REASONS FOR JUDGMENT
Favreau J.
[1]
The appellants are part of a group of 36
appellants for which the issue is the same; it must be determined whether,
during the 2004, 2005 and 2006 taxation years, each of the appellants was a “personal
services business” within the meaning of subsection 125(7) of the Income
Tax Act, R.S.C. 1985 c. 1 (5th Supp.) as amended (the Act), and whether the
Minister of National Revenue (the Minister) was justified in disallowing the
small business deduction set out at subsection 125(1) of the Act.
[2]
The appellants, except 9016-9293 Québec inc.,
were also part of a group of 32 appellants for which the issues were the same,
namely,
(a) whether each of the appellants was for the 2007 and
2008 taxation years a “personal services business” within the meaning of
subsection 125(7) of the Act, and whether the Minister was justified in
disallowing the small business deduction set out at subsection 125(1) of the
Act; and
(b) In the affirmative, whether each of the appellants was
entitled to limited deductions for personal services businesses within the
meaning of paragraph 18(1)(p) of the Act, and whether the penalties
imposed under subsection 163(2) of the Act were justified in the
circumstances.
[3]
The cases of the other appellants, except
2010-2369(IT)G and 2010‑2396(IT)G, for which discontinuances were filed the day before the
hearing, are suspended until a final decision is rendered in these four test cases.
The list of appellants and groups of files is appended to this judgment.
9016-9202 Québec inc. (9016-9202)
[4]
On April 16, 2007, the Minister made reassessments
in respect of 9016‑9202 for its taxation years ending on August 31,
2004, 2005 and 2006, disallowing the amounts deducted as small business
deductions, namely, $9,282, $8,140 and $7,105 respectively on the ground that
9016‑9202 was a personal services business.
[5]
On September 30, 2010, the Minister made
reassessments in respect of 9016-9202 for its taxation years ending on August 31,
2007 and 2008, disallowing the amounts deducted as small business deductions,
namely, $10,411 and $8,101 respectively and the amounts deducted as expenses,
namely, $47,717 and $7,575 respectively on the ground that 9016‑9202 was
a personal services business and imposing penalties under subsection 163(2)
of the Act, namely, $278 and $773 respectively.
9016-9293 Québec inc. (9016-9293)
[6]
On April 24, 2007, the Minister made
reassessments in respect of 9016‑9293 for its taxation years ending on
August 31, 2004, 2005, 2006, disallowing the amounts deducted as small business
deductions, namely, $4,069, $733 and $3,124, respectively on the ground that
9016‑9293 was a “personal services business”.
9017-6298 Québec inc. (9017-6298)
[7]
On April 18, 2007, the Minister made
reassessments in respect of 9017‑6298 for its taxation years ending on
August 31, 2004, 2005, 2006, disallowing the amounts deducted as small
business deductions, namely, $6,620 $5,148 and $6,016 respectively on the
ground that 9017-6298 was a personal services business.
[8]
On July 28, 2010, the Minister made
reassessments in respect of 9017-6298 for its taxation years ending on August 31,
2007 and 2008, disallowing the amounts deducted as small business deductions,
namely, $7,276 and $6,910 respectively and the amounts deducted as expenses,
namely, $122,054 and $124,831 respectively on the ground that 9017‑6298
was a personal services business and imposing penalties under subsection 163(2)
of the Act, namely, $13,449 and $12,716 respectively.
9046-0221 Québec inc. (9046-0221)
[9]
On April 16, 2007, the Minister made
reassessments in respect of 9046-0221 for its taxation years ending on August
31, 2004, 2005, 2006, disallowing the amounts deducted as small business
deductions, namely, $7,608, $9,410 and $8,894 respectively on the ground that 9046‑0221
was a personal services business.
[10]
On September 20, 2010, the Minister made reassessments
in respect of 9046‑0221 for its taxation years ending on August 31,
2007 and 2008, disallowing the amounts deducted as small business deductions,
namely, $6,547 and $7,584, respectively and the amounts deducted as expenses,
namely, $77,849 and $69,167 respectively on the ground that 9046‑0221 was
a personal services business and imposing penalties under subsection 163(2)
of the Act, namely, $8,610 and $7,046, respectively.
Partial agreement on the facts
[11]
At the beginning of the hearing, the parties
filed by consent a partial agreement on the facts. To make the content easier
to understand, it should be clarified that EBI refers to the corporation EBI
Environnement inc., which has since December 1, 2004, operated the business
that was previously operated by Services Sanitaires RS inc. and that 9069-1122
Québec inc. and 9120-2358 Québec inc. are not part of the test cases. The
partial agreement on the facts reads as follows:
[Translation]
4
EBI operates its business mainly in the areas of
Berthierville, Joliette, Repentigny and Sorel-Tracy.
5
EBI bids on contracts with the cities for
garbage collection and signed contracts with some municipalities or corporations.
6
The specifications signed by EBI and the
municipalities set out the conditions and schedule of collection.
7
Before March 1995, EBI`s employees performed the
garbage collection.
8
Since March 1995, EBI has developed a new
operating structure under which the collection is done by garbage collectors
who are independent contractors.
9
EBI signed about forty contracts with garbage
collectors for garbage collection, including the appellants.
10
The garbage collectors do not perform the same
operations but have signed the same type of contractor agreement with EBI. Only
the appendices of the contracts are different.
11
Operations are divided as follows among the garbage
collectors hired by EBI:
•
65% of the workers collect household waste and
remove it to Groupe EBI’s landfill.
•
25% of the workers collect construction waste
and remove it to the landfill.
•
10% of the workers deal with front loading and
removal to the landfill.
GARBAGE COLLECTORS
12
The following table specifies the incorporation
date and shareholder name for each appellant:
|
Years at issue
|
Appellants
|
Created
|
Shareholders
|
Type of
work
|
|
2004 to 2008
|
9016-9202
Québec
inc.
(Group
A)
|
28/02/1995
|
2004
to 2008: Jean-Rock
Bernèche
|
Roll-off
|
|
2004 to 2006
|
9016-9293
Québec
inc.
(Group
A)
|
28/02/1995
|
2004
to 2006: Jocelyn
Vincent
|
Roll-off
|
|
2004 to 2008
|
9017-6298
Québec
inc.
(Group
B)
|
15/03/1995
|
2004-2008: Jean Houde
|
Garbage pick-up
|
|
2004 to 2008
|
9046-0221
Québec
inc.
(Group
C)
|
23/01/1997
|
2004-2008: Richard
Arnold
|
Front loading
|
|
2006 to 2008
|
9069-1122
Québec
inc.
(Group
D)
|
5/10/1998
|
2004:
Services
administratifs
inc.
2005:
Robert Mandeville
2006-2008:
Jacques Bell
|
Rear loading
|
|
2004 to 2008
|
9120-2358
Québec
inc.
(Group
E)
|
28/08/2002
|
2004:
Jacques Bell
2005:
Sylvain Gravel
2006-2007:
Roger Douaire
2008-2011: Services
administratifs inc.
|
Rear loading
|
13
The appellants who do roll off pick up garbage
containers. Drivers work alone. They are paid per trip at a rate established
based on region.
14
The appellants who pick up garbage are paid
based on an annual lump sum. The appellants employed a person to help with
pick-up.
15
The appellants who do front loading are paid per
load. Drivers work alone.
16
The appellants who do rear loading are paid per
hour.
17
Before their companies were incorporated, Jean‑Rock Bernèche,
Jocelyn Vincent, Jean Houde, Richard Arnold, Jacques Bell
and Roger Douaire were employees of EBI.
18
Appellants 9017-6298 Québec inc., 9069-1122
Québec inc. and 9120‑2358 Québec inc. employed no more than five (5)
full-time employees during the years at issue.
19
Each of the appellants signed a contract with Services
Sanitaires R.S. inc. whereby it undertook to deliver pick-up and transportation
services identified in the appendix to the contract.
20
The income of each of the appellants for the
years at issue came entirely from EBI.
STRUCTURE OF THE COMPANIES
21
During the years at issue, EBI was the
appellants’ sole client.
22
During the years at issue, the appellants’
address was 61 Montcalm Street, Berthierville, P.O. Box 120, that is,
the same as EBI’s address.
23
During the years at issue, the appellants’
financial statements and tax returns were prepared by Pontbriand, Roy, Éthier,
that is, the same firm that prepared them for EBI.
24
During the years at issue, the appellants’
bookkeeping and remittances were done by Monique Grégoire, an employee of Les
Services Administratifs PRE inc. (PRE).
25
Ms. Grégoire works in the offices of , at 61 Montcalm Street in Berthierville.
26
Ms. Grégoire was designated as a contact person
for the purposes of tax, income tax and source deductions for each of the garbage
collector’s companies.
27
During the years at issue, the appellants paid
to the corporation and claimed as operation expenses $300 per month in
professional fees for the services performed by Monique Grégoire and
Pontbriand, Roy, Éthier.
28
EBI assumes the insurance and licensing for its
trucks. Part of the insurance expenses is billed to the appellants by EBI based
on the truck rental contract.
29
The appellants pay for the fuel and for regular
maintenance of the vehicle.
30
The appellants have taken out a health insurance
policy provided by the Comité paritaire des boueurs specifically designed for garbage
collectors.
31
Time sheets are completed by the garbage
collectors.
32
Jean-Rock Bernèche, Jocelyn Vincent, Jean Houde,
Richard Arnold, Jacques Bell and Roger Douaire became employees
of EBI when they were no longer shareholders of the appellants.
Additional facts from testimony
[12]
The following people testified at the hearing
for the appellants: Pierre Sylvestre, President of EBI;
Arthur Pontbriand, a member of the chartered accountants’ firm Pontbriand,
Roy, Ethier s.e.n.c.; Jocelyn Vincent, driver of a roll‑off truck;
Jean-Rock Bernèche, dispatcher at EBI since 2008; Guy Brissette,
Director General of the Comité Paritaire des Boueurs de la Région du Richelieu;
Alain Senneville, Operations Coordinator at EBI; Richard Arnold,
driver of a front‑loading truck; Jean Houde, driver of a rear‑loading
truck who had an employee under his supervision; Serge Brière, Director
General of EBI and Monique Desrochers Grégoire, an employee of
Services Administratifs PRE Inc.
[13]
For the respondent, only Johanne Desmarais,
delivery officer at the Canada Revenue Agency (CRA) testified at the hearing. She
processed the Notices of Objection filed by the appellants.
[14]
EBI is a wholly owned subsidiary of Gestion
Bayonne Inc., a Canadian‑controlled private corporation belonging to the
four (4) Sylvestre brothers (Pierre, Michel, Bernard and René). Services
Administratifs PRE Inc. is held 50% by Gestion Bayonne Inc., while the other
50% is held by 3099‑012 Québec Inc., a management company belonging to
Arthur Pontbriand, Denis Roy and Sylvain Ethier. Since 2008, that is, when the
companies’ structure was dissolved following the CRA’s audit, Services
Administratifs PRE Inc. has held all of the appellants’ shares. During the
years at issue, Services Administratifs PRE Inc. held all of the shares of
9074-2073 Québec Inc., which was in charge of personnel placement for the
appellants.
[15]
Pierre Sylvestre explained the proposal to
become a self-employed driver was put to about forty good drivers recognized
for their reliability and their quick work. For EBI, this resulted in an
economic benefit of about 15% to 20%, mainly due to a reduction in payroll
taxes. For the drivers, the proposed structure enabled them to benefit from a 15
to 20% pay increase and to be assured of an annual rather than seasonal
contract. With regard to disadvantages, the drivers lost benefits flowing from
their employee status and had to assume the costs of the operation and maintenance
of the trucks put at their disposal by EBI and the administrative costs of the
companies belonging to them.
Role of Les Services Administratifs PRE Inc. (PRE)
[16]
PRE dealt with all of the administrative aspects
of the companies belonging to the drivers.
[17]
All of the appellants, with a few
exceptions, were incorporated under Part 1A of the Quebec Companies Act
by the notary Robert Williamson from Boucherville. The authorized share capital
included an unlimited number of voting, participating, no par value class A
shares redeemable at the option of the company and an unlimited number of
non-voting, non-participating, no par value class B shares with a
non-preferential and non-cumulative dividend of 10% yearly, redeemable at the
option of the company. The share capital issued and paid
was at the outset generally comprised of 100 class A shares issued for a
consideration of $100. The companies’ fiscal year ended on August 31 of each
year. The driver to whom a company belonged was also the sole director of the
company. The companies’ incorporation fees were $2,000 payable in 10 monthly instalments
of $200.
[18]
With the help of
Pontbriand, Roy, Ethier s.e.n.c., a chartered accountants’ firm, PRE took care
of bookkeeping, including records, preparing financial statements, federal and
provincial tax returns for the companies and personal returns of their
respective shareholders as well as preparing tax reports and T4 and T5 slips,
declarations of dividends and share transfers. Pontbriand, Roy, Ethier invoiced
PRE for the services it provided to it.
[19]
PRE paid the accounts payable, cashed and
deposited cheques payable to the companies and took care of inter-company
billing.
[20]
PRE also managed a pool of resource-persons
to facilitate the replacement of drivers who were on vacation or sick and to
replace employees who worked on rear‑loading trucks when they were
absent. PRE paid directly the people whose services were
used and billed the companies who used the services of those people.
[21]
PRE billed each company $300 per month in
management fees.
[22]
PRE had only one employee, namely,
Monique Grégoire, and she worked from an office located at 61 Montcalm Street
in Berthierville, that is, at the same address as EBI. Ms. Grégoire
was supervised by Arthur Pontbriand of the chartered accountants’ firm
Pontbriand, Roy, Ethier.
The standard contracts concluded by the garbage collectors’
companies
[23]
Each garbage
collector’s company signed a non-notarized contract with Services Sanitaires RS
Inc., which was then assigned to EBI. All of the garbage collectors’ companies
signed the same contract; only the appendices were different to account for the
type of truck used by the company and to determine the price of the pick-up and
transportation of garbage.
[24]
Under the contract,
the garbage collector’s company undertook to rent the truck described in
Appendix A of the contract, which belonged to Services Sanitaires RS Inc.,
was licensed in its name, covered by appropriate insurance and used to provide
services to the clients of Services Sanitaires RS Inc. The garbage collector’s
company was required to leave on the truck the signage that Services Sanitaires
RS Inc. installed on it.
[25]
The garbage
collector’s company was entirely responsible for ensuring that the truck was
maintained and in good condition, repaired and filled up with fuel at a garage
recognized and approved by Services Sanitaires RS Inc and parked in the place
indicated by Services Sanitaires RS Inc. The garbage collector had to drive the
truck himself at all times and could be replaced only in emergencies and with
the consent of Services Sanitaires RS Inc. Services Sanitaires RS Inc. had the
right to inspect the truck in order to ensure that it met its requirements and
legal requirements.
[26]
The garbage
collector’s company undertook to conduct service calls in accordance with
instructions and terms and conditions that could be occasionally revised by the
parties. If a garbage
collector’s company was for any reason whatever unable to complete the pickup
and transportation of garbage, Services Sanitaires RS Inc. could take any
measure it deemed appropriate to provide the service even if that measure
resulted in a pecuniary loss to the garbage collector’s company. None of the
contract’s clauses should be interpreted as a guarantee by Services Sanitaires
RS Inc. of any volume of work to be given to a garbage collector’s company.
[27]
The garbage
collector’s company picked up and transported garbage as an independent
contractor, and as such, it was responsible (i) for any damage or harm to third
parties or to the truck when damage to the truck resulted from its negligence
or that of its employees; (ii) for continuously holding an insurance policy for
general and professional civil liability; and (iii) for holding all licences,
certificates and authorizations required by law in order to perform the
operations and services set out in the contract.
[28]
The contract
provided for the deposit by the garbage collector’s company of $7,000 as a
security to protect Services Sanitaires RS Inc. against any loss and/or damage
to the truck supplied to the garbage collector’s company or to guarantee for
any amount that could be owed to it by the garbage collector’s company and in
order for the garbage collector’s company to meet its contractual obligations.
[29]
The contract included
a non-competition clause, a non-assignment clause, except with the written
consent of the co-contractor, and termination clauses, one of which allowed the
contract to be terminated by either party upon four weeks’ notice.
[30]
The cost of the
services rendered by the garbage collector’s company was payable monthly by
Services Sanitaires RS Inc., that is, no later than the 15th day of each month
for the services rendered the previous month.
[31]
The garbage
collector personally signed the contract and gave an undertaking to Services
Sanitaires RS Inc., as a solidary co-debtor together with his company to meet
each and every obligation that the garbage collector’s company had agreed to
perform and fulfill under the contract.
Modus operandi of the garbage collectors’ companies
[32]
Jocelyn Vincent, a
driver of a roll-off truck used to transport large containers, explained that
he would go to EBI’s garage at about 6 a.m. to pick up the truck and check its
general condition, the motor-oil level and tire pressure. He would leave the
garage at about 6:15 a.m. to do the assignments assigned to him by the
dispatcher the day before. He would make 4 to 6 trips per day depending on the
distances to travel. He did not have a regular route, and he often received
assignments from the dispatcher through the truck’s onboard communication
system. He would come back to EBI’s garage between 5:30 and 6 p.m., where he would
refuel it and fill out a mechanical sheet and activity logs, which he would
give every day to the dispatcher.
[33]
For his services,
he would receive advances from his company every week, which were based on the
number of containers transported each week. Those advances would be given to
him without source deductions. At the end of the company’s fiscal year, the
advances would be converted into dividends, which would be included in
computing his income for the year.
[34]
Mr. Vincent was a
shareholder of 9016-9293 from 1995 to 2006, and he explained that, before he
became a shareholder of that company, he had been an employee of a business
bought by EBI and that he became an employee of EBI again in 2006 after he had
sold the company to PRE. As an employee of EBI,
he performed the same tasks that he had performed before as a shareholder of
his company. He also acknowledged that he had not incurred any advertising
expenses to increase his sales and that he had always been exclusive to EBI.
When he was sick or on vacation, the truck did not go out. He could not recall
if he had used the resource-persons’ pool to replace himself.
[35]
Mr. Vincent’s testimony was corroborated very
largely by that of Jean‑Rock Bernèche, another roll-off truck
driver, who was a shareholder of 9016‑9202 from 1995 to 2008. From 1982 to 1995, he was an hourly paid employee of Services
Sanitaires RS Inc., and, starting in 2008, he became a dispatcher for EBI.
[36]
For fiscal years ending on August 31, 2004,
2005, 2006, 2007 and 2008, the main operation expense items of his company were
as follows:
|
|
2004
$
|
2005
$
|
2006
$
|
2007
$
|
2008
$
|
|
Truck rental
Maintenance and repair
Fuel
Insurance
Contributions
Fees
|
20,710
15,089
13,198
1,080
2,667
3,600
|
19,685
19,866
12,689
1,080
2,667
3,600
|
22,895
13,684
13,887
1,080
2,267
3,600
|
21,600
6,419
13,178
1,080
2,667
3,600
|
850
689
511
45
2,500
3,600
|
[37]
Mr. Bernèche explained that lost work hours were
not paid and gave as an example the hours of waiting at the Sorel-Berthier
ferry. The cost of the ferry was reimbursed by EBI, however.
[38]
Alain Senneville, a driver of a
rear-loading truck requiring an employee to handle garbage cans, was an employee
of Services Sanitaires RS Inc. when he became a shareholder of 9017-6413 Québec
Inc. He stopped being a shareholder of that company in 2008 and transferred his
shares in the company to PRE without receiving consideration after it had been
stripped of its assets. He became
an operations coordinator at EBI.
[39]
He prepared his
timesheets daily and gave them to Ms. Grégoire at the end of each workday.
The timesheets were used to prepare monthly billing at EBI. His assistant’s
salary was billed to EBI at a pre-established rate. He recruited his assistant
himself from people he knew and he was not obliged to choose an EBI employee.
[40]
The contact
concluded between 9017-6413 Québec Inc. and EBI was a year‑long contract
and the routes were specified in an appendix to it as was the yearly billing
for each route. The prices paid by municipalities could vary from one year to
the next. The garbage collection days were five working days from Monday to
Friday.
[41]
Mr. Senneville’s
testimony was largely corroborated by the testimony of Jean Houde, another
former employee of Services Sanitaires RS Inc., who incorporated 9017-6298 in
1995. The truck he rented was a rear‑loading truck operated with an
assistant. He rented additional trucks in the spring and fall to complete his
routes. He took four to five weeks’ vacation per year and he was replaced by
other drivers, who were mainly employees of EBI. When he was absent, he had to
inform Ms. Grégoire at least 24 hours in advance.
[42]
The routes he was
responsible for occupied him five days per week, and he was paid in dividends.
The company’s operations ceased in 2009, and his shares were transferred to PRE
without consideration.
[43]
Mr. Senneville’s
and Mr. Houde’s companies are part of group B of companies whose cases are on
appeal.
[44]
Richard Arnold, a
former employee of Services Sanitaires RS Inc. since 1993, also testified at
the hearing. He became an
independent garbage collector in 1997 following the creation of 9046-0221, a
company from group C, which has 3 files on appeal.
[45]
His company’s activities
consisted in emptying dumpsters as a sub‑contractor for EBI. It was an
annual contract renewable every year. The truck rented from EBI was
front-loading that did not require an assistant. The truck was parked at the
MPC garage in Tracy, not at EBI’s garage in Berthierville. The truck was also
repaired at the MPC garage and the fuel was bought at a Shell station in Sorel.
[46]
The price of the
services rendered by 9046-0221 was based on the loading of each dumpster.
[47]
The timesheets
prepared by the witness were given each day to Robert Mandeville, an EBI
employee, and were used to prepare EBI’s monthly billing.
[48]
His company served
536 commercial clients of EBI located on the south shore of the
St. Lawrence every week. The garbage collector had to cross the river four
times per day to empty the dumpsters into EBI’s landfill. The cost of the ferry
was assumed by EBI. EBI also paid for a cell phone given to the witness.
[49]
Mr. Arnold remained
a shareholder of his company until August 31, 2010, on which date he again
became an employee of EBI, and was again paid an hourly wage and served the
same clients with the same truck.
Contribution to the Comité Paritaire des Boueurs
[50]
The Comité
Paritaire manages a mandatory group insurance plan for employees in the
industry whose contributions are paid by employers. The plan is optional for
self-employed workers. Since 2003, the industry did business with 180 self‑employed
workers, only 30 of whom were using the group insurance plan. The interposition
of a company did not affect the self-employed status of the workers who joined
the plan. The premium payable for a worker, which was paid as a dividend, was
$25 per month. The current monthly premium for employees is $350. A self‑employed
worker who was a plan member benefited from long-term wage insurance up to age
60.
[51]
The Comité
Paritaire established the conditions of employment including remuneration for
workers who were subject to the order, namely, employees who had worked 350
consecutive hours in a quarter. The order set out a base salary of $17 to $18
per hour, with time and a half paid after 40 hours of work from Monday to
Saturday and double time on Sundays.
End of the companies’ operations
[52]
All activities of
the companies ceased on August 31, 2010, with the cancellation of the
truck rental contracts.
[53]
At the end of
operations, the goal was to distribute the net value of each company’s assets
in the form of dividends after the accounts payable were paid to suppliers.
Each company’s shares were acquired by PRE for a consideration of $1. Some
companies, including that of Jean Houde, had a deficit when they closed.
The deficit amounts were not claimed from the garbage collectors because they
were mainly attributable to mechanical failures or compensation guarantees.
Applicable law
[54]
Subsection 125(7)
of the Act provides that in cases where, but for the existence of the
corporation, the incorporated employee would reasonably be regarded as an
officer or employee of the corporation to which the services are provided, as
opposed to a self-employed worker, the corporation must be considered a
“personal services business” (PSB). More specifically, subsection 125(7)
of the Act defines a PSB as follows:
125(7) Definitions — In this section,
“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;.
[55]
Paragraph 18(1)(p) of the Act limits the
expenses that PSBs can deduct in the computation of their business income.
Paragraph 18(1)(p) of the Act reads as follows:
18. (1) In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of
. . .
Limitation re
personal services business expenses
(p) 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;
[56]
For the 2007 and 2008 taxation years, the CRA
imposed penalties under subsection 163(2) of the Act the conditions for the
application of which are as follows:
False statements or omissions
163(2) Every person who, knowingly, or under
circumstances amounting to gross negligence, has made or has participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return, form, certificate, statement or answer (in this section referred to as
a “return”) filed or made in respect of a taxation year for the purposes of
this Act, is liable to a penalty of the greater of $100 and 50% of the total of
. . .
[57]
Since the contracts concluded between the
garbage collectors’ companies and EBI and/or Services Sanitaires RS Inc. are
governed by the Quebec civil law and since the concepts of contract of
employment and of contract for services are not defined in the Act, we must
refer to the Civil Code of Québec (the CCQ) in accordance with what is
set out in the Federal Law—Civil Law Harmonization Act, No. 1, S.C.
2001, c. 4, and in section 8.1 of the Interpretation Act, R.S.C., 1985,
c. I—21.
[58]
More specifically, the definitions of the
contract of employment and the contract for services found in articles 2085,
2098 and 2099 of the CCQ are relevant to this dispute. These provisions read as
follows:
2085
A contract of
employment is a contract by which a person, the employee, undertakes for a
limited period to do work for remuneration, according to the instructions and
under the direction or control of another person, the employer.
. . .
2098
A contract of
enterprise or for services is a contract by which a person, the contractor or
the provider of services, as the case may be, undertakes to another person, the
client, to carry out physical or intellectual work or to supply a service, for
a price which the client binds himself to pay to him.
2099
The contractor or
the provider of services is free to choose the means of performing the contract
and, with respect to such performance, no relationship of subordination exists
between the contractor or the provider of services and the client.
Analysis
[59]
Under the civil law of Quebec, the existence of
a relationship of subordination is essential in order to find that a contract
of employment exists.
[60]
Subordination exists if the payer has the power
of determining the work to be done, overseeing its performance and controlling
it.
[61]
It is not whether control has been exercised by
the employer, or not, that matters; it suffices that the employer had the power
to exercise it. That principle has been reaffirmed many times by the Federal
Court of Appeal, for example, in Gallant v. M.N.R., (1986) F.C.J. No.
330 and Les entreprises une affaire d’anglais inc. v. M.N.R., 2008 TCC
524.
[62]
The contract of enterprise is characterized by
the lack of control by the client with regard to the performance of work. The
provider of services is free to choose the methods of performing the contract.
[63]
The criteria developed by the common law,
namely, ownership of tools, expectation of profit, risk of loss and integration
into the business may be useful in qualifying a contract concluded under the
civil law of Quebec because they constitute indicia of supervision among many
others.
[64]
However, the criterion of the intention of the
parties to a contract does not need to be analyzed as to determination of the
existence of a PSB. The leading cases on this point are, inter alia, 609309
Alberta Ltd. v. Canada, 2010 TCC 166, 1166787 Ontario Ltd. v. Canada,
2008 TCC 93, Dynamic Industries Ltd. v. Canada, 2005 FCA 211 and 758997
Alberta Ltd. v. Canada, 2004 TCC 755. This is because the concept of a PSB
is an anti-avoidance provision aimed at denying the reduced small business
corporate tax rate and associated tax deferral to certain corporations’
businesses. The reduced rate and the sought-after tax deferral could not be
achieved to begin with unless the parties intended an independent contractor
relationship. The wording of the definition of a personal services business in
subsection 125(7) requires a court to ignore the independent contractor
relationship and make a reasonable guess but for the existence of the
corporations.
[65]
The question that the Court must raise at this
stage is as follows: but for the existence of the corporations, would it be
reasonable to consider that, during the 2004, 2005, 2006, 2007 and 2008
taxation years, there was a relationship of subordination between the
incorporated garbage collectors and EBI?
Context
[66]
At the outset, let us remember the context in
which the system was set up. Before 1995, Services Sanitaires RS Inc. used only
employees to collect garbage. In March 1995, Services Sanitaires RS Inc.
decided that its garbage collectors should function as independent garbage
collectors (i.e. as independent sub‑contractors) and be incorporated; if
not, Services Sanitaires RS Inc. would not sign service contracts with them.
Services Sanitaires RS Inc. thus took the initiative to set up the system and
had information sessions with the most reliable and most experienced truck
drivers to convince them to incorporate. Arthur Pontbriand and
Serge Brière, among others, took part in the information sessions.
[67]
With the help of the chartered accountants’ firm
of Pontbriand, Roy, Éthier, its external auditors, Services Sanitaires RS Inc.
took care of all of the administrative aspects of setting up the turn-key
system. The garbage collector had to only sign the service contract with
appendices, the truck rental contract, documents for incorporating the company
and the bank documents for opening a bank account to be in business.
[68]
All of the companies belonging to the garbage
collectors had the same fiscal year ending on August 31 of each year and had
only one shareholder and one director. The chartered accountants’ firm of Pontbriand,
Roy, Éthier prepared the financial statements, the companies’ tax returns and
the personal tax returns for almost all of the garbage collectors. Arthur
Pontbriand insured that the garbage collectors’ companies were in order.
[69]
The appellants all had the same capital
structure; they were created with a nominal capital investment and they were operated
in the same fashion. The appellants had the same mailing address as EBI, and
they all incurred the same administrative and insurance expenses.
[70]
Following the reassessments made by the CRA, EBI
decided to terminate the system, and all of the garbage collectors transferred
their respective companies’ shares to PRE without consideration, and most of
them returned to work for EBI. EBI even had to assume some deficits owed to
suppliers that existed when the shares were transferred.
Indicia of supervision
Powers of
supervision and control
[71]
In view of the
evidence before me, it seems clear to me that the degree of control exercised
by EBI over the appellants was significant and leads me to find that, but for
the existence of the corporations, the garbage collectors would have been
considered to be employees of EBI. In addition, the garbage collectors had been
employees of Services Sanitaires RS Inc. or EBI, as the case may be, before
they incorporated, and most, if not all, of them became employees of EBI again
after the appellants’ shares had been sold to PRE.
[72]
The service
contracts concluded by the appellants were intuitu personae contracts
because the garbage collectors had to drive the trucks belonging to EBI
themselves at all times and could only be replaced in emergencies with EBI’s
consent. This kind of contract normally shows an employer-employee relationship
rather than a contractor-client relationship where the contractor is free to
choose the means of performing the contract.
[73]
During the years at
issue, EBI required very detailed daily activity logs, which enabled it to know
for each appellant the exact time when tasks were performed as well as the time
required to perform them.
[74]
EBI’s supervisors ensured that the tasks
assigned to each appellant were performed correctly. The supervision of the
appellants’ activities was no less significant than that exercised over the
garbage collectors when they had been employees of EBI.
[75]
The evidence showed that, during the years at
issue, EBI monitored very closely the ownership, use and disposal of the
garbage collection trucks, which were, no doubt, the main work tool of the
appellants.
[76]
The trucks used by the appellants all belonged
to EBI and were leased to each of them. The appellants were required to use
EBI’s trucks to do the work that was assigned to them. Therefore, the
appellants could not use their own trucks. According to some contracts
concluded by EBI with its clients, EBI had to be the owner or lessee of a
minimum number of trucks. The list of trucks had to be provided to the clients
in question, and only those trucks could be used for the purposes of the
contract. The contracts binding the appellants specifically provided that, even
in case of a breakdown, they had to use EBI’s rental equipment. The appellants
had to keep on the trucks the signage installed by EBI.
[77]
The appellants had to park the trucks in places
indicated by EBI, namely, in almost all cases, at EBI’s garage. The appellants
had to have their trucks repaired and refuel them at garages recognized and
approved by EBI. Insurance for the trucks was mandatorily purchased by EBI,
which in turn required part of the premiums to be reimbursed.
[78]
It is clear from the evidence that the
appellants and their shareholders were under EBI’s control with regard to
freely disposing of the rental truck. There is no doubt that the appellants
would not have had such a rental contract if they had rented the trucks from a
third party rather than EBI.
[79]
The restrictions imposed on the appellants with
regard to the use of the trucks tend to show that the garbage collectors were
not free to choose the means of performing the contract.
[80]
The control exercised by EBI over the appellants
applied even to the internal operations of the companies in the relationship
between the companies and their employees. As part of the written agreements
between EBI and the appellants, EBI insured that the appellants deduct from
their own employees’ salaries the source deductions prescribed by the Act. Under
the standard contract appended to the Notices of Objection, EBI had the right
to make verifications regarding this and, if the appellants had not made all of
the source deductions, EBI had the right to withhold the payments owed to the
appellants found at fault. I do not know any independent contractors who would
accept that the payments of amounts owed to them be subject to such conditions.
Chance of profit and risk of loss
[81]
The analysis of the facts shows that the chances
of profit and risk of loss was rather low.
[82]
The garbage collectors’ investment in the
appellants’ share capital was of nominal value. The appellants’ incorporation
frees were advanced by EBI and then repaid by the appellants over a period of
10 months. EBI also advanced the funds needed for the appellants to operate in
the first month of operations until they received the first monthly payment set
out in the service contracts.
[83]
The amounts to be collected were set in advance and
the tasks to perform were determined by a year-long contract. Remuneration was
paid periodically, namely, every 30 days, for a minimum of 50 hours of work per
week, from Monday to Friday. The amount of the periodic payments was determined
by EBI and the appellants could not, as a practical matter, negotiate the
price.
[84]
The appellants were bound by non-competition
clauses prohibiting them from, among other things, soliciting clients in the
territory served by EBI and its clients, and thus the appellants did not seek
to operate their businesses for other clients in order to increase their
profits. In addition, a clause of the standard contract signed by the
appellants made any assignment or transfer of rights conditional on EBI’s
approval. The appellants could not sub-contract their contracts, which clearly
shows that they were not free to choose the methods of performing the contract.
[85]
The evidence has shown that the appellants’
revenues did not change significantly since their incorporation and the only prospect
of increasing the garbage collectors’ income came from the tax benefits that
such a structure permitted.
[86]
With regard to risk of loss, the rental fees for
the trucks, the cost of administrative services and insurance set in advance,
at a fixed rate.
[87]
Since the trucks did not belong to the
appellants and since the cost of major repairs related to their normal use as
well as part of the insurance fees for the trucks were assumed by EBI, the risk
of loss was that much lower.
[88]
The evidence has also shown that EBI paid for
the ferry for the appellants as part of their tasks as well as for cell phones
put at the garbage collectors’ disposal.
[89]
Sometimes, even the diesel used by the
appellants’ trucks was sold at a discount and was repaid by EBI. It was the same
for the rental costs of trucks, which was charged back to EBI.
[90]
The evidence also clearly showed that the
appellants were all recovered by PRE even though several companies had
significant deficits, which were never repaid by the garbage collectors. Those
deficits were likely absorbed by EBI.
The appellants’
integration into EBI’s activities
[91]
An analysis of the facts related to this case
reveals a high degree of integration of the appellants into EBI’s activities,
which in itself shows the existence of a relationship of subordination.
[92]
The most telling indication of the appellant’s
integration into EBI is, undoubtedly, the fact that the garbage collectors had
been salaried employees of EBI before the appellants were incorporated and
became employees of EBI once again after the years at issue. The appellants
performed the same tasks as their respective shareholders had performed before
using the same methods to perform them.
Conclusion
[93]
In the light of the considerations examined as
part of the indicia of supervision, it seems reasonable to me to conclude that,
but for the existence of the appellants, their shareholders would have provided
services to EBI as employees of EBI in 2004, 2005, 2006, 2007 and 2008, not as
independent contractors operating their own businesses.
Penalties
[94]
Contrary to the claims of the respondent’s
counsel, I do not believe that the Minister has discharged his burden of
proving that the conduct of the appellants and their shareholders amounts to
gross negligence based on wilful blindness.
[95]
The appellants were informed that the CRA had
rejected their Notices of Objection for the 2004, 2005 and 2006 taxation years
only on May 5, 2010, that is, well after the appellants’ tax returns for
the 2007 and 2008 taxation years had been filed on the same basis as those for
the previous years. In filing their tax returns for the 2007 and 2008 taxation
years, the appellants and their shareholders had not been grossly negligent or
willfully blind. The appellants and their shareholders had at that time been
represented by competent professionals, namely, Jacques Pontbriand of the
chartered accountants’ firm of Pontbriand, Roy, Ethier, and Isabelle Pipon of
Spiegel Sohmer, and they were fully justified in trusting their advice when
they filed their tax returns for the 2007 and 2008 taxation years.
[96]
At no time had the appellants and their
shareholders made false statements to the CRA. The sub-contractor system had
lasted from 1995 to 2008, that is, for close to 13 years, for 9 of which the
CRA did not dispute the structure in place. The assessments for the 2004, 2005
and 2006 taxation years did not include penalties, and the expenses claimed by
the appellants were allowed by the CRA. Only in the assessments for the 2007
and 2008 taxation years were the appellants’ expenses disallowed and penalties
imposed. Taking these facts into account, I do not see how the Minister can
claim in 2010 that the appellants and their shareholders have made false
statements in filing their tax returns for the 2007 and 2008 taxation years.
[97]
The only reason why the penalties were imposed
seems to me to be to force the parties to put an end to their fiscal
arrangements.
[98]
For these reasons, the appeals from
reassessments made in respect of the 2004, 2005 and 2006 taxation years are
dismissed with costs. The respondent is entitled to one set of costs for all of
the files on appeal and another set of costs for files 2010-2396(IT)G and
2010-2369(IT)G, for which discontinuances were filed the day before the trial.
The respondent is also entitled to disbursements for all of the files,
including those that had been discontinued.
[99]
The appeal from the reassessments made in
respect of the 2007 and 2008 taxation years are allowed without costs and the
reassessments are referred back to the Minister for reconsideration and
reassessments in order to cancel the penalties.
Signed at Ottawa, Canada, this 25th day of September 2014.
“Réal Favreau”
Translation certified true
On this 19th day of February 2015
François Brunet, Revisor
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