Citation: 2009TCC463
Date: 20090923
Docket: 2006-2403(IT)G
BETWEEN:
PETER CEDAR PRODUCTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2006-2404(IT)G
AND BETWEEN:
596283 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2006-2405(IT)G
AND BETWEEN:
EUROPA CEDAR CORP.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The issue in these appeals is whether Europa Cedar Corp. (“Europa”),
596283 B.C. Ltd. (“596”), and Peter Cedar Products Ltd. (“Peter Cedar”) were
carrying on a personal services business in relation to the services that were
provided to Anglo American Cedar Products Ltd. (“Anglo”) by Patrick Guterres
and Peter Laslo on behalf of 596 and Peter Cedar, respectively, during the
2001, 2002 and 2003 taxation years of these companies and by Randy Engh on
behalf of Europa during the 2002 taxation year of Europa.
[2] Personal services
business is defined in subsection 125(7) of the Income Tax Act (the
“ITA”) as follows:
“personal
services business” carried on by a corporation in a taxation year means a
business of providing services where
(a) an
individual who performs services on behalf of the corporation (in this
definition and paragraph 18(1)(p) referred to as an “incorporated
employee”), or
(b) any person
related to the incorporated employee
is a specified
shareholder of the corporation and the incorporated employee would reasonably
be regarded as an officer or employee of the person or partnership to whom or
to which the services were provided but for the existence of the corporation,
unless
(c) the
corporation employs in the business throughout the year more than five full-time
employees, or
(d) the amount
paid or payable to the corporation in the year for the services is received or
receivable by it from a corporation with which it was associated in the year;
[3] Randy Engh,
Patrick Guterres, and Peter Laslo were employed by Anglo prior to the
reorganization in 2000. Even
though the individuals were, prior to the reorganization, employees of Anglo,
this does not prevent them from changing their arrangement and carrying on a
business with respect to the provision of services to the same person (Galaxy
Management Ltd. v. The Queen, [2006] 1 C.T.C. 2052, 2005 DTC
1558).
[4] Anglo was (and
still is) a brokerage company that bought cedar shakes and shingles from
various mills (some of which were owned by Anglo) and sold these to various
customers. The mills that were owned by Anglo were acquired as a result of
Anglo providing financing to various mill owners who defaulted in the repayment
of the financing.
[5] Randy Engh,
Patrick Guterres, and Peter Laslo were the entire sales team of Anglo. Not only
were they responsible for sales of the product but they were also responsible
for locating sources of the cedar shakes and shingles and dealing with the mill
owners to purchase these.
[6] In 2000 a
reorganization was completed. The three individuals ceased to be employees of
Anglo. Patrick Guterres incorporated 596 and Peter Laslo incorporated Peter
Cedar. Randy Engh already had a company (Europa). These three companies formed
a partnership under the name “Tyee Cedar Sales” (“Tyee”) and Tyee entered into
a Sales Representative Agreement with Anglo. This agreement provided, among
other things, that Tyee would be “an authorized sales representative exclusive
to Anglo for the purpose of marketing and distributing the products of Anglo, and
other companies products” and also that “Tyee will provide to Anglo assistance
in purchasing goods and services”.
[7] Generally, Tyee
was to provide the same services that the three individuals had provided
previously. However, there were significant changes in the way in which the
services were to be provided and the manner in which Tyee and the individual
corporations were to be compensated.
[8] Prior to the
reorganization, when the three individuals were employees of Anglo, if an Anglo
mill (which would be a mill owned by Anglo directly or as a partner in a
partnership or a mill for which Anglo had provided financing to allow the mill
owner to acquire the logs to process) had product for sale, the individuals
would have to sell the product of that mill. After the reorganization, the
three individuals could negotiate with any mill to obtain the best price. If
they had a better price from a mill that was not an Anglo mill, the Anglo mill
would have the right to match the price but if they were unable (or unwilling)
to do so, the deal could be completed with the non-Anglo mill. The individuals
had greater discretion and greater control over the purchases of product after
the reorganization.
[9] Perhaps even
more significant than the change in the way in which purchases could be handled
was the change in compensation. Prior to the reorganization the individuals
were paid a commission based only on the selling price of the product sold.
After the reorganization, the amounts payable to Tyee were a percentage of the
gross profit plus freight savings for Anglo (with the percentage share of the
gross profit increasing as the profit of Anglo increased), the yard profits,
profits and freight savings related to Sunset Forest Products (another
brokerage firm that one or more of the three individuals introduced to Anglo),
and sales by either D. Martin or T. Potts. If a loss was incurred, it
would also be shared between Anglo and Tyee.
[10] Randy Engh,
Patrick Guterres, and Peter Laslo stated that prior to the reorganization they
were experiencing frustration with the arrangement with Anglo and wanted a
change. Some, if not all, of these individuals were also being courted by other
companies who wanted to retain their services.
[11] Gerry Clark, the
president of Anglo, stated that he knew that the competitors of Anglo were pursuing
these individuals. He also stated that he was concerned about a declining
supply of material for the cedar shake and shingle products and some of the
severance responsibilities that Anglo could be facing. The impetus for the reorganization
was the desire of the three sales people and Anglo to effect a significant
change in the way in which the buying and sales operations were conducted, the
relationship of the individuals to Anglo, and the way in which the compensation
would be determined.
[12] The common
statement of intention with respect to the selection of a partnership as the
form to effect the reorganization was that there was a very strong desire to ensure
that the three persons would work together and that they would not each work in
their own self-interest. Clearly, the partnership model was chosen because it
reflected a cooperative effort among partners and would encourage the three to
work together.
[13] At the
commencement of the hearing counsel for the Appellants and counsel for the Respondent
filed a Partial Agreed Statement of Facts and Definition of Issue for each
appeal. The issue that was agreed upon by counsel for the Appellants and counsel
for the Respondent is the same for each appeal and it was framed as follows: “did
the Appellant carry on a ‘personal services business’ within the meaning of
subsection 125(7) of the ITA?”
[14] Counsel for each
party also agreed in the same document that “if the issue is answered in the negative,
then the appeal should be allowed and the reassessments should be vacated [and]
if the issue is answered in the affirmative then the appeal should be dismissed”.
[15] As part of the
Partial Agreed Statements of Facts that were filed it was agreed that each of
Randy Engh, Patrick Guterres, and Peter Laslo were specified shareholders of
Europa, 596, and Peter Cedar respectively. It was not argued (and it appears
from the evidence) that neither paragraph (c) nor (d) of the definition of
personal services business will be applicable to any of these corporations.
[16] The three
individuals were also directors of Anglo. As noted by Justice Rip (as he then
was) in Taylor v. Minister of National Revenue, [1988] 2
C.T.C. 2227, 88 DTC 1571, for the purposes of the Act, a director of a
corporation is an employee of that corporation. Counsel for the Respondent did not make any argument
that the companies were carrying on a personal services business simply because
the individuals were directors and therefore employees of Anglo. Counsel for
the Respondent proceeded on the basis that this was not sufficient for the
purposes of the definition of personal services business. I agree with this
position.
[17] The definition of
personal services business provides in part that:
“personal
services business” carried on by a corporation in a taxation year means a
business of providing services where
(a) an individual who performs
services on behalf of the corporation (in this definition and paragraph 18(1)(p)
referred to as an “incorporated employee”),
…
… and the
incorporated employee would reasonably be regarded as an officer or employee of
the person or partnership to whom or to which the services were provided but
for the existence of the corporation,
[18] The Supreme Court
of Canada in The Queen v. Canada Trustco Mortgage Company, 2005 SCC 54,
2005 DTC 5523 (Eng.), [2005] 5 C.T.C. 215, 340 N.R. 1, 259
D.L.R. (4th) 193, [2005] 2 S.C.R. 601, stated that:
10 It has been long established as a matter of statutory interpretation
that “the words of an Act are to be read in their entire context and in their
grammatical and ordinary sense harmoniously with the scheme of the Act, the
object of the Act, and the intention of Parliament”: see 65302 British
Columbia Ltd. v. R., [1999] 3 S.C.R. 804 (S.C.C.), at para. 50. The
interpretation of a statutory provision must be made according to a textual,
contextual and purposive analysis to find a meaning that is harmonious with the
Act as a whole. When the words of a provision are precise and unequivocal, the
ordinary meaning of the words play a dominant role in the interpretive process.
On the other hand, where the words can support more than one reasonable
meaning, the ordinary meaning of the words plays a lesser role. The relative
effects of ordinary meaning, context and purpose on the interpretive process
may vary, but in all cases the court must seek to read the provisions of an Act
as a harmonious whole.
[19] It seems to me
that the reference to the person being “regarded as an officer or employee of
the person … to whom … the services were provided” in the definition of
personal services business should be interpreted as “the incorporated employee
would reasonably be regarded as an officer or employee” of that person in
performing the services provided by the corporation. A personal services
business is a business of providing services that is carried on by a
corporation. Therefore it seems to me that the question of whether the person
would be an employee (but for the existence of the corporation) is to be
decided in relation to the services that were provided by the corporation – not
based on some other services that the individual may be providing as an
employee separate and apart from the services provided by the corporation. The
issue of whether a business is a personal services business only arises if a
corporation is providing services and therefore the question is whether the
person would be an employee in providing those services if the corporation did
not exist.
[20] Just because the
person might otherwise be an employee (as in this case where the individuals
are directors of Anglo) would not be sufficient for the purposes of the
definition of personal services business if the services in question (being the
services provided by the corporation) are separate and apart from the person’s
other employment duties. In this case the provision of the buying and selling
services was separate and apart from the services the three individuals
provided as directors of Anglo. Therefore even though each individual was an
employee of Anglo by virtue of the fact that they were directors of Anglo,
since the services in question were not the services provided by them as
directors, the issue of whether they would be employees in relation to the
purchasing and sales services that were provided is to be decided separately.
The question is whether they would be employees of Anglo in relation to the
provision of these services if Europa, 596 and Peter Cedar did not exist.
[21] As a result, it seems
to me that the issue in these appeals can be rephrased as follows: if Europa, 596,
and Peter Cedar did not exist, would Randy Engh, Patrick Guterres, and
Peter Laslo be employees of Anglo in relation to the sales and purchasing
services that were provided to Anglo or would they be carrying on a business in
providing these services to Anglo? In this case, if they would be carrying on a
business, they would be doing so as members of a partnership.
[22] The issue of
whether a person is an employee or an independent contractor has been the
subject of numerous cases. In 671122
Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] S.C.J. 61, 2001
S.C.C. 59 (“Sagaz”), Justice Major of the Supreme Court of Canada stated
as follows:
46 In my
opinion, there is no one conclusive test which can be universally applied to
determine whether a person is an employee or an independent contractor. Lord
Denning stated in Stevenson Jordan, supra, that it may be impossible to give a
precise definition of the distinction (p. 111) and, similarly, Fleming observed
that "no single test seems to yield an invariably clear and acceptable
answer to the many variables of ever changing employment relations ..."
(p. 416). Further, I agree with MacGuigan J.A. in Wiebe Door, at p. 563,
citing Atiyah, supra, at p. 38, that what must always occur is a search for the
total relationship of the parties:
[I]t is exceedingly doubtful whether the search for a
formula in the nature of a single test for identifying a contract of service
any longer serves a useful purpose.... The most that can profitably be done is
to examine all the possible factors which have been referred to in these cases
as bearing on the nature of the relationship between the parties concerned.
Clearly not all of these factors will be relevant in all cases, or have the
same weight in all cases. Equally clearly no magic formula can be propounded
for determining which factors should, in any given case, be treated as the
determining ones.
47 Although
there is no universal test to determine whether a person is an employee or an
independent contractor, I agree with MacGuigan J.A. that a persuasive approach
to the issue is that taken by Cooke J. in Market Investigations, supra. The
central question is whether the person who has been engaged to perform the
services is performing them as a person in business on his own account. In
making this determination, the level of control the employer has over the
worker's activities will always be a factor. However, other factors to consider
include whether the worker provides his or her own equipment, whether the
worker hires his or her own helpers, the degree of financial risk taken by the
worker, the degree of responsibility for investment and management held by the
worker, and the worker's opportunity for profit in the performance of his or
her tasks.
48 It bears
repeating that the above factors constitute a non-exhaustive list, and there is
no set formula as to their application. The relative weight of each will depend
on the particular facts and circumstances of the case.
[23] As noted by Justice Major above:
The central question is whether the person who has been
engaged to perform the services is performing them as a person in business on
his own account.
Control
[24] One of the factors that is relevant in
determining whether an individual would be an employee is the control that the
payer would have over that person. In this case, it would appear that the level
of control would not support a finding that the individuals would be employees.
The three individuals decided who would be in the office at any particular
time. Anglo wanted to ensure that someone was in the office but it was left to
the three individuals to decide who it would be at any particular time. The
individuals, and not Anglo, decided who would deal with a particular mill or
customer. The individuals and not Anglo determined who would perform what tasks
and when such tasks would be performed in relation to the services to be
provided.
[25] In
the case of Direct Care In-Home Health Services Inc. v. M.N.R.,
2005 TCC 173, Justice Hershfield made the following comments in relation
to control:
11 Analysis of this factor involves a determination of who
controls the work and how, when and where it is to be performed. If control over
work once assigned is found to reside with the worker, then this factor points
in the direction of a finding of independent contractor; if control over
performance of the worker is found to reside with the employer, then it points
towards a finding of an employer-employee relationship. However, in times
of increased specialization this test may be seen as less reliable, so more
emphasis seems to be placed on whether the service engaged is simply “results”
oriented; i.e. “here is a specific task -- you are engaged to do it”. In such
case there is no relationship of subordination which is a fundamental
requirement of an employee-employer relationship. Further, monitoring
the results, which every engagement of services may require, should not be
confused with control or subordination of a worker.
12 In the case at bar, the Worker was free to decline an
engagement for any reason, or indeed, for no reason at all. …
(emphasis added)
[26] In this case the service engaged was
results oriented. The three individuals performed the purchasing and selling
functions and were given a significant amount of latitude and independence with
respect to the performance of these services. The individuals, and not Anglo,
negotiated or set the price at which product would be bought and sold. There
did not appear to be a relationship of subordination between Anglo and the
three individuals but rather they were working together, each performing part
of the brokerage business that was being carried on. In my opinion this factor would
indicate that the relationship would be a business relationship and not an
employment relationship if the three companies did not exist.
Equipment
[27] The three individuals used the offices
located within Anglo’s premises and each individual also had an office in his
home. Presumably when the individuals were at the offices of Anglo they were
using Anglo’s telephone and when they were at home they used their own phone.
Each individual had a vehicle that he would use in carrying out his activities.
They would visit the mill operators at their sites which would be at remote
locations. This factor does not, in and of itself, strongly indicate either an
employment relationship or a business relationship.
Helpers
[28] Tyee had one employee (Daryll Martin)
throughout the relevant period. Therefore the individuals (through Tyee) did
hire their own helper which would indicate that they were carrying on a
business and not employees of Anglo. The compensation schedule attached to the
Sales Representative Agreement provided that Anglo would reimburse Tyee 75% of
the direct employment costs of Mr. Martin for his education and training.
This appears to me to be simply a negotiated payment between Anglo and Tyee.
However since the amount reimbursed is 75% it does reduce the weight that
should be given to this factor.
Financial Risk / Opportunity for Profit
[29] The main component of the compensation was
a percentage of the gross profits of Anglo. The gross profits of Anglo were
directly affected by the efforts of the three individuals as they negotiated
the buying price and the selling price. Anglo was not involved in setting
either amount. What better indication could there be that there was opportunity
for profit? The members of Tyee would also have to share in any losses that may
have been realized, including losses in the yard operations. Therefore,
following the reorganization, the three individuals (through their companies)
were now exposed to the possibility of incurring losses that, prior to the
reorganization, would only be incurred by Anglo. The compensation arrangement
following the reorganization, in my opinion, clearly supports a finding that,
if the three companies did not exist, the three individuals would be providing
their services as a business.
Responsibility for Investment and Management
[30] The management of the sales and purchasing
functions was the responsibility of Tyee. While Anglo had the final approval
for any transaction, Anglo was not involved in negotiating or setting the
purchase price for the shakes and shingles nor was it involved in negotiating
or setting the selling price for the shakes and shingles nor was it involved in
determining which individual would deal with the buyer or the seller. As well
the individuals could make speculative purchases on behalf of Anglo. As noted
above, the three individuals (through Tyee) and Anglo were working together in
carrying on the brokerage business with Tyee and Anglo each being responsible
for how their part of the business operated. Therefore the individuals did have
responsibility for investment and management that would indicate that they
would be providing their services as a business and not as employees, if the
three companies did not exist.
Other Factors
[31] The Respondent had raised several questions
of the witnesses in relation to an employee profit sharing plan that had been
established by Anglo and from which each of the individuals received payments
after the reorganization. However the beneficiaries under the Trust include employees
of Anglo. Although “employees” is not defined for the purposes of the Trust,
since the Trust was established as an employee profit sharing plan as defined
in section 144 of the ITA, it seems reasonable to me that anyone who would be
an employee for the purposes of the ITA, would be an employee for the purposes
of this Trust. As noted above, since each individual was also a director of
Anglo, each individual would also be an employee of Anglo for the purposes of
the ITA and this could explain why payments were made to them under this Trust.
As a result the existence of this Trust and the fact that the individuals
received payments through this Trust does not lead to a conclusion that if the
three corporations did not exist that they would be employees in relation to
the provision of the services of buying and selling product.
[32] The Respondent had also raised several
questions of the witnesses in relation to the life insurance policy held by
Anglo on the lives of the individuals. However it was clear from the evidence
that this related to the shares of Anglo held by each individual (or his
company) and the obligation of Anglo that would arise to repurchase these
shares in the event of that individual’s death. As a result the life insurance
held by Anglo on the lives of the individuals does not lead to a conclusion
that if the three corporations did not exist that these individuals would be
employees in relation to the provision of the services of buying and selling
product.
[33] The Respondent had also raised the issue
that each individual still used Anglo’s name on their business cards. In Flash
Courier Services Inc. v. The Minister of National Revenue, [2000]
T.C.J. No. 235, Justice Rowe held that the couriers were independent
contractors notwithstanding the fact that the couriers had uniforms and
identification cards to identify them as being from Flash. At paragraph 21,
Justice Rowe made the following comments:
21 In the within appeals, one can say that an outsider
observing the intervenor carry out deliveries during the course of a day could
reasonably conclude the business was that of Flash. However, that would be as a
result of the surface arrangement between the parties. Paul had not installed a
sign or otherwise placed information on the side of his vehicle to indicate he
was the owner/operator. As discussed earlier, the security requirements were
the main reason the intervenor - and other couriers - wore a jacket and/or
shirt identiying [sic] them as being from Flash. Flash had the
facilities to receive calls from customers, dispatch the drivers to make
pickups and deliveries, store parcels, and to do all the administration and
accounting in order to account for revenue and the proper allocation between
Flash and each courier in accordance with the percentage set forth in the
particular contract.
[34] The business cards used by the three
individuals did not indicate any particular office or position with Anglo. In
this case the individuals were buying and selling product on behalf of Anglo
and as noted above, were working together with Anglo to buy and sell product.
Anglo provided the financing and the three individuals provided the deals. In
my opinion the fact that the three individuals were using business cards with
Anglo’s name on the cards does not lead to a conclusion that if the three
corporations did not exist that they would be employees in relation to the
provision of the services of buying and selling product.
[35] There is one other significant factor in
this case. All three individuals and their accountant testified that the
profits realized by Tyee were to be divided equally among the partners. For the
year ending December 31, 2001, the allocation of profits was not exactly
one-third to each partner. The percentages for that year were 31.3%, 33.5% and
35.2%. The percentages were close to 33.3% for each but not exact. Part of the
explanation was that one of the partners left during that year (and hence would
not receive a full year’s income) and the balance of the difference was explained
as the partners simply agreeing to minor adjustments to the income allocation.
I accept the explanations and find that the partnership was an equal
partnership, subject to such minor adjustments in allocating income as the
partners may agree upon.
[36] Since Tyee was established as an equal
partnership, this seems to me to clearly indicate that the individuals would
not be providing their services as employees. As employees each employee earns
his or her own salary or commission. The equal sharing of the profit realized
by Tyee confirms that these individuals would be carrying on business in common
as members of a partnership if the three companies did not exist. What could be
a better indication of carrying on business in common than sharing equally in the
profit?
Conclusion
[37] As a result I find that, for the years
under appeal, if Europa, 596, and Peter Cedar did not exist the three
individuals would not be employees of Anglo in relation to the provision to
Anglo of the services of buying and selling product but would be carrying on
business as members of the partnership, Tyee, in providing these services to
Anglo. Neither Europa nor 596, nor Peter Cedar were carrying on a personal
services business as defined in subsection 125(7) of the ITA in providing these
services in any of the years under appeal.
[38] As a result the appeals are allowed and the
reassessments are vacated. Each Appellant shall be entitled to its costs
(except disbursements) determined separately and independently of each other. Therefore
in determining the costs for one Appellant, such costs (except disbursements)
shall be determined as if costs had not been awarded to any other Appellant.
The amount for disbursements for each Appellant shall be determined based on
the amount of disbursements that were charged to or incurred by such Appellant.
Dated at Vancouver, British
Columbia, this 23rd
day of September, 2009.
“Wyman W. Webb”
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