603418 Ontario Inc. v. M.N.R., docket 96-1916-UI

Date: 19980903

Docket: 96-1916-UI

BETWEEN:

603418 ONTARIO INC.

o/a J.P. MOTOR SALES,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

RICHARD SCOTT,

Intervenor.

Reasons for Judgment

(Delivered orally from the Bench at Toronto, Ontario, on June 5, 1998)

Mogan J.T.C.C.

[1] This is an appeal under the provisions of the Unemployment Insurance Act (now the Employment Insurance Act). The Appellant is an incorporated company which has operated a car selling business known as J.P. Motor Sales in the City of Burlington, Ontario for 15 years. The Appellant is managed by its principal shareholder, Larry Pattinson, who was a witness in this appeal. In the period April 28, 1994 to January 12, 1995, there was a commercial relationship between the Appellant and Richard Scott (the Intervenor) who was also a witness. The issue is to determine whether that commercial relationship was one of employment in which Scott was an employee of the Appellant, or whether Scott was an independent contractor who entered into a joint venture enterprise with the Appellant.

[2] The Minister of National Revenue made a determination that there was an employment relationship and that the Appellant, as employer, was required to pay the relevant premiums which would permit Scott to claim unemployment insurance benefits with respect to the alleged period of employment. In this type of dispute, the jurisprudence is well established. The leading case is Wiebe Door Services Ltd. v. Minister of National Revenue, [1986] 3 F.C. 553. It has been commented on many times in this Court and also in the Federal Court of Appeal. Although there are certain tests laid down in Wiebe Door which I will consider, this appeal will be determined primarily on its facts.

[3] In April 1994, Scott met with Pattinson and stated that he had experience as a car salesman having worked for the preceding five to ten years with other car dealers. In addition, Scott had what he called an import/export business but it was really an unincorporated export business operating as a proprietorship under the name “Inter Can”. Scott had been trying to develop Inter Can and had established what he thought were good contacts in Costa Rica. He suggested to Pattinson that they could work under an arrangement whereby he (Scott) would procure cars for selected customers outside Canada. The Appellant would purchase the cars; Scott would arrange for their export to a foreign destination and, upon payment, Scott and the Appellant would share the profit. The evidence of Pattinson and Scott is consistent with respect to the above. They both agree that when they came together in late April 1994, the above proposition was accepted and the commercial relationship between Scott and the Appellant commenced immediately.

[4] Scott claims that he is an employee. He said that his first meeting with Pattinson took place on a Friday and, when Pattinson realized that Scott was an experienced car salesman, he said: “Tomorrow is Saturday. It is a busy day. Come into the office and start selling right away”. According to the evidence of Scott, he came in the next day and sold a car within the first two hours of being on the job. He said that when he effected the sale so quickly, Pattinson said to him: “You are hired”.

[5] Exhibit A-6 is a binder of 12 documents. Pattinson stated that he entered into a commercial relationship with Inter Can and did not employ Scott. He made an agreement that he would do commercial transactions with Inter Can. That statement seems to be borne out by some of the documentation contained in Exhibit A-6. Specifically, Tab 8 is a copy of the registration of the business name “Inter Can” by Scott. The registration was effected on May 20, 1994 and the parties are in agreement that their commercial relationship started on April 28, 1994 about three weeks before the registration of the business name.

[6] In Exhibit A-6, Tab 9, there is a series of commission statements issued by the Appellant to Inter Can showing in the various months the number of vehicles, including the model and year, which were sold by Scott and the computation of the commission earned less certain draws. Most of the commission statements are addressed to Inter Can and they cover the months from April to December 1994.

[7] Also, Exhibit A-6, Tab 11 contains a series of cheques issued by J.P. Motor Sales, most of which are issued to Inter Can. One or two of them are made out to Richard Scott Inter Can, and I am referring specifically to June 30, 1994, in the amount of $4,097.03. Most of the other cheques, however, are simply issued to Inter Can and they appear to represent all of the cheques which were issued by the Appellant to Scott in his business name during the period from April 1994 to January 1995. Also, Exhibit A-5 is a list of bank statements for an account in the name of Inter Can at the Bank of Montreal in Burlington. Into that account were deposited all of the above cheques issued by J.P. Motor Sales. From that account there were various cheques issued for whatever purpose including, apparently, the funds necessary to permit Scott to meet his personal living expenses. The words “Inter Can” interspersed with the commission statements, cheques and bank account lead the Appellant to maintain that there was no employment between itself and Scott.

[8] Although the arrangement put by Scott to Pattinson was a two-pronged affair, only one prong produced any significant business and that is the activity of selling cars. The other activity of finding cars which a specific foreign buyer would want to own, purchasing them and then exporting them to the foreign buyer, never got off the ground. According to the unchallenged evidence of Pattinson, there was not one car sold on this second prong of the arrangement.

[9] There is evidence of many phone calls made between Scott and his contacts in Costa Rica. The phone bills were put in evidence to confirm that. I infer from the evidence of both witnesses that the arrangement was that Scott did not have adequate capital to do this exporting of cars alone; that if he could arrange for this kind of export, the Appellant would put up the money to buy the car, work with Scott to arrange for its shipment, and when the proceeds were received, the profit would be shared on a 50/50 basis between Inter Can and the Appellant. I say “infer” because there were actually no transactions and, therefore, no profit to be shared on the export of a car. There was peripheral evidence, though, that Scott was quite active in procuring motorcycles and arranging for their shipment to foreign buyers, perhaps in Costa Rica, but that was not specifically made clear in the evidence. He did say that he actually arranged for certain containers to be delivered to certain sites in Ontario to be filled with product and shipped. I believe he said this transpired in the spring and fall of 1994 and again in January and February, 1995. Therefore, Scott did have some kind of export business going through Inter Can but probably with motorcycles and not with cars. Therefore, the second prong of the arrangement never bore any commercial fruit.

[10] The claims of the Appellant and Intervenor are in direct conflict. Counsel for the Appellant argued that both propositions must be looked at together as a unit and that the Appellant entered into a contract only with Inter Can. She supports her argument by showing that the cheques were made payable (almost in every case) to Inter Can, the commission statements were completed in the name of Inter Can, the money was deposited by Scott into the Inter Can bank account, and so there is a tracing of funds from the Appellant to Inter Can.

[11] Scott maintains, however, that he was just a car salesman. He admits that he had this other dream of being an exporter of cars and that he would need the financial resources of the Appellant to help him if it ever got off the ground. But he says that because it did not get off the ground, he ended up as a car salesman in the same manner as the other salesmen who were “employed” by the Appellant. Pattinson admitted that he did have at least two other salespersons and that they were issued T4 slips at the end of the year. There were source deductions from their commission income of unemployment insurance premiums, Canada Pension Plan contributions and income tax. He said, however: “I did not do any of that for Scott because he did not want it since he was an independent contractor. And so I went along with it and issued his cheques in the name of Inter Can. That is the way he wanted it and I was going to have to live with it”.

[12] There are some disputes in the evidence on which I shall comment. Pattinson says that Scott did not have duties like other sales people. In particular, there is a type of duty roster in the Appellant’s salesroom where the sales people, with certain flexibility, choose times when they volunteer to be on duty because the salesroom is open from 9:00 a.m. to 9:00 p.m. during the week and 9:00 a.m. to 6:00 p.m. on Saturdays. Naturally, there has to be someone on duty whenever the salesroom is open. That time was allocated among the sales personnel but Pattinson says that Scott did not have to be on duty like the rest. He was given a time assignment but he could call in and beg off and he would not be disciplined in the manner that an ordinary salesperson would. Scott says that he did have to keep his place on the duty roster. He said he was like the other salesmen in that sense, that the time was allocated to him and he did have to go in and perform when the dealership was open in order to provide service to the public.

[13] I am inclined to accept the evidence of Scott over Pattinson on the above point. He was paid the same commission as the other salesmen. He was not producing anything in the export part of the arrangement and it seems to me more reasonable that he was expected to perform like the other salesmen. Exhibit A-6, Tab 9 supports Scott’s evidence over that of Pattinson. I have reviewed Tab 9 which contains the commission statements in the name of Inter Can and, in particular, one statement shows that starting in April, a Camaro was sold with a commission of $436. Scott says that Pattinson agreed that the commission paid to him on the sale of cars was the same as that paid to any other salesperson, 25% of the profit.

[14] The various commission statements from May to December, 1994, indicate that Scott sold ten vehicles in May, nineteen in June, fourteen in July, eleven in September, twenty in October, seven in November and nine in December. There is no evidence as to what the average unit sales are for an effective car salesman in this area but I am impressed with the number of vehicles which were sold by Scott. From May to October, he was selling an average of ten or more vehicles per month or at least two per week. And also, in June and October, his sales were 19 and 20, respectively. He could make those sales, I would think, only by taking his turn on the duty roster. The sales are an indication that the main thrust of the commercial relationship was selling cars and not exporting vehicles.

[15] The evidence is also in conflict where Pattinson states that Scott wanted to be paid his gross revenue with no source deductions and that is why the payments went to Inter Can. Scott says he complained about the fact that there were no source deductions. In this area, I accept the evidence of Pattinson because the payments to Scott were not consistent with the way he paid his other sales personnel. I cannot imagine why he would pay the gross revenue to Scott unless he was asked to do so by Scott. I disbelieve Scott and I also disbelieve that he complained about it during the time. His complaints were long after the time when he worked and after he realized that if he had complained and had agreed to source deductions, he would have had a claim for unemployment insurance benefits. And so, on that conflict which is a significant one, I accept the evidence of Pattinson that the cheques were made payable to Inter Can at Scott’s request.

[16] I try to put myself in the minds of the men on the day they made the deal. Every businessman has a dream. Scott had been nursing this export dream before he ever met Pattinson. In fact, what he brought to Pattinson was that he had been developing the idea of an import/export business. He needed someone with Pattinson’s capital and he informed Pattinson that he was already exporting motorcycles and that they should expand it to cars. At the time, I think that the dream in Scott’s mind was sold to Pattinson and, on the assumption that it took off, it might have worked fine. The fact that it did not take off is just one of those accidents of business history.

[17] The third area of conflict is a small matter but there was a Sunbird sold in or around November under extraordinary circumstances. It is a strange tale but apparently a client of Scott bought a Sunbird and made a down payment. He did not have the rest of the money but said that he would come back in a week or two with the balance and pick up the car. When he returned, it was discovered that the car was stolen and gone from the lot. The police were alerted and the car was found near Waterdown, just north of Burlington. It was retrieved and it was not badly damaged. In the Inter Can commission statement for November 1994, it shows the list of sales and then, in the lower left-hand corner, it shows some charges against the recovery of the car, namely, towing $25, a charge which is illegible for $233, a work order for $325, and something else for $107, adding up to $690. According to the evidence of Scott, and I believe him, after this stolen car was recovered and repaired, the same man who wanted to buy it came back and bought it. He wanted to test it out to make sure it was not damaged by the thief, but at the end of the day he bought the car, and so his down payment was applied against the purchase price. Because there were expenses of $690 to repair the car, Pattinson charged one-half of that amount against Scott’s commissions for November which is shown as a charge of $345.

[18] The way Pattinson described the theft situation of the car, he felt that it was a regular situation and everybody should understand it. Scott should accept the deduction of $345 from his commissions for the month of November. Scott, however, says he disputed this at the time and he certainly disputed it subsequently in a letter that he wrote after their relationship ended. On this area though, I do not have any expert evidence as to what the practice is in a car dealership, but I would have thought that expenses caused by theft would be an insurance risk carried by the dealer, and that the car salesman would not be expected to bear any of those expenses. In this situation, if the purchaser made only a down payment and wanted to wait for a couple of days to get the rest of the money, suddenly the theft of the car becomes a 50% risk of the person who sold it. Under those circumstances, a salesman would be better off never to sell a car unless it was taken off the lot at the same moment it was sold. Common sense is against Pattinson on this issue and I am inclined to think that Scott would have disputed the charge of $345 against him.

[19] I mention the above examples of conflict in evidence because one of the things that makes cases like this difficult is the fact that when people come to Court two or three years after the event, what actually happened in 1994 becomes clouded with the mists of time and witnesses tend to see past events the way they want to see them. Although I am not impugning the integrity or honesty of Pattinson and Scott, where they conflict their evidence is self-serving. In one instance, I am more inclined to believe Pattinson than Scott and, in another, I am more inclined to believe Scott than Pattinson. It is important to discern the substance of what was really happening in the J.P. Motor Sales operation with regard to Pattinson and Scott in the last eight months of 1994. That brings me to the well-known tests in Wiebe Door.

[20] On the question of whether the two elements of the arrangement should be reviewed together as the Appellant maintains, or separately as the Respondent and the Intervenor maintain, my view is that they are separate and not together. I find that the relationship between Scott and the Appellant might have had two parts, being independent contractor with respect to the joint venture of exporting cars, but employment with respect to the sale of domestic cars in Canada. In effect, Scott starts out wearing two hats but he never gets the second hat to fit with respect to having a joint venture to export cars because he cannot put a deal together. According to the evidence of Pattinson on the export issue, which I believe, the only deal Scott was able to put together was to send a car to Costa Rica in circumstances where the buyer would not pay until it was delivered. The receipt of cash only on delivery in a foreign country for something as large as a car would not be prudent and Pattinson rejected it because it was not a reasonable proposition. The rejection which seems to have happened around November 1994, and the fact that the container in which the car was expected to be shipped sat on the Appellant’s lot for four to six weeks (according to the evidence of both men) and the payment for the storage of that container was borne by Scott, appear to be some of the factors which brought their commercial relation to an end.

[21] The fact is that to the extent that there were two parts to the arrangement, the only part that became operative was the one that produced an employee relationship. Notwithstanding the arguments of counsel for the Appellant who very carefully traced the flow of money by cheques payable to Inter Can and deposited into the Inter Can account, it is only a proprietorship (with Scott being paid directly) and not a corporation. Once the money was deposited into the Inter Can bank account, it was Scott’s and he could spend it on whatever he wished.

[22] In applying the Wiebe Door tests, the ownership of tools test supports employment because Scott went to the place of business and he was provided with a desk and telephone. The sales agreements had to be in the name of the Appellant and the vehicles were on the Appellant’s lot. While Scott could go out and drum up business, he could also effectively earn his income by staying on the lot and effecting sales from the people who came to buy cars. With regard to the test of opportunity for profit and risk of loss, Scott received a 25% commission on the profit from every car that was sold in Canada. He did not lay out any capital; he did not have to invest in the Appellant; he did not have to buy any cars; and he did not have to give any warranty or other type of promise as to the performance of the cars. All of that was provided by the Appellant.

[23] Therefore, Scott did not have any risk of loss and that risk was solely the Appellant’s. The Appellant had to determine whether it should buy a car at an appropriate price and whether that car could be sold at a higher price to earn a profit. The Appellant had to recruit competent salesmen who could effect the sales of these cars and, judging by the numbers produced by Scott, the Appellant engaged a competent salesman in him. Scott had no risk of loss and only an opportunity for profit.

[24] On the question of control, there was very little control exercised because, for an experienced salesperson like Scott, he did not need much control. He had between five and ten years of experience selling cars. He sold one within two hours of being put on the lot on April 28. Every salesperson in the car business needs some latitude and he had developed the skills he needed. As counsel for the Respondent stated, in the Federal Court of Appeal decision of The Attorney General of Canada v. Gayle Hennick, 179 N.R. 315, what is relevant is not so much the actual exercise of control as the right to exercise control. I am satisfied that with regard to the domestic sale of cars in Canada, the Appellant had the right to control Scott because it could allocate his hours when he had to be on duty and it could determine whether to accept a contract he brought in from a prospective customer. The sale contracts had to be approved by the Appellant and Scott did not have the authority or the latitude to effect sales on his own.

[25] Lastly, with regard to the integration test, the sale of these cars from the lot in Burlington was the business of the Appellant. The Appellant would always pay for any car purchased to be sold and it had the sole discretion in determining what cars it would buy to put on the lot. People like Scott and the other two salespersons who were referred to as Shawn and Robert had no say and their only function was to effect sales of the cars that the Appellant procured for sale. Also, the Appellant had to sign Scott’s application for a licence because pursuant to the Motor Vehicle and Dealers Act in Ontario, a person cannot walk around the province holding a salesperson’s licence. The licence is linked with a particular dealer, and the Appellant had to sign Scott’s application. On the integration test, no part of the business was Scott’s. His compensation was based on commission but it was for the service he provided in the character of employee, and not as an independent contractor.

[26] With respect to the question of what was in the minds of the parties at the time the working relationship began, counsel for the Appellant argued that it was a consulting contract. While that is the term used in Appellant’s Exhibit A-6, Tab 8 (the registration of Inter Can as a business name), I cannot accept that argument because it appears to me that in the realm of commercial activity which took place, Pattinson did not need consultation with or from Scott. If anything, Pattinson’s business judgment was better than Scott’s. He had the prudence to turn down Scott’s proposal to sell a car to someone in Costa Rica on the basis of cash on delivery. This is not a case where the Appellant, as a corporation with 15 years experience, needed consultation. It needed sales personnel and, in substance, what it got from Scott was an effective salesperson. He was used and compensated that way and, in that sense, he was the same as the other sales personnel, although he was given a different type of T4 slip at the end of the year. In this kind of litigation, it is the substance of the commercial relationship between the parties that counts. I find that the substance of that relationship is employment and I dismiss the appeal of the Appellant and uphold the determination by the Minister that this was insurable employment for the period April 28, 1994 to January 12, 1995.

[27] In my view, Scott (the Intervenor) invited the Appellant in April 1994 to adopt the position that their relationship was not employment so that he (Scott) would receive any remuneration free of source deductions. Accordingly, if the Appellant now suffers some financial burden as a result of this judgment caused by Scott’s later claim that he was an employee, I would recommend that the Appellant be granted any relief which may be available with respect to interest or penalty.

Signed at Ottawa, Canada, this 3rd day of September, 1998.

"M.A. Mogan"

J.T.C.C.