Date: 19991028
Docket: 97-2745-IT-G
BETWEEN:
TERRY GONSALVES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Teskey, J.T.C.C.
[1] The Appellant appeals his reassessment of income tax for the years 1993 and 1994.
Issue
[2] The sole issue before me is whether the Appellant, in these years, is entitled to the overseas employment tax credit ("OETC"), as provided for in subsection 122.3(1) of the Income Tax Act (the "Act") which reads:
122.3(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
(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),
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 the individual that the lesser of
(c) an amount equal to that proportion of $80,000 that the number of days
(i) in that portion of the qualifying period that is in the year, and
(ii) on which the individual was resident in Canada
is of 365, and
(d) 80% of the individual's income for the year from that employment that is reasonably attributable to duties performed on the days referred to in paragraph (c)
is of
(e) the amount, if any, by which
(i) where section 114 is not applicable to the individual in respect of the year, the total of the individual's income for the year and the amount, if any, included pursuant to subsection 110.4(2) in computing the individual's taxable income for the year, and
(ii) where section 114 applies to the individual in respect of the year, the total of
(A) the individual's income for the period or periods in the year referred to in paragraph 114(a), and
(B) the amount that would be determined under paragraph 114(b) in respect of the individual for the year if subsection 115(1) were read without reference to paragraphs 115(1)(d) to (f)
exceeds
(iii) the total of all amounts each of which is an amount deducted by the individual under section 110.6 or paragraph 111(1)(b) or deductible by the individual under paragraph 110(1)(d.2), (d.3), (f) or (j) for the year or in respect of the period or periods referred to in subparagraph (ii), as the case may be.
Facts
[3] The Appellant saw, in the Calgary Herald, an advertisement by Wheeler Canada of St. Catharines, Ontario, which is attached hereto as Schedule "A".
[4] Since the Appellant was highly qualified for the advertised position, he applied for the job and obtained it.
[5] On December 15, 1992, Wheeler Canada sent a letter to the Appellant, which is attached hereto as Schedule B, which became the contract between the Appellant and Wheeler Canada.
[6] The Appellant was paid by Wheeler Canada and received T4's for both years from Wheeler Canada as well as receiving the same fringe benefits as all the employees of Wheeler Canada.
[7] Andrew Belton, an authorized officer of Wheeler Canada, certified that Wheeler Canada, as an employer, met the requirements of paragraph 122.3(2)(a) of the Act and that the Appellant was an employee by completing T626 forms for both the 1993 and 1994 years.
[8] The oil refinery restoration project in Kuwait was required due to the destruction of the original refinery when Kuwait had been invaded by Iraq which led to the Gulf War.
[9] Foster Wheeler Bermuda ("Wheeler Bermuda") was the primary contractor for this restoration project. It is one of many corporations within the Foster Wheeler Group.
[10] Wheeler Bermuda required various types of expertise to fulfil its contractual obligations. The Appellant, pursuant to his contract with Wheeler Canada, travelled to Kuwait and performed his services at this refinery.
[11] I find as a fact that the Appellant was an employee of Wheeler Canada, a Canadian corporation from December 31, 1992 to January 14, 1994, and performed all or substantially all of his activities in Kuwait.
[12] The Appellant said:
... I did know that Foster Wheeler is an international company engaged worldwide in the oil patch. They are extensively involved with process design of plants. They manufacture boilers and pressure vessels, and I have operated the equipment that they do manufacture. They are very well known and quite often they are advertised in the petro-chemical magazines as process engineers, et cetera.
While I was a marine engineer, I operated equipment in the marine engineering realm that was built and designed and commissioned by Foster Wheeler.
Foster Wheeler is also known for their commissioning and inspection expertise, and they are also very well known in the service industry for repairs to pressure vessels and equipment that they do manufacture.
[13] I accept these statements as factual. Wheeler Canada provided the Appellant with life, medical and dental insurance as well as pension benefits.
[14] The Appellant's duties in Kuwait were to detect damage to pressure vessels, piping, boilers, fired heaters, to assess the damage and to identify by reports what needed to be done in order to restore the units to operational capability.
[15] The Appellant reported to a Mike Davies, a Canadian who was the plant manager.
[16] Having come to the conclusion that the Appellant was an employee of Wheeler Canada, I must now determine:
(i) Did Wheeler Canada carry on business in Kuwait?
and if so;
(ii) Did Wheeler Canada have to be the main contractor?
Did Wheeler Canada Carry on Business in Kuwait?
[17] The meaning of "carried on business" for the purposes of the overseas employment tax credit was interpreted by the Federal Court of Appeal in its decision in Timmins v. The Queen, released February 15, 1999, Court File A-512-96. At paragraphs 11 and 12, Noel J. speaking for the Court said:
11 Whether one reads the definition of "business" in ss. 248(1) as a definition or as something else, it inescapably brings within the meaning of this word the specific activities which it lists. The result is that profits generated by the carriage of these activities are, for purposes of the Act, business profits and taxable as such. While ss. 8(10) and 122.3(1) do not impose a tax but extend a benefit, it cannot be seriously argued that on that account only, the word business should be construed differently. There is nothing in the language of these subsections which excludes from their application the defined meaning of the word "business".
12 Applying this definition, it seems clear that even if it could be said that the Department was not carrying on a business in the ordinary sense, it was at least engaged in an "undertaking of any kind whatever," namely the provision of services under a contract for a fee. As such it was carrying on business under a contract as contemplated by ss. 8(10) and 122.3(1).
[18] From the evidence before me, I am satisfied that Wheeler Canada is part of the Foster Wheeler conglomerate, doing business worldwide in the oil industry and providing emergency services to a broad range of industries, particularly the petroleum and gas industries.
[19] Wheeler Canada supplied in the course of its business and for profit, the services of its employee (the Appellant), an engineer, to work as a plant inspector in a refinery restoration project being carried out in Kuwait.
Did Wheeler Canada have to be the main Contractor?
[20] I am satisfied that section 122.3 does not require that the specified employer also be the main or prime contractor of any qualifying project outside of Canada.
[21] Parliament added subsection 122.3(1.1) to disallow taxpayers from claiming OETC when employed by a personal corporation. This subsection reads:
122.3(1.1) No amount may be included under paragraph (1)(d) in respect of an individual's income for a taxation year from the individual's employment by an employer where
(a) the employer carries on a business of providing services and does not employ in the business throughout the year more than 5 full-time employees;
(b) the individual
(i) does not deal at arm's length with the employer, or is a specified shareholder of the employer, or
(ii) where the employer is a partnership, does not deal at arm's length with a member of the partnership, or is a specified shareholder of a member of the partnership; and
(c) but for the existence of the employer, the individual would reasonably be regarded as an employee of a person or partnership that is not a specified employer.
[22] I note that paragraph 8 of Interpretation Bulletin IT-497R3 – Overseas Employment Tax Credit, under the heading: "Sub-Contractor", reads:
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.
[23] All that was required is that Wheeler Canada provided services in connection with a contract under which Wheeler Canada carried on business outside Canada with respect to qualifying activities.
[24] Wheeler Canada was a sub-contractor in the Kuwait project and carried on its engineering business in Kuwait by providing engineering services to the main contractor of the project.
[25] For these reasons, the appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to the Overseas Employment Tax Credit as provided for in subsection 122.3(1) of the Act.
[26] Counsel wished to make submissions concerning costs. This can be done in person during the week of December 6th in Calgary or by conference call that week. I leave it up to the counsel to decide how and when in that week.
Signed at Ottawa, Canada, this 28th day of October, 1999.
"Gordon Teskey"
J.T.C.C.
SCHEDULE "A"
SCHEDULE "B"
FOSTER WHEELER LIMITED
DESIGNERS – MANUFACTURERS – CONSTRUCTORS
P.O. BOX 3007 – ST.CATHARINES, ONTARIO L2R 7B7
TEL. (416) 688-5134 CALGARY
TELEX – 061-5134 EDMONTON
CABLE – REWOP MONTREAL
FAX – 416-688-4588 VANCOUVER
December 15, 1992
Mr. T. Gonsalves
307 Signal Hill Pl. S.W.
Calgary, Alberta
T3H 2M5
Dear Mr. Gonsalves
We are pleased to confirm our recent offer to you as a Plant Inspector for the Foster Wheeler/Kuwait National Petroleum Company (KNPC) Refineries Restoration Project. Your Canadian domestic base salary for a forty (40) hour standard workweek will be $6,900.00 Cdn. per month. Your actual compensation vould be in accordance with the enclosed Compensation Summary. This offer of employment which is valid for one week. from the above date, is contingent upon:
1. Client approval of your resume.
2. Your successful completion of an overseas medizal exanifiation
and receiving the required inoculations.
3. A satisfactory review of your references.
4. Your signing the company's standard pattent and confidential
information agreement.
5. Your obtaining a Kuwait visa.
This is not an employment contract and either party may terminate this offer, its acceptance, its terms, or subsequent employment at any time. There is no guaranteed period of employment on this assipment, but it could possibly extend until the project is completed, provided that the ConDany/Client believes your performance is satisfactory and your services are required.
Foster Wheeler Limited
According to recent legislation concerning Immigration of Illegal Miens, proof of citîzenship is required. On your start date it vil be mandatory to provide us with the necessary documentation listed on Forn 1-9.
Insurance policies require that you provide us with evidence of correctness of date of birth. Therefore, please be prepared to p-roduce such evidence on your starting date.
Attached is an information sheet which contains the terms and conditions applicable to you on this assignment.
We understand that your employment with the Company will commence on January 2, 1993, and your assignment in Kuwait with commence on January 4, 1993.
Yours truly
FOSTER WHEELER LIMITED
(SIGNED)
L. K. Baxter
Corporate Manager, Human Resources
Please signify your acceptance of our offer by signing and returning one copy.
UNDERSTOOD AND AGREED:
(SIGNED: Terence Gonsalves) Date: 18th December 1992
Foster Wheeler Limited
FOSTER WHEELER/KNPC REFINERIES RESTORATION PROJECT
COMPENSATION SUMMARY
A. Cdn. Domestic Base Monthly Salary - $6,900.00
B. 20% of Base Monthly Salary for Monthly Completion Bonus for Kuwait Service (Based on A). - $1380.00
C. 20% Overtime for Kuwait Base Vork Week,
48 Hours at Straight Time (Based on A)
Overtime is dependent on project requixements and client approval. $1380.00
D. Additionally, an assignment completion bonus of 10% of ffA" earned during perfod of assignment, paid annually or upon satisfactory completion of the project assignment, whichever occurs first.
Pro-rated monthly equivalent - $690.00
ASSIGNMENT TOTAL MONTHLY - $10,350.00
(Including pro-rated monthly estImate, of assignment completion bonus)
NOTE:
1) Hours worked in excess of 48 hours per week will be paid at the rate of 1.25 of your Cdn. domestic base salary rate. Overtime is, of course, dependent upon site requirements and client approval.
2) Hours vorked on the weekly day of rest (Friday) will be compensated at the rate of 1.5 of Cdn. domestic base rate. (Based on A).
3) Hours worked on official Kuwait recognized holidays will be compensated at the rate of double t-ime of Cdn. domestic base rate. (Based on A).
THIS IS AN ESTIMATE OF YOUR ÏOTAL MONTHIY COMPENSATION BUT COULD CHANGE DEPENDING UPON OVERTIME ACTUALLY WORKED AS NOTED IN ICI ABOVE.