IN THE TAX COURT
2008-891(CPP)
BETWEEN:
QUADRA PLANNING
CONSULTANTS LTD.,
Appellant;
- and -
THE MINISTER OF
NATIONAL REVENUE,
Respondent.
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Held before Madam Justice Campbell in Courtroom No. 602, 6th
Floor, 701 West Georgia Street, Vancouver, B.C., on Thursday, February 12,
2009.
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APPEARANCES:
Ms. Michelle Moriartey, Counsel for the
Appellant;
Mr. Matthew Turnell,
Counsel for the Respondent.
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THE REGISTRAR: C.
DeSantos
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Allwest
Reporting Ltd.
#1200
- 1125 Howe Street
Vancouver,
B.C.
V6Z
2K8
Per: S. Leeburn
REASONS FOR JUDGMENT
(Delivered Orally from the
Bench
in Vancouver, B.C. on
February 12, 2009)
REGISTRAR: Madam Justice.
JUSTICE: Thank you. And
thank you to both counsel for coming back this morning. I appreciate it.
All right. Let the record show
that I am delivering oral reasons in the matter of the appeal of Quadra
Planning Consultants Ltd., which I heard yesterday.
This is an appeal from a
determination by the Minister of National Revenue that the workers, Michael McPhee
and Larry Wolfe, were employed by the Appellant, Quadra Planning, in
pensionable employment during the period January 1, 2005 through to February
28, 2007.
At the outset of the hearing Respondent
counsel advised the Court that the Minister was conceding that one of the
workers, Larry Wolfe, was employed as an independent contractor during the
period and therefore was not engaged in pensionable employment.
The issue concerning the
remaining worker, Michael McPhee, is whether he was employed in pensionable
employment with Quadra pursuant to the Canada Pension Plan during that
same period. Both Mr. McPhee and Mr. Wolfe gave evidence and I also heard from
Rosemary Basha, the Appeals Officer.
The Appellant was incorporated in
1987. Since its incorporation, Mr. McPhee and Mr. Wolfe have each owned 50
percent of the shares. They are the directors and officers of the company
although there are no written agreements between them. The company engages
primarily in environmental consulting services.
Prior to the incorporation of
Quadra, Mr. McPhee had operated his own environmental consulting business
as a soul proprietor. Both Mr. McPhee and Mr. Wolfe testified that they
viewed Quadra as a vehicle that would enable them to compete with larger
corporations in the industry to improve their image within the industry,
recognizing many potential customers preferred to deal with corporations. It
also enabled them to market and work cooperatively with smaller independent
consultants.
Both Mr. McPhee and Mr. Wolfe
agreed that each could provide consulting services to others and that they were
not providing these services exclusively to Quadra at all times. Mr. Wolfe
testified that he considered Quadra as one umbrella under which they would
collaborate to provide their services.
During the period under appeal Mr.
McPhee provided consulting services through his own proprietorship to the
Galiano Institute and in addition he worked three-quarters time as a professor
at Douglas College. Both Mr. McPhee and Mr. Wolfe testified that they
attracted clients by attending lectures, conferences, workshops, engaging in
proposals and maintaining general contacts within the industry. Work is
obtained by preparing and submitting project proposals on behalf of Quadra.
During this period three
proposals prepared by Mr. McPhee were unsuccessful and did not result in a work
project. Preparation of proposals take one to two days with more complex
proposals taking up to a week to complete. Project preparation involved client
contact, developing a project concept, research, budget preparation,
preparation of the proposal bid, and in some cases dealing with the hiring of
additional sub-contract consultants. The proposals would also contain an
estimate of professional fees expected to be incurred together with expenses.
The evidence was that Mr. McPhee
was never reimbursed by Quadra for the time spent on obtaining or on
preparation of these proposals even when they were successful in their bid. The
professional fees submitted in these proposals did not include an amount to
cover the preparation time and costs.
The evidence suggests that both
Mr. McPhee and Mr. Wolfe worked independently on their own proposals and
contracts in the same manner, but during the relevant period Mr. Wolfe had spent
more time pursuing his own interests as a sole proprietor doing fewer projects
within the Quadra umbrella.
When either Mr. McPhee or Mr. Wolfe
wrote a proposal that they successfully obtained, that person would sign the
contract and manage the project. Both confirmed that they had little
communication in respect to the projects each was conducting. Mr. Wolfe stated
that he did not review Mr. McPhee's proposals, review his contracts or the
final project reports. He testified that Mr. McPhee did not require his
permission to pursue these proposals and indicated that the only communication
would be communication on more complex projects. In fact Mr. Wolfe
testified that he was not aware of all of the projects which Mr. McPhee engaged
in on behalf of Quadra during this period.
When the proposals are
successful, Quadra's project contracts are fixed price contracts, which are,
according to the evidence, typical within the environmental consulting
industry. Both Mr. McPhee and Mr. Wolfe testified that as project managers,
in regard to their respective projects, they were each paid professional fees,
pursuant to the contracts, less a percentage payment retained on each project
by Quadra. When either Mr. McPhee or Mr. Wolfe provided more hours on a
project than were included in their budgeted costs, they did not bill amounts for
this additional time that would be required to complete the project. When
repair, correction or adjustments were required after the project was completed
Mr. McPhee was responsible to attend to the problem without further
compensation by Quadra.
Although no assistants were hired
during the relevant period, the evidence was that Mr. McPhee would have the
right to personally hire an assistant if preapproved by the customer.
Mr. McPhee received no overtime
or vacation pay, paid leave, or statutory holiday pay. Neither did he receive
the usual benefits such as insurance, health, dental or disability.
Mr. McPhee and Mr. Wolfe worked
from their home offices without compensation by Quadra for such use. Quadra
maintains no office space. They also use their own vehicles and cell phones.
Computers were supplied by Quadra to each worker. The evidence suggests that
office supplies and furniture may have been supplied by both Quadra and the
workers.
The evidence also revealed that Mr.
McPhee had guaranteed a line of credit in Quadra's name. A bonus was also paid
to him for the first time in 2006. In addition, the evidence suggests that Mr. McPhee
withdrew amounts from Quadra's account, which were in excess of his invoices to
Quadra. His evidence was that these amounts were advances.
I will turn now to my analysis in
this case.
I want to state at the outset
that this is not a black and white situation. The evidence suggests a lot of
grey area and the outcome is dependant primarily on my review and
interpretation of the facts before me.
I also want to commend both
counsel in their presentations. I know you are both relatively new to the arena
of the Court setting. But I also know you both spent a lot of time on
preparation before coming before me. It does not go unnoticed and I certainly
appreciate it. I do expect that both of you will have great futures as
practitioners in this Court if the presentations in this appeal are indicative
of your future work. So I thank both of you.
I want to begin by addressing the
factor of the intention of the parties in this appeal. Mr. McPhee and Mr. Wolfe
had a meeting of minds when they incorporated Quadra: that they would provide
services to the company and be treated as independent contractors. This was
also reflected in the reasons they came together in 1987, in that they
considered Quadra as a vehicle to provide a more acceptable face to their
collaboration in terms of attracting clients and competing with larger
corporations within the industry. They each retained their own sole
proprietorships and the evidence suggested that over the years they each used
those respective proprietorships to complete work in addition to using Quadra.
Mr. McPhee maintained a business
and GST number and reported business income and expenses on his tax return.
Quadra never issued T4s to Mr. McPhee. He always invoiced Quadra for the
services he rendered and collected GST on those.
The evidence of both Mr. McPhee
and Mr. Wolfe was that their common intention and understanding throughout
was that they should be considered independent contractors.
If intent alone were
determinative, then I believe the evidence of both Mr. McPhee and Mr. Wolfe of
their understanding of their relationship, together with the fact that they
invoiced Quadra for services and charged GST, points to Mr. McPhee being an
independent contractor. That is clearly how they viewed themselves in relation
to Quadra. In addition, none of the usual employee benefits were paid or
provided to either of them. They were only as successful as their next
proposal, and if they were unsuccessful over a period of time in obtaining the
projects despite the bids, or simply did not pursue proposals at all, then they
received no revenue.
All of this brings them within
the sphere of what we usually think of as independent contractors. I believe it
is also clear that where we have a meeting of minds or a common understanding
expressed by both parties as to what they intended their relationship with the
payor to be, then I cannot ignore the factor of intention.
I do not however believe that my
analysis ends there because the entire relationship must be considered in light
of the evidence to ascertain whether it supports the stated intent of the parties.
Therefore although intention is not determinative because both Mr. McPhee
and Mr. Wolfe had a common intention, it is one of the factors which must be
considered in an overall analysis of their relationship. This means that I must
now go to an analysis of the Wiebe Door factors in light of the facts
before me. (Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025)
As Justice Bowman stated in the
case of Lang et al. v. M.N.R., 2007 DTC 1754, if an analysis of the Wiebe
Door factors is inconclusive then a consideration of the findings on intent
becomes all the more important and decisive in the circumstances.
Now, I turn to the first factor
of control. In an examination of any of these factors it must be remembered
that Quadra is a separate legal entity with a distinct existence that must be
respected. It also makes any analysis a little more complicated because in
other decisions regarding employee versus independent contractor status, the
worker is not always a shareholder, director and officer of the payor as in
this appeal.
Mr. McPhee established his own
hours and schedule, negotiated contracts independently and signed those without
the need to consult with anyone else. In fact Mr. Wolfe confirmed that he was
often unaware of Mr. McPhee's projects and the evidence suggests that
neither had any right to veto contract work of the other.
Mr. McPhee could hire individuals
to assist him if he required them. He determined which projects he would or
would not pursue. He withdrew money from the Quadra account, which he referred
to as advances, as and when he needed funds. In fact, they both worked so
independently of each other that Mr. Wolfe was unaware of these advances until
just recently. Mr. McPhee also signed a line of credit in respect to Quadra.
Of course it is important to
remember that it is not the actual control that Quadra could exercise but the
right to exercise that control regardless of whether in fact the company did or
did not exercise it.
Since its incorporation, both Mr.
McPhee and Mr. Wolfe treated Quadra as a marketing vehicle in which the two of
them could pool their resources and contacts within the industry and further
their business interest as sole proprietors. This is reflected in the fact that
Quadra had no office. They worked independently of each other for the most part
and neither scrutinized the work of the other.
None of the usual employee
benefits were paid. They established their own hours, chose which contracts
they wanted to bid on. The evidence of both Mr. McPhee and Mr. Wolfe
suggests that neither could have interfered with the other’s projects, nor was
there any evidence to suggest that Quadra retained any latent power to control
these workers.
While it is true that the revenue
from the projects flowed through Quadra, there is nothing in the evidence to
suggest that the corporation had any right to direct or instruct Mr. McPhee to
accept or reject a particular project or to direct how it would be completed
after it was accepted. The evidence does not suggest that there was any power
in Quadra to control Mr. McPhee in these aspects. In fact, it supports the
evidence of both Mr. McPhee and Mr. Wolfe as to the reasons for their initial
coming together in the first place and incorporating Quadra. Quadra is a
separate legal entity but with two 50 percent shareholders. In light of their
conduct toward each other throughout the life of the incorporation, there was
very little actual residual control or right to control in the corporate
vehicle known as Quadra. But this is not surprising as it reflects the state of
intention surrounding the incorporation of Quadra and the conduct of their
activities thereafter.
I consider the factor of tools to
be neutral because the evidence suggests that each party supplied equipment.
However, I do consider the home office base to be the item of most importance
in this type of business where much of the proposal groundwork required such a
workspace to complete the work. This could tip the scale slightly perhaps in
favor of an independent contractor status.
Although the Respondent suggested
that because there was no written agreement it would be a reasonable inference
that some of the fees paid to Mr. McPhee on the projects could be
considered compensation for home office use, I reject that argument as there
was simply nothing in the evidence to suggest such a conclusion. It is mere
conjecture.
The chance of profit, risk of
loss factors must be considered from the perspective of the worker, again not
losing sight of the existence of Quadra as a separate legal entity.
Mr. McPhee's evidence was that he
had to search out clients and then he could spend days working on a proposal
which he might not be successful in obtaining. He was not compensated in any
manner for these hours nor did he expect to be. This is far removed from an
employee situation where the expectation would be for compensation. Certainly
his income was dependant on how aggressively he pursued proposal bids and how
successful he was in obtaining them: similar again to how independent contractors
operate. In fact, Mr. Wolfe testified that he had pursued other areas in the
relevant period and consequently his project numbers and revenue were down
significantly.
Mr. McPhee also risked further
loss if clients were unhappy and he had to address these concerns after
completion of the projects. Costs associated with this were again his personal
responsibility.
The extent to which Mr. McPhee
shouldered the responsibility for these costs would never be something that
typically an employee would agree to undertake without additional compensation.
The Respondent suggested that there would be no significant chance of profit for
Mr. McPhee because the remuneration was fixed as per the project and the only
opportunity to increase the profit might be to complete the work more quickly.
However, Mr. McPhee's evidence was that on one project for Fisheries and Oceans
Canada he was able to increase his professional fees by successfully reducing
the expenses, which he incurred in performing his services, thereby increasing
his profit margin. Again this is not typical of an employee/employer
relationship.
In respect to the integration
factor, Justice Bowman in Lang cautioned against using this test as it
is rarely useful or determinative. Recent case law seems to be moving in a
direction that gives less emphasis on this factor. If it is a consideration at
all, I believe there are factors pointing in both directions. Were his
activities so integrated into those of the corporation that Quadra could cease
to exist without his efforts? The answer to this is not as easy as the question
appears on its face. There is evidence to suggest that other planning
consultants were engaged by Quadra to work on and complete proposals. Some of
the documents at Exhibit A-1 included invoices and letter agreements, which an
individual by the name of Victoria McFarlane signed as principal on behalf of
Quadra.
I do not believe this factor
assists me in any helpful manner here.
In summary, if I view the
relationship between Quadra and Mr. McPhee based on intention alone, it falls
on the side of independent contractor. If I look at it from the sole
perspective of my analysis of the Wiebe Door factors then it also
points to Mr. McPhee as an independent contractor.
When I step back and look at all
of the evidence in light of all of these factors and ask “whose business is it?”,
then I must conclude it is Mr. McPhee's. And this is so despite very able and
persuasive argument by Respondent counsel.
The appeal is therefore allowed
without costs on the basis of the concession by the Respondent that Mr. Wolfe
is not engaged in pensionable employment pursuant to the Canada Pension Plan
and my conclusion that Mr. McPhee is an independent contractor and as a result
he is not engaged in pensionable employment with the Appellant, Quadra.
That concludes my reasons in the
appeal. I thank both counsel again. That is the work for the Tax Court for the
day in this week in Vancouver,
Thank you very much.
(PROCEEDINGS ADJOURNED AT 11:30 A.M.)
I hereby certify
that the FOREGOING is a true and accurate transcript of the proceedings
herein to the best of my skill and ability.
__________________________________
S. Leeburn, COURT REPORTER
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