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Citation: 2004TCC755
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Date: 20041116
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Docket: 2003-3050(IT)G
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BETWEEN:
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758997 ALBERTA LTD.,
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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
McArthur J.
[1]The Appellant, 758997 Alberta Ltd. (758), appeals the
assessment for its taxation year ending June 30, 1999 from the
Minister of National Revenue. The issues are:
(i) whether 758 was a personal
services corporation as defined in subsection 127(7) of the
Income Tax Act and if it is not a personal services
corporation then;
(ii) whether the expenses of
$59,742 denied by the Minister are deductible pursuant to
subparagraphs 18(1)(p)(i) or 18(1)(p)(ii) of the
Act.
[2] Walter Pielasa and his wife,
Susan, owned 60% and 40% of the shares of 758, respectively.
Walter is an engineering technologist. More specifically, he is a
designer and drafter of industrial piping.
[3] In August 1996, he entered a
contract with a placement agency, The Design Group Staffing
Services Inc. (DGS). DGS found him employment with Bantrel Inc.
who was in charge of construction projects for Nova Chemicals
(Nova) in its plant at Joffre, near Red Deer, Alberta. Nova is a
substantial petrochemical plant whose piping installations
appeared to be in an almost constant state of evolution. The
original contract with DGS was entered into by Mr. Pielasa
personally and was temporary employment for an indefinite period
of time.
[4] In November 1996, his then
fiancée moved to Calgary. At that time, Mr. Pielasa
believed his work at Nova's Joffre site was coming to an end
and he began looking for work in or closer to Calgarywhile
continuing to work at Joffre. He was offered a position with
Tri-Ocean Engineering Ltd. of Calgary in October 1997 as a pipe
designer at $46 per hour. At the same time, he incorporated
758.
[5] During this period, 758 contracted
with Kemex Engineering Services Limited to have Mr. Pielasa work
for 20 hours in mid-November. To retain a valuable client, DGS
negotiated a new contract for 758. On November 26, 1997, 758
entered into a contract with DGS to provide the services of a
piping designer to Bantrel for services at Nova's Joffre
plant at the end rate of approximately $50 per hour.
[6] This contract was for an
indefinite period and specified that 758 was considered an
independent contractor as opposed to an employee. The DGS
contract contained a non-competition clause for a period of three
months after its contract terminated. It provided further that
758 would provide a piping designer (Mr. Pielasa) to Nova through
Bantrel. Mr. Pielasa's timesheets had to be approved by
Bantrel and submitted to DGS who paid 758 who, in turn, paid
Mr. Pielasa. Mr. Pielasa was expected to comply with the
corporate policies of DGS, Bantrel and Nova.
[7] At the plant, Mr. Pielasa was
integrated into a project group. These groups consisted of Nova
employees and Bantrel staff and contractors. New project groups
were continuously being created and old ones dissolved, with the
normal length of a project being about eight months. Within that
longer timeframe, smaller projects would have shorter deadlines,
and the individual workers had the ability to decide what project
to work on as long as their assigned projects were completed by
the timeframe set by the project leader who was usually a Nova
employee. If there was a concern, Nova would raise the issue with
Bantrel, who in turn would either discuss it with the worker and
occasionally a DGS representative.
[8] Nova had liability insurance for
the job site and 758 or Mr. Pielasa did not. All of Mr.
Pielasa's designs were reviewed and signed by an engineer,
who then was legally liable for the end product. Even Mr.
Pielasa's Worker's Compensation Board premiums were paid
by another party, DGS.
[9] Mr. Pielasa often took work home
and used his own computer and copies of the AutoCAD software, but
these same tools were also supplied by Nova. In fact, Nova had a
different software package installed and Mr. Pielasa would have
to convert any work done away from the office into that software
system before it was of any use to the company. Bantrel provided
site-specific safety gear to Mr. Pielasa. The only tool that
Mr. Pielasa supplied that did not duplicate tools supplied by
Nova or Bantrel was his library of reference material. No
work-related training was made available to Mr. Pielasa by DGS,
Bantrel or Nova. DGS did however offer a benefits plan that
covered extended health, although 758 did not opt into the
program.
[10] It is highly unlikely that Mr. Pielasa
had that right to subcontract his work. He was part of a team,
Bantrel knew as did Nova of his competency and would not accept
replacement without approval. DGS, Bantrel and Nova retained
control, not 758 or Mr. Pielasa.
[11] Since the end of 2000, Bantrel has
stopped providing Nova with supplemental project workers. This
service is now provided directly by DGS. 758 managed to continue
to secure projects from DGS, all of which have been located at
the Nova Joffre plant. 758 also supplied Ms. Pielasa to Yanko and
Company (Yanko) for a half-year of clerical services in 2001. Ms.
Pielasa has been paid to work on several of the projects 758
secured through DGS. Her services did not include drafting or
design work, but instead was focused on word processing, document
drafting, editing, checking of drafting calculations and as
general clerical support to 758.
[12] The Appellant and Susan were married
and had a child. They resided, as a family in what had been
Susan's apartment in Calgary, but he retained his
Red Deer apartment where he resided during the workweek from
where he commuted some 30 kilometres daily to the Nova
Joffre plant. When he was not working, he resided with his family
in Calgary.
[13] I accept that his principal place of
residence was in Calgary with his wife and their child, now six
years old, but that he has maintained an apartment in Red Deer
for work purposes only. Although this is the same apartment that
he rented prior to moving to Calgary, most of his furniture and
personal effects have been moved to Calgary. With 125 kilometres
between Calgary and Red Deer and another 25 kilometres to the
Nova Joffre plant, Mr. Pielasa has used this apartment
extensively in the last seven years. 758 has continued to look
casually for additional contracts. The company's efforts have
been limited to lunches with colleagues, contact with a few
engineering firms in southern Alberta and word of mouth.
[14] The reassessment of 758 was based on
the assumption that it was a personal services business. As a
consequence, a number of expenses were disallowed under paragraph
18(1)(p), alternatively, the Minister pleads that even if
758 is not a personal services business, the same expenses were
properly disallowed as they were not incurred to earn income from
a business and they are personal or living expenses of specified
shareholders. Finally, a sum of $12,296.60 spent on wages to
Walter ($8,766.30) and Susan ($3,530.30) was disallowed as the
Minister's auditor was not satisfied that the amount was
actually paid as a wage or management fee.
[15] The first question is whether 758 was a
"personal services business" within the definition in
subsection 125(7). The test boils down to whether Mr. Pielasa
"would reasonably be regarded as an officer or employee of
the person or partnership to whom or to which the services were
provided but for the existence of the corporation". The
guiding tests to determine whether a person was an employee or
independent contractor are set out in Wiebe Door Services Ltd.
v. M.N.R.[1] as confirmed by the Supreme Court of Canada
in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc.[2] The tests
include (a) employer control; (b) ownership of tools; (c) chance
of profit or risk of loss and to an extent; integration.
[16] The Supreme Court of Canada in
Sagaz makes it clear that these factors are not exclusive
tests but are to be given weight according to the circumstances.
The primary consideration is to determine whether the worker is
simply part of DGS, Bantrel or Nova or whether Mr. Pielasa was in
business on his own account.
[17] I have little difficulty in concluding
that Mr. Pielasa was not in business on his own account. The
Appellant's counsel submits that the biggest hurdle the
Minister had to get over, in determining whether Mr. Pielasa is
an employee, is who is his employer? DGS found his work, Bantrel
and Nova supervised. It is irrelevant who the actual employer
was, DGS, Bantrel or Nova, probably all three but it does not
really matter.
[18] All that needs to be determined is
whether it can be reasonably considered that Mr. Pielasa was in
business for himself vis-à-vis the drafting work. He was
not. His arrangement with DGS, Bantrel and Nova put him in a
subordinate role where he was under the control of the three
corporations - told what to do, when and where to do it and in
some respects, how to do it. Obviously, this test supports the
Minister's position. He and 758 were not the boss, the three
corporations were. 758 was paid on an hourly basis for Mr.
Pielasa's services. He and 758 had no risk of losses or
ability to increase profits reflecting an employee relationship.
The tools he provided were insignificant. This test also favours
an employee relationship.
[19] The independence he had, stemmed from
the management style of the three corporations and not from an
independent contractor status. The contractual wording in the DGS
contract describing Mr. Pielasa as an independent contractor
and not an employee has no foundation in reality. The facts
disprove the contractual description and should be ignored. The
freedom over his project management and working relationship with
the three entities is no different from the independence
competent professional employees are commonly granted by their
employers. Mr. Pielasa's independence reflected the
management style of the three corporations and not an independent
contractor.
[20] The control test is very meaningful in
this instance. His contract with DGS assigned him to work at the
Nova plant, 30 kilometres from Red Deer and some 150 kilometres
from his principal place of residence in Calgary. He could not
decide for instance that "I will work in Calgary
today". He had to be on site at Nova's plant working
with a group organized by Bantrel on a specific project required
by Nova. He was a team player and not off on his own. He was
directed to use his professional skills as directed by the
project's leader. The projects were for a specific period of
time and to be completed by Mr. Pielasa and not his designate in
a specific period of time under the direction of Bantrel using
Nova's office, supplies and computers. He was paid a
contracted hourly rate determined by DGS, Bantrel and Nova. It
was not his business, it was the business of the tripartite group
of corporations. DGS issued a T4 for the wages paid to
Mr. Pielasa that was attached to his T1.
[21] Having found that 758 was a personal
services business, the remaining issue is whether 758's
disallowed expenses are allowable under
subparagraphs 18(1)(p)(i) and 18(1)(p)(ii) of
the Act which read in part:
18(1) In computing the income of a taxpayer
from a business or property no deduction shall be made in respect
of
...
(p) an outlay
or expense to the extent that it was made or incurred by a
corporation in a taxation year for the purpose of gaining or
producing income from a personal services business, other
than
(i) the
salary, wages or other remuneration paid in the year to an
incorporated employee of the corporation,
(ii) the cost to the
corporation of any benefit or allowance provided to an
incorporated employee in the year,
[22] The Minister disallowed the following
on the basis that they were personal expenses of Mr. Pielasa and
not incurred for the purpose of gaining or producing income.
These expenses are set out in paragraph 17(hh) of the Reply to
the Notice of Appeal as follows:
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Description
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Amount
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Automotive expenses
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$13,878
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Meals & entertainment
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$4,950
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Red Deer rent expense
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$4,980
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Calgary rent expense
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$900
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Telephone
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$378
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Utilities
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$237
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Wages
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$12,296
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Employee benefits
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$7,708
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Advertising expenses
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$504
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Insurance
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$371
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Total Personal Expenses
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$46,202
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Details of these expenses are set out in paragraph 17 of the
Reply to the Notice of Appeal, which I will deal with
briefly.
(jj) the Worker and
his Spouse rented and lived in an apartment in Red Deer,
Alberta;
This is not accurate. I have found earlier that Mr.
Pielasa's principal place of residence was with his wife and
child in Calgary. He used the Red Deer apartment for his work
with the group of three corporations.
(qq) the duties performed by the
Worker at the Jobsite were not of a temporary nature;
This is not accurate. The projects were generally from one
week to eight months in duration. This is probably why Nova used
placement agencies.
(tt) the
Worker's principal place of residence was in Red Deer;
As stated, this is not accurate.
(aaa) the meals and entertainment expenses
were not incurred by the Worker for business purposes;
(ccc) the wages and benefits claimed in the
1999 taxation year are personal expenses of the Worker;
I disagree with both of these. The meals and entertainment
expenses incurred by Mr. Pielasa, the $1,100 per month automobile
expenses, the insurance for the vehicle and the Red Deer
apartment expenses are all benefits to the incorporated employee
and, therefore, deductible by the Appellant under paragraph
18(1)(p).[3]
The wages and benefits claimed in 1999 were not personal expenses
of Mr. Pielasa. They represented wages and benefits paid to
the two "incorporated employees", Mr. and Ms. Pielasa.
The company's accountant testified that the amounts in
dispute were added as shareholder loans and deducted as wages and
benefits to represent the fact that some amounts paid by DGS for
the work conducted by Mr. Pielasa were incorrectly paid directly
to Mr. Pielasa. The amounts should have been made payable to 758.
The ledger was adjusted to record this error, with the result
that shareholder loans were recorded, and corresponding amounts
were credited for wages and benefits paid to Mr. and
Ms. Pielasa. This is not a case of an individual attempting
to contract with himself and pay himself wages as suggested by
the Minister, but rather it was a notation on the company's
ledger to recognize the error in the issuing of several cheques.
Therefore, the wages to Mr. Pielasa were properly recorded and
deducted, as were the wages to Ms. Pielasa.
[23]
(fff) the Appellant was not
entitled to deduct the Personal Expenses as the
Appellant was a personal services business;
As stated the Appellant is entitled to deduct certain expenses
as a personal services business. The following expenses were
properly disallowed by the Minister:
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Description
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Amount
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Calgary rent expense
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$900
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Advertising expenses
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$504
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50% of the Meals and Entertainment
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$2,475
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Total
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$3,879
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The Calgary rent expense is unreasonable given the Red Deer
rental space allowed; and the advertising expense is unrealistic
and also unreasonable (section 67); and the 50% restriction
is pursuant to subsection 67.1(1).
(ggg) further or, in the alternative, the
personal expenses were personal expenses of the Worker and were
not incurred for the purpose of gaining or producing income from
a business property;
The expenses, at least in part, were incurred for the purpose
of gaining or producing income from a business.
[24] The other adjustment to the
Appellant's 1999 taxation year is in regard to the capital
cost allowance. As a personal services business, 758 cannot
deduct capital cost allowances. This portion of the
Minister's reassessment should be upheld.
[25] Finally, the Minister disallowed
"Other Expenses" on the grounds that 758 was a personal
services business as outlined in paragraph 17(sss) which
reads:
(sss) the Appellant claimed other
expenses (hereinafter "Other Expenses") as follows:
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Description
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Amount
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Bank Charges
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$63
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Office Supplies
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$103
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Professional Fees
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$2,291
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Repairs and Maintenance
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$41
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Salaries paid to Spouse
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$7,500
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Employee Benefits for Spouse
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$117
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Amortization of Cumulative Eligible Capital
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$27
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Total
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$10,142
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Of these amounts only the salaries and benefits paid to the
spouse can be considered under subparagraph 18(1)(p)(i).
These could be deductible on the basis Ms. Pielasa was an
"incorporated employee".
[26] In summary, 758 is a personal services
business because it was reasonable to conclude that Mr. Pielasa
was offering his services to DGS, Bantrel and Nova as an
employee. The following expenses are allowed:
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Description
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Amount
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Personal Expenses
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Automotive expenses
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$13,878
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Meals & entertainment
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$2,475
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Red Deer rent expense
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$4,980
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Telephone
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$378
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Utilities
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$237
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Wages to Mr. Pielasa
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$8,766
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Wages to Ms. Pielasa
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$3,530
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Employee benefits
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$7,708
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Insurance
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$371
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Total "Personal" Expenses Allowed
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$42,323
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Other Expenses:
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Salaries paid to Spouse
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$7,500
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Employee Benefits for Spouse
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$117
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Total Expenses Allowed
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$49,940
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[27] The appeal is allowed, with costs, to
permit the Appellant to deduct total expenses in the amount of
$49,940.
Signed at Ottawa, Canada, this 16th day of November, 2004.
McArthur J.
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