R H Woolner v. Minister of National Revenue, [1983] CTC 2546, 83 DTC 490

D E Taylor:—This is an appeal heard in Montreal, Québec, on June 16, 1983 against income tax assessments for the years 1974, 1975 and 1976 in which the Minister of National Revenue disallowed amounts claimed as “business expense” by the appellant. The appellant’s 1975 income tax return contains financial information which is typical of that filed for all the relevant years:

AMOEBA REG’D STATEMENT OF INCOME 1975

Per T-1

originally

GROSS INCOME			filed
Innotech
Sept/75	$ 75.00
Jan/75	230.00
March/75	275.00
Feb/75	490.00	$ 1,070.00	$ 1,070.00
AMOEBA ENTERPRISES INC
Invoices		26,563.61	27,562.31
		27,633.61	28,632.31
EXPENSES
Outside consulting services	45.00
Automobile expenses	2,244.17
Insurance (50% x $55)	27.50
Interest	149.33
Rent (50% x $1,560)	780.00
Telephone	191.35
Travelling (50% = $1,080.33)	540.00

Materials and supplies	980.19
Promotion, entertaining and parking	972.25
CCA automobile	1,792.32
	7,722.11
Less: Personal use of automobile
25% x $4,036.49	1,009.00	6,713.11	7,934.40
		$20,920.50	$20,697.91

(The difference between the above income and expense statements is merely that, at the Notice of Objection stage, certain changes were suggested by the appellant, but they are not relevant to the points at issue in this appeal because the expense amounts disallowed by the Minister were the original amounts reported:

1974 — $3,914.56

1975 — 7,933.36

1976 — 5,802.01.

It is these amounts which the Board considers to be in question for purposes of this appeal.)

In the notice of appeal, Mr Woolner commented:

I believe that the expenses incurred by the operation of this business, from (which) I derived my income, and which I have claimed as tax deductible, are normal and reasonable.

He further provided details regarding the operation:

STATEMENT OF BUSINESS OPERATION FOR AMOEBA REG’D

FROM 1974 to 1976 incl.

1. Business was conducted from an equipped two room office located at 1201 St Mark Street, Montreal.

2. Design assignments of a diverse nature, including preparation of working drawings, presentations, models, instruction & procedure manuals and graphic design work, were completed in the company office for various clients in and around the Montreal area.

3. Due to the complex nature of much of the work, frequent visits to clients’ premises were required for consultation, work supervision and data collecting.

4. Two and three clients were sometimes visited in the same working day, involving up to 90 miles of travelling.

5. Apart from revenue producing work, approximately 500 hours were spent on various product design schemes intended for use as income producing projects at a later date. Amounts claimed as business expenses include the cost of materials etc used on these projects.

In reassessing, the Minister of National Revenue relied, inter alia, upon the following assumptions of fact:

(a) During the years under appeal, the Appellant was an industrial designer and draftsman;

(b) In July 1974, the Appellant with two other designers set up a corporation under the name of “AMOEBA Enterprises Inc” for the purpose of offering design and drafting services;

(c) In August 1974, the Appellant entered into an agreement with Petrofina Canada Limited, whereby it was agreed that the Appellant should, inter alia, make his personal services available to Petrofina Canada Limited, in return of which fees due by Petrofina to the Appellant be paid directly to AMOEBA Enterprises Inc;

(d) During the taxation years at issue, AMOEBA Enterprises Inc produced income tax returns but declared no taxable income, the income of the said corporation having been transferred to its shareholders as professional fees;

(e) Under the agreement between the Appellant and Petrofina Canada Limited, the Appellant had to make his services available to Petrofina for an indefinite period of time and in compliance with the latter’s requirements;

(f) During the taxation years at issue, Petrofina had control over what work the Appellant was to do and when and where he was to do it;

(g) The Appellant was required to provide personally his services to Petrofina;

(h) During the taxation years at issue, the Appellant worked almost exclusively for Petrofina Canada Ltd;

(i) The chance of profit and the risk of loss, with respect to services performed by the Appellant, were borne exclusively by Petrofina Canada Limited;

(j) Petrofina Canada Ltd supplied the Appellant with an office and all necessary equipment, and the Appellant was not required by his contract to pay for office rent or cost of supplies;

(k) The Appellant was not ordinarily required to perform his duties away from Petrofina’s place of business;

(l) During the taxation years at issue, the Appellant did not incur business expenses;

(m) The expenses claimed by the Appellant, in each of the taxation years at issue, were personal or living expenses of the Appellant;

The Respondent relies, inter alia, upon sections 3, 5(1), 8(2) and 67 and subsections 18(1)(a), 18(1 )(h), 60(b), 60(c) and 248(1) of the Income Tax Act, RSC 1952, ch 148, as amended by the Income Tax Act, SC 1970-71-72, ch 63, s 1, as it applied to taxation years 1974, 1975 and 1976;

The Minister further contended:

— that during the taxation years at issue the Appellant was not carrying on a business but was an officer or employee of Petrofina Canada Limited and therefore, the Minister of National Revenue was justified by virtue of section 8(2) of the Income Tax Act, to disallow the expenses claimed by the Appellant;

Alternatively, if it is found that the Appellant was indeed carrying on a business, — that the expenses claimed were personal or living expenses of the Appellant and consequently, the Minister of National Revenue was justified to disallow them;

Moreover, — that the expenses claimed by the Appellant for each of the taxation years in issue, were unreasonable in the circumstances;

The appellant testified that “Amoeba” had been established with himself and two associates, all of whom were providing similar services to Petrofina, in order to facilitate the billing procedures for Petrofina. There was an annual contract between Amoeba and Petrofina, as a “Blanket Order”, and for 1976, which was typical of the “blanket orders” filed, this order read in part:

AMOEBA ENTERPRISES INC

PO Box 94

Pointe-aux-Trembles, Que

BLANKET ORDER

Provide design and drafting services on an on-off basis as required for a period commencing January 1, 1976 to December 31, 1976. Work to be performed on PCL premises.

PRICE:

In accordance with rates, in effect as of December 1975, no adjustments will be made to salaries of personnel without prior approval of PCL.

INVOICING:

Monthly invoicing shall be accompanied by a copy of the weekly Time Sheets, duly authorized by PCL. The PO must appear on each invoice.

INSURANCE:

Insurance coverage as per PCL Regulations. This PO replaces R-1021 (1975) which is hereby considered complete.

Attached to this “Blanket Order” was a typical “Amoeba” invoice, also filed as an exhibit, for the services of the appellant and his two associates:

INVOICE:

Accounting Department

Petrofina Canada Ltd

11701 Sherbrooke St East

Pointe aux Trembles, Quebec

SERVICES RENDERED FOR THE PERIOD		December 1976
PERSONNEL	HOURS	RATE	AMOUNT
Sr Piping Draftsman	154	$16.40 per hr	$2525.60
(Mike Laing)
Instrumentation Designer	107	$18.45 per hr	1974.15
(Rod Woolner)
Senior Piping Designer	121	$18.45 per hr	2232.45
(George Teggin)
		Total	$6732.20

It was the testimony of the appellant that this was the usual format, and that payment was made by Petrofina, all in one cheque to Amoeba. The appellant also described his relations with the other alleged contractors, particularly “Innotech”, and he agreed that the income therefrom was very minor compared to that from Petrofina.

The respondent, through a Revenue Canada officer, filed copies of correspondence between Revenue Canada and both Petrofina and Innotech which dealt with the three associates of Amoeba, including the appellant. The correspondence makes it perfectly clear to me that the appellant could make no claim for expenses as an employee of Petrofina, but that is not the issue before the Board — his position was that he was not an employee, but rather in business as an independent contractor — Petrofina being only one, even though a major one, of his clients. A Mr Skruibis, an officer of Petrofina who had negotiated the contracts with Amoeba, testified that he was aware that Mr Woolner did some of his work at his own home, and he did not object to it; and he stated that he was also aware that Mr Woolner did provide design services to organizations other than Petrofina without any objection by Petrofina. Under questioning, he agreed that Petrofina effectively required first call on the services of Mr Woolner. Mr Skruibis fully expected, at the signing of each annual contract with Amoeba, that the required services would be provided by the three associates. However, he also pointed out that neither the appellant nor his associates were covered by any of the employee plans or benefits which were standard practice in Petrofina, and he was quite certain that no deductions (such as unemployment insurance, income tax, group insurance, pension, etc) of any kind had been made from the monthly invoices received from Amoeba and paid by Petrofina.

Before proceeding to review this matter, I would indicate that there is more than one facet to the appeal, and the complexity of these facets, indeed the potential plurality of positions, has been noticed by the respondent in preparing the alternative contentions in the reply to the notice of appeal (supra). One possible relationship is that of single, employee-employer between Petrofina and the appellant. I have already noted that if the appellant is held to have been an employee of Petrofina or Innotech, the evidence would not support the deduction of the expenses claimed from such employment income. However, that same exclusion would not preclude him from certain deductions from income from other sources if indeed it could be shown that the relationship there was based on a position of an independent contractor, the position he espouses. It is also completely possible that the appellant might be an employee of Petrofina and an independent contractor with, for example, Innotech. In that set of circumstances, some deductions directly related to the income from Innotech (or similar sources) could be considered. That would raise the question of not only the requirement for the claimed expenses in order to gain the relevant income, but also the reasonableness of those expenses in connection with that income. A further point is that the appellant (with his two associates) arranged his affairs so that the professional services contracts involved (without attaching any significance at this time to the words “professional services contracts”) were through Amoeba Enterprises Inc. The evidence, documentation and testimony provided little information on “Amoeba” and some of the responses of the appellant would lead me to question whether he regarded “Amoeba” as a corporation — separate and impersonal from himself, or merely as himself. In any event, “Amoeba” can only be treated by the Board on the pleadings and the evidence as a vehicle with no direct function in this dispute.

Apparently the appellant did not utilize “Amoeba” in the manner or for the purposes described in Sazio v MNR, [1968] CTC 579; 69 DTC 5001, and the issue of whether the appellant might be an “employee” of Amoeba did not arise and therefore is not examined by the Board. The cases of Fother- ingham v MNR, [1977] CTC 2372; 77 DTC 275, and Forst v MNR, [1982] CTC 2053; 82 DTC 1056, would support a view that the burden of proving he was an independent contractor should rest between the appellant himself and, for example, Petrofina, not between Amoeba and Petrofina. But I do not rule out that “Amoeba” might have had a legitimate role in this matter if it had been described to the Board. It simply was not so described. The nature and value of “Amoeba” in this matter is even more puzzling since the invoicing of time to Petrofina during certain months contained accounts for more than just the three associates. However, the Board must examine the basic question before it as if the contract between “Amoeba” and Petrofina was indeed a contract between the appellant and Petrofina, since that is essentially the proposition put forward by the appellant.

I would also note that counsel for the respondent provided to the Board and the appellant considerable jurisprudence, and pointed out the nature of the “contract of service” or “contract for service” contracts which they contained. The case of Rosen v The Queen, [1976] CTC 462; 76 DTC 6274, was referenced by counsel as a major guide post in looking at the facts of any similar individual appeal on this subject.

In Rosen (supra) the learned judge commented in the following way at 465 and 6276 respectively:

I believe that the decisive test in a case like this one is that given by Lord Denning in that well known case of Stevenson Jordon and Harrison, Ltd v MacDonald and Evans (1952), 1 TLR 101, referred to by Lord Parker, CJ, cited above, and I wish to quote him at length on this point:

It (the case) raises the troublesome question of the distinction between a contract of service and a contract for services. The test usually applied is whether the employer has the right to control the manner of doing the work. Thus in Collins v Herts County Council, Mr Justice Hilbery said:

“The distinction between a contract for services and a 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 cannot only order or require what is to be done but how it shall be done.”

Counsel also quoted from page 8 of the judgment of Mr Justice Cattanach in Thomas Alexander McPherson v MNR, an appeal under the Unemployment Insurance Act, rendered on March 24, 1976:

Detailed control over a professional employee as to the manner in which work is done is necessarily minimal but the material consideration is that the right of control exists even though it is sometimes impossible to exercise and is rarely needed to be exercised.

The various “tests” which have arisen in the jurisprudence over the years and which throw some light on this subject were received in detail, and most completely in Hauser v MNR, [1978] CTC 2728; 78 DTC 1532, and these were also enumerated by counsel during the hearing of this appeal. Finally, counsel dealt with Thibault v MNR, [1983] CTC 2211; 83 DTC 182.

In Thibault (supra), the Board pointed out the inherent difficulty of making the determination required in cases of this nature. Many of the cases which have been heard on this subject evolve out of relationships either with a teaching institution or a health services institution. It has been rarely indeed (perhaps the notable examples are James Sim v MNR and Dr William H Alexander v MNR, both referenced in Henry L Molot v MNR, [1977] CTC 2170; 77 DTC 111), in which the appellants have demonstrated a distinction between their work and that of the regular employees of such institutions. The difficulty to prove such a difference was highlighted in Thibault (supra) at 2214 and 185 respectively:

The teaching profession may leave less room for the ‘independent contractor’ to operate than that which obtains for some other professions because of the requirement to co-ordinate all efforts toward one single objective — education, according to the standards and policies established for the institution.

Keeping in mind that Mr Woolner was not in the teaching profession and returning then to the main problem — can it be said from the evidence that the appellant has clearly established that he was an independent contractor with Petrofina; or can it be said that the arguments of the Minister are totally persuasive that he was an employee of Petrofina? While it is true that the Minister has no responsibility in an income tax appeal to establish that Mr Woolner was an “employee”, it is appropriate to see if the evidence supports all, some, or even the critical assumptions ((a) to (m) above) recited by the Minister in the reply to the notice of appeal upon which the assessments were based. While the others may be indicia of some value, it would appear to me that the critical phrases are as follows:

(c) . . . whereby it was agreed that the Appellant should, inter alia, make his personal services available to Petrofina Canada Limited .. .

(e) . . . the Appellant had to make his services available to Petrofina for an indefinite period of time . . .

(f) . .. Petrofina had control over what work the Appellant was to do and when and where he was to do it;

(g) .. . provide personally his services to Petrofina;

(h) .. . the Appellant worked almost exclusively for Petrofina Canada Ltd.

Taking these in increasing order of importance, as I see it, I would suggest that neither “h” above, not “e” above in itself, nor a combination of the two, would be sufficient even if proven to be decisive in a determination that Mr Woolner was an employee of Petrofina. I do not have great difficulty in visualizing a relationship in which one party “worked almost exclusively” for another party; or made services available “for an indefinite period”, and still retained the status of an “independent contractor”.

With regard to “f”, the critical words “what”, “when” and “where” therein, would only confirm the view expressed by Mr Skruibis in testimony, that he called on the appellant when there was a particular job to be done and gave him the time frame within which it was to be completed. He did not insist that the work be done at Petrofina premises, although clearly he had the right to so insist. Again I have no difficulty conceiving of an independent contractor working under those constraints. Certainly they are constraints which are equally applicable to an employee, but they do not decisively show that Mr Woolner was an employee. I note with some interest that the very significant term “how” is missing from the Minister’s assumption and that this was the word that made the difference in the quotation from Rosen (supra) given above:

“,.. In the one case the master can order or require what is to be done, while in the other case he cannot only order or require what is to be done but how it shall be done.” (Italics mine)

I do not accept that requiring Mr Woolner to comply with Petrofina’s normal standards and procedures for the production of design and drafting work would of itself (nor even in conjunction with “h” and “e” above) make him into the employee of Petrofina as opposed to an independent contractor. There was no indication in the evidence that Mr Woolner’s precise or even general design and drafting functions, and the results therefrom, were dictated — or could be dictated — by Petrofina. As usual, we finally reach “g” and “c” above and, in my view, they say essentially the same thing and merely highlight the distinction often made between a “contract of service” and a “contract for service” (see reference to jurisprudence given earlier).

It is therefore solely in the contract and in its execution that one must seek clues which would point to one result or another, as far as this appeal is concerned. On the one side, there was an “agreed upon” hourly rate for the services performed, and invoicing was to be done monthly to Petrofina. To whatever degree the term “specific jobs” might be applicable to the tasks assigned to the appellant by Petrofina, it is clear the payment was not on a “per job” basis, but on a time structure. I can accept that Petrofina had a budget for each job assigned to the appellant, and wanted to retain financial control by such measures. I am not aware that an automobile mechanic, or a plumber for example, performing a task — in his own right and at his own discretion — becomes the employee of the payor merely because the account for the service is rendered based upon an hourly rate charged to complete it. The “hourly rate” factor, in my view, is a major element in this appeal militating against the appellant (certainly it is somewhat indicative of an employee status) but it is not in itself totally persuasive. That is particularly true when cast against the factors which would identify an “independent contractor” relationship between the parties — there were no employee type deductions made; he did not participate in any of the employee benefits provided by Petrofina; and charges for services by Amoeba to Petrofina included more than just the services of the three associates. In simple language, Petrofina did not treat the appellant in any way as an employee. That, to me, is the deciding factor in a case which contains many conflicting elements. I hasten to add that the perception of the arrangement from the payor’s viewpoint and the payor’s conduct in acting according to that perception need not be, and cannot be, regarded as determinative of a “contract of service” or a “contract for service” in all instances. Nevertheless, it cannot be disregarded since any responsible arm’s length payor might be expected to be conscious of the results of an incorrect perception of such a contractual arrangement. I would quote from Thibault (supra) at 2213 and 185 respectively:

The policy of the schools in requiring that these employment contract forms be signed and deductions made may be based on the understanding of the school administration that the liability for such deductions rests initially with the schools. It may appear to this appellant as a ‘Catch 22’ situation — a teacher cannot get the position or assignment desired without the contract form, and the contract form carries with it the deductions.

I can only suggest that when an issue comes down to as narrow a problem as was demonstrated in the present appeal, the task for an appellant to overturn a presumption that he was an “employee” is probably more difficult when he is faced with the normal deductions (and possibly ancillary employee benefits) having been part of the contractual arrangements as seen, acted upon or permitted by the payor.

Based on the testimony of the appellant, the physical evidence submitted and the information supplied by an officer of Petrofina, the Board concludes that the contractual arrangement Mr Woolner had with Petrofina during the years under appeal was not that of employee but that of an independent contractor. Mr Woolner was a businessman and entitled to deductions permitted under the Income Tax Act relevant to that category of taxpayers. It is fundamental to my understanding of the purpose of the sections of the Act relating to business expenses that a “businessman”, if so accredited by the Minister, has a “prima facie” right to a “base of operations”, and to the deduction from business income of the appropriate, relevant and reasonable expenses associated with that base of operations, as well as other necessary business expenses arising therefrom. I can think of no logical reason that in order to claim any business deductions, such a taxpayer should be required to establish his “base of operations” at some geographical location different from his residence. Equally, I can think of no reason that if he did so (establish a “geographically separate” office), the Minister would deny him the relevant business expense deduction. While there might be exceptions, this taxpayer insisted upon his requirement for such an office. I respect the converse opinions of some of my colleagues on this point (ie Verner v MNR, [1983] CTC 2333; 83 DTC 289, and Libera v MNR, [1981] CTC 2298; 81 DTC 276, but I am unable to share their views at this time. I recognize that Cork v MNR, [1981] CTC 2367; 81 DTC 346, is under appeal, but I would quote from 2374 and 350 respectively:

As I see it, therefore, the appellant has established his need for and use of a “base of operations” — no matter how limited that base might be. It is not an unusual situation for a sole properietor to have such a “base of operations” in his own residence, particularly at the commencement of a business venture. (See Keith R Jensen v The Minister of National Revenue, [1977] CTC 2121; 77 DTC 107.

Leaving aside the interjection of the structure “Amoeba” in this appeal, I am prepared to propose that a businessman, except in the most unusual circumstances, is entitled to, indeed must have a “base of operations”, and that should be available to Mr Woolner. In Cork (supra), the Board decided that the Minister, by his own actions, had already made the determination that the appellant was in business, and that no basis existed upon which to challenge the expenses claimed. In the instant case, the Board has decided on the evidence that the taxpayer’s claim to the status of businessman has been supported. The appellant provided very little directly which would support the deductions claimed and, indeed, in large part, he provided only general responses to questions regarding them posed by the counsel for the Minister. I emphasize that I am not greatly impressed with the individual items of expenditures claimed — either in their nature or in their amounts.

Faced now with the same question of “reasonableness” as arose in Cork (supra), the Board can only once again conclude that the Minister’s concentration on the “business-vs-employee” element of the appeal has resulted in the taxpayer’s basic support for the deductions therefrom which were claimed, going virtually unchallenged. I do not see it as the role of the Board to review and virtually reassess and since the appellant has succeeded in overturning the main thrust of the Minister’s contentions, the expenses claimed are to be allowed. Accordingly, the appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.