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Citation:2004TCC740
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Date: 20041125
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Docket: 2003-4584(IT)I
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BETWEEN:
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PAUL SMITH,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
O'Connor, J.
[1] The issue in this appeal is
whether the Appellant was required to include in his income for
the 2001 taxation year, an amount of $24,450.00 which he received
from Strategic Profit Inc. ("SP Inc.").
[2] The Appellant was the sole
shareholder of a company incorporated in 1992 under the name of
Money Mailer of Western Canada Inc. ("MM Inc.").
[3] The Appellant sometimes also
simply used the name of Money Mailer of Western Canada
("MMWC"). The evidence of the Appellant is that
although the latter name (not employing the abbreviation
"Inc.") may have been used, no proprietorship was ever
registered. In reality MMWC did not exist as a separate legal
entity.
[4] A Contract ("Contract")
was entered into on January 1, 2001. The first part of this
Contract reads as follows:
CONTRACTORS AGREEMENT
January 1, 2001
This is a contract agreement between Strategic
Profits Inc.
(The "Company")
and
Money Mailer of Western Canada (dba Paul
Smith),
of 3025 Brookridge Dr, North Vancouver,
BC V7R 3A7 smitty no85@canada.com (The
"Contractor")
WITNESSES THAT WHEREAS:
The Company wishes to engage the Contractor to perform certain
services as are outlined and specified on the attached
"Working Agreement" and "Vision, Mission, Values
and Philosophy Statement."
[5] None of the documents referred to
as "attached" were in fact attached. The Contract is
extremely loosely drafted and contains some provisions pointing
to an independent contractor relationship and some to an
employer-employee relationship. In my opinion the Contract cannot
be relied upon to determine the relationship between the
Appellant and SP Inc. However, it is clear that the Contract was
not with MM Inc.
[6] Pursuant to the Contract the
Appellant performed certain consulting and other services and was
paid directly by SP Inc. in the year 2001, a total of $24,450.00.
The payments totalling this amount were paid directly to the
Appellant by means of 22 cheques issued periodically in each and
every month of the year 2001, sometimes by means of one cheque a
month, sometimes three times a month but most of the time by two
cheques per month (this is evidenced by Exhibit A-2).
[7] The apparent contention of the
Appellant is that the cheques really belonged to MM Inc. and that
he had instructed SP Inc. to pay him directly because of
financial difficulties affecting MM Inc. This was done but there
is no satisfactory evidence that any portion of the $24,450.00
was ever paid over to MM Inc. The Appellant states he paid some
expenses with that money and kept the balance.
[8] The Appellant also contends that
he was not in an employee-employer relationship position with SP
Inc. and therefore was not in receipt of employment income. He
claims that he was rather an independent contractor, not an
employee.
[9] The Appellant's basic
submissions on that issue are set forth in the following extracts
from the Notice of Appeal.
...
CONTROL
· [Appeals
Div]According to the "contractors agreement", you were
responsible for estimating the time and costs of each project
assigned to you, however, the estimate was subject to consensus
by both yourself and Strategic Profits Inc. ("SP
Inc.")
· Standard
business practice in the technology industry requires that
contracts are "negotiated" and signed when the two
parties have come to an agreement. Prices are rarely fixed and
non-negotiable.
· [Appeals
Div] if the work performed was unsatisfactory, SP Inc decided
whether the work must be redone
· Standard
contracts in the technology industry require that a job be
completed according to the contract. If not, the work is to be
re-done until such a time it meets the specifications agreed
upon.
· [Appeals
Div] An office was provided to you for your use
· I was
allowed to share a work-station for those times when I was
required to be at the office-typically to use between
meetings.
· [Appeals
Div] According to the "contractors agreement" provided.
SP Inc. had the right to terminate your services should you
violate certain provisions of the agreement.
· Standard
contracts in the technology industry permit contract to be
terminated - with due process of course.
OWNERSHIP OF TOOLS:
· [Appeals
Div ] Although you sometimes worked at home and provided your own
computer, a computer was provided to you by SP Inc. at not
(sic) cost to you when you worked in their office.
· A shared
computer was provided, but majority of the work was completed
offsite - as stated in the Contractor's Agreement.
· [Appeals
Div] You claimed that the only expenses you incurred while
working for SP Inc. were transportation to SP Inc.'s office
and telephone calls
· Plus
typical home office expenses.
· [Appeals
Div] SP inc. covered the cost of liability insurance
· As a small
contractor in the tech industry - liability insurance is not
available
CHANCE OF PROFIT/RISK OF LOSS:
· [Appeals
Div] You were paid a rate of $20/hour regardless of the financial
health of SP Inc. You did not share in SP Inc.'s potential
for profit or risk of loss.
· If the
financial health of SPI was poor, this would be reflected in less
contracts being available.
· [Appeals
Div] SP Inc. covered all related costs such as materials, time,
and money should work have to be redone.
· My time is
not paid for work that had to be re-done as, obviously, the terms
of the contract haven't been met.
· [Appeals
Div] SP Inc. covered all costs relating to bad debts and was
responsible for invoicing and collecting from their
customers
· As
typically in the tech business - in order to portray a
"larger organization" contractors are assumed as
"part of the team" and contractor bills are grouped
together into one invoice to be presented to the client. There
can typically be several independent contractors involved in one
project.
· [Appeals
Div] Work performed by you were for SP Inc.'s customers and
therefore, SP Inc. was responsible for resolving all customer
complaints.
· As
typically in the tech business - in order to portray a larger
organization contractors are assumed as "part of the
team" and SP Inc would act as the contact point to the
client.
· [Appeals
Div] [Appeals Div] SP Inc. guaranteed all work performed to their
customers
· As
typically in the tech business - in order to portray a larger
organization contractors are assumed as "part of the
team" and SP Inc would act as the contact point to the
client.
ADDITIONAL FACTS:
· [Appeals
Div] You were subject to a probationary period while working for
SP Inc.
· Or in other
words, a way to determine "Preferred Contractor Status"
as indicated by the Contractors Agreement
· [Appeals
Div] You were entitled to rewards and recognition should you meet
or surpass certain requirements in the "contractors
agreement".
· A method by
which the company tries to secure the loyalty of contractors in a
competitive market
· [Appeals
Div] You were eligible to receive shares in the company for
exceptional performance and/or loyalty
· A method by
which the company can secure the loyalty of contractors in a
competitive market
· [Appeals
Div] The "contractors agreement" was signed by you as
Paul Smith not Money Mailer of Western Canada.
· The
contract is made out to Money Mailer of Western Canada and signed
by Paul Smith - a duly registered signing authority of that
company.
[10] The Respondent's submissions are
set forth in the following extracts from the Reply to the Notice
of Appeal:
...
12
a) SP Inc. was
in the business of developing and promoting computer software
programs and in internet marketing;
b) SP Inc.
hired the Appellant to prepare quotes for its customers, to
manage projects, to market its software and to do office
administration (the "Duties");
c) SP Inc.
established and paid the Appellant $20.00 per hour;
d) ...
e) SP Inc.
established a probationary period and monitored the
Appellant's performance of the Duties;
f)
...
g) SP Inc.
guaranteed the work done for its clients, ...
h) SP Inc.
provided the office space, office equipment, computer equipment
and internet access used by the Appellant in the performance of
the Duties;
i)
...
j)
...
k) on
occasion, the Appellant worked on projects from his home and used
his own computer;
l) the
Appellant did not invest, and was not required to invest, any
capital in the performance of the Duties;
m) the Appellant did
not incur any expenses in the performance of the Duties; and
n) ...
[11] The Appellant submits further as
follows - that he submitted invoices with respect to each of the
cheques described in Exhibit A-2 - that his rate of pay was not
strictly set by SP Inc. However, the Appellant does confirm that
the amount in question, namely $24,450.00 was based on an hourly
rate of $20.00 but that some services he rendered were outside
the core business of SP Inc. (i.e. no integration) and that not
all work he performed was based on an hourly rate. The Appellant
adds that SP Inc. did not reimburse travel expenses, however, the
Appellant acknowledges that the travel was not extensive,
involving principally bus travel from his home to
SP Inc.'s office. Also the Appellant submits that
SP Inc. furnished no benefits and no training, that the
Appellant had a personal computer with software and an internet
connection and a telephone at his home office, that he was not
supervised and that his services were not required
full-time.
[12] The Appellant referred to his office
consisting of a room at his parents' home. He considered this
as an office of SP Inc., however, no rent was paid by SP Inc. The
Appellant testified that the office available to him at SP
Inc.'s premises was a communal office used by himself and
other contractors. However, this allegation is rebutted by the
evidence of Laura Murphy, a trust account examiner of CRA, that
in her payroll audit of SP Inc., she saw cheques, with
appropriate deductions for eight employees, but only one set of
cheques to a "contractor" namely those to the Appellant
detailed in Exhibit A-2.
[13] The Respondent adds the following: SP
Inc. invoiced its customers with respect to the work performed by
the Appellant. SP Inc. covered any bad debts. SP Inc. guaranteed
the work to its customers. In this regard the Appellant says that
he guaranteed his work to SP Inc. The Respondent referred to
various questions in Exhibit R-3 and pointed out that some of
those questions were answered differently than the verbal
testimony given by the Appellant at the hearing. The Respondent
also referred to Exhibit R-2 a document put out by SP Inc.
entitled "The Management Team" which refers to the
Appellant by the title "VP Marketing
Administration".
Conclusion
[14] The question to be determined therefore
is whether the Appellant was an employee or an independent
contractor.
[15] This type of issue comes before this
Court frequently and, as is well known, the issue has generally
been resolved on the basis of a four-fold test. The tests
are:
(1) control,
(2) ownership of tools,
(3) chance of profit and risk of loss,
(4) the integration test.
Before analysing these tests, the following general comments
are relevant.
[16] In deciding the issue I am not simply
to substitute my opinion for that of the Minister but I am to
give some deference to the decision of the Minister. These
principles have been developed by the Federal Court of Appeal in
the following cases. In Légaré v.
Canada(Minister of National Revenue - M.N.R.),
[1999] F.C.J. No. 878 the Court had occasion to review the issue.
Paragraph 4 of that decision by Marceau, Desjardins and
Noël, J.J. stated as follows:
The Act requires the Minister to make a determination
based on his own conviction drawn from a review of the file. The
wording used introduces a form of subjective element, and while
this has been called a discretionary power of the Minister, this
characterization should not obscure the fact that the exercise of
this power must clearly be completely and exclusively based on an
objective appreciation of known or inferred facts. And the
Minister's determination is subject to review. In fact, the
Act confers the power of review on the Tax Court of Canada
on the basis of what is discovered in an inquiry carried out in
the presence of all interested parties. The Court is not mandated
to make the same kind of determination as the Minister and thus
cannot purely and simply substitute its assessment for that of
the Minister: that falls under the Minister's so-called
discretionary power. However, the court must verify whether the
facts inferred or relied on by the Minister are real and were
correctly assessed having regard to the context in which they
occurred, and after doing so, it must decide whether the
conclusion with which the Minister was "satisfied"
still seems reasonable.
Also in the case of Pérusse v.
Canada(Minister of National Revenue - M.N.R.)
[2000] F.C.J. No. 310, Marceau, J. at paragraph 14 said:
In fact, the judge was acting in the manner apparently
prescribed by several previous decisions. However, in a recent
judgment this court undertook to reject that approach, and I take
the liberty of citing what I then wrote in this connection in the
reasons submitted for the court.
Then at paragraph 15 he said:
The function of an appellate judge is thus not simply to
consider whether the Minister was right in concluding as he did
based on the factual information which Commission inspectors were
able to obtain and the interpretation he or his officers may have
given to it. The judge's function is to investigate all the
facts with the parties and witnesses called to testify under oath
for the first time and to consider whether the Minister's
conclusion, in this new light, still seems "reasonable"
(the word used by Parliament). The Act requires the judge
to show some deference towards the Minister's initial
assessment and, as I was saying, directs him not simply to
substitute his own opinion for that of the Minister when there
are no new facts and there is nothing to indicate that the known
facts were misunderstood. However, simply referring to the
Minister's discretion is misleading.
[17] Having reviewed all the Exhibits and
having considered the testimony submitted at the hearing, in my
opinion on a balance of probabilities the Appellant was engaged
by SP Inc. in the year 2001 under a contract of services (i.e.
employer/employee relationship) and not an "independent
contractor" relationship. My principal reasons are: (1) The
Contract was not with MM Inc. but rather with "Money Mailer
of Western Canada Inc. (dba Paul Smith)" and the terms of
the Contract bear this out; (2) the testimony of Laura Murphy and
several of the exhibits, in particular the description of
"The Management Team" (Exhibit R-2), the Questionnaire
(Exhibit R-3) contradict the testimony of the Appellant and in my
opinion are to be preferred.
[18] The result is that the Appellant in the
year 2001 received the $24,450.00 as employment income.
[19] Alternatively, even if the Appellant
was successful in his contention that he was an "independent
contractor" then he must be considered as having received
the $ 24,450.00 as business income from SP Inc., the Contract
referring to him as an "independent contractor", doing
business as Money Mailer of Western Canada Inc. (dba Paul
Smith).
[20] As a further alternative the Appellant
must be considered as having received the $24,450.00 as a
shareholder benefit, he being the only shareholder of MM Inc. In
this regard reference is made to subsection 15(1) of the
Income Tax Act (the "Act") which provides
as follows:
Benefit conferred on shareholder.
(1) Where at any
time in a taxation year a benefit is conferred on a shareholder,
or on a person in contemplation of the person becoming a
shareholder, by a corporation otherwise than by
(a) the reduction of
the paid-up capital, the redemption, cancellation or acquisition
by the corporation of shares of its capital stock or on the
winding-up, discontinuance or reorganization of its business, or
otherwise by way of a transaction to which section 88
applies,
(b) the payment of a
dividend or a stock dividend,
(c) conferring, on
all owners of common shares of the capital stock of the
corporation at that time, a right in respect of each common
share, that is identical to every other right conferred at that
time in respect of each other such share, to acquire additional
shares of the capital stock of the corporation, and, for the
purpose of this paragraph,
...
the amount or value thereof shall, except to the extent that
it is deemed by section 84 to be a dividend, be included in
computing the income of the shareholder for the year.
[21] Moreover even if one were to categorize
the $24,450.00 as a shareholder loan by MM Inc. to the Appellant
it still represents income of the Appellant because of the effect
of subsection 15(2) and paragraph 20(1)(j) of the
Act which bring unpaid shareholder loans into income.
[22] For all of the above reasons the appeal
is dismissed.
Signed at Ottawa, Canada, this 25th day of November, 2004.
O'Connor, J.
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