Marotta v. The Queen, 86 DTC 6192, [1986] 1 CTC 393 (FCTD)

McNair, J.:—This is an appeal by the plaintiff from the Minister’s reassessments with respect to the 1972 and 1973 taxation years whereby certain remuneration was treated as income from an office or employment and not as earnings from a professional partnership. A statement of claim was filed for each of the taxation years in issue and a statement of defence was delivered in response thereto. An order was made at the commencement of trial, pursuant to agreement of counsel, that both cases be heard and tried together based on common evidence.

The issue is whether remuneration paid to the plaintiff by the University of Toronto for the teaching of medical students was income from an office or employment with the university so as to constitute income during the calendar year in which the remuneration was received, or whether it was business income from a partnership that should be included in his income for the fiscal years of the partnership in which it was received.

The plaintiff graduated from the faculty of medicine of the University of Toronto in 1949. In 1956, after completing his internship and further medical specialisation, he joined the staff of St. Michael’s Hospital in Toronto as a neurologist. St. Michael’s was, and still is, a teaching hospital affiliated with the medical faculty of the University of Toronto. The plaintiff's appointment to St. Michael’s carried with it an appointment to the University

— Dr. Marotta became a lecturer. In 1969, the plaintiff became physician- in-chief at the hospital. That position was accompanied by a professorial rank at the University. As physician-in-chief, the plaintiff was considered the University's delegate for teaching functions at St. Michael’s, and he was responsible to the chairman of the Department of Medicine for the quality of teaching of medical students at the hospital.

In December of 1971 the plaintiff joined with some other doctors at St. Michael’s to form a professional partnership under the name and style of "St. Michael’s Hospital Physicians Association". There was a written partnership agreement. A preamble to the agreement depicts the relationship with the university in this way:

AND WHEREAS the Hospital is a teaching hospital in affiliation with the University of Toronto and particularly with the Faculty of Medicine of the said University;

The business of the partnership is said to be "the performance of the Medical Functions". These are taken to encompass three other functions, namely, "teaching", “patient” and “hospital”. Collectively, they entail the teaching of medical students and the conducting of related medical research, providing medical advice and treatment to private patients and to patients of the teaching unit of the hospital, and the conducting of laboratory and medical testing as well as research and other activities ancillary thereto.

The professional income of the partners is allocated as income of the partnership. The partnership's Executive Committee is given power, inter alia, to determine the division of profits or losses. Notwithstanding this, the chief of medicine of the hospital has the ultimate authority to determine the allocation and distribution of all salaried remuneration and other revenues received from the University of Toronto in connection with the partners' teaching functions as well as the development and implementation of all academic policies and programs relating to the hospital and its department of medicine. All cheques from the University of Toronto for teaching salaries are paid directly to the individual recipients rather than to the partnership. The partnership operates on the principle of "overage". Each professional partner is given an "income ceiling". Any excess of professional income over the ceiling amount is withheld from the individual partner and put in a pool. From here it is reallocated among those other less favoured members of the partnership whose total income happens to fall short of their respective ceilings. Some of the pool surplus is also made available for academic enrichment.

The partnership's fiscal year ends on the last day of February in each year. Its first fiscal year end was February 29, 1972. In calculating his income for the 1972 taxation year, the plaintiff included his share of the partnership profits for the two-month period ended February 29, 1972. He included in his income for the 1973 taxation year, his share of the profits for the partnership fiscal year ended February 28, 1973.

By notices of reassessment dated December 5, 1975, the Minister reassessed the plaintiff's taxable income for the 1972 and 1973 taxation years by adding in the salaried remuneration of $32,569.86 and $34,103.88 received by the taxpayer from the University of Toronto for those respective years. It is these reassessments that the plaintiff now appeals.

The relevant provisions of the Income Tax Act are sections 3 and 4, subsections 5(1), 6(3), 9(1), 11(2), 248(1) and paragraph 96(1)(f). Subsection 5(1) of the Act reads:

5. (1) Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages or other remuneration, including gratuities, received by him in the year.

It is unnecessary to reproduce the others verbatim.

The fundamental issue is whether the taxpayer's remuneration was income from an office or employment or income from a business or, viewed objectively from the standpoint of the actual hiring or engagement, whether the services in question were rendered under a contract of service or a contract for services.

Each case must be determined on its particular facts but the law has generally recognised four tests for determining whether the engagement under scrutiny is one of service or for services. Traditionally, the courts have focussed on the "control test” in classifying an employment relationship. Under this test, the individual performing the service is a servant, or seen to be working under a contract of service, if the ultimate authority over the performance of his work reposes with his employer in the sense that the individual is subject to his employer’s orders and direction. On the other hand, when an individual is working under a contract for services the manner of performance of his work is left to him; the employer can direct the objective to which the individual’s skill is to be addressed but he is relatively powerless to control the manner in which the individual’s skill is exercised in the circumstances. In many cases, it is the existence of the right of control that is vital rather than its exercise: see Simmons v. Heath Laundry Company, [1910] 1 K.B. 543 (C.A.); Stagecraft Limited v. Minister of National Insurance, [1952] S.C. 288; Morren v. Swinton and Pendlebury Borough Council, [1965] 2 All E.R. 349 (Q.B.D.); Short v. J. and W. Henderson Limited (1946), 62 T.L.R. 427 (H.L.); Argent v. Minister of Social Security, [1968] 1 W.L.R. 1749 (Q.B.D.); Humberstone v. Northern Timber Mills (1949), 79 C.L.R. 389 (H.C.A.) per Dixon, J., at 404; Sim v. M.N.R., [1966] C.T.C. 383; 66 D.T.C. 5276 (Ex. Ct.); and Market Investigations Limited v. Minister of Social Security, [1969] 2 Q.B. 173 (Q.B.D.).

Short v. Henderson, supra, held that a union stevedore employed by the respondent to unload their ship was the latter's employee and, even though the employer's right of selection was curtailed and its control over wages, supervision and dismissal was limited, this did not necessarily mean that the employee was an independent contractor. Here the respondent retained superintendence and control over the method of doing the work and this was the decisive factor in the circumstances.

It follows therefore that the fact that the decision to hire or fire the physician-in-chief must be jointly made by St. Michael’s Hospital and the University of Toronto does not necessarily lead to the inevitable conclusion that the contract here was one for services.

Superintendence and control is an important, determinative test but it cannot be the decisive test in the case of a professional man of particular skill and expertise. In such cases, there can be no question of the employer telling him how he must do his work: Morren v. Swinton, etc., supra. Resort must often be had to other tests.

One that is often applied in the case of professionals is the organization or integration test. Here the determinative factor in distinguishing the contract of service from the contract for services is whether the person is employed as part of the business with his work forming an integral part thereof or whether his work, although done for the business, is not integrated into it but is only accessory to it: Stevenson, Jordon and Harrison, Ltd. v. MacDonald and Evans, [1952] 1 T.L.R. 101 (C.A.)

In Rosen v. The Queen, [1976] C.T.C. 462; 76 D.T.C. 6274 (F.C.T.D.) Marceau, J., applied Lord Denning's decisive test of integration in the Stevenson, Jordon case to find that the part-time university lecturer was an employee and not an independent contractor in that the subjects taught were an integral part of the curriculum of the university so that the business in which he was actively participating was its business and not his own. The case turned on this point but the learned judge nevertheless rejected the taxpayer's argument that the university did not have a sufficient degree of control to create the employee relationship, stating at 465 (D.T.C. 6276):

On the other hand, the degree of control that the universities could exercise over the plaintiff’s lecturing activities appears to me to have been no different than the degree of control a modern university today exercises over the experienced and specialized members of its teaching staff, who are undoubtedly employees. The general freedom he was given in the teaching and examination of his students is certainly not exceptional today, specially at the postgraduate level or in a continuing education division.

Co-ordinational control as to “where" and “when" the work is to be done may loom larger in determining whether the alleged servant was part of his employer's organization than the factor of “how" the work is to be performed: Co-Operators Insurance Ass’n. v. Kearney (1964), 48 D.L.R. (2d) 1 (S.C.C.) at 22-23.

The third test is that of economic reality, where in most cases the issue must be decided by posing the crucial question of whose business or un- dertaking it is in the sense of whether that person is carrying on business for himself or on his own behalf and not merely for a superior. Implicit in this is the question of who runs the risk of profit or loss; Montreal v. Montreal Locomotive Works, [1947] 1 D.L.R. 161 (P.C.) per Lord Wright at 169-70; Regina v. Mac’s Milk Ltd. (1973), 40 D.L.R. (3d) 714 (Alta. C.A.) at 727-29; and Boardman v. The Queen, [1979] C.T.C. 159; 79 D.T.C. 5110 (F.C.T.D.).

The final test is the relatively novel one of the specified result test, which found expression in Alexander v. M.N.R., [1969] C.T.C. 715; 70 D.T.C. 6006 (Ex. Ct.). The case involved a professional radiologist under contract with a hospital to act as departmental head and provide professional services in his field of competence. A fact that was found to be not entirely irrelevant was that the hospital authority did not treat the radiologist as an employee for purposes of pension and income tax deductions at the source, unlike other departmental heads.

Jackett, P., stated the test in these terms at 724 (D.T.C. 6011):

. . . It seems evident that what is an appropriate approach to solving the problem in one type of case is frequently not a helpful approach in another type. On the one hand, a contract of service is a contract under which one party, the servant or employee, agrees, for either a period of time or indefinitely, and either full time or part time, to work for the other party, the master or the employer. On the other hand, a contract for services is a contract under which the one party agrees that certain specified work will be done for the other. A contract of service does not normally envisage the accomplishment of a specified amount of work but does normally contemplate the servant putting his personal services at the disposal of the master during some period of time. A contract for services does not normally envisage the accomplishment of a specified job or task and normally does not require that the contractor do anything personally. If, in this case, the appellant had been given a post to work as a radiologist in the Hospital full time for an indefinite period of time at an annual salary there could, I should have thought, have been little doubt that he was an officer or employee of the Hospital. If, on the other hand, the appellant had had an ordinary medical practice and had undertaken to do exactly the same things that he was in fact bound by the present contract to do, but to do the office part of the work in his own office as and when he could find time to do it, and on the same terms as to payment as we find in the present contract, I do not think that any one would have doubted that it was the ordinary work of a practicing doctor, which is a typical example of work done under contracts for services.

The problem arises in these cases because, in fact, there can be a contract of service that has features ordinarily found in a contract for services and there can be a contract for services that has features ordinarily found in a contract of service.

Collier, J., quoted these comments in Boardman v. The Queen, supra, but held that the government psychiatrist was from the standpoint of business and economic reality an employee, despite the mutual intention of the parties to create the employment status of independent contractor.

By the terms of an agreement dated June 30, 1972 between the university and the hospital the appointment of physician-in-chief or head of the department of medicine teaching service at the hospital is to be made by the hospital but only on the recommendation of a joint search committee and with the approval of a joint relations committee. Both committees are comprised of hospital and university representatives. The plaintiff had been appointed to that post in 1969 before the agreement came into effect but there can be no doubt that the appointment was jointly made by the university and the hospital. Dr. K. J. R. Wightman, Sir John and Lady Eaton Professor of Medicine at the University of Toronto, wrote Dr. Marotta to confirm that he had been recommended for the post of physician-in-chief and requesting his acceptance. The second and third paragraphs of the letter summarize the terms of engagement:

The appointment carries with it the University rank of Professor, and a full-time University post with tenure. The basic University salary is $30,000 per annum with an additional $1,500 available on presentation of vouchers for expenses incurred in necessary travel or entertaining. The appointment is full-time in the sense that an office and one or two secretaries will be provided for you in the Hospital. However it is anticipated that you would be in a position to continue with some private practice. However this should be limited to a point where your net income from private practice should be no more than $15,000.

If you are willing to accept this post on these terms, I will forward my recommendation to the Hospital and to the Dean. I think it would be wise, when the appointment is made, to arrange for a review committee to be set up after you have held the post five years to give an opportunity for you and the University and the Hospital to assess the progress which is being made. I am sure you are aware that all hospital appointments are annual appointments. However if at the end of five years you feel that you do not wish to remain as Head of the Hospital Department of Medicine it would be possible then to step down without loss of rank or salary from the University.

The agreement between the university and the hospital for the establishment of the latter as a teaching hospital did not materially change these terms of engagement. Dr. Marotta continued to be provided with an office and secretarial facilities in the hospital. The university remitted his salary by cheques made payable to him directly. The T-4 supplementaries showed him as an employee of the University of Toronto. There were deductions at source for Canada Pension, unemployment insurance and income tax. In addition, the plaintiff participated in the university's registered pension plan and in its group life and long-term disability insurance plans. Clearly, the university envisaged the position as that of a full-time professor of medicine teaching clinically at an affiliated teaching hospital, and with a strict limitation of $15,000 on private practice income. In the eyes of the university, they had not contracted for the part-time services of a private practitioner. The business at hand from the standpoint of the university was the best teaching of medicine. Dr. Marotta took up the challenge with dedication and zeal.

The plaintiff was given much latitude. He was not held to a strict syllabus or curriculum and seems to have been given a free hand with respect to the subject matter, method and manner of teaching. The plaintiff was free to take vacations when he chose and he was not required to strictly account for his time. The position of physician-in-chief was one of great responsibility. Besides the important teaching role, there were administrative duties to perform such as preparing schedules and syllabuses and monitoring the performance of his teaching colleagues. The plaintiff admitted in his testimony that his own performance was undoubtedly subject to some monitoring by the heads of his department at the university and that the Dean of the faculty was the one ultimately responsible for ensuring that the proper admixture of medical subjects or specialties was being taught.

Dr. Marotta’s duties were performed on a day-to-day basis, unfettered by the trammels of niggling supervision and control. This freedom from supervisory restraint is not at all unusual in modern day university circles. The appointment to the post of physician-in-chief was reviewable at the end of five years. It is true that any decision to remove him from the position would have to be made jointly by the university and the hospital. The con- trol test could not be decisive in his case because of his high professional attainments and the degree of latitude afforded him by the university and the hospital. Nevertheless, it can be logically inferred that had he failed abysmally to live up to the high expectations held of him, the necessary ways and means would have been quickly found to ease him from the post. There can be no doubt but that the ultimate control rested with the university. While the relationship between the plaintiff and the university may have possessed some of the features of a contract for services, especially from the standpoint of control, it is my view that the features common to a contract of service greatly outweigh them in terms of the other three so- called tests.

The work facilities were provided by the university through the medium of the hospital. The risk of profit or loss was on the university rather than the plaintiff. Dr. Marotta placed his eminent professional skill and competence at the disposal of the university in return for recompense. The business in which he was principally engaged was the university’s and not his own and the work done was fully integrated within the teaching system or organization of the university. Finally, the work was not defined by or limited to a specified task or specific objective in any contractual sense.

In my opinion, the weight of evidence shows that the plaintiff’s relationship with the University of Toronto was that of an employee and not that of an independent contractor. The nature of the remuneration received was salary and the mode of its application by the partnership does not change it into business income for tax purposes.

The plaintiff’s appeal is therefore dismissed, with costs.

Appeal dismissed.