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.
|
"Louise Lamarre Proulx" |
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.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]