Citation: 2011 TCC 19
Date: January 24, 2011
Dockets: 2010-659(CPP)
2010-660(CPP
BETWEEN:
1663254 ONTARIO INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
(Edited
from the transcript of Reasons for Judgment delivered orally from the Bench on
December 3, 2010 in Ottawa,
Canada)
Campbell J.
[1]
Both of these appeals
were heard together on common evidence. As a result of CPP Contributor Program reviews,
the Minister of National Revenue - I am going to refer to as the “Minister” - assessed
the two Appellant corporations in March of 2009 for Canada Pension Plan - I’m
going to refer to that as “CPP contributions” - plus interest and penalties for
the 2006 and 2007 taxation years.
[2]
These assessments were
in respect of two workers, Mr. Andre Theriault and Mr. Michael Skelton. The issue
in both appeals is the same: whether the two workers were engaged by the Appellant
corporations pursuant to a contract for services or a contract of services or,
more simply stated, were the workers employees or independent contractors of
the Appellant corporations? If they are employees, they will be engaged in
insurable employment, and if they are found to be independent contractors, of
course they will not be.
[3]
I heard evidence from
two witnesses, John Van Zanten and Michael Skelton. The Minister relied on the
assumptions of fact attached as Schedules “A” and “B” to my Reasons.
[4]
Mr. Van Zanten
testified regarding the basic corporate structure that evolved as a result of
Mr. Skelton and this witness collaborating on a business arrangement in March
of 2005. Mr. Skelton approached Mr. Van Zanten with a business proposal
respecting start-up operations for a service provider of fibre optic splicing
to telecommunication entities. Mr. Van Zanten completed what he referred to as
a “due diligence” review in this area and discovered that these two workers
were sought after, highly-skilled individuals within Ontario.
Very few others possessed the skill set of fibre optic welders. Mr. Van Zanten
had been approached for financing and his testimony reflects that, after he
completed his homework and decided to enter this venture with these two
individuals, he used a model that he had been given at Queen’s University in
respect to construction endeavours and, with his background as a lawyer, he
incorporated several numbered companies, two of which were the Appellant
corporations.
[5]
Mr. Van Zanten
continues today to manage the books for all of these numbered companies, and is
intricately involved in the business operations. It is the workers, as
confirmed by Mr. Van Zanten’s testimony, who provide the particular and
necessary skills for the success of this business operation. Both workers are
specialized fibre optic welders whose responsibility it is, according to the
evidence, to splice fibre optic cable for a variety of customers of one of the
corporate entities, Direct Fibre Tek Solutions Inc. I am going to refer to that
company simply throughout as “DF”.
[6]
In setting up his
corporate model, Mr. Van Zanten testified that, in acting as a business advisor
to the Appellants, he followed the owner/operator model of construction
companies. He stated that it was the aim of the parties to avoid any appearance
of employee/employer relationship because of the rather severe constraints that
the Ontario Employment Standards Act imposed on employees’ working hours. If
the workers were employees, their business venture would be less profitable
because the workers, if employees, would be limited in the number of hours they
could work weekly. Mr. Van Zanten, in fact, stated that he would never have
entered into this business venture with the workers if they could not have
avoided the workers being classified as employees and, consequently, limited by
and subject to the provisions of the Employment Standards Act.
[7]
Mr. Van Zanten
characterized the Appellant corporations as conduits incorporated for the
purpose of tax planning, as the vehicles through which monies flowed to the
workers and as the mechanism used to clarify the relationship between the
parties and the entities in accordance with their business model, which he
adopted from Queen’s University, and in accordance with the intention of the
parties.
[8]
DF used the services of
both of these workers. When customers required fibre optic work, they
invariably contacted the workers directly through the customer project manager.
Most often, this was done by e-mail. DF’s involvement, after the workers
submitted a draft account on the completion of the work, would be to complete
the final account for the customer. Mr. Van Zanten stated, however, that the
workers themselves did not bill DF for their services. He confirmed that the
Appellants were never provided with any of the work information, the work
orders, the invoices or any specifics relating to these work projects.
[9]
According to his evidence,
none of the numbered companies advertised for business, kept phone lines or maintained
business offices and they had no customers or assets. In addition, there was no
other source of revenue for the Appellants except as funds flowed through from
DF to the workers. When a project was completed and money received, DF first
paid out expenses, and only if there were excess monies available did the flow
of funds trickle down to the workers through the Appellants. No cheques were
exchanged and this flow was by deposit. According to Mr. Van Zanten,
if DF had no money left after expenses, the workers received no money in
respect of that project.
[10]
The next witness, Mr.
Skelton, testified that he is one of a very small, select group in Ontario that
possess this specialized skill of fibre optic welding. Corporations that
require this skill know who these individuals are and actively seek them out to
provide the services of splicing fibre optic cable. The workers are contacted
in most cases directly by e-mail, although they are considered the customers of
DF. Both these workers determine their schedules as they relate to work in
progress and projects just being taken on. These schedules are influenced largely
by customer needs, but, to some extent, they are able to manipulate their
scheduling to attend to family or personal commitments.
[11]
Although he has never
had to deal with a customer complaint, if one arose, he testified that the
customer would likely contact him directly and he would correct that problem on
his own time and without compensation. All of the necessary information or
specifics required for completion of a work project are communicated directly
from the project manager of the customer to the workers. The Appellants are
never involved and none of this information is ever relayed to the Appellants.
[12]
Mr. Skelton started
working in this field as an employee for such corporations as Centrix and
Accon, where he was paid an hourly rate no matter how many jobs he completed.
He had a benefit package and generous vacation benefits. In the present
arrangement, the workers received no benefits, no medical and drug plan, no
sick days and no vacation time. Mr. Skelton recognizes he is the sole
shareholder of the pertinent Appellant corporations and that they acted as a
conduit through which his money flowed from DF on the completed projects. He
acknowledged that he had no special expertise or knowledge as to why the
corporate network of the companies had been established as they had been by
Mr. Van Zanten. In fact, Mr. Skelton, on cross-examination, was not
sure what a director was. He did, however, know that it was his intent to be an
independent contractor in this business relationship with Mr. Van Zanten so
that he would not be limited in the hours that he could work in order that the
profit margin would be increased. Mr. Skelton explained that his monetary
return is not based on the number of hours he worked but, instead, relates
first to the existence of profit margin in DF at the end of the day in respect
to a work project, and second, on his personal efficiencies in completing
projects quickly. He compared this to the automotive industry where, if an
hourly rate is charged for one task, but several different tasks can be
completed within that hour and billed out, then the profit potential increases.
[13]
Lastly, with respect to
equipment and tools, Mr. Skelton indicated that he owned a basic tool box
containing cutters and screwdrivers, et cetera, but that all of the
specialty equipment for the splicing was supplied by DF and not the Appellants.
The customers supplied no tools, but did provide the necessary materials to
house specific items at the work project site.
[14]
I turn now to my
analysis. Let me say at the outset that, when I initially read through the
Minister’s Assumptions of Fact, as stated in the Reply, some of which appeared
contradictory, I was unsure why the Respondent was challenging the business
relationship of these parties in this manner. After hearing the evidence, I am
even more perplexed as to why these matters have been pursued in Court as they
were yesterday.
[15]
After reviewing all of
the evidence of these two witnesses respecting the business relationship and
looking again at the various caselaw, there is no other conclusion that I would
reach here except that these two workers are clearly independent contractors.
In fact, if there was ever a clear-cut case for deciding such workers are not employees,
this would be it. The workers are sole shareholders in each of the respective Appellant
corporations and the Appellant corporations each hold 25 percent of the shares
of DF. Although they have not committed the nature of their business
relationship to writing, the evidence supports their clear intention to avoid
an employee/employer arrangement and they had valid reasons for wanting to do
this. They wanted to avoid the hourly regime that employees have to adhere to
pursuant to the Employment Standards Act in Ontario.
Mr. Van Zanten would never have committed to this venture if that
regime were superimposed upon them, and Mr. Skelton made it clear in his
testimony that he had been an employee in the past and now wanted the freedom
to enter such a venture as he was motivated by the opportunity for pocketing
profits in such a specialized field where customers came looking for his expertise.
[16]
The parties’ intention
to conduct the affairs of the workers as independent contractors was supported
by the ensuing conduct of all parties in respect to how these work projects
were carried out. In these appeals, it is more than a mere statement of intent
by the parties respecting what their relationship was to be. The facts of this
case support their stated intention and, unlike some cases, there is no conflicting
opinion between the Appellants and the workers as to the nature of their
relationship.
[17]
If I understand the Respondent’s
argument on the factor of intention, counsel stated that the parties’ intention
was unclear, that there was no written contract, that the intent conflicts with
the Wiebe Door Services v. The Minister of National Revenue, 87 D.T.C.
5025, factors and that the customers had no choice but to contact the workers
directly because the Appellants had no phone. In response, and first, I think
the parties’ intention could not be clearer; second, that it makes no
difference that there was no written contract as they clearly had a verbal
agreement which they all appeared to understand and abide by; third, the
factors of Wiebe Door, which I will canvas momentarily in my Reasons,
support their stated intention; and fourth, the customers contacted the workers
directly because of their expertise and, in fact, bypassed DF, with whom the
customers had the contracts.
[18]
The manner in which
these parties have chosen to describe their business relationship is not
determinative unless it reflects their relationship as it exists in reality. As
I stated in my Reasons in the National Capital Outaouais Ski Team v. The
Minister of National Revenue, [2007] T.C.J. No. 82, and I quote:
[33] …one must return to the basic principles laid down by
the Supreme Court in Sagaz Industries. More
specifically, statements of intent in an agreement are not determinative unless
they reflect the parties' actual legal relationship. Therefore, courts must
evaluate all of the relevant facts and circumstances to determine if these
reflect the intention that the parties originally stated. …
[19]
Turning now to the
four-in-one test as set out in Wiebe Door and the Supreme Court of
Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001]
S.C.J. No. 61, these factors are control, tools, chance of profit/risk of loss
and integration. The workers had absolute control over the when, where and how
concerning the specifics of their job performances. There is no control that
resides with the Appellants. In fact, the Appellants had no knowledge of the
work projects, of the scheduling, of who the customers would be at any given
time or the job cost. Nothing respecting the projects or the contracts flows
through the Appellants’ books.
[20]
As case law has pointed
out, it is not the actual control that is exercised, but the “right” to
exercise that control that is important. But, even from that perspective, there
is no evidence to support that the Appellants had any type of latent power or
right to control these workers in any fashion. They acted as free agents in
every aspect, unfettered in their approach to these work projects. It was DF,
not the Appellants, which had the contracts with the customers. DF invoiced,
and after paying its expenses, it disbursed profit to the workers, through the
Appellant corporations, by direct deposit.
[21]
The little reporting
the workers did respecting the eventual project invoicing was directed again to
DF and not the Appellants. If there was any control over the workers, it
resulted from the customers’ demands, which is typical of many entrepreneurial
ventures. The Appellants have an independent legally recognized existence. The
workers were the sole shareholders and directors in each pertinent Appellant
corporation but that does not, however, in the appropriate circumstances,
prevent them from putting on another hat that recognizes them as independent
contractors.
[22]
I think, if one steps
back and looks objectively at the entire relationship between the Appellants
and the workers, it is clear that the Appellants were conduits and a means to
an end. As taxpayers, the parties were free to fashion their commercial affairs
in a manner that best suited their needs. This was the vehicle they chose. The
decision of Justice Tardif of this Court in Groupe A.B.H. Assurances Inc. v.
The Minister of National Revenue, [1997] T.C.J. No. 1358, stated the
following at paragraph 19:
[19] Thus, it was shown that for all practical purposes
the company could not dismiss any of the three individuals whose work is at
issue in this case without endangering the company's very survival. The
dismissal of an employee is the ultimate expression of the power to control.
Without the power to dismiss or reprimand, the power to control becomes
fictitious and ineffectual.
[23]
These conclusions are
equally applicable in these appeals. Mr. Van Zanten testified that the
Appellants had no knowledge of the work projects so they could not possibly
instruct or control the workers. The Appellants had no goodwill on their books.
They were essentially shell corporations. Mr. Van Zanten stated that the
Appellants would be, and I quote, “of no use” if the workers were not there.
Even if the Appellants had the right to dismiss the workers, which the evidence
did not support, what would be gained by that action? It would be so
detrimental to the Appellants that their very existence would no longer be
required. Where the workers went, so did the customers.
[24]
As Justice Tardif
stated, in the case I just quoted – without the Appellants having the power and
ability to dismiss or reprimand these workers, control is simply a fiction and
ineffectual.
[25]
Although the Respondent
suggested that since the Appellants and the workers claimed no expenses, this
test did not favour the Appellants, I disagree as I believe this statement
leads to an incorrect conclusion. First, taxpayers are “entitled” to claim
expenses. They are not required to claim them. Second, it was DF and not the
Appellants that owned and supplied all of the specialized fibre optic tools
required by the workers to complete the projects. The workers had the usual
tool boxes, but the Appellants had no assets, no tools, no equipment and no
goodwill.
[26]
Again, I disagree with
the Respondent’s characterization of the profit/loss factor as well. From the
workers’ viewpoint, if they worked more efficiently, it meant more money in
their pockets. Mr. Skelton testified that this would be the reason he would not
hire someone to replace him, as that would mean a loss of profit. The workers
received no salary and no benefit package and, indirectly, they shared in the
expenses of each work project because they were entitled to profit, if any,
only after all associated expenses were paid. If there was no profit, they
received no money on a project. This is far removed from the nature of an
employee/employer relationship as it relates to this factor. Even from the
Appellants’ perspective, there was no opportunity for profit or risk of loss because
it operated as a conduit only for the flow of money.
[27]
With respect to
integration, the workers were not fully integrated with the Appellants. If the
workers abandoned the Appellants, the customers would follow them because of
their specialized skills. There is no evidence that any of the customers would
choose to stay with the Appellants if the workers left. The customers were the
customers of the workers or of DF even though, on the books of DF, it had the
contracts with the customers.
[28]
The workers are
independent contractors based on all of the Wiebe Door factors and, in
this sense, these factors support the stated intention of the parties to be
independent contractors. The central question as defined by Justice Major in Sagaz
was, and I quote, “…whether the person who has been engaged to perform the
services is performing them as a person in business on his own account” or, as
I like to state it simply, as “Whose business is it?” The workers were
conducting business on their own or jointly in this venture and subjecting
themselves to a chance of profit or a risk of loss, as the case may be. The
profit/loss scenario is entirely dependent on the workers’ own initiative
unrelated in any way to the Appellants. There can be but one conclusion here,
and that is that it was not the Appellants’ business. As Mr. Van Zanten stated,
and I believe I quote from his testimony: “We are the people running the
business.” The workers are independent contractors in every sense of the word
and my conclusion is fully supported by the evidence and, to some extent, by
the very Assumptions of Fact upon which the Minister relied. Accordingly, the
appeals are allowed.
Signed at Vancouver, British Columbia, this 24th day of January
2011.
“Diane Campbell”
Schedule “A”
Assumptions of Fact, 2010-659(CPP)
Business
Information
(a) the Appellant operated a business of
providing fibre optic technician services to a number of telecommunication
service providers (the “Business”);
(b) the Appellant provided its services
to Direct Fibre Tek Solutions Inc. (“DFTS”);
(c) DFTS’s customers were Atrai Networks
LP, Cogeco Cable Inc, Tandem Networks, Aecon Utilities, etc.;
(d) Andre Theriault is the 100% common
shareholder of the Appellant;
(e) the shareholders and their percentages
of holdings of DFTS were:
·
1663255 Ontario Inc.
(Appellant) 25%
·
1663254 Ontario Inc. 25%
·
1649378 Ontario Inc. 25%
·
1649377 Ontario Inc. 25%;
(f) Andre Theriault controlled the
day-to-day operations and made the major business decisions for the Appellant;
(g) the shareholders of the four
shareholder corporations of DFTS, including the Worker, controlled the
day-to-day operations and made the major business decisions for DFTS;
Control
(h) the Worker
was not hired under a written agreement;
(i) the
Worker’s duties were to splice fibre optic wire for customers of DFTS;
(j) the Worker
was highly skilled in his field;
(k) the Worker
performed his duties at various locations in Eastern Ontario;
(l) the Worker
was required to report to DFTS and their customers by email;
(m) the Worker’s
hours were based on DFTS’s customers’ needs;
(n) the Worker
was required to work long hours if needed;
Ownership of
Tools and Equipment
(o) the Worker, DFTS and their customers
provided the Worker with all the tools, equipment and materials required to
complete his work, at no cost to the Worker;
(p) the Worker, DFTS and it’s customers
were responsible for the maintenance and repairs of the tools and equipment
used by the Worker;
Subcontracting
Work and Hiring Assistants
(q) the Worker
provided his services personally;
(r) the Worker
did not hire substitutes or helpers;
Economic
Elements
(s) the Worker
was paid based on funds available in the Appellant’s bank account;
(t) the
Appellant determined the Worker’s rate of pay;
(u) the Worker
was paid by cheque;
(v) the Worker
was not required to complete invoices in order to be paid;
(w) the Appellant did not provide the
Worker with any bonuses, vacation pay or paid vacation;
(x) during the period, the Worker
provided his services exclusively to the Appellant;
(y) the Worker did not incur any expenses
in the performance of his duties;
(z) the Worker purchased supplies, which
were reimbursed through DFTS’s billing to its customers;
Responsibility for Investment and
Management
(aa) the customers determined if work
needed to be redone and covered the related costs;
(bb) the Appellant did not have any other
workers performing the same services as the Worker;
(cc) the Worker reported his income from
the Appellant as “Other income” and did not claim expenses on his personal
income tax returns for the 2006 and 2007 taxation years, as per the following:
|
Year
|
Other Income
|
|
2006
|
$15,300
|
|
2007
|
$44,500
|
(dd) the Appellant reported the following
“Management and administrative fees” as revenue on its Income Statement:
|
Year
|
Revenue
|
|
2006
|
$17,100
|
|
2007
|
$44,800
|
(ee) the Appellant reported the following
“Management and administrative fees” as expenses on its Income Statement:
|
Year
|
Expense
|
|
2006
|
$15,300
|
|
2007
|
$44 ,500
|
(ff) the Worker
did not charge the Appellant GST; and
(gg) the Appellant
did not charge DFTS GST.
Schedule “B”
Assumptions of Fact, 2010-660(CPP)
Business
Information
(a) the Appellant operated a business of
providing fibre optic technician services to a number of telecommunication
service providers (the “Business”);
(b) the Appellant provided its services
to Direct Fibre Tek Solutions Inc. (“DFTS”);
(c) DFTS’s customers were Atrai Networks
LP, Cogeco Cable Inc, Tandem Networks, Aecon Utilities, etc.;
(d) Michael Skelton is the 100% common
shareholder of the Appellant;
(e) the shareholders and their
percentages of holdings of DFTS were:
·
1663255 Ontario Inc. 25%
·
1663254 Ontario Inc.
(Appellant) 25%
·
1649378 Ontario Inc. 25%
·
1649377 Ontario Inc. 25%;
(f) Michael Skelton controlled the
day-to-day operations and made the major business decisions for the Appellant;
(g) the shareholders of the four
shareholder corporations of DFTS, including the Worker, controlled the
day-to-day operations and made the major business decisions for DFTS;
Control
(h) the Worker
was not hired under a written agreement;
(i) the
Worker’s duties were to splice fibre optic wire for customers of DFTS;
(j) the Worker
was highly skilled in his field;
(k) the Worker
performed his duties at various locations;
(l) the Worker
was required to report to DFTS and their customers by email;
(m) the Worker’s
hours were based on DFTS’s customers’ needs;
(n) the Worker
was required to work long hours if needed;
Ownership of
Tools and Equipment
(o) the Worker, DFTS and their customers
provided the Worker with all the tools, equipment and materials required to
complete his work, at no cost to the Worker;
(p) the Worker, DFTS and it’s customers
were responsible for the maintenance and repairs of the tools and equipment
used by the Worker;
Subcontracting
Work and Hiring Assistants
(q) the Worker
provided his services personally;
(r) the Worker
did not hire substitutes or helpers;
Economic
Elements
(s) the Worker
was paid based on funds available in the Appellant’s bank account;
(t) the
Appellant determined the Worker’s rate of pay;
(u) the Worker
was paid by cheque;
(v) the Worker
was not required to complete invoices in order to be paid;
(w) the Appellant did not provide the
Worker with any bonuses, vacation pay or paid vacation;
(x) during the period, the Worker
provided his services exclusively to the Appellant;
(y) the Worker did not incur any expenses
in the performance of his duties;
(z) the Worker purchased supplies, which
were reimbursed through DFTS’s billing to its customers;
Responsibility
for Investment and Management
(aa) the customers determined if work
needed to be redone and covered the related costs;
(bb) the Appellant did not have any other
workers performing the same services as the Worker;
(cc) the Worker reported his income from
the Appellant as “Other income” and did not claim expenses on his personal
income tax returns for the 2006 and 2007 taxation years, as per the following:
|
Year
|
Other Income
|
|
2006
|
$24,700
|
|
2007
|
$37,500
|
(dd) the Appellant reported the following
“Management and administrative fees” as revenue on its Income Statement:
|
Year
|
Revenue
|
|
2006
|
$26,600
|
|
2007
|
$67,700
|
(ee) the Appellant reported the following
“Management and administrative fees” as expenses on its Income Statement:
|
Year
|
Expense
|
|
2006
|
$24,700
|
|
2007
|
$67,500
|
(ff) the Worker
did not charge the Appellant GST; and
(gg) the Appellant
did not charge DFTS GST.
Email this Content