Sutcliffe v. The Queen

Sutcliffe v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2005-12-22
Neutral citation
2005 TCC 812
File numbers
2001-2556(IT)G
Judges and Taxing Officers
Judith Woods
Subjects
Income Tax Act
Decision Content
Citation: 2005TCC812
Date: 20051222
Docket: 2001-2556(IT)G
BETWEEN:
MARK SUTCLIFFE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] This is an appeal by Mark Sutcliffe, a former Air Canada pilot, concerning remuneration received by him during a period that he was a non-resident of Canada. The assessments were made under the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, (the "Act") and pertain to the 1996, 1997 and 1998 taxation years.[1]
[2] The assessments issued to the appellant are not unique. After receiving an inquiry from a Member of Parliament, the Canada Revenue Agency (the "Agency") undertook a review of the taxation of pilots employed by Air Canada and Canadian Airlines (as it then was) who filed tax returns on the basis that they were non-residents of Canada. The Agency's review culminated in the development of an assessing policy that was communicated to the appellant by letter dated December 7, 1998.
[3] Several pilots, including the appellant, received reassessments pursuant to the assessing policy described in the letter. In some cases, the Agency challenged the residence status of the pilot while in others the pilot's status as a non-resident was accepted and the reassessments only increased the amount of remuneration that was subject to tax.
[4] The reassessments issued to the appellant are in the latter category. The Minister accepted that the appellant was a non-resident and issued assessments that increased his "taxable income earned in Canada."
[5] In addition to challenging the computation of federal tax, the appellant sought leave to appeal the allocation of income for provincial tax purposes. The provincial allocation issue is not part of this appeal because the appellant's application to amend the notice of appeal to include this issue has been disallowed: The Queen v. Sutcliffe, [2005] 1 C.T.C. 149 (F.C.A.).[2]
[6] The main issue in the appeal is how remuneration should be allocated to duties performed in Canada. There are three aspects to the dispute. The first concerns international flights, in which the appellant takes the position that remuneration received for these flights is not subject to tax, even to the extent of the "domestic portion" of the flights. The second concerns domestic flights, in which the respondent takes the view that the remuneration is fully taxable, even with respect to the "foreign portion" of the domestic flights that overflew the United States. The last issue concerns remuneration such as vacation and sickness pay that is not linked to specific duties. The appellant submits that remuneration that is not linked to specific duties is not taxable.
[7] Both parties gave numerous arguments in support of their respective positions and these are discussed at some length below. In general, I have concluded that the positions above taken by the appellant and the respondent are not supported by the clear words of the Act or the Canada-United States Income Tax Convention (1980) (the "Convention.").
Facts
(a) General
[8] Throughout the relevant period, the appellant was employed by Air Canada as a pilot and was a resident of the United States. He became a non-resident in 1994 when he moved from Canada to Lewiston, New York, which is within commuting distance of the Toronto airport.
[9] The appellant had the ranks of captain and first officer on DC9 and A320 aircraft. His flight assignments, which were made under a bidding system, were made on the basis of groups of flights called "pairings." All of the pairings assigned to the appellant began and ended in Toronto, which was his base of operations for employment purposes.
[10] The appellant flew over 1,000 flights during the period under appeal. They were each listed in pay summaries that were issued by the airline, with the flights being identified by airport code. It appears that most of the flights were either between two points in Canada (domestic flights) or between a point in Canada and a point in the United States (international flights). The appellant also had a small number of flights to Caribbean destinations. Based on my cursory review of the list of flights, the most frequent cities that the appellant flew to, other than Toronto, were Boston, Newark, New York, Chicago, Ottawa, Montreal, Winnipeg and Halifax.
(b) Description of employment duties
[11] The terms of the appellant's employment were governed by collective agreements negotiated by The Air Canada Pilots Association. There were two agreements in force during the relevant period (the "Collective Agreements").
[12] The primary duties that the appellant had consisted of flying passenger aircraft, either as a captain or first officer. In addition to operating the aircraft, the appellant had duties on the ground before and after each flight. In general, the appellant was on duty commencing approximately 60 minutes before takeoff until 30 minutes after landing.
[13] The conditions of employment also required:
· that the appellant attend training sessions involving practice flying ("line indoctrination"), ground school and simulator training;
· that the appellant fly as a passenger when he was not already in the city where a flight was to depart from ("deadheading");
· that the appellant be away from home for periods of time between flights ("layovers");
· that flights assigned to the appellant could be reassigned to pilots with more seniority ("displacement"). In the event of a displacement, the appellant was given reasonable notice before leaving home for the airport; and
· that the appellant be on "reserve duty," meaning that the appellant had to be available to fly if asked, but he could decline if a pilot with less seniority were available.
(c) Description of remuneration
[14] The provisions in the Collective Agreements dealing with the remuneration of pilots are complex. In general, the appellant's remuneration had some similarity to a fixed annual salary because he was paid during periods such as sickness and vacation when duties were not performed. His pay cheques were not fixed amounts, however. The remuneration varied depending on the nature of the duties performed and the type of off-duty period. For example, the appellant received amounts determined by a formula for time spent in flying, deadheading or training. He also received different amounts for periods during which duties were not performed, such as when he was on reserve duty, was displaced, was on vacation or was sick.
[15] The following summarizes the types of remuneration received by the appellant during the relevant period. The descriptions are general, but are sufficient for purposes of the issues in the appeal.
[16] Flying pay - Flying pay was an amount paid for each flight, determined primarily on the basis of flight time.[3] The time was determined in minutes, starting with when the aircraft pushed back from the departure gate and ending when it came to a stop at the arrivals gate.[4] Many other factors also figured into the calculation of flying pay, such as whether the flight was an overseas flight, whether the pilot flew at night and the type of aircraft. Although the appellant was required to be on duty for a period of time before and after each flight for duties connected with the flight, the preparation time was not included in the computation of flight minutes which were used to compute flying pay.[5] The amount of flying pay that could be earned for a month was subject to a minimum and maximum, which varied depending on the circumstances. To illustrate, flying pay could be adjusted for minimum and maximum flying times of between 70 and 78 hours, respectively.
[17] Deadheading - A certain amount was paid when the appellant flew as a passenger for employment purposes. The amount was determined as a percentage of flying pay.
[18] Training - A certain amount was paid for periods when the appellant undertook training. Generally, the amount paid was a percentage of flying pay.
[19] Displacement - If the appellant was displaced (that is, bumped from a flight assignment by a pilot with more seniority), an amount was paid equal to the amount of flying pay that the appellant would have earned if he had taken the assignment. The flight time was determined not by the actual time of the flight but by the flight time listed in Air Canada's published schedule.
[20] Vacation - A certain amount was paid for each day of vacation. The amount was calculated, generally, as a percentage of flying pay.
[21] Sickness - A certain amount was paid for each day that the appellant was unable to perform duties because of sickness. The amount was calculated in accordance with a formula that depended on a number of factors. For example, if a pilot who had been scheduled to fly on a particular day was sick, the pilot might be paid as if he had flown the flight and the time was determined by the flight times listed in Air Canada's published schedule.
[22] Guarantees - The appellant received minimum amounts, generally referred to in the Collective Agreements as guarantees. Three different types of guarantees are relevant to the appeal:
· Monthly minimum guarantee - When the appellant had only a few flight assignments in a particular month, he received additional flying pay. This was often paid when the appellant was on reserve duty. The amount was calculated based on a minimum number of hours of flying pay per month, which was pro-rated if the appellant was on reserve duty for only part of a month.
· Duty period guarantee - For every "period" of flight duty, the appellant received a minimum amount of flying pay. This top up amount compensated the appellant for periods when the actual flying time on a particular flight assignment was small.
· Trip hour guarantee - The appellant received additional compensation during layovers. The payments were structured as a guarantee so that the appellant would receive, in general, a minimum of one hour of flying pay for every four hours that the appellant was away from his home base during a pairing.
[23] The total remuneration received by the appellant in the relevant taxation years is set out in the following chart which separates flying pay, domestic and international, and other types of pay:[6]
Domestic
flying pay
Intl.
Flying pay
Other
pay
1996
$47,663
$51,144
$36,887
1997
$48,491
$86,138
$35,910
1998
$45,475
$92,952
$46,215
(d) The appellant's income tax returns
[24] In the appellant's income tax returns for the first two of the three taxation years under appeal, he computed "taxable income earned in Canada" by excluding flying pay for international flights and much of the remuneration listed as "Other Pay" in the above chart. He did not provide a complete list of the types of remuneration that were included or excluded. I believe that tax was paid generally on remuneration for domestic flights and training (other than practice flying on international flights).
[25] The appellant testified that, for the third taxation year under appeal, he prepared his income tax return in a manner that attempted to comply with the Agency's new assessing policy.
(e) The reassessments
[26] The reassessments that were issued to the appellant were made on the basis outlined in a letter from the Agency dated December 7, 1998. In general, the appellant's remuneration was divided into taxable portions and non-taxable portions, with the taxable portion being remuneration that was reasonably attributed to duties performed in Canada. The allocation was based on actual information where it was known, and on assumptions where the relevant facts were not known.
[27] I have set out below extracts from the December 1998 letter which explains in some detail how the appellant was reassessed.
The Department's position is that the income earned by a non-resident employee employed by a Canadian based airline is taxable in Canada on the following basis:
a) Flying Pay
[...] We are of the view that remuneration for domestic flights is wholly taxable in Canada regardless of whether or not the flight path between the two points in Canada crosses over the United States border.
[...] The portion of an international flight originating or terminating in Canada which is flown in Canadian airspace is taxable in Canada. [...]
In determining the domestic component attributable to international flights the Department has prepared the attached schedule. The information compiled is based on average flight paths and is not flight specific. However, the following assumptions are included in the calculations:
i) average flight paths are determined as the most direct route between the point of origin and the destination using conventional navigation e.g. great circle routes,
ii) distance in Canada is computed by distance from the point of origin (or destination) to (or from) the point on the border or in territorial waters where the flight leaves (or enters) Canada, which is determined from the average flight path,
iii) the distance for the flight path is from data received from a Canadian airline, and was cross-referenced to an independent third-party source,
iv) time in Canada is determined by dividing the distance in Canada by airspeed,
v) airspeed is the average airspeed throughout the flight determined by reference to the distance and minutes for the flight as indicated by the airline.
vi) a minimum of 15 minutes in Canada on any flight to cover taxiing and departure.
[...]
b) Training
[...] For tax purposes, such remuneration is considered sourced where the training took place and should be allocated on the basis of working days. Where training includes actual flying (domestic and/or international flights) the applicable remuneration should be allocated in accordance with a) above.
c) Deadheading
It is the Departments position that deadhead pay should be allocated on the same basis as a) above, regardless of the fact that you may or may not have taken the deadhead trip. The basis for this position is that you receive this remuneration because you are under your employer's order to deadhead; otherwise you would not receive this pay. As a result, you are considered to be providing services to your employer even though you may or may not have taken the deadhead trip.
[...]
f) Vacation Pay, Sick Pay, Displacement, Bank Time, Minimum Guarantee pay and Other Pay
These amounts are considered non-service-related amounts, and as such cannot be related to a specific location. As a result, they are considered taxable to the extent the other services that you provide to Air Canada are performed in Canada. Therefore, such income should be allocated on the following ratio:
Total of items a) to e) earned in Canada
x
Total of items f) for the year
Total of items a) to e) above for the year
Where applicable, any incidental amounts such as Duty Pay Guarantee, Navi-Aid, Overseas Operations Pay, Trip Hour Guarantee, etc., should be included in items a) through to f) * above to which they specifically relate. If they cannot be attributed to a specific item in a) to e), then the amounts should be included in f).
[*The reference to f) should perhaps be to e).]
[28] In the case of the appellant, it appears that, in making the reassessments, flying pay, training pay, deadhead pay and duty period guarantees were allocated to locations where duties were performed and that the other remuneration received by the appellant was pro-rated in accordance with f) above.
[29] In the case of flying pay for international flights, the remuneration was allocated to Canada on the basis of flight minutes that the flight was determined to be in Canadian territory (the "domestic portion"). For example, if on a flight between Toronto and New York it is assumed that the flight was in Canada for ten percent of the time, then ten percent of the remuneration paid for that flight would be allocated to Canadian duties.
[30] Using this methodology, the Minister allocated a relatively small portion of the flying pay for international flights to Canada. The following chart summarizes, for each year, the total remuneration for international flights and the taxable portion computed for purposes of the reassessments.
Income from
international
flights
Amounts
attributable to
duties in Canada
1996
$51,144
$10,001 (20%)
1997
$86,138
$16,023 (19%)
1998
$92,952
$13,849 (15%)
(f) Other facts
(i) Domestic flights
[31] All flying pay for domestic flights was attributed to duties performed in Canada in the reassessments, regardless of whether or not the flight paths crossed the United States border.
[32] There are three routes for which this is relevant - Torontobeing at one end of each route and Vancouver, Montreal and Halifax being at the other end. According to the testimony of the appellant, which I accept in this regard, flights between Toronto and Montreal or between Toronto and Halifax usually overfly the United States and flights between Toronto and Vancouver sometimes overfly the United States.
(ii) Fifteen minute rule
[33] In the event that the flying time apportioned to Canada for a particular flight was determined to be less than 15 minutes, the Minister increased the flying time to 15 minutes. An official of the Agency, Rene Fleming, explained that this was a reasonable adjustment to make because it accounted in a very small way for the pilot's duties on the ground, such as flight preparation and taxiing. The adjustment was made to several of the appellant's flights, such as flights from Toronto to New York, where the distance from Toronto to the border is very small.
(iii) Evidence regarding accuracy of assessments
[34] Both parties led evidence regarding the accuracy, or inaccuracy, of the reassessments.
[35] For the appellant, several Air Canada pilots and a dispatcher testified. In general, they described the Agency's methodology as being grossly oversimplified, based as it is on the idea of "average flight paths" and speeds which are essentially fictional.[7] It also does not take into account delays in either take offs or landings.
[36] According to the testimony, pilots are presented with flight plans prepared by dispatchers prior to the departure of a flight. The dispatchers use a computerized system for calculating the shortest distance between two points modified with reference to restricted airspace, weather patterns, and the jet stream. Those flight plans inevitably change once the flight has begun due to changes in weather and wind patterns. Fuel is very expensive, so taking advantage of tail winds and avoiding head winds is important to routing. The pilots testified that the actual flight path and time of each flight is inherently unpredictable as a result of these variables. As a result, the Agency's methodology was highly artificial, according to the pilots.
[37] In support of the assessments, the respondent suggested that a number of the assumptions that the Agency used were in the appellant's favour. For example, the assessments did not take into account duties on the ground before and after each flight.[8] Duties on the ground obviously take place in both domestic and foreign locations. The failure to take these duties into account on either end is presumably in the appellant's favour because of the relatively small amount of remuneration allocated to Canada. The percentage of remuneration allocated to Canada would increase if duties on the ground were taken into account.
[38] In terms of support from independent sources, the respondent introduced a chart prepared by Canadian Airlines that had apportioned remuneration to the provinces. No one representing the airline testified at the hearing and there was no evidence led as to how the apportionment had been done. In light of this, I did not find that the chart was very helpful.
[39] The respondent also introduced actual flight data that was obtained from Nav Canada, a non-profit corporation that is charged with air control in Canada and parts of the northern Atlantic.
[40] Sometime after the assessments had been issued, the Agency became aware that Nav Canada keeps extensive records of actual points of entry to and exit from Canada on every international flight.
[41] The Agency sought Nav Canada's assistance in order to check the accuracy of its assumptions regarding the distances that the appellant had flown in Canada on international flights. An official from Nav Canada collected information from actual flights during a 12-month period ending October 31, 2003 on the same international routes that the appellant had flown.
[42] The respondent introduced into evidence a chart[9] prepared by the Agency that shows how the income would differ if the distances were computed using Nav Canada's records for the 12-month period of collected data instead of the distance assumptions that the Agency had used (usually, great circle distances). The chart compared the appellant's taxable income earned in Canada with respect to international flights using these two methods. It included all of the appellant's international flights except those for which the 15 minute rule was applied (e.g., New York).
[43] The following is an excerpt from that chart. It illustrates that the taxable income earned in Canada is similar under both methods. I would note, though, that
a large number of international flights are excluded, presumably because the 15 minute rule applied to them.[10]
Income as per assessments
Income as per NavCan data
1996
$4,442
$4,438
1997
$6,115
$6,214
1998
$4,724
$5,405
[44] The respondent also introduced a chart prepared by the Agency[11] that compares distances as recorded by Nav Canada and distances assumed by the Agency on selected routes flown by the appellant. Excerpts from this chart are provided in Appendix A. Although the chart has limited usefulness because the Agency used "selected" flights, I have included it in these reasons because it is instructive to see the difference in mileage for particular flights.
Positions of parties
[45] Both parties presented several arguments in support of their respective positions. The following summary is based on their written submissions.[12]
(a) Position of appellant
[46] It is the position of the appellant that the relevant provisions are subparagraph 115(1)(a)(i) of the Act and Article XV of the Convention.
[47] He submits that, by virtue of these provisions, he is not taxed on remuneration that is attributable to international flights or remuneration that is in the nature of "benefits" which is not paid for duties performed.
[48] With reference to international flights, the appellant submits that the unique nature of air travel makes it impractical for pilots to accurately measure remuneration from duties performed in Canada on flights that cross borders. He submits that this problem is recognized throughout the world and that countries generally do not tax remuneration for international flights outside the pilots' country of residence. Canada should follow this practice, it is suggested, in order to avoid double taxation and administrative complexity. The appellant further suggests that it is appropriate to exclude remuneration for international flights because this was the method of apportionment that was followed by his employer for source deduction purposes.
[49] The appellant argues in the alternative that there should be a consistent basis of taxation with respect to international and domestic flights. The appellant submits that if he is taxed on remuneration for international flights that he should be allowed to exclude the portion of remuneration for domestic flights that is attributable to the period that the aircraft was not in Canadian territory.
[50] As for remuneration for periods when duties have not been performed, such as sickness and vacation pay, the appellant suggests that this remuneration is not taxable because it is not attributable to duties performed in Canada. Further, being in the nature of "benefits," the appellant submits that the remuneration is exempt from tax under Article XV of the Convention.
(b) Position of respondent
[51] The respondent takes the position that the assessments are correct because they have reasonably allocated remuneration to duties performed in Canada in accordance with subparagraph 115(1)(a)(i) of the Act and Article XV of the Convention. What is reasonable in the circumstances of this case, according to the respondent, is that the appellant is taxed on all remuneration paid for domestic flights, the portion of remuneration for international flights that is attributable to the "domestic portion" of those flights, and a pro-rata portion of other remuneration that either is not attributable to specific duties or is not attributable to known locations.
[52] Even if the assessments do not reasonably apportion the appellant's remuneration, the respondent argues, the assessments should be upheld because the appellant has not suggested a reasonable alternative.
[53] In reference to domestic flights, the respondent suggests that remuneration attributable to them is fully taxable even if some of the duties take place outside Canada. The position is based on a contextual interpretation of subparagraph 115(1)(a)(i) of the Act and Article XV of the Convention, taking into account the fact that domestic flights have a substantial connection to Canada. The respondent also suggests that it is inappropriate to vary the assessments because there is an insufficient factual foundation to establish that any of the domestic flights flown by the appellant actually crossed into the United States.
[54] As for remuneration that is not attributable to specific duties, the respondent suggests that it is reasonable to allocate a portion of this remuneration to duties performed in Canada. Alternatively, the respondent suggests that there should not be an apportionment at all and that this remuneration is fully taxable in Canada. The argument relies on the application of subparagraph 115(1)(a)(v) of the Act instead of subparagraph 115(1)(a)(i).
Analysis
(a) General scheme
[55] The general scheme of taxation applicable to employment income earned by a resident of the United States is that the remuneration is subject to tax as "taxable income earned in Canada" to the extent that the remuneration is attributable to duties performed in Canada.
[56] The main provisions are subparagraph 115(1)(a)(i) of the Act and paragraph 1 of Article XV of the Convention which read:
Section 115
(1) For the purposes of this Act, the taxable income earned in Canada for a taxation year of a person who at no time in the year is resident in Canada is the amount, if any, by which the amount that would be the non-resident person's income for the year under section 3 if
(a) the non-resident person had no income other than
(i) incomes from the duties of offices and employments performed by the non-resident person in Canada [...]
[Emphasis added]
Article XV
1. Subject to the provisions of Article XVIII (Pensions and Annuities) and XIX (Government Service), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
[Emphasis added]
[57] Overriding this general scheme is a special exemption in the Convention for employees who work in international transportation. The exemption does not apply to the appellant, however, because it is limited to pilots who work for airlines that are resident in the United States.
[58] The exemption is in paragraph 3 of Article XV which reads:
Article XV
3. Notwithstanding the provisions of paragraphs 1 and 2, remuneration derived by a resident of a Contracting State in respect of an employment regularly exercised in more than one State on a ship, aircraft, motor vehicle or train operated by a resident of that Contracting State shall be taxable only in that State.
[59] The general scheme is clear. Remuneration that relates to duties in Canada is subject to Part 1 tax as "taxable income earned in Canada." How this applies to the types of remuneration earned by the appellant is the question in this appeal. I will begin the analysis with remuneration paid for international flights.
(b) International flights
(i) General
[60] Neither the Act nor the Convention provides rules of apportionment that apply to employees who perform only part of their duties in Canada. In this case the taxable portion may be computed on any reasonable basis.
[61] In Interpretation Bulletin IT-420R3,[13] Non-residents - Income earned in Canada, the Agency suggests that pilots engaged in international flight may allocate remuneration to Canada on the basis of time or distance. The following is an excerpt from paragraph 7:
[...] For a non-resident who is employed in the transportation of passengers or goods partly inside and partly outside Canada such as by rail, bus, truck or aircraft (and who is not exempt from Canadian tax under a tax treaty), the income allocation may be calculated either on the basis of time or kilometres travelled. [...]
[62] This position is not binding on taxpayers of course but it does provide notice to the appellant as to the general assessing position of the Agency.
[63] It is not in dispute that the appellant performed some duties of employment in Canada in connection with international flights. Part of each flight was in Canada[14] and the appellant was required to perform duties on the ground before and after each flight.
[64] It is important to note that the appellant does not take the position that duties performed in the air over Canadian territory are not duties in Canada for purposes of this appeal.[15] I have assumed, then, that these duties are performed "in Canada."
[65] Notwithstanding this, the appellant suggests that no remuneration for international flights be allocated to Canada.
[66] The evidence of the appellant focused on flaws with the Agency's assumptions used in apportioning remuneration to Canada. In considering differing methods of apportionment, though, the question is not whether there are flaws with a particular method. The question is which of the parties' methods is more reasonable.[16]
[67] In comparing the two methods proposed by the parties, it is clear that the Minister's approach results in a much closer approximation than the approach suggested by the appellant.
[68] Moreover, the appellant has not provided any evidence that would support a more accurate allocation. It is not sufficient for the appellant to establish that the Minister's apportionment is inaccurate. He has not provided any reasonable basis to vary the assessments as they relate to international flights.
[69] The appellant suggests that if I reject his position regarding international flights, an allocation should be made based on actual flight paths. This proposition is patently unreasonable because there is no evidence that records of actual flight paths still exist. To the contrary, the evidence on this point suggests that the flight plans filed by pilots after each flight are retained by the airline only for a short period.
[70] Before turning to some of the specific arguments raised by the appellant, I would comment that if the appellant's method were accepted, the practical effect would be to extend the exemption in paragraph 3 of Article XV of the Convention to all pilots resident in the United States. This interpretation is not justified given the clear language in paragraph 3.
[71] I now turn to specific arguments raised by the appellant regarding international flights.
(ii) Is appellant's method of allocating flying pay generally recognized around the world?
[72] The appellant submits that it is reasonable to pay tax on remuneration for domestic flights and not international flights because this is an accepted practice around the world. Counsel refers to this approach as the "traditional method" and suggests that great harm ("double tax and chaos") would follow if Canada did not follow this international practice.
[73] According to the appellant, the "traditional method" was accepted by the Agency until 1998 when the Agency's assessing practice changed. And it only changed, he suggests, for pilots of Air Canada and Canadian Airlines. Pilots of other airlines are still not required to pay tax on remuneration for international flights.
[74] In support of this argument, testimony was provided by Dr. Brian Campbell, a business consultant who specializes in the aviation industry. According to Dr. Campbell's curriculum vitae, he has spent a large part of his 35-year career "heavily concentrated in the economic elements of commercial air transportation." In addition to being an independent consultant, Dr. Campbell co-founded two start-up airlines, Midway Airlines, Inc. and Air Chicago.
[75] I would note that Dr. Campbell did not testify as an expert witness and he acknowledged that he was not qualified to give an opinion on taxation laws. Further, there is no indication from Dr. Campbell's curriculum vitae or from his testimony that he had any specialized knowledge of taxation, apart from what he had learned from his general financial experience.
[76] Dr. Campbell testified as to his knowledge about the taxation of pilots around the world. In general, his view is reflected in the following excerpt from his examination-in-chief:
Q. [...] is [the Agency's method] used or practised in the United States or in any other countries that you know of?
A. I have never seen evidence of it practised in the United States; I have never seen evidence of it practiced in any other country with which I am familiar.
[77] It is not clear to me that the taxation practices in other countries have any bearing on the interpretation of provisions of the Act or the Convention. Apart from this, though, I am not satisfied that Dr. Campbell is knowledgeable as to those taxation practices.
[78] Although Dr. Campbell has impressive credentials, they were not in the highly specialized area of taxation. Dr. Campbell admittedly was not an expert in the laws of taxation and there is no indication from his evidence that he had an in-depth knowledge of the taxation of pilots. I find that his testimony is not sufficient to establish even on a prima facie basis[17] that the method of allocation suggested by the appellant is an international practice that has been accepted around the world.
[79] Another problem that I have with the appellant's submission is that there was no evidence properly before me regarding the domestic tax laws of other countries or income tax conventions other than the Canada-United States Income Tax Convention (1980). The failure of the appellant to present any expert evidence regarding foreign tax laws or practice is not helpful to his submission. In addition, the appellant did not refer to the Model Tax Convention published by the Organisation for Economic Co-operation and Development (OECD), which has "has world-wide recognition as a basic document of reference in the negotiation, application and interpretation of multilateral or bilateral tax conventions.[18]
[80] Further, I would note that if there is an accepted international practice as the appellant suggests, it is not reflected in Canada's income tax conventions. Canada has an extensive network of income tax conventions with other countries. As noted above, the only income tax convention that I was referred to was the convention with the United States. From a cursory review of other income tax conventions to which Canada is a party, these conventions seem to adopt the same, or a similar, approach to that set out in paragraph 3 of Article XV of the income tax convention with the United States.
[81] What may be inferred from Canada's income tax conventions is that Canada and its treaty partners have considered concerns about double taxation of pilots involving international flights. In order to address these concerns, they have provided a general exemption for remuneration for international flights but it is limited to situations where the pilot works for an airline based in his country of residence. The policy appears to balance two competing objectives - on the one hand, the desirability of avoiding complexity and double taxation for pilots engaged in international flights and, on the other hand, the recognition of a country's right to tax remuneration earned by pilots working for airlines based in their country. The appellant's position runs counter to the latter objective.
[82] As for Canada's assessing practice, the appellant argues that prior to 1998 Canada allowed non-resident pilots to exclude remuneration for international flights. I do not accept this submission because IT-420R3 suggests just the opposite. It was the Agency's policy during the relevant period, as suggested by the bulletin, to impose tax to the extent that duties were performed in Canada, unless relief was provided by an income tax convention.
[83] For these reasons, I reject the proposition that it is reasonable to exclude remuneration for international flights on the basis that it is in accordance with international practice.
(iii) Are other methods of allocation too complex?
[84] The appellant submits that an interpretation that requires remuneration to be allocated based on where duties are performed should be rejected as being too complex and requiring onerous record-keeping.
[85] The appellant stresses the severe administrative burden on pilots if they are required to keep records that would enable an accurate apportionment of remuneration. This submissionmisapprehends what is required to comply with subparagraph 115(1)(a)(i).
[86] If an income-generating activity is carried on in more than one country, it is often necessary to apportion income on some reasonable basis. An appropriate method of apportionment should strive for accuracy but also adopt a practical approach to record-keeping. The use of sampling and estimations are some of the methods that might be acceptable in any particular case to reduce administrative complexity.
[87] In the appellant's circumstances, the use of sample flight paths and sample flight times might have avoided much of the complexity that the appellant refers to and yet provide a reasonable estimation of remuneration from duties performed in Canada. Accordingly, I reject the suggestion that the appellant's method should be accepted because other methods are too complex.
(iv) Are other methods prone to double taxation?
[88] The appellant suggests that the Agency's approach leads to serious double taxation issues for all pilots around the world.
[89] First, I do not accept the proposition that the effect of the decision in this appeal will have a significant impact on the taxation of all pilots around the world. If other countries have provided exemptions for pilots similar to that in paragraph 3 of Article XV of the Convention, then the concern that the appellant raises is restricted in a practical sense to pilots who, like the appellant, are residents of a different country than the residence of the airline that they work for.
[90] Moreover, if there are serious double taxation concerns, these are proper matters for Parliament to address through changes to the Act and Canada's income tax conventions. As noted earlier, it appears that Parliament has considered the issues of complexity and double taxation that the appellant raises and has provided the relief that is contained in paragraph 3 of Article XV of the Convention. It is not the role of the co