AMENDED REASONS FOR JUDGMENT
Heard on Common Evidence
These Reasons for Judgment are issued in substitution for the
Reasons for Judgment dated October 20, 2014
Bocock J.
I. Introduction
[1]
The Minister determined and assessed the
Appellant corporation which carries on business as Falcon Enterprises
(“Falcon”) as an employer and the two Appellant Eissner brothers, Jan and
Thomas, as employees, concerning two consecutive periods: January 1 to December
31, 2011 (the “2011 Period”) and January 1 to December 31, 2012 (the “2012
Period”).
[2]
At the hearing of the matter, Appellant’s
counsel withdrew the appeals relating to the assessments with respect to the
2011 Period for all Appellants and the 2012 Period in respect of the Appellant,
Thomas Eissner, and the coincident impact of such an appeal for the 2012 Period
on the Appellant, Falcon.
[3]
Therefore, the sole matter and issue for this
court to determine is whether Jan Eissner was an employee or independent
contractor in respect of Falcon for the 2012 Period.
[4]
Such a question of pensionable employment is
frequently heard before this Court in respect of the Canada Pension Plan,
(R.S.C., 1985, c. C-8) (“CPP”) specifically within the definition of
employment within the CPP subsection 2(1) and the reference to
pensionable earnings in paragraph 6(1)(a) of the legislation which provides
as follows:
2. (1) “employment” means the state of being employed under an express
or implied contract of service or apprenticeship, and includes the tenure of an
office;
Pensionable
employment
6. (1) Pensionable employment is
(a)
employment in Canada that is not excepted employment;
II. Facts
related to Jan Eissner for the 2012 Period
[5]
Falcon operated within the oil and gas industry in
southwest Manitoba. The company provided servicing, maintenance and repairs to
oil wells through its service rig equipment.
[6]
Jan was effectively the chief operating officer
of Falcon and in common parlance “ran the show”. The Respondent recognized such
situation when it admitted the following facts in the reply: the Appellant (Jan)
did not report to anyone, was not supervised, controlled his own schedule and
vacations and provided management service and managed the day-to-day business
operations of Falcon.
[7]
Further, the Respondent in assessing Jan and
Falcon for the 2012 Period made certain factual assumptions that Jan worked
exclusively for Falcon, could not subcontract work or hire replacements, did
not invoice Falcon for his services and was hired pursuant to a verbal
agreement.
[8]
At the hearing, the Court heard testimony on
behalf of the remaining Appellants from Jan and his brother, Thomas. An appeals
officer of the Canada Revenue Agency (“CRA”) was cross-examined briefly in
relation to the filing history of the Appellants and the CRA internal report on
an appeal (“CPT110 Report”).
[9]
Aside from the CPT110 Report, certain relevant
documents were tendered into evidence by the Appellants: invoices for the 2012
Period reflecting Jan’s personal contracting relationship with another oil
drilling company (“Tundra”), a services agreement between Falcon and Jan dated
as of January 1, 2012, management fee invoices rendered by Jan to Falcon for a period
subsequent to the 2012 Period, Jan’s T1 tax return for the 2012 Period
reflecting no employment income and only business income, GST information of
the CRA confirming Jan’s sales revenue and GST paid on same and , lastly, Falcon’s
T2 corporate tax returns reflecting Jan as an independent contractor.
[10]
The agreement, entitled “services agreement”,
provided for the usual declaratory and narrative statements concerning the
parties’ intentions to be independent contractors and indemnifications for
income taxes, CPP contributions and EI premiums. It also required Jan to collect
and remit GST, which he did during the 2012 Period. The services agreement also
made clear no relationship would be created between Jan’s employees (although
factually there were none) and Falcon.
[11]
During the 2012 Period, Jan provided services to
several other companies. In those instances, the sole service provided by Jan was
his industry knowledge, management and skill. There was uncontroverted evidence
that all equipment, supplies and service rigs were provided by the other oil
companies when Jan worked for them, the example of which was Tundra, to which
Jan provided such services directly and in respect of which he was reimbursed
for his expenses. As a worker for Falcon, the situation to this extent was
substantially similar for Jan.
[12]
As to remuneration paid by Falcon, Jan was paid
$3,500 by bi-weekly and was not paid vacation pay. Although no actual invoices
for the 2012 Period were adduced into evidence, Jan testified they were
submitted during the 2012 Period in a similar fashion to those for which a
sample was adduced into evidence for a subsequent period. Further, Jan through
his services agreement, was insured for extended health benefits, but was responsible
for reporting his own worker compensation status.
III. The
Law
[13]
The leading case of 10392644 Ontario Inc. o/a
Connor Homes v the Minister of National Revenue, 2013 FCA 85 has
established the present cumulative authority concerning the general test and
methodology to be employed by the trier of fact when grappling with the
described “deceivingly simple” question of whether an individual is “performing
the services as his own business on his own account”: 1671122 Ontario Ltd.
v. Sagaz Industries Canada Inc., 2011 SCC 59 at paragraph 47. In Connor
Homes supra, the Federal Court of Appeal identifies the two step
process of inquiry to be undertaken in order to address the question and then
proceeds to state at paragraphs 39 and 40 the following:
[39] Under the first
step, the subjective intent of each party to the relationship must be
ascertained. This can be determined either by the written contractual
relationship the parties have entered into or by the actual behaviour of each
party, such as invoices for services rendered, registration for GST purposes
and income tax filings as an independent contractor.
[40] The second step
is to ascertain whether an objective reality sustains the subjective intent of
the parties. As noted by Sharlow J.A. in TBT Personnel Services Inc. v. Canada,
2011 FCA 256, 422 N.R. 366 at para. 9, “it is also necessary to consider the
Wiebe Door factors to determine whether the facts are consistent with the
parties’ expressed intention.” In other words, the subjective intent of the
parties cannot trump the reality of the relationship as ascertained through
objective facts. In this second step, the parties intent as well as the terms
of the contract may also be taken into account since they colors the
relationship. As noted in Royal Winnipeg Ballet at para. 64, the relevant
factors must be considered “in the light of” the parties’ intent. However, that
being stated, the second step is an analysis of the pertinent facts for the
purpose of determining whether the test set out in Wiebe Door and Sagaz has
been in fact met, i.e whether the legal effect of the relationship the parties
have established is one of independent contractor or of employer-employee.
[14]
In summary, TBT Personnel Services Inc. v
Canada, 2011 FCA 256 and the subsequent Connor Homes cement the two
step process for the determination of whether a worker is a person in business
on her or his own account. Firstly, was the subjective intention of the
parties established or reflected in writing and/or by action? Secondly, does
the objective reality, based upon an analysis of the Wiebe Door
factors, sustain or deny the subjective intention of the parties.
[15]
The context in Connor Homes and, almost
without exception, in all of the other authorities considered and reconciled within
that leading authority are those of distant, arm’s length workers. The matter
before the Court is not so concerned. It is uncontroverted evidence before the
Court that Jan was inextricably linked with the overarching business
undertaking of Falcon: they self dealt with respect to his own agreement, he
construed his own obligations, responsibilities and salary and he was in
control of Falcon’s profits and accountable for its business decisions and
losses.
[16]
In a recent “post-Connor Homes” case
before this Court, Campbell J. outlined in AnMar Management Inc. v Minister
of Natural Revenue, 2012 TCC 15, the dilemma of closely held corporations
where the principal is invariably also a worker in the context of the
longstanding employment versus contractor debate when she states the following:
[18] The whole concept of the
shareholder/director of a corporation, which he or she owns and controls, also
being an employee is a difficult, although not impossible, reality that may
exist. The question is: Who is controlling things in those circumstances?
[17]
Campbell J. further references Bowman J., as he
then was, who stated:
[19] Justice Bowman in the case of Zupet, which I referenced above,
put it succinctly at paragraphs 11 and 12 where he stated, and I quote from
that case:
[11]
I should think that even lawyers who are accustomed to juggling in their heads
a variety of inconsistent legal fictions that bear no resemblance to reality
might have some philosophical difficulty with the idea that an artificial
person of which the only mind is the mind of an individual that owns it
exercises a degree of control over that individual sufficient to establish a
master-servant relationship.
[12]
Yet that is exactly what the Courts have done.
[20] Justice Bowman
again, at paragraph 13 of Zupet, went on to point out the inherent difficulties
with this concept, and I quote:
[13]
… This is an accepted fact of commercial reality (or, if you will, commercial
unreality). One can sell to one’s company, buy from one’s company, and lease to
or from one’s company. And one can be an employee of one’s own company. I
understand it to be generally accepted that a meeting of the minds is an essential
ingredient in a contract. One might wonder how there can be a meeting of the
minds when we have only one mind - in essence, an identity or fusion of minds.
This seems, however, to bother no one.”
[21] … Again,
Justice Bowman in Zupet, at paragraph 17, stated that the other questions to be
answered are: Whether the stated legal relationships are genuine and binding
and not a sham. Secondly, what in fact did the parties do? With what type of
relationship is their behaviour more consistent? Thirdly and finally, what type
of relationships did the parties intend? All of these questions merge and
overlap and must, in the majority of cases, be considered and answered together
against the backdrop of all of the facts of the case. In most cases, it is important
to step back and look at the “big picture”.
[18]
In keeping with the two step approach in Connor
Homes, the Court now turns its attention to the services agreement: it is a
clear expression of the intention of the parties. The question is to be asked however
is, should the intention reflected in that services agreement be diminished or
count for less because of the close relationship between the parties?
[19]
The Respondent certainly assessed the Appellant
on that basis and constantly submitted before this Court an argument along
those lines. Respondent’s counsel’s primary arguments were that:
a.
although the services agreement references the
continuing obligations of Jan in respect of employees he may hire, he did not
hire any;
b.
the respondent contends that the services
agreement is inconsistent with the objective reality because Jan’s profit is so
closely and inextricably linked with Falcon’s;
c.
under the services agreement, invoicing was
required, but no documentary evidence for the 2012 Period was produced;
d.
the services agreement was not produced at the
ruling stage and an adverse inference should be drawn from that;
e.
no invoices for expenses where ever submitted;
f.
the services agreement merely formalized an
existing relationship which did not alter dramatically, if at all, during the
2012 Period from previous periods; and
g.
the GST account utilized by Jan to remit his charged
GST on service fees was originally opened with a third party (Jan’s wife) and
in respect of initial business purpose of which was farming.
IV. Analysis
[20]
The written services agreement that exists was
executed by both parties, Falcon and Jan. Jan also contracted with other oil
and drilling companies in the 2012 Period. The evidence regarding those other
service recipients was fulsome and uncontroverted: Jan likely had no written
agreement with them, but equally important, the structures, operations and
dealings as between Jan and Falcon were all bona fide, manifest and not a sham.
[21]
The actions of Jan and Falcon do not contradict
their subjective intention. The inconsistencies maintained by Respondent’s
counsel with respect to the services agreement are either immaterial or are not
contradicted by the evidence in terms of the ultimate parties’ relationships.
While Falcon supplied the tools of the trade, this was factually and anecdotally
confirmed by Jan to be consistent and common-place throughout the oil drilling
industry in southwest Manitoba and was consistent with his relationship with
Tundra. It is also noted that Jan did provide his computer and occasionally a
motor vehicle to Falcon. As to profit, not only was Jan’s profit linked to his
effort and knowledge, but he was free to, and did, contract directly with other
businesses on very similar terms and conditions to those present in the Falcon
relationship.
[22]
As to control, as mentioned, the Respondent
admitted Jan retained control, and in any event, evidence at the hearing was
clear and obvious on this point: Jan was in control of his agreed to services.
[23]
In summary, the intention was clear at the outset
and has not been revealed as unrealistic by an examination of the Wiebe Door
factors. At worst, the examination of those factors is indeterminate as to an employer/employee
versus independent contractor relationship and, at best, indicates that a
separate business of Jan’s existed. Therefore, based upon an examination of the
“real world” conduct of Jan and Falcon during the 2012 Period, there is nothing
which otherwise demonstrates that the services agreement did not generally reflect
the objective reality that Jan and Flacon were independent contractors.
[24]
For these reasons, the appeal is allowed on the
basis that Jan and Falcon were engaged as independent contractors during the
2012 Period. As specified in paragraph 2 of these reasons for judgment, the balance
of the appeals were withdrawn.
Signed at Vancouver, British Columbia, this 5th day
of November 2014.
“R.S. Bocock”
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