Date: 20010518
Docket: 2000-1011-IT-I
BETWEEN:
RODNEY R.E. TROY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Watson, D.J.T.C.C.
[1] This appeal was heard under the Informal Procedure at Montréal, Quebec, on March 30, 2001.
[2] In computing his income tax for the 1997 taxation year, the Appellant claimed the amount of $7,855.30 as overseas employment tax credit ("OETC"). By notice of reassessment, the Minister of National Revenue (the "Minister") disallowed the OETC claimed by the Appellant.
[3] In so reassessing and maintaining this reassessment, the Minister made the following assumptions of fact:
"a) the Appellant is a qualified hydrographer and was the sole full-time employee of "Hydrographic, Marine Services Inc." (hereinafter, "HMSI");
b) HMSI was incorporated in 1990 and its shareholders were for the year in litigation, Rodney Troy (51%) and his wife, Lyne E. Girard-Troy (49%);
c) the Appellant was the president of HMSI and his wife was the V.P. Administration;
d) the Appellant did not deal at arm's length with his employer and was a specified shareholder of HMSI;
e) during the 1997 taxation year, HMSI has received most of its income from an international recruitment company "Dutch Onshore Offshore Recruitment Co." (hereinafter, "DOOR");
f) the only other business income declared by HMSI for the 1997 taxation year, was an amount of $1,500.00 collected as a finder's commission for recruiting one person;
g) during the 1997 taxation year, HMSI dealt with DOOR to obtain consulting/working contracts for the Appellant. DOOR clients are non-resident companies specializing in supervision of hydrographic survey. These companies, in turn, were contracting out services with offshore construction companies or oil companies;
h) the payments for those contracts came from the offshore construction companies or oil companies to the survey companies to the foreign recruitment company DOOR to finally reach the Canadian company HMSI;
i) during the 1997 taxation year, the invoicing was always done between HMSI and the Dutch recruitment company DOOR and no invoicing was done by the Appellant himself;
j) the Appellant did not receive a regular salary from HMSI and was dependent upon foreign payments made to HMSI to collect any money;
k) the Appellant supervised the team who did the hydrographic survey and both the team and the Appellant, through HMSI, were hired by DOOR;
l) the Appellant did not have a written contract with his own company HMSI and HMSI did not have any written contract with DOOR;
m) if HMSI is deemed to be the Appellant's employer, it is not a specified employer since the nature of its activities was throughout the 1997 taxation year, the onshore/offshore personnel recruitment and HMSI did not carry on business in the country in which the Appellant performed his duties;
n) HMSI carries on a business of providing services and does not employ in the business throughout the year more than 5 full-time employees;
o) HMSI and even DOOR did not have any contracts with the companies who were performing qualifying activities during the 1997 taxation year;
p) but for the existence of HMSI, the Appellant would reasonably be regarded as an employee of DOOR that is a non-resident company, carrying business of providing services as a recruitment company and was therefore not a specified employer;
q) moreover, the Appellant entered in an employee/employer relationship with DOOR customer, the survey company which was also a foreign company and therefore could not be considered a specified employer. This relationship was based on the following facts:
i) the Appellant was working under the supervision of DOOR customer and was reporting to that customer every day to give him a full report of the day activities;
ii) the Appellant's remuneration was based on a daily rate for the duration of the contract, independently if he was working or not;
iii) the Appellant was using the equipment and the material of the survey company;
iv) the Appellant was living aboard the ship which belongs to the oil company, for the duration of the contract without paying anything for his room and board;
v) the Appellant was reimbursed for his transportation to the ship;
vi) the Appellant did not work within a budget and there was no specific date to end the contract;
vii) when the Appellant was hired, he only knew approximately how long will be the contract and the task to be done might change accordingly to the client's needs (the survey company) and his employment might cease at any time without any notice and he could be replaced by somebody else for whatever reason;
viii) the Appellant was working exclusively for the survey company and could not work for anybody else during the duration of the contract since he was on call 24h/24h;
r) since the Appellant was employed on an "on demand" basis for various periods in the year and was paid only for those periods, with no commitment for indeterminate employment or for a minimum number of days of employment in the year, he was then considered to commence and cease employment at the beginning and end of each such period;
s) throughout the 1997 taxation year, HMSI concluded an agreement with DOOR to hire the Appellant for the following periods:
15/02/97 to 03/06/97: with the oil company "Katar Gas and Petroleum Co.";
03/07/97 to 23/08/97: with "Inter Connector Alliance";
22/09/97 to 20/11/97: for the "Norfra Pipeline Project";
t) the Appellant did not qualify for the OETC since none of the periods of employment exceeded six consecutive months."
[4] At the hearing the Appellant admitted paragraphs b) to d), f) to j), l), n) and o) and denied paragraphs a), e), k), m) and p) to t).
[5] The Appellant has the onus of establishing, on a balance of probabilities, that the Minister's reassessment was ill-founded in fact and in law and that he was entitled to the OETC for the 1997 taxation year. Each case stands on its own merits.
[6] The Appellant is a qualified hydrographer and was a full-time employee of HMSI during the 1997 taxation year. HMSI was incorporated in 1990 and the only other full-time employee at this time was the Appellant's wife who looked after the administrative side of the business. The Appellant owned 51% of the shares of HMSI and his wife owned the remaining 49%. The Appellant was not paid on a regular basis but only with the amounts received by HMSI for the Appellant's work overseas, mostly from DOOR, the international recruitment company. DOOR obtained consulting/working contracts for HMSI with its clients who were non-resident companies specializing in supervision of hydrographic surveys; these companies, in turn, were contracting out services with offshore construction companies which were subcontractors of various oil companies. The Appellant explained that in a typical situation, the work would come from an offshore oil company, which would contract with an offshore construction company, which, in turn, would contract with an offshore survey company; the offshore survey company would finally contract with smaller companies such as HMSI. Under these contracts, HMSI would provide hydrographic services through its employee, the Appellant.
[7] During the 1997 taxation year, most of the amounts received by HMSI came from DOOR; in fact, the monies came from the offshore oil companies through the offshore construction companies and through the survey companies to DOOR to reach HMSI and finally paid to the Appellant. The Appellant testified that HMSI was not a subcontractor of DOOR; as a recruitment company, DOOR was nothing but a contact or intermediary between the survey companies and HMSI. He stated that HMSI did not conclude any agreement with DOOR to hire him, rather HMSI hired DOOR in order to get DOOR's contacts with the survey companies and DOOR received a percentage on the contracts for its contacts. The Appellant went on to explain that using DOOR's contacts was very important in HMSI area of work because the worldwide demand for such services was extremely hard to find; when the survey companies contacted HMSI directly, HMSI would ask the survey companies to contact DOOR and to go through DOOR to contract with HMSI so that HMSI could maintain its good relationship with DOOR; if it was not possible for HMSI to provide the services of its employee, the Appellant, HMSI, would refer qualified personnel to the requesting company.
[8] During the 1997 taxation year, HMSI entered into contracts with three different companies for the following periods: from February 15 to June 3 with Katar Gas and Petroleum Co., from July 3 to August 23 with Inter Connector Alliance and from September 22 to November 20 with Norfra Pipeline Project.
[9] The applicable provisions of the Income Tax Act read in part as follows:
"Section 122.3: Deduction from tax payable where employment out of Canada.
(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 ...
122.3(1.1) Excluded Income. 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 carried 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.
248(1) Definitions. In this Act,
...
"specified shareholder" of a corporation in a taxation year means a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation..."
[10] It is clear from his testimony that the Appellant acted in good faith when he claimed the OETC for the 1997 taxation year. However, taking into consideration all of the circumstances of this appeal including the testimony of the witnesses, the admissions and the documentary evidence, the Court is satisfied that the Appellant has failed in his onus of establishing, on a balance of probabilities, that he was entitled to the OETC for the 1997 taxation year pursuant to subsection 122.3(1.1) of the Income Tax Act. There is no question that during the relevant period HMSI was engaged in the business of providing services and did not employ in the business more than five full-time employees throughout the year and that the Appellant was not dealing at arm's length with HMSI. As for paragraph 122.3(1.1)(c) of the Income Tax Act, the Court is satisfied that but for the existence of HMSI, the Appellant would be reasonably regarded as an employee of the survey companies which are not specified employers. Having concluded that the income was excluded, the Court need not resolve the issues raised by the Minister whether the Appellant was an employee of a specified employer during the 1997 taxation year, whether this specified employer was carrying on business outside of Canada with respect to a qualifying activity during this year or whether the Appellant worked long enough to meet the qualifying period to be entitled to the OETC during this taxation year.
[11] The appeal is accordingly dismissed.
Signed at Ottawa, Canada, this 18th day of May 2001.
"D.R. Watson"
D.J.T.C.C.