Wolfgang Hauser v. Minister of National Revenue, [1978] CTC 2728, [1978] DTC 1532

The Chairman:—This is the appeal of Wolfgang Hauser from an income tax assessment in respect of the 1975 taxation year. In his income tax return for that year the appellant claimed as a deduction from income an amount of $2,556.02 as expenses incurred in carrying on a business. Of the expenses claimed, the Minister allowed as professional dues an amount of $366.18, but disallowed expenses claimed for supplies and materials, taxes, business fees, liability insurance, books and journals, telephone accounting fees and travel and conventions in the amount of $2,189.84.

The Issue:

The deductions of the expenses claimed is predicated on the appellant’s contention that he was not an employee, as claimed by the respondent, but was an independent contractor in the exercise of his profession.

Resumé of the Facts:

The appellant is a medical doctor appointed to St. Mary’s Hospital in his specialty as a pathologist. The appellant’s appointment was to the Department of Laboratories, the Director of which was Dr D S Kahn. The appellant was. director of one of. the hospital’s laboratories, viz: the biochemistry laboratory and his main responsibility, as defined by Dr Hauser, was to ensure the output and the quality control of the work done in the biochemistry laboratory by some 15 technologists who are employees of the hospital.

The biochemistry laboratory (as all other laboratories) provides services to the hospital by running biochemical tests on patients where physicians have prescribed such tests. All the necessary equipment of the laboratory is furnished by the hospital so that the appellant’s contribution is his personal knowledge and skill.

The appellant, in the 1975 taxation year received, according to T-4 slips introduced as Exhibit R-1, the following amounts:

From the T-4 slips it is clear that deductions were made in respect of the Quebec pension plan, unemployment insurance and income tax.

Mr Oswald Schmitt, director of finance of St Mary’s Hospital who was called as a witness explained that the appellant’s income was governed by an agreement signed in 1971 by the Ministry of Social Affairs and the Federation of Medical Specialists for the Biochemistry professionals. The agreement provides that qualified professionals would be remunerated at a rate of 19¢ per unit produced in a laboratory up to a ceiling of 195,000 units; any units produced in excess of that figure are paid at a rate of 0.0057¢ per unit.

That is the basis on which the appellant was paid in 1975. However, before making such a payment to any medical specialist St Mary’s Hospital had to submit a budget to the Ministry of Social Affairs for each specialist and that payment is not included in the hospital’s general budget. For 1975, St Mary’s Hospital had approved $39,400 for the biochemistry laboratory. In 1975 the hospital’s biochemistry laboratory produced 890,953 units which was in excess of what the Ministry of Social Affairs approved. The appellant was paid on the basis of 164,211 units at 190 per unit which amounted to, according to his T-4 slips the appellant received, $31,200.09. The difference between the $39,400 approved budget and the $31,200.09 paid to the appellant went to pay other certified biochemists who replaced the appellant when the appellant was absent from the laboratory.

Considerable evidence was adduced as to the complexity surrounding the calculation of the amount of the appellant’s remuneration as well as the corresponding services rendered by the appellant. However, such details, in my view, are not pertinent to the question as to whether the appellant was an employee of St Mary’s Hospital or whether he was in private practice as a pathologist with admitting privileges in the hospital.

Finding of Facts:

1. Notwithstanding the agreement between the Ministry of Social Affairs and La Fédération des Médecins Spécialists du Québec, (Exhibit A-1) and the rate of remuneration to be paid biochemists, (Exhibit A-2), the appellant was paid directly by St Mary’s Hospital in accordance with the above agreement and from a special budget approved by the Ministre des Affaires Sociales.

2. In each of the appellant’s T-4 slips produced as Exhibit R-1, the normal deductions from employees’ salaries, pension, unemployment insurance and taxes were made in respect of the appellant’s remuneration. The appellant: participated in a group insurance plan toward which the hospital contributed the first $1,500 and thereafter paid 50% of the premium. The evidence is that the group insurance plan and the hospital’s contribution to the pension plan and UIC were considered as fringe benefits and was not mandatory, however, it was also stated by Mr Schmitt that such an arrangement did not extend to private practitioners and had the appellant asked that his income tax not be deducted (which he did not do) he would have had to sign a document releasing the hospital of its obligation of doing so.

Notwithstanding that the appellant’s status is that of a professional, there is nothing inherent in that title which excludes him from being an employee, contrary to what the appellant alleges, and it is difficult not to see from the above two factors a very close analogy to any clear employer/employee relationship.

However, since the facts on which the decision as to whether the appellant is or is not an employee of St Mary’s Hospital have at times been considered as marginal, I will apply the tests which the courts have evolved on this subject and to which counsel for the respondent referred in argument.

+. The Control Test: This test, which in certain circumstances is still applicable, has been found by the courts to be too inflexible in determining the issue; particularly in respect of professionals, highly trained and skilled tradesmen. In this instance, it is clear that the director of laboratories could not or would not interfere in the appellant’s exercise of his professional skills. However, even though the usual strict control of an employer over the employee’s work are not found in this instance it does not automatically rule out the possibility that an employer/employee relationship does in fact exist. Before the appellant could be promoted from associate to active member of the Department of Laboratories, the recommendation of the executive committee allegedly of the council of physicians and dentists it had to be approved by the board of directors of St Mary’s Hospital. The appellant was then appointed director of the clinical chemistry laboratory for a period of 5 years, (see letter dated January 3, 1972, from executive director of St Mary’s Hospital).

As I see it, the appellant, at that time, became a full member of the hospital staff. He reported to Dr Kahn, the head of laboratories, who, according to the appellant’s testimony, advised him what his work involved. -It is Dr Kahn, on the basis of the remuneration agreements, who decided on the allocation of the remuneration of funds available for the Biochemistry Laboratory and the amount to be paid to the appellant. The appellant’s remuneration was passed through the hospital salary computer as were those of all hospital employees and the appropriate tax deductions made, (Exhibit R-3). The appellant, as a Staff member, therefore was under the hospital’s control for the general assignment and reporting of his work and for the amount of remuneration that would be allocated to him. Although these factors would not be present if the appellant were in fact a private practitioner, the application of the control test, in my view, is not the circumstances of this appeal, a wholly satisfactory or conclusive one.

2. The Integration Test: There is no doubt in my mind that the biochemistry laboratory was an integral part of the medical services rendered by St Mary’s Hospital and that the appellant was appointed by the hospital under a contract of service by which his knowledge and skills in pathology or in any other related field, in which the appellant may have been qualified, was employed in the hospital’s general Organization in the treatment of patients. In such circumstances the courts have held, as rightly indicated by counsel for the respondent, that the taxpayer was an employee.

3. The Economic Reality Test: This test is particularly revealing if we compare the economics of the appellants professional activities in St Mary’s biochemistry laboratory with that of a private practitioner operating his own private laboratory. In the latter case, the private practitioner runs the risk of financing the equipment, supplying the help necessary to operate and administer his laboratory and he then has to ensure that he has sufficient clients to render his laboratory operation economically viable. The appellant, on the other hand, uses the equipment and supplies which are all furnished by the hospital. He neither hires nor fires any of the technologists who work under him but can, if necessary, request additional help from the hospital’s administration and all the technologists and clerks working in the hospital’s biochemistry laboratory are hired and paid directly by the hospital. The appellant does not seek out clients; the tests are principally made for patients in St Mary’s Hospital and patients and employees of the hospital, (Exhibit R-2, a monthly statistical summary of the biochemistry laboratory). The evidence is that in his absence from the laboratory the appellant is not obligated to arrange for or pay his replacement. Substitute pathologists are paid directly by the hospital.

In this respect the instant appeal differs from the case of Dr William A Alexander v MNR, [1969] CTC 715; 70 DTC 6006, which was allowed by Chief Justice Jackett of the then Exchequer Court. In my view, the differences in otherwise comparable cases stresses the importance and usefulness of the economic reality test. Dr Alexander was a professional radiologist in charge of the Radiology Department in a hospital and he deducted expenses claimed as having been incurred as a result of carrying on his profession as radiologist. The Department of National Revenue disallowed the expenses contending that Dr Alexander was an employee of the hospital. In deciding the issue, Chief Justice Jackett allowed the appeal on the grounds that Dr Alexander’s contract with the hospital provided that he assume the administrative responsibility of his department as well as providing his professional services. Among the provisions of the contract with the hospital, Dr Alexander was obligated to provide coverage of all the radiological work of the hospital whether or not he did the work personally and regardless of the volume of work that had to be done. Since this was at least one characteristic of a contract for services, Chief Justice Jackett held that notwithstanding that the work done by Dr Alexander which might otherwise be considered as part of a contract of service must, in these circumstances, be considered as a contract for services. In the instant appeal, the evidence is that the appellant had no administrative responsibilities and he was not obligated to provide, at his own expense, a coverage for the professional pathological work done in the laboratory. This was looked after by St Mary’s Hospital administration and some biochemical tests were referred out by the hospital to private biochemical laboratories.

On applying the economic reality test to the facts of the present appeal, unlike the Alexander case (supra), there is no valid evidence whatever which might support the proposition that the appellant was under a contract for services. All the evidence tends to establish that from an economic reality point of view the appellant was under a contract of service and therefore an employee of St Mary’s Hospital.

4. The Specific Result Test: This test which was adopted by Chief Justice Jackett of the Exchequer Court in the Alexander case (supra), distinguished a contract for services from a contract of service in these words at page 724 [6011]:

I do not think that I need to review the authorities as a preliminary to reaching a conclusion.* [1] It seems evident that what is an appropriate approach to solving the problem in one type of case is frequently not a helpful approach in another type. 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. If, in this case, the appellant had been given a post to work as a radiologist in the Hospital full time for an indefinite period of time at an annual salary there could, I should have thought, have been little doubt that he was an officer or employee of the Hospital.

In the instant appeal the appellant was appointed as director of the biochemistry laboratory of St Mary’s Hospital for a five year period on a full time basis. His income from the hospital, though paid periodically, was calculated on a yearly basis. It was the appellant’s personal professional services which were at the disposition of the hospital and the appellant’s work was done on a continuous day to day basis with- out there being any limited or specified amount of work that the appellant had, by contract, to accomplish. The appellant had to do the work personally and did not employ or pay substitute part time pathologists to do his work in his absence. According to the specific result test one cannot but conclude that the appellant was an employee of St Mary’s Hospital.

As a result of applying all four tests to the facts of this appeal including the control test, there is nothing that supports the contention that the appellant was under a contract for services or was an independent contractor. All the evidence, in my opinion, clearly indicates that the appellant was under a contract of service and was an employee.

Having come to the conclusion that the appellant is an employee, the question that arises, is which of the expenses claimed by the appellant pursuant to subparagraph 8(1 )(i)(i) of the Income Tax Act, SC 1970-71-72, c 63, as amended, are deductible. The MNR, under the above-mentioned section, has already allowed an amount of $366.18 Claimed by the appellant as professional dues. The appellant, at the hearing, gave no explanation as to exactly what taxes, licences or fees he referred to or how the amount of $357 claimed was made up and he failed to establish that that amount was deductible under subparagraph 8(1)(i)(i).

The amount of $200 claimed by the appellant as payment for a liability insurance was raised by the appellant during argument and although no evidence was adduced in relation to that expenditure, counsel for the respondent admitted that the amount was paid but Stated that it was the Minister’s view that the amount was not deductible under subparagraph 8(1 )(i)(i) of the Income Tax Act. In support of that position, the cases of MNR v Robert A F Montgomery, (1970) CTC 115; 70 DTC 6080, and Her Majesty the Queen v Robert B Swingle, (1977) CTC 448; 77 DTC 5301 ; were cited.

Subparagraph 8(1 )(i)(i) was interpreted restrictively by the Exchequer Court and the Federal Court trial division and the deductions claimed in each case were disallowed. In the Swingle case (supra) whose facts are more comparable to that of the instant appeal, the Federal Court of Appeal reversed a decision of the Tax Review Board which had allowed the deduction. The learned Mr Justice Collier stated at page 457 [5307]:

To my mind, the defendant has not proved one essential matter, quite necessary before the so-called main issue can be met. The defendant is a chemist or an analyst, or perhaps both. If he is viewed as a chemist, it has not, as I see it, been shown, on the materials before me, that the professional status of a chemist is one “recognized by statute’’. I am convinced the defendant has indeed a “professional’’ status in his particular field—just as much as a doctor or lawyer. But no statutes recognizing that professional status were put before me, nor cited.

Even if the appellant had established that the professional status of a biochemist is one recognized by statute, which the appellant did not do, he would still have to meet the requirement that the payment of liability insurance is necessary to maintain his professional status. Although the appellant gave no evidence to that effect he alleged that he would not be able to work as a biochemist if he were not covered by liability insurance which he referred to in argument as a malpractice insurance.

In my opinion, though the payment of the liability insurance claimed by the appellant no doubt afforded him some financial security in the exercise of his profession, it was not a payment which was necessary to maintain his professional status within the meaning of subparagraph 8(1 )(i)(i) of the Income Tax Act and is therefore not deductible.

For these reasons the appeal is dismissed.

Appeal dismissed.