Date: 19990709
Docket: 97-974-IT-I
BETWEEN:
JACQUELINE B. MacLEOD (MARWICK),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1] These are appeals by Jacqueline B. MacLeod (Marwick) (the
Appellant) from assessments made by the Minister of National
Revenue (the Minister) with respect to her 1993 and 1994 taxation
years. These assessments were made on the basis that the
Appellant failed to remit income tax deductions from
employees' wages as required by subsection 153(1) of the
Income Tax Act (the Act) pursuant to the provisions
of subsection 108(1) of the Income Tax Regulations as
authorized by paragraph 221(1)(a) of the Act. In
addition, the Minister levied a penalty in accordance with the
provisions of paragraph 227(8)(a) of the Act. In so
assessing, the Minister acted on the basis that Minda Perez
(Perez) and Esmenia Paeste (Paeste) were employed by the
Appellant under contracts of service from March 1993 to October
1993, and from November 1993 to October , respectively.
[2] The Appellant's position is that in assessing, the
Minister acted on the basis of two fundamentally flawed
assumptions. First, the Appellant contends that Paeste and Perez
were independent contractors and not employees as assumed by the
Minister and that accordingly, the Appellant had no obligation to
withhold any amount from the wages paid to them for their work
and is not liable for any of the tax, interest or penalties
assessed.
[3] In the alternative, the Appellant contends that if they
were employees, the Minister further erred in assuming that there
was also an agreement between the Appellant and each of Paeste
and Perez that the amounts that they would be paid for their
services were to be regarded as net amounts and that accordingly,
the Appellant, in addition to paying those amounts, was obliged
to pay amounts equal to the source deductions for income tax,
Canada Pension Plan contributions and unemployment insurance
premiums.
[4] Furthermore, the Appellant contends that if Paeste and
Perez are found to have been employed by her then it would follow
that she is liable for penalties under paragraph
227(8)(a) of the Act and for interest under
subparagraph 227(8.3)(a)(ii) of the Act. But,
the Appellant contends, because Paeste and Perez were resident in
Canada, she is not liable to pay any amount of tax on their
behalf which the Minister incorrectly assessed under
subsection 227(8.4) of the Act and is not liable to
pay the greater amount of interest which the Minister incorrectly
assessed under subparagraph 227(8.3)(a)(i) of the
Act.
Appellant's testimony
[5] Since 1989, the Appellant has carried on a business, Fine
Design Corporate Promotions, from her residence.[1] In July 1992, she gave birth to
a daughter, Rachel, and took some time off from work. In March
1993, the Appellant decided to resume working and it became
necessary to obtain a babysitter. In order to do so, the
Appellant contacted an agency and in due course, interviewed and
hired Minda Perez. She testified that the initial plan was to
have a "live-in caregiver". To that end, she informed
Perez that she had a two-bedroom apartment and since the
child was in the second bedroom, Perez would have to live in the
solarium. The Appellant says that since this arrangement was
admittedly inadequate, they agreed it would not be a live-in
situation. In exchange, the Appellant agreed to provide Perez
with a Toronto Transit Commission (TTC) pass. The Appellant
maintained that she offered to pay Perez $5.50 per hour with
payment to be made every two weeks. Perez agreed and commenced
work on March 5, 1993. The Appellant dismissed Perez in October
1993 alleging that she caught her mistreating the child by
yelling at her.
[6] The Appellant met Paeste through a friend. She interviewed
her, discussed the job requirements and also offered Paeste the
sum of $5.50 per hour to be paid every two weeks. According to
the Appellant, Paeste accepted those terms but insisted on being
paid in cash. Paeste babysat for the Appellant from
October 1993 to the middle of October 1994 when she was
fired for failing to advise the Appellant that her child had
fallen and had injured herself while playing on a playground
slide.
[7] With respect to both Perez and Paeste, the Appellant
maintains that the agreements required her to pay them $5.50 per
hour to be calculated on the actual number of hours of
babysitting. She specifically denied that the amounts paid were
net pay or that she had agreed to pay income tax, CPP and UI
premiums on their behalf. She further testified that neither
Perez nor Paeste were provided with a TD-1 form by her since she
did not consider them to be her employees[2] and that for the same reason, she
refused Perez's request for a T4. Severance was not paid in
either case nor were unemployment insurance certificates
provided.
[8] The Appellant testified that both Paeste and Perez were
experienced babysitters, required virtually no instructions as to
how they attended to their duties and maintains that she did not
brief them with respect to such matters as what the child was to
be fed, when she was to be fed or bathed and so forth, other than
giving them "some basic guidelines". She testified that
each brought children's toys and books for toddlers which
they used in the course of babysitting. She further alleged that
both Paeste and Perez were looking after other children (as paid
nannies) during the periods that they were working for her and
that each often babysat her daughter at her sister-in-law's,
at her mother's, and at their own homes without seeking or
obtaining her permission to do so.
[9] Evidence was adduced on behalf of the Respondent from
Minda Perez and Esmenia Paeste.
(a) Perez testified that she obtained her employment with the
Appellant through the auspices of a babysitting agency, Dear
Nanny. Her hours of work were to be from 8:00 a.m. to 6:00 p.m.,
five days per week. Perez claims that she asked for $700 per
month and the Appellant countered by offering $650 per month with
the promise of a raise after three months. Perez accepted and
says that after three months, her wages were increased as
promised. According to Perez, she was to be paid every two weeks
with payment being a net amount after the Appellant deducted and
remitted the income tax, CPP and UI as required. Perez also
maintains that on several occasions after she left the
Appellant's employ, she asked for a T4 slip but never
received one. Perez received instructions from the Appellant with
respect to the manner in which she was to attend to the
child's needs; as to how she was to do other work around the
apartment, and was provided with all items necessary to attend to
the Appellant's child. Perez did not work for any other
employers during that period of time and says that in fact she
was not entitled to do so under the terms and conditions of her
Immigration Employment Authorization[3] which was obtained for her by the
Appellant. Perez denied being fired and says she left the
Appellant's employ because she obtained employment at a
higher rate of pay.
(b) Esmenia Paeste testified that she was hired in November
1993 to look after the Appellant's daughter as well as to do
light housecleaning, laundry and light cooking. The rate of pay
which was set by the Appellant was $650 per month which,
according to Paeste, was to be a net amount after income tax, CPP
and UI deductions. Her hours of work were to be 8:00 a.m. to 6:00
p.m., five days per week. The Appellant spent the first day with
Paeste instructing her as to the manner she wished the child to
be cared for. She did not bring any toys or other necessary
material since all such items were provided by the Appellant. The
Appellant also provided her with a TTC pass because a term of her
employment authorization was that she live in but the Appellant
"told me I didn't have no room at her apartment. She
would prefer me to live out". Paeste maintained that she was
paid $325 twice a month, in cash as she preferred, without fail,
and flatly disagreed with the testimony of the Appellant with
respect to the amount of wages she had received and specifically
rejected the suggestions made by Counsel for the Appellant that
at certain times, she was paid less than the agreed upon
amount.[4] She also
maintained that although she met other babysitters who were
looking after other children, she never babysat any other child
during the period of her employment by the Appellant. At the time
her employment was terminated, Paeste asked for and received a
letter of reference from the Appellant.
[10] The Respondent also adduced evidence from Frederick
Thomas Burgess (Burgess) who is a payroll auditor with Revenue
Canada and performed the audit in these appeals. The audit flowed
from a complaint made by Paeste to the effect that she was unable
to obtain T4's for 1993 and 1994 from the Appellant. The
initial T4 for Paeste was prepared by Burgess based on the
complaint and his discussion with her. He then communicated with
the Appellant, had several meetings with her and as a result of
information received included Perez in his audit. After
completing his review Burgess proceeded to assess the Appellant
and for that purpose assumed that the amounts paid to each of
Perez and Paeste were net amounts and therefore, simply grossed
up those amounts to include income tax, CPP and UI, the value of
the TTC passes and initially, in the case of Paeste, the value of
board and lodging. With respect to the latter, Burgess says he
acted on the basis of statements made by Paeste to the effect
that her arrangement was as a live-in nanny. However, after
further investigation, he concluded that the initial T4 he
prepared for Paeste was wrong and issued an amended T4 to delete
the value of the board and lodging. This change was also
reflected in the ultimate assessments against the Appellant.
Appellant's position
[11] It is the Appellant's position that both Perez and
Paeste were independent contractors and not employees. This
position is premised on the Appellant's assertions that there
was no supervision by her of their work in the traditional sense;
that she exercised virtually no control over the manner in which
both took care of her daughter; that each of them provided their
own "tools of the trade" such as children's books
and toys which they used to amuse and educate the child in her
care; that they took the child on trips to parks, to other homes
and to their own respective homes; and that they reserved the
right on short notice to decline to work on any given day, all of
which are factors establishing that each of Perez and Paeste are
to be regarded as self-employed.[5] The Appellant also alleges that both Perez and
Paeste took care of other children at other places and thus, it
can be said that they carried on a babysitting service and were
in business for themselves.
Conclusion
[12] In Wiebe Door Services Ltd. v. The Queen,[6]MacGuigan J.A. after reviewing a
number of decisions with respect to the distinction between a
contract for services and a contract of service made the
following comment:
Perhaps the best synthesis found in the authorities is that of
Cooke J. in Market Investigations, Ltd. v. Minister of Social
Security, [1968] 3 All E.R. 732, 738-9:
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. No exhaustive list has been compiled
and perhaps no exhaustive list can be compiled of considerations
which are relevant in determining that question, nor can strict
rules be laid down as to the relative weight which the various
considerations should carry in particular cases. The most that
can be said is that control will no doubt always have to be
considered, although it can no longer be regarded as the sole
determining factor; and that factors, which may be of importance,
are such matters as whether the man performing the services
provides his own equipment, whether he hires his own helpers,
what degree of financial risk be taken, what degree of
responsibility for investment and management he has, and whether
and how far he has an opportunity of profiting from sound
management in the performance of his task. The application of
the general test may be easier in a case where the person who
engages himself to perform the services does so in the course of
an already established business of his own; but this factor is
not decisive, and a person who engages himself to perform
services for another may well be an independent contractor even
though he has not entered into the contract in the course of an
existing business carried on by him.
There is no escape for the trial judge, when confronted with
such a problem, from carefully weighing all of the relevant
factors, as outlined by Cooke J.
Emphasis added
[13] I agree with Counsel for the Appellant that factors such
as babysitting in the home of the sitter, caring for the children
of multiple families at once, providing books and toys for the
children and performing the services outside of the parent's
home could indicate a substantial degree of independence and
might signify self-employment. However, in my view, much of the
Appellant's testimony to that end has been contradicted by
both Perez and Paeste. The determination of the true nature of
the contractual arrangements in these particular appeals is
complicated by the fact that portions of the testimony of each of
these three witnesses is questionable and in the case of the
Appellant in several instances, not credible. In addition, with
respect to the testimony of Perez and Paeste, a further
difficulty arises from the fact that English obviously was not
their principal language. In fact, there were a number of
occasions when it appeared from their responses that both, but
particularly Perez, did not fully comprehend the question being
put to them.
[14] A number of factors lead me to conclude that the
Appellant's testimony with respect to the nature of the
employment of Perez and Paeste cannot be relied upon.
(a) I am unable to accept her testimony that no specific
directions were given to them with respect to the manner in which
they were to attend to her daughter's needs. Having heard and
observed the Appellant in the course of the trial, it is a fair
inference that she would have been a hands-on employer and would
not in any circumstances, leave her child with a nanny without
being precise and unequivocal in her instructions to them.
(b) The Appellant testified that while employed by her, both
Paeste and Perez babysat a number of other children. In
cross-examination she conceded that she "believed" that
Paeste took care of one other child, a two-year old, whose name
she did not remember and that Perez looked after the same child.
Both Perez and Paeste maintained they were not employed by any
other persons to babysit during the relevant periods. I accept
their testimony in preference to that of the Appellant.
(c) With respect to the Appellant's assertions that they
babysat her child at other homes (and more specifically that
Paeste babysat the child at the Appellant's mother's home
on a number of occasions) the Appellant's testimony is
equally unconvincing. I add that in the course of her testimony
that Paeste only took the child to the mother's home on those
occasions when she was specifically directed to do so by the
Appellant.
(d) Both Perez and Paeste required and obtained employment
authorization from the Immigration Department. These
authorizations describe the Appellant as the employer and
indicated that Paeste and Perez were not authorized to work in
any occupation other than that stated (Paeste as a
servant/domestic, and Perez as housekeeper) and were not
permitted to work for any employer other than the Appellant. The
Appellant conceded that she had applied to the Immigration
Department for these employment authorizations but denied having
seen the actual documents. On balance, whether she saw these
documents or not, I am satisfied that the Appellant was aware of
the terms and restrictions under which Paeste and Perez were
permitted to work in Canada.
(e) The evidence also established that in 1993, the Appellant
opened a payroll account for payroll deductions with Revenue
Canada. She says she did so "to have it properly in the
event I ended up having employees" in her marketing business
but "it never worked out that way". She maintained that
the account was not opened for potential babysitters but in
cross-examination, said it was opened for "any, you know,
potential live-in caregiver in addition to any employees that I
may have for my business". These statements were
contradicted by Burgess who testified that the Appellant had
advised him that two separate payroll accounts had been opened,
one for the babysitter and another with respect to her
business.[7]
(f) One further portion of the Appellant's testimony
warrants review. On or about September 30, 1994, the Appellant
wrote a reference letter for Paeste in which she stated:
This letter will acknowledge that Jasmine Paeste was employed
to babysit my daughter for approximately one year and two
months.
During that time she performed regular childcare duties that
included feeding, bathing, changing, and playing with my
daughter. My daughter was in Jasmine's care from the age of
13 months. Jasmine also performed light housekeeping duties and
prepared some of the household meals. She is particularly good
with domestic work. I no longer require the services that Jasmine
has provided because my daughter has been enrolled in
pre-school.
I recommend Jasmine for another babysitting position
(particularly with a child under two years of age) or a position
involving domestic work that is in a private home or the
hospitality industry.[8]
The Appellant testified that she had no recollection of
writing this letter albeit conceding that: "It looks like my
signature". This letter contradicts her testimony that
Paeste was not required to perform any household duties.
Furthermore, the Appellant specifically makes reference in the
letter that Paeste's services were no longer required because
her daughter was enrolled in pre-school, a statement totally at
odds with her testimony that she fired Paeste for her failure to
advise her of her daughter's playground accident.
The cumulative effect of these and other inconsistencies in
the Appellant's testimony is that I am unable to accept the
Appellant's version regarding the nature of the
employment.
[15] On balance, I am satisfied that neither Perez nor Paeste
engaged themselves to perform these services for the Appellant as
persons in business for themselves. Each of them entered into an
agreement with the Appellant whereby they agreed to work on a
full-time basis for an indeterminate period of time in return for
wages. Taking into consideration the overall evidence, I am
satisfied that the Appellant exercised "control" with
respect to where, when and how the work was to be performed to
the degree required under these particular circumstances. In
addition, there is no acceptable evidence before me to establish
that either Perez or Paeste were employed by others as
babysitters during the relevant periods of time, another factor
which leads to the conclusion that they were not independent
contractors. I find, therefore, that the relationship between the
Appellant and the two babysitters constituted in each case a
contract of services.
Alternative Submission
[16] Counsel for the Appellant argues that if Paeste and Perez
were employees, then the taxpayer would concede that there should
have been source deductions. Counsel then, and quite correctly,
posed the further question: on what amounts, on the amounts that
were actually paid, or on the amounts that Revenue Canada alleges
were constructively paid?
[17] The question raised by the Appellant is a valid one.
There is no dispute between the parties regarding the amounts
which were paid to each of Perez and Paeste[9] nor is there any dispute that the
auditor prepared the assessments on the assumption that there was
an agreement between the Appellant and the employees to gross-up.
The Appellant's position quite simply is that she paid each
of Perez and Paeste the gross amount and agrees that she should
have withheld the required deductions from that gross amount and
she did not.
[18] It is fair to say that there is a good deal of confusion
surrounding the agreement which was reached between the
babysitters and the Appellant regarding the basis on which they
were to be paid. Counsel for the Appellant argued that any
misunderstanding may have arisen from language and communication
problems and there is some merit in his position. Most certainly,
both Perez and Paeste had difficulty in understanding and
responding to questions both in-chief and in cross-examination.
On the evidence, I am not satisfied that the amounts received by
Perez and Paeste were net amounts as asserted. Furthermore, their
testimony with respect to "net pay" suggests that it
might have been the product of discussions with Revenue Canada
and perhaps some after-the-fact rationalization.
[19] I have therefore concluded that a gross-up agreement did
not exist between the Appellant and the two babysitters. In
result, I also conclude that the Appellant failed to withhold
source deductions from their pay and that these source deductions
should be calculated based on the gross amounts the nannies
received. As was observed by Counsel for the Appellant, the rules
which apply when an employer fails to withhold source deductions
from an employee differs from the rules which apply when an
employer withholds source deductions and does not remit them.[10] These
provisions dictate that where an employer withholds source
deductions but fails to remit the employer is responsible for the
taxes together with any interest and penalties. However, if the
employer does not withhold from a resident employee, the employer
is not liable for the tax that should have been withheld.[11]
[20] Where the taxpayer has paid the gross amount and has
failed to withhold source deductions, the consequences are that
she is liable to pay a penalty equal to 10% of the amount that
should have been withheld and is liable for interest on that
amount as provided by paragraph 227(8)(a). As well, she
would also be liable for interest pursuant to subparagraph
227(8)(3)(a)(ii).
[21] Accordingly, the appeals are allowed and the assessments
are referred back to the Minister for reconsideration and
reassessment on the basis that both Perez and Paeste were
employed by the Appellant under contracts of service and that the
amounts paid to both of them by the Appellant were gross amounts
in respect of which the Appellant failed to withhold the tax
deductions as required by the Act.
Signed at Ottawa, Canada, this 9th day of July, 1999.
"A.A. Sarchuk"
J.T.C.C.
APPENDIX
Income Tax Act
153(1) Every person paying at any time in a taxation year
(a) salary or wages or other remuneration,
...
shall deduct or withhold therefrom such amount as is
determined in accordance with prescribed rules and shall, at such
time as is prescribed, remit that amount to the Receiver General
on account of the payee's tax for the year under this Part or
Part XI.3, as the case may be, and, where at that prescribed time
the person is a prescribed person, the remittance shall be made
to the account of the Receiver General at a financial institution
(within the meaning that would be assigned by the definition
“financial institution” in subsection 190(1) if that
definition were read without reference to paragraphs (d)
and (e) thereof).
221(1) The Governor in Council may make regulations
(a) prescribing anything that, by this Act, is
to be prescribed or is to be determined or regulated by
regulation;
227(8) Subject to subsection (8.5), every person who in a
calendar year has failed to deduct or withhold any amount as
required by subsection 153(1) or section 215 is liable to a
penalty of
(a) 10% of the amount that should have been deducted or
withheld; or
227(8.3) A person who fails to deduct or withhold any amount
as required by subsection 135(3), 153(1) or 211.8(2) or section
215 shall pay to the Receiver General interest on the amount at
the prescribed rate, computed
(a) in the case of an amount required by subsection
153(1) to be deducted or withheld from a payment to another
person, from the fifteenth day of the month immediately following
the month in which the amount was required to be deducted or
withheld, or from such earlier day as may be prescribed for the
purposes of subsection 153(1), to,
(i) where that other person is not resident in Canada, the day
of payment of the amount to the Receiver General, and
(ii) where that other person is resident in Canada, the
earlier of the day of payment of the amount to the Receiver
General and April 30 of the year immediately following the year
in which the amount was required to be deducted or withheld;
227(8.4) A person who fails to deduct or withhold any amount
as required under
(a) subsection 135(3) in respect of a payment made to
another person, or
(b) subsection 153(1) in respect of an amount paid to
another person who is non-resident or who is resident in Canada
solely because of paragraph 250(1)(a)
is liable to pay as tax under this Act on behalf of the
other person the whole of the amount that should have been so
deducted or withheld and is entitled to deduct or withhold from
any amount paid or credited by the person to the other person or
otherwise to recover from the other person any amount paid by the
person as tax under this Part on behalf of the other person.
Regulations
108(1) Subject to subsections (1.1), (1.11) and (1.12),
amounts deducted or withheld in a month under subsection 153(l)
of the Act shall be remitted to the Receiver General on or
before the 15th day of the following month.
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