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Citation:2005TCC237
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Date: 20050408
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Docket: 2004-1720(IT)I
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BETWEEN:
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JEFFREY ADAMS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellant, Jeffrey Adams, is
appealing under the Informal Procedure an assessment by the
Minister of National Revenue of his 2002 taxation year in which
the Minister disallowed his claim for an Overseas Employment Tax
Credit under section 122.3 of the Income Tax Act. In 2002,
Mr. Adams who is resident in Alberta, was working in Algeria as
an oilfields drilling supervisor. The essence of the dispute
between Mr. Adams and the Minister hinges upon the
determination of who his "employer" was during the
qualifying period.
[2] To succeed in his appeal, Mr.
Adams must demolish the assumptions upon which the Minister based
his decision; these appear in paragraph 8 of the Reply to the
Notice of Appeal:
8. In so
assessing the Appellant for the 2002 Taxation Year and in
confirming that assessment the Minister made the following
assumptions of fact:
(a) In the 2002
Taxation Year the Appellant was employed by Adams Family
Enterprises Ltd. (the "Employer");
(b) The Employer is
owned by the Appellant;
(c) The Appellant
has a non-arm's length relationship with the Employer;
(d) The Appellant is
a specified shareholder of the Employer.
[3] The basis for these assumptions
was prescribed Form T626[1], the original of which Mr. Adams acknowledged that he,
as an authorized officer of Adams Family Enterprises Ltd., had
signed certifying, among other things, that Adams Family
Enterprises Ltd. was his "employer". Mr. Adams does not
dispute that he holds the majority of the shares in Adams Family
Enterprises Ltd.; accordingly, he is a "specified
shareholder" within the meaning of section 122.3 of the
Act.
[4] Mr. Adams takes the position,
however, that notwithstanding the information supplied in Form
T626, his employer when he was working in the Algerian oilfields
was not Adams Family Enterprises Ltd., but rather, a Saskatchewan
company known as Cheyenne Oilfield Consulting Service Inc. Mr.
Adams was not asked on cross-examination to explain the
contradiction between this document and his evidence concerning
the contract with Cheyenne, nor did his Agent seek clarification
on redirect. However, in response to the Court's request for
clarification following the conclusion of his testimony, he
explained that he was motivated to set up Adams Family
Enterprises Ltd. because "you have to have a company to
operate in Alberta"; in other words, he incorporated to
comply with Government of Alberta requirements for those working
in the energy industry. He also needed a corporate entity to
handle Workers' Compensation matters and to obtain liability
insurance. From these comments and Mr. Adams' earlier
testimony, I am able to infer that he signed Form T626 on behalf
of Adams Family Enterprises Ltd. showing his
"employer" as Adams Family Enterprises Ltd. without
truly understanding its purpose or realizing the information
provided to the Minister was inaccurate. Certainly the taxpayer
has a duty to provide accurate information to the Minister but
the legislation does not demand perfection. Mr. Adams was
candid and credible in the presentation of his evidence; in his
particular circumstances and given the complexity of the OETC
provisions, it is not unreasonable that mistakes might be
made.
[5] In support of his argument that
Cheyenne was his employer, Mr. Adams put in evidence a copy
of a contract[2]
between "Cheyenne Oilfield Consulting Service
Inc." (referred to in that document as "Cheyenne")
and "Jeff C. Adams of Adams Family Enterprises
Ltd." (referred to therein as "Adams"). The Crown
argued that because the Cheyenne Agreement refers to Jeff C.
Adams "of Adams Family Enterprises Ltd.", Cheyenne was
contracting with Adams Family Enterprises Ltd. and not Mr. Adams
personally. While I accept that this terminology is somewhat odd,
I do not think it necessarily leads to the conclusion urged by
the Crown. As I read it, the prepositional phrase "of Adams
Family Enterprises Ltd." is merely descriptive of "Jeff
C. Adams", no different in character from, for example,
"of Calgary, Alberta" or other such designations which
typically follow the name of the party in a contract. In such
cases, few would take this to mean that the contract was between
Cheyenne and "Calgary, Alberta". Also consistent with
the conclusion that the contract was with Mr. Adams personally is
the fact that the agreement is signed by
"Jeff C. Adams" with no accompanying
reference to Adams Family Enterprises Ltd. Compare this to the
signature line of the other party which specifies that the
signature of Larry Ireland is "For and on behalf of Cheyenne
Oilfield Consulting Service Inc.".
[6] The preamble to the Cheyenne
Agreement states that Cheyenne has agreed with an overseas
company known as BP Exploration (In Salah) Limited "...
to provide Drilling Supervision Services" to that company.
Clause 1 provides that "Adams" will "...
perform such of the Drilling Supervision Services as may be
delegated to him by Cheyenne from time to time". Entered as
Exhibit A-1 was the companion agreement to Exhibit A-2, the
agreement between Cheyenne and BP Exploration (In Salah)
Limited. It was from this document that Cheyenne as
"contractor" derived its right to sub-contract its
obligations to third parties specified therein under the heading
"Personnel". In Clause 1.6 of the BP Exploration
(In Salah) Limited agreement, the name "Jeff
Adams" has been typed in the space provided as the
sub-contracting "Personnel"; nowhere in that agreement
are there any references to Adams Family Enterprises Ltd.
[7] Finally, I do not accept the
Crown's argument that there was sufficient evidence for the
Court to conclude that payment for Mr. Adams' drilling
supervision services was made to Adams Family Enterprises Ltd.,
not Mr. Adams. This was not one of the Minister's
assumptions and therefore the Crown had the usual burden of
proving the facts to support its position. I am not satisfied
that there was clear evidence to show that any payments were made
from Cheyenne to Adams Family Enterprises Ltd. It was clear
from Mr. Adams' testimony that he has a tendency to blur the
legal boundaries between himself and his company, a habit he (and
his accountant) would be well advised to break if future
difficulties are to be avoided. Although in one of his answers on
cross-examination Mr. Adams made a vague statement that
"everything goes through my company", he later
described funds that somehow made their way into the Adams Family
Enterprises Ltd. account as "the money [he] was
paid". [Emphasis added]. But Mr. Adams was not challenged on
cross-examination to give precise details of these financial
transactions nor did the Crown call any department officials who
may have had information on this point. No bank records were put
in evidence. In any case, even if Cheyenne deposited funds
directly into the Adams Family Enterprises Ltd. account, I am
satisfied on a balance of probabilities that it did so at the
direction of Mr. Adams in his personal capacity as the party
entitled to receive such payments under his agreement with
Cheyenne.
[8] In view of all the above, it is my
view that the Cheyenne agreement was between Mr. Adams and
Cheyenne; accordingly, his "employer" for the purposes
of section 122.3 was Cheyenne Oilfield Consulting Service Inc.,
not Adams Family Enterprises Ltd.
[9] The next step is to determine
whether Cheyenne was a "specified employer", an
essential element of the eligibility criteria in subsection
122.3(1). This term is defined in subsection 122.3(2) of the
Act:
(2)
Definitions. In subsection (1),
"specified employer" - "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; ...
[10] As a corporation, Cheyenne comes within
the definition of "person"[3] whose registered office, according to
Exhibit A-2, is Carievale, Saskatchewan. This is sufficient to
bring Cheyenne within the definition of specified employer under
paragraph 122.3(2)(a). Having established that Mr.
Adams' employer Cheyenne was a "specified
employer", it remains to determine whether Mr. Adams is able
to satisfy the eligibility criteria set out in paragraphs
122.3(1)(a) and (b), the relevant portions of which
read:
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 six consecutive months that
commence 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,
...
[11] The Crown argued that even if Cheyenne
was Mr. Adams' employer, it was "just a recruitment
company" and accordingly, could not be said to have
"carried on business outside Canada" as required by
subparagraph 122.3(1)(b)(i). In support of its position,
the Crown referred the Court to Fonta c. R.[4] in which
Lamarre Proulx, J. concluded that the taxpayer was not
entitled to an OETC because the purported specified employer
"acted as a specialized personnel agency for
[the overseas company]" and that "... it seems
certain in law that such services are not services pertaining to
subcontracting under an engineering contract". At
paragraph 18 of her reasons, the learned judge considered
the meaning of "subcontract":
18
"Sous-traitance" [subcontracting] is defined as follows
in Vocabulaire juridique, 2nd ed., Gérard Cornu (PUF), at
page 774:
Souse-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 * subcontractor,
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.
[ ] 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.
[12] In my view, Fonta is
distinguishable from the present facts: Exhibits A-1 and A-2
together with Mr. Adams' description of Cheyenne's
operation are indicative of a genuine subcontract. I am satisfied
on a balance of probabilities that Mr. Adams was working
under a true subcontract with Cheyenne to perform the drilling
supervision services Cheyenne had agreed with BP Exploration (In
Salah) Limited to carry out in Algeria. Expressed in terms of the
statutory provisions above, then, Mr. Adams was resident in
Canada throughout the "qualifying period" in 2002 and
was employed by Cheyenne, a specified employer, as a drilling
supervisor (and therefore, "other than for the performance
of services under a prescribed international development
assistance program of the Government of Canada") and as
such, performed his duties in the Algerian oilfields in
connection with a contract under which Cheyenne as the contractor
of BP Exploration (In Salah) Limited, carried on
business outside Canada with respect to the exploration for or
exploitation of petroleum. Accordingly, all elements of
paragraphs 122.3(1)(a) and (b) having been
fulfilled, Mr. Adams is eligible to claim the Overseas Employment
Tax Credit, unless the exclusionary provisions of
subsection 122.3(1.1) apply:
(1.1) Excluded Income. No amount may be included under
paragraph [122.3(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
...
(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.
[13] Subsection 122.3(1.1) is written
conjunctively; thus, only where all of the criteria in that
subsection are met will an otherwise eligible taxpayer be
rendered ineligible for the OETC. This was the approach taken in
Troy v. R.[5], similar in some respects to the present
case and for that reason, cited by the Crown in support of its
position at the hearing. In dismissing the appeal, Watson, D.J.
found that subsection 122.3(1.1) precluded Mr. Troy from claiming
an OETC in that all of the conditions of that provision had been
fulfilled:
[10] "... There is no question that during the
relevant period HMSI [the "employer"] 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."
...
[14] In the present case, however, at least
two of the criteria in subsection 122.3(1.1) criteria cannot
be satisfied. First, having found that there was a genuine
subcontract between Mr. Adams and Cheyenne, Cheyenne cannot be
said to be "carrying on a business of providing
services" as contemplated by
paragraph 122.3(1.1)(a). While that is sufficient to
foreclose the operation of subsection 122.3(1.1), should I
be in error, I am also of the view that there is no evidence to
fulfil the condition set out in paragraph 122.3(1.1)(b)
i.e., there was no suggestion that Mr. Adams was not dealing at
arm's length with Cheyenne, or that he was a specified
shareholder of that company. Given that not all of the statutory
criteria have been satisfied, subsection 122.3(1.1) presents no
obstacle to Mr. Adams' eligibility for an OETC.
[15] The appeal is allowed and the
assessment referred back to the Minister on the basis that Mr.
Adams' employer in 2002 was Cheyenne Oilfield Consulting
Service Inc. and that he is entitled to an Overseas
Employment Tax Credit for that taxation year.
Signed at Ottawa, Canada this 8th day of April, 2005.
Sheridan, J.
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