.
Citation: 2008 TCC 521
Date: 20080918
Docket: 2007-2041(CPP)
BETWEEN:
DONALD L. MANCELL PERSONAL LAW CORPORATION,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
DONALD MANCELL,
Intervenor.
AND:
Docket: 2007-2042(CPP)
JKBC HOLDINGS LTD.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
DONALD MANCELL and KATHRYN MANCELL,
Intervenors.
REASONS FOR JUDGMENT
Paris, J.
[1]
Donald Mancell Law Corporation
(“Law Corporation”) is appealing from an assessment of contributions under the Canada
Pension Plan (the “Plan”) in respect of services provided to the
corporation by the Intervenor, Donald Mancell, in 2002, 2003 and 2004.
[2]
JKBC Holdings Ltd
(“JKBC”) is appealing from an assessment of contributions under the Plan
in respect of services provided to the corporation by the Intervenors, Donald
and Kathryn Mancell, in the same years.
[3]
The issues in these
appeals are whether Donald Mancell was in pensionable employment with Law
Corporation and whether Donald and Kathryn Mancell were in pensionable
employment with JKBC, within the meaning of subsection 6(1) of the Plan.
The Appellants and Intervenors maintain that the Mancells were never employees
of the corporations but were independent contractors working under contracts
for services.
[4]
At the request of the
parties, the appeals were heard on common evidence. Mr. Mancell
represented the Appellants and himself and his spouse as Intervenors in the
appeals.
[5]
The facts relied upon
by the Minister of National Revenue (“Minister”) in assessing the Appellants
are set out in the Replies to the Notices of Appeal and are reproduced below:
Law Corporation:
9. a) the Appellant was incorporated in the Province of British Columbia in 1991;
(admitted)
b) the Worker incorporated the Appellant to hold
ownership in a law practice; (admitted)
c) the Worker was a director, officer and sole
owner of the voting shares of the Appellant; (admitted)
d) the Worker sold the law practice in 1997;
(admitted)
e) prior to and subsequent to the 1997 sale of
the law practice, the Appellant held ownership in a 5000 plus square foot
complex in Port Hardy British Columbia; (admitted)
f) the Worker’s duties included providing
investment advice for the repair and upkeep of buildings, setting rent amounts
and doing on site visits; (admitted)
g) the Worker managed the Appellant’s day to day
operations;
h) the Worker performed his duties from his
office located at his personal residence in Comox, British Columbia;
i) the Worker’s remuneration was based on draws
(advances) from the Appellant with his fees being set at the end of the year
based on performance;
j) both the Worker and his wife had single
signing authority on the Appellant’s bank account; (admitted)
k) the Worker determined his own hours and days of
work; (admitted)
l) the amounts paid by the Appellant to the
Worker were management fees and wages;
m) the Worker provided his own tools and equipment
to perform his duties; (admitted)
n) the Worker was required to provide his
services personally;
o) the Worker did not incur expenses in the
performance of his duties;
p) the Worker did not share in the Appellant’s
potential for profits or the risk of loss;
q) the Worker did not claim personal expenses on
his tax returns in respect of the services he provided to the Appellant;
r) the amounts paid by the Appellant to the
Worker were recorded as wages or management fees in the Appellants corporate
tax returns; and
s) the Worker was not in business for himself;
JKBC:
9. a) the Appellant was incorporated in the province of Alberta on August 8, 1996;
(admitted)
b) the Appellant owns a 26 suite and a
22 suite apartment building located in Edmonton Alberta; (admitted)
c) the Appellant’s voting shares are owned equally by the
Workers; (admitted)
d) the Workers are directors and shareholders of
the Appellant; (admitted)
e) Donald is an officer of the Appellant;
(admitted)
f) during the period under review, the workers
lived in Comox, British Columbia; (admitted)
g) the Workers provided investment advise for
repair and upkeep of the buildings, set rent amounts and did on site visits; (admitted)
h) the Workers provided direction and or
recommendations to the Appellant and the property managers on maintenance and
repair issues; (admitted)
i) the Workers were in charge of the day to day
operations of the Appellant and were responsible for all business decisions;
j) Donald performed some legal work for the
Appellant in respect of evictions; (admitted)
k) the Appellant’s apartment buildings are
professionally managed by Peter Miller in Edmonton;
l) the Workers took draws from the profits of
the Appellant with final settlement set at the Appellant’s fiscal year end;
m) the Workers have never worked without payment
from the Appellant;
n) the amounts paid by the Appellant to the
Workers were management fees and wages;
o) the Workers were required to provide their
services personally;
p) the Workers did not incur expenses in the
performance of their duties;
q) the Workers did not claim personal expenses on
their tax returns in respect of the services provided to the Appellant;
r) amounts paid to the Workers were recorded as
management fees in the Appellants corporate tax returns; and
s) the Workers were not in business for
themselves.
Law Corporation
[6]
Law Corporation owned a
rental property in Port Hardy, British
Columbia, which is a three
and a half hour drive from the Mancell’s residence in Comox,
British Columbia. The property had six commercial units, one residential unit
and an office. The office was rented by a lawyer, Mr. Grier, who also
acted as the caretaker for the building in exchange for a reduced rent.
Mr. Grier dealt with day‑to‑day matters and tenant problems that
arose and contacted Mr. Mancell if there was something Mr. Mancell needed
to do.
[7]
Mr. Mancell said
his role in running the building was like that of a property manager. He found
tenants and organized any repair work, and handled the paper work for the
building. Most of the repairs were done by contractors although on occasion he
would also do some of the work himself using his own tools. He said he visited
the property a couple of times each year.
[8]
Mr. Mancell was paid
the following amounts by Law Corporation:
2002: $17,000
2003: $22,000
2004: $26,500
His pay was roughly equal to the profit earned by Law
Corporation. The payments were made as money was available to Law Corporation.
[9]
Mr. Mancell said
that he did most of the work for Law Corporation from a home office he
maintained in Comox. Any expenses incurred in doing work for the Corporation
were charged back to it, although he said that he did not charge for the use of
the office. He did not consider himself to be an employee and said that since Law
Corporation’s only activity was to earn rental income, it did not need any
employees.
[10]
He had no written
contract with Law Corporation and did not invoice it for any of the work done.
He did not charge GST on his services, saying that since the corporation could
have claimed an input tax credit for any GST he charged, it would just be a
wash anyway. He believed that the corporation recorded the amounts paid as
management fees on its financial statements.
[11]
During the periods in
issue, Mr. Mancell was absent on at least two extended trips taken with
his spouse and children to the U.S. and Mexico.
He continued to oversee the Port Hardy property as well as he could by keeping
in contact with Mr. Grier by e-mail. A friend and business associate of
the Mancells, Mr. Peter Miller made himself available to Mr. Grier for
consultation and to write cheques for work that needed to be done.
JKBC
[12]
Mr. and
Mrs. Mancell were the directors of JKBC and owned the shares along with
their children. JKBC owned two apartment buildings in Edmonton which were managed by Mr. Miller. Mr. Miller also owned some
apartment buildings in Edmonton and was responsible for convincing the
Mancells to acquire property there.
[13]
Mr. Miller’s company
charged JKBC 3% of its gross rental revenue for the property management
services it provided. There were also caretakers working on‑site in the
two buildings who were paid by JKBC. The caretakers and Mr. Miller
(through his company) made the day‑to‑day decisions affecting the
rental properties, and Mr. Mancell was involved in major decisions
concerning repairs and rental rates.
[14]
Mr. Miller and
Mr. Mancell travelled to Edmonton about twice a year for about 3 days
at a time to inspect the properties, prepare a list of any work that was
required and line up contractors for the work. They also investigated the
rental and real estate market in Edmonton. Mr. Mancell occasionally went to Edmonton for the same purposes. Mrs. Mancell apparently
did not go to Edmonton with him but was consulted on certain
matters relating to the rental operations, most notably the decoration of the
buildings.
[15]
Mr. and
Mrs. Mancell were paid monthly by JKBC, and Mr. Mancell received
additional amounts based on the profits and availability of cash in the
corporation. He said that there were a couple of months over two years that he
and Mrs. Mancell were not paid when no cash was available in the company.
However, copies of the cheques from JKBC to Mr. and Mrs. Mancell were put
into evidence (Exhibit A‑8) showed only one month (January 2002) where no
payment was made. According to those cheques the total amounts received by Mr.
and Mrs. Mancell were as follows:
|
|
Cheques made out to both Mr. and Mrs. Mancell
|
Cheques made out to Mr. Mancell
|
|
|
|
|
|
2002
|
14,000
|
106,000
|
|
2003
|
55,000
|
32,000
|
|
2004
|
56,000
|
33,000
|
[16]
In cross‑examination
Mr. Mancell said that he and his spouse reported income from JKBC as
follows:
|
|
Kathryn Mancell
|
Donald Mancell
|
|
|
|
|
|
2002
|
22,300
|
37,000
|
|
2003
|
—
|
28,000
|
|
2004
|
34,500
|
34,500
|
[17]
No reason for the
discrepancy between the amounts paid by JKBC and the amounts reported was
given.
Arguments
[18]
Mr. Mancell
referred to the four factors that have been cited frequently in the relevant
jurisprudence dealing with the determination of whether a worker is working
under a contract of service or a contract for services: control, ownership of
the tools, the chance of profit and risk of loss and the integration of the
worker into the payor’s business.
[19]
He argued that neither
he nor his spouse were given any direction by either Appellant in the
performance of their work, that they set their own hours and even took long
trips during the time they were managing the real estate belonging to Law
Corporation and JKBC. They provided their own office, although many of their
other expenses were reimbursed. They were not responsible for the day‑to‑day
operations at any of the rental properties and their work did not occupy a
great deal of their time.
[20]
Mr. Mancell
submitted that the analysis of the relevant factors clearly indicated that both
he and Mrs. Mancell were independent contractors.
[21]
Counsel for the
Respondent argued that the duties undertaken by Mr. and Mrs. Mancell
were appropriately seen as the duties of the directors of a corporation and not
those of independent contractors. She submitted that since a director of a corporation is included in the
definition of “officer” found in section 2 of the Plan, and an officer
is included in the definition of the term “employee” in the same section, the
Court should find that Mr. and Mrs. Mancell were both employees of JKBC
and that Mr.
Mancell was
an employee of Law Corporation by virtue of their being directors of those
corporations.
[22]
Alternatively
she said that an analysis of the four elements referred to by Mr. Mancell
also supported this conclusion.
[23]
She
contended that even if the corporations did not exercise control over Mr. and
Mrs. Mancell that it still retained the power to do so, which was the
critical factor according to the Federal Court of Appeal in Groupe Desmarais
Pinsonneault & Avard Inc. v. M.N.R., 2002 FCA 144.
[24]
Counsel also submitted
that the Appellants effectively provided most of the tools needed for the work
done by the Mancells by reimbursing them for the expenses they incurred in the
course of that work. She also said that there was no chance of profit or risk
of loss because while the remuneration paid may have varied, it was always
paid.
[25]
Finally counsel said
that there was no evidence to corroborate Mr. Mancell’s testimony that the
Appellants as well as Mr. and Mrs. Mancell intended that the Mancells be
independent contractors. No written agreement was entered into and no GST was
charged to the Appellants. She also suggested that the recording of the amounts
paid as “management fees” indicated that there was an employment relationship.
Analysis
[26]
I will deal firstly
with the Respondent’s submission that Mr. and Mrs. Mancell were employees
because they were directors of the Appellant corporations.
[27]
The definitions of
“officer” and “employee” found in section 2 of the Plan reads as
follows:
office and officer —means the position
of an individual entitling him to a fixed or ascertainable stipend or
remuneration and includes a judicial office, the office of a minister of the
Crown, the office of a lieutenant governor, the office of a member of the
Senate or House of Commons, a member of a legislative assembly or a member of a
legislative or executive council and any other office the incumbent of which is
elected by popular vote or is elected or appointed in a representative
capacity, and also includes the position of a corporation director, and
“officer” means a person holding such an office;
employee —includes an officer;
[28]
In order for the
position of a director to fall within the definition of “officer” set out
above, the director must be entitled to a “fixed or ascertainable stipend or
remuneration” for carrying out the duties of the position. In this case there
has been no evidence led to show that the amounts received by Mr. and Mrs. Mancell
from the Appellants were connected with any activities they undertook as
directors, and there was no assumption made by the Minister to this effect at
the time of the assessments. I am not satisfied that there was any fixed or
ascertainable stipend attached to the position of director with the two
Appellant corporations, and therefore the Respondent’s first argument cannot
succeed.
[29]
I am also not convinced
that the work done by Mr. and Mrs. Mancell for which they were paid was work
that could be said to be the ordinary work of a director of a corporation. Much
of the work appears to have been more in line with that done by a property
manager than a director.
[30]
It is therefore
necessary to carry out an analysis of the elements of the relationship between
the Appellants and Mr. and Mrs. Mancell as set out in Wiebe Door Services
Ltd. v.Canada (Minister of National Revenue – M.N.R.), [1986] 3 F.C.
553 (F.C.A.) and approved by the Supreme Court in 671122 Ontario Ltd. v.
Sagaz Industries Canada Inc., 2001 SCC 59. In this case, the relevant
factors are the control that the Appellants had over the Mancells’ activities,
ownership of the tools, and the chance of profit and risk of loss to the
Mancells from the activities.
[31]
I agree with the
Respondent’s counsel that it is difficult to determine the level of control a corporation
exercises over the worker when the worker is either the sole director or one of
two directors of the corporation. However, in this case the evidence discloses
that the Mancells were not required to work fixed hours and were not
responsible for day‑to‑day operations. They took time off (sometimes
for long periods) when they wished and apparently arranged for a replacement
(Mr. Miller) to take over their duties while they were away. To this
extent, the control element points to the existence of a contract for services.
[32]
To the extent that the
use of the Mancells’ home office was not reimbursed, the next element in the Wiebe
Door test, the ownership of the tools used in the work, also points towards
a contract for services.
[33]
I also find that the
Mancells had a substantial chance of profit given that most if not all of the
profits of both Appellants were flowed out to them under the work arrangements.
To a certain extent those profits would be determined by the decisions made
concerning the rents to charge and the expenditures to incur in the operation
of the rental properties.
[34]
It also appears that there
may have been a slight risk of loss to the Mancells in their work for the
Appellants. I understood that the Mancells would only be paid if there were
profits from the Appellants’ rental operations. In the event that the
Appellants were not profitable, the costs of the home office would still only
be borne by the Mancells.
[35]
Although the intention
of the parties respecting their relationship may be relevant in cases of this
kind, the evidence of the parties’ intention here is less than clear.
Mr. Mancell’s explanation for not charging GST on the management fees is
not convincing, and it is also surprising that the contractual arrangements
between the Appellants and the Mancells were not put in writing. Given the
non-arm’s length relationship between the parties and the large sums of money
paid out, one would expect some form of documentation to have been drawn up. I
infer that little thought was actually given to the status of the Mancells with
the Appellants.
[36]
In light of the
foregoing analysis, I conclude that the balance of the pertinent factors
support the Appellants’ position that the Mancells were engaged under contracts
for services. In so concluding, I would accord the greatest weight to the
absence of supervision and control by the Appellants over the Mancells’ work,
which is a strong indicator of the existence of a contract for services.
[37]
The appeals are therefore
allowed.
Signed at Ottawa, Canada, this
18th day of September 2008.
“B.Paris”
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