Donald B Macdonald v. Minister of National Revenue, [1974] CTC 2204, 74 DTC 1161

The Chairman (orally: May 27, 1974):—This is an appeal by Donald B MacDonald from the reassessment by the Minister of National Revenue for the 1970 taxation year. The amount in issue is not great, but the principle involved is one that might have important ramifications for many persons in the same position as Mr MacDonald. I have often said in my decisions that one should not be influenced by the amount involved, whether it be great or small, but one must try to reach a conclusion to the best of one’s ability on the evidence presented and the principles of income tax law, or the common law where applicable, and not on the basis of what effect it might have on one particular individual.

The evidence is that Mr MacDonald is a highly successful life and general insurance salesman. He pointed out in his evidence that, under the laws of the Province of Ontario, in order for one to sell life and general insurance one must be licensed by the Province, and must be sponsored by one of the companies licensed by the federal government to carry on life insurance sales in this country under the provisions of an Act which goes back to pre-Confederation times. Those last words are mine, not Mr MacDonald’s.

The evidence is that he operates out of an office supplied by the London Life Insurance Company, with a secretary paid by that company, and that his entire income is dependent upon the sales that he makes and the commission agreement that he has with London Life for those sales. His entire income is commission income. The question is whether or not he is entitled under paragraph 11(1)(ia) to deduct convention expenses. I quote the section because it is short:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(ia) an amount paid by the taxpayer in the year as or on account of expenses incurred by him in attending, in connection with a business or profession carried on by him, not more than two conventions held during the year by a business or professional organization;

There is no doubt that the conventions in question were held by business or professional organizations, nor is there any doubt—in fact, it is admitted—that the degree of success and study that Mr MacDonald has put into his vocation would qualify him as a professional within the meaning in my decision in Axler & Palmer Ltd v MNR, [1973] CTC 2167; 73 DTC 119. However, in that case it was a question of whether or not a company was entitled to report its income as a professional under the cash or the accrual system which existed under the pre-1972 act, an issue quite different from the one that is before me today.

The question is whether or not this appellant was an employee of the London Life Insurance Company. There was a contract (Exhibit A-1) which specified—and I am quoting from memory—that, notwithstanding the terms and conditions, the appellant was an independent contractor. This then raises the question as to whether or not the form or the substance of the matters involved before me is important. I think it is well established that it is the substance of the whole transaction, or series of transactions, that one must look at, rather than any isolated part thereof or any wording agreed to by contracting parties if in fact what actually took place did not substantiate the description given to the relationship between them in any written agreement.

Counsel for the Crown has, of course, considerable advantage over the appellant in this case, and has made an exhaustive search of the law, and has cited some well-established and applicable law.

If support is still needed for what I have just said with respect to contracts between parties, I need only refer to a very recent judgment of Mr Justice Cattanach of the Federal Court of Canada sitting as an umpire under the Unemployment Insurance Act in the case of Irving Edward Orton v MNR (NR9). The judgment is dated April 25, 1974, and at the bottom of page 3 the learned judge says:

The fact that the parties to a contract refer therein to a certain relationship existing between them, as was done in paragraph 5 of the contract between the appellant and Public Works, is not conclusive of the existence of that relationship. The parties simply by saying something is what it is not cannot convert that something into something other than it is.

This sounds very much like Mr Justice Cattanach’s words in T G Quance v The Queen, [1974] CTC 225; 74 DTC 6210, where he said that the mere discharging of an employee and paying him what would otherwise be taxable funds could not be metamorphized into something else by virtue of the discharge. In the Orton case (supra) he goes on to cite Ready Mixed Concrete v Minister of Pensions, [1968] 1 All ER 433 at 439:

... That the question whether the relation between parties to a contract was that of master and servant or otherwise was a conclusion of law dependent on the rights conferred and the duties imposed by the contract; and that if facts were such that the relation is that of master and servant, it was irrelevant that the parties had declared it to be something else. Such a declaration was not necessarily ineffective, for if it were doubtful for what rights and duties the parties wished to provide, such a declaration might help in resolving the doubt and in fixing them in the sense required give effect to the expressed intention.

In Dr W H Alexander v MNR, [1970] Ex CR 139; [1969] CTC 715; 70 DTC 6006, President Jackett, as he then was (now Chief Justice of the Federal Court), outlined the basic distinctions between a contract of service where the relationship is that of employer and employee, and a contract for services where the relationship between the parties is that of client and independent contractor. I quote his words at page 153 [724, 6011]:

... On the one hand, a contract of service is a contract under which one party, the servant or employee, agrees, for either a period of time or indefinitely, and either full time or part time, to work for the other party, the master or the employer. On the other hand, a contract for services is a contract under which the one party agrees that certain specified work will be done for the other. A contract of service does not normally envisage the accomplishment of a specified amount of work but does normally contemplate the servant putting his personal services at the disposal of the master during some period of time. A contract for services does normally envisage the accomplishment of a specified job or task and normally does not require that the contractor do anything personally. . . .

In the case before Mr Justice Cattanach the appellant was not engaged to perform a specified job or task, as is normally the case In a contract for services, but to provide specifications for a number of projects before the department as were assigned to him. These assignments were made as a part of the routine process of that particular section of the department in carrying out its functions. A task would be assigned to any specification writer in the section (including the appellant) who happened to be free at the time the task arose.

The evidence today of Mr Keaney, the regional manager of the London Life Insurance Company, has made it clear that the bulk of the business written for his company is written. by people who are in the same position as Mr MacDonald. There are still people who are engaged in activities resulting from older types of contracts that were written some years ago whereby these people are paid a small salary plus a commission for making the collections, and a small additional commission so long as the business stays on the books.

Two fairly recent decisions of the Pension Appeals Board—Comet Realties Ltd v MNR in 1972 and Mann and Martel v MNR in 1968— contain a premise that seems now well accepted by judges who preside in courts of law. After looking at the entire situation as disclosed by the evidence, the exhibits and the written agreement, the Board came to the conclusion that the salesmen in those two cases, who were real estate salesmen, were integral parts of the appellants’ businesses. In the Comet Realties case it was stated that without these salesmen there would have been very little income for Comet Realties and the principal shareholders would have had to take a much more active part in the selling of real estate than they did. In the Mann and Martel case it was stated:

The essence of the business, that is, the means by which the appellant comes by its revenues, is trading in real estate; and the necessary work of the appellant’s salesmen ... is to bring about, as agents for vendors and purchasers, such trading. Without salesmen there would be no business on the scale of the operation conducted by the appellant. Without salesmen there would be but one small brokerage office, the activities of which, in quantitative terms, would bear no relation to the large concern which exists In Tact.

Many cases have been cited on the rules, as they have evolved over the years, concerning the question of what an independent contractor is, and the various tests that are now considered applicable. It is interesting to note that, as far back as 1924 in Performing Rights Society, Limited v Mitchell and Booker (Palais de Danse), Limited, [1924] 1 KB 762 at 767, the court, although still maintaining a great deal of reliance on the control issue, acknowledged that this circumstance is only one of several to be considered, although it is usually of vital importance. The jurisprudence as it has evolved over the years has lessened the significance of control where it applies to men of superior qualifications in their fields such as the appellant in this case. I am more inclined to look at the type of test that was used by Mr Justice Cattanach, sitting as an umpire under the Unemployment Insurance Act, in the recent case of Irving Edward Orton v MNR, and those in the Mann and Martel and Comet Realties cases, and ask: what business would there be for London Life without men like this appellant as an integral part thereof? In asking myself that question, I can come to no other conclusion but that without men such as this appellant there would be no business on the scale and with the high degree of success that exists in this field of endeavour.

On the basis of the evidence before me and the cases to which I have referred I must, therefore, come to the conclusion that, although the appellant is a professional man, he is not engaged in a business or profession so as to allow him to take advantage of paragraph II (1)(ia) of the Income Tax Act, and the appeal must fail.

Appeal dismissed.