Société De Projets Etpa Inc. v. M.N.R., [1993] 1 CTC 2392

Dussault, T.C.C.J.:— These are appeals from assessments for the appellant's 1984, 1985 and 1986 taxation years. In these assessments, the Minister of National Revenue (the "Minister") refused to allow the appellant the small business deduction provided in section 125 of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") on the ground that the business operated was a personal services business within the meaning of paragraph 125(7)(d) of the Act and was accordingly excluded from the definition of “ active business" within paragraph 125(7)(a) of the Act.

In assessing the appellant, the Minister relied, inter alia, on the facts set out in subparagraphs (a) to (n) of paragraph 11 of the reply to the notice of appeal, which read as follows:

(a) during 1980 the appellant was incorporated and Étienne Paquin then became the principal, if not the only, shareholder of the appellant;

(b) for more than 20 years, up to the date the appellant was incorporated, Étienne Paquin was employed by the company Imprimerie Bourguignon Ltée, where he worked as a salesperson;

(c) starting in 1980, Mr. Paquin continued to do the same work for Imprimerie Bourguignon Ltée but he had payment made to the appellant;

(d) during the years in issue, the appellant earned its income, other than interest, solely from a single source, Imprimerie Bourguignon Ltée;

(e) during the three years in issue, the services rendered by the appellant to Imprimerie Bourguignon Ltée were the same as those rendered by Étienne faquin before the appellant was incorporated;

(f) during the taxation years in issue, the appellant did not supply any tools or equipment;

(g) during these periods, the appellant had no responsibility to the customer once the contract was accepted by Bourguignon Ltée;

(h) during these years, the appellant did not bill customers. All billing was done by Bourguignon Ltée and the appellant received only its commission, ten per cent of the contract;

(i) during the periods in issue, the appellant had no employee other than Étienne faquin. Mr. faquin did the same work as before the incorporation, that is, he worked as a salesperson representing Imprimerie Bourguignon Ltée;

(j) moreover, during the years in issue, the work done by Mr. faquin was the same as the work done by salespeople employed by Imprimerie Bourguignon Ltée;

(k) during the years in issue, the appellant was in no way identified as Mr. faquin's employer, and communications with Étienne faquin took place right at Imprimerie Bourguignon Ltée;

(l) during the period in issue, the appellant was not even listed in the telephone directory;

(m) during the periods in issue, Étienne faquin acted much more like an employee of Bourguignon Ltée than like an employee of the appellant;

(n) but for the incorporation of the appellant, Mr. faquin would have continued to work for Imprimerie Bourguignon Ltée as an employee.

[Translation.]

Étienne faquin was the only witness called. He explained that his business relationship with Imprimerie Bourguignon Ltée ("Imprimerie Bourguignon”) had started in about 1961 or 1962 by a project to develop an advertising folder including text and photographs which a customer had ordered from him and which he had himself taken to Imprimerie Bourguignon for printing, in return for payment amounting to ten per cent of the amount billed to the customer by Imprimerie Bourguignon. Thereafter, the number and nature of the projects grew and expanded, with Mr. faquin being the one who developed ideas for advertising or presenting products, particularly certain types of special packaging for pharmaceutical and cosmetic products marketed by businesses operating both in Canada and the United States and in Europe. In all the projects with these businesses, which Mr. faquin described as his own customers, he himself acted as, to use his own comparison, no more nor less than the architect of the project, while Imprimerie Bourguignon looked after production, somewhat like a builder in the real estate industry. The agreement between Mr. faquin and Imprimerie Bourguignon under which payment would be ten per cent of the amount billed to the customer continued until 1986 or 1987, when the new owners of Imprimerie Bourguignon proposed to reduce payment to five per cent. The parties then broke off their relationship and, according to Mr. faquin, Imprimerie Bourguignon scooped the customers he had until then been serving. The incorporation of the appellant occurred in 1980. According to Mr. faquin, the basic conditions establishing the relationship between the parties were never substantially altered, except for the fact that after 1980 the appellant played the part he had played personally up to then. Apart from the condition relating to payment, these basic conditions are set out in an agreement signed in January, 1965 by Mr. Paquin and Paul Lamy, as the controller of Imprimerie Bourguignon (Imprimerie Bourguignon being referred to in that agreement as the Company"), on the following terms:

1. That Étienne Paquin performs his duties independently and that he is responsible for all expenses incurred.

2. That the company has no responsibility whatever for projects undertaken by Étienne Paquin.

3. That all disbursements or charges incurred by Étienne Paquin in a project which is not carried out will be borne by him.

[Translation.]

This agreement supports Mr. Paquin’s position that he and subsequently the appellant were always completely independent of Imprimerie Bourguignon to which they simply brought projects developed by them, over which Imprimerie Bourguignon exercised no form of control and of which it was furthermore not aware before Mr. Paquin or the appellant submitted them to it. Mr. Paquin testified, for example, that there had never been any supervision whatever over his design work, the manner in which it was done, the place where it was done or the hours of work. Moreover, he stated that he went to Imprimerie Bourguignon only to attend to the production of the projects there. Furthermore, he stated that he had always maintained an office in his home. According to him, the appellant also rented a small space at Imprimerie Bourguignon, which space he furnished himself, for convenience when he went there with customers to check on production. Copies of cheques establishing that $50 rent per month was paid by the appellant to Imprimerie Bourguignon for several months in 1985 were also submitted in support of this assertion. Mr. Paquin further stated that he, through the appellant, had often reimbursed Imprimerie Bourguignon for overtime or“ "press time" in order to shorten production time to satisfy customers. Several copies of cheques for amounts varying from some hundred dollars to several thousand dollars were also submitted in support. The reasons for the payments are entered on most of these copies of cheques.

In short, Mr. Paquin asserted that he was, at the time in question, completely independent in the projects he undertook through the appellant, and to which he devoted half his time, the other half being devoted to managing income properties comprising some 30 units. These properties are owned by another company of which he is also the sole shareholder and director.

With respect to other projects which Mr. Paquin or the appellant might have had carried out by other printers, the documents submitted indicate that there were some in 1981 and 1982. Moreover, when the business relationship between the appellant and Imprimerie Bourguignon was terminated, other projects were undertaken with other printers, and the appellant itself subsequently purchased a small print shop. However, for 1984, 1985 and 1986, the appellant's projects seem to have been carried out exclusively by Imprimerie Bourguignon. On this point, Mr. Paquin stated that he had abandoned the small projects which did not pay well enough in order to concentrate on the others, and asserted that at the time his interest was in doing business with the firm which, in his view, had the necessary machinery and equipment to satisfy his customers’ needs. According to him, there was never an exclusivity agreement between him or the appellant and Imprimerie Bourguignon.

Among the other documents entered in evidence, we find a notice of cessation of employer contributions to a pension plan, sent to the Crown Life Insurance Company in March, 1981, and signed by Jules Bourguignon, who was at that time the president of Imprimerie Bourguignon. Mr. Raquin explained that, by agreement with Jules Bourguignon, it had been arranged earlier that he would simply join the group of employees for purposes of the pension plan despite his position in relation to the company, and that it had been decided that these contributions would cease when the appellant was incorporated. Mr. Paquin also explained that he had joined the group of Imprimerie Bourguignon employees for the purposes of a group health insurance plan and that he had reimbursed Imprimerie Bourguignon each year for premiums it had paid.

Mr. Paquin further stated that he had never received any fringe benefit of any nature whatever from Imprimerie Bourguignon. He ana the appellant had always borne all expenses relating to project development, including all travel expenses, and had never been reimbursed for these expenses.

We would note, on the other hand, that in his 1980 income tax return, which was entered in evidence, Mr. Raquin is described as a salesperson for Imprimerie Bourguignon. The total amount of income reported for that year is also shown on a T4 information slip issued by Imprimerie Bourguignon. A deduction for expenses amounting to $16,277, listed in a statement of income, was claimed as employment expenses. On this point, Mr. Paquin simply remarked that what counted in his mind was the ten per cent in earned income and not what he considered to be the internal paperwork, which his accountant had looked after.

Counsel for the appellant submitted that the only question in issue was whether Mr. Paquin could reasonably have been considered to be an employee of Imprimerie Bourguignon in 1984, 1985 and 1986, but for the existence of the appellant. Based on the evidence, he argued that he could not have. According to him, Mr. Paquin is a completely independent businessman, who carries out various projects involving printing and who also actively attends to the management of multiple-unit residential properties. Counsel also stated that Mr. Paquin is a man who knew how to take the necessary risks to secure a higher income by being active in both these areas at once. In printing matters, he stated, Mr. Paquin had always had his own customers, he was independent and the sole master of his time, he was not controlled by anyone and he bore absolutely all of the expenses involved in his projects, as well as the risks of loss for projects which did not materialize.

Counsel for the appellant submitted that the control test is definitely the most important in establishing whether or not there was an employeremployee relationship from the point of view of the civil law. On this point, he argued that it is impossible to detect any control whatever in relation to the projects developed by the appellant and submitted to Imprimerie Bourguignon for the final printing work to be done.

Counsel for the appellant also argued that, if we examine other tests such as the real economic situation and integration into the business, we reach the same conclusion: that Mr. Paquin could not reasonably have been considered to be an employee of Imprimerie Bourguignon during the years in issue, had the appellant not existed. The same is true if we apply the tests of ownership of the tools and the chance of profit and risk of loss. However, he emphasized the importance of examining all aspects of the relationship between the parties involved, following the approach adopted by the Federal Court of Appeal in Wiebe Door Services v. M.N.R., [1986] 2 C.T.C. 200, 87 D.T.C. 5025. Finally, he submitted that we must examine the relationship as it existed during the years in issue and not simply conclude, as did the Minister, that the relationship was one of employer and employee on the ground that it was exclusive and that it continued for a number of years. Therefore, according to him, we must examine the agreement between the parties and give effect to the relationship which they genuinely intended to establish between them.

In support of his arguments, counsel for the appellant also referred to the decisions in the following cases:

Engel v. M.N.R., [1982] C.T.C. 2422, 82 D.T.C. 1403 (T.R.B.);

Campbell v. M.N.R., 87 D.T.C. 47 (T.C.C.);

Bass v. M.N.R., [1988] 1 C.T.C. 2022, 87 D.T.C. 666 (T.C.C.);

Wiebe Door Services Ltd. v. M.N.R., supra;

Floro v. M.N.R., [1988] 2 C.T.C. 2319, 88 D.T.C. 1675 (T.C.C.);

Bradford v. M.N.R., [1988] 2 C.T.C. 2359, 88 D.T.C. 1661 (T.C.C.);

David T. McDonald Co. v. M.N.R., [1992] 2 C.T.C. 2065, 92 D.T.C. 1917

(T.C.C.);

Tedco Apparel Management Services Inc. v. M.N.R., [1991] 2 C.T.C. 2669, 91

D.T.C. 1391 (T.C.C.);

Beiss v. Sous-ministre du Revenu du Québec, [1981] R.D.F.Q. 48 (Prv. Ct.);

Dennis Sport Import Ltée v. Sous-ministre du Revenu du Québec, SO-

QUIJ No 87F-1;

Grolier Limitée v. Sous-ministre du Revenu du Québec, SOQUIJ No

87F-33; and

Sapina v. Sous-ministre du Revenu du Québec, SOQUIJ No 91F-88.

Counsel for the respondent then argued that even though the case was not clear, counsel for the appellant had not succeeded in establishing that Mr. Paquin could not reasonably have been considered to be an employee of Imprimerie Bourguignon in 1984, 1985 and 1986, but for the existence of the appellant. Thus, he said, the relationship with Imprimerie Bourguignon started in the 1960s when Mr. Paquin did not have any experience in printing. In 1980, shortly before the appellant was incorporated, Mr. Paquin was considered to be an employee and Imprimerie Bourguignon made source deductions from his earnings, with no protest by him. Moreover, explained counsel for the respondent, he also described himself as a salesperson for Imprimerie Bourguignon in his income tax return for the 1980 taxation year. With respect to the integration test, counsel also raised a doubt as to whether the customers described by Mr. Paquin as belonging to him or the appellant were not rather customers of Imprimerie Bourguignon since that firm alone ultimately billed the customers. Moreover, if a customer was not satisfied, he said, the question of Mr. Paquin doing business with another print shop did not arise. According to counsel for the respondent, it was not certain that the exclusivity of the relationship was based on Mr. Paquin's loyalty to Jules Bourguignon, or on the fact that Imprimerie Bourguignon had the appropriate machinery for the kind of work needed. Rather, he believed that the exclusivity was based on a long employer-employee relationship. With respect to the test of ownership of the tools, counsel for the respondent acknowledged that Mr. Paquin, and subsequently the appellant, owned everything but estimated that the value of it all did not exceed $5,000. With respect to the element of supervision or control, counsel submitted that it is not of great relevance in this case, since control was not so necessary in view of the type of work done. Finally, with respect to the test of the chance of profit and risk of loss, counsel for the respondent stated that he was surprised to find that Mr. Paquin estimated that he was successful in more than 50 per cent of his projects, and he submitted that the risk was not so great at the time as it seemed, since in any event it was agreed that Mr. Paquin — and thereafter the appellant — received ten per cent of the amount billed by Imprimerie Bourguignon. Counsel submitted that the real risk occurred rather in 1987 and 1988, after the relationship with Imprimerie Bourgui- gnon was terminated and the appellant itself invested in a small print shop. In support of his analysis, counsel for the respondent referred to the following decisions:

Wiebe Door Services v. M.N.R., supra;

Moose Jaw Kinsmen Flying Fins Inc. v. M.N.R., [1988] 2 C.T.C. 2377, 88

D.T.C. 6099:

Tedco Apparel Management Services Inc. v. M.N.R., supra.

Mr. Paquin is the only shareholder and director of the appellant, which was incorporated in 1980. The issue is whether the appellant was operating a personal services business in 1984, 1985 and 1986, so that, if this was the case, it was then not eligible for the small business deduction in section 125 of the Act for those years. The personal services business was defined in paragraph 125(6)(g.1) of the Act in 1984 and in paragraph 125(7)(d) of the Act in 1985 and 1986. It is admitted that the conditions set out in those paragraphs were met for the years in issue except for the condition respecting the theoretical relationship between Mr. Paquin and Imprimerie Bourguignon. The condition specified in this respect by the two paragraphs is in fact substantially the same for the years in issue and consists in determining whether an individual who is referred to as the “incorporated employee” in those paragraphs "would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation. . . .”. While the issue here is the answer to a theoretical question respecting the application of a legislative provision concerning income tax, I believe that the approach adopted by the Federal Court of Appeal in Wiebe Door Services, supra, and reiterated in Moose Jaw Kinsmen Flying Fins, supra, must be followed. In his reasons for the decision of the Court in Wiebe Door, supra, MacGuigan, J. analyzed the four tests set out by Lord Wright in Montreal v. Montreal Locomotive Works Ltd., [1946] 3 W.W.R. 748, [1947] 1 D.L.R. 161, as follows at page 204 (D.T.C. 5028):

Taken thus in context, Lord Wright's fourfold test 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.

And, a little later, at page 205 (D.T.C. 5029):

. . . 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.

It is these passages from the reasons of MacGuigan, J. to which the Court referred in Moose Jaw Kinsmen Flying Fins, supra.

In Wiebe Door Services, supra, MacGuigan, J. added the following, inter alia, referring to various authorities:

What must always remain of the essence is the search for the total relationship of the parties. Atiyah's counsel in this respect, supra, at page 38 [Vicarious Liability in the Law of Torts, London: Butterworths, 1967], is, I believe, of great value:

[I]t is exceedingly doubtful whether the search for a formula in the nature of a single test for identifying a contract of service any longer serves a useful purpose. The most that can profitably be done is to examine all the possible factors which have been referred to in these cases as bearing on the nature of the relationship between the parties concerned. Clearly not all of these factors will be relevant in all cases, or have the same weight in all cases. Equally clearly no magic formula can be propounded for determining which factors should, in any given case, be treated as the determining ones. The plain fact is that in a large number of cases the court can only perform a balancing operation, weighing up the factors which point in one direction and balancing them against those pointing in the opposite direction. In the nature of things it is not to be expected that this operation can be performed with scientific accuracy.

This line of approach appears to be in keeping with what Lord Wright said in the little-known Privy Council decision in Montreal Locomotive Works

Of course, the organization test of Lord Denning and others produces entirely acceptable results when properly applied, that is, when the question of organization or integration is approached from the persona of the''employee" and not from that of the "employer", because it is always too easy from the superior perspective of the larger enterprise to assume that every contributing cause is so arranged purely for the convenience of the larger entity. We must keep in mind that it was with respect to the business of the employee that Lord Wright addressed the question "Whose business is it?"

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 (Q.B.D.), at pages 737-38: [1]

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 he takes, 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. at pages 206-207 (D.T.C. 5030).

From this point of view, the theoretical question which must really be answered is: could Mr. Paquin reasonably be regarded as having been able to perform the duties which the appellant undertook to perform, as an individual doing business for himself, but for the existence of the appellant? I find from all of the evidence that I must answer this question in the affirmative. This is what emerges from Mr. Raquin's testimony,the credibility of which I have little reason to doubt, and which was confirmed by a number of pieces of evidence. The agreement signed by Mr. Raquin and Imprimerie Bourguignon in 1965 clearly establishes that Mr. Paquin was to be completely independent in his projects, for which he was further to bear the risk and cost in the event that they did not materialize. There was no evidence from which I could find that there was any control or supervision by Imprimerie Bourguignon over Mr. Paquin, and subsequently over the appellant, on this point. Mr. Paquin described how, after the appellant was incorporated, there was some diversification with other print shops, although for the years in issue it does seem that the appellant did business only with Imprimerie Bourguignon. However, the payment of rent to Imprimerie Bourguignon for the use of an office on site and the payment of often substantial sums of money for overtime or to speed up the production of certain projects confirm, in my view, the existence of two separate businesses. These are in fact definitely not the terms which characterize an employer-employee relationship. Taking responsibility for all other general expenses and all other costs relating to designing or developing projects, including the travel expenses required in order to meet customers, both outside the province and outside the country, with no reimbursement by Imprimerie Bourguignon, also appears to me to be a significant point. The absence of any guarantee of any minimum payment whatever and the absence of fringe benefits of any nature whatever also indicate that Mr. Paquin was certainly independent and that there was a separate business operated by him and subsequently by the appellant. Accordingly, their services were, in my opinion, rendered to the customers rather than to Imprimerie Bourguignon itself. The exclusivity of the business relationship during the years in issue seems to me, as Mr. Paquin explained, simply to have been a practical and effective manner of doing business. The title of “salesperson” stated by Mr. Raquin in his 1980 tax return, the treatment of expenses as employment expenses and the issuance of a T4 information slip by Imprimerie Bourguignon for that year indeed raise some doubt as to the nature of the relationship between the parties at that time, despite the way Mr. Paquin described it. However, the incorporation of the appellant in 1980, the cessation of contributions to the pension plan, the more diversified business relationships which followed, the rental of an office at Imprimerie Bourguignon and the reimbursement for overtime by the appellant, to refer only to these items, seem to me to have definitely given concrete effect to the independent relationship initially intended by the parties. Thus I cannot conclude from the evidence relating to 1980 by itself, in view of all of the evidence submitted, that Mr. Raquin could reasonably have been regarded as an employee of Imprimerie Bourguignon in 1984, 1985 and 1986, but for the existence of the appellant. On the balance of probabilities, I believe that I cannot reach this conclusion on the evidence submitted as a whole.

For these reasons, the appeals are allowed, with costs, and the assessments are referred back to the respondent for reconsideration and reassessment.

Appeals allowed.