Heritage Realty Ltd. v. M.N.R., docket 1999-3241-EI

Date: 20000708

Dockets: 1999-3241-EI; 1999-3242-CPP

BETWEEN:

HERITAGE REALTY LTD.,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

DANIEL VERMETTE,

Intervenor.

Reasons for Judgment

Porter, D.J.T.C.C.

[1] These appeals were heard on common evidence, by consent of the parties, at Winnipeg, Manitoba on May 12, 2000.

[2] The Appellant appeals the decisions of the Minister of National Revenue (hereinafter called the “Minister”) dated April 23, 1999 that the employment of Daniel Vermette (“Vermette”) with Heritage Realty Ltd. (hereinafter called the “Corporation”) from January 1 to December 31, 1997 was insurable under the Employment Insurance Act (the “EI Act”) and pensionable under the Canada Pension Plan (the “Plan”) for the following reason:

“...Daniel Vermette was employed under a contract of service, and therefore, he was your employee.”

[3] The decisions were said to be respectively issued pursuant to subsections 93(3) of the EI Act and 27.2(3) of the Plan and were based on paragraphs 5(1)(a) and 5(2)(i) of the EI Act and 6(1)(a) of the Plan.

[4] Vermette whose employment was the subject of the decisions has intervened on this appeal on the side of the Appellant. The established facts reveal that Vermette and his father-in-law, one Clarence Recksiedler (“Recksiedler”) arranged to have incorporated the Corporation. Their respective wives each held 50% of the issued shares therein throughout the material time. The Corporation operated a real estate selling business and both Vermette and Recksiedler worked with the Corporation selling real estate. The Corporation and Vermette, supported by Recksiedler, maintained that their individual working arrangements with the Corporation were contracts for services as independent contractors. The Minister has held that they were employees working under a contract of service and furthermore, that he was satisfied that it was reasonable to conclude having regard to all of the circumstances, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, that they would have entered into substantially similar contracts of employment if they had been dealing with each other at arm’s length. There are thus two issues here; first, whether the working arrangements amounted to contracts for services or contracts of service. Secondly, if they were contracts of service, they would be excluded from insurable employment under paragraph 5(2)(i) of the EI Act as being between related persons under subsection 251(1) of the Income Tax Act, unless the Minister exercised his discretion under paragraph 5(3)(a) of the EI Act, which he purported to do. I do not need to deal with the second issue unless the Appellant is unsuccessful on the first issue.

[5] The manner in which the Court should go about deciding whether any particular working arrangement is a contract of service and thus an employer/employee relationship or a contract for services and thus an independent contractor relationship, has been clearly laid out by the Federal Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025. The test to be applied has been further explained by that Court in Moose Jaw Kinsmen Flying Fins Inc. v. M.N.R., 88 DTC 6099. There are, following these cases, numerous decisions of this Court, some of which have been cited by counsel, which demonstrate how these appellate guidelines have been applied. In the Moose Jaw Kinsmen Flying Fins Inc. case, above, the Federal Court of Appeal said this:

"[Analysis]

“The definitive authority on this issue in the context of the Act, is the decision of this Court in Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025. MacGuigan J. speaking on behalf of the Court, analyzed Canadian, English and American authorities, and, in particular, referred to the four tests, for making such a determination enunciated by Lord Wright in City of Montreal v. Montreal Locomotive Works Ltd., [1974] 1 D.L.R. 161 at 169-70. He concluded at page 5028 that:

Taken thus in context, Lord Wright's fourfold test [control, ownership of tools, chance of profit, risk of loss] is a general, indeed an overarching test, which involves "examining the whole of the various elements which constitute the relationship between the parties".

In his own use of the test to determine the character of the relationship in the Montreal Locomotive Works case itself, Lord Wright combines and integrates the four tests in order to seek out the meaning of the whole transaction.

At page 5029 he said:

“... I interpret Lord Wright's test not as the fourfold one it is often described as being but rather as a four-in-one test with emphasis always retained on what Lord Wright, supra, calls "the combined force of the whole scheme of operations," even while the usefulness of the four subordinate criteria is acknowledged.”

At page 5030 he had this to say:

“What must always remain of the essence is the search for the total relationship of the parties.”

He also observed "there is no escape for the trial judge, when confronted with such a problem, from carefully weighing all the facts.

“... like MacGuigan J. we view the tests as being useful subordinates in weighing all of the facts relating to the operations of the Applicant. That is now the preferable and proper approach for the very good reason that in a given case, and this may well be one of them, one or more of the tests can have little or no applicability. To formulate a decision then, the overall evidence must be considered taking into account those of the tests which may be applicable and giving to all the evidence the weight which the circumstances may dictate.”

[6] The nature of the tests referred to by the Court can be summarized as follows:

a) The degree or absence of control exercised by the alleged employer;

b) Ownership of tools;

c) Chance of profit and risk of loss;

d) Integration of the alleged employee's work into the alleged employer's business.

[7] I also take note of the further words of MacGuigan J., in the Wiebe case, above, where he approved the approach taken in the English courts:

"Perhaps the best synthesis found in the authorities is that of Cooke J. in Market Investigations, Ltd. v. Minister of Social Security, [1968] 3 AR 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."

[8] To this I would add the words of Décary, J.A. in Charbonneau v. Canada (M.N.R.) [1996] F.C.J. No. 1337, where speaking for the Federal Court of Appeal he said this:

"The tests laid down by this Court ... are not the ingredients of a magic formula. They are guidelines which it will generally be useful to consider, but not to the point of jeopardizing the ultimate objective of the exercise, which is to determine the overall relationship between the parties. The issue is always, once it has been determined that there is a genuine contract, whether there is a relationship of subordination between the parties such that there is a contract of employment ... or, whether there is ..., such a degree of autonomy that there is a contract of enterprise or for services. ... In other words, we must not pay so much attention to the trees that we lose sight of the forest. ... The parts must give way to the whole.”

The Facts

[9] The Minister was said, in the Replies to the Notices of Appeal filed on his behalf by the Deputy Attorney General of Canada, in coming to his decisions, to have relied upon the following assumptions of fact, which are the same in each appeal:

"(a) the share structure of the Appellant was as follows:

(i) Darcy Vermette 50% (daughter)

(ii) Audrey Recksiedler 50% (mother)

(b) Darcy Vermette is the daughter of Audrey Recksiedler;

(c) the Worker is the husband of Darcy Vermette;

(d) the Appellant operated a real estate selling business;

(e) the Worker is a registered real estate agent;

(f) the Worker was hired to list and sell real estate;

(g) the Worker and the Appellant entered into a written contract which included the following:

(i) the Worker is entitled to the full amount of commission earned;

(ii) the Worker is required to pay the Appellant 20% of his gross commissions to cover administrative and operating costs as listed;

a) use of office facilities and meeting room,

b) process listing and provide reports;

c) prepare Feature sheet and information sheet,

d) secretarial services including typing,

e) reception service,

f) MLS and Offer to Purchase forms,

g) use of picture board,

h) use of fax machine,

i) weekly sales meetings,

j) in-house accounting and payroll,

k) transaction processing;

(iii) the Worker is responsible for:

a) all advertising, postage, business cards,

b) long distance calls, photocopying,

c) signs,

d) promotional material,

e) MLS catalogues and Real Estate Board fees,

f) camera, film, and processing;

(iv) the Worker set his own commission rate for the sale of his listings;

(h) the Appellant determined the percentage of gross commission withheld from the Worker, for administrative and operating costs;

(i) the Appellant received the entire commission, withheld a percentage for expenses, and paid the remainder to the Worker;

(j) the Appellant withheld 20% of the Worker's gross commission, up to $90,000.00 in gross commissions, after that the Appellant withheld 10% of the Worker's gross commissions;

(k) there is no maximum with regards to commissions withheld by the Appellant to cover expenses;

(l) the Worker performed his services personally;

(m) the Worker was not directly supervised, however, the Appellant had to approve sales documents completed by the Worker;

(n) the Worker did not have the freedom to work for others;

(o) the Appellant normally scheduled meetings once a week;

(p) the Worker followed the rules and guidelines determined by the Real Estate Board;

(q) the Appellant issued a T4 to the worker for the 1997 year;"

[10] The Appellant agreed with all of these assumptions, save and except items (h), (i) (needed further explanation) (m), and (n).

[11] Evidence was given by both Vermette and Recksiedler. They both struck me as being completely honest and people of integrity. I have absolutely no difficulty in accepting their evidence as they were entirely credible. The determination of these appeals revolves around the interpretation to be placed upon the evidence, rather than the nature of that evidence.

[12] Recksiedler in dealing with the assumptions of fact, said with respect to item (m), that it was not a question of approving the sales contracts, but rather one of the Corporation checking the sale documents for technical mistakes and ensuring that the funds were deposited into the trust account. This was because Recksiedler was the authorized official under the Manitoba Real Estate Board legislation and rules, and the Corporation was the licensed broker. Vermette was licensed as a real estate sales person or agent. The checking was done by the secretary in the office and it was done in order to ensure that everything was in order and complied with the legislative requirements or the rules and guidelines laid down by the Real Estate Board. The assumption made by the Minister was correct to the extent that it said that Vermette was not supervised. However, it was incorrect in the sense that it said that the sales documents had to be approved. They were simply double-checked. They had to comply with the outside standards and the office made sure that they did.

[13] With regard to item (n), “that Vermette was not free to work for others”, under the Real Estate rules which governed the situation, as a real estate agent, he could only enter into a contract with one broker at a time. Recksiedler maintained that did not affect whether or not it was a contract for services as it was the same situation for all real estate agents. They could only operate through one broker at a time, although they were able to sell property for other real estate agencies. Their contracts, whatever they are, whether a contract of service or a contract for services, can only be with one licensed broker at a time. However, within the terms of that contract, the witness said that Vermette was free to do whatever he liked; come to work or not, set his own sales commission and develop all of his own contacts.

[14] With respect to item (o), the witness said that he scheduled meetings in the office so that he and Vermette could keep in touch, but they were entirely voluntary meetings. There was no requirement to attend, but it just made good business sense to meet once in a while on a regular basis.

[15] With regard to item (q), the witness said that the T4 sent to Vermette was issued by the secretary in error, which of course started this whole chain of events.

[16] With respect to item (h), the witness said that the percentage of gross revenue withheld from Vermette and himself for administration and operating costs was agreed upon by themselves. It was not imposed by the Corporation.

[17] With respect to item (i), the witness explained that the Corporation was the broker under the Securities Act rules and it could not itself buy or sell property. It acted as a service company for the two real estate agents and all monies under the external rules by which they were governed had to be handled through its trust account.

[18] Generally speaking, the witness said that Vermette set his own hours of work, he was on no set schedule, he could work 60 to 100 hours per week or none entirely as he liked. If he did not sell property, he still had his own expenses to pay.

[19] It is apparent that although the shares in the Corporation were held in the names of the respective wives, Vermette and his father-in-law were in fact the principals and operators of the Corporation. They started it in order to “put their efforts together”. They both were established real estate agents beforehand. They each paid into the company by way of shareholders’ loans the sum of $3,500.00. In addition, their verbal agreement between themselves was that they would pay the company a minimum of $300.00 per month whether or not they made any sales commissions for that month. If they made sufficient commissions that the percentage to be retained by the Corporation matched or exceeded that amount, they did not have to pay the $300.00, but if that figure fell short their agreement was to make up that amount. This was not part of their formal written agreement, but I am satisfied that it was their verbal operating agreement. This fact was not considered by the Minister.

[20] The further aspect relating to expenses was that Vermette incurred his expenses on his own account. Counsel for the Minister argued that these should be considered subsection 8(1) of the Income Tax Act expenses. However, the purpose here is to consider whether they are the tax expenses an employee would normally take on himself or whether they were more consistent with a person in business for himself. Vermette was required to pay for all his own advertising, his postage, business cards, long distance phone calls, cell phone charges, car and gas expenses, any significant photocopying, any signage that he used, promotional materials, his entries in the MLS catalogue, real estate board fees and camera and film processing. He had to purchase his own car, his fax machine at home, his own tape measures, his own camera, his own lock boxes, his own laptop computer, and his own cell phone. Thus, he incurred all these expenses, plus the minimum $300.00 per month payable to the Corporation whether or not he had any sales or any commissions. All the promotional material was in the name of Heritage Realty Ltd. Vermette was unable, by the Real Estate Board rules, to list properties in his own name. He had to use the corporate name. Similarly, all signs had to bear the corporate name. The witness explained again that this was because the Corporation held the broker’s license.

[21] The contract signed between Vermette and the Corporation was entered into evidence. It is entitled “Heritage Realty Ltd. Contract with Self-Employed Commissioned Sales Agents”. It reads as follows:

"1. The Real Estate Agent is entitled to the full amount of commission earned.

2. The Real Estate Agent is required to pay Heritage Realty Ltd. 20% of his/her gross commissions to cover the administrative and operating costs as listed.

Administrative and Operating Costs

- use of closing office/meeting room

- process listings and provide reports

- prepare Feature Sheet & Information Sheet on listings

- secretarial services including basic typing

- reception service

- use of office facilities

- MLS and Offer to Purchase forms

- use of picture board

- use of fax machine

- weekly sales meetings

- in-house accounting and payroll

- transaction processing

Agent Expense

- all advertising, postage, business cards

- long distance calls, photocopying

($.05 per copy)

- signs

- promotional material

- MLS catalogue and Real Estate Board fees

- Camera, film and processing

3. The Real Estate Agent sets his/her own commission rate for the sale of his/her listings."

[22] Whilst the title given to this document is not necessarily conclusive, I note that it purports to be a contract with an independent self-employed contractor. The contract does not specify the minimum monthly payment to the company, but I accept the evidence on this point that there was a verbal agreement to this effect between the parties.

[23] Vermette himself gave evidence and confirmed the evidence given by his father-in-law. He particularly stressed that he was free to set his own commissions at whatever rate he chose; for instance, he could sell the property of a relative or a friend at a 2% commission if he chose and the Corporation had absolutely no input into or say about that.

[24] That then is the crux of the evidence before me and I turn now to consider how the 4 Part Test applies to that evidence.

Application of the 4 Part Test to the Evidence

[25] I mention at the outset that it is not the title put upon the arrangement by the parties which is of all importance, but rather the Court must consider the substance of the arrangement. Whilst it is not for the Minister or the Court to rewrite the contract entered into by the parties, if the substance of the arrangement is not in accordance with the title, then it is the substance which must prevail. If, however, the preponderance of the evidence does not detract from the title, then a certain deference needs to be given to the arrangement chosen by the parties.

[26] Control: It is clear with regard to this aspect of the test that it is not so much the actual control exercised, but the right to control which is of importance. In the situation at hand, Vermette had a great deal of individual freedom to go about his work as he saw fit. He was not at the beck and call of anyone else and acted totally independently. Such restrictions as they were, seemed to be imposed externally by the rules governing real estate agents in Winnipeg. The Corporation held the broker’s license and thus sales had to be done in its name and all monies had to be deposited into its trust account. No doubt that was to afford a degree of protection to the public. That was not a matter of supervision by the Corporation, but rather the reason why the Corporation was established in order to comply with the external rules. No real estate agent could operate otherwise and it is surely not to be suggested that on that account alone no real estate agent could be said to be operating his own independent business.

[27] The whole tenor of the arrangement was for the Corporation to provide a service to Vermette as he went about his business rather than the other way around. There was a total lack of supervision over him by the Corporation, save for the externally imposed requirements I have mentioned. This aspect of the test very much leans towards an arrangement with an independent contractor.

[28] Tools: Whilst the Corporation administered an office and provided secretarial services, all of which involve the provision of some equipment, Vermette himself provided all the tools he needed on a day-to-day basis as I had outlined above. The expense of his car, laptop computer, cell phone, lock boxes and other items were obviously not inconsiderable. Whilst the tools for the administrative business provided by the Corporation were provided by it, it is clear that the tools needed to get out promote and sell real estate were provided by Vermette himself. Thus, whilst there is an aspect of the Corporation providing tools, this is really only in relation to the administrative back-up and the greater part of the tools used to do the actual work were provided by Vermette himself. This aspect of the test, thus, also leans more to an independent contractor status.

[29] Profit and Loss: Clearly Vermette stood to lose a certain amount of money if he did not produce sales. At the outset, he had a minimum to pay to the Corporation for administrative services provided. This is totally inconsistent to the situation of an employee working under a contract of service. I am not aware of any employee who has to pay his purported employer an administrative service fee whether or not he makes any money. Generally speaking, a minimum payment is made the other way around. In addition, Vermette had all his ongoing expenses to pay whether or not he actually made any sale. In any month, he might have easily incurred losses. In addition to that, the amount of profit he made depended upon how prudent he was with his expenses, how he went about his sales and what rates of commission he charged. In short, he stood to make a profit depending upon how well he used his entrepreneurial skills. He had his own investments in his equipment, he incurred his own expenses and the amount of profit he made depended upon his effort and skill. It was not a question, as it so often is in these cases, of the more he worked, the more he made. It involved the type of entrepreneurial effort which distinguishes a situation of a true employee from an independent contractor. This test clearly indicates in my mind that it was a contract for services.

[30] Integration: The question that has to be asked with respect to this aspect of the test is “whose business was it?” That question has to be looked at from the point of view of the worker. It is clear that Vermette and his father-in-law set up this corporation to service their respective occupations of real estate agents. They put the shares in the names of their respective wives, who played no role or part in the operation or management the company. Vermette and Reckseidler took on this role themselves. If of course they had placed the shares in their own names, there would be no question of their work being insurable employment as they would each have owned more than 40% of the shares in the corporation. The intent of the legislation clearly, as a general rule, is that people in business for themselves, do not participate in the employment insurance scheme. If they embark upon their own entrepreneurial enterprise, they take their own risks. In reality, the arrangement established in this case is the same as if they had owned the shares themselves. It was their business. In effect, it was their alter ego. The purpose of the business it seems to me, was to provide an administrative service to themselves so that they could carry on their own separate real estate selling businesses, jointly pooling their efforts. The Corporation, however, serviced them and provided a name and trust account, as well as a location and secretarial service under which they could operate in accordance with the externally established rules governing real estate agents in the area. They, it seems to me, did not work for the Corporation, but rather the Corporation provided a service to them for which they paid a minimum fee and a percentage of their sales commissions. If they did not conduct their own businesses, the Corporation had no business of its own. It seems to me it was simply a service company and it would be completely artificial to say that it employed the two agents. The difficulty encountered here is that the funds were handled by the Corporation which paid out the commissions less 20%. In effect, it might equally well have paid out the whole amount and invoiced back the 20% administration fee as that, in reality, is what was taking place. In other words, although it handled the money, it was not paying the agents, but rather the agents were paying the Corporation.

[31] When looked at in this light, Vermette in reality, was paying the Corporation for services provided which included handling the funds. This aspect of the test clearly points to Vermette being in business for himself. It was his business, he could have taken that business elsewhere and hooked up with another broker if he wished to provide the same kind of administrative service.

[32] In the final analysis, I am of the view that Vermette was embarked upon his own entrepreneurial venture. Every case, of course, turns upon its own peculiar set of facts. Counsel for the Minister cited the case of Epp v. M.N.R., [1992] T.C.J. No. 234, D.R.S. 94-00383, a decision of Judge Sarchuk of this Court. That case also turned on its own facts and I note that in particular, the Judge felt that the terms of the original agreement were a “strong and cogent argument that the relationship was intended to be a contract of service”. In that respect, it is quite distinguishable.

[33] In the cases at bar, when I consider the forest as a whole, as well as the individual trees, the evidence is quite clear that the arrangement in question was a contract with an independent contractor. Furthermore, I am not at all certain that it was a contract for services to be provided by Vermette as opposed to a contract for services to be provided by the Corporation to Vermette. The complete freedom with which Vermette worked, save for the use of the name and depositing the monies to the trust account, the payments that he had to make to the Corporation, including the minimum monthly payment, the expenses he had to incur and the manner in which he went about generating his income, the nature and title of the contract itself all point to Vermette being in business for himself and not working as an employee of Heritage Realty Ltd. under a contract of service.

Review of the Minister’s Decision under Paragraph 5(3)(b) of the EI Act

[34] Even if I was in error in holding that this was not a contract of service, and without going into it in any great detail, in my view, the decision of the Minister under paragraph 5(3)(b) of the EI Act is not sustainable in law. Whilst I clearly accept that I must give due deference to the decision of the Minister, he clearly did not take into account one of the most relevant factors in the arrangement, namely that Vermette was required to pay to the Corporation a minimum monthly fee for services provided. That is not the hallmark of an arrangement normally entered into between an employer and an employee operating at arm’s length and the Minister, if he had considered that factor, could not lawfully, from a reasonable and objective point of view, have come to the decision that he did. Clearly, in the arrangement at hand, Vermette and his father-in-law were the alter ego of the Corporation. They controlled it, managed it, and operated around it in a manner in which no employee being employed at arm’s length could considerably do. If I needed to deal with this issue, I would have no hesitation in holding that the employment was excepted under paragraph 5(2)(i) of the EI Act. In the event, it is not necessary to go there because I am of the view that this was not employment in the sense of a contractof service in the first place.

Conclusion

[35] In the event, the appeals are allowed and the decisions of the Minister vacated.

Signed at Calgary, Alberta, this 8th day of July 2000.

"Michael H. Porter"

D.J.T.C.C.