Principal Issues: [TaxInterpretations translation]
Does a software implementation contract entered into by a specified employer in the course of carrying on its business outside Canada constitute a qualifying activity for the purposes of clause 122.3(1)(b)(i)(B) of the Act?
Position: yes
Reasons: documents 990561, 9810326, 9810326, 9730155 and 9321595
November 27, 2000
XXXXXXXXXX Tax Services Office Headquarters Resources, Partnerships and Trusts Division XXXXXXXXXX Section XXXXXXXXXX Johanne Desparois, M.Fisc.
2000-005444
Interpretation of clause 122.3(1)(b)(i)(B) of the Income Tax Act
This is further to your memo of October 30, 2000 requesting our interpretation of the expression “construction, installation, agricultural or engineering activity” used in clause 122.3(1)(b)(i)(B) of the Income Tax Act (the “Act”). More specifically, you asked us whether a project that requires the coordination and implementation of accounting software as well as the introduction of a financial management system and several other tasks necessary to improve the management system of a foreign government constitutes an installation activity for the purposes of clause 122.3(1)(b)(i)(B).
You stated that the employer is a specified employer within the meaning of subsection 122.3(2) of the Act and that it carries on business outside Canada. You also stated that the other conditions set out in subsection 122.3(1) are satisfied. Your question is therefore whether a contract for the coordination and implementation of software, entered into by a specified employer in the course of carrying on its business outside Canada, constitutes an eligible activity for the purposes of clause 122.3(1)(b)(i)(B). You also asked whether the word “installation” used in this clause should be interpreted in relation to the word “construction”.
OUR COMMENTS
The Act does not define the expression “construction, installation, agricultural or engineering activity” used in clause 122.3(1)(b)(i)(B). Consequently, we are of the view that those expressions must be given their ordinary meaning, taking into account the overall context of the text in which they are used, so that the interpretation adopted is consistent with the object and spirit of the Act and Parliament's intent. The purpose of section 122.3 is stated, in particular, in the March 1996 budget plan published by the Department of Finance on page 194 [page 178 in the English version], which reads, in part, as follows:
“The primary purpose of this credit is to ensure that Canadian firms, employing Canadian staff, are in a position to compete against foreign firms in bidding on overseas work.”
We are therefore of the view that the expressions used in clause 122.3(1)(b)(i)(B) must be given their ordinary meaning, i.e., the meaning accorded to those terms in a dictionary, in order to comply with Parliament's intention, which is to increase the competitiveness of Canadian businesses in international markets.
In addition, we are of the view that an installation activity could constitute an eligible activity for the purposes of section 122.3 without being related to a construction activity. In fact, the English text of that clause reads as follows: “any construction, installation, agricultural or engineering activity”. We are therefore of the view that the English version of this clause clarifies the plausible doubts created by the punctuation used in the French version. Considering both versions of the Act, we are of the view that the word “installation” must be interpreted independently of the other three terms used in that clause. Consequently, we are of the view that a project may qualify as an installation activity without being related to a construction activity provided that the specified employer demonstrates that it carries on a business outside Canada that relates, among other things, to an installation activity in the ordinary meaning of that term.
Whether a particular activity constitutes an installation activity for the purposes of clause 122.3(1)(b)(i)(B) is a question of fact that can only be resolved after an analysis of all the facts relating to the particular situation. Generally speaking, an installation activity is, according to the ordinary meaning of that expression, an activity the nature of which is the installation of one or more things. Based on this definition, we are of the view that a particular employer that carries on a business abroad relating to the coordination and implementation of software, as well as the introduction of financial management systems, could probably successfully argue that its business relates to an installation activity for the purposes of section 122.3.
Furthermore, we are of the opinion that by relying on the case of Shane C. Gabie v. Her Majesty the Queen (98 DTC 2207) (the “Gabie case”), this particular employer could also argue that its business relates to an engineering activity if its business consists of developing software.
In Gabie, Mr. Gabie was an employee of a corporation resident in Canada and worked in Boston for a subsidiary of his employer. The employer's business consisted primarily of software development and business management consulting. The employer designed and built software as part of the development of computer systems. The employer contracted with a Massachusetts government agency to provide services in the areas of functional analysis, database design, application development and programming. The issue in that case was whether the employer carried on a business in Boston relating to a qualifying activity for the purposes of clause 122.3(1)(b)(i)(B).
The Tax Court of Canada concluded that the employer carried on business outside Canada with respect to any engineering activity, specifically an activity related to software engineering, even though the employee was not a professional engineer. In reaching this conclusion, the Tax Court of Canada referred, in particular, to Information Circular 86-4R3, entitled “Scientific Research and Experimental Development”, citing paragraph 6.10(f), which defines the term “software engineering” as follows: “Software engineering involves the study, in terms of basic or applied research, of the methodology for the design, implementation, testing, and performance evaluation of software systems; that is, advances in the methodology required to construct computer programs with greater flexibility, efficiency, reliability, and ease of maintenance.”
In light of the foregoing comments, we are of the view that it would be reasonable to conclude that a software development business carried on outside Canada by a specified employer can constitute an installation or engineering activity for the purposes of section 122.3.
We hope you find our comments helpful.
Marc Vanasse, C.A.
Manager
Resources, Partnerships and
Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch