Abdul Razzaq Qureshi v. Minister of National Revenue, [1992] 1 CTC 2370, 92 DTC 1150

Tremblay, T.C.C.J.:—This appeal was heard on June 6, 1990 at the City of Halifax, Nova Scotia.

I. Point at Issue

The point at issue is whether the appellant, a commission salesman involved in the business of door-to-door sales of encyclopedias, is correct to consider himself to be an independent contractor for the 1982, 1983, 1984 and 1985 taxation years.

The respondent considered the appellant to be an employee for the litigious years. He consequently disallowed a substantial part of sales expenses claimed by the appellant in the following amounts:

The appellant says that all of the expenses incurred by him, and which have been disallowed by the respondent, were expenses which he incurred for the purpose of gaining and producing income from his business, within the meaning of paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). They were therefore expenses which he was entitled to deduct in calculating his profit from his business pursuant to subsection 9(1) of the Act.

This Court will also have to deal with the validity of the waivers obtained by the respondent in respect of 1982 and 1983 taxation years.

2. Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1181.

3. Facts

3.01 Throughout the 1982, 1983, 1984 and 1985 taxation years, the appellant was a commission salesman in the business of door-to-door sales of encyclopedias. The appellant was associated with P.F. Collier & Sons Ltd. (hereinafter called Collier) for the early part of 1982 and the latter part of 1985, and with Grolier Ltd. (hereinafter called Grolier) for the remainder of the four-year period.

3.02 Both Collier and Grolier were structured the same way. The very first position in which a person may be involved is "sales representative". These persons are hired strictly to sell encyclopedias. They incur no financial responsibilities in the course of their work.

The sales representatives are under the control of a "field manager". The field manager has to plan road trips to be made by his group of sales representatives. He has the authority to assign each "sales representative" a particular area to be covered during the day. He is responsible for dropping his personnel off in the field and picking them up at the end of the day. He generally assumes most of the travelling costs such as gas and oil expenses, the vehicle use itself and hotel bills. The field manager often pays sales representatives' meals while the group is on the road.

The "sales manager" and the "district sales manager" are respectively the two next positions. The sales manager supervises the work of the field managers. His job is to keep the efficiency and the motivation of the various groups of sales representatives at its highest level. He usually goes on the road to support his personnel. The "district sales manager" does mainly the same work as the sales manager. However, he often has to hire and train sales representatives because of the high turnover of employees in the sale of encyclopedias field.

3.03 Though there was no restriction on the appellant in respect of the territory where he could work, he primarily conducted business in the maritime provinces as a sales manager and district sales manager.

Despite the numerous responsibilities related to the appellant's position, he sometimes had to supervise his own group of sales representatives on road trips. The lack of field managers to adequately supervise the sales representatives was the main reason of such occasional involvement of the appellant as a field manager.

3.04 The appellant was remunerated for the most part by commission income. These commissions were earned from both his own sales of encyclopedias (5 per cent of his total income) and the sales of the persons under his supervision (95 per cent of his total income).

3.05 The appellant had to pay all the expenses incurred by him in the performance of his work other than monthly rent of an office located in Halifax, basic furniture to be put in the said office such as a desk and some chairs, monthly telephone charges other than long distance calls and the newspaper advertising costs in order to recruit sales personnel for the office. These latter expenses were paid by Collier and Grolier.

3.06 The oral evidence given by Mr. Tim Chesnutt, former field manager of the appellant at Collier and Grolier, by Mr. Robert Craig, president of Collier during the litigious years and by the appellant himself clearly states that Mr. Qureshi was totally free to use any kind of strategy in order to stimulate the sales of encyclopedias by his personnel. The relevant excerpts of the testimonies read as follows:

Direct examination of Mr. Robert Craig

Now, on the expenditure side, you mentioned some items earlier that the company, Collier, does pay certain things. You've told us about those.

Right.

On these types of expenditures, for incentives for salespeople and so on, is there any control over those expenditures by the company?

No, there isn't.

For example, do you dictate to Mr. Qureshi that he must spend a certain minimum amount every month?

No, we don't, no.

Okay. So he's totally up to his own devices to decide what he's going to spend his money on?

Exactly.

And where he spends it and what types of things.

Exactly. I mean, as far as we're concerned, it's his show, so to speak. He earns a healthy commission on every sale that's made, you know, say, roughly in the neighbourhood of—even at just the district through general sales manager level, roughly 10%. The more he is able to generate by way of sales—and, again, whatever methods he chooses to use to motivate those people, the more money he's going to make. (T.S., page 96-97)

Direct examination of Mr. Abdul Qureshi

What control did Grolier have over you in terms of your need to spend a particular amount in a particular time period? Anything like that?

There was no control.

Did you have to show to Grolier how much you spent in any time period?

No.

What control did Grolier have over your day-to-day or month-to-month operations?

None whatsoever.

Did they dictate to you as to where you had to do your sales or take your salespeople?

As long as sales were produced accordingly, they do not care where they were produced. (T.S., pages 64-65)

3.07 This absence of control by Collier and Grolier about the expenses incurred by the appellant highlights the importance of keeping his sales representatives motivated on road trips. The importance of motivating his personnel and providing them with all sorts of incentives was regularly mentioned in the appellant's testimony. This excerpt, extracted from pages 78 to 80 of the appellant's oral evidence, presents quite clearly such an idea. It reads as follows:

The types of amounts you were deducting, Mr. Qureshi, were those required by either Grolier or Collier to be made by you?

In a written form, no.

In any form?

I was expected to travel and incur business. And it was understood that those expenses have to be incurred in order to run a successful business.

But I believe we touched on this earlier. Did either company, in a particular time frame, specify to you what expenses had to be paid?

No.

Your expenses then relate to what types of expenses, generally?

Generally, it would be my personal, meaning my business travelling. There will be—that pertain to motivational meetings that were held with salespeople.

MR. QURESHI

Your Honour, my clients were my salespeople that worked under my supervision.

BY MR. QURESHI

My business—my income was based on how well they performed. So for me to earn any income, I would have to motivate my salespeople. If they do not make any sale, I do not earn any income.

3.08 Different kind of expenses incurred by the appellant in the course of his work were revised by the respondent by way of notices of reassessment dated December 14, 1987. The reply to the notice of appeal included a detailed analysis of the reasons disallowing such expenses claimed by the appellant in respect of the 1982, 1983, 1984 and 1985 taxation years. The major reasons for such disallowance are that the appellant was not required by the terms of his employment to incur these expenses and that these latter expenses represented expenditures of a personal nature.

3.09 The first category of expenses that were revised is the automobile expenses. These expenses were claimed for one automobile in 1982 and 1983 and for two automobiles in 1984 and 1985. During all these years, the overall personal use of the only vehicle used in 1982 and 1983 and of the two vehicles used in 1984 and 1985 was stated at 25 per cent by the appellant. According to the appellant's testimony, the automobile expenses were incurred in order to transport the highest number of salespeople from the Halifax office to differ ent locations within the Maritimes, to supervise them, to make sure everything was going right and to meet everybody at the end of every day.

3.10 The appellant also claimed large amounts of travel expenses which principally included hotel, meal, plane and rail fare expenses.

Regarding the hotel expenses, Mr. Tim Chesnutt stated that the appellant sometimes paid the bills for the field manager and his group of salespeople. The appellant also paid such hotel costs for the sales representatives under his direct supervision.

The appellant did not maintain any type of record to indicate who was staying in the hotel rooms that were used by his personnel. The receipts provided by the appellant however showed quite clearly that a certain number of hotel expenses were assumed by Mr. Qureshi.

The meal expenses were generally incurred in order to stimulate his personnel when things were not going very well on certain road trips. Such motivational meetings used to generate a lot of excitement and enthusiasm among the salespeople.

Once again, the appellant did not maintain any kind of record to indicate who specifically was at any individual meal with him. However, a great number of meal expenses receipts indicated the name of individuals to whom were paid such expenses.

The plane and rail fares were generally incurred to compensate for the lack of sales representatives while the group was on the road. According to the appellants testimony, it was necessary in such circumstances to send people to join the rest of the team in order to generate sufficient enthusiasm and efficiency (Exhibit A-9).

3.11 The appellant claimed expenses in respect of money advanced to his personnel. These loans were incurred when some sales representatives did not sell enough in order to pay basic living expenses. Though these amounts of money were expected to be reimbursed sooner or later, some of these sales representatives left the company without paying back the advances made by the appellant. Despite the numerous attempts of the appellant to get in touch with these people, he never recovered the amounts identified as bad debts in Exhibit A-2. No lawsuits were launched by the appellant against these persons in order to recover his money.

According to the oral evidence given by Messrs Tim Chesnutt and Robert Craig, such loans of money appear to be a very common thing in the encyclopedia sales business. These advances of money constituted an investment in promising sales representatives in order to provide them sufficient time and experience to become successful in such a rough business.

The appellant submitted no written or oral evidence with regard to such advances of money except three receipts which clearly indicate the name of the sales representative involved and the sum of money that was advanced by the appellant.

3.12 In 1984 and 1985, the appellant claimed expenses in order to maintain an office in his residence. This office in the appellant's home was in the immediate area of the local office provided by Collier and Grolier to the appellant (3.05). These expenses were mostly related to the purchase of a desk, a few chairs and a computer. This office in the appellant's home was set up in order to hold meetings with his field managers who were working up in Halifax. These meetings, which generally took place at night, were thus held in a business atmosphere. Moreover, a computerized letter to the purchaser was always prepared by the appellant when a sale was completed by his personnel. Such a letter, which was expected to be received the day following the transaction, was sent in order to avoid any change of mind from the eventual purchasers before the administration personnel of Collier and Grolier could call to confirm the sale. The importance of the above procedure was another reason to set up an office in the appellant's home.

3.13. The appellant claimed sales promotion expenses as well. These expenses were related to different kinds of entertainment activities offered to his personnel in order to keep them motivated. This excerpt, extracted from pages 81 and 82 of the appellant's testimony, presents the reasons that induced the appellant to incur such expenses. It reads as follows:

I personally realized that one of the most important parts of my success, or one of the main things that pertained to my success, is the fact that I must have people that are motivated and are willing to work under my supervision. The tickets to concerts or sports games and movies would pertain to, on occasions, instead of taking people to a club or to a bar and having drinks.

And it [promotion expenses] could be concerning somebody wants to leave the business. A lot of times, on a day-to-day basis when they face a lot of rejection from the customers when they go to work, or in my own case, and in other people's cases, when they get negative influence from their friends and from their parents, saying,"Encyclopedia salesman. Ha, ha, ha. You're not going to make any money." And they would want to quit because they cannot stand the pressure. So to give them a relaxed, you know, environment and understanding of the business, you would want to relate to them on that basis, a one-to-one basis in a different setting than an office setting.

Dinner and banquet expenses were also included within the said promotion expenses. Once again, such sales meetings on an individual basis or for the entire staff were held in order to motivate his people at the beginning of, during or at the end of national sales contest organized by either Collier or Grolier.

3.14 The appellant claimed expenses in respect of salaries paid in 1984 and 1985 to casual employees who occasionally performed clerical tasks for him during the litigious years. No receipt or any other paper evidence was provided in order to prove such expenses.

3.15 Bonus expenses were equally claimed by the appellant in respect of the 1984 and 1985 taxation years. Such bonuses were one of the numerous strategies used by the appellant in order to stimulate the sales of his personnel in difficult periods. The appellant described the importance of such bonuses on page 119 of his testimony. This excerpt reads as follows:

And we use that a lot of—quite often, Your Honour, because if somebody doesn't have any money at all and they really want to make money, well, we'll use that. We'll say, “Look, you want money and I know that the cheque will not be here for about ten days or so, because that's the time it takes to process the application form, if you need some money, go out and write two good sales today and I'll give you fifty dollars ($50) as a bonus.” So it would—for them to have some cash, they will go out and be really inspired. And instead of working till 9 o’clock and then getting discouraged, they will put a little bit extra effort in the evening to be able to win that extra bonus.

No written evidence was submitted by the appellant in order to prove the amount of bonus expenses that were claimed in respect of the 1984 and 1985 taxation years.

3.16 The appellant claimed office expenses in respect of an answering machine, computer software and basic office supplies such as pencils, clipboards, pads, envelopes and paper clips. These expenses were related to the office that was provided to the appellant by Collier and Grolier. The appellant also included the cost of his subscriptions to the Harvard Business Review and Time Magazine in his deduction for office expenses.

3.17 In 1984, the cost of shipping live lobsters to the head office of his employer was also claimed as a deductible expense by the appellant. This excerpt, extracted from pages 136 and 137 of the appellant's testimony, illustrates the reason for such an expense. It reads as follows:

Well, one of the important part of running as—being an office manager, my job is to make sure that when sales are made by sales representatives, those sales are looked favourably somewhat by the credit manager or by people at head office in Toronto—I mean, in Montreal or in Toronto. Of course, if—for example, a sale is written. It is sent to Montreal. They look at it.

Sitting in the office and not appreciating what the representative has gone through to make that sale, just looking at the, you know, facts on the statement itself, they can make a decision whether it's accepted or not. Some of them will be gray area. For example, if some—a family, while they might have previously a record of not paying on time, the company would either accept it or not. It really depends on the credit manager's judgment. Now, we always made a—so it's very important for me to have a good rapport with those credit managers in Montreal or in Toronto head office, whatever it might be. And a way of keeping a good rapport, we will— in this instance, we—I sent them lobsters to head office. Of course, head office, I would send lobsters not for any reason but business reason. I mean, I don't see any reason why it would be a personal reason.

3.18 In 1984 and 1985, a capital cost allowance was claimed by the appellant in respect of a typewriter that was used for the office. A capital cost allowance was also claimed for a computer whose use was described above (3.12).

3.19 The company (either Collier or Grolier) determined the price of the product being sold and had final approval of all sales. Most of these sales were made on credit terms with the said company.

3.20 The appellant was expected to render services to the company only. This excerpt, extracted from page 190 of the appellant's testimony, confirms the validity of this statement. It reads as follows:

We heard yesterday, that these people are main competitors. So the point I’m trying to make is, I assume that you worked for Grolier, or you worked for Collier. You didn't work for both. You weren't out there freelancing for all different companies.

No, that is correct. Yes.

3.21 The appellant's booking system was rather simple. The appellant saved all receipts which pertained to business purposes. These receipts were then stored in bags until the tax preparation period. At that time, all these receipts were categorized and calculated by a receptionist of the appellant's office.

3.22 The appellant did not maintain a separate bank account that was solely used for business purposes.

3.23 Neither did the appellant maintain a cash disbursement journal to show specifically where he was spending his cash.

3.24 The appellant never employed any accountant to help him keep proper books.

4. Law—Cases at Law—Doctrine

4.01 Law

The Court will mostly rely on paragraphs 18(1)(a), 18(1)(h), section 67 and subsection 230(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). These provisions read as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

230. (1) Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at his place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.

4.02 Cases at Law—Doctrine

Counsel for the parties referred the Court to the following cases at law and doctrine:

1. Stevenson, Jordan and Harrisson Ltd. v. Macdonald and Evans, [1952] 1 T.L.R. 101;

2. Hauser v. M.N.R., [1978] C.T.C. 2728, 78 D.T.C. 1532 (T.R.B.);

3. M.N.R. v. Parsons et al., [1984] C.T.C. 352, 84 D.T.C. 6345;

4. Wiebe Door Services Ltd. v. M.N.R., [1986] 2 C.T.C. 200, 87 D.T.C. 5025 (F.C.A.);

5. Optical Recording Corp. v. The Queen, [1986] 2 C.T.C. 325, 86 D.T.C. 6465 (F.C.T.D.), [1987] 1 C.T.C. 417, 87 D.T.C. 5248 (F.C.A.);

6. McMillen Holdings Ltd. v. M.N.R., [1987] 2 C.T.C. 2327, 87 D.T.C. 585 (T.C.C.);

7. Devor v. M.N.R., [1988] 2 C.T.C. 155, 88 D.T.C. 6370 (F.C.T.D.);

8. Wolofsky v. M.N.R., [1990] 1 C.T.C. 2470, 90 D.T.C. 1345 (T.C.C.);

9. Graves v. Canada, [1990] 1 C.T.C. 357, 90 D.T.C. 6300 (F.C.T.D.);

10. Atiyah, P.S., Vicarious liability in the law of torts, London, Butterworths, 1967;

11. Noël, M., Contract of services—A tax perspective and analysis, Twentyninth Tax Conference, 1977, Canadian Tax Foundation, page 712;

12. Archambault, P. "Employé et travailleur autonome: distinction juridique et le problème des sources du droit", Revue de planification fiscale et successorale, (1987) vol. 9, page 287;

13. Thivierge, Y. L'évolution jurisprudentielle de la distinction entre employé et travailleur autonome”, Revue de planification fiscale et successorale, (1984) vol. 6, page 9.

5. Analysis

5.01 The counsel for both parties provided written submissions to this Court in order to present their respective arguments. They agreed to debate the same questions of law. Thus, this judgment will have to deal with the following issues:

1. Should the Reassessments against the appellant be vacated on the basis that the theory of the Assessment by the respondent was incorrect, in that he was assessed as being an employee, when in fact he was self-employed for all years under appeal?

2. Should the Reassessment relating to 1983 be vacated on the basis that the respondent did not assume that the appellant was an employee "at the time of the Assessment"?

3. Should the Reassessments relating to 1982 and 1983 be vacated because they are dependent on Waivers which are invalid because of duress and/or misrepresentation?

4. Was the appellant self-employed or an employee for some or all of the years under appeal?

5. Depending on whether the appellant was self-employed or an employee, what amount is he entitled to deduct for each of the years under appeal?

5.02 Should the reassessments against the appellant be vacated on the basis that the theory of the assessment by the respondent was incorrect in that he was assessed as being an employee when, in fact, he was self-employed for all years under appeal?

5.02.1 This Court cannot accept this appellants contention. In effect, the usual way to appeal against an assessment of the respondent was presented in M.N.R. v. Parsons, supra, where the appeal division held (at 35 (D.T.C. 6346)):

We are all of opinion that the appeal must succeed on the narrow ground that the only way in which the assessments made against the respondents could be challenged was that provided for in sections 169 and following of the Income Tax Act.

In our view, the Income Tax Act expressly provides for an appeal as such to the Federal Court from assessments made by the Minister; it follows, according to section 29 of the Federal Court Act, that those assessments may not be reviewed, restrained or set aside by the Court in the exercise of its jurisdiction under sections 18 and 28 of the Federal Court Act.

5.02.2 However, an exception to this general principle was stated by the Trial Division of the Federal Court in Optical Recording Corporation, [1986] 2 C.T.C. 325, 86 D.T.C. 6465 (4.02(5)). It reads as follows (at pages 332-33 (D.T.C. 6471)):

The issues to be determined here are much broader than, and different from, matters of extension of time to appeal, the validity of a notice of assessment and appeal therefrom. The issues here raise questions of fundamental administrative illegality, unfair treatment and estoppel which engage the superintending jurisdiction of a superior court, such that even if this Court's disposition of them be ultimately adjudged to be wrong, the Court's decision to encertain [sic] them should be seen to be correct. The case at bar is therefore quite distinct from the Parsons case.

5.02.3 We can infer from the latter statement that the Federal Court may dismiss an assessment when the acts of the respondent's officers raise questions of fundamental administrative illegality and unfair treatment. In such a case, the judicial review of the Federal Court will be raised in order to quash the assessment of the respondent.

5.02.4 This Court does not believe that the alledged [sic] mistake of the respondent in assessing the appellant's legal status may constitute the kind of fundamental error that was contemplated in the Optical Recording Corporation (4.02(5)) case. Moreover, the Tax Court of Canada does not have the jurisdiction to vacate an assessment on such a basis. The jurisdiction issue will be discussed in detail in the analysis of the third issue, namely the validity of the waivers obtained by the respondent.

5.03 Should the reassessment relating to 1983 be vacated on the basis that the respondent did not assume that the appellant was an employee “at the time of the assessment"?

5.03.1 It is submitted that the reassessment relating to 1983 should be vacated because the appellant has proved that the assumption of facts referred to by the respondent in the reply, namely that the appellant was an employee in 1983, was not the assumption of facts made by the respondent's assessor at the time the reassessment was issued. Accordingly, there should be a shift in the burden of proof about the assumption of facts made by the respondent for the 1983 taxation year.

5.03.2 The state of law regarding such a shift in the burden of proof is well presented in the Wolofsky case (4.02(8)) as follows (at page 2473 (D.T.C. 346-47) ):

As I understand it, Mr. Justice Cattanach expresses the view that there may be a shift in the burden of proof between the facts known to the Minister at the time of the assessment and those known to him after the time of the assessment albeit they are described in the Minister's reply. It is a view that seems to have been accepted by the courts as it has often been cited though I am not sure that it was the ratio decidendi of these cases.

With respect to the position expressed by Mr. Justice Cattanach, to take advantage of it, the appellants must show that the assumptions of facts as described in the respondent's reply to notice of appeal were not those made by the respondent's assessors at the time the assessment was made. This evidence was not adduced and therefore the submission as to the burden of proof fails.

The burden of proof rests on the taxpayer to question the facts assumed by the Minister as described in the reply.

5.03.3 The fact that the respondent originally considered the appellant as an independent contractor during the 1983 taxation year is not in dispute (see notice of confirmation dated January 20, 1989 and Exhibit A-24).

5.03.4 Moreover, paragraph 3(b) of the reply states that the appellant was presumed to be an employee for the 1982, 1983, 1984 and 1985 taxation years. Consequently, the case law clearly states that the respondent will have to prove that the appellant was an employee during the 1983 taxation year. The appellant will however have to prove the assumptions of facts made by the respondent for the other taxation years.

5.03.5 The reassessment relating to 1983 will have to be vacated if the respondent cannot prove the fact that the appellant was an employee during this taxation year. Further development will be made on this question later.

5.04 Should the reassessments relating to 1982 and 1983 be vacated because they are dependent on waivers which are invalid because of duress and/or misrepresentation ?

5.04.1 This issue raises two questions of law. Firstly, the jurisdiction of the Tax Court of Canada to declare null and void the waivers which were signed by the appellant must be investigated in the light of the recent jurisprudence. Moreover, this Court will have to analyze the conduct of the respondent's servants when the waivers were signed in order to find any kind of wrongdoing from their part susceptible to render null such waivers.

5.04.2 The jurisdiction of the Tax Court of Canada was analyzed in several decisions, namely Optical Recording Corporation (4.02(5)), McMillen Holdings Ltd. (4.02(6)) and Devor (4.02(7)).

5.04.3 This latter decision provided a complete development on this issue. Rouleau, J. analyzed the limitations on the jurisdiction of the Tax Court of Canada by presenting the main decisions where this issue was considered. These excerpts, from pages 159-62 (D.T.C. 6373-74) of the Trial Division decision, present the reasons that may be relevant to the present issue:

The Federal Court-Trial Division is of course charged with the supervision of the activities of federal boards, commissions and tribunals which include individuals exercising or purporting to exercise powers conferred under the laws of Canada (sections 18 and 2, Federal Court Act). It is equally clear that this jurisdiction may be lost pursuant to section 29 of the Act.

In my view therefore, it would appear that where the Tax Court of Canada or the Federal Court of Canada has been specifically empowered by the Income Tax Act to hear an appeal from the decision of the Minister of National Revenue, the supervisory jurisdiction of this Court is lost and the plaintiff must proceed with the appeal as laid out in the Act. Where, on the other hand, the relief that he seeks cannot be granted by the Tax Court of Canada or the Federal Court pursuant to the Income Tax Act, the plaintiff is entitled to step outside the Act and seek relief from this Court under section 18 of the Federal Court Act.

The appeal route set out in the Income Tax Act appears in sections 169 and following. Once a taxpayer has served a Notice of Objection to an assessment (under section 165), he may appeal to the Tax Court of Canada provided that the Minister has confirmed the assessment or has not notified the taxpayer of any change in the assessment. The taxpayer may then appeal the decision of the Tax Court of Canada to the Federal Court-Trial Division. The taxpayer may also appeal the Minister's decision directly to the Federal Court of Canada in lieu of commencing his appeal procedure in the Tax Court of Canada.

The powers of the Tax Court to dispose of an appeal is set out in subsection 171(1) of the Act.

The interplay of subsection 171(1) of the Income Tax Act and section 29 of the Federal Court Act was briefly considered by the Federal Court of Appeal in the case of M.N.R. v. Parsons, [1984] C.T.C. 352, 84 D.T.C. 6345. The matter had commenced in the Trial Division before Mr. Justice Cattanach as a review of thd Minister's actions under section 18 of the Federal Court Act (Parsons v. M.N.R., [1983] C.T.C. 321, 83 D.T.C. 5329).

The Parsons case concerned the assessment by the Minister of the Directors of a corporation as liable for taxes owing by the corporation pursuant to section 159 of the Act as it then read.

Mr. Justice Cattanach proceeded to grant the relief sought by the applicants on the merits of their case.

The Minister appealed to the Federal Court of Appeal. In a very brief decision, Mr. Justice Pratte stated at page 352 (D.T.C. 6345):

We are all of the opinion that the appeal must succeed on the narrow ground that the only way in which the assessments made against the respondents could be challenged was that provided for in sections 169 and following of the Income Tax Act. This, in our view, clearly result from section 29 of the Federal Court Act.

In our view, the Income Tax Act expressly provides for an appeal as such to the Federal Court from assessments made by the Minister; it follows, according to section 29 of the Federal Court Act, that those assessments may not be reviewed, restrained or set aside by the Court in the exercise of its jurisdiction under sections 18 and 28 of the Federal Court Act.

Since the decision of the Federal Court of Appeal, there have been several decisions of the Trial Division which have followed Parsons, supra, namely Be- chthold Resources Ltd. v. M.N.R., [1986] 3 F.C. 116, [1986] 1 C.T.C. 195 (T.D.), Danielson v. M.N.R., [1986] 2 C.T.C. 341, 86 D.T.C. 6495, G.R. Block Research & Development (1981) Corporation v. M.N.R., [1987] 1 C.T.C. 253, 87 D.T.C. 5137 and my own decision in the case of Gibbs v. M.N.R., [1984] C.T.C. 434, 84 D.T.C. 6448.

There have also been several decisions which have maintained that Parsons can be distinguished on its facts. The case of WIC Western Technologies Corporation v. M.N.R., [1986] 1 C.T.C. 110, 86 D.T.C. 6027 held that where the Minister had acted without jurisdiction by assessing a taxpayer before the taxpayer was required to file a return, the assessment was a nullity and an application to quash would be entertained by the Court. Mr. Justice Collier characterised the Parsons case as one where the Court was being asked to determine whether or not the Minister had erred in law and not whether the Minister had acted outside his jurisdiction.

In the case of Optical Recording Corporation v. The Queen, [1986] 2 C.T.C. 325, 86 D.T.C. 6465, . . . the taxpayer was assessed by the Minister by a notice of reassessment which on its face provided that under certain circumstances, the Minister was prepared to modify or withhold its usual collection action”. The taxpayer did not file a Notice of Objection to the assessment in reliance on the representations made by the Minister.

Mr. Justice Muldoon hence characterised the action before him as follows:

The case at bar raises issues about the paragraph attached to the purported notice of assessment . . . and the respondent Minister's policy of collections . . . Which are quite beyond the scope of the appeal provisions of the Income Tax Act upon which the Appeal Division relied in order to invoke section 29 of the Federal Court Act in derogation of the Trial Division's jurisdiction in the Parsons Case.

The issues to be determined here are much broader than, and different from, matters of extension of time to appeal, the validity of a notice of assessment and appeal therefrom. The issues here raise questions of fundamental administrative illegality, unfair treatment and estoppel which engage the superintending jurisdiction of a superior court, such that even if this Court's disposition of them be ultimately adjudged to be wrong, the Court's decision to entertain them should be seen to be correct. The case at bar is therefore quite distinct from the Parsons case.

I am persuaded by Mr. Justice Muldoon's reasoning that there is residual jurisdiction in this Court to supervise administrative acts for which no right of appeal is provided in the Income Tax Act. I note that this decision is under appeal, but until this issue is dealt with by a higher Court, in my view, this case expresses accurately the state of this Court's jurisdiction.

How is the relief sought by the plaintiff to be characterised? He seeks to have the waivers which he signed declared null by reason of the duress and undue influence exerted on him by the Minister's servants.

In my view the relief sought by the plaintiff is not merely the variance or vacation of a specific reassessment under subsection 171(1). He is seeking a declaration of nullity, and makes a plea of non est factum with respect to the waivers, relief which I have not been persuaded could be provided by the Tax Court of Canada. The latter may only examine a particular reassessment and dispose of it according to section 171, supra. It could not issue a declaration that the waivers signed by the plaintiff are void and of no effect.

The fact that the relief sought by the plaintiff in this Court might incidentally affect an assessment whose validity can be challenged before the Tax Court is not in itself a bar to the bringing of an application for judicial review. The attack mounted by the plaintiff raises some very serious questions about the conduct of the Minister's servants which I do not believe the Tax Court is empowered to hear.

5.04.4 In McMillen Holdings Ltd. (4.02(6)), Judge Rip made the following observations on the jurisdiction of the Tax Court of Canada at page 2336 (D.T.C. 591-92):

Section 12 of the Tax Court of Canada Act grants this Court original jurisdiction to hear and determine appeals on matters arising under the Act and other statutes. Subsection 171(1) of the Act regulates how the Court may exercise its original jurisdiction to hear and determine an appeal under the Act. Section 13 of the Tax Court of Canada Act simply grants the Court all powers, rights and privileges as are vested in a superior court of record in respect of witnesses, documents and other matters necessary or proper for the due exercise of its jurisdiction, that is, to hear and determine appeals, but section 13 does not increase the Court's jurisdiction to that of a superior court of record. The due exercise of this Court's jurisdiction on matters arising under the Act is to hear and determine an appeal from a tax assessment. I cannot overemphasize that the Court's original jurisdiction is to hear and determine appeals in matters arising under the Act; an action against the Crown based on the Act, but is not an appeal from an assessment, is not an appeal arising under the Act, which is within the jurisdiction of this Court.

5.04.5 This Court totally agrees with the reasoning elaborated in Optical Recording Corporation (4.02(5)), McMillen Holdings Ltd. (4.02(6)) and Devor (4.02(7)) cases. Therefore, it must be concluded that the Tax Court of Canada does not have the jurisdiction to pronounce the nullity of the waivers obtained by the respondent under duress and because of misrepresentation.

5.04.6 Though the following comments are not necessary to dispose of the present issue, this Court is not convinced that the respondent officers grossly mispresented the purpose of the said waivers. The evidence provided by both parties demonstrates that the waivers were signed in order to avoid a hasty reassessment by the respondent. It also allowed more time for the appellant to make further representations to support his claim. In the Courts view, the fact that the respondent's officer did not recommend that the appellant obtain legal advice prior to signing the waivers would not be determining enough to void the said waivers.

5.05 Was the appellant self employed or an employee for some or all of the years under appeal?

5.05.1 Regarding this issue, it has to be noted that the Income Tax Act does not give any applicable definition of employee and independent contractor concepts. It therefore appears that the determination as to whether an individual who provides services to a third party is an employee or an independent contractor for income tax purposes must be made in accordance with the common law or civil law concepts. The eventual use of either common law or civil law principles depends on whether the legal relationship to be ascertained arose in the province of Québec or another Canadian province. It is not in dispute that the legal relationship between the appellant and Collier or Grolier companies took place in Nova Scotia and other maritime provinces (3.03). It will be therefore necessary to apply to this case the tests which were evolved by the common law courts on such matter. [1]

5.05.2 A certain number of tests have been elaborated by the courts in the course of decisions pertaining to the distinction between an employee and an independent contractor. These tests are aimed to highlight the major characteristics which may differentiate an employee from an independent contractor. It is, however, important to keep in mind that no single test is decisive or universally correct. This quotation, extracted from Atiyah work titled "Vicarious Liability in the Law of Torts" at page 38, is frequently cited in different texts relating to the legal qualification of employment contracts in order to ensure a global application of the test elaborated by the courts. It reads as follows:

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 factor should, in any given case, be treated as the determining one. The plain fact is that in a large number of cases the court can only perform a balancing operation, winding 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.

5.05.3 Therefore, this Court will have to consider the overall evidence taking into account those of the tests which may be applicable and giving to all the evidence the weight which the circumstances may dictate.

5.05.4 This Court, bearing these preliminary remarks in mind, will then present the main guides expressed by the case law and the doctrine over the past few years. This Court will rely in particular on an outstandingly well documentâtes paper prepared by Marc Noël about the independent contractoremployee legal distinction. [2]

The four main tests whose application was suggested by the author are the following ones: the test of control, the integration test, the economic reality test and the specified result test. [3]

5.05.5 This Court will briefly present each of the above criterion. Such comments will mainly be extracted from Marc Noël, Esq. text as cited above (4.02(11)). Afterwards, the facts of the present case will be investigated in the light of such jurisprudential and doctrinal guides.

5.05.5.1 Test of control

Underlying the test of control is the fact that in usual circumstances, servants or employees are subject to a considerable measure of control, extending not only to the work which is done but also to the manner in which it is done.

The control test clearly refers to the fact that in usual circumstances, an employee or servant will be subject to the supervision of his employer or master. In a similar fashion, one who is engaged as an independent contractor under a contract for services will usually be at liberty as to the manner in which the services are performed. Accordingly, where the control test is assessed positively, the existence of control will point strongly towards the existence of an employer/employee relationship.

However, the development of the law in the last 60 years, and particularly in the last 15 or 20 years, clearly indicates that the emphasis has shifted and that the test of control is no longer decisive. Control remains, of course, an important factor, but it no longer has the universal application which it was thought to have at the turn of the century. The shortfalls of the test of control became apparent when its application led to the conclusion of the existence of an independent contractor relationship in cases where it was clear that the relationship was one of employer/employee. For instance, clearly superintendence and control cannot be decisive where one is dealing with a professional man or a man of some particular skill and experience.

The above clearly shows that a test of control does not have the universal application which it was thought to have during the early 19005. However, it also shows that the failures of the test of control occur themselves in marginal cases where employees perform their services in circumstances where the employer cannot, because of the nature of the work, exercise any control or supervision over the manner in which the work is performed. Outside this particular context, it would seem that the test of control should retain its full value since control and supervision remain one of the most important elements underlying an employer/employee relationship.

5.05.5.2 Th e integration test

The integration or part and parcel test was first enunciated by Denning, L.J., in Stevenson, Jordon and Harrison Ltd. v. MacDonald and Evans (4.02(1)), where the following proposition was advanced at page 1T1:

One feature which seems to run through the instances is that, under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it, but is only accessory to it.

Stephenson Jordan and Harrison Ltd. v. McDonald and Evans (4.02(1)) offers a further authoritative test of employment as opposed to a contract for services in considering the element of integration. Therefore, the essential question underlying such a test was the following one: Was the work performed integral to the business of the party who engaged the worker? However, this authoritative decision must now be considered in relation to Wiebe Door Services Ltd. v. M.N.R. (4.02(4)). That decision of the Federal Court of Appeal has in effect considerably limited the application of the integration test. MacGuigan, J. states at pages 205-206 (D.T.C. 562-63):

Lord Denning's test may be more difficult to apply, as witness the way in which it has been misused as a magic formula by the Tax Court here and in several other cases cited by the respondent, in all of which the effect has been to dictate the answer through the very form of the question, by showing that without the work of the "employees" the "employer" would be out of business ("Without the installers, the appellant would be out of business”). As thus applied, this can never be a fair test, because in a factual relationship of mutual dependency it must always result in an affirmative answer. If the businesses of both parties are so structured as to operate through each other, they could not survive independently without being restructured. But that is a consequence of their surface arrangement and not necessarily expressive of their intrinsic relationship. . . .

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.

In conclusion, the new approach that was developed in the Wiebe Door Services Ltd. (4.02(4)) case regarding the application of the integration test considerably affected the importance of the latter guide in the employee/ independent contractor determination.

5.05.5.3 The economic reality test

The economic reality test, as the words indicate, relates to the economic implications which usually flow from an employer-employee relationship, or an independent contractor relationship as the case may be. The aim and purpose of the economic reality test is to verify the existence of various factors of an economic nature and draw from their existence an inference as to the nature of the relationship which is sought to be ascertained. The existence of an independent contractor relationship could be concluded if the application of the economic reality test reveals that the alleged employee has opportunities for profit through his working relationship. In effect, the notion of profit is inconsistent with an employer-employee relationship.

The underlying elements of an employer-employee relationship to which the economic reality test relates, such as the fact that an employee generally incurs no expenses in the course of his employment, bears no financial risk and has no chance of profit, are consistent and important enough to make the economic reality test a very useful tool in many determinations. Similarly, applying the economic reality test to an independent contractor relationship, the chances of profit and the risk of loss clearly typify the undertaking of one who carries on business independently.

The above is particularly true with reference to the determination under the Income Tax Act where the very scheme of the Act appears to be based on the economic reality which surrounds a business undertaking, where the chance of profit and the risk of loss generally exists, and where expenditures must be made to earn income as opposed to employment where, generally, these factors do not exist.

5.05.5.4 The specified result test

Where a party agrees that certain specified work will be done for the other, it may be inferred that an independent contractor relationship exists. On the other hand, an employer-employee relationship usually involves the employee putting his personal services at the disposal of his employer during a given period of time without reference to a specified result, and generally envisages the accomplishment of work on an ongoing basis.

5.05.6 The Court mostly relied on the test of control and the economic reality test to analyze the legal status of the appellant. The application of these guides convinced this Court that the appellant must be considered as an independent contractor.

5.05.7 In effect, the facts of this case clearly showed that there was no control on the appellant's conduct of his business (3.06). I totally agree with the appellant’s submission to the effect that every time the appellant spent money on his sales staff, he was making an informed business decision to put his sales representatives in a situation whereby they could increase the total commissions for the appellant and thereby increase his overall profit for the year (3.07).

The fact that the company (either Collier or Grolier) paid office rent and provided basic furnishings and telephone service (3.05), it has a fixed remuneration structure by which the appellant was paid, had final approval of all sales (3.19), and had the exclusive use of the appellant services (3.20) might suggest the appellant was an employee. However, these facts are not important enough to outweigh the absence of control on the appellant's conduct and the financial risk that were closely related to most of the appellant's expenses for his staff.

5.06 Depending on whether the appellant was self-employed or an employee, what amount is he entitled to deduct for each of the years under appeal?

5.06.1 Though this issue does not raise controversial legal questions, it is nevertheless of the highest importance for the appellant from a practical point of view. However, the huge number of receipts produced by the appellant to the respondent's officer and the small number filed as evidence before the Court complicate the determination of the quantum of deductible expenses that will be allowed by this Court. Such determination will rely principally on Exhibit A-19 which lists the amount of expenses being claimed by the appellant in addition to the amounts that were allowed by the respondent in respect of 1982, 1983, 1984 and 1985 taxation years.

5.06.2 Different factors are relevant in determining the percentage of expenses to be allowed in a case like the present one. Among them, the credibility of the appellants oral evidence, the reasonableness of the expenses being claimed, as well as the quality of evidence provided, will be considered by this Court.

5.06.3 Before dealing with the evaluation of the different categories of expenses claimed by the appellant, this Court wants to express its conviction that the oral evidence given by the appellant is without any doubt credible. However, his ambition and enthusiasm to succeed in business led him to incur a large amount of expenses which do not meet the reasonableness criterion provided in section 67 of the Act.

5.06.4 The first group of expenses that will be dealt with are for the automobile, hotel as well as plane and train. Firstly, the reasonable character of these expenses cannot be disputed. In effect, the majority of the work of the appellants personnel was done on the road. Moreover, these expenses were expected to be assumed by the field manager (3.02) or the appellant himself during road trips. It is therefore clear that these expenses were not frivolous but necessary in the encyclopedia sales business.

Moreover, this Court does not think the appellant was compelled to indicate on each hotel receipt who was staying in the rooms which were paid by him in order to respect section 230 of the Act (3.10). It is clear that the persons who were staying in those rooms were the appellants sales personnel. Can it be seriously contended that the appellant paid for more than one room for a night in order to satisfy his own personal needs? It was therefore not necessary to keep any kind of record to indicate precisely who was staying in the hotel rooms used by the appellants staff. Neither was it necessary to keep any kind of mileage log or any records to show how much the appellants automobiles were used. In fact, this Court would distort the real object of section 230 of the Act by imposing such a burden on the appellant.

The receipts provided by the appellant were amply sufficient to determine the amounts that could be deducted regarding the automobile, hotel, plane and train fare expenses incurred by him.

This latter conclusion will not be affected by the few receipts which were in the names of other persons such as Exhibits A-10 and A-23. It must be said that the appellant's testimony clearly describes the circumstances surrounding these isolated evidence problems.

This Court will consequently allow the totality of the additional expenses claimed by the appellant in Exhibit A-19 with regard to the automobile, hotel, plane and rail fare expenses.

5.06.5 The second category of expenses that will be studied concerns meal and promotion ones. The meal expenses were paid by the appellant to his personnel on road trips (3.10). The promotion expenses included banquets, meals, entertainment tickets and gifts (3.13). The main objective of these expenses was to generate enthusiasm among the staff in order to increase the number of sales.

It cannot be doubted that the aim of such expenses is to generate profit. In effect, the more the sales representatives sell, the more the appellant earns profit from their sales. However, the appellant claimed large amounts of such expenses. It is particularly obvious when one sums up all the additional expenses claimed by the appellant in respect of these categories of expenses (Exhibit A-19). The total of such expenses is $9,627. It seems reasonable to this Court to allow 60 per cent of the additional promotion and meal expenses namely $5,776 in order to respect the limitation enacted in section 67 of the Act.

5.06.6 Bad debts, salaries and wages, bonus and tip expenses must be analyzed as well (3.11, 3.14 and 3.15). Regarding these latter expenses, the appellant clearly admitted that no receipts could be provided in order to prove the quantum of such expenses (see pages 118-119 and 169-170 of the appellant's testimony).

The lack of evidence should be fatal to the appellant. However, the high credibility of his testimony incites this Court to allow him 20 per cent of the additional claims of the appellant with regard to these items, namely $2,548.

5.06.7 Regarding the additional claims of the appellant related to the office in his home, dues and subscriptions and office expenses, this Court will confirm the assessment of the respondent.

It must be recalled that a deductible expense has to be reasonable as required by section 67 of the Act. Therefore, to use the words of Justice Mackay in Graves (4.02(9)) at page 362 (D.T.C. 6300-6304): "The type of deductions contemplated under paragraph 18(1)(a) of the Income Tax Act do not include expenses arising simply by virtue of casual connection to a business activity. . . . they must also be reasonable expenses."

This Court does not believe it was necessary to maintain an office in his home. Collier and Grolier rented an office for the appellant in Halifax (3.05). The appellant lived in Halifax during the litigious years. The reasons given by the appellant in his oral evidence are not convincing enough to induce this Court to allow such expenses (3.12).

It is obvious that the dues and subscriptions are personal expenses (3.16). Finally, this Court believes the appellant claimed too many office expenses to conduct his business. (3.16). In effect, the biggest part of the appellant's responsibilities are management tasks rather than bureaucratic ones. The office expenses allowed by the respondent appear to be fully reasonable.

5.06.8 It must be said that the appellant provided no evidence to support the additional claims in respect of parking and tolls as well as the car rental expenses. This Court has no choice but to disallow these additional claims.

5.06.9 The cost of shipping live lobsters to the head office of his "employer" was also claimed as a deductible expense by the appellant. The reasons that motivated such an expense were very well presented in the appellant's oral evidence (3.17). This Court is impressed by the way the appellant conducts his business. Everything looks prepared and well thought out. There is no doubt that the appellant is an alert, ambitious and successful businessman. However, section 67 of the Act restricts the expenses being claimed by any person involved in business. It would not be reasonable to allow the totality of such an expense. This Court will therefore allow 50 per cent of that additional claim, namely $139.

5.06.10 Finally, the appellant claimed a capital cost allowance in respect of a typewriter and a computer (3.18). The independent contractor legal status was previously stated by this Court (5.05.7). The appellant was therefore entitled to claim such deductions in the amounts of $356. and $102.

6. Conclusion

The appeal is allowed with costs by varying the reassessment pursuant to the above reasons for judgment.

Appeal allowed.