Date: 20010109
Docket: 2000-297-IT-I
BETWEEN:
PHILIP J. O'BRIEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.T.C.C.
[1]
This appeal is from an assessment for income tax for the
Appellant's 1997 taxation year. In filing his income tax
return for that year the Appellant claimed a rebate of Goods and
Services Tax (GST) as provided for in section 253 of the
Excise Tax Act. This rebate (sometimes called the employee
and partner rebate) is available to members of a partnership
which is a registrant, and to certain employees of registrants in
order to compensate them for GST paid on expenditures they are
obliged to make and which are deductible in computing their
income for the year. In the present case the only dispute between
the parties is as to whether the Appellant earned his income as
an employee, or as an independent contractor. If it was as an
employee then he qualifies for the rebate; if it was as an
independent contractor then he does not.
[2]
Since 1990 Mr. O'Brien has been the sole shareholder, a
director and the president of McKin Health Care Specialties Inc.
(McKin). During 1997, and for some years prior to that, he was
also president and a minority shareholder of SurgiTech Canada
Inc. (SurgiTech). Both these companies were engaged in selling
products related to medical treatment and health care to
hospitals, nursing homes and similar end-users. The products are
manufactured in the United States and distributed in Canada by
McKin and SurgiTech. The industry is highly competitive.
[3]
Mr. O'Brien's evidence was that the terms of the
contracts between himself and McKin, and between himself and
SurgiTech were that he provided his executive services as a
director and as president without compensation. His time was
devoted approximately 70% to the business of McKin and 30% to the
business of SurgiTech, and for each of these companies he worked
as a salesperson, in addition to his other duties, and it was
only for his sales work that he was paid. His pay was determined
entirely by commissions paid on sales made by him, and out of
these commissions he was obliged to pay all the expenses
associated with making these sales. The expenses included such
things as advertising, promotion and trade show costs, the
provision of a leased vehicle, a cellular telephone and an office
in his home. In 1997, Mr. O'Brien's commission income
from the two companies totalled $78,543, and he incurred expenses
of $63,903.96.
[4]
According to his evidence Mr. O'Brien, on behalf of the
companies, entered into these contracts with himself in his
personal capacity about 1990. No written contract exists, but he
has been compensated on this basis since then. The Respondent
does not challenge the existence of this contract, and has
accepted it for the purpose of assessing income tax. However, the
Respondent takes the position that when the common-law test is
applied, Mr. O'Brien, in his capacity as a salesperson, is
not an employee of either company, but an independent contractor.
The Respondent conceded that Mr. O'Brien is an employee when
he acts as president of the companies, for which he receives no
pay. His entitlement to the GST rebate must arise out of his
relationship with the company in connection with his commission
sales activity, or not at all.
[5]
The approach to be taken in such cases has been thoroughly
reviewed by the Federal Court of Appeal in its judgment in the
Wiebe Door case[1]. The trial judge must conduct a careful review of the
evidence as to the circumstances of the employment, bearing in
mind the factors referred to by the Federal Court of Appeal in
that case, with a view to determining whether in the particular
case the worker is a servant or an independent contractor. There
is no single easy test that will govern every case. The expressed
wishes of the worker and the employer are a factor to be
considered, but they are not dispositive of the issue.[2] Other significant
factors include the degree of control exercised by the employer
over the way in which the work is to be done, the ownership of
the necessary tools and equipment, the opportunity for both
profit and loss by the worker, the degree to which the work and
the worker are integrated into the business of the employer, and
whether or not the worker is bound to do the work himself, or if
he may hire and pay people to help him with it. The Federal Court
of Appeal gave specific approval to the following formulation of
the issue by Cooke J. in the Market Investigations[3] case:
The observations of Lord Wright, of Denning L.J., and of the
judges of the Supreme Court in the U.S.A. suggest that the
fundamental test to be applied is this: "Is the person who
has engaged himself to perform these services performing them as
a person in business on his own account?" If the answer to
that question is "yes," then the contract is a contract
for services. If the answer is "no" then the contract
is a contract of service.
[6]
Counsel for the Respondent placed much emphasis on the elements
of control, the ownership of the tools, and the opportunity that
Mr. O'Brien has to augment his earnings by increasing his
volume of sales.
[7]
As I appreciated Mr. O'Brien's evidence, his schedule is
subject above all to the availability of his customers. He deals
with both administrators and medical personnel, and must meet
with them when they make time for him. Subject to that
constraint, Mr. O'Brien is free to set his own schedule and
work in whatever way suits him. It is difficult to say, however,
to what extent this freedom results from the fact that as
president of both companies he permits himself that freedom, and
to what extent it is a normal incidence of the nature of a
salesperson's work. There is no written contract spelling out
the amount of control that he as president can exercise over
himself as salesperson. In my opinion this factor should not be
given much weight.
[8]
Mr. Sood argued that the salesman's tools are his car, his
cellular phone, his home office and his advertising and
publicity, all of which are provided by Mr. O'Brien at his
own expense. Many commission salespersons bear these same
expenses while working as employees. The provision of tools is, I
believe, of greater significance in those cases where the tools
and equipment required to do the job represent a substantial
capital investment. In the present case the car is leased, and
the office consists of space in his family home. There is no
evidence to suggest any substantial investment in fixed assets by
Mr. O'Brien. This factor too, in my opinion, should be given
little weight.
[9]
The opportunity for profit and risk of loss refers not simply to
the opportunity that a piece worker or a commission salesperson
has to earn more by working longer hours or more efficiently. It
involves an element of entrepreneurship on the part of the
worker. Again, in the present case it is difficult to apply this
element of the test because of the peculiar relationship that
exists between Mr. O'Brien and McKin and SurgiTech. It is
likely that both of these companies owe their existence to Mr.
O'Brien's entrepreneurship, in his capacities as
shareholder, director and president. As a salesperson he sells
for the company, and as I understood his evidence the rules that
apply to other salespeople apply to him as well. This factor does
not, in my view, support the proposition that
Mr. O'Brien sells as an independent contractor.
[10] In my
opinion the most important factor in this case is the degree of
integration of Mr. O'Brien's efforts into the corporate
enterprise. His efforts as a salesman are entirely towards the
sale of the products of McKin and SurgiTech. It seems likely that
there would be a certain amount of overlap between his selling
activities and his executive activities. Sales is the whole
raison d'être of these companies – it is the only
way they make money. In my view an informed but independent
observer would identify Mr. O'Brien with the companies when
he is selling and when he is doing executive office work. The
observer would not consider that when he left the office and went
to call on customers he had stepped outside the company to work
only on his own account and not on the company's.
[11] Mr. Sood,
in his able argument, suggested that Mr. O'Brien should be
considered to be self-employed as a salesperson, because on his
T1 General Income Tax Return for 1997 he reported his income on
the line designated for self-employment income.[4] I do not consider this
any more determinative of the legal relationship between the
Appellant and his companies than a contractual provision would
have been. As the Federal Court of Appeal has held,[5] the relationship must
be determined from the facts and the law, not from the agreement
of the parties. This is all the more true where, as here, the
Appellant signed an income tax return prepared by his accountant.
No doubt Mr. O'Brien addressed his mind to whether the form
disclosed all his income. It is much less likely that he thought,
even momentarily, about the question whether he was an employed
commission salesperson, or an independent contractor. In my view
the Appellant was employed as a commission salesperson.
[12] The
appeal is allowed and the assessment is referred back to the
Minister of National Revenue for reconsideration and reassessment
on the basis that the Appellant is entitled to the GST rebate of
$3,566.73 claimed.
Signed at Ottawa, Canada, this 9th day of January, 2001.
"E.A. Bowie"
J.T.C.C.
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