Placements Marcel Lapointe Inc. v. MNR, 93 DTC 821, [1993] 1 CTC 2506, [1993] 1 CTC 2261, [1993] DTC 809 (TCC)

Tremblay, T.C.CJ.:—This appeal was heard on April 8, 1992 in Sherbrooke, Quebec. The last written arguments were filed on May 29, 1992.

1. Point at issue

The question is whether the appellant, a business providing construction cost appraisal services, was entitled to claim deductions of $39,300, $52,800 and $64,000 respectively in calculating its income for the fiscal years ending September 30 of each of the years 1985, 1986 and 1987. The appellant also argued that the assessment issued for the year 1985 was statute-barred given that the waiver referred to by the Minister of National Revenue was not validly consented to by the appellant, contrary to subparagraph 152(4)(a)(ii) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The respondent disallowed the deduction, claiming that, during the years in question, the revenue from appraisal fees in the amount of $39,300 in 1985, $52,800 in 1986 and $64,000 in 1987 constituted income from a personal services business and that the respondent was thus correct in disallowing the small business deduction in respect of those amounts in the calculation of the appellant's income tax, in accordance with the provisions of subsection 125(1) and paragraph 125(7)(d) of the Act.

2. Burden of proof

2.01 The burden is on the appellant to show that the respondent's assessments are incorrect. This burden of proof derives from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In that same judgment, the Court found that the facts assumed by the respondent in support of assessments or reassessments are also presumed correct until proof of the contrary. In the instant case, the facts assumed by the respondent are described in subparagraphs (a) to (m) of paragraph 9 of the respondent's reply to the notice of appeal. That paragraph reads as follows:

9. In assessing the appellant for its taxation years 1985, 1986 and 1987, the respondent, the Minister of National Revenue, relied inter alia on the following facts:

(a) Placements Marcel Lapointe Inc. claims to be a business providing construction cost appraisal services, which services are rendered by its president and principal shareholder, Mr. Marcel Lapointe; [admitted]

(b) Société de Construction Gératek Ltée retains Placements Marcel Lapointe Inc. in order to obtain appraisal services for the purpose of submissions which it makes to its clients; [admitted]

(c) Société de Construction Gératek Ltée also retains Mr. Marcel Lapointe as an employee, as project coordinator and site supervisor when the submissions are accepted; [admitted]

(d) Mr. Marcel Lapointe, who is an accredited appraiser by profession, [admitted] is paid in the form of wages by Société de Construction Gératek Ltée; [denied]

(e) the corporation Placements Marcel Lapointe Inc. provided its services exclusively to Société de Construction Gératek Ltée during the taxation years in issue; [denied]

(f) during those same years, Société de Construction Gératek Ltée determined Mr. Marcel Lapointe's work schedule, both as regards his duties as project coordinator and site supervisor, and his duties as appraiser, which he performed through his corporation, Placements Marcel Lapointe Inc.; [denied]

(g) the schedules determined between Société de Construction Gératek Ltée and its clients should [sic] be respected by Mr. Lapointe, both personally and through his corporation, Placements Marcel Lapointe Inc.; [denied as drafted]

(h) during the taxation years in issue, Placements Marcel Lapointe Inc. had no office and incurred no expense in order to earn appraisal fees; Mr. Lapointe instead used the office which Société de Construction Gératek Ltée provided him in the context of his employment; [denied]

(i) Placements Marcel Lapointe Inc. received 25 per cent of net annual book profits before tax of Société de Construction Gératek Ltée; [admitted subject to further clarification]

(j) during the taxation years in issue, Mr. Marcel Lapointe was an individual who provided services through his corporation Placements Marcel Lapointe Inc. to Société de Construction Gératek Ltée, and, had it not been for the existence of that corporation, he could reasonably have been considered an employee of Société de Construction Gératek Ltée; [denied]

(k) Mr. Marcel Lapointe owned at least 10 per cent of the shares issued from the capital stock of Placements Marcel Lapointe Inc. during the taxation years in issue [admitted] and was therefore a specified shareholder of that same corporation within the meaning of the Income Tax Act; [denied]

(l) Placements Marcel Lapointe Inc. did not employ more than five full-time employees during the taxation years in issue; [admitted]

(m) Placements Marcel Lapointe Inc. was not associated with Société de Construction Gératek Ltée within the meaning of the Income Tax Act during the taxation years concerned. [ignored]

[Translation.]

3. Facts

The facts of the instant case were substantially presented as follows in the written submissions of the parties.

3.01 On December 16, 1979, under Part I of the Companies Act, R.S.Q. 1977, c. C-38, Marcel Lapointe incorporated the company Placements Marcel Lapointe Inc., the letters patent of which (Exhibit A-1) provide as follows, at clauses 1 and 5:

1. Valuate, estimate and appraise all types of assets, properties and operations. The powers requested do not include those of claims adjuster within the meaning of the Insurance Act, [R.S.Q. 1977, c. A-32].

5. Supervise construction work and manage projects.

[Translation.]

Mr. Marcel Lapointe held 83 per cent of the shares from that time until 1987 and 100 per cent from then until the present.

3.02 In 1979, Placements Marcel Lapointe Inc. opened an appraisal office under the name, “Evaluation des Cantons de I'Est", but, given the existence of another similar corporate name creating confusion, Evaluation des Cantons de I'Est was changed to "Lapointe Smith & Associés Inc.”, in which 50 per cent, and subsequently 33 /3 per cent of the capital stock was held by Placements Marcel Lapointe Inc. This appraisal office provided property appraisal services for mortgage loan purposes and appraisal services for public expropriation purposes.

In December 1982, Placements Marcel Lapointe Inc. sold all the shares which it held in the capital stock of Lapointe Smith & Associés Inc. to Adélard Lachance.

3.03 Experience of Mr. Marcel Lapointe

3.03.1 In 1951, Mr. Lapointe took a course at the Grade 11 scientific level, and, in 1952, he took his first job as a carpenter's apprentice in construction for the company J.M. Jeanson Inc. of Sherbrooke.

In 1954, he left this first job and worked as a carpenter for Adélard Jacques Inc. until 1958, on the condition that, during this last year, he would rise to the position of site foreman.

3.03.2 From 1959 to 1961, he worked successively as carpenter, site foreman, superintendent and estimator for Brassard et Michaud Inc. on projects that concerned the construction of a hospital at Lac Mégantic. At that time, he also took estimation courses at the Institut d'estimation de Montréal, which awarded him an estimator's diploma.

In 1961, he became general superintendent for Brassard Construction Inc. and worked on the construction of a school and a hospital in Beauceville, as well as on the construction of a library.

In 1963, he worked as a building and roads estimator for Mégantic Construction Inc. on the Expo 67 project and on the Décarie autoroute project in Montréal.

3.03.3 He was employed from 1964 to 1978 by J.W. Roy Inc. as a construction project superintendent and estimator. During the years 1967, 1968 and 1969, in addition to his employment, he began appraisal studies which led to his graduation as an accredited appraiser in May 1970. During that period, he worked on the construction of Pavillon II at the CEGEP de Sherbrooke, the Palais des Sports de Sherbrooke, the Le Triolet secondary school in Sherbrooke and the Hôpital Hôtel-Dieu in Sorel. He left J.W. Roy Inc. in December 1978.

3.04 In 1982, the Société de Construction Gératek Ltée (hereinafter "Gératek") was seeking the services of an experienced estimator. It established initial contact with Mr. Lapointe and offered him a 25 per cent interest in the capital stock of Gératek in order to obtain the services of a highly qualified construction project estimator so as to minimize the risk of errors in the filing of submissions.

Mr. Lapointe declined the offer. Instead, he suggested that his company, Placements Marcel Lapointe Inc., which had already been offering such estimation and appraisal services since its incorporation in 1979, provide estimation services to Gératek in exchange for a 25 per cent interest in total before-tax profits realized by Gératek.

Mr. Lapointe explained the refusal of Gératek’s offer by the fact that, since he was providing for his retirement, he did not want to take on major financial risks and that, by obtaining a share of profits, he was thus limiting his risk to the loss of his time in the service of Placements Marcel Lapointe Inc. and to some charges incurred.

3.05 Mr. Marcel Lapointe stated that, in his experience, with the exception of a $500 to $1,000 bonus at Christmas, the profit-sharing scale which he had known in the construction industry prior to Gératek's proposal provided for payment of a bonus of up to 10 per cent of profits realized on a particular project and that he had never known of an employee in that industry who had obtained a 25 per cent share of all thebefore-tax profits of a construction business.

3.06 During his examination, Mr. Beauregard, principal shareholder of Gér- atek, told this Court that he had reached this agreement with Mr. Marcel Lapointe on his own, without consulting his accountant. He indicated that the company's generosity could be explained by Mr. Marcel Lapointe's undisputed experience. In his view, such an agreement was therefore profitable for Gér- atek.

3.07 Mr. Marcel Lapointe contended that, during the years under appeal, Placements Marcel Lapointe Inc. was free to offer appraisal and estimation services to other clients besides Gératek, which it did on a few rare occasions, by providing training courses, for example, to technicians from the office of architect Louis Faucher. Those occasions were rare since Gératek's needs left it little time. He added that the projects to be appraised for submission purposes were drawn from public calls to tender which appeared in specialized newspapers and that advertising in the media or yellow pages was therefore pointless.

3.08 To prepare the estimates, Placements Marcel Lapointe Inc. needed only a pencil, a calculator and a table. Mr. Marcel Lapointe was also master of his own time and of the manner in which those estimates were done.

Mr. Marcel Lapointe and his wife testified that this estimation work was carried out in part at their residence and, in order to complete the submissions, at Gératek's office because Mr. Marcel Lapointe took part in the submissions filing process in concert with Mr. Gérard Beauregard, who made the final decision.

3.09 Mr. Marcel Lapointe testified that, during a normal day, he spent 75 per cent of his time preparing estimates for Placements Marcel Lapointe Inc. and 25 per cent of his time supervising sites for Gératek.

Placements Marcel Lapointe Inc. was paid in the months following the preparation of Gératek's draft financial statements on the basis of calculations done by the latter’s accountant, whom Mr. Marcel Lapointe trusted fully.

3.10 Mr. Marcel Lapointe contended that, if Gératek made no profits, Placements Marcel Lapointe Inc. received nothing and thus lost all the time Mr. Marcel Lapointe had spent preparing estimates. There was one exception, however, in 1987, when a small sum of $6,475 had been paid despite the fact that Gératek had realized an operating loss during that year in the order of $27,077, after taking into account a sum of $352,828 in bad debts [Exhibit 1-2 (1987)]. According to the testimony of Mr. Gérard Beauregard, that bad debt was in no way attributable to an error by Placements Marcel Lapointe Inc. or by Mr. Marcel Lapointe, but to Gératek, which had failed to verify the solvency of a client at a particular site.

Without this bad debt of $352,828, Gératek should have realized an operation profit in the order of $325,751, of which $81,437.75 would have been owed to Placements Marcel Lapointe Inc., according to the agreement and method of calculation illustrated in Exhibit 1-4, that is the application of the 25 per cent paid by Gératek. Matters turned out otherwise; however, and Placements Marcel Lapointe Inc. thus incurred a net loss of $74,967.75.

Mr. Gérard Beauregard explained that the payment of this sum of $6,475 was one way of making up for a small portion of the expenses and services that Placements Marcel Lapointe Inc. had incurred or rendered during that year.

3.11 It was apparently after this agreement had been reached (3.04) between Gératek and Placements Marcel Lapointe Inc. that Mr. Gérard Beauregard suggested Mr. Marcel Lapointe take over supervision of the sites.

Mr. Marcel Lapointe explained that, since Placements Marcel Lapointe Inc. had not provided site supervision services in the past, but only appraisal and estimation services, Mr. Marcel Lapointe agreed to provide these services personally in consideration of a sum of $500 per week.

3.12 A questionnaire dated December 28, 1988 put to Mr. Gérard Beauregard concerning the nature of the work performed by Mr. Marcel Lapointe (Exhibit I-6) shows that the latter worked “ personally” as a site coordinator approximately 25 hours a week during the years in issue.

3.13 The Waiver

3.13.1 A first assessment for the 1985 taxation year had already been prepared on March 3, 1986 [Exhibit 1-1(B)], and it was only on December 15, 1988 that the officer of the respondent, Mrs. Sylvie Lupien, employed at that time by the Department of National Revenue, called at Mr. Lapointe's home and asked him to sign a waiver of the application of the time limitation of three or four years under subsection 152(4) of the Act.

3.13.2 Mr. Marcel Lapointe testified that Mrs. Sylvie Lupien had visited him around lunch time on December 15, 1988 and asked him to sign a waiver (Exhibit A-2) concerning the small business deduction in the amount of $18,242 in respect of the 1985 taxation year.

As a result, on December 15, 1988, the appellant, through its president, Mr. Marcel Lapointe, signed the said waiver.

3.13.3 According to the testimony of Mr. Ballard, head of the group of Mrs. Lupien, when the latter called at Mr. Lapointe's home, the respondent already had enough information to determine that the appellant was operating a personal services business.

Still according to Mr. Ballard's testimony, Mrs. Lupien had to obtain one final piece of information, that is whether the appellant hired more than five employees for the estimation services which it provided to Gératek. However, it appeared that the employee [sic] hired fewer than five employees.

Mr. Ballard further indicated that no waiver is requested if too much information is missing from the file in order to reassess. In such cases, the respondent would abandon any planned reassessment.

3.13.4 Mr. Lapointe testified that he had been pressed by Mrs. Lupien to sign this document, without being able to consult his accountant and that she had mentioned afterward that, whether he signed the said waiver (Exhibit A-2) or not, that would not change the course of events since the Department of National Revenue "had its powers" [translation].

Mrs. Lapointe, wife of Mr. Lapointe, corroborated the testimony of her husband on the fact that the latter, according to her, had had no other choice but to sign the document in question.

3.13.5 Mr. Lapointe also testified that the meeting was very brief, without any explanation as to the implications of such a waiver or of his right to consult a professional before signing.

3.13.6 From December 15, 1988, the time period the Minister of National Revenue had within which to reassess expired on March 3, 1989, which left two and a half months before expiry of the deadline.

3.13.7 A letter of proposed adjustments (draft assessment) to the income previously declared by the appellant in respect of the year 1985 was sent by Mrs. Sylvie Lupien to Malette, Benoît, Boulanger on March 8, 1989, to the attention of Mr. Lapointe (Exhibit 1-7), and the notice of reassessment for the 1985 taxation year [Exhibit l-1(E)] was sent on June 6, 1989.

3.14 At the hearing, counsel for the respondent submitted to us an affidavit signed by Mrs. Lupien, now residing in Vancouver (Exhibit 1-8).

Counsel for the appellant objected to its filing on the ground that it denied his right to cross-examine Mrs. Lupien. The Court allowed the affidavit to be filed subject to a decision at a later date. This objection was rightly made; consequently, the Court, which has not even read the affidavit, will disregard it.

4. Law — case law and doctrine — analysis

4.01 Law

The Court will rely mainly on subsections 125(1) and 152(4)and paragraph 125(7)(d) of the Income Tax Act. These provisions read as follows:

125. Small business deduction.

(1) There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the year, a Canadian- controlled private corporation, an amount equal to 20 per cent of the least of

(a) the amount, if any, by which the aggregate of

(i) the aggregate of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada (other than the income of the corporation for the year from a business carried on by it as a member of a partnership), and

(ii) the specified partnership income of the corporation for the year exceeds the aggregate of

(iii) the aggregate of all amounts each of which is a loss of the corporation for the year from an active business carried on in Canada (other than a loss of the corporation for the year from a business carried on by it as a member of a partnership), and

(iv) the specified partnership loss of the corporation for the year,

(b) the amount, if any, by which the corporation's taxable income for the year exceeds the aggregate of

(i) % of the aggregate of amounts that would be deductible under subsection 126(1) from the tax for the year otherwise payable by it under this Part if the amount determined under subparagraph 126(7)(d)(i) were determined without reference to paragraph 123(1)(c), and

(ii) 2 times the aggregate of amounts deducted under subsection 126(2) from

the tax for the year otherwise payable by it under this Part, and

(c) the corporation's business limit for the year.

125(7)(d) Personal services business.—" Personal services business" carried on by a corporation in a taxation year means a business of providing services where

(i) an individual who performs services on behalf of the corporation (in this paragraph and paragraphs 8(3)(a.1) and 18(1)(p) referred to as an "incorporated employee"), or

(ii) 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

(iii) the corporation employs in the business throughout the year more than five full-time employees, or

(iv) 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;

Subsection 152(4) of the Act will be reproduced if necessary.

4.02 Case Law and Doctrine

Counsel for the parties referred the Court to the following case law and doctrine:

Case Law

(a) Validity of the waiver of the deadlines of three or four years

1. Qureshi v. M.N.R., [1992] 1 C.T.C. 2369, 92 D.T.C. 1150 (T.C.C.);

2. Optical Recording Corp. v. The Queen, [1987] 1 C.T.C. 417, 87 D.T.C. 5024 (F.C.A.) upholding [1986] 2 C.T.C. 325, 86 D.T.C. 6465 (F.C.T.D.);

3. McMillen Holdings Ltd. v. M.N.R., [1987] 2 C.T.C. 2327, 87 D.T.C. 585;

4. Devor v. M.N.R., [1988] 2 C.T.C. 155, 88 D.T.C. 6370, (F.C.T.D.);

5. Burke v. M.N.R. (1965), 38 Tax A.B.C. 56, 65 D.T.C. 260, (T.A.B.);

6. Bailey v. M.N.R., [1989] 2 C.T.C. 2177, 89 D.T.C. 416 (T.C.C.);

7. Cal Investments Ltd. v. The Queen, [1990] 2 C.T.C. 418, 90 D.T.C. 6556 (F.C.T.D.).

(b) Personal services business

8. Tedco Apparel Management Services Inc. v. M.N.R., [1991] 2 C.T.C. 2669, 91 D.T.C. 1391 (T.C.C.);

9. 533702 Ontario Ltd. v. M.N.R., [1991] 2 C.T.C. 2102, 91 D.T.C.982 (T.C.C.);

10. Wiebe Door Services Ltd. v. M.N.R., [1986] 2 C.T.C. 200, 87 D.T.C. 5025;

11. Hauser v. M.N.R., [1978] C.T.C. 2728, 78 D.T.C. 1532;

12. Alexander v. M.N.R., [1969] C.T.C. 715, 70 D.T.C. 6006;

13. Cornforth v. The Queen, [1982] C.T.C. 45, 82 D.T.C. 6058;

14. Les Distributeurs Clé d'Or Inc. v. M.N.R., Cour d'appel du Québec, no. 500-09-001311-836, April 12, 1988.

(c) Presumption of partnership

15. Northern Sales (1963) Ltd. v. M.N.R., [1973] C.T.C. 239, 73 D.T.C. 5200;

16. Latini v. M.N.R., [1971] Tax A.B.C. 159, 71 D.T.C. 107;

17. Beaudoin Daigneault v. Richard, [1984] 1 S.C.R. 2, 51 N.R. 288.

(d) Failure to summon a person likely to shed light on the dispute

18. Pantalons Star Laurierville Ltée v. M.N.R., [1992] 2 C.T.C. 2453;

19. Enns v. M.N.R., [1987] 1 C.T.C. 2256, 87 D.T.C. 208.

Doctrine

20. Pierre Dussault, Robert Langlois, Normand Ratti, Fiscalité corporative DRT 509, (Course notes), University of Sherbrooke, 1990, pages 11 and 12;

21. Interpretation Bulletin IT-90;

22. Conference Report, Tax Problems of Small Business, a round table discussion, 1981, page 342;

23. Conference Report, Update on the Use and Tax Treatment of Corporate and Limited Partnerships, 1976, page 591;

24. Corporate Management Tax Conference 1985, Tax Planning for Executive and Employee Compensation and Retirement, The Outlook for Executive Compensation: Accountability and Shareholder Value, 1985, pagel;

25. Canadian Tax Journal, The Business of Defining a Partnership Under the Income Tax Act, March-April 1974, volume XXII, no. 2, page 190;

26. Conference Report, Partnership, 1971, page 427;

27. Jean-Louis Baudoin, Les obligations, 1983, Les Editions Yvon Blais Inc., page 113.

4.03 Analysis

4.03.1 Counsel provided the Court with memorandums containing their respective arguments. The present appeal in fact raises two questions.

The first point for determination is whether the assessment issued against the appellant for the 1985 taxation year was statute-barred on the ground that the waiver signed on December 15, 1988 by Mr. Marcel Lapointe in favour of the appellant was allegedly not validly consented to in accordance with subparagraph 152(4)(a)(ii) of the Income Tax Act.

Second, this Court must determine whether, for each of the taxation years in issue, the appellant was entitled to claim the small business deduction under subsection 125(1) of the Act in respect of estimate fees in the order of $39,300, $52,800 and $64,000 collected by the appellant from Gératek, or whether, on the contrary, the appellant was not justified in deducting these sums since it had to be considered as a personal services business under paragraph 125(7)(d) of the Act.

4.03.2 Thus, should the reassessment in respect of the year 1985 be set aside on the ground that it is apparently based on an invalid waiver obtained through undue pressure, misrepresentation and illegal means.

First, can the conduct of Mrs. Lupien, an employee of the Department of National Revenue, justify invalidating the waiver obtained by her on December 15, 1988?

Second, does the Tax Court of Canada have jurisdiction to set aside the waiver actually signed by Mr. Marcel Lapointe?

4.03.3 In the judgment delivered by the undersigned in Qureshi [4.02.(1)], I decided, in referring to Devor [4.02(4)], McMillen Holdings Ltd. [4.02(3)] and Optical Recording Corp. [4.02(2)], that the Tax Court of Canada did not have jurisdiction to set aside the waivers which the respondent had apparently obtained through coercion or misrepresentation.

This judgment is recent, and the development of the law on this question has not changed.

4.03.4 In the instant case, however, the appellant argued that, although this Court had already so ruled, it had done so under the former Act entitled Tax Court of Canada Act, short title, 1980-81-82-83, c. 158, T-2, which was subsequently replaced by the Act to amend the Tax Court of Canada Act [sic] (1988,

c. 61, assented to on September 22, 1988) c.-51 (4th Supplement).

The appellant thus argued that the case law deriving from the former Act was no longer applicable because of the wording of the new section 12, conferring on this Court exclusive original jurisdiction to hear questions arising from the application of the Income Tax Act.

He therefore argued that one must interpret the new section 12 of the Act broadly, acknowledging that this Court has the exclusive power to apply the law [sic] in general, including, consequently, the power to set aside a waiver not validly consented to.

4.03.5 In response to this argument advanced by the appellant, the respondent, in his reply of May 29, 1992, emphasized the fact that the present appeal was filed before the coming into force of section 26 of the Tax Court of Canada Act, which was assented to [sic] on January 1, 1991 in the Canada Gazette, Part II, volume 124, page 4358. The notice of appeal was in fact filed on May 25, 1990. Even though an amended notice of appeal was filed on March 27, 1992, it was the first appeal that gave rise to the action.

Section 26 provides that any appeal instituted under the Income Tax Act and pending before the Tax Court of Canada on the day on which the present section comes into force shall be heard as though the latter had not been enacted.

Section 26 reads as follows:

26.(1) Any appeal or proceeding instituted under the Income Tax Act or the Petroleum and Gas Revenue Tax Act and pending before the Tax Court of Canada on the day on which this section comes into force shall be heard and disposed of, and any amendment to an appeal made under paragraph 165(7)(b) of the Income Tax Act shall be heard and disposed of, by that Court as though this Act and sections 13 to 26 and 45 of An Act to amend the Tax Court of Canada Act and other Acts in consequence thereof, chapter 61 of the Statutes of Canada, 1988, had not been enacted.

(2) For greater certainty, an appeal instituted under the Income Tax Act and referred to in subsection (1) shall be heard and disposed of, and all rights and obligations with respect to such an appeal shall apply, as though section 164, subsections 165(3), (4) and (7), 167(4) and (5), sections 170 and 171, subsections 172(1) to (3) and 173(1) and (2), sections 174 to 178 and 179.1 and subsections 225.1(3) to (5), 230(6), 239(4) and 247(3) were read as they existed immediately prior to the coming into force of this section.

[Emphasis added.]

Thus, the respondent argued, and rightly so, that it is indeed section 12 of the former Act that applies to the present case, and, consequently, the state of the law studied in the above-mentioned judgments (4.03.2) and referred by the parties is therefore still applicable to the present case.

Thus, under section 26 cited above, which makes the state of the law relative to the former section 12 applicable, this Court does not have jurisdiction to set aside the requested waiver.

4.03.6 Despite the conclusion given on this first question, the Court will nevertheless rule on the question concerning the validity of the waiver.

First, it appears relevant to reproduce the comment of Rip, J. of this same Court in Bailey [4.02(6)]. The latter explained the reasons for the existence for the waiver in the Act [subsection 152(4) of the Act]. He wrote as follows:

A waiver is usually given by a taxpayer to the respondent when there is an unresolved dispute over one or more specific matters and the three year time period within which the respondent may reassess is fast approaching. The execution of a waiver avoids a hasty reassessment by the respondent; it provides the taxpayer with further opportunity to consider adjustments proposed by the respondent and to allow him to make further representations to support his claim.

The evidence filed by both parties in this case showed that, as of December 15, 1988 (when the waiver was signed), the respondent still had a period of 78 days before the deadline for reassessing the appellant expired. (3.13.6).

Furthermore, it was also admitted in evidence that, on that day, the respondent had almost all the information he needed in order to reassess. It therefore appears that the latter apparently had enough time to reassess if no waiver had been signed. (3.13.3).

4.03.7 If it is true that Mrs. Lupien told Mr. Lapointe during her visit that” In any case, if he [sic] did not sign, the Minister had its powers" [translation], did the appellant truly suffer? The Court does not believe so. The facts in the case and the evidence presented through the testimony and admissions of the parties show that the respondent had the time to reassess the appellant even without the waiver. That waiver no doubt gave the respondent a little more time to reassess. (4.03.6)

Furthermore, as regards the above-mentioned expression used by Mrs. Lupien, the Court is not satisfied with the interpretation that the appellant made of it.

It could also have meant that the Minister had the power to reassess even without that waiver since he was still within the time limits, as shown by the evidence.

4.03.8 Consequently, even if this Court had decided that it did in fact have jurisdiction to rule regarding the waiver, the testimony and evidence submitted do not suggest to us that the waiver signed by Mr. Lapointe was invalid.

Furthermore, the Federal Court has stated in Cal Investments Ltd. [4.02.7], "The taxpayer would not, absent unusual circumstances such as a forged signature, be in a position to repudiate it when the limitations have run out.”

Thus, the expression used by Mrs. Lupien, that is" In any case, the Minister has its powers" [translation] does not constitute an unusual circumstance in this Court's opinion.

4.03.9 Second Point at Issue: Personal Services Business

4.03.9(1) Subject to the oral argument presented by the parties, the sole point for determination at this stage of the analysis is whether Mr. Lapointe could reasonably be considered, within the meaning of section 125 and paragraph 125(7)(d) of the Act cited above (4.01),"as an officer or an employee of Gératek, had it not been for Placements Marcel Lapointe Inc.” [translation].

In other words, can it be said that, had it not been for the existence of Placements Marcel Lapointe Inc., Mr. Lapointe could reasonably have been considered an employee or an officer of Gératek?

4.03.9(2) An answer to this question requires an examination of tests developed by the courts concerning the distinction between an "employee" and a“ "self- employed worker".

Counsel for both parties made a well-structured presentation to us of the tests studied in the context of the instant case.

The tests studied for the purposes of the present case are:

— the degree or absence of control exercised over the work done by the appellant;

— the ownership of the necessary tools;

— the chance of profit and risk of loss;

— the ownership of the business;

— the degree to which the work done is integrated within the payer's business.

It is important to mention that none of the above tests is conclusive in itself. These tests involve matters of fact that will be assessed in light of all the evidence and circumstances put before the Court.

4.03.10 Control test.

The evidence clearly establishes that Mr. Lapointe acquired over the years undisputed experience in the appraisal field.(3.03).

Consequently, this fact renders all the Gératek's control over the estimates done by the appellant quite uncertain.

Furthermore, since changes have occurred in working relations as a result, inter alia, of the increasing specialization of employees, this test has had to be applied in a more refined manner appropriate to each case, employees now being much more independent in the performance of their duties.

4.03.11 In the course of her argument, counsel for the respondent admitted that Mr. Lapointe's undoubted expertise in the appraisal field indeed made it difficult to control the work which he did. However, she situated this control at another level. She saw a form of control, first, in the fact that no submission was made before it was approved in advance by Mr. Beauregard, president of Gératek. Second, Messrs. Beauregard and Lapointe met regularly not only concerning the coordination of work sites, but also to establish estimates in the submissions. According to counsel for the respondent, that showed that a certain degree of control existed not only with respect to the supervision of work sites, but also in relation to the estimates prepared by Mr. Lapointe for the appellant.

4.03.12 Counsel for the respondent also argued that, contrary to what Mr. Beauregard had claimed in Exhibit 1-6 concerning Mr. Lapointe's terms of employment (3.12), Mr. Lapointe spent half his time on work site supervision as an employee and the other half estimating for the appellant.

The Court sees no real consequence for the present matter in this last argument. It is not decisive in the instant case.

4.03.13 The arguments advanced by counsel for the respondent concerning Gératek's control tend to show that there existed an employer-employee relationship between Marcel Lapointe and Gératek.

However, the Court sees the many meetings between Gératek and Mr. Lapointe (for the company) much more as evidence of the collaboration necessary to the coherence of estimates and related submissions than as some form of control which Gératek allegedly exercised over Marcel Lapointe.

The tasks performed by a self-employed worker do not necessarily mean that the latter is cut off from all contact with the payer. On the contrary, some work requires more collaboration with the payer, although this in no way implies an employer-employee relationship.

This test does not appear to harm the appellant. In our view, there is no evidence that the latter could reasonably have been considered an employee of Gératek.

4.04 Ownership of the tools.

Both parties admitted that this test could not be very important in the instant case given the few tools used by Mr. Lapointe for estimation purposes (3.08). The Court is also of this view.

As to the office made available to Mr. Lapointe, the latter said that that office was used more to deliver the estimates which were prepared at his personal residence.

The evidence submitted tends to support this contention. Consequently, there is no point in dwelling further on this point.

4.05 Chance of profit and risk of loss or the test of economic reality.

Although no test is absolutely conclusive, this one has a definite, indeed decisive importance in distinguishing between an employee and a self- employed worker.

While an employee's salary is generally supposed to be a fixed and definite wage, that of a self-employed worker necessarily reflects an entirely different economic situation. Ownership and payment of the cost of tools are an example of this situation (4.04), the principle being that the individual holding employee status incurs no expense in the context of his work. If he does so, he will normally be reimbursed by his employer. It is therefore fundamental to determine whether the appellant in the instant case actually assumed the risks associated with his business, since, in reality, the notions of risk of loss and chance of profit are incompatible with the employer-employee relationship.

4.05.1 As I have already argued in Qureshi v. M.N.R. [4.02(1)], the very structure of the Income Tax Act appears to be based on the economic reality surrounding commercial businesses in which the chance of profit and risk of loss generally co-exist, and in which expenses must be incurred in order to earn income, as opposed to an employment situation in which these factors are generally non-existent.

4.05.2 The evidence submitted shows that Mr. Lapointe turned down a 25 per cent interest in Gératek's capital stock. He preferred to be paid on a scale of 25 per cent of Gératek’s net profits on all accepted submissions. (3.04).

4.05.3 Counsel for the appellant argued that the latter and Gératek pooled their resources, knowledge and skills in order to share the profits that derived therefrom, each assuming the losses in different ways, Gératek having to pay all the suppliers of goods and services at a risk of profit or loss, and the appellant having to prepare estimates at the risk of realizing a profit or of losing the time spent on their preparation.

Thus, he contended that the appellant increased the likelihood of profit by the high quality work of Mr. Marcel Lapointe. Consequently, he argued that the time and quality of the care devoted to the preparation of the estimates were a guarantee of profits, whereas a botched job done quickly in neglected fashion was a guarantee of a loss.

The appellant argued that this agreement was profitable for it during the years in question, but that it had incurred a major loss in 1987 (3.10).

It indicated that the risk of loss lay in the fact that, if the estimate was wrong, execution of the contract that might arise therefrom would necessarily generate an operating loss, thus depriving it of income.

4.05.3 [sic] The appellant also argued that the circumstances described above created a presumption that a partnership existed between Gératek and itself. It based its claim on the following passage from the decision delivered in Northern Sales (1963) Ltd. v. M.N.R. [4.02(16)] at page 246 (D.T.C. 5205):

The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner. Again that factor is not conclusive and the presumption can be rebutted.

The appellant thus argued that such an association demonstrated the existence of an independent business rather than of an employer-employee relationship.

4.05.4 Mention should first be made of the distinction that should be drawn in this case between Marcel Lapointe, employee of Gératek, and Marcel Lapointe who worked for Gératek on behalf of the appellant.

The conditions which Marcel Lapointe, employee of Gératek, enjoyed as site coordinator can have no influence on the question which concerns us.

Once again, Mr. Lapointe worked on behalf of the appellant, the latter receiving 25 per cent of the net profits earned by Gératek (3.04).

It appears obvious that the appellant will also share in the financial losses suffered by Gératek, as was in fact the case in 1987, although the appellant was nevertheless compensated for expenses incurred (3.10).

4.05.5 The question must therefore be asked whether the appellant assumed the risks associated with Gératek. Could the quality of Mr. Marcel Lapointe's work on behalf of the appellant have an influence on Gératek's profitability? Without any doubt.

Lastly, must it especially be determined to what extent the appellant actually assumed the losses generated by Gératek?

4.05.6 Counsel for the respondent submitted that such a situation did not bear a loss for the appellant, but rather a lost opportunity. She indicated that a loss would have been suffered only if the company had had to assume the loss, on a bad debt borne by Gératek, for example (3.10).

She added that, since the appellant had not endorsed Gératek and therefore did not have to cover the loss suffered by Gératek in 1987 with its own funds, it could not claim to have borne a loss personally [sic], but rather a lost opportunity. It appears that this case has the quality of a hermaphrodite [sic], in that each of the parties can view the situation to its own advantage.

4.05.7 Counsel for the respondent thus interpreted lost opportunity and risk of loss or loss suffered as two separate concepts.

The Larousse dictionary defines manque à gagner" (lost opportunity) as "loss bearing on profit" [translation].

The Petit Robert dictionary defines it in the following manner: “lost opportunity to make a profitable transaction; sum that one could have earned" [translation].

Thus it appears that the lost opportunity is a loss of profit, not a loss associated with the risk of loss as that term is usually understood.

The risk of loss implies that the person (physical or moral) assumes the financial risk, is responsible for it, as was the case in this instance with the bad debt assumed by Gératek. Although this necessarily influences the profits which will subsequently be earned by the appellant, the latter in fact bears only a loss of what it could have earned, not a loss which it must assume as a financial risk.

4.05.8 Now is it correct to say that the notion of risk of loss encompasses that of lost opportunity?

The appellant referred us to the Quebec Court of Appeal judgment in Les Distributeurs Clé d'Or Inc. v. Le sous-ministre du Revenu du Québec [4.02(14)], which reads in part:

The evidence shows that the more Clé d’Or products are bought by the retailers of her unit, the larger the bonuses the manager receives. She therefore generates an increased likelihood of profits through her own work, even though she has no risk of loss properly speaking. She has atleast one risk related to the lost opportunity which may arise from failure to generate a larger volume of purchases, and thus sales, among her retailersand also to have new retailers join her unit. In this respect, she certainly risks losing income.

[Translation.]

This Court is also of the view that the appellant in the instant case risked losing income. It seems doubtful to me, however, and I say this with respect, that one can include the notion of lost opportunity in the concept of risk of loss, in the sense in which one becomes financially responsible for the business. Lost opportunity is interpreted on the basis of a potentially realizable profit, not of a financial risk properly speaking, in the sense in which one becomes financially responsible for the business.

4.05.9 To push the argument to the extreme, we could ask ourselves whether the appellant would have assumed a share of the responsibility if Gératek had gone bankrupt. It would certainly have suffered a financial setback since Gératek was its principal source of income. However, one cannot say that it would have suffered the resulting losses, except for the loss of its source of income as an employee of that same company.

4.05.10 The appellant argued that a partnership existed between Gératek and itself. The appellant and Gératek shared a risk in the following circumstances:

(a) The appellant provided appraisal services to Gératek;

(b) The appellant was paid for those appraisal services only if Gératek realized a profit;

(c) If Gératek realized no profit, the appellant was not paid for the appraisal services, and, in that respect, a risk of loss of the value of the appraisal work performed by the appellant, and from which Gératek benefitted, was certainly assumed.

4.05.11 It is true that the appellant and Gératek shared in profits and that the relationship that bound them in fact resembled a partnership.

Under the Civil Code, however, in order for there to be a partnership contract, there must also be a sharing of losses. We have determined above that a lost opportunity is not equivalent to a loss in the sense given that term in a similar context.

A partnership contract therefore cannot be found to have existed between the appellant and Gératek. There was in fact a sui generis contract between them, providing for the pooling of their resources, the sharing of profits and the assumptions of losses by Gératek.

For the appellant, the loss consisted in a lost opportunity as well as a loss of time devoted to the preparation of the estimate.

However, the year 1987 showed that, in such situations, an amount would nevertheless be paid in the form of compensation for costs incurred (3.10).

4.05.12 Counsel for the respondent argued that the 25 per cent received for estimate services could easily be confused as a form of bonus. She referred us to Tedco Apparel Management Services Inc. [4.02(8)], in which the scope of the word "bonus" is discussed, as follows:

In general, a bonus is the type of remuneration that is applicable to an employee, not a shareholder as such . . . still less to an independent contractor.

The Larousse dictionary defines the word “boni” (bonus), inter alia, as "extra wage granted to a worker who exceeds production standards" [translation].

Counsel for the respondent thus submitted that there was nothing to prevent the parties from negotiating a bonus equivalent to 25 per cent of the payer's net profit, as occurred in the instant case. She argued that, by its high performance, the appellant guaranteed itself a better bonus than if it had turned in a mediocre performance.

The Court cannot accept this interpretation. The definition states it clearly: it is an extra wage. In this case, Mr. Lapointe received no base salary. Thus, 25 per cent cannot be considered as a bonus. It constituted his entire earnings.

Furthermore, a bonus of 25 per cent of Gératek's net revenue appears exorbitant if one considers what is normally paid as a bonus. Mr. Beauregard's accountant was incidentally very surprised at the figure. (3.06)

4.06 Earnings

4.06.1 Earnings in the instant case were therefore calculated on the basis of an agreement under which the appellant received 25 per cent of net profit before tax; this calculation being made on the basis of draft financial statements prepared in the months following the close of the fiscal year.

As the evidence showed, and according to the testimony of Messrs. Marcel Lapointe and Gérard Beauregard, such an agreement is unusual in the construction industry.

Consequently, how can this kind of earnings be styled? The Court is of the view that it is more appropriate to that of a senior officer, an individual often of great importance to the company's success, which also explains the high earnings paid to him.

And, as I mentioned, in Tedco Apparel Management Services Inc. [4.02(8)]:

In my view, this part of the evidence is very significant and even conclusive. As the commission was paid on Tangerine's total sales [Gératek's in the instant case], is it not thus reasonable to think that Mr. Cohen [Placements Marcel Lapointe Inc.] was working for Tangerine [Gératek] rather than as an independent contractor [4.03.2(6)]?

This case concerns an identical situation. The appellant was also paid out of the total profits of Gératek (3.04).

4.06.2 In light of the circumstances of the instant case, is it reasonable to consider Marcel Lapointe (representing Placements Marcel Lapointe Inc.) as an officer of Gératek? We must answer in the affirmative. The evidence has clearly shown that Gératek had needed the appellant's services for the undisputed qualifications and competence of Mr. Marcel Lapointe (3.04, 3.06).

Mr. Beauregard also testified to this effect (3.06).

Furthermore, Marcel Lapointe being in fact the appellant's sole representative, it was he whom Gératek wanted to contact when it made the first offer (3.04).

4.07 Specific result.

In general, the fact that there is an agreement to produce a specific result indicates the presence of a business. Consequently, it must be determined whether the taxpayer, the appellant in the instant case, was personally [sic] in the service of Gératek or whether its services were retained in order to perform a specific task.

The appellant in this case was hired to do estimation work. This last case tends to indicate that, in such instances, the appellant may, if necessary, have its work done by another person.

Alexander [4.02(12)] may shed some light in this respect. In that case, the appellant, a radiologist, worked on salary at a hospital. His employment contract provided that the appellant had to take on the administrative responsibilities of his department in addition to providing his professional services as a radiologist.

All the services and all the equipment were provided by the hospital.

The appellant was considered as receiving business income. The fact that he had undertaken by contract to have himself replaced by another person was a decisive factor which led the judge to rule that this indicated that the appellant himself was not necessarily required to be in the hospital’s service, but rather to render services in general personally, or, in exceptional cases, through a third person.

Does the present case point to the same finding? The Court does not believe so.

Once again, the evidence clearly shows that Gératek relied on the appellant for the undisputed personal competence of Mr. Marcel Lapointe (3.04, 3.06). It does not appear conceivable in the circumstances that Gératek had agreed that a third person might perform the estimation work.

As mentioned above, the generous earnings granted the appellant corroborates this analysis in the Court's view.

4.08 Integration. Both parties referred us to Wiebe Door Services Ltd. [4.02(10)]. It appears from this decision that the integration test must be applied from the point of view of the employee, not the employer, as Mac- Guigan, J. indicates:

Of course, the organization test of Lord Denning and others produces entirely acceptable results when properly applied, that is, when the question of organization or integration is approached from the persona of the "employee" and not from that of the "employer", because it is always too easy from the superior perspective of the larger enterprise to assume that every contributing cause is so arranged purely for the convenience of the larger entity. We must keep in mind that it was with respect to the business of the employee that Lord Wright addressed the question "Whose business is it?”

Thus, the question that must be asked in the instant case is not whether the services rendered by the appellant were an integral part of the business of Gératek, but rather, when the appellant performed its estimation work, did it do so in the context of its own business or not?

Each party emphasized certain points which in light of an examination of the facts are not, in the Court's view, conclusive.

In short, the evidence does not satisfactorily corroborate the factors that could have favoured one party or the other with respect to this test.

4.09 Consequently, the Court is of the view that the evidence, the tests which are significant in the instant case are those of earnings and specific result as well as risk of loss, for the reasons mentioned above (3.04, 3.06, 4.06, 4.07).

The notices of reassessment issued by the respondent must therefore be upheld.

5. Conclusion

Consequently, the appeal must be dismissed.

Appeal dismissed.