HER MAJESTY THE QUEEN,
REASONS FOR JUDGMENT
means of a Notice of Assessment dated October 22, 2001, the Minister of
National Revenue (the "Minister") demanded payment from the Appellant
in the amount of $29,095.27 in accordance with Section 160 of the Income Tax
Act (the "Act").
Appellant, a computer technician, formed the corporation 9043-5769 Québec Inc.
("9043") in November 1996. The Appellant was the sole shareholder,
administrator and officer of 9043 during the 1998, 1999 and 2000 taxation
years. During the period at issue, 9043 obtained subcontracts from only one
corporation, Sodéfi Informatique Inc. ("Sodéfi"). The subcontracts
obtained from Sodéfi involved only one client, Hydro-Québec
("Hydro"). During this period, the Appellant was the only employee of
Minister determined that 9043 was a personal services business, as defined in
subsection 125(7) of the Act and reassessments were issued in respect of 9043
on May 16, 2001, denying the deduction for small businesses in respect of the
1998, 1999 and 2000 taxation years:
(i) 1998 – $ 10,316
(ii) 1999 – $ 12,219
(iii) 2000 – $ 1,239
or around May 31, 2001, 9043 declared bankruptcy.
the 1998, 1999 and 2000 taxation years, the Appellant had received dividends
from 9043 totalling $56,783, $70,525 and $58,600 respectively. The Appellant
had included, in calculating his income for the 1998, 1999 and 2000 taxation
years, the amounts of $73,978, $88,156 and $73,250 respectively as grossed-up
Minister held that the payment of these dividends by 9043 constituted a
transfer of property within the meaning of section 160 of the Act and on
October 22, 2001, he held the Appellant jointly and severally liable for
paying an amount equal to the tax debt of 9043 in respect of the 1998, 1999 and
2000 taxation years; the fiscal period of the corporation ended on October 31
in each of these years.
the Appellant is disputing the justification for these reassessments issued
against 9043 on May 16, 2001, maintaining that 9043 was not a personal services
business, but rather an actively operated business and that as such it was
entitled to the deduction for small businesses. He also claims that he cannot
be held jointly and severally liable for the unpaid tax debts of 9043 for the
period at issue, since the Minister wrongly denied 9043 the deduction for small
businesses in respect of the 1998, 1999 and 2000 taxation years.
only question at issue in the instant case is the following: was 9043 a
personal services business within the meaning of subsection 125(7) of the Act
during the period at issue?
relevant portion of subsection 125(7) of the Act reads as follows:
"personal services business"
"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
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,
 In order to determine whether 9043 was, during the period at issue, a
personal services business within the meaning of subsection 125(7) of the Act,
it will be necessary to determine whether it would have been reasonable, in
the instant case, to consider the incorporated Appellant an employee of Hydro,
to which the services would have been provided, but for the existence of 9043.
 Sodéfi, a computer services business, obtained a contract from Hydro
in 1999 (the "contract") under which it undertook to provide to Hydro
analysis and programming services in the "Focus" computer language.
On March 23, 1999, Sodéfi and 9043 signed an agreement (the
"subcontract"), under which 9043 undertook to fulfil the contact. The
subcontract stipulated that 9043 was to retain the services of the Appellant to
carry out the contracts that had been entrusted to it by Sodéfi. The life of
the subcontract was one year. The subcontract stipulated that it would end
automatically at the end of the contract, and that in that case no recourse of
any kind could be exercised by 9043 in respect of virtue of the end of the
subcontract. The subcontract also stipulated that, if Hydro were of the opinion
that 9043 was not discharging its obligations to Hydro's full satisfaction,
Sodéfi could terminate the subcontract, without notice or penalty. The
subcontract that terminated on March 31, 2000, was, however, renewed several
times. Under the terms of the subcontract, Sodéfi was to pay 9043 fees of $55
an hour for each hour of work performed for Hydro by the Appellant. The method
of payment was as follows: Sodéfi paid 9043 for the work done by the Appellant
upon receipt of a statement of account detailing the work and the actual hours
worked by the Appellant for a given month. The corporation 9043 was required to
submit its monthly statement of account to Sodéfi within five working days
following the end of each month. Lastly, the subcontract stipulated that, to
protect the position of Sodéfi with its clients, 9043 and the Appellant would
not perform similar work for Hydro during the year following the end of the
 We can accordingly
assert that it was 9043 that provided services to Hydro in its capacity as a
subcontractor of Sodéfi. Thus, but for the existence of 9043, the Appellant
would have provided services to Hydro as a subcontractor of Sodéfi. The
question that must now be asked is the following: were it not for the existence
of 9043, would it be reasonable to regard the Appellant as an employee of
Hydro, to whom the services were rendered? In order to answer this question, we
must essentially determine whether or not there was a "de facto"
relationship of subordination between the Appellant and Hydro, since it can be
said that, in Quebec, what fundamentally distinguishes a contractor from an
employee is the absence, in the former case, of a relationship of subordination
between the provider of the services and the client and the presence, in the
latter case, of the right of the employer to direct and control the employee.
In fact, we must remember that when the Courts are called upon to define
concepts of Quebec private law for the purposes of the application of a federal law, they
must comply with the rule of interpretation at section 8.1 of the Canadian Interpretation
Act. Thus, in order to distinguish a contractor from an employee, there is
a requirement, at least, there has been since June 1, 2001, to base the
decision on the relevant provisions of the Civil Code of Quebec (C.C.Q.).
These rules are incompatible with the rules set out in such decisions as Wiebe
Door Services Ltd. v. M.N.R.,  3 F.C. 553, and 671122 Ontario Ltd.
v. Sagaz Industries Canada Inc.,  2 S.C.R. 983. Contrary to the
situation under common law, the constituent elements of contracts of employment
have been codified and since the entry into force of article 2085 C.C.Q. and
article 2099 C.C.Q., on January 1, 1994, the courts no longer have the
latitude that the common-law courts have to define what constitutes a contract
of employment or a contract of enterprise or service. If it is necessary to
base ourselves on the case law to determine whether the Appellant "de
facto" performed services for Hydro as an employee or a contractor, it
will be necessary to choose those decisions which took an approach in conformity
with the principles of civil law.
 The Appellant thus
has the burden of proving, according to the balance of probability, the absence
of a relationship of subordination between himself and Hydro. To do this,
evidence of independence such as those that were used in Wiebe Door,
supra, namely the ownership of tools and the risk ogff loss or the
possibility of profit, could be used to demonstrate the absence of a
relationship of subordination between the Appellant and Hydro. Although such
indications of autonomy are not elements that are essential to a service
contract, they can nonetheless be highly revealing with respect to the absence
of a relationship of subordination.
The work of the Appellant for Hydro
 The Appellant testified that he was a programmer-analyst specializing
in the "Focus" language and that in this capacity he had developed
information technology applications for some services of Hydro (the
"client"). He explained that he had also developed databases for the
client and, lastly, that he had submitted management reports.
 The Appellant testified that Hydro used consultants for specific
projects that required expertise that was not to be found among Hydro's
employees. Pierre Lortie, an employee of Hydro who worked with the Appellant,
testified to the same effect. The Appellant explained that his services had
been retained by Hydro because its employees lacked the necessary expertise in
the "Focus" language to complete these projects. He added that 50% of
the members of the information technology team to which he had been assigned
were consultants. Mr. Lortie testified similarly.
 The Appellant related that contracts were assigned to the Appellant in
the following manner: Mr. Phaneuf (the leader of the Information Technology
team for which he worked) asked him to meet with the client, who had an IT
project. At these meetings, the client explained the nature of the project to
the Appellant and asked him for his opinion regarding the number of hours
needed to carry out the project. Subsequently, the client worked out the
schedule for the project and notified Mr. Phaneuf accordingly. The Appellant
explained that he had not taken part in any decisions regarding the budgetary
dimension of the project, since this was the subject of discussions between Mr.
Phaneuf and the client.
 The Appellant explained that no one told him how to do the work that
was required of him, as no one at Hydro really had the skill and expertise to
direct him. In fact, he generally worked on his own, although he was required
to communicate with the Hydro employees.
 The Appellant testified that he could use a computer provided by Hydro
to do his work. For security reasons, he could have access to this computer
only if he was on Hydro premises. He explained that he could have done the
lion's share of his work at his home, with his own computer, if Hydro had
allowed him to access the database from his home. The security reasons cited by
Hydro prevented this.
 The Appellant related that he was obliged to maintain, for all
practical purposes, the same schedule of working hours as the Hydro employees
who were part of his team, so that he could communicate with them. However, he
explained that, in addition to the hours of work stipulated in the schedule, he
had worked many hours, even on weekends, in order to meet the clients'
deadlines. He revealed that he was required to notify Mr. Phaneuf in the event
he was absent because he was sick. He testified that, before taking vacation,
he also had to notify the client, Mr. Phaneuf and Sodéfi. Lastly, he explained
that, during the entire period during which he had performed services for
Hydro, he had not taken any extended vacations. At most, he had taken a few
days leave to extend his weekends from time to time.
 Counsel for the Respondent admitted that the working conditions of the
Appellant were very different from those of the Hydro employees who were part
of his team. In fact, in contrast to these employees, the Appellant was not
entitled to paid vacation or to paid sick leave, and he was not involved in any
pension plan. He received no benefits. In addition, he did not know when his
work would end and he had no promise of contracts in the future; lastly, he was
not a member of any union.
 I will now determine whether or not a relationship of subordination
existed between Hydro and the Appellant in light of the evidence submitted. The
evidence in the instant case reveals that, once the contract was given to the
Appellant and the schedule for the contract had been determined, it was up to
the Appellant to decide how he would proceed. It also emerges from the evidence
that no one at Hydro had the competence or the expertise to supervise the
Appellant. We are thus dealing once again with the situation where the skills
and the expertise of the worker exceed those of the client, hence a situation
where the client can exert little control over the way in which the work is to
be performed. The fact that a task was given to the Appellant and that a
schedule was assigned to him certainly did not, in my view, establish a
relationship of subordination. Do we not, in fact, find the same requirements
in a contract for services? The evidence is thus conclusive, in my view, in
respect of the fact that Hydro gave little or no direction to the Appellant
about the way the work was to be done (the "how"). However, it cannot
be concluded from that that there was no relationship of subordination, simply
because the client exercised little control over the "how", given
that the expertise and the skills of the worker exceeded those of the client.
Thus, a researcher who nonetheless enjoys wide freedom regarding the
performance of his work can nonetheless be subject to a relationship of subordination.
In such cases, the relationship of subordination may be reflected in the
imposition of rules of conduct or by instructions by the client as to where the
work is to be performed and on the time at which and the timeframe within which
the work is to be performed. This relationship of subordination may also be
reflected in a high degree of integration of the worker into the activities of
the client, which is of itself an indicator of a relationship of subordination.
 Did Hydro give or was Hydro able to give instructions regarding the
place where the work was to be performed? The testimony of the Appellant in
this respect deserves to be quoted here:
Q. What was your place of
work or the location where you worked?
A. Well, mainly at Crémazie.
Q. The same place where
Q. ... that Mr. Lortie has
Q. Were there other
A. Sometimes, because there
were various sectors. Sometimes, I often worked in the Richelieu sector, which
is in Saint‑Bruno. I also worked at the headquarters, the building with
the Hydro symbol.
A. I also worked in the West
sector, that means, that's it.
Q. Who determined where you
worked. Was it the client? Mr. Phaneuf? Yourself?
A. Well, depending on where
the client was, sometimes I had to travel, and sometimes I worked on site, for
example, in the Richelieu sector, I was working at Saint-Bruno. I was there four days a week, at
Saint-Bruno and then one day I was in my office at Crémazie.
Q. Could you work from home?
A. Yes, I was connected to
the headquarters via a modem, but it was quite, it was fairly rare that this
was done because the data were confidential and Hydro was not comfortable about
their being accessed from outside, from outside the office.
 The fact that the work could not generally be performed at the
Appellant's residence does not of itself lead me to conclude that the Appellant
was an employee. This requirement was dictated by reasons of security (data
confidentiality). However, the obligation placed upon the Appellant to respond
frequently to being summoned by Hydro and to perform services at a variety of
locations assigned by Hydro seems to me indicative of a relationship of
subordination, even though this obligation is not of itself conclusive. This
obligation to work at the various Hydro buildings so that the Appellant could
communicate with Hydro employees also illustrates a certain integration of the
Appellant into the activities of Hydro.
 Did Hydro give or could it give direction regarding the time when the
work was to be performed? The testimony of the Appellant in this regard
deserves to be quoted:
Q. Regarding the work
schedule now, could you describe your work schedule to us?
A. Well, like...
Q. Mr. Lortie.
A. Mr. Lortie, he had to be
there, I believe between nine thirty (9:30 a.m.) and eleven thirty (11:30 a.m.)
and between one thirty (1:30 p.m.) and three thirty (3:30 p.m.) in the
Q. And that was mandatory?
A. Yes, that was because,
those are the hours, those are the client's working hours. We were
"dealing" with the clients, that meant that you couldn't show up at
night. You had to be there during the hours when the client was there.
Q. And as far as the rest of
the time was concerned?
A. Well, that was flexible,
sometimes I would go home at seven thirty (7:30 p.m.), sometimes I would go
home at nine thirty (9:30 p.m.). Sometimes I might work nine hours in a day,
while on another day I might work six hours, and so on.
It is apparent from the evidence that Hydro was giving instructions to the
Appellant with regard to compliance with a specific schedule. These
instructions included the obligation to be available at certain times, but also
made provision for supervising his hours of work by means of time sheets or a
These facts surely do not demonstrate that there was no relationship of
subordination between the Appellant and Hydro.
 In addition, Hydro imposed rules of conduct on the Appellant. The
evidence revealed that the Appellant was required to notify Mr. Phaneuf if he
were absent because of illness. The Appellant also testified that before taking
leave, he had to notify Mr. Phaneuf. Would a contractor be subject to the same
constraints? I doubt it. Generally, a contractor does not have to ask
permission of a client to be absent or to take vacation. The contractor
generally determines his own vacations and absences. His only obligation is to
meet the schedule.
 In my view, the Appellant agreed to integrate himself into the
operating framework of Hydro in order to provide his services. In the instant
case, the Appellant devoted approximately 40 hours a week to a single Payor
year-round, during the entire period at issue. Mandatory presence at assigned
places of work in accordance with a schedule established so that the Appellant
can communicate with other Hydro employees accordingly leads me to believe that
the Appellant was substantially integrated into the Hydro corporation. Regular
assignment of tasks to be performed and the imposition of rules of behaviour
also lead me to conclude that there was in the instant case a high degree of
integration of the Appellant into the activities of Hydro, which of itself
demonstrates that there was in this case a relationship of subordination
between the Appellant and Hydro.
 Since the evidence allows me to clearly discern that a "de
facto" relationship of subordination existed between Hydro and the
Appellant, I am of the opinion that it would have been reasonable to consider
the Appellant corporation an employee of Hydro, for which the services would
have been performed, but for the existence of 9043.
 For these reasons, the appeal is dismissed, with
Signed at Ottawa, Canada, this 19th day of January
Translation certified true
on this 29th day of May 2006
Monica F. Chamberlain, Reviser