REASONS
FOR JUDGMENT
Lyons J.
[1]
David Hines, the appellant, appeals the
reassessment made by the Minister of National Revenue under the Income Tax
Act (the “Act”) in which it was determined that in 2008, the
appellant was an employee of Wellspring Energy Solutions Ltd. (“Wellspring”)
and received the amount of $88,298 (the “Amount”) from Wellspring as
employment income. The appellant contends that he was an independent contractor
and the Amount includes amounts that he was reimbursed for as expenses that he
paid on behalf of Wellspring.
[2]
The issues are whether the appellant was an
employee or independent contractor in 2008 and if the Amount includes the reimbursement
of expenses paid to the appellant by Wellspring that he had previously paid on
its behalf and submitted to Wellspring.
[3]
The appellant testified on his own behalf. Keith
Walker testified on behalf of the appellant.
I.
Facts
[4]
The appellant has worked in the industrial,
professional engineering and architectural sectors, has been in business since
1975, has worked as a consultant in Venezuela offering guidance on the
development of downhole pumps for gas wells and has taken matters from
conception as an oil skimmer to patent and production.
[5]
Wellspring, a research and development company,
was incorporated in 2008 and ceased to operate in May 2009. It focussed on
downhole well pump technology operating in the oilfield industry.
[6]
Around 2007, the appellant met with Robert
Hughes. Mr. Walker, an electrical engineer and business associate of the
appellant, subsequently met with Mr. Hughes to discuss the completion of the
well pump. All three became shareholders of Wellspring. According to the appellant,
it was agreed that he would be retained as a consultant under contract for
$8,000 monthly to provide his opinion and advice to develop the well pump and
steer it to a successful conclusion so that Wellspring could sell it; he moved
from Ontario to Calgary. In January 2008, he began to provide his services
to Wellspring.
[7]
Mr. Walker also provided advice to, and was a
director of Wellspring. He and the appellant claimed that Mr. Hughes was
the mind behind Wellspring who scheduled meetings with oil companies and hired
the appellant’s wife and daughter as the accounting department.
[8]
The appellant claims that he invoiced Wellspring
but no GST was included on his invoices because he had not reached the $30,000 threshold
and was not a GST registrant in 2008. The appellant indicated that he was not
always paid or Wellspring did not have enough money to pay him, yet he
continued working as he expected he would be paid as a shareholder. The
appellant could not recall in cross‑examination the number or percentage
of shares that he held but remained a shareholder after his resignation.
[9]
The appellant stated that Wellspring was in a
tough financial situation and needed certain things to operate but did not have
credit cards. He agreed to use his as long as he received reimbursement of certain
expenses. When Wellspring needed items, he mostly purchased them. He then
submitted the costs to Wellspring’s accounting department which was responsible
for totalling his receipts because it was Wellspring’s expenses and it claimed
the amount as an expense, not him. The appellant was also a director and in
that capacity or as a shareholder, he sometimes purchased items for Wellspring
which he was reimbursed for or entitled to be reimbursed. As to the cheques
issued to him by Wellspring totalling the Amount, he estimated that
approximately half was allocable to the services he invoiced for and the other
half was for the reimbursement of the expenses that he had submitted.[1]
[10]
The shareholders were unhappy and wanted a new
board of directors. Candy Victor, who was elected as a director, arrived at his
residence a few days after the new executive took over in April 2009 to pick up
the books, receipts and documentation. Others showed up for the shop contents.
He claims that he was unable to obtain copies of his invoices from her. Even though
the appellant was not in favour of a new board, he agreed to it. However, when
asked to perform certain tasks, he handed in his resignation.
[11]
The appellant filed his 2008 income tax return,
claimed he was self‑employed and reported net business income from
Wellspring in the amount of $9,856.[2]
In 2012, the Minister reassessed the appellant by including employment income
in the Amount in his 2008 taxation year.
II.
Analysis
[12]
I agree with the appellant’s submission that the
burden is on a taxpayer to prove, on the balance of probabilities, his or her
case. However, where the Minister has not set out any proper assumptions of
fact in the pleadings, the onus reverts to the Minister to establish the
correctness of the assessment. The appellant argues that two of the respondent’s
assumptions shift the burden to the respondent because the assumptions
constitute mixed questions of law and fact that answer the question that the
Court must decide.[3]
[13]
He asserts that the assumptions pled in his case
are similar to those in Health Quest Inc. v Canada, 2014 TCC 211, [2014]
TCJ No. 155 (QL) [Health Quest], in that the Court found that the
taxpayer was at a distinct disadvantage in determining the case it had to meet
and noted that the respondent had assumed how the law (shoes were zero-rated
pursuant to Schedule VI of the Excise Tax Act), is to be applied to the
facts. The assumptions pled in Health Quest read:
(f) the Appellant also supplied other products which
were not zero-rated pursuant to Schedule VI of the Act; and
(g)
during the periods under appeal, the Appellant failed to collect tax of not
less than $42,274.42 on its supply of products which were not zero-rated pursuant
to Schedule VI of the Act.
[14]
The assumptions in the present case read:
g) the appellant was an employee of Wellspring in
the 2008 taxation year;
h) the appellant received employment income from
Wellspring for the 2008 taxation year of not less than $88,298.
[15]
In Health Quest, the Court also found
that there was insufficient evidence provided by the respondent to satisfy the
burden because the Reply contains no assumptions of fact, or material facts,
that would clearly differentiate the features of the footwear for the appellant
for which the Minister alleges HST should have been collected and remitted nor
were other facts assumed elsewhere in the Reply. For those reasons and because
of the inadequacies of the assumptions, the appeal was allowed.
[16]
I find that the assumptions in the present case are
not comparable to those in Health Quest. In that case, the Court was
clearly concerned about the specialized meanings pled under the Excise Tax Act
plus the lack of and differentiation in the assumptions placed the appellant
at a distinct disadvantage. None of those elements apply in the present appeal,
therefore no disadvantage exists. Even if the two assumptions in the present
appeal are mixed fact and law, there were facts elicited throughout the hearing
that were sufficient on the balance of probabilities to support the Minister’s
reassessment.[4]
[17]
The appellant’s alternative submission is that
although the appellant was a director and shareholder of Wellspring, he was
hired to provide consulting services as an independent contractor and was not
subordinate to anyone at Wellspring.
[18]
The Supreme Court of Canada in 671122 Ontario
Ltd. v Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 S.C.R. 983 [Sagaz]
encapsulates, at paragraph 47, the essence of the inquiry that needs to be made
in determining whether or not an individual is an independent contractor or an
employee. That is:
47. … The central
question is whether the person who has been engaged to perform the services is
performing them as a person in business on his own account. …
[19]
In answering that question, the Federal Court of
Appeal instructs a two‑step analysis is to be undertaken (subjective
intent of each party measured by objective factors) as enunciated in 1392644
Ontario Inc. (c.o.b. Connor Homes) v Canada (Minister of National Revenue -
MNR), 2013 FCA 85, [2013] FCJ No. 327 (QL). The Court clarified the role of
intention and the weight to be given to it. It noted that the legal effect of
the relationship determines the legal status and cannot be decided solely on the
declared subjective intention of the parties and held that whilst it is
relevant, it is not determinative because the parties’ intent “must be grounded
in a verifiable objective reality.”[5]
Mainville J. states at paragraph 42 that:
42. … The first
step of the analysis should always be to determine at the outset the intent of
the parties and then, using the prism of that intent, determining in a second
step whether the parties’ relationship, as reflected in objective reality, is
one of employer-employee or of independent contractor. …
A. Intention
[20]
The respondent submits, and I agree, that the evidence
with respect to subjective intent was based solely on the appellant’s testimony
of his intent to be an independent contractor to steer and guide the pump technology
project for Wellspring without any evidence from Wellspring as to its intent.
[21]
In his testimony, the appellant said that he had
initially spoken with Mr. Hughes “as the leader of the band” and they
entered into a verbal arrangement, part of which was that the appellant would
move to Alberta and he would be an independent contractor. Yet, he also
described himself as “wearing many different hats” but then stated that his
role as director amounted to virtually nothing except that he purchased items
in that capacity and as a shareholder. He said that he was not always paid
as an independent contractor but was confident that he would be paid because of
his shareholdings which subsisted after he resigned. However, during
cross-examination, he was unable or unwilling to quantify the number or
percentage of his shareholdings. He claims that he invoiced Wellspring for his
services but no invoices were produced at the hearing.
[22]
I am drawing an adverse inference from the
failure to call Mr. Hughes to testify as a witness to assist in ascertaining
the intent of the parties. I find and conclude that the evidence does not
demonstrate that it was intended that the appellant was an independent
contractor nor was there any such common understanding between the parties. Consequently,
intention is not a relevant factor in this appeal and regard must be had to
objective factors to ascertain the nature of the relationship between the
parties.
B. The Wiebe
Door Test
[23]
In answering the central question as to “whose
business is it?”, the Court in Sagaz endorsed the objective factors, as
follows, articulated by the Federal Court of Appeal in Wiebe Door Services
Ltd. v The Minister of National Revenue (1986), 87 DTC 5025 (FCA) [Wiebe
Door] and states at paragraph 47:
47. … In making this determination, the level of control the
employer has over the worker’s activities will always be a factor. However,
other factors to consider include whether the worker provides his or her own
equipment, whether the worker hires his or her own helpers, the degree of
financial risk taken by the worker, the degree of responsibility for investment
and management held by the worker, and the worker’s opportunity for profit in
the performance of his or her tasks.
[24]
However, no single factor is conclusive in characterizing
the objective reality of the parties’ relationship and that list of factors is
not exhaustive.
i. Control
[25]
The level of control the employer has over the
worker’s activities involves a determination of who has the authority to
exercise control over the individual providing the services and how, when and
where services are to be performed.
[26]
The respondent argued that the factor of control
is more difficult to apply in circumstances where the appellant was also a
shareholder but elements of control were present.
[27]
While some aspects in the arrangement indicate
less control by Wellspring over the appellant, other aspects of the arrangement
show Wellspring had the right to exercise some control over him. He worked
every day, during evenings, did not take vacation and costed parts for a
special downhole coil. He participated in meetings with industry specialists,
scheduled meetings relating to the downhole coil and development process
discussing the profile of the well and site conditions and sometimes observed
pre and post-pump installations.[6]
Mr. Walker indicated that the appellant was engaged to fix the business and
initiate negotiations with Wellspring’s client, Enbridge.
[28]
Although the appellant said that he was not
responsible for anything, he then said he was partly responsible for corporate
decisions, did anything that arose in the development of the pump, travelled to
and attended on-site meetings with Wellspring’s clients, provided guidance to
individuals on-site, such as Andy Riopel and Darcy Lamoureux, and sometimes
produced a report.
[29]
Generally his evidence was such that there was
no clear delineation as to which hat he was wearing and in which capacity when
he carried out certain activities. I find that the control factor does not
assist in either direction.
ii. Ownership of
tools and equipment
[30]
In terms of whether the appellant owned and
provided his own tools and equipment in the provision of services to
Wellspring, the appellant said that Mr. Hughes had an agreement with another
company where “we” had an office but Wellspring did not enter into a rental
agreement. Although the appellant did not have an office, he could use one by
sitting at a desk. In September 2008, when the appellant moved to Red Deer, Alberta, Wellspring operated from his residence. Other tools consisted of pens,
paper and a tape measure but it was unclear who provided those.
[31]
I find that the appellant did not provide
equipment as an independent contractor. Rather, Wellspring initially provided a
desk to the appellant and since September 2008, Wellspring paid rent to the
appellant to operate its business from Red Deer. I infer that the appellant had
an office at his residence for Wellspring’s activities. In my view, this factor
tilts in the direction of an employer-employee relationship.
iii. Hiring
helpers
[32]
The evidence was that the appellant did not hire
helpers. This is not a relevant factor.
iv. Opportunity for profit and degree of financial risk
[33]
The degree of financial risk taken by the
appellant and opportunity for profit bore little opportunity for profit and
financial risk.
[34]
Although the appellant testified that he would
follow a critical path plan to successfully resolve the development of the well
pump, it appears that the appellant did not stand to lose or gain in his role
of guiding and steering as it was agreed that he would be paid $8,000 per
month. He was confident that he would eventually be paid as a shareholder if he
was not paid as an independent contractor. I find it improbable that an
independent contractor would continue to provide services when he was not being
paid over a period of time.
[35]
Furthermore, the concept of “profit” necessarily
requires a surplus of revenues over expenses and that in an employment
arrangement where a worker receives a set rate for services while making no
contribution to the expenses of the organization, there can be no true
“opportunity” for profit. In the decision of TBT Personnel Services Inc. v
Canada, 2011 FCA 256, [2011] FCJ No. 1340 (QL), the Court held that since
the operating expenses were borne exclusively by the appellant company, the worker
could not “profit” financially. Since Wellspring appears to have been responsible
for many if not all of the operational costs, by virtue of the reimbursement
mechanism, the appellant was not in a position to profit. I will return to the
expenses later in these reasons.
[36]
I find on this factor that the appellant did not
have an opportunity to profit and bore virtually no financial risk, which is
indicative of an employer-employee relationship.
v. Other factors
[37]
The manner in which the activities were
conducted do not bear the hallmarks of an independent contractor. Despite being
in business since 1975, the appellant did not maintain separate books and
records; he did not record expenses as an independent contractor nor produce
invoices at the hearing. Although he confidently stated that the amount
reported as net business income in his income tax return, was “100% correct”,
when asked how he arrived at the net business income, he indicated that “some
of this doesn’t make sense to me”. Since September 2008, Wellspring operated
out of his residence at the same time that he claims that he was an independent
contractor. Mr. Walker, Mr. Hughes and others stayed at his residence when
conducting Wellspring business.
[38]
Wellspring’s bills were sent to the appellant.
He said he paid certain expenses of Wellspring because it was financially
strapped. Without keeping track, he viewed it as Wellspring’s responsibility to
tally up the expenditures he had made on Wellspring’s behalf. The submitted expenditures
to Wellspring’s accounting department were reimbursed and amounted to approximately
half of the Amount.
[39]
I am unconvinced that the appellant was in
business on his own account as an independent contractor. I am satisfied and
find that he was working within Wellspring’s business for its benefit as an
employee.
[40]
The appellant submits that subordination, a
concept utilized in the Civil Code of Quebec, is persuasive and should be
applied as the appellant was not subordinate to anyone at Wellspring. I concur
with the respondent’s submission that subordination is not a relevant factor to
be taken into consideration in the common-law context.
[41]
Based on the totality of the evidence and for
the foregoing reasons, I conclude that the appellant was not in business on his
own account.
vi. Expenses
[42]
Given my finding that he was an employee, it is strictly
unnecessary to deal with expenses. However, I will provide some comments. The
appellant’s evidence with respect to the purported expenditures was vague,
inconsistent, hard to reconcile and not credible. I reject his evidence on this
aspect. He estimated that approximately half of the Amount he received relates
to expenses for which he was reimbursed as he had incurred those for the
benefit of Wellspring. He said he did not claim these as expenses because these
are Wellspring’s expenses. Despite the estimate, he had no records of expenses
that he had incurred on behalf of and submitted to Wellspring nor any evidence
that provides any linkage to the Amount assessed nor records of his own
expenses as an independent contractor. When asked about expenses that were to
be reimbursed to him, he stated that he did not tally up the expenses but
simply submitted these to the accounting department of Wellspring as it was its
responsibility.
[43]
Another missing evidentiary link that the appellant
failed to establish was the expenses on the incomplete credit card statements
(“statements”) of his father-in-law to the Amount that he received. The expenses
on the statements are attributable to Wellspring, and in any event, comprise
personal expenses for meals and fuel for personal errands.
[44]
His evidence was inconsistent as to whether the
expenses he claimed on his return relate to his own expenses or Wellspring’s.[7] As the respondent points out,
there was an intermingling of expenses making it impossible to reconcile or
quantify any expenses he might have incurred. I find and conclude that no part
of the Amount includes expenses reimbursed to him by Wellspring.
[45]
It is improbable that someone who has been in
business since 1975 would not retain copies of his own invoices and receipts
for expenditures in order to show how much relates to his services and the
expenses. I draw an adverse inference from his failure to call Candy Victor as
a witness to bring the records and who could have corroborated his claims with
respect to the invoicing and the expenses.
[46]
For the foregoing reasons and on the totality of
the evidence, I conclude that the appellant was not in business on his own
account. He was an employee engaged by Wellspring in its business and received
employment income in the Amount assessed in 2008.
[47]
The appeal is dismissed.
[48]
The respondent is awarded party and party costs.
Signed at Edmonton,
Alberta, this 7th day of December 2015.
“K. Lyons”
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