Citation: 2009TCC26
Date: 20090128
Docket: 2007-1802(IT)G
BETWEEN:
DOUGLAS GILLESPIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1]
The Minister of
National Revenue (the “Minister”) assessed the Appellant for the 2003 and 2004
taxation years on the basis that he was not entitled to the overseas employment
tax credit (“OETC”) for those years.
[2]
From those assessments
the Appellant takes this appeal.
Issues
[3]
The parties agreed that
the only issue before the Court is whether or not the Appellant was an
independent contractor or an employee during the years in issue “but for the
existence of Doug Gillespie Consulting Inc.”.
[4]
Put another way, would
the Appellant be reasonably regarded as an employee of Elbit Systems Ltd.
(“Elbit”) under the applicable section of the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”)?
Evidence
[5]
The Appellant testified
that he is a resident of Winnipeg, Manitoba and has lived there since 1985.
Before that time, he was in the Canadian Armed Forces, particularly in the
Naval Air Branch. He was engaged in Sea King helicopter maintenance, Tudor
aircraft, and heavy transport aircraft. He worked at bases in Shearwater, Nova Scotia, Moose Jaw, Saskatchewan, and
Trenton, Ontario, before coming to Winnipeg in 1985.
[6]
In 1988 he went to
British Aerospace as part of the Department of National Defence and became an
employee of British Aerospace in 1989. Canada sold the aircraft that he was
working on to Botswana and he stayed on to do the maintenance on
them. He was the contact person for the Botswana Air Force. He also wrote the
maintenance course for them.
[7]
He was informed about a
job with Elbit. The opportunity was in Venezuela working with Venezuela Air Force personnel as the supervisor. The project
was with respect to F-5 aircraft. He considered it to be a challenge.
[8]
The position offered
more wages, or three times the salary he was earning at that time. His new
salary was in the range of $200,000 per year. There were certain risks that he
would have to take: he would have to give up his medical and dental coverage;
it was a violent country; and he had to buy his own software, computer and
camera.
[9]
He identified Exhibit A-1
which was a letter sent to the Canada Revenue Agency (“CRA”) by Elbit which,
among other things, referred to him as an independent contractor and not as an
employee of Elbit. This document was admitted into evidence only for the
purpose of showing that it was sent and not for the truth of the statements
contained therein.
[10]
It was the Appellant’s
evidence that that indication was correct and he considered himself to be an
independent contractor to Elbit and not an employee.
[11]
Exhibit A-2 was
identified by the Appellant as his Consultancy Agreement which came to him
after he had been contacted by an agent of Elbit. He had been interviewed in Canada. Paragraph 5(b) set out that nothing in it should be
construed as creating an employer-employee relationship. He considered himself
to be an independent contractor thereunder.
[12]
He attempted to obtain
liability insurance for himself but could not due to the high cost so he
obtained coverage through Elbit’s plan for him personally.
[13]
He incorporated a
company, Doug Gillespie Consulting Inc. (the “Company”) for the purpose of
further protecting his personal liability. In the event that the aircraft
failed after he completed his work, he would be responsible. It was a big risk.
When he was discussing the contract, the insurance was not to be provided.
Further, Elbit agreed to give him paid vacations and pay out‑of‑the‑country
medical costs.
[14]
He was to organize and
set up all the elements to perform the structural upgrade on the airplanes, the
inspection of them, to order parts, keep track of the work and when it was to
be done and prepared a training manual for the workers. He had to document
testing, overhaul the hydraulics, gather all the information as to what had to
be done and forward it to the Venezuela Air Force. He had to inventory the
aircraft because the aircraft required more work than what was at first
believed necessary. The Appellant quantified what was needed by way of parts,
material etc. and the Venezuela Air Force picked the persons that were
qualified to do it from their ranks. The Appellant chose the person who was to
be second in command of the project.
[15]
The Appellant bought
whatever extra machinery and equipment that was necessary and he invoiced the Company
for it.
[16]
He said that Elbit
brought in a “sheet metal man” to give “hands-on instructions” to the workers.
The Appellant kept track of all of the parts and was responsible for the
“logistics”. The aircrafts were ultimately reassembled. He laid out the day’s
work after meeting with the Venezuelan foreman and would view the progress of
the work.
[17]
Often times they worked
in the night. He had to arrange to feed and transport the workers. He spent
quite a bit of time shopping for parts. Whatever he bought for the project he
received reimbursement. He had to provide monthly progress reports to Elbit.
The program manager in Haifa came down periodically to view the job.
[18]
He purchased whatever
tools he needed or received them from the Venezuelan Air Force. He had the
right to ask for different workers from the Venezuelan Air Force.
[19]
He decided when they
needed experts for certain work, for testing and when they needed any special
equipment. He had to make the proper “paper trail” for the work and it became
part of the aircraft’s record.
[20]
Exhibit A-4 is an On
The Job Training Manual and Exhibits A-5 to A8 are Workbooks, 4, 5, 2, and 1,
respectively, being manuals and programs that he created. Exhibit A-9 was
samples of invoices that he had submitted to Elbit for monies expended by him
for which he was seeking reimbursement.
[21]
He said that he had to
respond to the needs of the Venezuelan Air Force with respect to this project
and had to replace certain parts with substitutes if an export licence could
not be obtained from the United
States.
[22]
He also travelled to Israel and back to pick up the necessary signature. The job
started in 2002 and finished in 2004.
[23]
With respect to the
present claim, he visited a chartered accountant who told him that he should
claim the deduction. It was disallowed ultimately.
[24]
Exhibits A-10, A-11 and
A-12 were letters from Elbit that the Appellant received which purportedly
supported his status as an independent contractor but were not accepted for the
proof of the truth of the statements made therein.
[25]
In cross‑examination,
Exhibit R-1, the Consultancy Agreement was admitted.
Argument on Behalf of the Appellant
[26]
Counsel for the
Appellant argued that there was only one issue. But for the existence of the Company,
would the Appellant have been an independent contractor or an employee?
[27]
There is no silver
bullet which will decide one way or the other. Was he in business on his own
account or for someone else? It is more likely that he was an independent
contractor.
[28]
It is significant that
there was an agreement that both parties signed. The question to be asked is “does
it reflect the real situation?”
[29]
Both parties chose not
to have an employer-employee relationship for their own reasons. There were
benefits for both in their arrangement.
[30]
The Appellant was
assigned specific tasks as set out in Exhibit A-2, paragraph 2. a. of the Consultancy
Agreement. Under paragraph 5. b. he was not to be considered an employee. Under
paragraph 5. d. the Appellant was responsible for any damage that ensued
because of his work.
[31]
The letters that were
introduced are corroborative of the agreement.
[32]
The Minister has called
no evidence to support his position.
[33]
With respect to the
matter of control, the Appellant controlled his own work. “It was his baby”
even though he provided project reports every couple of months.
[34]
He did what he felt was
necessary. He appointed the second in command and he organized the other 25
workers. He organized the tools and trades that were necessary to get the
contract completed. He decided the hours. He set up the schedules; the
logistics; the procurement of parts; prepared programs; arranged training and produced
manuals.
[35]
With respect to the
ownership of tools, he provided his own computer, cell phone, camera and
procured other tools.
[36]
Regarding profit and
loss, he could make a profit and he could suffer a loss as a result of the
safety issues. Regarding integration, he was not part of Elbit.
[37]
The facts discussed
here meet the tests in Wiebe Door Services Ltd. v. M.N.R., [1986] 2
C.T.C. 200.
[38]
As in Wolf v. Canada,
[2002] 3 C.T.C. 3, the Appellant was entitled to arrange his affairs in his own
way to allow him to take advantage of a tax benefit. His actions were
consistent with the terms of the contract.
[39]
The appeal should be
allowed.
Argument on Behalf of the Respondent
[40]
Counsel said that 671122
Ontario Ltd. v. Sagaz Industries Canada Inc., 2001, S.C.C. 59, applies. Wolf,
supra, has been revisited.
[41]
The purpose of the OETC
is to facilitate Canadian business abroad. There is an anti-avoidance measure
in the relevant section that says that you cannot incorporate a company merely
to be able to gain the credit when you are really an employee of a company
which is not a specified employer under the provisions of paragraph 112.3(1.1)(c)
of the Act.
[42]
The important parts of
the agreement are the objective parts, not the bare statements made therein.
The Appellant must show on a balance of probabilities that he is an independent
contractor. He needs to provide corroborative evidence of that position. His
evidence amounts to no more than self-serving evidence.
[43]
The Reply was drafted
in accordance with the terms set out in the agreement.
[44]
In answering the
question of whether the Appellant could reasonably be regarded as an employee
of the person or partnership that is not a specified employer, the question of
intention is not relevant but control is. Intention is highly subjective,
corroboration is important and this case cries out for it. See Huh v. Canada,
2000 DTC 2422 where the Court was faced with the lack of corroboration even
though the taxpayer’s evidence was long and detailed. Those parts that were
corroborated were accepted and those that were not corroborated were not
accepted.
[45]
Further in that case
the mere statement of their intention was not accepted as sufficient evidence
of it. There were no written documents to demonstrate the taxpayer’s position
with respect to the corporation. The written agreement produced was in conflict
with the oral testimony. There was no documentation provided to establish the
presence of a bank account and the oral testimony of its existence was
rejected.
[46]
The case of Tobin v.
M.N.R., 2003 Carswell Nat 2322, is support for the position that the onus
of proof is on the Appellant to lead evidence that destroys the presumptions in
the Reply. This has not been done. Corroborating evidence should have been
available and the oral evidence of the Appellant was self-serving.
[47]
He said that he
reported monthly but there were no copies of any such reports and no documents
to show that he did report. The best evidence of a party’s intention is the
nature of their actions. One must ask, is the evidence of the Appellant
credible?
[48]
The Appellant was a
highly skilled employee at British Aerospace without risk. What changed when he
did the work for Elbit?
[49]
As in 1166787
Ontario Ltd. v. R., 2008 DTC 2722, the independence that the Appellant here
had with respect to his work was no different from the independence that
consultant professional employees are granted by their employers and there was
no risk of loss for the Appellant here in the performance of his contract as found
in the above-cited case.
[50]
As In Logitek
Technology Ltd. v. M.N.R., 2008 Carswell Nat 2335:
19. … In the case of highly skilled or professional workers,
however, the necessary control is established if the employer has the right to
tell the worker what to do, even though he cannot tell him or her how to do it.
[51]
In this case, Elbit had
the right to give the Appellant other work if it wished to do so other than
work in Venezuela. It was Elbit that obtained the contract
and not the Appellant. Is he in his own business or is he an employee?
[52]
Regarding the issue of
chance of profit and risk of loss, it must be a commercial loss or profit.
[53]
A regular pay cheque
like the Appellant received is indicative of an employee situation: here his
expenses were reimbursed.
[54]
He did not have his own
business. When Elbit left Venezuela, he left. He is a classic professional
employee.
[55]
He gets paid when he
works. He was a technical supervisor in regular employment.
[56]
The appeal should be
dismissed.
Rebuttal
[57]
The big difference
between the case at bar and the cases cited by the Respondent is the written
agreement. Not all of the Appellant’s expenses were paid and he could not
change the work that was to be done.
Analysis and Decision
[58]
The factual situation
in this case is not really in issue as counsel for the Appellant did not
directly or indirectly challenge the presumptions contained in the Reply to
Notice of Appeal. Rather it is the conclusion to be drawn from the facts that are
in issue.
[59]
The Court is satisfied
that credibility is not a real issue here as the Appellant appeared to the
Court to be a straight-forward, honest, intelligent and knowledgeable witness.
It is true that, apart from the signed contract itself, there was no
corroborative evidence of his testimony, but that does not detract from his
overall demeanour as a witness which was most satisfactory.
[60]
The Court is satisfied
that the Appellant believed that he was entering into an independent contractor
situation with Elbit, certainly at the beginning, but the factual situation
changed somewhat from the time the negotiations started until the final
contract was signed on September 21, 2001.
[61]
The Company came into
existence after the consulting agreement was signed and the Appellant said that
his purpose in incorporating was to give him further protection against
personal liability. He said that he went to an accounting firm when preparing
his income tax return for the years in question and there was no evidence given
that the availability of the OETC was one of the factors that he considered in
incorporating, but even if it was, there was nothing improper about that.
[62]
The burden of proof is
extremely important on the facts of this case where there are factors
established in evidence that in some instances are indicative of an independent
contractor situation and other established facts that would suggest an
employer-employee relationship.
[63]
It is the Appellant’s
duty to tip the balance in his favour on such competing facts, and if he is not
successful in doing so, he cannot succeed in this appeal.
[64]
The case of Wiebe
Door Services Ltd., supra, is helpful in the case at bar. The four tests
set our therein are
(a)
The degree or absence
of control, exercised by the employer,
(b)
Ownership of tools,
(c)
Chance of profit and
risk of loss,
(d)
Integration of the
alleged employee’s work into the alleged employer’s business.
To that list this Court adds the terms and conditions
of employment and the intention of the parties as established by the evidence
of the parties and a written agreement between the parties, if one exists.
[65]
It has been well
settled that all of these factors need not be given the same weight. In some
cases one factor will stand out and may be given a great deal of weight and the
other factors may be given less weight. As indicated in that case and others,
it is not just a numbers game so that if you have the majority of factors
indicating one conclusion then that defines the relationship.
[66]
In Royal Winnipeg
Ballet v. M.N.R., 2006 CarswellNat 492 (F.C.A.), the Federal Court of
Appeal overturned a decision of the Tax Court of Canada that found the ballet
dancers to be employees. The Court concluded that the Tax Court Judge had
failed to consider the question of intention.
[67]
In Wolf, supra, the
Federal Court of Appeal placed a great deal of weight on the intention of the
parties as evidenced by the terms of the contract.
[68]
Each case must be
decided on its own factual situation, after taking into account the
above-referred to factors.
[69]
In the case at bar, the
Court will consider each of the above referred to factors in light of the
evidence given. Of significance also is the case of Sagaz Industries
Canada Inc., supra, referred to by counsel for the Respondent.
[70]
In that case the Court
asks itself the question, whose business is this? Is the taxpayer engaged in a
business in his own right or is he acting as part of the purported employer’s
business?
Intention
[71]
The only evidence of
intention here is that of the Appellant and the written agreement. It states
that the parties are entering into an independent contractor arrangement. But
is that intention consistent with the facts?
[72]
The Court puts little
weight on the letters that were submitted in support of this contention.
Further, no one was called from the employer to corroborate the evidence of the
Appellant and this could have been done. There was no explanation offered as to
why this evidence was not available.
[73]
The Appellant submits
that he was an independent contractor and yet he obtained for himself a number
of benefits that are normally associated with an employer-employee situation
such as a definite salary, regular hours, and duty to work overtime, liability
insurance, paid vacations and repayment of expenses including travel costs. All
of these benefits were included in his agreement.
Control
[74]
The Appellant had a
great deal of anonymity on the job. He selected the second in command, he
requested the proper trades’ people and could ask them to be replaced, he
directed the daily work at the job site, kept the work on schedule, wrote
manuals for the workers and secured the necessary parts and equipment that he
deemed necessary. There is no doubt that he had a great deal of control of his
work.
[75]
However, he was doing
one project only. That was a project that was given to him by Elbit. It was the
only project he was doing. He was not free to do work for any other party.
Elbit told him when to do the work and set out the number of hours he had to
work in a week. Elbit could tell him when to stop his work and when to start it
and they did so. He was not free to hire someone else to do his work. He had to
provide his services personally.
[76]
The Court is satisfied
that the Appellant was a highly skilled technical person who was hired by Elbit
to perform very technical work. However, it also had the right to give him other
work apart from his work in Venezuela.
[77]
He had to perform the
work in accordance with established procedures and even though he could
recommend that some workers be removed, these workers were not hired by him but
were provided by Elbit, through the Venezuela Air Force.
[78]
Again, the agreement
provided that he work nine hours per day, five days a week and in special
circumstances dictated that they would work overtime.
[79]
This Court is persuaded
by the able argument of counsel for the Respondent that the Appellant falls
into the same category as the worker in 1166787 Ontario Ltd.,
supra, where Justice Miller, said at paragraph 27:
27 … The independence Lee had with respect
to how she did her work is no different from the independence that competent
professional employees are granted by their employers.
[80]
Consequently, this
Court finds that in the case of such employees it is no longer acceptable to
find that a worker who is not told how to do a job makes that worker an
independent contractor.
[81]
The amount of control
exercised by Elbit here was sufficient to indicate an employer-employee
relationship.
Ownership of Tools
[82]
The Court is satisfied
that this factor is consistent with an employer‑employee relationship.
[83]
It is true that the
Appellant was responsible for buying his own cellular telephone and his
computer but the vast majority of his tools were provided by Elbit because he
was reimbursed for all of his purchases.
Chance of Profit and Risk of Loss
[84]
The Court is satisfied
that the Appellant had no chance of making a profit or suffering a loss in the commercial
sense.
[85]
His salary was set and
if he worked he received the pay as set out in the agreement. There was no
possibility that he could earn more money by working harder or longer. His only
income was his salary.
[86]
Likewise, he could not
suffer a loss because all of his expenses were paid for by Elbit.
Integration
[87]
The Court is satisfied
that the Appellant’s work was completely integrated into that of Elbit. He was
not engaged in a business of his own. Elbit was his only contract and he did
not hold himself out as being able to provide services for others and there
were not other indications that he was operating a business on his own.
[88]
When the Court asks the
question, whose business is this? The answer has to be that it was that of
Elbit.
Terms and Conditions of Employment
[89]
The terms and
conditions of employment are of less significance here than the others factors
but they are similar to any that would be found in any employer‑employee
relationship.
[90]
This is a classic case
of where the parties purported to be entering into one kind of relationship in
a written agreement, but acted in a completely different manner. The old adage
that actions speak louder than words is appropriate here.
[91]
The appeals are dismissed
and the Minister’s assessment is confirmed.
Signed at Toronto,
Ontario, this 28th day of January 2009.
“T. E. Margeson”
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