Jean M Gagne v. Minister of National Revenue, [1983] CTC 2502, 83 DTC 474

D E Taylor [TRANSLATION]:—This appeal was heard in Montreal, Quebec, on December 10, 1982, together with the appeal brought by R Guy Monette, and the statements, evidence and conclusions in the case at bar are applicable to Mr Monette’s appeal to the extent that they are relevant. In assessing the appellant for the taxation years 1975, 1976 and 1977, the Minister of National Revenue relied, inter alia, on the following facts:

(a) During the years in question, the appellant practised law, his profession, in the firm of Monette, Clerk, Barakett, Levesque, Bourque & Pedneault (hereinafter referred to as the “law firm” or the “firm”;

(b) The appellant was at the time connected to the firm by means of a yearly contract;

(c) Under this contract, the appellant undertook to provide his services to the firm exclusively;

(d) The appellant’s means of remuneration was determined according to a percentage of the firm’s gross income as established by the accountants;

(e) Further, since this percentage was established on the basis of the number of lawyers practising in the firm as of January 1 in each particular year, any variation in the number of practising lawyers led to an alteration in the level of remuneration;

(f) The appellant received as an advance a fixed sum every two weeks, with an adjustment taking place at the end of the firm’s fiscal year;

(g) If for any reason the appellant could not carry out a particular task, the firm made the choice of someone to replace him according to which of the other lawyers in the firm were available and what their areas of expertise were; the choice also took into account the client’s preference as to a replacement;

(h) During the years in question the chance of profit and risk of loss were in no way the appellant’s, because all the expenditures necessary to the proper operation of the firm such as support staff wages and office expenses were borne by the firm;

(i) The services provided for the firm by the appellant were an integral part of the firm’s activities;

(j) During the years in question the appellant was employed by the law firm and was not an independent contractor;

(k) In his tax returns for the years in question, the appellant claimed expenses totalling $6,959.45, $10,586.31 and $11,459.50 respectively;

(l) The respondent disallowed $5,592.00, $6,994.00 and $7,812.00 under the heading of deductions permitted in computing income from employment.

The respondent’s submission is thus limited to asserting that the appellant agreed to provide his services to the firm (in fact, to the nine senior partners) pursuant to a contract (Exhibit A-3, which is set out below), and that he did so on the same basis as the other employees and not (a) as a partner of the firm or (b) as an independent contractor who had contracted with other independent contractors for purposes of providing services to the public.

The appellant, for his part, puts forward as his chief submission that he was a partner in the law firm, a junior partner to be sure, but nevertheless a partner. In addition to the appellant in the case at bar and Mr Monette, there were some seven or eight other junior lawyers in the same firm, working under similar arrangements. In addition, the firm included about nine other lawyers, who were its senior partners. For ease of reference, the Board will use the expressions “senior partners” and “junior partners” in these reasons to describe and differentiate the two groups of lawyers, but no special significance should be attached to these expressions unless they prove to have a bearing on the decision of the Board on the matter before it.

Exhibit A-3

(translation)

The firm of Monette, Clerk, Michaud, Barakett and Levesque

hereinafter called The firm,

and

Mr Jean-M Gagné

hereinafter called The lawyer

The firm retains the services of the lawyer for the year 1976, from January 1 to December 31, and the lawyer agrees to provide his services exclusively to the firm for the aforementioned period.

The lawyer will receive for his services fees representing 2.1% of the gross income of the firm, excluding work in progress, all as established by the firm’s accountants.

This percentage has been set with reference to the number of lawyers practising in the firm as of January 1, 1976. Any change in the number of professionals practising in the firm will give rise to a revision in the fee percentage.

The lawyer will receive as an advance on fees the sum of $850.00 in each two- week period, and any adjustment will be made at the conclusion of the firm’s fiscal year.

In consideration of the fact that the lawyer is receiving fees, no deduction for purposes of income tax, pension plans, health insurance or other will be made by the firm, and the lawyer will be personally responsible for making any payments required by the government authorities under this head.

Montreal, the fifth day of February, 1976.

per Monette, Clerk, Michaud, Barakett & Levesque

(signed) André Michaud

(signed) Jean-M Gagne

The appellant testified that in the taxation years 1975, 1976 and 1977, it was not he who billed clients directly for services which he had provided to them, he was not paid directly for these services, and he was not directly responsible for collection — it was the firm that was responsible for all these tasks. However, it was also the firm and not the lawyers themselves that took care of these matters when the services were provided by the senior partners. In his statement, the appellant added that in his opinion his relations with clients, his work habits and how he organised his work, whether with respect to keeping track of files or the place or method chosen for carrying out his responsibilities, and so on, were also similar to those of the senior partners. On the other hand, he indicated that there were differences in responsibilities; that, for example, the senior partners periodically examined the appellant’s work and the work of the other junior partners. The senior partners, both individually and as a group, exercised greater control on the conduct of business in the firm than did the junior partners, and so on. The respondent did not submit that the senior partners assigned legal files to the junior partners more than to themselves, nor that the clientele or account books of the two groups were differently constituted. It appears that the lawyers in the firm were largely specialized in various areas of law, and as far as possible, every lawyer was free to follow his own direction, as long as he adhered to the general policy of the firm and his work appeared to be of benefit to the firm. Although no precise details were given to the Board on this subject, it would also appear that in general it could be much more difficult to reach an agreement on the conditions under which services would be provided with the senior partners than with the juniors.

From the evidence, I can find nothing in the foregoing which would allow me to conclude that the appellant must be considered a mere “employee”, whereas a senior partner must be treated as a person in business. To go back to Exhibit A-3, this cannot be accounted a true “employment contract” such as what a teacher might have with a teaching institution. Failing evidence to the contrary, this exhibit constitutes a contract by which the law firm retains the services of the appellant and the appellant agrees to provide his services exclusively in consideration of a given percentage of the gross billings of the firm. Each of the parties to the action interprets in his/its own way the nature of the relationship created by the contract, one party viewing the appellant as an employee, the other party characterizing him as an independent contractor. Naturally, I am assuming that the two parties to the contract (Exhibit A-3) had sufficient competence to draw up a simple contract of employment to the extent that they had the intention to do so and had so agreed. On the other hand, they were also sufficiently competent to draw up a contract making the appellant a partner in the firm, even a junior partner. In my view, they clearly did not make that latter type of contract — the appellant is not a partner in the firm, in any meaning of the word. I note particularly the fact that the appellant had no capital invested in the firm, nor interest in the client accounts.

In consequence, can it be said that the contract, whether or not this was the intention, was a contract for services or, as the respondent submits, a contract of employment? Or would it be more appropriate to state that this was a business contract, as the appellant for his part submits? In examining these points, I make reference to the recent decision in the Jean Thibault case (not yet reported). That case concerned contracts signed by the appellant for giving lessons in teaching institutions. The appellant had argued that he was an independent contractor, but this submission failed by reason of the fact that the teaching institutions had of necessity reserved to themselves the right to supervise the appellant’s work.

I find that the respondent’s analysis of the contractual obligations in his reply to the notice of appeal in the case at bar does not in itself categorically establish that the appellant was an employee — even were that analysis correct. Rather, in fact, that analysis raises a significant doubt with respect to the Minister’s assumption. Nonetheless, the onus is on the appellant to displace the presumption that he is an employee.

The appellant’s principal submission is in paragraph 6 of the notice of appeal, which reads as follows:

(translation)

6. Throughout the above-noted taxation years, the appellant was not the employee of the firm of Monette, Clerk, Barakett, Levesque, Bourque & Pedneault; and, without restricting the generality of the foregoing, more particularly in that:

(a) the appellant did not receive orders or instructions from the firm of Monette, Clerk, Barakett, Levesque, Bourque & Pedneault on how to carry out his duties;

(b) the appellant decided on his own the number of hours he would devote to his profession and no set timetable was imposed on him;

(c) the appellant was solely responsible and in charge of the steps to be taken to carry out instructions from his clients.

I am unable to conclude that subparagraphs 6(a) and (b) of the said notice of appeal, establish without a doubt that the appellant was an independent contractor, even were I to accept the content of these subparagraphs as accurate. However, if subparagraph (c) could be upheld, it would greatly assist the appellant. Was he really “solely responsible and in charge of the steps to be taken to carry out instructions from his clients”? In other words, if the appellant’s submission is correct, the law firm would not assume any responsibility if the appellant should fail to carry out client instructions properly. In my view, it is apparent from the evidence given that a client who was dissatisfied with the services provided to him by one of the senior partners could first turn to his “own” lawyer for compensation, but, ultimately, he could claim against the firm as a whole. If the appellant’s submission were accepted, in such a case his dissatisfied clients would not seek compensation from the firm, but only from the appellant, given that the latter assumes full responsibility for his acts. There was no evidence in support of such a view, and among the expenses which the appellant wished to deduct cannot be found any insurance premium or expenses relating to his professional responsibility by reason of his being an independent contractor. I incline to assume that he was covered by liability insurance taken out by the law firm. That is without doubt the best reason for the firm’s not relinquishing its power of supervision over the appellant’s duties, and clearly it did not give up its power of supervision in the contract (Exhibit A-3). Given that it has already been established in this case that the appellant was not a partner in the law firm, it must necessarily be concluded that the only other connection that there could be between him and the firm was that existing between an employee and his employer, at least in so far as the application of the Income Tax Act is concerned.

To sum up, there is nothing in the statements or the evidence leading to the conclusion that the appellant was either a partner in the firm or an independent contractor who provided his services to the firm. The Minister’s submission that he was an employee, at least for the purposes of income tax, has not been disproved.

I am also of the view that neither the statements nor the evidence confirm the second point raised by the appellant at the hearing, which was that even as an employee he had the right to avail himself of all the deductions which he claimed. It has not been established that the appellant was required by the contract of employment to incur the various office expenses which he has claimed supposedly pursuant to subparagraphs 8(1 )(i)(i) and (ii) of the Act. Section 20 of the Act deals with deductions permitted in computing income from a business, and not with income from an office or employment and, consequently, does not apply in the case at bar. The appellant has not established that the payment of the annual dues was a requirement which fell squarely within the terms of subparagraph 8(1 )(i)(i) of the Act. A decision of the Board, Addie v MNR, [1980] CTC 2647; 80 DTC 1556, contains the following comment at 2650 and 1559, respectively:

The membership dues in the Canadian Bar Association are deducted by all practising lawyers, whether they be partners or employees of the” [1] legal law firm.

The above remark is based principally on the comments made and citations referred to by the judge in The Queen v Swingle, [1977] CTC 448; 77 DTC 5301. This may have been a remark in obiter, and I could find no precedents allowing such a deduction for an employee.

Appeal dismissed.