REASONS
FOR JUDGMENT
Lyons J.
[1]
C. J. McCarty Inc., the appellant (“CJ”),
appeals the reassessments issued by the Minister of National Revenue (the “Minister”) made under the Income Tax Act (the
“Act”) relating to the taxation years ending December 31, 2007 (“2007”)
and December 31, 2008 (“2008”). CJ has been reassessed on the basis it carried
on a “personal services business” within the meaning of subsection 125(7).
Consequently, CJ is subject to the limited deductions available to its
“incorporated employee” pursuant to paragraph 18(1)(p) and is not entitled
to a small business deduction pursuant to subsection 125(1) of the Act.
I.
Issue
[2]
Bruce McCarty and Steve Blazino, the accountant,
both testified on behalf of CJ and gave credible evidence.
[3]
The issue is whether CJ was a “personal services
business” in 2007 and 2008 (“relevant time”). It is common ground that the case
turns on whether Bruce McCarty “would reasonably be regarded as an … employee
of [MEG Energy Corp. (“MEG”)] but for the existence of [CJ].”
II.
Facts
[4]
Between 1996 to 2000, Bruce McCarty was a consultant
working on a large-scale project in Indonesia, however, he returned to Canada because
of political unrest.
[5]
CJ was incorporated on June 5, 2001. It is owned
by Bruce McCarty, his spouse, Nancy McCarty, and their daughter.[1] According to Mr. McCarty, he
and Nancy were employees of CJ with his daughter working occasionally. He is
the president and sole director of CJ and has 35 years’ experience in construction
management working on large national and international projects. Its head
office is located in Thunder Bay, Ontario. At the relevant
time, CJ was a Canadian‑controlled private corporation.
[6]
Between 2001 to 2004, Mr. McCarty worked with
Bantrel to carry out phase 1 of a construction project for Suncor to build a
plant for a steam‑assisted gravity drain (“SAGD” – a new process that
removes sand, previously mixed with bitumen and water, to produce a flowable
liquid that is deposited into the pipeline). His role was to develop a
construction management team by recruiting personnel and develop systems and
procedures to proceed with construction. Whilst employed at Suncor, he met
Bryan Weir, the Assistant Manager of the Projects Group.
[7]
Subsequently, CJ assisted Access Pipeline Inc. (“Access”)
with a “stumble” that occurred in the same vicinity as the Suncor project. MEG
was a partner and 50% shareholder of Access.
[8]
In need of experienced personnel, Bryan Weir,
now VP Growth Projects for MEG, contacted Bruce McCarty to ascertain his
availability relating to the construction of a refining facility at Christina
Lake which is 130 kilometres from Fort McMurray, Alberta. Mr. Weir wanted to
have a similar arrangement with Mr. McCarty as he did at Suncor. At the relevant
time, MEG employed 150 people.
[9]
CJ decided that it would provide the construction
management services (“services”) to MEG on the formation of three written “Consulting Agreements” effective from December 8, 2005 to January
3, 2007, April, 1, 2007 to March 31, 2008 and March 1, 2008 to December 31,
2008 (“Agreement 1”, “Agreement 2” and “Agreement 3”, respectively).[2] In each Agreement, a Principal
Agreement, with the same date as the Agreement, is appended as Schedule “B.”
[10]
While there is some variation as between the
three Agreements, the key provisions are materially
similar. In these reasons, Agreement 2 will be used as the example with respect
to the terms and conditions covering the three Agreements unless otherwise
noted.
[11]
Article 2.1 provides that MEG agrees to engage
CJ, the consultant, to provide the services during the term of the Agreement.
[12]
Article 4.2 sets out the nature of the Agreement
and stipulates that all the services to be provided
under the Agreement shall be performed by Mr. McCarty, the Principal, on
behalf of CJ to MEG unless otherwise agreed to by MEG in writing.[3] The services, Mr. McCarty’s role and the requirements under the
Agreement (reporting, insurance and expectations as to service delivery) are
set out in Schedules “A” and “B” and Article 4,
respectively.
[13]
Pursuant to Article 10.2, CJ is to require Mr.
McCarty to execute the Principal Agreement under which he would be bound by and
comply with certain terms, including Article 4, as if he was a signatory to the
Agreement. CJ and MEG are signatories to all the Principal Agreements. Mr.
McCarty only executed Agreement 3 in his personal capacity.
[14]
Bruce McCarty testified that Agreement 2 relates
to building a $900 million pilot plant for the SAGD process. CJ reviewed
engineering and schematic drawings and was responsible for contracting goods,
subject to MEG’s approval, and determining the optimum package by trade and
commodity. CJ would be responsible for setting up contracts with contractors –
a multi-trade arrangement involving up to approximately 50 contractors –
establishing time limits and linking in MEG’s purchasing manager. At the time
of Agreement 2, 20 people worked on-site. By the time of
Agreement 3, 1,500 people worked on-site for which accommodations and trailers
had to be arranged by CJ.
[15]
He described Agreement 2 as a “clean contract”
in that it identified an hourly fee of $154 per hour
plus GST (it had been $125 in Agreement 1 and later increased to $164.55 under
Agreement 3). He said that the hourly fee was not his number and was set by Mr.
Weir to accord with industry standards. He also said that the increase in the
hourly rate was the cost of business to reflect the standards and state of the
industry. At one point, he suggested that the increase was in line with what
MEG employees received but in re-direct he clarified that only MEG employees
received raises, not contractors. The allowable hours per month were capped at
200 per month without authorization and he forewarned Mr. Weir that would be
exceeded with a project of this magnitude. He testified that the cap was quite
often exceeded.
[16]
Article 5.3 provides that “the Corporation
shall also reimburse the Consultant for certain out-of-pocket expenses”
including a certain number of return flights to Thunder Bay, lodging and rental
vehicle expenses when residing in Calgary which are subject to verification,
audit and adjustment by MEG if necessary.[4]
Mr. McCarty indicated if he held a meeting, he billed
for food. When in Calgary, he billed the cost of food. Renting a car depended
on the location of his vehicle which was used to tour MEG’s jobsite at
Christina Lake. A person at MEG would make his airline travel arrangements and
if there was a spare seat on MEG’s plane, he would take it. Invoice and expense reports submitted by CJ to MEG for reimbursement
disclose the above types of expenses and a cell phone.
[17]
CJ was obliged to invoice MEG for services
rendered within the first week of the following month. Bruce McCarty stated that he prepared the invoices which his wife
formalized and then sent to Mr. Weir with the expense receipts attached. She paid
the bills, signed the cheques, kept track of bank and financial matters,
prepared HST returns and worked with the accountant all of which took
approximately 12 hours a month. In cross‑examination, he agreed that the
invoices do not show any time allocated to his wife or his daughter nor were
wages paid to them as employees.
[18]
Mr. Blazino, the accountant for CJ, corroborated
in his testimony that Nancy provided the source documentation to the accounting
firm and after various reviews, the accounting firm prepared the financial
statements.
[19]
In computing income, CJ claimed small business
deductions in the amounts of $48,959 and $60,194 and sought to deduct as
ordinary business expenses the amounts of $97,143 and $105,004 (the “Expense
Amounts”) for 2007 and 2008 as follows which included the out-of-pocket
expenses:
|
|
2007
|
2008
|
|
Meals and entertainment
|
$8,587
|
$17,492
|
|
Amortization of tangible assets
|
$807
|
$787
|
|
Bank charges
|
$448
|
$1,087
|
|
Business taxes, licenses and
membership
|
$270
|
$220
|
|
Office expenses
|
$1,543
|
$2,360
|
|
Professional fees
|
$4,600
|
$3,970
|
|
Telephone and communications
|
$2,850
|
$5,388
|
|
Travel expenses
|
$62,508
|
$54,966
|
|
Vehicle expenses
|
$15,530
|
$18,734
|
|
|
|
|
III.
Position
[20]
CJ’s position is that Mr. McCarty could not
reasonably be considered to be an employee of MEG. Consequently, CJ is an
active business entitled to a small business deduction pursuant to subsection
125(1) and should not be characterized as carrying on a personal service business.
[21]
The respondent’s position is that CJ was a
personal services business within the meaning of subsection 125(7). As such, CJ
is prohibited from deducting the Expense Amounts as business expenses and is
restricted to the types of expenses set out in paragraph 18(1)(p).[5]
IV.
Analysis
[22]
All statutory references in these reasons
are to the provisions of the Income Tax Act and the provisions in force for
the 2007 and 2008 taxation years.
[23]
Subsection 125(1) provides that a small business
deduction may be taken by a corporation relating to “… amounts each of which is
the income of the corporation for the year from an active business carried on
in Canada …”
[24]
The definition of “active business carried on by
a corporation” in subsection 125(7) “… means any business carried on by the
corporation other than a specified investment business or a personal services business
…”[6]
[25]
The term personal services business is also
defined in subsection 125(7) and is the central focus of this appeal. That and the
related provision in paragraph 18(1)(p), “… were enacted to deny
certain tax advantages that may be obtained by providing services through a
corporation, rather than personally” that would otherwise be available.[7] These provisions read as
follows:
248(1) Definitions. In this Act, …
“personal services business” - “personal services business”
has the meaning assigned by subsection 125(7); …
…
125(7) Definitions. In this section, …
“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 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;
…
18(1) General limitations. In computing the income of a
taxpayer from a business or property no deduction shall be made in respect of
…
(p) Limitation re personal services business expenses
- an outlay or expense to the extent that it was made or incurred by a
corporation in a taxation year for the purpose of gaining or producing income
from a personal services business, other than
(i) the salary, wages or other remuneration
paid in the year to an incorporated employee of the corporation,
(ii) the cost to the corporation of any
benefit or allowance provided to an incorporated employee in the year,
(iii) any amount expended by the corporation
in connection with the selling of property or the negotiating of contracts by
the corporation if the amount would have been deductible in computing the
income of an incorporated employee for a taxation year from an office or
employment if the amount had been expended by the incorporated employee under a
contract of employment that required the employee to pay the amount, and
(iv) any amount paid by the corporation in
the year as or on account of legal expenses incurred by it in collecting
amounts owing to it on account of services rendered
that would, if the income of the corporation
were from a business other than a personal services business, be deductible in
computing its income;
[26]
The exclusions in paragraphs (c) and (d)
of the provision pertaining to the application of a personal services business
do not apply and are not in issue in this appeal.[8]
[27]
One implication in finding that there is a
personal services business is that the corporate income from a personal
services business is not an active business, therefore does not qualify for a
small business deduction and is taxed at a higher rate than other business
income.[9]
Another implication is that in computing income of a
personal services business, paragraph 18(1)(p) prohibits the deduction
of an outlay or expense relating to an incorporated employee (or amounts
expended by the corporation to collect accounts). Therefore, this paragraph
applies only if the appellant carried on a personal services business.
[28]
The definition of a “personal
services business” in subsection 125(7) requires that there be a “specified shareholder” of the corporation, defined in
subsection 248(1) as any person who holds 10% or more of any class of shares of
the corporation. Bruce McCarty’s shareholding of 40 voting shares in CJ clearly
satisfies that requirement.[10]
[29]
The remaining requirement, in issue in this
appeal, under subsection 125(7) in determining whether a corporation is a
personal service business is:
….whether the incorporated employee [Mr. McCarty] would reasonably
be regarded as an officer or employee [MEG] …. but for the existence of the
corporation [CJ]…[11]
[30]
CJ argued that the key to the definition “is a specified shareholder
of the corporation and the incorporated employee” with the latter defined in
paragraph 125(7)(a) as “an individual who performs services on behalf of
the corporation.” Bruce McCarty was not only a specified shareholder but
performed services on behalf of CJ in his capacity as president and as one of
three employees of CJ that is an active business and should not be
characterized as a personal service business. Therefore, but for the existence
of CJ and based solely on the relationship between Bruce McCarty personally and
MEG, the Court could reasonably conclude that he was not an employee of MEG and
CJ is entitled to the small business deduction and the Expense Amounts claimed.
CJ drew parallels between the present case and in Dynamic. As noted by the respondent, Dynamic is the leading case in
the personal services business context as recently confirmed by the Federal
Court of Appeal in Aniger Consulting Inc. v Canada, 2010 TCC 637,
2011 DTC 1039.
[31]
Clearly, the phrase “but for the existence”
requires the Court to disregard the actual relationship of the parties, MEG and
CJ, and determine what would have been done had a different relationship been
set up as between Mr. McCarty and MEG.
[32]
As noted by Sharlow J. in Dynamic, the
hypothetical question is a manifestation of the wording of paragraphs (b)
and (c) of the definition. In considering whether Dynamic carried on a
personal services business, the Court said that the principles in Wiebe Door
Services Ltd. v. Canada (Minister of National Revenue – MNR), [1986] 3
FC 553 (FCA) [Wiebe Door] and 671122 Ontario Ltd. v Sagaz Industries
Canada Inc., 2001 SCC 59, [2001] 2 S.C.R. 983 [Sagaz] assists in
characterizing whether the individual would reasonably be regarded as an
employee of a third party purchaser of the services provided by the individual if
his/her corporation’s role, rights and obligations were disregarded.
[33]
In Sagaz, the Supreme Court of Canada said
that the central question is whether the individual who has been engaged to
provide services to another is performing them as a person in business on his
or her own account.[12]
To decide that question, it is necessary to look at the factors, enunciated in Wiebe
Door, of control, tools, whether the worker hires helpers, chance of profit
and risk of loss. The relative weight of each of those factors depends on the
facts of the case. Before turning to those factors, it is necessary to
determine if intention is a factor in the application of the provision
pertaining to personal services businesses.
Intention
[34]
Article 3.1 in each Agreement indicates that CJ
considers itself an independent contractor.
[35]
Initially, CJ and the respondent submitted that intention
of the parties in entering the Agreement is irrelevant. CJ had argued that how the
parties choose to describe themselves and their intention is not relevant for
the Court’s consideration. Reliance was placed on the statement by Sharlow J.,
at paragraph 56, in Royal Winnipeg Ballet v Canada
(Minister of National Revenue – MNR), 2006 FCA 87, 2006 DTC 6323 (FCA) that
“… There is ample authority for the proposition that
parties to a contract cannot change the legal nature of that contract merely by
asserting that it is something else …”
[36]
Both parties referred to the decision of 609309
Alberta Ltd. v Canada, 2010 TCC 166, 2010 DTC 1136 [609309 Alberta Ltd.],
in which Boyle J., at paragraph 23, states:
23. In the context of a personal services business determination,
the intention of the parties is not a helpful or relevant test for at least
three reasons. …
[37]
First, this (anti-avoidance) provision is designed
to deny tax advantages otherwise available. Second, a contract between the
corporation purchasing and the corporation providing the services will always
be a contract for services because a corporation can never be an employee under
a contract of services; thus, intention would have been to enter into a
contract for services. Third, the provision requires the Court to disregard the
existence of the corporation and reasonably guess what the parties would have
done otherwise.[13]
In G & J Muirhead Holdings Ltd. v Canada, 2014 TCC 49, 2014 DTC 1067, Boyle J. reiterated that intent is irrelevant relating to the personal services
business provision.
[38]
In W.B. Pletch Co. v Canada, 2005 TCC
400, 2006 DTC 2065, Hershfield J. found the parties’ intention to be a neutral
factor without any bearing in the determination of the hypothetical question posed
in the provision relating to the personal services business as “it is clear
that the relationship targeted by the definition of ‘personal services
business’ cannot simply be a matter of choice; …” The respondent argued that this
anti-avoidance provision is designed to negate the parties’ choice.
[39]
Several recent decisions from this Court have
also held that intent is not a relevant consideration in determining if a corporation
is a personal services business.[14]
[40]
Having reflected on the decision in 1392644
Ontario Inc. (cob Connor Homes) v Canada (Minister of National Revenue – MNR),
2013 FCA 85, [2013] FCJ No. 327 (QL) (FCA) [Connor Homes], in reply
submissions, CJ asserted that the intention of the parties, evidenced by the
terms of the Agreement, is a relevant factor for consideration in the personal
services business context. It viewed Connor Homes as providing a direction
that subjective intent evidenced by objective indicia is to be applied more
broadly than in the Employment Insurance Act and the Canada
Pension Plan context. CJ relied on comments made at paragraph 37 of that decision
that the employee-employer relationship has important legal and practical
ramifications to tort law, social programs, labour relations and taxation
(goods and services registration and status under the Act).
[41]
I agree with CJ’s statement of the principle in Connor
Homes that subjective intent of the parties is measured by the objective
criteria (in Sagaz and Wiebe Door) and add that the Court
referred to a two-stage inquiry where intention is applied at one of the
stages.
[42]
I disagree, however, that the principle applies
in the context of the provision relating to a personal services business. The
language and framing of that provision effectively renders the parties’ intent
redundant - by ignoring CJ’s relationship with MEG as parties to the Agreements
- to determine what Mr. McCarty and MEG would have done by virtue of positing
the hypothetical question. Furthermore, the phrase “would reasonably be
regarded as an … employee” is inconsistent with a subjective approach.
[43]
Significantly, in Dynamic, Sharlow J. did
not consider the parties’ intention as a factor in determining that there was
no personal services business even though the trial judge had addressed intention
as a factor.
[44]
I conclude that intention between the parties does
not assist with the characterization as to whether Mr. McCarty would reasonably
be considered as an employee of MEG in the context of a personal services
business.
[45]
Turning to the facts, the factors and the
question to be determined that but for the existence of CJ, whether Mr. McCarty
would reasonably be considered to be an employee of MEG.
Control
[46]
The question is whether MEG had the right to
control the manner in which Bruce McCarty performed his activities as a
construction manager. CJ argued MEG did not have such right. The respondent
argued that there are indicators of control. In my view, the evidence
establishes that he was mostly self-directed in pursuit
of the desired results without MEG exercising any meaningful
control over his activities.
[47]
It is undisputed that Mr. McCarty has a
specialized expertise and significant management construction experience. In
such instances, the control test suggests that if the entity does not have the
ability to tell the individual what to do or how to do it, it tends to support
an independent contractor.
[48]
The services to be delivered are itemized in
Schedule “A” of the Agreement. Each Agreement shows a finite period of time. Although
there are some common elements across the Agreements (assist with construction
plans, act as a representative at various meetings and provide advice on
certain aspects), the description of services in paragraph 1 of Agreements 2
and 3 and paragraphs 1, 2 and 3 of Agreement 3 appear to be markedly different activities
and projects which is apparent from the invoicing. This could be construed as
Mr. McCarty being available to MEG to do what MEG wanted or could equally be
construed as him being able to select assignments offered.[15] The evidence on this aspect
was not sufficiently detailed. I find this to be a neutral element.
[49]
Article 4.1(b) of Agreement 3 provides that CJ shall provide the services during MEG’s usual business hours. Whilst
that suggests some control, when Mr. McCarty was
cross-examined about this, he said that was “laughable”
as construction occurs 24 hours a day on major sites and with 1,500 people,
problems can occur at any time of the day or night. I find that MEG did not
dictate any hours of work. This diminishes the characterization of an employee
working usual business hours.
[50]
Even though exclusivity was not required by MEG
under the Agreement, the work had been done exclusively for MEG because of the magnitude
of the project. Mr. McCarty said projects of such magnitude seldom come along.
Under the Agreement, he had the right to work for third parties but
acknowledged that was subject to being available to deal with MEG’s problems
and no conflicts of interest pertaining to the obligations with MEG. The right to
work for others points away from an employee relationship.
[51]
Although Mr. McCarty spoke with Mr. Weir twice
monthly, met him on site when visiting Calgary and a three or four-page monthly
progress report went to his desk plus specific reports for awarding contracts.
He said that Mr. Weir was inexperienced, often absent and provided little
direction. Article 3.2 of each Agreement states that
MEG only directed the results to be achieved from the provision of services and
not the method nor manner of achieving such results. This is borne out by Mr. McCarty’s
evidence that he was told to “go build it” and “get it built” but
was not told what to do nor how to accomplish the
desired results. He said “No one told him what to do”. The reporting mechanism
is a form of control and suggestive of an employee, however, in moving to the
desired results, he was left largely to his own devices. This is more conducive
with an independent contractor carrying on business on his own account.
[52]
Overall, I find that there was no meaningful
degree of control by MEG over Mr. McCarty’s work activities. This factor tilts in
favour of an independent contractor.
Integration
[53]
Integration is based on mutual reliance of the
organization (because it needs an individual) and the benefits flowing to the
individual.
[54]
CJ asserted that the fact that a corporation monopolizes
the services of an individual over a lengthier period of time, as noted by the
Court in Dynamic, is not necessarily indicative that an
employer-employee relationship is being forged. In Dynamic, the Court also
considered the history of the individual’s business.
[55]
During the currency of the Agreements, CJ could
have worked for third parties but provided services solely to MEG because of
the scale of the project and the demands on Mr. McCarty’s time similar to Dynamic.
One of the Agreements was for approximately nine months and the others were for
a year. Upon returning from overseas, he saw an opportunity and incorporated in
2001 and began providing his construction management services through CJ.
Subsequent to the conclusion of Agreement 1 but before the commencement of
Agreement 2, CJ was engaged in activities with Access for services rendered in
January and February and in March 2007, unrelated to the three Agreements.[16] He was asked, in cross-examination,
when his responsibilities at MEG would end and responded by saying at the end
of the project which he later clarified as when the “final certificate” was
issued except for warranty work for MEG. At the time of the hearing, CJ
continued to subsist.
[56]
There was no evidence that prior to Agreement 1
being entered into, that a relationship existed previously between him and MEG.
He also indicated that MEG employed a construction manager and there were other
contractors that worked on MEG’s site.
[57]
It is reasonable to conclude that at the
relevant time, the services he provided to MEG would have been provided as an
independent contractor and was not integral to MEG’s business.
Tools
[58]
CJ asserted that no tools were provided by
Dynamic to Mr. Martindale.
[59]
Mr. McCarty confirmed that CJ included in the
amounts charged to MEG, his out-of-pocket expenses for travel, rental vehicles,
accommodations, meals and flights, as previously identified, for which CJ paid
and MEG then reimbursed, and in some instances, MEG arranged the travel for him
directly. Expenses for
automotive, telephone and travel combined that were billed by CJ amount to
$105,000 and $97,000 in 2007 and 2008, respectively. Of those amounts, $96,000
and $89,000, respectively, were reimbursed by MEG. When he was at the jobsites at Christina Lake, he stayed at MEG’s bunkhouse and ate
at MEG’s mess hall.
[60]
The tools and equipment used by Mr. McCarty,
being a cell phone, a computer with Primavera software licensed to MEG or a MEG
engineer to access MEG’s reports that were needed to provide his services were
owned by MEG.
[61]
The equipment provided by CJ or him consisted of
a brief case, pens, pencils, stationery, clothing for chemical spills and his
personal cell phone. He also used his own vehicle when at Christina Lake to
tour the jobsites and go to the site office.
[62]
There was a contribution of tools in varying
degrees by CJ, Mr. McCarty and MEG. Weighing this factor leans slightly in
favour of Mr. McCarty being reasonably regarded as an employee.
Helpers
[63]
The respondent argued that the Agreement with MEG
required Bruce McCarty to perform the services personally as illustrated in
Article 4.2. Article 10.2 is also key in that it states that “The Consultant
shall require the Principal to execute a Principal Agreement in the form
attached hereto as Schedule “B”, whereby the Principal agrees to be bound by,
and to comply with, the terms of Article 3, Article 4, Article 7 and Article 8
of the Agreement, with the same force and effect as if the Principal was a
signatory to the Agreement.”
[64]
The Principal Agreement indicates that having
read and understood the Agreement, Mr. McCarty agrees to be bound by the same
obligations that CJ had agreed to under the Agreement with MEG, as if he had
been a signatory to the Agreement and is to fully comply with all terms,
conditions and be subject to any restrictions even if the Agreement is
terminated. Mr. McCarty said that he had signed the Agreement on behalf of CJ,
but he did not do so in his personal capacity nor did he consider himself
bound. He had only signed Agreement 3 in his personal capacity albeit he did
abide by the terms of the Agreements having provided services and sent
invoices.
[65]
He further indicated that even though he is the Principal and was to perform all the services, it was impossible
as he could not do it all on his own and the contract was to be one part of a group
of people and that was not the reality of the way it worked. During cross-examination, however, he admitted that his wife and
daughter were not on the “payroll” and were not paid wages for their services.
Instead, CJ paid dividends to all three. This was corroborated in the cross‑examination
of Mr. Blazino who confirmed that no salary, wages and no employee benefits or
allowances were recorded as an expense on the income and expense statements for
CJ. He indicated that he was not part of the decision as to why wages were not
claimed.
[66]
Under Article 3.4, CJ
needed the prior consent of MEG to subcontract services. For example, in order
for Mr. McCarty’s wife to provide assistance to him to carry out the services,
approval would have been needed from MEG. Article
4.1(g) says that CJ “shall not subcontract the
provision of any Services without prior consent of the Corporation.” Article 10.7 reads “The Agreement may not be assigned by the
consultant or the services hereunder subcontracted without the prior written
consent of the Corporation.”
[67]
The fact that no wages were paid and there was
no evidence that MEG had consented, is inconsistent with his assertion that Nancy
and their daughter were employees of CJ at the relevant time. I find that
others were not permitted under the Agreement to do any work unless approved by
MEG and Mr. McCarty was to provide the contracted services.
[68]
The evidence relating to this factor leans
towards an employee status.
Chance of
profit and risk of loss
[69]
The chance of profit and risk of loss factor is
intended to reveal whether the activities of Mr. McCarty provided him with the
opportunity for profit in the performance of his activities entailing the kind
of risks that are more typical of those borne by a business entity rather than
an employee.
[70]
The respondent argued that the opportunity for
profit was solely a function of the hours worked times the hourly rate which
was further limited by MEG having the right to not authorize anything over 200
hours per month (initially by Agreement and later by practice).
[71]
CJ was remunerated for the services provided to
MEG for a specified hourly fee. Typically, this is associated with an employee.
However, the Court in Dynamic, at paragraph 56, noted that the
“cost-plus” hourly rate basis contract is commonly used by a subcontractor
carrying on a construction management business.[17] The Court found that it was
normal in that line of work and because Mr. Martindale was not remunerated on a
timely basis, had to assist with warranties and one other aspect of the
remuneration, that this was untypical and pointed away from an employment
relationship even though Mr. Martindale had received an hourly fee, overtime
and a bonus.
[72]
Mr. McCarty did not receive overtime or a bonus.
He confirmed that he did not receive health benefits or pension plans similar
to other MEG employees. He said that senior people that he dealt with at MEG
received stock options. He did not. Weighing these factors leans towards an
independent contractor.
[73]
Initially, he said that increases were the cost
of doing business and industry standards, then suggested these were tied to increases
that MEG’s employees had received and later clarified that only MEG’s employees
received raises. This evidence is inconclusive.
[74]
While the 200-hour cap can be viewed as a
limit, it can also be viewed as opportunity especially since he had forewarned
Mr. Weir of his expectation that it would be easily exceeded on such a project.
His evidence was that it was often exceeded. In my view, the 200-hour cap is an
unusual feature of his remuneration and not typical of an employment scenario.
[75]
Mr. McCarty testified that he had encountered
delays in payment and if Mr. Weir was away, matters would sit on his desk
though he expected that eventually he would be paid. Mr. Blazino testified that
at the end of December 2007, the amount of $20,765 was outstanding in the
accounts receivable which had been invoiced at the end of December 2007 and had
not been received by CJ.
[76]
The normalcy of an hourly rate in that line of
business and the manner he was remunerated (hourly rate, the cap, no fringe
benefits similar to MEG’s employees, the delays in payment and the expectation
of performing warranty work), diminishes the characterization that he would
reasonably be regarded as an employee.
[77]
CJ had argued that the risk elements as to the
liability, the risk of not getting paid or the delay in payment were the
elements that point to an independent contractor status. It referred to the
situation in Dynamic in which there was uncertainty as to the specific insurance
coverage, that no insurance contract or confirmation was entered into evidence
and that Mr. Martindale’s (here Mr. McCarty’s) belief was that Dynamic (here
CJ) was insured under S.I.L.L.’s (here MEG’s) policy did not prevent the Court
from determining it was not a personal services business.
[78]
In the present case, Article
4.1(i) of the Agreement required that general liability insurance of $2 million
and motor vehicle insurance of $1 million be maintained unless it was waived in
writing by MEG. Mr. McCarty denied that the handwritten notation “waived”
adjacent to that Article was his.[18] I accept his evidence on that.
[79]
Significantly, Mr. McCarty testified that the
risk of a “stumble” in the context of an $800 to $900 million project weighed
heavily on CJ with the risk of everyone being sued, CJ and Mr. McCarty
included. I am satisfied with that explanation and his testimony that
contractors would not be allowed on MEG’s site without insurance, lends
credence to his belief that insurance had been arranged
with a small company in southern Alberta, albeit no
documentary evidence was produced. I infer that some insurance had been arranged
whether through CJ’s efforts or by MEG similar to S.I.L.L. in Dynamic.
[80]
In addition to the risk of being sued, if Mr.
McCarty’s performance impacted MEG’s performance, the
provisions would end CJ’s contract.
[81]
The amount billed for expenses and reimbursed in
the present case posed little risk of loss relating to the expenses.
[82]
Based on the manner of remuneration and the exposure
to the risks, it would be reasonable to conclude that the services Bruce McCarty
provided to MEG would have been provided as an independent contractor on his
own account.
[83]
On the totality of the evidence, the weight of
factors is tipped towards an independent contractor and it would not be
reasonable to conclude that, but for the existence of CJ, that Mr. McCarty
would have provided his services to MEG as an employee.
[84]
Having reached that conclusion, it is
unnecessary to consider paragraph 18(1)(p) and CJ is entitled to the
Expenses Amounts as business expenses.
[85]
On the balance of probabilities, I conclude that
but for the existence of CJ, Mr. McCarty would reasonably be viewed as a
person performing services for MEG as a person carrying on a business on his
own account. CJ, therefore, did not carry on a personal services business in
2007 and 2008 as defined in subsection 125(7) of the Act.
[86]
The appeals are allowed.
[87]
Party and party costs are awarded to the appellant.
Signed at Edmonton, Alberta, this 12th day of August 2015.
“K. Lyons”
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