A-512-96
John F. Timmins (Appellant) (Plaintiff)
v.
Her Majesty the Queen (Respondent) (Defendant)
Indexed as: Timminsv. Canada (C.A.)
Court of Appeal, Desjardins, Décary and Noël JJ.A. "Montréal, February 5; Ottawa, February 15, 1999.
Income tax — Income calculation — Deductions — Taxpayer employed by Province of New Brunswick to perform services in Africa — Claimed deductions, tax credit for overseas employment under Income Tax Act, ss. 8(10), 122.3(1) — MNR rejecting claims on ground employer not carrying on business outside Canada for profit, reasonable expectation of profit — Trial Judge interpreting —carried on business— as requiring predominant profit motive — Judge erred in application of S.C.C. decision involving Assessment Act (Ontario statute) — Employer at least engaged in —undertaking of any kind whatever— under definition of —business— in Act, s. 248(1) — Not required to carry on business for —predominant— purpose of earning profit — Profit, big or small, still profit — Trial Judge erred in holding employer did not have reasonable expectation of profit.
This was an appeal from a Trial Division decision dismissing the appellant's appeal from income tax reassessments for his taxation years 1982, 1983 and 1984. From November 15, 1982 to November 30, 1984, the appellant was employed in Malawi, Africa by the Province of New Brunswick under a contract entered into between the Province, as executing agency, and the Canadian International Development Agency, for the purpose of establishing and administering dairy farms, in return for a fee and reimbursement of certain expenses. For the taxation years 1982 and 1983, the appellant claimed deductions for overseas employment under subsection 8(10) of the Income Tax Act; for the 1984 taxation year, he claimed a tax credit also for overseas employment under subsection 122.3(1) of the Act. The Minister of National Revenue rejected these claims on the basis that the appellant was not employed by an employer who "carried on business" in Malawi for profit or with a reasonable expectation of profit. The Trial Judge was of opinion that the phrase "carried on business" in subsection 8(10) of the Act requires a predominant profit motive. He held that, while profit was one motive for entering into the contract, it was incidental to other more significant purposes such as humanitarian reasons, increased employment opportunities for the people of New Brunswick and stimulation of the economy. The issue on appeal was whether the Trial Judge correctly held that the employer did not carry on business in Malawi within the meaning of subsections 8(10) and 122.3(1) of the Act during the period in question. If it carried on business during the relevant period, the appellant would be entitled to claim the overseas employment tax deductions for 1982 and 1983, and the overseas employment tax credit for 1984.
Held, the appeal should be allowed.
The Trial Judge based his decision on a Supreme Court of Canada case: Regional Assessment Commissioner et al. v. Caisse populaire de Hearst Ltée. where, for the first time, this test was incorporated into the Income Tax Act as a condition precedent to the existence of a business. His Lordship erred in seeking to apply this test under the Act. Where one "carries on" a business in the ordinary sense or by pursuing one or more of the activities included in subsection 248(1) over time, one is "carrying on business" under the Act. Profits generated by carrying on these activities are, for the purposes of the Act, business profits and taxable as such. There is nothing in the language of subsections 8(10) and 122.3(1) of the Act which excludes from their application the defined meaning of the word "business". Even if it could be said that the appellant's employer was not carrying on a business in the ordinary sense, it was at least engaged in an "undertaking of any kind whatever", namely the provision of services under a contract for a fee. As such, it was carrying on business under a contract as contemplated by subsections 8(10) and 122.3(1). The Trial Judge ignored the definition of the word "business" in subsection 248(1) of the Act. Although that word must generally envisage an activity capable of giving rise to profits, it does not require that this activity be undertaken for the "predominant" purpose of earning a profit. To incorporate such a requirement into the Act would curtail its reach in so far as the taxation of business profits is concerned. It was not open to the Trial Judge to hold that the employer did not have a reasonable expectation of profit unless he was first willing to find that profits had not been generated under the contract. The Trial Judge acknowledged that those responsible for the project had a prospect for profit at the relevant time and there was no suggestion in the evidence or in any of his findings that this prospect could not be reasonably entertained. Nothing turned on the fact that the anticipated profits were small, just enough to ensure that the project would not operate at a loss. A profit is a profit whether big or small and irrespective of one's motivation for generating it. It was not open to the Trial Judge to hold that the employer could not reasonably anticipate earning a profit when it entered into the contract.
statutes and regulations judicially considered
Assessment Act (The), R.S.O. 1970, c. 32.
Income Tax Act, R.S.C. 1952, c. 148 (as am. by S.C. 1970-71-72, c. 63, s. 1), ss. 2(3)(b), 3, 8(10) (as am. by S.C. 1980-81-82-83, c. 48, s. 2), (11) (as am. idem), 9, 13(9) (as am. by S.C. 1988, c. 55, s. 6), 24(2) (as am. by S.C. 1991, c. 49, s. 17), 27(1)(a) (as am. by S.C. 1984, c. 31, s. 14), 28(2) (as am. by S.C. 1980-81-82-83, c. 48, s. 13), (4.1) (as enacted by S.C. 1991, c. 49, s. 18), (5), 29(1), 111(5)(a) (as am by S.C. 1987, c. 46, s. 40; 1988, c. 55, s. 83), 122.3(1) (as enacted by S.C. 1984, c. 1, s. 66; c. 45, s. 39), (2) (as enacted idem), 125(7) (as am. by S.C. 1977-78, c. 32, s. 32; 1984, c. 45, s. 40), 143(1) (as am. by S.C. 1977-78, c. 1, s. 71), 149(1)(j) (as am. by S.C. 1986, c. 6, s. 15), 248(1) "business" (as am. by S.C. 1979, c. 5, s. 66), "personal or living expenses", 253 (as am. by S.C. 1991, c. 49, s. 197).
cases judicially considered
considered:
Regional Assessment Commissioner et al. v. Caisse populaire de Hearst Ltée, [1983] 1 S.C.R. 57; (1983), 143 D.L.R. (3d) 590; 21 M.P.L.R. 9; 46 N.R. 285; Tara Exploration & Development Co. Ltd. v. M.N.R., [1970] C.T.C. 557; (1970), 70 DTC 6370 (Ex. Ct.); Canadian Marconi Co v The Queen, [1984] CTC 319; (1984), 84 DTC 6267 (F.C.A.).
referred to:
Moldowan v. The Queen, [1978] 1 S.C.R. 480; (1977), 77 D.L.R. (3d) 112; [1977] CTC 310; 77 DTC 5213; 15 N.R. 476; Tonn v. Canada, [1996] 2 F.C. 73; [1996] 1 C.T.C. 205; (1995), 96 DTC 6001; 191 N.R. 182 (C.A.).
authors cited
Shorter Oxford English Dictionary, 3rd ed., Oxford: Clarendon Press, 1990. "carry on".
APPEAL from Trial Division decision ([1996] 3 F.C. 436; [1996] 3 C.T.C. 175; (1996), 96 DTC 6378; 114 F.T.R. 81) dismissing the taxpayer's appeal from income tax reassessments. Appeal allowed.
appearances:
Guy Du Pont and R. Bruce Eddy, Q.C., for appellant (plaintiff).
Donald G. Gibson for respondent (defendant).
solicitors of record:
Eddy, Young, Hoyt & Downs, Fredericton, for appellant (plaintiff).
Deputy Attorney General of Canada for respondent (defendant).
The following are the reasons for judgment rendered in English by
Noël J.A.: This is an appeal from the decision of the Federal Court, Trial Division1 which dismissed the appellant's appeal from income tax reassessments for the taxation years 1982, 1983 and 1984. The respondent cross-appeals alleging the learned Trial Judge's failure to award costs in her favour despite her success in the proceedings below.
The following facts were found by the Trial Judge2 and are not disputed by the parties:3
(a) During the period between November 15, 1982, and November 30, 1984, the appellant was employed in Malawi, Africa, by the Province of New Brunswick in its Department of Agriculture and Rural Development (the Department). The appellant performed his duties in connection with a contract made between the Province, as executing agency, and the Canadian International Development Agency (CIDA), an agency of the Government of Canada's Department of External Affairs.
(b) Under this contract, which was entered into on September 23, 1980, the Department agreed to provide services for the purpose of establishing and administering several dairy farms in Malawi, in return for a fee and reimbursement of certain expenses. As executing agency, the Province was required to provide the goods and services necessary for the performance of the contract in Malawi. The appellant was one of the persons employed by the Province to perform services in Malawi for this purpose.
(c) For the taxation years 1982 and 1983, the appellant sought to deduct from his income the sums of $1,986 and $14,943, respectively, as deductions for overseas employment, pursuant to subsection 8(10) [as am. by S.C. 1980-81-82-83, c. 48, s. 2] of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63, s. 1 (hereinafter the Act).
(d) For the 1984 taxation year, the appellant claimed a credit of $4,403.94 as an overseas employment tax credit, pursuant to subsection 122.3(1) [as enacted by S.C. 1984, c. 1, s. 66; c. 45, s. 39] of the Act which replaced subsection 8(10) in 1984.
(e) By notices of reassessment, dated December 9, 1986, the Minister of National Revenue (the Minister) disallowed the appellant's claims for the overseas employment tax deductions for 1982 and 1983, and the credit for 1984.
(f) By notices of objection, dated January 23, 1987, the appellant objected to the income tax reassessments for the years 1982 to 1984.
(g) The Minister confirmed the reassessments by notification of confirmation, dated November 20, 1987, on the basis that the appellant was not employed by an employer who "carried on business" outside of Canada within the meaning of subsection 8(10) of the Act in 1982 and 1983, or within the meaning of subsection 122.3(1) of the Act in 1984.
(h) In reassessing the appellant for the 1982, 1983 and 1984 taxation years, the Minister relied, inter alia, on the assumption that during this period, the Department did not carry on business in Malawi, for profit or with a reasonable expectation of profit.
(i) The Department was the appellant's employer during the relevant period and was a "specified employer" within the meaning of subsections 8(11) [as am. by S.C. 1980-81-82-83, c. 48, s. 2] and 122.3(2) [as enacted by S.C. 1984, c. 1, s. 66] of the Act.
The only issue to be decided in the appeal is whether the Trial Judge correctly held that the employer did not carry on business in Malawi within the meaning of subsections 8(10) and 122.3(1) of the Act during the period from November 15, 1982 to November 30, 1984.4 If the Department was carrying on business under the contract during the relevant period, the appellant is entitled to claim the overseas employment tax deductions for 1982 and 1983, and the overseas employment tax credit for 1984. The entitlement of the appellant to the claimed deduction or credit is therefore entirely dependent on the characterization of his employer's activities under the Act.
The Trial Judge read into the phrase "carried on business" a requirement for a predominant profit motive.5 He held in this instance that while profit was one motive for entering into the contract, it was incidental to other more significant purposes:
While the generation of profit, as a safety net, was one motive, it was certainly not the predominant purpose for which the contract was entered into. In my view, even if a profit was earned, it was merely incidental to other, more significant, purposes.6
These other more significant purposes were found to be humanitarian reasons, increased employment opportunities for New Brunswickers and economic stimulation.7
Finding as he did that the project in Malawi had not been undertaken predominately for profit, the Trial Judge concluded that the Department was not carrying on business during the time when the appellant was performing the duties of his employment in that country. The appellant therefore was not entitled to the deduction or the credit.
It is important to note at the onset that the conclusion reached by the Trial Judge does not hinge on the fact that the Department, as a component of the Government of New Brunswick, was not subject to taxation8 nor does it rest on the suggestion that governments cannot, in principle, carry on business. Rather, the conclusion is that in order for a specified employer to have "carried on business" under a contract for purposes of subsection 8(10) and after 1984, subsection 122.3(1) of the Act, it must have had profit as a predominant purpose for entering into the contract.
The Trial Judge derived this requirement from a decision of the Supreme Court of Canada rendered under The Assessment Act, of Ontario, R.S.O. 1970, c. 32.9 This is the first known instance where this test has been incorporated into the Income Tax Act as a condition precedent to the existence of a business.
In my view, the Trial Judge erred when he sought to apply this test under the Act. The word "business" is defined as follows:10
248. (1) In this Act,
. . .
"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c ), an adventure or concern in the nature of trade but does not include an office or employment; [Emphasis added.]
The expressions "carry on business," "carrying on business" or "carried on business,"11 while undefined must, when regard is had to the ordinary meaning of the words, refer to the ongoing conduct or carriage of a business.12 It would seem to follow that where one "carries on" a business in the ordinary sense or by pursuing one or more of the included activities under subsection 248(1) over time, one is "carrying on business" under the Act.13
The Trial Judge in his reasons twice refused to confront this definition and in particular the argument that the Department was carrying on business within the defined meaning.14 The Trial Judge stated:
The plaintiff contends that the Department was carrying on an "undertaking of any kind whatever". However, the above provision [i.e. the definition of "business" in s. 248(1)] does not define "business"; rather, it lists a number of examples which are included in the term: Canadian Marconi Co v The Queen, [1984] CTC 319 (F.C.A.), reversed on other grounds, [1986] 2 S.C.R. 522.15 [Emphasis added.]
The point had indeed been made by this Court in Canadian Marconi but only for the purpose of making it clear that beyond the included activities listed in subsection 248(1), the word "business" retains its ordinary meaning.16
Whether one reads the definition of "business" in subsection 248(1) as a definition or as something else, it inescapably brings within the meaning of this word the specific activities which it lists. The result is that profits generated by the carriage of these activities are, for purposes of the Act, business profits and taxable as such.17 While subsections 8(10) and 122.3(1) do not impose a tax but extend a benefit, it cannot be seriously argued that on that account only, the word business should be construed differently. There is nothing in the language of these subsections which excludes from their application the defined meaning of the word "business."
Applying this definition, it seems clear that even if it could be said that the Department was not carrying on a business in the ordinary sense,18 it was at least engaged in an "undertaking of any kind whatever," namely the provision of services under a contract for a fee. As such it was carrying on business under a contract as contemplated by subsections 8(10) and 122.3(1).
In my view, the Trial Judge ignored the definition set out in subsection 248(1) when he held that business could not be "carried on" within the meaning of subsections 8(10) and 122.3(1) in the absence of a predominant profit motive. The definition in subsection 248(1) reflects no such requirement. Although the word "business" when used in the Act must generally envisage an activity capable of giving rise to profits,19 it does not require that this activity be undertaken or carried on for the "predominant" purpose of earning a profit. To incorporate such a requirement into the Act would severely curtail its reach in so far as the taxation of business profits is concerned.
The Trial Judge went on to hold that the Department was not carrying on business on an alternative ground. Relying on Moldowan v. The Queen20 and Tonn v. Canada,21 he held that the Department did not have "a reasonable expectation of profit" when it entered into the contract. He did so despite acknowledging that this case was totally devoid of any tax avoidance features22 and despite the Crown's concession that:
It is only where there is no actual profit, . . . that the reasonable expectation of profit test should operate. This, however, is not the case here.23
According to the terms of the contract, the Department was to be reimbursed for the actual costs incurred for providing the services and was to receive an annual fee of $25,000 plus a markup of 25% on the cost of salaries.24 The annual fee was intended to cover the cost of employing a Canadian-based Project Co-ordinator and any professional employees required to supervise or advise on-site personnel.25 The markup was intended as an allowance towards the cost of administrative overhead.26
In his reasons, the Trial Judge expressed the view that the additional costs and administrative overhead were not significant.27 He found as a fact that the contract did not require added personnel or office space.28 The Trial Judge characterized the contract as "a costs-plus contract with minimal financial risk ."29 (Emphasis added.)
Financial statements were tendered in evidence showing that net profits of $136,289 had been made by the Department over the ten-year life of the contract.30 The Trial Judge did not seem to see the need to pronounce himself on whether actual profits had been generated under the contract or not. He stated with respect to the financial statements placed before him:
I am not concerned with the amount of the profit as determined, nor am I expressing an opinion on the commercial viability of the project.31
Although the Trial Judge questioned whether all the costs allocated to the project had been taken into account in the preparation of these financial statements, he made no findings in this regard.32 Needless to say it was not open to the Trial Judge to hold that the Department did not have a reasonable expectation of profit unless he was first willing to find that profits had not been generated under the contract.
But even if the reasons of the Trial Judge are read as incorporating such a finding, I am of the view that it was not open to him to conclude that the Department did not have a reasonable expectation of profits based on the findings that he made.
The Trial Judge noted that no business plan had been formulated as such.33 But he found as a fact that those responsible for the project intended the revenues generated under the contract to exceed the cost of providing the services. The Trial Judge stated:
It appears that Mr. Andrew [the then Assistant Deputy Minister, Agriculture and Rural Development] intended that the Department would make a profit, regardless of how large, which would act as a safety net in the event that some of its calculations or assumptions had not been correct.34
The Trial Judge acknowledged that prior to entering into the contract Mr. Andrew would have ascertained the costs involved in providing the services:
Similarly, Mr. Andrew had an obligation to ascertain his costs in order to minimize the burden on the public and to account for the use of public funds.35
He also found as a fact that Mr. Andrew was intent on building into the contract more than the estimated costs to insure that the project would operate in the black [at page 461]:
Mr. Andrew clearly wanted to have a safety net, as part of the contract terms, in case the Department's estimates or assumptions were inaccurate.
It will be recalled that the Trial Judge had found earlier that no additional employees or space in Canada were required to perform the services even though a fee was payable under the contract to cover such expenditures.
The Trial Judge evaluated the Department's expectation of profit in light of the testimony of Mr. Andrew. He stated:
If a small profit was eventually produced, that would merely augment the Province's accomplishments.36
In so stating, the Trial Judge acknowledged that those responsible for the project had a prospect for profit at the relevant time and there is no suggestion in the evidence or in any of the findings made by the Trial Judge that this prospect could not be reasonably entertained. As the Trial Judge found, the expected profits were small and were to do no more than ensure that the project would not operate at a loss. But nothing turns on this; a profit is a profit whether big or small and irrespective of one's motivation for generating it. In the absence of some evidence pointing in the other direction it was not open to the Trial Judge, having regard to his own findings, to hold that the Department could not reasonably anticipate earning a profit when it entered into the contract.
For these reasons, the appeal should be allowed, the decision of the Trial Division should be set aside and the reassessments for the 1982, 1983 and 1984 taxation years should be referred back to the Minister for reassessment on the basis that the appellant's employer was carrying on business under contract during the taxation years in question as required by subsections 8(10) and 122.3(1) of the Act. Costs should go to the appellant here and below. Having regard to the disposition of the main appeal, the cross-appeal is rendered moot.
Desjardins J.A.: I concur.
Décary J.A.: I agree.
1 The decision under appeal is reported at [1996] 3 F.C. 436 (T.D.) (hereinafter Timmins).
2 Timmins, at pp. 441-444.
3 Memorandum of fact and law of the appellant, at para. 2. Memorandum of fact and law of the respondent, at para. 1.
4 S. 8(10) reads in part:
8. . . .
(10) Where any individual is resident in Canada in a taxation year and, throughout a period of more than six consecutive months that commenced in the year or a previous year (in the subsection referred to as the "qualifying period").
(a) was employed by a person who was a specified employer, and
(b) performed all or substantially all the duties of his employment in one or more countries other than Canada
(i) in connection with a contract under which the specified employer carried on business in such country or countries with respect to
(A) the exploration for, or exploitation of, petroleum, natural gas, minerals or other similar resources,
(B) a construction, installation, agricultural or engineering activity, or
(C) any prescribed activity, or
(ii) for the purpose of obtaining a contract for the specified employer to undertake any of the activities referred to in clause (i)(A), (B) or (C),
there may be deducted in computing his income for the year from that employment an amount equal to . . . . [Emphasis added.]
S. 122.3(1) provides for a credit rather than a deduction by reference to essentially the same statutory language with the exception of s. 122.3(1)(a), which in contrast with s. 8(10)(a) reads:
122.3 (1) . . .
(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 . . . . [Emphasis added.]
The limitation introduced by this paragraph was subject to a transitional provision which delayed its application beyond 1984. It is therefore not applicable to the present appeal.
5 Timmins, at p. 460.
6 Timmins, at p. 462.
7 Timmins, at p. 461.
8 The parties here and below take the position that the Government of New Brunswick was a "specified employer" within the meaning of s. 8(11) and s. 122.3(2)(a ) of the Act. Memorandum of fact and law of the appellant and respondent at paras. 2(i) and 1 respectively.
9 ;Regional Assessment Commissioner et al. v. Caisse populaire de Hearst Ltée, [1983] 1 S.C.R. 57.
10 S. 248(1) [as am. by S.C. 1979, c. 5, s. 66] which provides for this definition is found in Part XVII of the Act under the statutory heading "interpretation".
11 These are used interchangeably throughout the Act. See for instance ss. 2(3)(b), 13(9) [as am. by S.C. 1988, c. 55, art. 6], 24(2) [as am. by S.C. 1991, ch. 49, art. 17], 27(1)(a) [as am. by S.C. 1984, c. 31, s. 14], 28(2) [as am. by S.C. 1980-81-82-83, c. 48, s. 13], (4.1) [as enacted by S.C. 1991, c. 49, s. 18], (5), 29(1), 111(5)(a) [as am. by S.C. 1987, c. 46, s. 40; 1988, c. 55, s. 83], 125(7) [as am by. S.C. 1977-78, c. 32, s. 32; 1984, c. 45, s. 40], 143(1) [as am. by S.C. 1977-78, c. 1, s. 71], 149(1)(j) [as am. by S.C. 1986, c. 6, s. 15], 253 [as am. by S.C. 1991, c. 49, s. 197].
12 "Carry on" a. To advance (a proceeding); b. To keep up; c. To work at, prosecute; d. To move on; e. To behave or "go on". Shorter Oxford English Dictionary , 3rd ed., Oxford: Clarendon Press, 1990.
13 Unless the activity in question does not lend itself to being "carried on". For instance, in Tara Exploration & Development Co. Ltd. v. M.N.R. , [1970] C.T.C. 557 (Ex. Ct.), Jackett P. held that a non-resident corporation could not be considered to have "carried on" business in Canada for purposes of s. 2(2) of the Act merely by having had "an adventure in the nature of a trade" in Canada. He wrote, at p. 567:
With considerable hesitation, I have concluded that the better view is that the words "carried on" are not words that can aptly be used with the word "adventure". To carry on something involves continuity of time or operations such as is involved in the ordinary sense of a "business". An adventure is an isolated happening. One has an adventure as opposed to carrying on a business.
14 Timmins, at pp. 446 and 455.
15 Timmins, at p. 446.
16 Canadian Marconi Co v The Queen, [1984] CTC 319 (F.C.A.), at pp. 330-331.
17 S. 3 imposes a tax on income from a "business" and s. 9 provides that a taxpayer's income from a business is its "profit therefrom."
18 A conclusion with which I would disagree.
19 This meaning is dictated by the Act's fundamental raison d'être which is to levy a tax on profits and governs unless a different meaning can be evidenced by specific language or by necessary implication. (See for example the definition of "personal or living expenses," in s. 248(1) or the language of the loss carry forward limitation in s. 111(5)(a )(i).)
20 [1978] 1 S.C.R. 480.
21 [1996] 2 F.C. 73 (C.A.).
22 Timmins, at p. 461. In Tonn, supra, at p. 96, Linden J.A. warns that the "Moldowan test" should be applied sparingly, if at all, when the circumstances do not admit to any suspicion of avoidance.
23 Timmins, at p. 453.
24 Para. 3 of the contract, Appeal Book, Vol. II, at p. 102.
25 Para. 3.1 of the contract, Appeal Book, Vol. II, at p. 102.
26 Para. 3.4 of the contract, Appeal Book, Vol. II, at p. 102.
27 The Trial Judge noted that (at p. 461):
No new entity was created to provide the services for which the Department contracted; rather, the evidence suggests that the contract was merely considered to be an additional activity within the Department.
28 Timmins, at pp. 461-463.
29 Timmins, at p. 461.
30 The contract was renewed from year to year and made to apply to other projects in other countries. The financial statements in question sought to reflect the financial performance of the Department under the contract over its ten-year life.
31 Timmins, at p. 466.
32 The reasons indicate that indirect costs "may have been" incurred by other named departments without indicating what these costs may have been. (Timmins , at p. 467) With respect to capital costs, the reasons suggest that capital expenditures "if material" should have been allocated without indicating what these expenditures might have been. (Timmins , at p. 467).
33 Timmins, at pp. 461-462.
34 Timmins, at p. 460.
35 Timmins, at p. 462.
36 Timmins, at p. 461.