Citation: 2010 TCC 166
Date: 20100319
Dockets: 2004-24(IT)G
2004-25(IT)G
BETWEEN:
609309 ALBERTA LTD.,
STAN NANCE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
These appeals were
heard together on common evidence. Mr. Nance and his former common‑law
spouse were the sole shareholders of the corporate appellant in the relevant
years, 1998 and 1999.
I. Issues
[2]
The issues in this case
involve (i) whether 609309 Alberta Ltd. (“609309”) was a “personal services
business” and Mr. Nance its “incorporated employee” under subsection 125(7)
of the Income Tax Act (the “Act”); (ii) whether some of 609309’s
expenditures were properly disallowed because of the personal services business
restrictions in paragraph 18(1)(p), because they were not laid out
to earn income as required by paragraph 18(1)(a), because they were
personal or living expenses described in paragraph 18(1)(h), or because
they were unreasonable; (iii) whether Mr. Nance received an amount as a
tax‑free special worksite board and lodging allowance described in
subsection 6(6); and (iv) whether management fees accrued by 609309 in
1999 were incurred as deductible business expenses and, if so, whether they
were caught by the 180‑day requirements of subsection 78(4).
II. Facts
[3]
Mr. Nance is an
experienced and successful ironworker. In his early years he was involved in a
number of structural steel projects including high rises, bridges, oil sands
plants and heavy machinery. He had worked in Alberta, Saskatchewan, British Columbia and Hawaii on significant projects. By the years in
question he was largely involved in a supervisory role in construction
management and through the 1990’s had worked in this capacity on several major
projects of Canada’s large petroleum and chemical companies.
[4]
In 1993 and 1994 he was
employed by Spantec Constructors Ltd. (“Spantec”), a Canadian industrial contractor,
to work on the Genesee power plant west of Edmonton. In early 1994 Spantec decided to close its Calgary
office. Spantec sent Mr. Nance a letter in April 1994 confirming it would
no longer be providing him with full‑time employment. The letter went on
that Spantec intended to continue to have Mr. Nance working for it on an
hourly basis and would also cover his associated employment expenses. The
letter closes with a further reference to providing him with employment in the
future.
[5]
Mr. Nance
testified that he had a related conversation with the Spantec officer who signed
the letter at about the same time in which he was told Spantec wanted to continue
to use him on a contract basis.
[6]
Based upon the letter
and the conversation, Mr. Nance testified that he decided it would make
sense to work through a corporation. He then formed 609309 with himself and his
then common‑law spouse as equal shareholders and continued working as a
contractor from there.
[7]
For contracts booked
through 609309, Mr. Nance provided all of the revenue generating services
to clients. His then common‑law spouse attended to the necessary books,
payroll, banking, liaising with accountants and running errands. 609309 did not
have any other employees. 609309 provided the services of Mr. Nance for
construction management as well as some building construction work. Mr. Nance
did not do all of his work through the corporation and he continued to be
employed directly when working through his union.
[8]
Mr. Nance and his
spouse lived in Eckville. His spouse ran a hair salon in town. They also
jointly owned three modest rental properties and a quarter section of land.
[9]
In November 1997,
Spantec and 609309 entered into a contract titled Personal Services Contract
which provided that 609309 would provide the personal services of Mr. Nance
as Steel Superintendent to Spantec. The work was at the Nova Chemicals
Cogeneration Plant in Joffre Alberta. Joffre is near the city of Red Deer which
has a population of 90,000 and is Alberta’s third
largest city. According to the evidence of both sides, Joffre is less than an
hour’s drive from Eckville. Surprisingly, no one could or would tell me or
agree on the driving distance and no one asked Mr. Nance either how far
the Joffre worksite was from his home or how long it took him to drive even though
he drove it regularly in the years in question.
[10]
The Personal Services
Contract provided that 609309 would receive forty‑four dollars per hour
worked by Mr. Nance and there were no overtime rates. Spantec was
obligated to provide professional liability insurance coverage as well as
comprehensive general liability insurance coverage for the services of
Mr. Nance provided by 609309. The contract included an express agreement by
Spantec and 609309 that they were independent contractors and required that Mr. Nance
be an employee of 609309. Under the terms of the Personal Services Contract
Spantec provided a pickup truck for Mr. Nance’s work and reimbursed all
related fuel and maintenance charges. He was also allowed to use the pickup
truck to drive to and from work whether he was staying at his Eckville home or
at his summer trailer.
[11]
In November 1998, the
1997 Personal Services Contract was either replaced or extended with an
unsigned one page Project/Agreement Contract because, in Mr. Nance’s
words, the prior purchase order ran out. This document provided that 609309
would provide Mr. Nance’s supervisory services on the same project at the
same hourly rates. This document provided that the billed hours were to match
the crew hours and that additional hours to complete paperwork etc. was not to
be billed. It also set the work hours as Monday to Thursday, 10 hours per day.
It provided that expenses would be paid to Mr. Nance not 609309, and would
be billed on Spantec’s expense claim paper. It further provided that the living
out allowance and expenses, or LOA, was also to be submitted on Spantec expense
claim forms. It is clear from the evidence that Spantec’s employee expense
claim forms were used for these purposes by Mr. Nance and Spantec.
[12]
While neither agreement
provided for the terms of the LOA, Mr. Nance received a seventy‑five‑dollar
per day allowance directly from Spantec as a LOA. Mr. Spantec said he was
only entitled to receive it for days worked, however as detailed below, I find
that, and it is clear from the documentary evidence submitted by the Crown
that, he put in signed Spantec employee expense claims and received LOAs for
many more days than he worked. This is evidenced by the 609309 invoices to
Spantec and corroborating daily timesheets submitted at the same time.
[13]
Neither Mr. Nance
nor 609309 reported the LOA amounts for income tax purposes.
[14]
I must begin by
commenting on the quantity and quality of the appellants’ evidence.
[15]
I received extremely
little corroborating evidence to support Mr. Nance’s testimony. Neither
his former common‑law spouse nor anyone from Spantec testified. There
were no supporting documents of any kind entered to justify any of the expenses
deducted as having been incurred nor confirming the property or services acquired.
There was no evidence of any nature led by the appellants to explain, much less
substantiate, the accrued management fees. There was no corroborating evidence
of Mr. Nance’s testimony that 609309 had other clients than Spantec during
the period 1998 and 1999 and whether or not 609309 reported the income. I heard
no evidence of what was done in the home office, no details of what Mr. Nance’s
supervisory services involved, or what the numerous motor vehicles other than
the one provided by Spantec were used for. Similarly I did not hear any
evidence if or how expenses for his Eckville home, such as cleaning services,
utilities, and the home computer, were allocated to the home office.
[16]
Mr. Nance
testified in a most general fashion. There is certainly nothing wrong with
being a man of few words. However, I found Mr. Nance to be, at critical
times, evasive and not forthcoming. Specifically, when he was challenged in
cross‑examination about his testimony that he really did not report to
anyone conflicting greatly with his answers on discovery that he reported on a
regular or daily basis to a named Project Manager, he retorted simply “Well,
everybody has to report to somebody”. Another example was when in cross‑examination
he was asked about the express reference to employment with Spantec in its
April 1994 letter to him and that it did not suggest the use of a consulting
corporation but spoke of working on an hourly contract basis, he replied to the
effect that “I guess you can read it anyway you want”. In the circumstances, absent
clear corroborating uncontradicted written evidence, I cannot accept Mr. Nance’s
testimony alone on any of the issues in dispute as sufficient to discharge the
onus on the appellants to satisfy me on a balance of probabilities.
[17]
Specifically, I find
that the only client 609309 had in the period in question was Spantec. I accept
the evidence put in by the respondent that substantially all of the reported
revenues of 609309 were accounted for by amounts billed to and received from Spantec.
Mr. Nance’s evidence to the contrary was wishful.
[18]
I also find Mr. Nance’s
decision to establish 609309 and provide his services through it was neither at
the request nor suggestion of Spantec.
[19]
Mr. Nance’s testimony
was most inconsistent as to when he worked and as to when he commuted daily to
and from his Eckville home to Joffre or to and from his holiday trailer by the
river during the summer months. Mr. Nance did not have a place to stay at
the Joffre worksite where he was only provided a work cubicle and a pickup
truck. He testified he could remember staying on occasion at a motel or hotel
in Blackfalds near Joffre though I was not given a name of an establishment, a
reason for the occasion, much less an invoice or credit card statement. The evidence
is such that there was nowhere else for me to think Mr. Nance could have
slept most every night but in his own bed in Eckville or in his summer trailer
by the river. Specifically, I find that Mr. Nance did in fact commute
daily from either his home or trailer to his worksite in Joffre and did not
incur any board or lodging expenses in Joffre or thereabouts on all but the
rarest occasions. I further find that Mr. Nance did not work at the
Joffre worksite everyday including most weekends. I find he worked his contracted
forty hours per week or thereabouts consistent with the written agreement, and
the invoice and timesheet in evidence. I find that he nonetheless put in for
and received a seventy‑five‑dollar daily LOA for each day of the
year whether he worked it or not except for an approximately two‑week
period over Christmas and New Years. I assume this reflected the
understanding he and 609309 had with Spantec regarding the LOA.
III. Personal Services Business
[20]
A personal services business
is defined in subsection 125(7) of the Act and, in a case such as
this, requires me to determine if, but for the existence of 609309, Mr. Nance
would reasonably be regarded as an employee of Spantec.
[21]
The determination of
whether an individual is an employee or independent contractor includes
considerations of (i) the intent of the parties; (ii) control over the work;
(iii) ownership of tools; (iv) chance of profit/risk of loss; and (v) the
business integration, association or entrepreneur criteria. None of these considerations
govern, and the relative weight and relevance of each will depend upon the
facts of a particular case and the context of the issue involved. Leading
authorities on this include 671122 Ontario Ltd. v. Sagaz Industries Canada
Inc., 2001 SCC 59, [2001] 2 S.C.R. 983, in the Supreme
Court of Canada, Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025,
and Royal Winnipeg Ballet v. M.N.R., 2006 FCA 87, 2006 DTC 6323,
in the Federal Court of Appeal and Lang et al. v. M.N.R.,
2007 TCC 547, 2007 DTC 1754, in this Court.
[22]
Appellants’ counsel
relies strongly upon the intention of the parties in this case as evidenced by
the terms of the Personal Services Contract entered into between 609309 and
Spantec. He points out that several judgments of this Court have focused on the
importance of this consideration since the Federal Court of Appeal’s decision
in Royal Winnipeg Ballet.
[23]
In the context of a personal
services business determination, the intention of the parties is not a helpful
or relevant test for at least three reasons. Firstly, the section is an anti‑avoidance
provision aimed at denying the reduced small business corporate tax rate and
associated tax deferral to certain corporations’ businesses. The sought‑after
reduced rate and tax deferral could not be achieved to begin with unless the
parties intended an independent contractor relationship. The anti‑avoidance
nature of the personal services business restrictions are discussed at length
by Sharlow J.A. in Dynamic Industries Ltd. v. The Queen, 2005 FCA 211,
2005 DTC 5293. Since the service provider in a personal services
business is by definition a corporation, there is no employment alternative.
Thirdly, the wording of subsection 125(7) definition requires a court to
ignore the actual relationship and reasonably guess what the parties would have
done had they done otherwise. Both of these considerations cause me to conclude
that a subsection 125(7) personal services business determination is quite
different from the ordinary Employment Insurance, Canada Pension Plan and
income tax determination of whether the known, real and actual relationship
between a worker and a payor constitutes employment or an independent
contractor relationship. In this regard, I agree with the V.A. Miller J. when
she said in 1166787 Ontario Limited v. The Queen, 2008 TCC 93,
2008 DTC 2722, that she did not think intent is a relevant consideration
in a case involving a personal services business determination under
subsection 125(7). I also note that McArthur J. did not consider the
parties’ intentions in making his personal services business determination in 758997
Alberta Ltd. v. The Queen, 2004 TCC 755, 2004 DTC 3669, against
the taxpayer in a case involving an industrial piping designer and drafter
working at the same Nova Chemicals Cogeneration site in Joffre. The Federal
Court of Appeal in Dynamic Industries did not consider the parties’
intentions in making its personal services business determination.
[24]
In any event, there is
little helpful evidence in this case to assist me in determining what Spantec
and Mr. Nance would have intended had they decided to contract directly.
Mr. Nance’s testimony was that he believed Spantec wanted to deal with a
corporation not with him directly. No one from Spantec testified. The Personal
Services Contract makes it clear that Spantec required Mr. Nance to be an
employee of 609309; it would not be acceptable to Spantec for Mr. Nance to
be an independent contractor of 609309, he had to be an employee. I can infer
that each of Spantec and 609309 intended the relationship between them to be an
independent contractor relationship but than there was little alternative since
a corporation cannot be an employee. Both prior to the years in question and
after the years in question, Spantec obtained Mr. Nance’s services
directly as an employee for similar supervisory construction management work.
There may well have been real business considerations for Spantec requiring
Mr. Nance to be an employee of 609309 if not an employee of theirs in order
to ensure appropriate workers’ compensation was obtained and was paid for only
once and by the appropriate party, that Spantec’s insurance for general
liability as well as professional liability extended to Mr. Nance as an
unnamed insured, and similar reasons. In the face of the ambiguous direction in
which what little helpful evidence I have of intention in this case leads, I
conclude that the parties’ intentions are not helpful in making a determination
one way or the other in this case.
[25]
With respect to the ownership
of tools, 609309 provided the laptop used by Mr. Nance in his work and
Spantec provided the pickup truck and workspace. No other tools were needed. I
note Mr. Nance used the Spantec provided truck for driving to and from
work. This consideration does not lead me in one direction over the other and
is therefore not particularly helpful in this case.
[26]
The opportunity for
profit of Mr. Nance and 609309 was limited to forty‑four dollars per
hour worked by Mr. Nance plus the additional seventy‑five‑dollar
daily LOA. All related expenses, including insurance, were borne by Spantec
except for workers’ compensation. The only risk of loss to Mr. Nance and
609309 was getting caught up in a potential insolvency of Spantec or its client
Nova Chemicals, neither of which were possibilities according to the evidence.
[27]
With respect to
control, I must find that the extent of control that Spantec had and needed
over the services provided by Mr. Nance were such that a proper
characterization of his services, had he contracted directly with Spantec,
would have been one of employment. There is a significant degree of control
evidenced by what documents were in evidence. However, I make this finding
primarily based upon Mr. Nance’s entirely inconsistent testimony on this very
issue at trial compared with his answers under oath on discovery.
[28]
It is inconceivable
that even Spantec’s most senior representative on the site would not be
reporting regularly, directly or indirectly, to an overall project overseer.
The structural steel work is but one component of a working cogeneration plant.
I infer from Mr. Nance’s nonsensical denial of his earlier answer on
discovery that, if truth were told, the degree of reporting required was, at
least in Mr. Nance’s mind, sufficient to cause him at the very least a significant
risk of being an employee.
[29]
Overall, it is simply
hard to see how a worker on these contracted financial terms with Spantec could
be said to be truly in business for himself.
[30]
I am not satisfied on
the evidence put forward that it is more likely than not that, had Mr. Nance
and Spantec contracted directly for his services, the contract would have been
such as to characterize Mr. Nance as an independent contractor of Spantec.
Thus, the reassessments do not have to be amended to characterize the business
of 609309 as other than a personal services business.
IV. Disallowed Expenses
[31]
I am not satisfied that
any of the disallowed expenses should be allowed. The allowable expenses of a
personal services business are subject to the restrictions of paragraph 18(1)(p)
and, as discussed by the Federal Court of Appeal in Dynamic Industries,
this can result in otherwise deductible business expenses not being deductible
at the corporate level notwithstanding that the denied deduction may also be
included in a shareholder’s income.
[32]
In any event, the
evidence in this case is insufficient to satisfy me on a balance of
probabilities that the expenses claimed were actually incurred by 609309 and
related to its business. There was a lack of documentary evidence and a
complete absence of explanatory testimony. Mr. Nance’s testimony is that
he honestly did not know how the business expenses were compiled.
[33]
Appellants’ counsel
relies on the fact that most of the amount of expenses in question was added to
Mr. Nance’s income as a shareholder benefit. In his submission only one‑half
should have been so included since Mr. Nance’s former common‑law
spouse was also a fifty‑percent shareholder. I do not have sufficient
credible evidence to allow me to conclude that it is likely that the expenses
benefited Mr. Nance’s former spouse as much as they benefited him or that it is
incorrect to have otherwise allocated all of the benefit to him.
[34]
Appellants’ counsel
also points out that all of the disallowed expenses reflected as shareholder
benefit amounts could have been payable by 609309 to Mr. Nance as
additional remuneration and employee benefits and therefore deductible under
the restrictive personal services business provisions of paragraph 18(1)(p).
He refers to 758997 Alberta in support of such an outcome. I do not need to
even consider the approach taken by McArthur J. in that case since it is clear
that, while he was dealing with a somewhat similar personal services business
arrangement, the quality of the oral and evidentiary record for him was
markedly different. I should add that it is not clear to me that a proper
consideration of the Federal Court of Appeal’s comments in Dynamic
Industries would allow me to follow the result in the earlier 758997
Alberta decision in any event.
V. LOA/Special Worksite
[35]
The LOA amounts
received by Mr. Nance directly from Spantec are not eligible for the
subsection 6(6) tax‑free treatment of reasonable board and lodging
allowance and benefits at special worksites or remote worksites.
[36]
Subsection 6(6)
only applies to an allowance received by an employee. Mr. Nance was not an
employee of Spantec; he was an employee of 609309. Spantec paid the LOA
directly to Mr. Nance. Neither 609309 nor Mr. Nance accounted for the
LOA for bookkeeping, accounting, tax or other purposes. It is not clear that
subsection 6(6) could apply to the LOA paid by Spantec to Mr. Nance.
[37]
Subsection 6(6)
requires that a qualifying allowance be in respect of expenses the taxpayer has
incurred for board and lodging at the special worksite and that it be
reasonable. In this case Mr. Nance was sleeping in his own bed almost
every night. He did not use the LOA amounts for board and lodging at or near
the worksite. Also, he was paid the LOA for days he neither worked at the
Joffre site nor stayed there or nearby. This went well beyond a checkout
allowance for those weekends where an employee returns home occasionally for
family or other personal reasons when not working. Neither of the two requirements
is met.
[38]
A special worksite must
be such as the taxpayer could not reasonably be expected to have returned home
daily because of the distance. In this case, Mr. Nance did return home
almost daily, not on occasion for family or other reasons. This requirement
therefore is not met.
[39]
Subsection 6(6)
only applies if the taxpayer was required by his duties to be away from home or
at a special worksite or remote location for 36 hours or longer. In this case,
Mr. Nance worked ten‑hour shifts at a site less than an hour’s drive
from his home. It cannot be said that this required him to be away 36 hours.
[40]
I have great difficulty
seeing that a fifty‑four‑minute drive over public roads through the
city of Red Deer or its outskirts could be sufficiently
distant to meet either of these last two requirements.
VI. Management Fees
[41]
The evidence with
respect to the disallowed management fees deducted by 609309 is no better than
the evidence with respect to its other disallowed expenses. I have no evidence
that it was in fact ever payable or paid, to whom it was paid, or what if any
services were provided. There was no agreement, invoice, cancelled cheque or
anything else. Mr. Nance’s testimony was that he was only made aware of
the issue in the last few days and does not know to whom it was paid. The
evidence is not sufficient to satisfy me on a balance of probabilities that the
expense was incurred for purposes of 609309’s business.
[42]
I can add that since
the business of 609309 was a personal services business, it would not be
deductible under paragraph 18(1)(p) unless it was remuneration paid
to Mr. Nance. In that case, there is no evidence that it was in fact paid
within the 180‑day period mandated by subsection 78(4).
[43]
The taxpayers’ appeals
are dismissed. The Crown is entitled to costs in each appeal in accordance with
the Tariff. Since the hearing of the appeals was joined on common evidence,
there will be only one set of costs for the hearing date. Since the hearing
went past 6:00 p.m. in the evening at the request of the parties and with the gracious
consent of Court staff, costs for the hearing shall be computed as if it were a
hearing of one and a half days.
Signed at Ottawa,
Canada, this 19th day of March 2010.
"Patrick Boyle"
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