UN the Aircraft, fit for the purpose for which they are required and properly equipped and maintained, and a flight crew and maintenance personnel who are qualified, competent, and fully licensed for the duties required under this Charter Agreement. The Carrier shall perform the services under this Charter Agreement in good faith and in compliance with the terms and conditions of this Agreement, and shall abide by all reasonable instructions of the UN.

As to the legal status of the carrier and of its employees, counsel for the Respondent referred the Court to clause 5 of the same document:

5.1 It is understood that the Carrier is an independent contractor, and shall remain in control of the Aircraft and shall be responsible for navigation, operation and maintenance of the Aircraft, and that the flight crew and maintenance personnel shall at all times remain the servants or agents of the Carrier. The UN shall have the right to provide reasonable instructions to the Carrier and shall provide to the Carrier the schedule of flights, as required. However, the pilot in command shall retain the right to make decisions as to the feasibility of a flight in the light of weather and other conditions, for the safety of the passengers.

The representative of the Appellants submitted two arguments. The first, based on the interpretation of subparagraph 110(l)(f) of the Act, was that the use of the expression “employment with” did not mean “employment by” and could encompass employment activities performed at the request of the United Nations and that a person did not need to be an employee of the United Nations as long as that person carried on his or her employment activities in connection with the United Nations. The second argument, respecting the aircraft maintenance engineers, was based on the interpretation of section 122.3 of the Act and the words “employment outside Canada” in any “engineering activity”.

The Appellants’ representative argued that although the Appellant Stephen James Creagh was an employee of Canadian Helicopters, his duties were with the United Nations. He took his directions from them. He was represented to be a member of the United Nations. The use of the preposition “with” rather than “by” was an indication of the legislator’s intent which was to cover the exact situation of the Appellants.

Counsel for the Respondent referred to the decision of the Supreme Court of Canada in Quebec (Communauté urbaine) v. Corp. Notre-Dame de Bonsecours, (sub nom. Quebec (Communate urbaine) v. Corp. Notre- Dame de Bon-Secours)) 3 S.C.R. 3, (sub nom. Notre-Dame de Bon- Secoures (Corp.) v. Quebec (Communauté urbaine)) [1995] 1 C.T.C. 241, (sub nom. Corp. Notre-Dame de Bon-Secours v. Quebec (Communauté urbaine)), 95 D.T.C. 5017, where Mr. Justice Gonthier formulates the rules of interpretation of tax legislation at pages 251-52 (D.T.C. 5023):

The rules formulated on those pages, some of which had been relied on recently in Symes v. Canada, [1993] 4 S.C.R. 695, [1994] 2 C.T.C. 40, 95 D.T.C. 6001, may be summarize follows:

- The interpretation of tax legislation should follow the ordinary rules of interpretation;

- A legislative provision should be given a strict or liberal interpretation depending on the purpose underlying it, and that purpose must be identified in light of the context of the statute, its objective and the legislative intent; this is the teleological approach;

- The teleological approach will favour the taxpayer or the tax department depending solely on the legislative provision in question, and not on the existence of predetermined presumptions;

- Substance should be given precedence over form to the extent that this is consistent with the wording and objective of the statute;

- Only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer.

Counsel for the Respondent also drew the attention of the Court to the history of subparagraph 110( 1 )(f)(iii) of the Act which was enacted to avert double taxation. It was added in 1994, being applicable to the 1991 and subsequent taxation years. This provision which allows, in the circumstances therein described, to be deducted in computing taxable income, income from employment replaced the tax credit previously available under subsection 126(3) of the Act. The Technical Note explaining the reason for the enactment of paragraph 126(3) of the Act states the following:

Certain international organizations, such as the United Nations and its agencies, impose a special levy on the salaries and wages of its employees computed in the same manner as income tax. In order to avert the double taxation that would occur if this employment income were subject to tax under the Act, subsection 126(3) provides a special deduction for these employees in computing their tax liability. This takes the form of a credit equal to the lesser of the amount of the special levy and the Canadian tax otherwise payable on their remuneration from the international organization. In practice, for most employees the amount of the special levy exceeds the amount allowed as a credit under subsection 126(3). Subsection 126(3) is amended for the 1985 and subsequent taxation years for employees of the United Nations and most of its agencies, such that the credit will be computed simply as the amount of Canadian tax otherwise payable on income from such employment, without reference to the amount of the special levy.

This last reference, according to the rules of statutory interpretation, is legislative history and, where an enactment is ambiguous, legislative history may be used to determine the purpose of such legislative enactment or the mischief that the enactment sought to correct. I do not find that the legislative enactment herein is ambiguous and I shall then follow the ordinary rules of interpretation. One of the ordinary rules of interpretation is that the words of an act are to be read in their entire context and in their ordinary sense [2]

In my view, an examination of the context and of the language of the legislative enactment in question suffices to enable one to understand that the legislator’s intent is to allow income from employment to be deducted if certain conditions are met. The legislator did not give reasons why such a deduction was allowed in the calculation of income. From this perspective, it is of interest and comforting to read the legislative history of the enactment, but being subject to taxation by the United Nations does not become a condition for the application of the legislative provision. What is a condition is that the employment income be income from employment with a prescribed organization.

The Appellants’ representative has put much emphasis on the preposition “with” that follows the term “employment”. The argument is interesting but it cannot alter the fact that the essential word to examine is “employment”. In a sentence, the substantive is primary; the preposition is subordinate. It serves to join one word to another. The preposition “with” is used to make a link between employment and the prescribed organization. It is the meaning of the term “employment” that must be determinative as well as whether this meaning may be subject to variation depending on whether it is used with the preposition “by” or “with”.

Employment is defined in paragraph 248(1) of the Act as follows:

“employment” means the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign) and “servant” or “employee” means a person holding such a position.

The term “employment” is used several times in the Act, and when it is used, it always means the contractual relationship of an employer and an employee as is the case when this term is used in any legal text. It does not mean an activity in which a person engages. The preposition “with” cannot change the meaning of the word “employment” in the Act. If the legislator had wanted to provide for the case of work activity and not for the case of employment, it would have used the former expression and not the latter. It has been admitted by the Appellants and it is also abundantly clear from the evidence, that the Appellants were employees of Canadian Helicopters and that, this company was their employer. The appeals consequently fail on this point.

As for the Appellants who are aircraft maintenance engineers, their representative pursued an alternative argument, i.e. that they came within the scope of section 122.3 of the Act, which refers to employment outside Canada in engineering activities.

Mr. Ajit Thomas explained that to obtain an aircraft maintenance engineer’s licence it takes a minimum three years’ aircraft maintenance apprenticeship followed by a written examination administered by Transport Canada. In Cambodia and Kuwait this Appellant’s basic duties were to perform maintenance on his employer’s aircraft and to keep them up to the standards laid down by Transport Canada. He also stated that he was not a professional engineer.

The Appellant’s representative referred to clause 7 of the Aircraft Lease Agreement between the United Nations and Sky link (Exhibit R-1, tab 1), which reads as follows:

7. Supply during the term of the Lease Agreement the minimum number of licensed ground aircraft maintenance personnel consistent with flight safety and serviceability requirements to maintain the Aircraft in such condition as to satisfy all applicable air worthiness requirements of country of registration.

Counsel for the Respondent submitted on the one hand that the qualifying activities described in section 122.3 of the Act must be looked at from the perspective of the employer not of the employee and that the nature of the contract between Canadian Helicopters and the United Nations was an aircraft lease agreement and was not and could not be considered an engineering contract, and on the other hand, that although one speaks in English of an aircraft maintenance engineer, such an “engineer” is not to be confused with a professional engineer, and the engineering activities referred to in clause 122.3(l)(b)(i)(B) of the Act refer to professional engineering. The French version of this legislative enactment confirms this interpretation.

Counsel for the Respondent drew the attention of the Court to the pertinent Technical Note, which says that the enactment’s purpose was to improve the international competitive position of Canadian companies undertaking engineering projects outside Canada. Again, although it is interesting to read the Technical Note in order to understand the reasons which brought the legislator to enact the particular legislative provision in question, the Technical Note is not needed in order to interpret this provision. The text is not ambiguous. It requires, if we restrict ourselves to the arguments raised in the present appeals, that the employer carry on business outside Canada with respect to any engineering activity.

There is no evidence before me that the business carried on by the employer was with respect to an engineering activity or to any other activity described in clauses (A) or (B) of section 122.3 of the Act, cited at the beginning of these reasons. The evidence was that it was with respect to a peacekeeping mission. In consequence, the appeals fail on this point also.

As mentioned at the beginning, the appeals of the Appellants who have earned employment income outside Canada from an employer who carried on business outside Canada in support of natural resource exploration are allowed as regards that portion of their employment income.

The appeals concerning the employment income earned by the Appellants as employees of Canadian Helicopter with respect to a United Nations peacekeeping mission are dismissed.

Appeals dismissed.