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Citation: 2004TCC32
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Date: 20040109
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Docket: 2002-4864(IT)I
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BETWEEN:
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PRO-STYLE STUCCO & PLASTERING 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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Docket: 2002-4862(CPP)
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AND BETWEEN:
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PRO-STYLE STUCCO & PLASTERING LTD.,
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Appellant,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent.
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REASONS FOR JUDGMENT
Rip, J.
[1] These
appeals were heard together on common evidence. The basic issue in these appeals
by Pro-Style Stucco & Plastering Ltd. ("Pro-Style") from an
assessment of a penalty for 2000 pursuant to subsection 162(7) of the Income Tax Act
("Act") and from a decision of the Minister of National
Revenue pursuant to the Canada Pension Plan ("CPP") with respect to
2000 is whether John Marocco, the sole shareholder and director of Pro-Style,
was an employee of Pro-Style in calendar year 2000. The Minister claims that he
was an employee; the appellant says that he was not.
[2] The
appellant has been assessed:
(a) CPP contributions
of $1,205.10 under sections 21 and 22 of the CPP;
(b) a penalty of
$120.51 for failure to remit contributions under section 21(7) of the CPP;
(c) interest of
$231.53 on account of contributions not remitted, in accordance with subsection
21(6) of the CPP; and,
(d) a penalty of $400
for failure to file a T4 and T4 Summary returns under subsection 162(7) of the Act
with respect to the employment of Mr. Marocco.
[3] The
appellant also claims that the CPP contribution in the amount of $1,205.10 is a
duplication of the amount Mr. Marocco was assessed on the basis that he was an
employee of the appellant.
[4] If
Mr. Marocco is not an employee of Pro-Style, then the penalty assessed under
subsection 162(7) of the Act will be vacated and the appellant will not
be liable for CPP contributions, penalty and interest under the CPP.
[5] Pro-Style
carries on the business of plastering. Mr. Marocco, a plasterer, is the
president, sole director and shareholder of Pro-Style, an Alberta corporation.
The corporation's fiscal year end is February 28.
[6] Mr.
Marocco and Pro-Style executed a document entitled
"Directors Contract and Agreement", dated August 10, 1996
("Agreement"). The Agreement contained the following recitals:
WHEREAS the company is desirous of
engaging JOHN MAROCCO as a/the director of PRO STYLE STUCCO &
PLASTERING LTD.
WHEREAS John Marocco is desirous of
being the/a director of PRO STYLE STUCCO & PLASTERING LTD.
and the parties
agreed, among other things:
1.1 ...
a) [the
director] by acting as an active director of the corporation receive a
directors fee of up to 80% more or less (eighty percent) of the net profit of
the corporation.
b) the directors
fee shall be determined at the completion of the year end of the corporation.
c) The director
may take a draw in the form of a loan from the corporation provide [sic]
that;
i) there is [sic]
sufficient funds available at the time and that by taking such draw does not in
any way jeopardizes [sic] the ability of the corporation to meet it's [sic]
financial obligations.
d) Should the
directors loans (draws) exceed the designated percentage of profit as
determined at the corporate year end such loans shall be carried forward to the
next year and deducted firstly from the directors allocation of profits in that
year.
e) The Director
is contracted to the corporation and shall not be construed as an employee of
the corporation
1.2 The
corporation and its Board of Directors and Shareholders unanimously appoint and
elect John Marocco to the position of, and with the duties and responsibilities
and title of President as outlined in the by-laws of the corporation.
1.3 The effective
date of the commencement of the appointment as a director of the corporation
shall be April 1, 1996.
1.5 The term of
this agreement is continuos [sic].
1.6 This agreement
and appointment shall be entered as a resolution of the corporation. ...
[7] Mr.
Marocco occasionally operates under the firm name and style of Marocco
Management. Marocco Management is a subcontractor of Pro-Style. The appellant's
position is that Mr. Marocco is not an employee of the corporation but is a
contractor who manages the corporation. Mr. Marocco insists he is the director
of the corporation but not an employee.
[8] Mr.
Marocco described how he is paid by Pro-Style. He said he was paid "five
or six times over the year" in different amounts "each time".
His pay depended on the appellant's profits; if there were no profits, he would
not be paid. Mr. Marocco said that he does not get paid on a regular basis,
weekly or semi-weekly, for example, as does an employee. Only at the end of the
year would it be decided what the appellant would pay him, he declared. During
2000, Pro-Style advanced him money and the loans were recorded as shareholder's
loans. In Pro-Style's 2000 fiscal year the corporation paid Mr. Marocco
director's fees of $18,950.
[9] The
appellant's office is in Mr. Marocco's personal residence; he does not charge
the corporation any rent. From time to time, the appellant uses some of Mr.
Marocco's personal assets such as mixers, scaffolding, planks, wheelbarrows,
shovels and trowels, again without payment.
[10] Mr. Marocco's services to Pro-Style include hiring and firing,
arranging insurance, repairs and maintenance to vehicles and arranging for
subcontractors, other plasterers, to perform work on contracts awarded to
Pro-Style.
[11] At times, if subcontractors failed to appear for work, Mr. Marocco
would perform the plastering himself.
[12] From time to time Pro-Style has held back money to subcontractors on
account of defective work. However, at no time has Pro-Style ever held back any
money owed to Mr. Marocco.
[13] The corporation has no employees, Mr. Marocco insisted.
[14] Mr. Marocco could not recall what "fees" the appellant paid
him in 1998 when the appellant had a loss of $52,710. He acknowledged that his
sole source of income during the period 1997 to 2001, inclusive, was from
Pro-Style. In 1998 he received $2,000 from Pro-Style. Pro-Style's income and
amounts Mr. Marocco reported having received from Pro-Style in his income
tax returns in subsequent years follow:
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Year
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Pro-Style's Income -
Fiscal Year
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Received by Mr. Marocco
(calendar year)
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1999
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$96,303
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$20,000
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2000
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$19,975
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$18,950
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2001
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$23,614
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$10,500
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2002
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($27,426)
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$ 7,500
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[15] All amounts were received by Mr. Marocco as
director's fees. At no time did he invoice Pro-Style for his services. In
Pro-Style's 2000 fiscal year, the appellant reported a payment to Mr. Marocco
of a "management fee" of $25,000. Because the appellant's fiscal
period is not the calendar year, it is difficult to reconcile what amounts were
actually paid by Pro-Style to Mr. Marocco in the 1999 calendar year and the
2000 calendar year. It may well be that the $20,000 Mr. Marocco reported on his
1999 income tax return represents a portion of the $25,000 Mr. Marocco received
in that year. However, Mr. Marocco could not clarify or confirm this.
[16] The Crown produced Pro-Style's 2000 income tax
return, which included a general index of financial information. The index
referred to direct wages by Pro‑Style of $12,447 and employee benefits of
$5,524. Mr. Marocco could not recall Pro-Style paying any "salary" in
2000 although he did remember that the appellant paid $2,705 to casual labour
to "clean up" jobs; he said Pro-Style would pay $250 for each
"clean up", but then said he would pay the $250 "once in a blue
moon", perhaps four or five times a month.
[17] The appellant's assets in 2000 were slightly
over $140,000 and included a forklift, scaffolding and a three-ton mixer. The
corporation also owned vehicles and paid insurance for these vehicles.
Pro-Style also pays workmen's compensation insurance if a subcontractor
does not carry such insurance. The corporation also accepts all risks with
respect to delivery delays, quality of work with its principals. The
corporation also, according to Mr. Marocco, paid insurance of $6,505 for
fire and theft and for liability insurance.
[18] Mr. Marocco said that although he only provided
services to Pro-Style in 2000, he was free to provide services to any other
contractor.
[19] I find it difficult, but not necessarily
impossible, to find that a corporation having one shareholder, who is also the
sole director, can carry on business in the construction industry without any
employees, even that sole director. The appellant's agent, Mr. Mason,
reminded me that the intent of the parties in an agreement is important and the
intention of the parties in the Agreement entered into between Pro‑Style
and Mr. Marocco is clear: the parties wanted to create a contractual
relationship. Mr. Marocco wore several different hats but none was an
employee of Pro‑Style, Mr. Mason submitted.
[20] Mr. Mason referred to the reasons for judgment
of Bell, J. in Sara Consulting & Promotions Inc. v. M.N.R.. Bell, J. held that, on
the evidence before him, "in-store" demonstrators of food, beverage
and related products in various retail outlets were independent contractors and
not employees. The facts in Sara are quite different from those at bar.
[21] In a situation where one person is the sole
director and shareholder of a corporation and provides services to that
corporation, the traditional tests to determine whether that person is an
employee or an independent contractor are not always useful. How can one
measure, for example, the level of control the employer has over the worker's
activities when the person who directs the employer is the worker? It may well
be, as Mr. Marocco implied, that Pro‑Style was incorporated because he
wanted limited liability in carrying on the business. Therefore he caused all
contracts to be taken in the name of Pro‑Style. Pro‑Style, however,
accepted all risk with respect to the quality of the work. The business carried
on was Pro‑Style's, not Mr. Marocco's, and his services were integral to
that business.
[22] The Agreement between Mr. Marocco and Pro‑Style
may purport to be a contract for Mr. Marocco to supply his services to Pro‑Style
but the parties also agreed that Mr. Marocco is to be a director of Pro‑Style. There are statutory provisions that
designate Mr Marocco as an employee of Pro‑Style due to the fact he is,
and acts as, a director of the corporation and is also its president. For
example, the CPP defines an employee to include an officer. An officer means a
person holding an office "entitling him to a fixed or ascertainable
stipend or remuneration ... and also includes the position of a corporation
director".
Clause 1.1(a) of the Agreement entitles Mr. Marocco to an ascertainable
stipend for his work as director. The CPP also defines "employment"
to include "the tenure of an office". An "employer" is a
person "liable to pay salary, wages or other remuneration for services
performed in employment, and in relation to an officer includes the person from
whom the officer receives his remuneration".
The employer at bar is Pro-Style.
[23] For these reasons Mr. Marocco was an employee of
Pro‑Style during 2000.
[24] There is no merit in the appellant's argument
that if he is unsuccessful in his appeals, his CPP contribution is duplicated.
As counsel for the respondent stated, the necessary adjustments will be made to
prevent any duplication. Both the employee and the employer are liable for
their respective contributions to the CPP. Any excess contributions made by Mr.
Marocco as a result of his claim that he was a self-employed person will be
returned to him.
[25] The appellant was liable to file information
returns for purposes of the Act and failed to do so; it is therefore
liable for the assessed penalties.
[26] The appeals are dismissed.
Signed at Ottawa,
Canada, this 9th day of January, 2004.
Rip,
J.
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