Date:
20010130
Docket:
1999-3863-IT-I
BETWEEN:
CHRISTIAN
FONTA,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasons for
Judgment
Lamarre Proulx,
J.T.C.C.
[1] This is an appeal for the 1996
and 1997 taxation years. The issue is whether the appellant was
entitled to claim an overseas employment tax credit for those
years under section 122.3 of the Income Tax Act ("the
Act").
[2] The facts on which the Minister
of National Revenue ("the Minister") relied in making
the reassessments are set out as follows in paragraph 7 of the
Reply to the Notice of Appeal ("the Reply"):
[TRANSLATION]
(a) in the tax
return he filed for the 1996 taxation year, the appellant claimed
$15,469.92 as an OETC;
(b) by notice of
assessment dated July 14, 1997, for the 1996 taxation year, the
OETC was revised to $10,734.53;
(c) in the tax
return he filed for the 1997 taxation year, the appellant did not
claim any amount as an OETC;
(d) in the notice
of objection he filed for the 1997 taxation year, the appellant
asked that he be granted an OETC of $8,030;
(e) in the tax
returns he filed for the 1996 and 1997 taxation years,
respectively, the appellant reported employment income of $95,612
in 1996 and $64,562 in 1997 from Reliance Resources Group Canada
Inc. (hereinafter "the corporation");
(f) during
the taxation years at issue, the corporation was a Canadian
corporation that acted as an employment agency;
(g) during the
taxation years at issue, the corporation did not carry on
qualified activities outside Canada involving any
resource-related activity, any construction, installation,
agricultural or engineering activity or any prescribed
activity;
(h) during the
taxation years at issue, the corporation's client was not the
American company to which the appellant provided services but
rather an American employment agency named Top Tempo;
(i) the
Minister therefore refused to grant the appellant OETCs of
$10,743.53 in 1996 and $8,030 in 1997.
[3] Exhibit A-1 is a letter
dated July 18, 1996, from ATS Reliance Technical Group, a
division of Reliance Resources Group Canada Inc. (hereinafter
ATS), confirming that the appellant had been engaged by that
company:
. . .
This is to
confirm that since March 20, 1995, Mr. Christian Fonta has been
engaged by our firm providing Engineering services.
. . .
[4] ATS is a personnel agency. The
engineering services were provided to Siemens Transportation
Systems Inc. (hereinafter Siemens).
[5] Exhibit A-2 is a letter dated
August 5, 1999, from Siemens to the appellant. It explains the
legal relationship between the various persons involved as
follows:
. . .
This will confirm our conversation regarding your assignment with
Siemens Transportation Systems, Mass Transit Division, from March
20, 1995 through May 9, 1997. In order to fill an urgent need
within our company for experienced rail design engineering
capability, you were recruited in Canada by a temporary agency,
ATS Reliance. You accepted the assignment and worked in our
engineering department under the direction of Mr. Norman Halden,
Manager of Engineering.
As you were recruited and employed by ATS Reliance, you submitted
weekly time reports to them and received your pay from them. ATS
Reliance is a subcontractor to Siemens, engaged in providing
temporary workers of a technical nature. The work you performed
was for the design of our mass transit rail vehicles in our
Sacramento, California Mass Transit Vehicles Division engineering
department. Because of a contractual arrangement between Siemens
Transportation Systems and a third party, Top Tempo Future
Personnel, the billing from ATS to Siemens went through
them.
. . .
[6] It should be noted that Siemens,
the engineering company, calls ATS a "subcontractor" in
that letter.
[7] Exhibit A-3 is a letter from Top
Tempo, Temporary and Permanent Staffing, a division of Future
Personnel Agency. The letter is dated August 10, 1999, and was
also written to the appellant. The two paragraphs of the letter
read as follows:
. . .
I understand that there has been some confusion relative to your
employment between March 20, 1995 and May 9, 1997. I hope this
communication will help clarify the situation.
You were recruited in Canada and placed by ATS with Siemens
Transportation Services as a Design Engineer for their transit
rail vehicles in Sacramento. You worked in Siemens'
Engineering Department under Mr. Norman Halden. You were never
employed by Top Tempo/Future Personnel Agency. Any relationship
between ATS and Top Tempo was for billing purposes
only.
. . .
[8] The letter seeks to refute the
fact set out in subparagraph 7(h) of the Reply (quoted in
paragraph 2 of these Reasons). That fact was dropped by counsel
for the respondent during his argument. He assumed that there was
a direct relationship between Siemens and ATS. That direct
relationship was also mentioned in Siemens' letter of August
5, 1999, quoted above.
[9] The appellant explained that
ATS, as his employer, filled out a T626(E) form so that he could
obtain the overseas employment tax credit (Exhibit A-4).
The certification is dated July 18, 1996, and is for the period
from May 25, 1995, to the date of the signature. It
confirms that throughout that period the appellant, as an ATS
employee, performed his duties in the United States in connection
with a contract under which the employer conducted an engineering
activity.
[10] At the request of the appellant's
agent, counsel for the respondent filed the objection audit
report as Exhibit I-1. The appellant referred to a passage
on page 3 of that report:
[TRANSLATION]
. .
.
Since the payer, Reliance Resources Group Canada Inc., is an
employment agency that does not carry on qualifying activities,
the OETC cannot be granted. However, if we refer to
paragraph 8 of IT-497R3, the OETC can be granted even
where the specified employer does not carry on a qualifying
activity if the employer has a subcontract with a company that
itself carries on qualifying activities. This does not apply
here, since the payer had a subcontract with an American
employment agency called Top Tempo, which does not carry on
any qualifying activities either. Accordingly, the OETC cannot be
granted. For the years at issue, the worker's status
therefore really has no importance, since it has been determined
that the payer or its client did not carry on any qualifying
activities. However, for 1998, since the payer is dealing
directly with a company that, prima facie, seems to carry
on qualifying activities and since the worker holds employment
that is included in insurable employment under paragraph
6(g) of the Employment Insurance Regulations, the
client would appear to be eligible for the OETC.
. .
.
[11] Based on the last sentence of this
extract, the result could have been different if Siemens and ATS
had dealt directly with each other. The appellant's agent
argued that the payer dealt directly with Siemens during the
years at issue as well. As already mentioned, this fact is no
longer being disputed by the respondent.
[12] Paragraph 8 of Interpretation
Bulletin IT-497R3, entitled
"Sub-contractors", reads as follows:
8.
Ordinarily, the specified employer
will itself directly carry on the qualified activities described
in ¶ 6 (a) to (c) above, that entitle employees to claim the
OETC. However, assuming all of the other requirements of
subsection 122.3(1) are met, the OETC is also available to
employees of a specified employer that carries on business
outside Canada in other than a qualifying activity. Often
referred to as a sub-contractor, such a specified employer would
be one who has a contract or subcontract to provide its services
through its employees to another person in respect of a
qualifying activity carried on by that person outside Canada, or
in respect of such a qualifying activity which that person has
subcontracted to a third party. For example, assume that a
specified employer (A Ltd.) has contracted to carry on business
outside Canada by providing data processing services to a
non-resident company (B Ltd.) whose only business is the
exploration for natural gas. Assuming the other requirements of
subsection 122.3(1) are met, the employees of A Ltd.
providing the data processing services would qualify for the
OETC, since their employment is in connection with a contract
under which the specified employer carried on business outside
Canada with respect to qualifying activities.
[13] The appellant's agent referred to
this Court's decision in Terry Gonsalves v. Canada,
[1999] T.C.J. No. 745. He argued that the appellant is in
the same situation as in Gonsalves, where the judge held
that Wheeler Canada carried on its engineering business in Kuwait
by providing engineering services to the main contractor of the
project.
[14] Counsel for the respondent also
referred to that decision, arguing that the judge in
Gonsalves concluded that there was a genuine subcontract,
which was not the case here. Counsel also referred to this
Court's decision in Betteridge v. Canada, [1998]
T.C.J. No. 1078, and in particular to paragraph 23 of the
reasons:
23
. . . 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,
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.
[15] Counsel for the respondent finished
by arguing that ATS did not carry on business outside Canada and
that personnel recruitment is not a subcontract in connection
with an engineering activity.
Conclusion
[16] The relevant part of subsection
122.3(1) of the Act reads as follows:
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
(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) . . . .
[17] "Specified employer" is
defined in subsection 122.3(2) of the Act:
"specified employer" means
(a) a
person resident in Canada,
(b) a
partnership in which interests that exceed in total value 10% of
the fair market value of all interests in the partnership are
owned by persons resident in Canada or corporations controlled by
persons resident in Canada, or
(c) a
corporation that is a foreign affiliate of a person resident in
Canada . . . .
[18] "Sous-traitance"
[subcontracting] is defined as follows in Vocabulaire
juridique, 2nd ed., Gérard Cornu (PUF), at
page 774:
Sous-traitance
[TRANSLATION]
Derived
from traitant [dealing with], traiter [to deal
with], Lat. tractare.
·
Process by which a
*contractor, known as the main contractor, through an agreement
called a *subcontract, assigns to another person called the
*subcontractor - under the main contractor's responsibility -
all or part of the performance of the contract of *enterprise or
public contract entered into with the *client (section 1, law of
Dec. 31, 1975), the use of subcontracting implying that
the main contractor must have the subcontractors accepted by the
client.
"Sous-contrat" [subcontract] is defined as
follows in Dictionnaire de droit québécois et
canadien, Hubert Reid (Wilson & Lafleur), at
page 543:
[TRANSLATION]
Subcontract, n.
q
Contract entered
into between one of the parties to an initial contract and a
third party that undertakes to perform the initial contract in
whole or in part. E.g. a subcontract under a contract of
enterprise, a sublease.
Comp.
pre-contract, contract, subcontractor
Fr.
sous-contrat
"Subcontract" is defined as follows in
Black's Law Dictionary, 7th ed., at
page 325:
Subcontract. A
contract made by a party to another contract for carrying out the
other contract, or a part of it.
[19] The purpose of the provision is
described in Annex 5 of the 1996 Budget, Supplementary
Information, at pages 178-79:
The primary
purpose of this credit is to ensure that Canadian firms,
employing Canadian staff, are in a position to compete against
foreign firms in bidding on overseas work. The tax systems of a
number of countries other than Canada provide tax relief to their
residents working abroad, thus allowing firms from those
countries to base their bids for overseas contracts on the
reduced salary costs that such tax relief allows. Similarly, the
OETC enables Canadian employers to reduce their employment costs
with respect to foreign contract work, while maintaining the
after-tax value of the remuneration their employees receive
in connection with such work.
[20] Although the letter from Siemens
states that "ATS Reliance is a subcontractor to Siemens,
engaged in providing temporary workers of a technical
nature", that letter obviously cannot change the law with
regard to the concept of subcontracting.
[21] Counsel for the respondent noted that
the employment was insurable under paragraph 6(g) of the
Employment Insurance Regulations. Under that provision,
ATS is presumed to be an employer within the meaning of that
legislation. However, even if the appellant were an employee of
Siemens, he would not be entitled to the overseas employment tax
credit because Siemens was not a specified employer within the
meaning of the Act, although it is acknowledged to have
carried on engineering activities. As an employee of ATS, the
appellant could obtain the credit only if ATS, which could have
been a specified employer, carried on outside Canada the
qualifying activities described in
paragraph 122.3(1)(b) of the Act, quoted
above.
[22] The evidence showed that ATS acted as
a specialized personnel agency for Siemens. It is questionable
that such a business was carried on outside Canada. Moreover, it
seems certain in law that such services are not services
pertaining to subcontracting under an engineering contract. ATS
did not perform part of Siemens' engineering contract outside
Canada as a subcontractor.
[23] The appeal is therefore
dismissed.
Signed at Ottawa,
Canada, this 30th day of January 2001.
J.T.C.C.
[OFFICIAL
ENGLISH TRANSLATION]
1999-3863(IT)I
BETWEEN:
CHRISTIAN
FONTA,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Appeal heard on July
27, 2000, at Montréal, Quebec, and additional written
representations received on August 8 and November 23, 2000, at
Ottawa, Ontario,
by the Honourable Judge
Louise Lamarre Proulx
Appearances
Agent for the
Appellant:
Émile Malka
Counsel for the
Respondent: Mounes Ayadi
JUDGMENT
The appeal from the assessments made under the Income Tax
Act for the 1996 and 1997 taxation years is dismissed, in
accordance with the attached Reasons for Judgment.
Signed at Ottawa,
Canada, this 30th day of January 2001.
J.T.C.C.
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