Ralph Brandes v. Minister of National Revenue, [1983] CTC 2187, 83 DTC 158

Guy Tremblay:—This appeal was heard on May 27, 1982, at the City of Toronto, Ontario.

1. The Point at Issue

The point at issue is whether the appellant was correct in considering himself, in the 1974 and 1975 taxation years, as a self-employed business man producing and directing short films and commercials for various clients, and, therefore, in deducting the following business expenses in the computation of his net income: $10,101 in 1974 and $7,384 in 1975.

The respondent contends that, during the said years, the appellant was an employee and that the claimed expenses were not incurred for the purpose of producing income from a business.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumptions of fact on which the respondent based the assessments are also deemed to be correct. In the present case, in paragraph 8(a) to (g) of the reply to the notice of appeal, the respondent described the facts on which he based his assessments:

8. In so assessing the Appellant, the Respondent relied upon the following findings or assumptions of fact:

(a) prior to the years in question, the Appellant carried on a business with a February 28th year end;

(b) in November 1973, the Appellant entered into a verbal contract of employment wih Cinera Productions Ltd:

(c) the Appellant agreed to work for Cinera Productions Ltd exclusively for a two-year period;

(d) during the period in question, the Appellant carried out all of his duties of

employment under the control and direction of Cinera Productions Ltd;

(e) the Appellant was paid a salary of $1,152.00 per month, plus $500.00 per “shooting day”;

(f) during his 1974 and 1975 taxation years, the Appellant was employed by Cinera Productions Ltd, under a contract of service;

(g) the expenses claimed by the Appellant in 1974 and 1975 were not incurred for the purpose of producing income from a business.

3. The Facts

3.01 The appellant, during the fiscal years ending February 28, 1974, and February 28, 1975, reported the following net business incomes:

3.02 By notice of reassessment dated March 19, 1979, the respondent added to the computation of the appellant’s income for his 1974 taxation year, employment earnings in the amount of $17,361.49 calculated as follows:

3.03 By notice of reassessment dated March 19, 1979, the respondent added to the computation of the appellant’s income for his 1975 taxation year, employment in the amount of $25,178.15 and deducted his net business income in the amount of $14,214, calculated as follows:

3.04 The appellant, a director of films and commercials, operates through a limited company, Brandes Productions Limited, which was incorporated in March of 1976. He is a member of the Director’s Guild of America.

3.05 The appellant testified that:

(a) He started in the advertising business prior to 1969. In 1969, however, he started on his own under the name of Ralph Brandes Productions. He was director of commercials. He then worked with different advertising agencies and other film production agencies.

(b) The director of a commercial is responsible for the artistic control of the commercial — for selecting the talent, selecting the crew, and the styling of the commercial which includes props, wardrobe, etc, to make the film.

(c) In producing a commercial, there is a pre-production stage, a shooting stage, and a post-production stage.

The pre-production would be involved with my client’s discussing what creative idea they have come up with, how I might interpret it which would influence the amount of monies that would be involved. There would be a number of weeks involved in the pre-production or the planning of the commercial.

Then on the shooting day all those factors would come together and the director would then tell the talent where to stand, how to speak, the crew what to speak, do, what lights, a cameraman, et cetera. After that shooting we get into the post-production stage where the director still is responsible for pulling it altogether by the use of people like editors, sound engineers, recordings of music, recordings of the different parts of it.

In other words, the director is totally responsible all the way through and has all the control of producing the artistic part of producing the commercial. The producer, I guess to point out is the one who is responsible for the financial part of that. We would collaborate together to do it within a budget and the producer normally is responsible for the payments of the major amounts of money. (SN pages 10 and 11)

3.06 Twelve invoices issued from March 1972 to November 1972, by Ralph Brandes Productions Ltd, to different agencies (Filmmakers Ltd, first Take Productions Moreland-Latchford Ltd, Ardiel Advertising Ltd, etc) were filed as Exhibit A-1. These invoices concern expenses and professional services (SN pages 13, 14 and 15). For the fiscal years 1969 to 1973 the expenses were allowed as deductible by the respondent.

3.07 The arrangements varied with each client but, in general, when it was for a continuing length of time he received a retainer for the talent and reputation, and a fee for the actual work being done. In other cases, it was strictly on a fee basis.

3.08 Twenty-nine invoices, dated from June 1973 to February 1974, issued by Ralph Brandes Productions to different companies (Kessler, Morrison, Meteskey & Giacomelli Ltd; Young & Rubican Ltd; The 25th Frame Film Production Co Ltd; Glen-Warren Production Ltd; Cinera Productions Ltd) were filed as Exhibit A-2. (SN page 16)

3.09 Over 45 invoices, dated from March 1974 to February 1975, issued to Cinera Productions Ltd were filed as Exhibit A-3. (SN page 31)

3.10 In November of 1973, the appellant made a verbal agreement with Cinera Productions Ltd, which “was primarily an animation company producing animated films for different films and for commercials”. Its clients were mostly advertising agencies. (SN page 18)

3.11 The appellant explained how the arrangement came about:

I had some dealings with Cinera Productions when I was connected with the Ontario Government and together we had produced and done a couple of films and through that association I decided we would have an agreement that we would work together in getting in some business and expanding the type of business that Cinera had at the time, that is to have more live action commercials being done and we entered into a verbal contractual agreement where I would supply my talent and energy and help to bring in business and then direct the actual doing of that commercial. (SN page 19)

3.12 The arrangement was made with the two owners of Cinera, Vladimir Goetzelman and Terry Cake. The appellant’s function was “. . . to direct television commercials and also to help to get that business in”. (SN page 20). He had the “artistic control” of the commercial.

3.13 He further explained his function under this arrangement with Cinera as follows:

Prior to the pre-production stage, I guess it must be mentioned again that part of my time and energy would be spent in dealing with clients and convincing them that they should work with me in connection with a company called Cinera, Cinera being the producer, myself being the director.

When we got into the pre-production, once we were awarded a job, I then sit down with the agency, the different people that would be involved, their producers, their creative people, we would determine how the commercial was to be shot, the look of it, the tone of it, the design of it, in elaborate detail.

That would be the pre-production stage and the actual shooting stage would be when all those elements would come together, the talent that would be involved, the crew that would be involved and the various other people that were necessary to film it. It then would go into the post-production stage where the film itself was put together and married to the sound effects and music and different graphics and all the other components necessary to make the commercial. (SN pages 21 and 22).

Well in the pre-production stage there would be a set designer for example that might be involved and he would design a set, could be for example a courtroom like we are in. He would design that and I would collaborate with him and then that would be presented to the agency whether that would fit with their requirements. (SN pages 22 and 23).

Q Who decided how the planning of the commercial, the budgeting for the commercial was to be done?

A I would decide on the planning of the commercial or the design of it, the financial part would be in collaboration again with Cinera Productions.

Q With respect to the actual on-site direction on the shooting day, who decided how that was to be done?

A I would.

Q Was anybody from Cinera present on the shooting day?

A Sometimes but not always.

Q Were they present to oversee how you were doing the job?

A No, there would be a producer involved. His concern would be the finances of it and whether for example with the crew, if we had trouble during the day and we got into an overtime situation, he and I would confer in the corner how much more we were going to go into overtime, how much money would be involved and whether it was necessary, I might have requirements to do a few more shots but anything financial, it would be in collaboration with the producer.

In terms of control or direction of what happened during the day, that was totally mine as the director. (SN pages 24 and 25)

During the actual shooting there would be a cameraman that would be involved or a cinematographer well I had, sorry, I would choose the cinematographer as well for the one I would work with, there would be different crew involved, I would select the talent, there would be auditions for who would be the voice, who would be the main character and all the other extra characters and in the post-production stage I would work directly with an editor and direct him in how to put the pieces together of the film we had shot. (SN page 23)

Most of the material instruments (cameras, lights, etc) were rented by Cin- era (SN page 27).

3.14 The appellant said that under this arrangement the income “depended on getting the business”. He explained as follows:

I would spend a lot of time with the clients being the advertising agencies, getting them to know me, getting to know them, some of which have been my clients in the past and then we would go through bidding or the quoting stage of different commercials. (SN page 21)

Q . . . First of all with respect to dealing with the clients to promote yourself and the idea of having Cinera and you produce and direct the film, who decided how that was to be done?

A Well it was a mutual agreement how it would be done. My major efforts were out there to get the business, there was a certain amount of business that Cinera would get in by their reputation and it was really a collaboration of efforts. (SN page 24)

3.15 This agreement was to the effect that the appellant would receive a yearly retainer fee of $14,000 (ie $576 per two weeks, plus $500 per shooting day). This arrangement did not have a term: . . it was loose, as long as it was good for both parties it would continue”. (SN pages 20 and 21)

3.16 The appellant also explained that:

(a) He had no specified hours of work: “it was up to me to spend my time as I saw fit in order to develop the business”. (SN page 32)

(b) He had the authority to hire personnel to assist him in the production and exercised that authority. (SN page 36)

(c) If a commercial had to be re-shot, he was not paid for the re-shooting when the error was attributable to himself.

(d) The arrangement was terminated in 1975 because he had the opportunity to be “. . . involved with writing in concepts and a few other types of films other than commercials”. (SN page 37)

(e) Then, he had an arrangement with another commercial production house called Harriott Productions Limited. It was a similar arrangement to the one with Cinera (verbal, retainer fee, shooting fee, etc).

3.17 In cross-examination, the appellant testified that:

(a) He was paid by cheques to the order of Ralph Brandes Productions. (SN page 43)

(b) He was reimbursed for the expenses incurred by him: “hustling lunches, promotion”. (SN page 43)

(c) He had no profit-sharing arrangement.

(d) He had no proprietary rights in the films he made (SN page 44); the client agency owned this right (SN page 51).

(e) The individuals who worked on a film (the editor, the cameramen, the sound men, the lighting men, the assistant script writer) were all paid by Cinera (SN page 45), but some of them were selected by the appellant.

(f) Mr Goetzelman had the experience but he did not have the business.

3.18 In re-examination, the appellant made the distinction between the expenses he incurred, those which were reimbursed, and those which were not reimbursed, but were claimed in the computation of his net business income. One can see the quantum of these expenses in paragraph 3.01 above. The latter mentioned expenses were cca on equipment, office, telephone, Ight, heat, legal and accounting, and car, etc (Financial statement filed with the income tax return).

3.19 In his testimony, Mr Vladimir Goetzelman, film producer and one of the main shareholders of Cinera, testified that:

(a) He has operated through Cinera since 1968.

(b) He knew the appellant since 1964 as a member of an industry in which he himself operated as a director-producer.

(c) Cinera does two types of work: animated films and non-animated films (live action films).

(d) In 1974, . . we needed or wanted the association of a live action director within our company to do that kind of work, be responsible for that kind of work and create that kind of work because my own time was taken up in other things. We wanted to expand the depth of the company”. (SN page 59)

(e) Mr Brandes “. .. had a good reputation as a director and had been in business for himself. He understood the business”. (SN page 59)

(f) Basically we would agree to pay Mr Brandes a retainer, he would be paid for work that he creates for the company, brings to the company on a per shooting day basis, and that was all, you know, we had certain equipment that were lying around not doing any work and he had clientele, he had the reputation and it was kind of a joint venture idea for us. (SN page 59)

(g) Mr Brandes:

. . . Was more than just directing. It involved a certain amount of producing and it involved selling, in the sense that he was charged with creating business. It was part of the arrangement that he would go out and create business with clientele that he had, just general clientele in the industry and execute that work through our company. (SN page 60)

(h) Under the arrangement, the appellant was responsible for the sales function: “He was on his own charge to create business”. (SN page 62)

(i) The appellant had the final say with respect to the mechanical or organizational function, and with respect to the creative function. Also, he “. .. would set the tone of the costing”. (SN page 63)

(j) The witness never controlled the hours worked by the appellant.

(k) The appellant, in the pre-production stage, performed his functions “. .. in various offices, ours, the client’s, restaurants. During the production phase, the location which could be studio or any place in Canada or the world”. (SN page 66)

(l) The appellant took part in the medical plan in Cinera but he paid for this himself. Cinera did not pay for it because he reimbursed Cinera for its part. (SN page 68)

(m) Under the arrangement, the appellant was not retained to do a task, . Only to create business, to create production”. (SN page 72)

3.20 In cross-examination, Mr Vladimir Goetzelman testified that:

(a) Prior to the arrival of the appellant in Cinera, the said company was doing live action commercials, which commercials were directed by himself and other free-lance directors. (SN page 73)

(b) Under the arrangement, the appellant could not direct commercials for other production houses. (SN page 73)

(c) The retainer fee was discussed in terms of the annual amount of $14,000, broken down to a bi-weekly amount of $576. It was the minimum guarantee. (SN page 74)

(d) The appellant could not be paid or reimbursed unless he invoiced Cinera. (SN page 74)

(e) In the years involved in this appeal, Cinera had about 30 employees, most of whom worked on animated films.

(f) When the appellant left Cinera, the latter continued to do live action commercials which were directed by the witness and some other freelance directors.

4. Cases at Law — Analysis

4.01 Cases at Law

Counsel for both parties referred the Board to the following cases:

1. Wolfgang Hauser v MNR, [1978] CTC 2728; 78 DTC 1532;

2. Canadian Broadcasting Corporation v MNR, per Mr Justice Heald as Umpire in a decision pursuant to the Unemployment Insurance Act, NR-25 (Du Pasquier) and NR-26 (Denike), dated September 4, 1974;

3. Thomas Alexander McPherson v MNR, per Mr Justice Cattanach as Umpire in a decision pursuant to the Unemployment Insurance Act, NR-91, dated March 24, 1976;

4. Charles L Braive v MNR, [1981] CTC 2790; 81 DTC 748.

In fact, they also referred to other cases and passages which were quoted in the Charles L Braive case, (Supra), including reference 1 and 3 above.

4.02 Analysis

4.02.1 As it is underlined in the Charles L Braive case (supra), the guides or measures to which the courts largely referred are (most of them being facets of another one):

1. Right to control;

2. Right to dismiss;

3. The nature of the task;

4. The freedom of action given;

5. The magnitude of the contract amount;

6. The manner in which it is to be paid;

7. Ownership of tools;

8. Chances of profit;

9. Risks of loss; and

10. Integration to payer’s business.

4.02.2 The appellant’s contention is that the decision in Braive applies in the instant case because, in substance, in both cases the appellants are production managers in film production.

The Braive case is summarized as follows at 748:

The taxpayer worked in the film production industry, as contracted to do so by individual film companies, as a production manager and sound editor. The taxpayer’s work included preliminary research, survey of shooting locations, hiring personnel, production preparation, business affairs and budget, co-ordinating the film production operation, scheduling, filming and film editing. The taxpayer considered himself to be self-employed in the industry and deducted his expenses. The Minister assessed the taxpayer as an employee of the motion picture firms and disallowed the deductions. The taxpayer appealed to the Tax Review Board.

Held: The taxpayer’s appeal was allowed. The Board decided on the evidence that there was not sufficient control exercised over the taxpayer while he carried out his duties to establish him to be a servant as required in an employeremployee relationship. Therefore, the Board found the taxpayer to be self- employed and entitled to the relevant deductions. Therefore, the taxpayer’s appeal was allowed.

4.02.3 In the Braive case, the appellant, during the three years under appeal, worked for more than 18 different companies involved in motion picture production. In the instant case, the appellant, during the two years involved, worked for only one company, Cinera Productions Ltd. Is this aspect sufficient to make the appellant an employee?

4.02.4 As it was underlined in the Braive case:

If one analyzes the criteria and compares them with the facts given by the evidence, one finds that the solution of the point in dispute is not crystal clear. Some criteria are in favour of the appellant’s thesis and some in favour of the respondent’s thesis.

4.02.5 Mr Justice McCordie in Performing Right Society Limited v Mitchell and Booker (Palais de Danse) Limited, [1924] 1 KB 762, proceeded to discuss the criteria indicated by the authorities for determining whether the relationship of the employed to the employer is that of independent contractor, or of employee, and then says that:

The final test, if there be a final test, and certainly the test to be generally applied, lies in the nature and degree of the detailed control over the person alleged to be the servant. This circumstance is, of course, only one of several, but it is usually of vital importance.

4.02.6 In the present case, it seems obvious that, concerning the control test, the appellant had the final say. This is evidenced not only by the description of the work by the appellant (paragraphs 3.13, 3.14, 3.16(a) and (b) ), but also by the testimony of Mr Goetzelman, one of the main shareholders of Cinera Productions Ltd (paragraph 3.19(h), (i) and (j)).

4.02.7 Concerning the risk of loss test, it seems, at first glance, that this guide does not apply in favour of the appellant’s thesis. Indeed, he was reimbursed for different expenses (paragraph 3.17(b)); he had no profit sharing arrangement (paragraph 3.17(c)); and he did not pay for those who worked with him, despite the fact that he could have hired them (paragraphs 3.13 and 3.17(e)).

4.02.8 Also, the fact that the appellant received $576 per two weeks confirms, at first glance, not only that he has no financial risk but that he is an employee.

However, one must remember that this two-week payment was a retainer (for a continuing length of time) (paragraphs 3.07 and 3.15). There was also a fee of $500 per shooting day (paragraph 3.15). The number of shooting days during a year depended on the work of the appellant. Cinera Productions Ltd had the equipment and the appellant had the clientele (paragraph 3.19(f)). It was part of the arrangement that the appellant .. would go out and create business with clientele that he had .. . and execute that work through the company.” (paragraph 3.19(g)). The appellant was on his own charge to create business (paragraph 3.19(h) and (m)).

The Board thinks that Mr Goetzelman well summarized the arrangement between the appellant and Cinera Productions Ltd: “. . . it was kind of a joint venture idea for us” (paragraph 3.19(f)).

4.02.9 Concerning the ownership of the material tools, the evidence adduced showed that Cinera Productions Ltd had the ownership. As I did in the Braive case (supra), I agree with Mr D E Taylor when he says, in Charles A Latimer v MNR, [1977] CTC 2128; 77 DTC 84, that “. . . professional skills could be regarded as tools”. The appellant’s experience, his intelligence and his organizational abilities are his major tools.

4.02.10 Counsel for the respondent quoted Mr Justice Cattanach at length in the Thomas Alexander McPerson case, (supra):

A contract of service is one under which one party, the servant or employee, agrees for a period of time or indefinitely either full time or part time to work for another, the master or the employer. Looking at the contract between the parties the appellant has agreed to perform duties as outlined for the Cross Institute, part time, for an indefinite period. The fact that the services are to be of a continuing nature for an indefinite period is indicative of the contract being one of service.

On the other hand, a contract for services is one under which one party, an independent contractor, undertakes that certain specified work will be done for the other. The test usually employed is whether the employer has the right to control the manner of doing the work. Thus in Collins v Hertfordshire County Council ((1947) KB 598), Mr Justice Hilberry said at page 615;

. . . the distinction between the contract for services and the contract of service can be summarized in this way: In the one case the master can order or require what is to be done, while in the other case he can not only order or require what is to be done but how it shall be done.

However it has been pointed out that this test is not universally correct. There are many contracts of service where the master cannot control the manner in which the work is to be done. Many examples occur where very special skills are required such as the master of a ship and in the learned professions, medicine, law and the clergy. The counsel for the Minister in this appeal is a qualified barrister and solicitor. He is an employee of the Department of Justice. At the trial his employer cannot order him how he will conduct that trial. That is done at his discretion as exigencies arise. He is on his own. (page 7 and 8)

Reverting to the distinction between a contract of service and a contract for service, a contract of service does not normally envisage the accomplishment of a specified amount of work but that the employee will put his personal services at the disposal of the employer. In the present instance that is precisely what the appellant has done. It is not to be expected, no matter how devotedly hoped, that the appellant’s research would result in an immediate cure for cancer. Therefore his efforts are continuing and as I have previously pointed out will be conducted over an indefinite period of time and the indefinite nature is in itself an indicia of a contract of service.

Contrasted with this is that a contract for service normally envisages the accomplishment of a specified job. Whether the appellant can find a cure for cancer during his life time is very doubtful. His life time itself is indefinite and the past has demonstrated that others have devoted their lives to this end without result. Added to this a contract for service does not normally envision that the contractor must do the work personally.

The fact that in a contract for service a person is expected to do the work personally rather than engaging others to do so has led to the first of indicia of a contract of service first mentioned in Park v Wilsons & Clyde Coal Co Ltd and repeated by Lord Thankerton in Short v Henderson being the master’s power of selection of his servant, (page 9)

4.02.11 The Board shares the opinion of Mr Justice Cattanach. However, in the present case, considering the nature and complexity of the task; consid- ering that the major part of the appellant’s income (the number of shooting days) depended on his initiative (he had to create the business); and, considering the freedom of action given, the Board thinks that it is a fair and objective conclusion to say that the appellant was a self-employed person.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.