Tax Court of Canada Judgments

Date: 19981207

Docket: 97-2908-IT-I

BETWEEN:

KEITH JAMES BETTERIDGE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

RIP, J.T.C.C.

[1] Keith James Betteridge, the appellant, appeals from an income tax assessment for 1993 that denied him an overseas employment tax credit ("OETC") on the basis that he was not employed by a specified employer carrying on business activities outside Canada as required by the provisions of subsection 122.3(1) of the Income Tax Act ("Act").

FACTS

[2] Dr. Betteridge is a Professor emeritus at the University of Guelph ("University"). He is a veterinary surgeon and research scientist. At all relevant times he was employed by the University of Guelph and was paid by the University. Dr. Betteridge retired from the University in April 1996.

[3] In 1993 Dr. Betteridge held an Industrial Research Chair in Animal Biotechnology which was funded by the Natural Sciences and Engineering Research Council ("NSERC") and Semex Canada ("Semex"). NSERC is a federal government agency financing research in natural sciences. Semex is based at Guelph and represents all artificial breeding organizations in Canada, specifically for exporting frozen cattle semen and embryos of livestock. Semex carries on business in various countries. Its agents receive the frozen product and distribute it to inseminators in those countries. Dr. Betteridge's activities and those of the laboratory in which he worked related directly to the international trade of cattle semen and embryos.

[4] Starting in December 1989 until autumn 1993, Dr. Betteridge worked for the University on a Semex project that was financed by the Ontario Premier's Council Technology Fund for the purpose of providing sexed frozen embryos for export. The work involved contacts between the University and Semex and the Ontario government. Dr. Betteridge stated his work was to advance techniques to help business. The overall objective of his research program was to understand and manipulate the development of mammalian embryos in ways that would benefit the animal production industry.

[5] The contract between the University and Semex is dated December 19, 1989.

The contract provided for Semex and the University to combine their expertise and equipment to carry out certain of the obligations of an agreement between the Ontario Technology Fund and Semex and to achieve each of the Semex's and the University's aims and objectives in the area of sexing, cryopreservation and the duplication (cloning) of manipulated bovine embryos. The University was to perform the various tasks under the contract and Semex was to pay for the price of the work so performed. Dr. Betteridge was responsible for the overall supervision of the work. The University was free to publish the data and results of the research. The intellectual property resulting from the research was the property of the University but the University was to grant to Semex a licence to use and sub-licence the intellectual property, royalty free at first, and later, if Semex exercised an option to acquire the intellectual property, at a fee to be negotiated.

[6] However, the agreement between Semex and the University was subject to the agreement between Semex and the Province of Ontario. Under the latter agreement, all intellectual property must be used exclusively for production by Semex or its members.

[7] During the period August 20, 1992 to August 31, 1993, Dr. Betteridge was on "study leave" but continued to receive his full salary from the University. Dr. Betteridge spent this time in Paris, France, he said "to carry out" the terms of the agreement between the University and Semex. Dr. Betteridge worked in the laboratory of Dr. Jean-Paul Renard. Dr. Betteridge declared that Dr. Renard's laboratory was "uniquely" equipped to facilitate a particular phase of his research program of direct relevance to the contract between Semex and the University. His research in France included cloning and produced scientific results, he submitted. Dr. Betteridge also stated his work had favourable financial implications for the University.[1]

[8] There is no dispute that Dr. Betteridge was a resident of Canada in 1993, that he was outside of Canada for more than six months commencing in 1992 and that his work in France constituted agricultural activity within the meaning of clause 122.3(1)(b)(i)(B) of the Act.[2] The dispute between the parties is whether he performed all or substantially all of his duties of employment with the University of Guelph in France in connection with a contract under which the University carried on business outside Canada, as required by subparagraph 122.3(1)(b)(i).

Parties' Submissions:

[9] The Minister of National Revenue ("Minister"), in assessing, assumed that in 1992 and 1993, the appellant was employed by the University of Guelph and that he received employment income from the University during the time he was in France. Furthermore, during his leave in France, the appellant was "involved" in Semex's research activities and he was not an employee of Semex. The work performed by Dr. Betteridge in France was not in connection with a contract by his employer, the University of Guelph, to carry on agricultural activities outside of Canada. The University was not carrying on business outside Canada and Semex was not the appellant's employer carrying on business outside of Canada.

[10] Dr. Betteridge acknowledged that the overall activities of the University are to advance knowledge and understanding, and to educate its students. However, he does not concede that the preponderant purpose of the University's contract with Semex was for these purposes. In the field of applied research in which Dr. Betteridge was employed by the University, he declared, the generation of alternative sources of revenue to the university has become extremely important. Thus the University of Guelph has incorporated Guard Inc. to commercialize inventions and new technology resulting from research at the university, the type of research undertaken by Dr. Betteridge. The University earns revenue from this source to augment its other sources of revenue, government grants and tuition, for example. Dr. Betteridge is of the view the University has a commercial interest in his working in France to invent a profitable technology.

[11] Therefore, Dr. Betteridge submitted, the University of Guelph was in the business of making inventions through his work in France. And because his work took place in France in 1993, the University was carrying on business in France. He referred me to The Queen vs Gurd's Products Company Limited, 85 DTC, 5314 (FCA).

ANALYSIS:

[12] Subsection 248(1) of the Act describes "business" to include a wide range of activities. However, the definition in subsection 248(1) is not exhaustive and would generally include an activity engaged in for the pursuit of profit.

[13] In The Fundamentals of Canadian Income Tax, 5th ed. (Scarborough: Carswell, 1995) at 260, Prof. Krishna writes:

“Business” implies economic activity. But economic activity by itself is not enough to establish a “business”: The activity must be undertaken for the purpose of realizing a profit. The taxpayer must have profit motive. It is profit motive that differentiates a trade or business from a hobby or pastime.

[14] Hogg and Magee write in Principles of Canadian Income Tax (Scarborough: Carswell, 1995), at 193 that:

"... a business is an organized activity that is carried on with a reasonable expectation of profit."

[15] Thorson, P. stated in Samson v. M.N.R. (1943), 2 DTC 610 at 618 :

In my view, the term "trade or business" as it is used in section 5(f) [of the Income War Tax Act] contemplates an activity in which the prospect of gain or profit is involved and "the pursuit of a trade or business" involves the pursuit of gain or profit.... .

[16] Similarly, in Halbegewachs v. Canada, 93 DTC 5037 at 5039 (F.C.T.D.), Strayer J. wrote that a "business" implies some reasonable prospect for net income. In Varma v. M.N.R., 86 DTC 1342 at 1344 (T.C.C.), it was held that the word "business" is indicative of a commercial intent and that a business is a source of income from which there must be a reasonable expectation of income.

[17] It is possible, of course, for an entity to have more than one purpose. For example, a university may be organized to educate students but it could also be said to be organized to provide income for itself. And when an institution like a university provides income for itself, the income is used to fulfill its raison d'être. In order to determine if an entity carries on business, the courts have looked to what is the "preponderant purpose" of the entity. In Ontario Regional Assessment Commissioner v. Caisse populaire de Hearst Ltee, [1983] 1 S.C.R. 57, McIntyre J. wrote at p. 64:

The preponderant purpose test is based upon a determination of the purpose for which an activity is carried on. If the preponderant purpose is the making of a profit, then the activity may be classified as a business. However, if there is another predominant purpose to which any profit earned is merely incidental, then it will not be classified as a business.

[18] To determine the preponderant purpose of an organization, the courts have looked to a variety of factors. These include the stated purposes of the corporation[3], its charitable status[4] and the particular activities at issue in the case[5]. In Rideau Club vs City of Ottawa, (1908) [15] O.L.R. 118, Osler J. looked at various organizational aspects of the enterprise to determine whether the Club was a business. These factors included the purpose of incorporation, whether there was capital stock, whether profits or earnings were made, whether dividends were paid, and whether there were proprietary interests which could be sold or assigned. These organizational indicia may be helpful to determine if the predominant purpose of an organization was to earn profits.

[19] The University of Guelph was created by the University of Guelph Act, S.O. 1964, c. 120. In section 3 the objects and purposes of the University include the advancement of learning and the dissemination of knowledge, the intellectual, social, moral and physical development of its members and the betterment of society.[6] Section 23 states that the property, income, revenues, issues and profits of all University property shall be applied solely to achieving the objects and purposes of the University.

[20] There is no evidence Canadian universities are organized in a manner consistent with business enterprise. They are corporations without the capital, for example. The University of Guelph itself is precluded from using or alienating its proprietary interests except for the advancement of its stated objects. Canadian universities are not organized and operated in a fashion that it can be said that their preponderant purpose is the earning of profits. I do not believe Parliament contemplated that universities carry on a business for profit.

[21] However, while a university may not be "in business", it is possible for a university to engage in commercial activities. All Canadian universities do in fact engage in business activities, like operating bookstores, parking lots, residences and cafeterias.[7] While the revenues from such activities may not be taxable since universities are exempt from tax, this does not alter the fact that universities earn revenue by commercial means. Or, like the University of Guelph, the University may incorporate a corporation like Guard Inc. to carry on business. In such a case it is that corporate entity and not the University who carries on business.

[22] In Timmins v. The Queen, 96 DTC 6378, Wetston, J. held that to determine whether or not a taxpayer's employer was carrying on business under a contract in the context of subsection 122.3 (1) (as well as subsection 8(10)) of the Act, the preponderant purpose test, as opposed to the reasonable expectation of profit test was appropriate. Under the preponderant purpose test, the issue is whether the employer had as its predominant purpose a profit motive when it entered into the particular contract. In Timmins, the Department of Agriculture of the Province of New Brunswick entered into the contract with the Canadian International Development Agency to provide for the purpose of establishing and administering dairy farms in Malawi. The taxpayer, an employee of the province, worked in Malawi during 1982 and 1983 in connection with the contract. Wetston, J., held the province entered into the contract for three main reasons: humanitarian, increased employment opportunities for residents of that province and economic stimulation. Wetston, J. looked at the Department's particular purpose in participating in the development project and held that the province (i.e., the Department) did not enter the contract to make money, and if it made a profit, it was merely incidental to the purpose cited.

[23] Even if I had found the University of Guelph did carry on business, I am satisfied that the University was not carrying on business in France. The mere fact that Dr. Betteridge went to France in furtherance of a contract between two Canadian corporations, Semex and the University, does not mean that his employer, the University, was carrying on business in France. 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[8], 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.

[24] The appeal is dismissed.

Signed at Ottawa, Canada, this 7th day of December 1998.

"Gerald J. Rip"

J.T.C.C.

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