Date: 19981028
Docket: 97-2058-IT-I
BETWEEN:
SHANE C. GABIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
RIP, J.T.C.C.
[1] Shane C. Gabie has appealed income tax assessments for
1993 and 1994 in which the Minister of National Revenue
(“Minister”) disallowed claims for an Overseas
Employment Tax Credit (“OETC”) pursuant to
section 122.3 of the Income Tax Act
(“Act”).
[2] During July 1993 to April 19, 1994 (“qualifying
period”), Mr. Gabie was employed by Hexagon Computer
Systems Incorporated (“Hexagon”) a Canadian resident
corporation, to work for a subsidiary corporation of Hexagon
located in Boston, Massachusetts. During the relevant times,
Hexagon was principally in the software development and
management consultation business. Both Hexagon and its subsidiary
designed and constructed software in the process of developing
computer systems. Hexagon had a contract with the Massachusetts
Housing Finance Agency (“MHFA”), an agency of the
Commonwealth of Massachusetts government, to provide such
services as systems analysis, database design and development and
application programming. As a qualified technical professional,
the appellant was employed and paid by Hexagon to work at MHFA in
Massachusetts to provide these services. MHFA carries on the
construction of housing by contracting out the actual
construction.
[3] Mr. Gabie is not a professional engineer nor does he have
a university degree in engineering. He received a Bachelor of
Science degree from Carleton University where he minored in
computer science; he is considered to be a qualified technical
professional.
[4] According to Mr. Gabie the nature of the work he performed
was that of software engineering. Mr. Gabie stated that he
performed the necessary analysis using structured and recognized
systems analysis. The analysis consists of several steps,
including defining the problem and mapping out problems with a
computer aided software engineering tool. This tool maps out
entities in the analysis and the relationship between the
entities.
[5] Mr. Gabie testified that an analysis is performed and then
solutions are created on a step-by-step basis. Results are tested
piecemeal and then a systems design, involving the various
entities that the business requires to track and control
information, is put together. The business process and software
process have to be manipulated to work together to create a
systems prototype for testing. Once the prototype is approved,
the software is constructed.
[6] Mr. Gabie’s job for Hexagon was to create a systems
life cycle. A systems life cycle includes a systems analysis,
requirement analysis, systems design and building the eventual
prototype.
[7] The essential difference, Mr. Gabie explained, between the
work performed by a person who has a degree in computer science
and one who has a degree in computer engineering is that the
former works with computer software and the latter works on
computer hardware.
[8] Section 122.3 provides that:
(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”) and
(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)
...
(B)
any construction, installation, agricultural or engineering
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),...
[9] The Minister’s position is that Hexagon did not
carry on a business outside of Canada with respect to a
qualifying activity as enumerated in subparagraph
122.3(1)(b)(i) of the Act, specifically,
Hexagon’s activities with MHFA do not constitute an
“engineering activity” as referred to in that
provision. The appellant submits that he was employed by Hexagon
in connection with a contract that Hexagon had with MFHA, under
which Hexagon carried on business outside Canada with respect to
any engineering activity.
[10] Mr. Gabie further argues that the term “engineering
activity” includes the whole range of work which may be
described as engineering and this is what Hexagon did in
Massachusetts. In rejecting his claims for the OETC, Mr. Gabie
asserts that Revenue Canada is disregarding international
standards, namely, the standards set down by the International
Organization for Standardization (“ISO”), to which
Canada has subscribed.[1] He is also of the view that Revenue Canada’s
disregard for international standards is a rejection of
engineering as it pertains to software.
[11] The parties do not dispute that Hexagon is a specified
employer as defined by subsection 122.3(2) or that Mr. Gabie
performed all of his duties as an employee of Hexagon outside of
Canada for more than six consecutive months as required.
[12] To determine whether the work performed by Mr. Gabie
qualifies as an “engineering activity” under the
applicable provision of the Act, I must make a finding,
amongst other things, that Mr. Gabie’s employment in
Massachusetts was in connection with a contract between Hexagon
and MHFA under which Hexagon carried on business with respect to
an engineering activity: Creagh v. Canada [1996] T.C.J.
No. 1404, at paragraphs 32 and 33, per Lamarre-Proulx
T.C.C.J.
[13] The French version of the Act uses the word
“ingénierie” for “engineering
activity” in clause 122.3(1)(b)(i)(B). According to
the Robert & Collins English-French dictionary, the
word “ingénierie” in French is translated as
“engineering” in English. "Engineering" and
"engineering activity" do not necessarily mean the same
thing. One may not be a professional engineer, for example, but
still work in any engineering activity. Where there is a conflict
between the French and English versions of the Act, a
judge should interpret the version that best meets the interest
of Parliament.
[14] The term “engineering activity” is not
defined in the Act. However, there are regulations to the
Act that consider, either directly or indirectly, the term
“engineering”. Paragraph 2900(1)(d) of the
regulations, which sets out prescribed expenditures for the
purpose of section 37.1 of the Act, refers to “work
with respect to engineering, design, operations, research,
mathematical analysis, computer programming, data collection,
testing and psychological research where that work is
commensurate with the needs, and directly in support of”
basic research, applied research and experimental development[2].
[15] Mr. Gabie testified that software engineering is
recognized worldwide as an engineering discipline, complete with
regulatory bodies and standards organizations. The ISO, he
stated, recognizes software engineering as an engineering
discipline. Canada is a member in the ISO and its acceptance of
ISO 9000 means, according to Mr. Gabie, that the Canadian
government accepts software engineering as a true engineering
discipline.
[16] The term “engineering” has also been used in
Revenue Canada’s Information Circulars. Information
Circular 97-1, entitled “Scientific Research and
Experimental Development Administrative Guidelines for Software
Development”, dated February 28, 1997, discusses the three
criteria for determining the eligibility of work as scientific
research and experimental development (SRED). The second
criterion discusses “scientific or technological
uncertainty” and states in section 3.2:
One type of technological uncertainty is “system
uncertainty”, which refers to uncertainty of the successful
integration of software components or technologies. System
uncertainty exists only if the integration is not achieved
through routine engineering and requires changes to the
basic design of the underlying technologies...
[emphasis added]
[17] In Information Circular 86-4R3, entitled
“Scientific Research and Experimental Development”,
dated May 24, 1994, Revenue Canada recognizes and defines, at
paragraph 6.10(f), the term “software
engineering”:
Software engineering involves the study, in terms of
basic or applied research, of the methodology for the design,
implementation, testing, and performance evaluation of software
systems; that is, advances in the methodology required to
construct computer programs with greater flexibility, efficiency,
reliability, and ease of maintenance. [emphasis added]
[18] The appellant defined software engineering as a
step-by-step process that facilitates the specification, design,
implementation, and testing of a software solution for a set of
stated requirements in the most expeditious and cost-effective
manner possible. Mr. Gabie suggests that this is the process
Hexagon applies to perform its obligations under the contract
with MHFA.
[19] The definition in Information Circular 86-4R3 is
similar to the definition offered by the appellant and describes
the activities of the appellant in performing services for
Hexagon.
[20] The ISO, according to Mr. Gabie, lists six phases of the
software engineering process, namely: system engineering/system
analysis; software requirements analysis; design; implementation;
testing and maintenance. In the text Software Engineering: A
Practitioner's Approach by Roger S. Pressman[3], Michael Stovsky
comments at page 202:
A quality assurance system may be defined as the
organizational structure, responsibilities, procedures,
processes, and resources for implementing quality management
[ANS87]. ISO 9000 describes quality assurance elements in generic
terms that can be applied to any business regardless of the
products or services offered.
[21] Mr. Pressman also refers to the software engineering
process, at page 202:
ISO 9001 is the quality assurance standard that applies to
software engineering. The standard contains 20
requirements that must be present for an effective quality
assurance system. Because the ISO 9001 standard is applicable to
all engineering disciplines, a special set of ISO guidelines (ISO
9000-3) have been developed to help interpret the standard for
use in software process. [emphasis added]
[22] Software engineering was defined by another person, Fritz
Bauer, referred to by Mr. Pressman,[4] as
.... the establishment and use of sound engineering principles
in order to obtain economically software that is reliable and
works efficiently on real machines
It is clear from that the ISO recognizes the discipline of
software engineering.
[23] Software engineering is an important function in the
present economy. Engineering today includes more than a
“hands-on” type of activity resulting in a
physical attribute, as submitted by counsel for the respondent.
The increasing flow of information and the commercial reality of
the modern world has made the development of
“databanks” and “integrated systems”
important in the construction of bridges, sanitation systems,
buildings, roads, hydro, hydraulic and other projects that are
traditionally thought of as engineering projects and their
development, as explained by Mr. Gabie, constitutes an
independent engineering activity. As stated by Iacobucci J., in
R. v. Salituro [1991] 3. S.C.R. 654, at p. 670:
... Judges can and should adapt the common law to reflect the
changing social, moral and economic fabric of the country. Judges
should not be quick to perpetuate rules whose social foundation
has long since disappeared. Nonetheless, there are significant
constraints on the power of the judiciary to change the
law ... The judiciary should confine itself to those
incremental changes which are necessary to keep the common law in
step with the dynamic and evolving fabric of our society.
[24] On the facts submitted by Mr. Gabie, he was employed by a
person resident in Canada, Hexagon, and performed all or
substantially all of his employment in the United States during
the qualifying period in connection with a contract under which
Hexagon carried on business outside Canada with respect to any
engineering activity, specifically an activity related to
software engineering. It does not, in my view, matter that Mr.
Gabie is or is not a professional engineer so long as his
employer's business outside Canada was with respect to any
engineering activity and Mr. Gabie's employment outside
Canada was performed in connection with that business. This
interpretation applies the plain meaning rule to interpret tax
legislation referred to by Major, J. in Friesen v.
Canada.[5]
[25] The appeal is therefore allowed with costs, if any.
Signed at Ottawa, Canada, this 28th day of October
1998.
"Gerald J. Rip"
J.T.C.C.
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