Citation: 2013 TCC 261
Date: 20130820
Docket: 2012-1867(CPP)
BETWEEN:
NIAGARA
GORGE JET BOATING LTD.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I Introduction
[1]
This is an appeal from
determinations by the Minister of National Revenue (the “Minister”) that Mr. John
Kinney (the “Worker”) was an employee in pensionable employment with Niagara
Gorge Jet Boating Ltd. (the “Appellant”) during the period from January 1, 2002
to December 31, 2006. The Appellant requested a review of the determinations,
which were confirmed.
II Factual Background
[2]
The Appellant provides
jet boat tours on the Niagara River from facilities located in Niagara-on-the-Lake,
Ontario and in Lewiston, New York.
[3]
The shareholders of the
Appellant were John Kowalski, Joseph Kowalski, Joanne Clifford and John Kinney,
each owning 25% of the Appellant.
[4]
The Worker is a
resident of the United States.
[5]
The Worker was hired by
the Appellant to manage its operation in Canada and the United States.
[6]
The Worker and the
Appellant signed a written contract dated December 14, 1998 in which
the parties confirmed that it was their intention to enter into a client-independent
contractor relationship.
[7]
In her Reply to the
Notice of Appeal, the Respondent admitted the following:
(a)
The Worker was hired to
create and monitor the operational procedures of the Appellant’s business.
(b)
The Worker could
provide his services to others, “subject only to a prohibition on acting for
businesses directly competing with the Appellant.”
(c)
The Worker had flexible
working hours. The Respondent denied, however, that the Worker was “subject to
no minimum or maximum” number of hours.
(d)
The Worker maintained
his own home office and received no reimbursement for his office expenses.
[8]
In determining whether
the Worker held pensionable employment during the period at issue, the Minister
relied on the assumptions of fact set out in paragraphs 13(a) to (fff) of the
Reply to the Notice of Appeal, which will be referred to in the relevant
sections of these reasons.
[9]
The Minister’s
assumptions as to the duties performed by the Worker were as follows:
- Managed the U.S. and Canadian jet-boating operations on the Niagara River.
- Provided advice on tours.
- Developed new ventures.
- Expanded the business.
- Dealt with legal matters.
- Handled major boat renovations.
- Trained management on how to safely
run white-water rafting tours.
- Provided ongoing training and supervision
to all staff.
- Developed and updated the
Appellant’s training manuals.
[10]
The Minister found that
the Worker was not in business for himself when performing services for the
Appellant. The Appellant asserts that the Worker was an independent contractor
and was therefore not required to pay Canada Pension Plan contributions.
III Issues
[11]
Was the Worker employed
in pensionable employment with the Appellant? In other words, was the Worker an
employee or an independent contractor?
[12]
What percentage of the
Appellant’s work activities constituted employment in Canada?
IV Analysis
[13]
The primary issue is
whether the Worker was employed with the Appellant in pensionable employment within
the meaning of paragraph 6(1)(a) of the Canada Pension Plan ("CPP")
during the relevant period.
[14]
The term “employment”
is defined in subsection 2(1) of the CPP as the state of being employed
under an express or implied contract of service or apprenticeship, and includes
the tenure of an office.
[15]
Pensionable employment
is defined as follows in paragraph 6(1)(a) of the CPP:
6.
(1) Pensionable employment is
(a)
employment in Canada that is not excepted employment;
(b)
employment in Canada under Her Majesty in right of Canada that is not
excepted employment; or
(c)
employment included in pensionable employment by a regulation made
under section 7.
[16]
Excepted employment is
defined in subsection 6(2) of the CPP. In the case at bar, the Worker is
not caught by any of the element of the definition of excepted employment in
that subsection.
[17]
However, pursuant to
paragraph 7(1)(a) of the CPP, the Governor in Council may make
regulations for including in pensionable employment any employment outside
Canada or partly outside Canada, being employment that would be pensionable
employment if it were in Canada.
[18]
In paragraph 16(1)(a)
of the Canadian Pension Plan Regulations, (the "Regulations") there
is such an exception, which brings into pensionable employment employment
outside Canada if the employee “ordinarily reports for work at an establishment
in Canada of his employer”, as long as that employment would be pensionable
employment if it were in Canada.
[19]
Employment which is not
held under an express or implied contract of service is not considered
pensionable employment. Thus, the performance of services under a contract for
services (a client- independent contractor relationship) is excluded from
pensionable employment.
[20]
Because the evidence
shows that the Worker performed his duties in Canada and the United States, to the extent that it is concluded that the relationship between the parties was that
of an employer and employee, the secondary issue requires a determination as to
what percentage of the Appellant’s work activities represents employment in Canada.
[21]
When considering a
person’s rights and obligations under the CPP, one must determine
whether the person is an employee (employed under a contract of service) or a
self-employed person (bound by a contract for services).
[22]
The common-law test
governing this determination was established in Wiebe Door Services Ltd. v.
M.N.R.
and subsequently confirmed by the Supreme Court of Canada in 671122
Ontario Ltd. v. Sagaz Industries Canada Inc. That test requires consideration of the
following four elements (which are not exhaustive), bearing in mind the nature
of the relationship of the parties:
1. Control
2. Ownership of the tools
3. Chance of profit
4. Risk of loss.
[23]
Furthermore, it has
been established that the intent of the parties must be taken into account when
determining the legal nature of a contract. The recent Federal Court of Appeal decision
in 1392644 Ontario Inc. o/a Connor Homes v. The Queen sheds some light
on the analysis to be undertaken when it comes to the intent of the parties,
and on how that analysis is to be carried out.
[24]
To summarize, the Court
noted in Connor Homes that the parties may characterize their
relationship however they please, but the legal effects that result from the
relationship are not decided solely on the basis of the parties’ subjective
intention. The Court also made reference to the manner in which the analysis
should proceed, which is that the intent of the parties should be ascertained
before commencing the Wiebe/Sagaz analysis. The Court states the
following in explaining how to conduct the analysis:
38 Consequently,
Wolf and Royal Winnipeg Ballet set out a two step process of
inquiry that is used to assist in addressing the central question, as
established in Sagaz and Wiebe Door which is to determine
whether the individual is performing or not the services as his own business on
his own account.
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 paragraph 9, “it is
also necessary to consider the Wiebe Door Services Ltd. 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 [sic] intent as well as the terms of the
contract may also be taken into account since they colors [sic] 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 [sic] whether the legal
effect of the relationship the parties have established is one of independent
contractor or of employer-employee.
[25]
Applying this
framework, does the evidence show that the Worker was performing his services
in the course of a business carried on for his own benefit?
A. Intent of the Parties
[26]
The Minister made the
following assumptions with respect to intention:
- The Worker did not
report business income or claim business expenses in his Canadian personal income
tax returns for the 2003-2006 taxation years.
- The Worker did not
have his own clients; the clients were those of the Appellant.
- The Worker did not manage his own
staff.
- The Worker did not
have a registered business name or trade name until 2006.
- The Worker did not
have a registered business number with the CRA until 2006.
- Beginning in 2005, the
Worker charged the Appellant GST; however, the Worker did not remit this GST to
the Receiver General.
[27]
The Appellant’s counsel
insisted that the parties intended to enter into a client-independent
contractor relationship, as evidenced by their written agreement. Furthermore,
the contract refers to the Worker as “the contractor”.
[28]
I accept as true that
the intent of the parties was that their relationship be that which is
reflected in a contract for services.
B. Control
[29]
In her Reply to he
Notice of Appeal the Minister assumed the following:
- The Worker’s hours of
work varied depending on the time of year it was and what needed to be done.
- The Worker’s hours worked were not
recorded.
- The Worker was
responsible for the daily operations of the Appellant.
- During April to
October, the Worker was expected to be on site at least ten days every two
weeks.
- During November
through March, the Worker was expected to be at the Appellant’s work locations
enough to perform his responsibilities in a satisfactory manner.
- The Worker was
required to report to the Appellant on a weekly and monthly basis on the weekly
cash position and the monthly trial balances.
- The Worker was
required to attend management team meetings on a regular basis.
- The Worker performed
his duties at the Appellant’s various work locations in the U.S. and Canada, and from his home office.
- The Worker was
required to obtain the Appellant’s written approval for:
o Issuing full time
staff contracts
o Issuing staff bonuses
o Purchase orders
o Contracts over $5,000
o Real estate
acquisitions.
- The Worker had
signing authority on the Appellant’s bank account and only his signature was
required for amounts up to $10,000.
- The Worker had the
authority to sign contracts on behalf of the Appellant.
[30]
The Worker was a
director and minority shareholder of the Appellant. In evidence, the Worker was
described as having the “honorary” title of president of the Appellant.
[31]
The Worker’s hours were
flexible and seemed to be determined by him to a large extent. The Minister
assumed that there was a minimum and a maximum number of hours, but this was
denied by the Appellant.
[32]
The Worker was required
to attend board and management team meetings.
[33]
The contract specified
those actions of the Worker that had to be approved by the board of directors
in writing, and these included actions with regard to full‑time staff
contracts, staff bonuses, purchase orders and contracts over $5000, as well as
real estate transactions. The Worker also had to report his weekly cash position
and monthly trial balance to the board.
[34]
The Appellant did not
directly supervise the Worker in the performance of his day-to-day activities.
As noted by Sharlow J.A. in TBT Personnel Services Inc. v. The Queen, this factor
is a neutral one when a worker is highly skilled in his field and would need
little or no supervision regardless of the characterization of the work
relationship.
[35]
Furthermore, as noted
in Meredith. v. The Queen.,
“[t]he importance lies in the corporation’s legal power to control the
employees, not whether the employees feel subject to that control”. (My
emphasis.)
[36]
The Appellant submits
that the fact that the Worker was permitted to work for other clients is a
factor indicative of independent contractor status. Although this is true, the
Worker only worked for other clients during the periods before and after the
relevant period.
[37]
It seems to me that the
Worker’s signing authority in various matters on behalf of the Appellant is not
indicative of a person who was in business for himself.
[38]
The Appellant has
failed to show that the assumptions of the Minister are incorrect. I note that
the written contract defines the Worker’s duties as being those of a manager.
Furthermore, he was the president and a director of the Appellant. A reasonable
inference can be drawn from the evidence as the Worker reported to the board of
directors of the Appellant.
[39]
The control factor
points to an employment relationship.
C. Ownership of Tools and Equipment
[40]
In determining that the
Worker was an employee, the Minister made the following assumptions with
respect to the ownership of the tools:
- While working in Canada, the Worker had access to the Appellant’s office space, computer, cell phone, VHF
radio, company vehicle and office supplies at no cost to the Worker.
- The Appellant also
provided the jet boats and safety equipment for the boats.
- The Worker provided
his own wet suit and water gear, and a home office and home computer.
- The Appellant
provided the Worker with company business cards identifying the Worker as president
of the Appellant.
- The parties were
responsible for the maintenance of their own tools and equipment.
[41]
One of the common
attributes of independent contractors is that they make a significant
investment in the tools and equipment used in their work, and retain all rights
pertaining to the use of those assets.
[42]
The evidence shows that
the Appellant provided the Worker with access, at no cost, to a desk and chair
to perform his duties. The Worker did, however, have his own computer, cell
phone and vehicle. Some of the expenses relating to these tools were reimbursed
by the Appellant. The Worker also had his own wet suit and water gear.
[43]
It is noteworthy that, the
nature of the business was jet boating, the main tools for which were the boats
and the safety equipment, which were provided by the Appellant.
[44]
The Appellant submits
that the most important tool provided by the Worker was his knowledge. An
analogous argument was made in Asare-Quansah v. The Minister of National Revenue, a case
in which a chartered accountant who had contracted to design a financial literacy
course submitted that the main tool he used for that purpose was his knowledge.
Campbell J. Miller went on to find the ownership of the tools factor to be a
neutral one in that case, and did not really explore the question of an
intangible tool, saying only that knowledge “has not traditionally been the
type of tool or equipment that courts usually refer to.”
[45]
The Appellant failed to
rebut the Minister’s assumptions or show that they were incorrect. The
ownership of tools factor points to an employer-employee relationship.
D. Chance of Profit/Risk of Loss
[46]
With respect to the
chance of profit/risk of loss factor, the Minister made a number of
assumptions:
- The Worker was paid a
base salary of $60,000 a year, an additional $5,000 for each of the months of
January, August, September and November, and an additional $10,000 per month for
the months of February, March, April and May.
- The Worker was
entitled to annual manager profitability fees based on a percentage of eligible
surplus profit amounts.
- Other workers also received
bonuses.
- The Worker was
entitled to annual director’s fees in the amount of $25,000.
- The Appellant
determined the monthly timing of payments to the Worker.
- The Appellant
determined the method of payment to the Worker, which was payment by cheque.
- The Worker was paid
in his personal name until early 2006. Thereafter, he was paid in both his
personal name and in the name of his company, 7863 Management Company LLC.
- The Worker submitted
invoices to Whirlpool Jet Boat Tours in order to be paid.
- The Worker had access to the Appellant’s
company credit card.
- The Appellant
provided the Worker with summer housing and paid his travel expenses an amount
of up to $8,000 per year upon submission of receipts.
- The Appellant
provided the Worker with a travel allowance of up to $5,000 annually to travel to
certain destinations with the approval of the Appellant.
- The Appellant was ultimately
responsible for resolving customer complaints.
- The Worker incurred
expenses relating to the home office, wet suit and cell phone that he provided
in the performance of his work.
[47]
More often than not
employees will not have any financial risk because their expenses will be
reimbursed, and they will not have any ongoing fixed costs. Independent
contractors, alternatively, face financial risk which may lead to losses
because they usually pay fixed monthly overhead even if no work is being
performed at the time.
[48]
Here, the Worker had a
chance of profit as his income was directly related to the success of the
business from year to year. The Worker had a base salary, but admitted that the
majority of his income came from the bonus structure and the year-end profit
sharing. I would suggest, however, that this chance of profit is more closely
tied to his shareholder status than his position as president and manager of
the company. Although the Worker did make an investment in the company, that
does not necessarily mean that he had to do so in order to perform his services
for the company.
[49]
In terms of risk of
loss, it is true that if the company had filed for bankruptcy the Worker could have
lost his original investment, but this can be true of any employee who invests
in the company employing him. Furthermore, this potential loss of investment
does not equate to lack of job security as a financial risk. The Worker had a
base salary as well as access to the company credit card. The Worker also had
other benefits such as a $5,000 travel allowance, reimbursement of health care
premiums up to $4,500, and annual director’s fees. The sum of the evidence
suggests that the Worker did not have to pay many expenses out of his own pocket.
I do not find that this security is reflective of the risk of loss that most
independent contractors endure when in business for themselves.
[50]
The hiring of
substitutes or replacements can help determine whether a worker is in business
on his own account, because the subcontracting of work can affect his chance of
profit and risk of loss. In the present case, the evidence shows that at no
point did the Worker hire a substitute for himself. This weighs in favour of the
existence of an employment relationship.
[51]
The Appellant failed to
rebut the Minister’s assumptions with regard to chance of profit and risk of
loss. The Appellant’s counsel insisted on the fact that the Worker had the
opportunity to earn bonuses based on the Appellant’s profits. I note on this
point that most chief executive officers of Canadian corporations often share
in the profits of the businesses that they direct.
[52]
The chance of
profit/risk of loss factor points to the existence of an employer-employee
relationship.
V Conclusion
[53]
Notwithstanding the
characterization of the relationship by the parties as being one governed by a
contract for services, the ongoing and continuous nature of the relationship
weighs in favour of an employment relationship. In light of the evidence and
the application of the Wiebe/Sagaz factors, I conclude that the Worker
was an employee of the Appellant. Hence, he was employed in pensionable
employment in Canada.
[54]
As noted above this is
not a complete answer. If the Worker "ordinarily" reported for work
at an establishment in Canada of his employer then part of his employment will
be considered pensionable employment in Canada under paragraph 16(1)(a)
of the Regulations. Conversely, if he did not “ordinarily” report for
work in Canada, the time spent in Canada working for the Appellant will not be
considered pensionable employment in Canada.
[55]
The word “ordinarily”
is an adverb. It means most of the time, generally, usually, etc.
[56]
The evidence shows that
the Worker spent about 20% of his working hours in Canada and about 80% if his
working hours in the United States. His services were more in demand in Lewiston, New York than in Niagara-on-the-Lake, Ontario. Therefore, only 20% of the
Worker’s services constitute pensionable employment in Canada.
Signed at Québec, Québec, this 20th day of August 2013.
"Robert J. Hogan"
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