Citation: 2010 TCC 436
Date: 20100819
Docket: 2007-3661(IT)G
BETWEEN:
WILFRED MacISAAC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2007-3663(IT)G
AND BETWEEN:
TIM SPEAKMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1]
The Appellants are
appealing the decision of the Minister of National Revenue (the “Minister”) denying
their applications for overseas employment tax credit (“OETC”) with respect to
the income earned from their employer, Offshore Recruiting Services Inc.
(“ORSI”), in the 2005 taxation year.
Evidence
[2]
Adrian Coady was the
President of ORSI. He attended St. Francis Xavier University and the University of
Toronto. He has been dedicated to the oil and gas industry since then, in both
land operations and non-land operations. He was the manager of personnel at
Harvey Offshore Services Inc. in St.
John’s, Newfoundland, until 1997 when he founded ORSI. Harvey Offshore Services Inc. provided personnel to drilling
operations. Most of his work was operational.
[3]
He is able to “chase
down” clients and obtain qualified personnel for many businesses who operate
offshore. ORSI is located in St. John’s, Newfoundland, and has six administrative personnel (payroll), two recruiting
personnel in St. John’s and one employee in Halifax.
In 2008, ORSI had a $19,000,000 turnover in salaries and expenses. They had
many employees operating around the world. In 2009, they had 200 people
worldwide, in 2008, 272 people and in 2005, 200 people.
[4]
He wanted to continue
the core business he had with Harvey Offshore Services Inc. ORSI provides
primary operational personnel to rigs, ships and offshore businesses. ORSI had
twenty clients in Canada and internationally. Most of their
clients have a contractual relationship with them. It develops contractual
terms and rate scales for different levels of competence. It tries to convince
their clients to engage its services. A lot of public relations is involved.
[5]
It tries to secure a
contract with the clients and then secure the personnel that the contract
requires.
[6]
ORSI profiles the employee
for the client and when the employee is accepted ORSI processes them for that
job including medical and drug screening before engaging them and dispatching
them. ORSI has to determine their “certificates of competence”. It has a
training matrix that determines where the prospective employee is in relation
to what is needed.
[7]
ORSI buys the plane
ticket, puts them in the air, has an agent meet them, obtains their hotel and
takes them to the helicopter to go to the vessel. Each person must bring along his
documentation including his passport and qualifications certificates. The
employee is then assigned, accommodated and put to work, in Canada and internationally.
[8]
In 2005, ORSI was
heavily involved in Canada and in other places around the world such
as in the Gulf of Mexico, the North Sea, West Africa, Brazil
and Mauritania. Most of ORSI’s work is for major clients
who have 20 to 30 employees at any one site. Sometimes they supply a whole
ship’s complement. After an inquiry by a client, ORSI makes an assessment of
the ship’s layout and requirements. It is an interactive process.
[9]
ORSI has responsibility
for their employees throughout the process, although it does not direct their
day-to-day work. If the employee is not working out, he has to be replaced.
[10]
Time sheets are
prepared by ORSI personnel who prepare logs of the hours of work and they are
approved by the Master of the ship or some other person who has authority to
sign off on them. Time sheets are sent to ORSI’s payroll specialists. ORSI then
pays the employees.
[11]
When crew changes are
performed, ORSI sends a detailed disembark list for the employees’ going and
coming. It has responsibility for the well-being of their employees. Either
ORSI or the employee contacts their families. Those injured or killed are
returned by ORSI. Other than supervisors on the ship, ORSI is responsible for
the employees.
[12]
During the term of the
contract, ORSI’s people at the site or in St. John’s or Halifax resolve matters in dispute or it is done by
telephone.
[13]
ORSI provides a good
benefits plan for all employees at the point of hiring.
[14]
After the employee is
hired, ORSI has a standard one-on-one format for assessments. It is an
interactive process. ORSI’s employees go on board the ship or platform to
conduct the assessment unless there is only one employee there.
[15]
These assessments may
be driven by ORSI or by others. There is continuous interfacing with the
employees at the sites. ORSI maintains the safety accreditations certificates
for its employees.
[16]
Exhibits A-2 to A-5
were admitted by consent. These included a Sun Life Insurance benefits policy.
There is also an employee liability plan to provide protection to ORSI’s
clients for actions of its employees provided by Lombard Canada Limited.
Exhibit A-3 was a client contract for Wilfred MacIsaac and M‑1 Drilling
Services Inc. It may never have been signed.
[17]
In all contracts, the
clients require liability insurance and employee insurance. Exhibit A-2, Tab 1,
was another agreement which was unsigned. Exhibit A-2, Tab 5, was a crew
contract with Tim Speakman. He worked for ORSI in Holland
and the Gulf of Mexico. Exhibit A-3, Tab 2, was the crew contract with Wilfred
MacIsaac. He was denied the deduction by the Minister even though he provided
services outside of Canada. He was in charge of the operation in Equatorial Guinea.
[18]
The witness said that
ORSI was not just a placement agency. A placement agency was a “one time deal
only”. That type of agency finds a person for the client, provides that person
to the client and that is it. ORSI does much more than that. It finds,
interviews, monitors and processes the employee. It does drug screening, crew
contracts, provides a benefits plan, does logistics, administers the payroll,
interfaces on board the ships or rigs and has full liability on a 24-hour basis
for the employee and is responsible for his well-being.
[19]
In one case, ORSI acted
as a placement agency and received a finder’s fee. That is all ORSI did. He was
not an employee of ORSI and received no benefits from ORSI. That was not ORSI’s
core business.
[20]
Exhibit A-6 was
admitted by consent. It was a signed copy of an Agreement for Provision of
Personnel between ORSI and Dutch Onshore Offshore Recruiting (“DOOR”) dated
January 1, 2003. Exhibit A-4, Tab 4, was an invoice for Wilfred MacIsaac for
2005. Other invoices were also identified from Exhibit A-4 at Tabs 7 to 27.
[21]
ORSI had a contractual
relationship under which the invoices were paid. The terms were identical
to those contained in the unsigned agreement. In December of 2005,
Mr. MacIsaac ceased to be ORSI’s employee. Crew contracts are normally
signed in Canada but exceptionally may be signed outside of
Canada.
[22]
In cross-examination,
he confirmed that he worked principally out of the St. John’s office, as do the two payroll specialists and the two
human resource specialists. The only other office is in Dartmouth, Nova Scotia.
[23]
He has been the
President of ORSI since its inception and manages and directs its business. He
works mostly in Newfoundland but also travels. ORSI has 200 employees.
It has contracts with vessel owners and provides them with specialized
operational personnel for their ships and operations. They do their part to
provide what the client requires. He does research as to who owns the ships,
what jobs they are doing and what they require.
[24]
He signs the client
contracts although one of his specialists might sign off on the crew contracts.
The employees report to the vessel or the structure. Rarely are the employees non-Canadian.
[25]
Exhibit A-3 at Tab 2, contained
the agreement with M-1 Drilling Fluids. It was in effect for 2005 but Mr.
MacIsaac was receiving $600 per day and had four travel days instead of three.
Exhibit A-3, Tab 1, was an agreement for the provision of personnel. ORSI
assumes the duty and provides the transportation. Exhibit A-6 was in effect for
the year 2005 and covered Mr. Speakman, who was a hydrographer-surveyor. Each
employee has a crew contract similar to the one in Exhibit A-3, Tab 2, between
ORSI and Wilfred MacIsaac.
[26]
Mr. MacIsaac was a
Canadian citizen resident in Canada and the contract was signed in Canada.
[27]
The worker is subject
to the hierarchy in place for the platform and under section 3.02 of the
contract with M-1 Drilling Fluids, it could terminate his employment.
[28]
Mr. MacIsaac approved
his own time sheets and sent the information to ORSI, who made up his pay based
upon the time sheets. M-1 Drilling Fluids accepted them and paid the invoice
prepared by ORSI. This was a variation from the contract, but he would not
admit that ORSI abdicated any control over the worker or his work.
[29]
Exhibit A-1, Tab 5,
related to Tim Speakman. It was signed by him and by ORSI. He was a marine
surveyor. This work category was added after the profile was done.
[30]
Mr. Speakman was very
senior and probably reported to a party manager who was someone in the
hierarchical regime. He did not report to ORSI daily and had no direct supervision
from ORSI. He submitted time sheets which were approved by the party manager.
In the cases of Mr. Speakman and Mr. MacIsaac, ORSI did not purchase their
travel tickets or book them. In every other case, ORSI buys the tickets or
is reimbursed for them.
[31]
ORSI has a contract for
the provision of personnel that has evolved over a period of time. All recruits
have different training, qualifications and competency certificates.
[32]
A “mud engineer” and a
“fluid engineer” have “in-house” training. They must meet the client
company’s requirements. The human resource personnel often familiarize
themselves with other jurisdictions. ORSI uses “due diligence” in its
search to provide the personnel. When ORSI provides the training for an
employee, sometimes it is reimbursed for the cost.
[33]
When an employee is
dispatched to a site, he signs on to the vessel in accordance with the ship’s
articles. Then he reports to a department. ORSI may have input into the
relationship between the supervisor and the worker.
[34]
One can never guarantee
the work. ORSI uses its “best efforts” and “due diligence”. There is no
list of thresholds in the contract. The contract provisions of personnel
contain the total agreement.
[35]
In addition to
personnel, ORSI provides payroll, personnel reports, insurance and benefits
plans.
[36]
The form of invoice for
the payroll is created in St. John’s and hard-copied to
the client in Houston. The funds are deposited directly into the
Vendor’s bank account.
[37]
ORSI is a Canadian
labour contractor and provides personnel to the oil and gas industry through
its human resource section. There is competition and a tremendous demand
for skilled workers. ORSI expends considerable efforts and experience in
training personnel. It markets its activities over a wide area and puts a
considerable effort into retaining its clients. It matches talents with the
clients’ needs.
[38]
ORSI supports the
employee outside of Canada by providing insurance benefits if the
worker is hurt and provides assistance in time of bereavement. ORSI does
promotion to develop a client base through blogs, personal contacts, repeat
business, visits to prospective clients, self-promotion through an updated
profile, word of mouth and corporate intelligence. Its clients are inside and
outside of Canada and are normally in remote places. It has
a database separated into work categories and makes use of email, telephone and
fax services.
[39]
ORSI’s human resource
people are specialists according to its designation. It is a job title. They
have years of experience in this kind of work and in logistics.
[40]
ORSI may have described
itself as a supplier of services before, but it is a matter of semantics and he
is more careful now.
[41]
He never used or
authorized the term “placement services” in reference to ORSI’s work.
[42]
He confirmed that the
law firm of Felesky Flynn was authorized to act for ORSI in a GST appeal where
it was described as a supplier of personnel and related human resource services
and described as “placement services”, but he said that that was just the
“splitting of hairs”.
[43]
ORSI prepares the
documentation for the overseas employment tax credit as well as a form letter
to CRA regarding the employee seeking the credit, but it never uses the credit
as an inducement to attract employees.
[44]
It profiles an employee
to a client. It provides a work history and training of the people as part of
the acceptance process between ORSI and the client. When the client accepts the
worker then the employee is processed until mobilization. After the
screening is completed, ORSI signs him to a contract. Normally ORSI assists the
worker in getting to the workplace. The client authorizes the first
mobilization and pays the expenses. In 2005, eleven claims were rejected.
[45]
In re-direct, he said
that in 2005 Mr. Speakman was an ORSI employee and not a DOOR employee. There
was no difference in scope between “providing the services” and providing
“qualified and competent personnel”.
[46]
He was involved in
drafting Exhibit A-3 and said that no dispute arose with the clients about what
was being supplied.
[47]
Timothy Edward Speakman
has worked for ORSI since 2005. He was educated at Ryerson and received a Bachelor
of Technology from that institution and a Master of Engineering from the University of Calgary. He had received the tax credit in
question from 1991 to 2004. It was denied in 2005.
[48]
He signed Exhibit A-1,
Tab 5, which was a contract with ORSI. This contract meant that he would
go out on a job on a mutually-agreed basis. It outlined the benefits that
he would receive. He would be working with DOOR and in many different
locations. He never saw Exhibit A-6 until the examinations for discovery in his
case. It was the ORSI agreement for the provision of personnel to DOOR. He was
an employee of ORSI and not DOOR and had a contract with ORSI. He invoiced ORSI
each pay period and it paid him.
[49]
He identified the ORSI
time sheet at Exhibit A-1, Tab 2, and said that he had signed it. It was
prepared outside of Canada. He also sent his expense sheets to ORSI
each month. He would have contact with ORSI while he was at sea. ORSI provided
him with group health coverage and payroll services. He worked on a vessel and
ORSI went as far as any employer could in supporting its employees in the
offshore.
[50]
In cross-examination,
he admitted that he never received an overseas tax credit while he worked for
ORSI. He referred to DOOR as a personnel agency. ORSI sent him to DOOR and DOOR
sent him to his work at GeoLab. The services that he provided to DOOR were the
same as DOOR provided to GeoLab.
[51]
He identified the crew
contract at Exhibit A-2, Tab 5. After this was signed, he was mobilized.
[52]
He did not know if he
reviewed the Notice of Objection before it was filed. He did not sign it.
[53]
He had a pipeline
inspection job for DOOR and there were nine people on the crew, but only one
was an employee of GeoLab. All of the remainder were supplied by agencies. He
knew nothing about business between DOOR and GeoLab.
[54]
His pay rate came from
ORSI. He submitted pay vouchers once per month except on one occasion when he
was working on two projects.
[55]
He sent an ORSI time
sheet and a DOOR time sheet.
[56]
He communicated with
ORSI by email. He had no visits from ORSI at the work site. His pay was by
automatic deposit to his bank account in Vancouver.
[57]
GeoLab chartered the
vessel and provided the food and the accommodation. He carried his own safety
equipment, but GeoLab would have supplied it if he needed it.
[58]
He agreed to have his
case appealed by ORSI.
[59]
In re-direct, he said
that ORSI was more than a personnel agency. ORSI provided payroll service
to him and took the liability for his pay.
[60]
Wilfred Charles
MacIsaac was a Drilling Fluids Engineer employed by ORSI. He was required to
maintain the fluids to a specific standard in offshore drilling rigs
lubrication. He had taken courses put on by the oil industry in blow-out
prevention, survival and first aid.
[61]
In 1978, he took
political science at St. Francis
Xavier University. In 1978, he commenced work with the oil industry in Alberta and was trained by his employer. He returned to Nova Scotia in 1980 to work in the offshore oil industry. He has
worked in different parts of the world.
[62]
In 2005, he worked for
ORSI as a Drilling Fluids Engineer in Africa and Equatorial Guinea. The work was for Exxon Mobil each day. He worked for
28 days, twelve hours per day, and then had 28 days off. He returned to
Antigonish, Nova Scotia.
[63]
In 2005, he filed his
income tax return and claimed the tax credit in issue here. He had received the
credit since 2001. In that year, he developed a work relationship with ORSI as
an employee. He signed the new crew contract with ORSI at Tab 2 of Exhibit A-3.
It was between him and ORSI, which says that the employer, ORSI, employs him as
the employee. ORSI paid his wages.
[64]
After his 28 days of
work on the vessel, he emailed his hours to ORSI and told them about his travel
days. He did not have to sign off with anyone else but ORSI. He was paid every
fourteen days by direct deposit to his account.
[65]
He identified the ORSI
handbook at Exhibit A-4, Tab 1. He received this from ORSI. He received the
benefits from ORSI that are set out in Exhibit A-3 at Tab 2, Article 2.01.
[66]
He communicated with
ORSI on many occasions. It sent him the paperwork and he sent it back to them
after completion. If there were any problems, he expected ORSI to go to
the rig operators and address the problems.
[67]
In cross-examination,
he said that he had worked for others beside ORSI. He liked the health
benefits and liability insurance that ORSI provided for him.
[68]
There were no problems
with respect to him and Mobile J that ORSI had to deal with in 2005. He used
M-1 Drilling Fluids to fill out his reports each day. He had contact with
Mobile J, the vessel operator, each day regarding the fluids. He did not have
to report these matters to ORSI.
[69]
M-1 Drilling Fluids would
have to approve the time sheets.
[70]
It was suggested to him
that in 2005, ORSI objected to a GST assessment and in the appeal documents it
indicated that it was an employment agency. He was unaware of the objection or
of that statement. The original appeal in his case was signed by an employee of
ORSI. He agreed that the appeal here was initiated by ORSI and he authorized a
Mr. Dawe to complete the appeal on his behalf. He worked with M-1 Drilling
Fluids who were providing funds for Exxon Mobil.
[71]
In 2005, he got a job
from ORSI on a different platform. The drilling was done by Pride.
[72]
His contact with ORSI was
by email in St. John’s. He signed his contract at home.
[73]
He had seen the
agreement for the provision of personnel, at Exhibit R-1, Tab 1, between ORSI
and M-1 Drilling Fluids. He sent in his time sheets to ORSI and received
payment to his account in Antigonish. He received pay stubs such as those shown
in Exhibit A-4, Tab 5. He was shown the invoices from ORSI to M‑1 Drilling
Fluids but was not familiar with them. The direct deposit to his bank account
in Antigonish, Nova Scotia, was from ORSI in St. John’s, Newfoundland, for all of 2005.
[74]
He was referred to the
examination for discovery where he had said that ORSI provided logistics and
manpower to its clients. He agreed that he had made that statement. He also
agreed that he had said that ORSI dealt with offshore oil companies and
contractors on his behalf and supplied him with health care where there was
none before. ORSI also provided structure and “making ends meet”.
[75]
He did not participate
in the contracts between ORSI and the oil companies and drillers. He had no
profit sharing with ORSI. He went to meetings with ORSI about operations
or the rigs related to his work. He had to follow the rules of the platform
like all other workers. He did not participate in the contract between ORSI and
Pride. He performed similar duties on platforms in Angola
but did not participate in negotiations about the project.
[76]
He reported to the Exxon
Mobil representative on the rig. He received his salary and expenses and
presumed that that money would come from Haliburton.
[77]
He looked through the
documents of the Minister and knew what ORSI’s position was and the
position of the Minister.
[78]
He recruited ORSI and
ORSI matched him with an oil job. ORSI arranged logistics. Most of the airfare
was covered by M-1 Drilling Fluids.
[79]
All of his dealings
with ORSI in 2005 were done electronically and no one visited him. His daily
routine was worked out with M-1 Drilling Fluids. If he had problems with his
work on the rig, the rig operator would deal with it. The operator could
direct him to work longer hours. Exxon Mobil had control of the rig and M-1
Drilling Fluids was in control of the fluids.
[80]
He was unaware of any
tax being paid on his behalf to any foreign governments.
[81]
In re-direct, he said
that M-1 Drilling Fluids could also dismiss him. ORSI could have
discharged him at any time. Any meetings that he went to with ORSI were
work-related.
Argument on Behalf of the Appellants
[82]
In a detailed and
extensive written argument, counsel for the Appellants took the position that
ORSI had the responsibility for its employees throughout the work process, even
though it did not typically direct their work day-by-day. It was responsible
for running the payroll operation for these employees and it was engaged in the
logistics of getting them to their workplace and home.
[83]
ORSI is involved when
there are accidents or incidents involving its employees. It is involved in
workers’ assessments and in the maintenance of their certificates and
accreditations.
[84]
ORSI carries employee
liability insurance up to $8,000,000 for events in order to protect it as the
employer, and this is referred to in the M-1 Drilling Fluids contract regarding
Wilfred MacIsaac.
[85]
ORSI conducts business
internationally through employees such as Wilfred MacIsaac and Tim
Speakman who provide their specialty services in different parts of the world.
[86]
ORSI has acted only
once as a placement agency. That person was not signed on as an employee.
[87]
ORSI provides “human
resource services” by putting the right people in the right places. These
employees report within the structure that is available either on a platform or
on a vessel. Once there, they are under the supervision of personnel on the
platform or vessel and there was no direct supervision of the work on the
vessel or the platform by ORSI. The norm is for ORSI to purchase the tickets
for its employees and the fact that they did not do so for Mr. MacIsaac and
Mr. Speakman was other than the norm.
[88]
ORSI sometimes pays for
employee training and sometimes the client company pays for it.
[89]
Counsel for the
Appellants conceded that ORSI does not direct the day‑to‑day
activities on board of its employees, but this does not preclude its position
that it has input and discussions with both the employees and supervisors about
its employees and their work and it would not concede, as the witness
indicated, that ORSI abdicated any control over him or his work.
[90]
ORSI’s undertaking is
to use its best efforts to provide suitably qualified personnel who will use
their best efforts and due diligence in performing their work.
[91]
ORSI runs the payroll
system; the authority to issue the payroll comes from the actual installation
which provides the documents to make up the payroll and, except in the case of
Wilfred MacIsaac, would have to be signed off by an authorized person on the
vessel or platform. This is a critical part of ORSI’s business.
[92]
ORSI attends to the
payment of invoices with respect to medical services provided under the Sun
Life policy and then submits the invoices to Sun Life. The security of the
employee with respect to such coverage is a very important part of ORSI’s work.
[93]
Tim Speakman took the
position that ORSI was more than a personnel agency to him. It provided payroll
services, group health insurance, liability insurance, and it provides him with
regular pay. He communicated regularly with ORSI regarding benefits and even
though he tried to deal with any problems on board, he would call ORSI if he
needed help.
[94]
Health benefits
provided by ORSI were one reason why he came to be employed by this company. He
said that ORSI was his employer and it could have discharged him at any moment.
[95]
Counsel said that the
only legal issue raised in the pleadings was that the employees were not
considered to be carrying on business outside of Canada
as required by subsection 122.3(1) of the Income Tax Act (the “Act”).
[96]
Counsel argued that
pursuant to paragraph 122.3(1)(b) of the Act, at all relevant
times both Appellants performed all or substantially all of their duties
outside of Canada, in connection with a contract under which the specified
employer (ORSI) carried on business outside of Canada with respect to the
exploration for or exploitation of petroleum, natural gas, minerals or other
similar resources. Further, ORSI was not a placement agency and was a
contractor or subcontractor and did carry on business outside of Canada pursuant to paragraph 122.3(1)(b) of the Act.
[97]
The purpose of the Act,
in general, is to aid Canadian companies, more specifically specified
employers, to carry on business outside of Canada
with respect to qualifying activities such as engineering. In essence, the
section permits them to compete in bidding against foreign companies for
overseas work.
[98]
The issue raised by subparagraph
122.3(1)(b)(i) has been addressed in Betteridge v. Canada,
[1999] 1 C.T.C. 2569. In that case, the OETC was denied because the Court found
that the research carried out abroad was with respect to a contract that the
university had for work that was being done in Canada.
[99]
This case can be
distinguished from those at bar because both employees here were required to
carry out their work on behalf of ORSI at locations abroad.
[100]
The cases at bar can be
distinguished from the factual situation in Fonta v. Canada, [2002] 3 C.T.C. 2177, because ORSI did not provide its services
by acting as a “specialized personnel agency” for one client. It provided its
services to many clients.
[101]
In Dunbar v. Canada,
2005 TCC 769, [2006] 1 C.T.C. 2423, the Court found that an employer
personnel supply business did carry on business outside of Canada. The circumstances there were similar to those in the
cases at bar. There the Court found it significant that the employer was a
co-insured with Norbulk (the offshore personnel contractor), which situation
may not have been necessary if the Canadian company was simply an employment
agency.
[102]
In the cases at bar,
both employees were highly trained and internationally respected
professionals working in the worldwide oil and gas industry. In Dunbar, the Court concluded that it was not a simple
placement agency.
[103]
In the cases at bar,
DOOR was a personnel supply company as opposed to an end user, as in Dunbar.
[104]
Counsel also relied
upon the decision in Purves v. Canada, 2005 TCC 290, [2005] 3
C.T.C. 2041, where the Court found that the Canadian employer, said to be a
personnel agency, did carry on business outside of Canada.
[105]
Counsel relied upon the
decision in Mys v. Canada, 2007 TCC 736, [2008] 4 C.T.C. 2191, where the Court distinguished the case of Fonta
and found that the employer was not a specialized personnel agency because it
had other clients as well.
[106]
Further, counsel relied
upon the decision in Surprenant v. Canada, 2005 TCC 192,
2005 DTC 586, and argued that the language in that contract between
the Canadian and French companies essentially matched the language in the DOOR
or M‑1 Drilling agreements with ORSI.
[107]
In Adams v. Canada, 2005 TCC 237, 2005 DTC 636, the Court rejected the
Respondent’s argument that the Canadian employer was just a “specialized
personnel agency” for the overseas company, and found that it was a true subcontractor
where a portion of the main contract was assigned to the subcontractor in
partial performance of the main contract. This is the same situation as in the
cases at bar.
[108]
Further, ORSI carried
on business outside of Canada to obtain the DOOR and M‑1 Drilling Fluids
contracts in the first place through prior trips to Holland.
Further, Mr. Coady and other administrative staff employees continued to travel
abroad on ORSI business before and after 2005. It is only semantics to suggest
that there is a difference between providing services of skilled personnel and
providing skilled personnel.
[109]
ORSI does not have as
its only activity the recruiting of services. ORSI supports and represents
its employees, provides payroll services, and is engaged in international
business as per its contracts with DOOR and M‑1 Drilling Fluids which
called for employer liability insurance.
[110]
All of these functions
fit within the language found in clause 122.3(1)(b)(1)(A) of the Act.
The phrase “with respect to” is of wide and broad interpretation, as stated in the
case of Purves by Bowie J. Each of the services provided by ORSI,
including recruiting, is reasonable, if not necessary, support for exploring
for or exploiting petroleum, natural gas, minerals or other natural resources
per clause 122.3(1)(b)(i)(A).
[111]
The appeals should be
allowed with costs.
Argument on Behalf of the Respondent
[112]
Counsel opined that one
issue to be decided in these appeals is whether ORSI is a specified employer
carrying on business in connection with a contract with respect to a qualifying
activity pursuant to subsection 122.3(1) of the Act.
[113]
She referred to the
letter from Felesky Flynn, ORSI’s tax counsel, in another litigation matter
where the issue was referable to zero rated supplies and the matter of HST on
those supplies. She pointed out that in that letter counsel stated that the
supplies were zero rated because they were “most appropriately characterized as
supplies of personnel and related human services (placement services) and not
as suppliers of various ‘services’ that the personnel were directed to carry
out while on board the vessels”.
[114]
ORSI further argued
that the subject supplies involved finding and placing qualified personnel in
the service of the non-resident clients to meet their needs for crew to work
aboard vessels operated by or for the benefit of those clients offshore eastern
Canada. Further, the supplies were made pursuant to an
“Agreement for Provision of Personnel” and that the agreement identifies the
type of person required by the non-resident client. It does not specify the
duties of such personnel.
[115]
ORSI argued that it was
in the business of supplying personnel and not in the business of supplying the
activity of the personnel.
[116]
In its corporate
profile, ORSI describes itself as an “employment agency”. It was
successful in its GST reassessment on this basis.
[117]
The Appellants signed a
waiver to allow an ORSI representative to initiate the appeals herein.
[118]
The second issue to be decided
is whether the Appellants are entitled to an Overseas Employment Tax Credit
with respect to their employment with ORSI during the taxation year 2005
pursuant to section 122.3 of the Act.
[119]
Counsel’s position is
that they are not so entitled because their employer, ORSI, was not carrying on
business outside of Canada in connection with a contract with respect
to a qualifying activity. ORSI was in the business of personnel placement. Its
core business is the recruiting of qualified personnel. It operates from its
offices in St. John’s, Newfoundland and does not carry on
business outside of Canada.
[120]
The requisite section
refers to the qualifying activity of the specified employer and not the
employee. The Appellants’ performance of their duties in connection with ORSI’s
clients are not carried on outside of Canada and are not in
respect of a qualified activity.
[121]
There is no “location
test” under subsection 122.3(1), so that the analysis of whether work or
business has been “carried on” outside of Canada
depends upon an analysis of the facts. See Rooke v. Canada, 2002 FCA 393, 2002 DTC 7442 (F.C.A.), and Seto v.
Canada, 2007 TCC 489, 2007 DTC 1647.
[122]
R. v. Gordon, [1961] S.C.R. 592, recites the requisite
elements of “carrying on business” as (i) recognition of time, attention and
labour; (ii) incurring of liabilities to other persons; and (iii) for the
purpose of livelihood and profit.
[123]
ORSI performed the
entirety of its business and contract activities from within Canada. Any activity that ORSI claimed occurred outside of Canada is merely in auxiliary support to a core activity
from its Canadian contracts. The crew contract signed by the Appellants
and ORSI is the trigger for the payment of salary and not the completion of the
time sheets. The time sheets are merely necessary to allow ORSI to administer
the payroll, invoice clients, and pay the personnel.
[124]
ORSI’s administrative
support, payroll, provision of employee support and insurance were performed
pursuant to contracts signed in Canada, drafted in Canada,
and administered in Canada. ORSI’s core business is operated from its
head office in St. John’s,
Newfoundland.
[125]
All of ORSI’s business
activities are performed in Canada, originate in Canada
or are triggered by contract obligations arising from Canadian contracts. Any emails,
correspondence, time sheets or telephone calls are merely incidental to the
fulfillment of those contracts. The carrying on of business pursuant to the
contracts has no connection to a qualifying activity.
[126]
The facts in the cases
at bar are not the same as in Dunbar. Here, ORSI was not a party to
the actual oil and gas operations. The contractor in these appeals controlled
and managed its project and directed the activities of the Appellants once they
were placed. In Dunbar, the performance of the Appellant as the
ship’s captain, being the navigator of the ship, was tied to the actual payment
of the exploration contract.
[127]
ORSI is an independent
contractor and neither ORSI nor its affiliates are agents of the client or the
client’s client.
[128]
ORSI does not contract
for or with respect to any qualifying activities. ORSI contracts for the
provision of personnel.
[129]
The client contracts
are with respect to the “Provision of Personnel”. There are no references
or articles relating to a qualifying activity. The contracts speak for
themselves. Further, ORSI is not a party to the contracts between the
subcontractor and the oil and gas company. ORSI supplies personnel. It does not
participate in the exploration of oil and gas, by its own admission.
[130]
ORSI now seeks to
reject its earlier statements that it was an “employment agency” and now
submits that it supplies specialized personnel and is more than a placement
agency, even though its circumstances have not changed.
[131]
On the issue of credibility,
counsel says that Mr. Coady made a number of prior inconsistent statements and
was overly broad about ORSI’s outside Canada activities and
travel. His evidence was inconsistent with ORSI’s documented company profile
and its previous representations made under Mr. Coady’s direction to the
Respondent and the public at large, including its advertisements. Many parts of
his testimony were inherently unreliable.
[132]
He did not provide
direct answers to direct questions. His explanations were overly broad and at
times misleading. The Appellants themselves have an obvious partial position
with respect to the outcome but otherwise spoke to the circumstances within
their personal knowledge.
[133]
The documented evidence
supports the position of the Minister.
[134]
The appeals should be
dismissed with costs.
Appellants’ Reply Submissions
[135]
In reply, counsel for
the Appellants said that the Respondent has failed to distinguish the cases at
bar from Dunbar. ORSI need not be an agent of its clients in order to be
competent to carry on business outside of Canada in connection with a contract
with such clients. ORSI is competent to do just that and an agency relationship
is not a pre-condition to establishing that an entity is carrying on business
outside of Canada. Dunbar was not a contractor-subcontractor relationship, but a subcontractor‑subcontractor
situation as in the factual situation of Mr. Speakman. This situation did not
adversely affect the favourable decision for the worker in Dunbar. “No
specific performance quotas” of any nature arise in any of the “key provisions”
referred to by the Court in Dunbar nor in its analysis. That case, as in
the cases at bar, required nothing more from its employees than to carry out
their work consistently each day until the completion of the work cycle. This
is what was required of Mr. Speakman and Mr. MacIsaac.
[136]
The requirement of ORSI
to carry liability insurance was a critical factor in the Dunbar case
and ORSI had the same requirement here. It was not done gratuitously by ORSI,
it was required of it. Thus, ORSI was carrying a part of the risk associated
with carrying on the business outside of Canada
and was carrying on business outside of Canada.
[137]
The Appellants here
were not supervised in the carrying out of their specialized work and any purported
supervision was not of their work but rather in coordination of all work being
carried on at the work site.
[138]
This was not a factor
in the decision in Dunbar and in any event does not go to either of the
outstanding issues here. The case of Purves is ample indication for the
fact that the trial judge did not have any concern that the workers’ daily
supervision by GMC staff had any effect on whether the worker was entitled to
the OETC claim. Likewise, the Court rejected the position that Comtech was merely
a supplier of personnel and so was not carrying on business outside Canada.
[139]
Supervision may have
been relevant on the issue of whether the worker was an employee or of whom. This
was not an issue in the cases at bar.
[140]
ORSI was, through its
client contracts, as or more involved with petroleum or natural gas exploration
and/or exploitation as was Comtech with GMC in Purves or as was OSC
with petroleum or natural gas exploitation in Dunbar.
[141]
ORSI was indeed
carrying on business in Canada but it was also carrying on business
outside Canada. It is not significant that in the years
in question there may have been a break in the amount of travel abroad as
opposed to other years, which had the effect of allowing ORSI to enjoy the
fruits of its earlier labours. In the years in issue, it may have relied more
heavily on telephone and email contacts, but this fact is non-decisive as
to the issues here.
[142]
Selected statements
made by former outside ORSI counsel were in relation to a different context of
an HST dispute that arose in 2002 and was resolved in 2005. It was with respect
to a different tax regime.
[143]
There is no difference
between provision of services of personnel and provision of personnel. In Dunbar,
the contract referred to provision of personnel and not provision of services. This
did not prevent the Court from finding that OSC did indeed carry on
business outside Canada and was not simply a placement agency.
[144]
Finally, there is no
merit in the Respondent’s position that the ORSI/DOOR and ORSI/M‑1
Drilling Fluids contracts were not with respect to “the exploration for or
exploitation of petroleum, natural gas …” under clause 122.3(1)(b)(i)(A)
of the Act. It was clear that the specialized work performed by both
workers here were with respect to exploration for or exploitation of petroleum,
natural gas, etc.
Analysis and Decision
[145]
Simply put, the main
issue in these appeals is whether or not ORSI (the alleged employer)
carried on business outside of Canada during the years in question in
connection with the agreement, with respect to a qualifying activity, as to
entitle the Appellants to receive the OETC for the 2005 taxation year pursuant
to subsection 122.3(1) of the Act.
[146]
Before tackling that
issue, the Court will firstly deal with a number of sub‑issues that
became manifest during the trial and subsequent written arguments.
[147]
The Respondent has
raised a very important issue regarding the credibility of Adrian Coady. Counsel
submitted that Mr. Coady “had made a number of prior inconsistent statements
and was overly broad with bolstered assertions about ORSI’s outside of Canada activities and travel”, and his statements were
“inconsistent with ORSI’s documented company profile and other documented
evidence about ORSI”. He, of course, denied that ORSI was a placement agency
which statement was inconsistent with the previous representations made by him
on behalf of ORSI.
[148]
The Court does not
accept that depiction of Mr. Coady or his evidence. He was obviously a
person who was very familiar with ORSI’s business and its employees. He would
not agree that ORSI gave up any control of the worker at the job site except
with respect to day-to-day supervision of the rig or ship, and essentially said
that ORSI ensures that there is due diligence and best efforts. Further, the
Court concludes from what he said that ORSI would generally have input
discussions with both the employees and the supervisors.
[149]
What the Court
concluded from his evidence was that ORSI was supplying suitably qualified and
competent personnel like Mr. MacIsaac and Mr. Speakman who were expected to
perform their functions satisfactorily.
[150]
With respect to the
evidence of the two Appellants, the Court can find no fault with the way
they testified nor with the facts that they elucidated. They obviously had
a partial position with respect to the outcome of the appeals, but the Court
could detect no indication that this affected the quality of their evidence.
[151]
The second sub-issue
has to do with the position of the Respondent that outside counsel, in an
unrelated matter, had taken the position that supplies supplied by ORSI were
zero rated because they were “most appropriately characterized as supplies of
personnel and related human services … (placement services) and not as supplies
of various ‘services’ that the personnel were directed to carry out while
aboard the vessels”.
[152]
None of the witnesses
had anything to do with that statement and they all agreed that it was not
accurate.
[153]
It matters not that as
a result of that position the outside counsel was successful in convincing CRA
that the supplies were zero rated. This Court must consider the evidence that
is before it and not what someone might have argued in a non-related matter for
whatever reason.
[154]
The third sub-issue
that has arisen is whether or not the Appellants were employees of ORSI. This
was raised by counsel for the Appellants in his Reply because of the
Respondent’s references to the matter of supervision of the workers at the job site.
[155]
However, the Court is
satisfied that this was not put into issue by the Respondent during the trial
and as counsel for the Appellants indicated, the Respondent led no evidence in
this regard during the trial.
[156]
The only evidence given
was that of the Appellants and Mr. Coady who maintained throughout that the
workers were employees of ORSI and in referencing the issues at sections D.1
and 20.2, counsel for the Respondent did not refer to this sub-issue.
[157]
The Court is satisfied
on the basis of all the evidence presented that the Appellants were employees
of ORSI at all relevant times.
[158]
This leaves for
consideration of the Court as to whether ORSI was carrying on a business
outside of Canada during 2005, pursuant to a contract in a
qualifying activity. Relevant in that regard is the case of Dunbar.
In that case, C. Miller J. found that an employer personnel supply
business did carry on business outside of Canada.
After reviewing a number of related cases, he went on to say:
22 What I draw from these cases and the Interpretation
Bulletin is that if the Canadian company's business is solely that of a
placement agency, the business is not being carried on outside Canada simply by
virtue that the personnel placed, conduct their activities outside Canada. If, however, the
business is providing services by way of subcontracting to a contractor, which
services must necessarily be provided outside Canada, then the business can be considered to be carried on
outside Canada.
It is a fine distinction, which in this case is particularly fine. Yet, this
difference explains how a computer consulting company providing a computer
specialist to a project in France can qualify as operating outside Canada (Surprenant),
as can an engineer working for a Canadian engineering company on a project
outside of the country (Purves and Gonsalves v. The Queen, [2000 D.T.C. 1491 (F.C.A.)].
[159]
In paragraph 78 of the
Respondent’s argument, counsel sought to distinguish the facts in Dunbar
from those in the cases at bar. Amongst other submissions, she said that
ORSI’s work is the placement of personnel from specific work categories, that
is their core work. However, that does not make the facts in ORSI different
from those in Dunbar.
[160]
If ORSI did nothing
more than merely recruit the worker and then send him or her off to a subcontractor
and have no more input into the life of the worker, as would happen in the
so-called “head-hunter” cases, then the terms “placement agency only” would
have more meaning than it does in the facts of these cases and obviously than
it had in Dunbar.
[161]
In these cases, the
relationship between the worker and ORSI did not stop when the worker was
assigned to a subcontractor. ORSI continued to be involved in logistics
involving the workers. In some cases, it arranged the purchase of tickets for
them. In other cases, it did not.
[162]
It provided medical
benefits for them and health benefits, as well as insurance coverage for them
if they were hurt or killed.
[163]
It provided payroll
services for them and arranged for bereavement care for them as well as kept in
touch with their families. It had ongoing communications and contact with the
workers and had responsibility for the employees during the work process, even
though it did not direct or supervise them at the work site. This was not
necessary and indeed would be impractical for them to do so.
[164]
Mr. Coady, as well as
the two Appellants, took the position that ORSI was responsible for them while
they were employed by ORSI. Of particular importance in these cases as well as
in Dunbar was the fact that ORSI’s contracts with DOOR and M‑1 Drilling Fluids
each required ORSI to carry considerable liability insurance coverage for its
employees working abroad. Therefore, in essence, ORSI’s contracts required
it to carry part of the risk associated with carrying on business outside Canada where the Appellants worked.
[165]
The Court does not
accept the Respondent’s arguments that the facts in Dunbar could be distinguished from the facts in these cases.
[166]
The Court concludes
that there is no magic in arguing that in one case the company supplies
personnel (an engineer) and in the other case provides services (engineering
services). As argued by the Appellant in Purves, an engineer necessarily
performs engineering services, so if you provide an engineer then you are
providing engineering services.
[167]
Counsel for the
Respondent argues that the Appellants must fail here because ORSI was not
carrying on business outside of Canada in connection to a contract with respect
to a qualified activity.
[168]
As referred to by Bowie
J. in the case of Purves in commenting upon the words “in respect of”, he
referred to Nowegijick v. The Queen, [1983] 1 S.C.R. 29, where Dickson
J., as he then was, said:
11 … The words “in respect of” are, in my opinion, words of
the widest possible scope. They import such meanings as “in relation to”, “with
reference to” or “in connection with”. The phrase “in respect of” is probably
the widest of any expression intended to convey some connection between two
related subject matters.
[169]
In the cases at bar,
the job of ORSI under its client contracts was to supply the highly skilled
employees, Mr. Speakman and Mr. MacIsaac, to the work sites outside of Canada where their clients, DOOR and M‑1 Drilling Fluids,
were obviously engaged in a qualified activity. The contracts required them to
do this.
[170]
There can be no doubt
that the highly skilled work of the Appellants were with respect to “the
exploration for or exploitation of petroleum, natural gas …” for the
purposes of clause 122.3(1)(b)(i)(A) of the Act.
[171]
The appeals will be
allowed and the matters will be referred back to the Minister for reassessment
and reconsideration on the basis that both Appellants qualify for the OETC in
accordance with section 122.3 of the Act.
[172]
Costs are awarded to
the Appellants. There will be one bill of costs for both Appellants.
Signed
at New Glasgow, Nova Scotia, this 19th day of August 2010.
“T.E. Margeson”
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