Citation: 2013 TCC 135
Date: 20130430
Docket: 2012-1000(IT)I
BETWEEN:
GOMEZ CONSULTING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bédard J.
[1]
On September 14,
2010, the Minister of National Revenue (the “Minister”) issued reassessments of
the Gomez Consulting Ltd.'s (the “appellant”) tax liability and thereby
disallowed its claim for the small business deduction in calculation of its tax
liability for the 2007 and 2008 taxation years and disallowed the deduction of
expenses in the amounts of $10,000, $8,341, and $9,613 for the 2007, 2008 and
2009 taxation years, respectively. The Minister concluded that the appellant
was a personal services business during the taxation years in issue and,
consequently, disallowed the small business deductions claimed by the appellant
pursuant to subsection 125(1) of the Income Tax Act (the “Act”)
and disallowed the said expenses claimed by the appellant in accordance with
paragraph 18(1)(p) of the Act. The Minister concluded that the
appellant was a personal services business on the basis that if it was not for
the existence of the appellant, Mr. Luis Gomez Almeida could reasonably be
regarded as an employee of Canada Revenue Agency (“CRA”) and Canada Mortgage
and Housing Corporation (the “Clients”), the entities to which the services
were provided. The said reassessments are now appealed from.
[2]
In determining the
appellant’s tax liability for the relevant period, the Minister relied on the
following assumptions of facts (which are enumerated in para. 10 of the
Reply to Notice of Appeal):
a.
during the relevant period, Luis Gomez Almeida
was an employee and sole shareholder of the appellant (admitted)
b.
during the relevant period, the appellant had
only two employees, Luis Gomez Almeida and his spouse Maria J. Riviere (admitted)
c.
the appellant carried on a business of providing
information technology (“IT”) consulting services (admitted)
d.
the appellant entered into agreements with AQR
Management Services Inc. (“AQR”) for the provision of computer related services
by Luis Gomez Almeida to the Canada Revenue Agency (“CRA”) and to the Canadian
Mortgage and Housing Corporation (“CMHC”) as follows: (admitted)
|
Date
|
Clients
|
From
|
Up to
|
|
March 11, 2006
|
CRA
|
March 20, 2006
|
June 30, 2007
|
|
May 1, 2006
|
CRA
|
July 1, 2006
|
May 31, 2007
|
|
May 1, 2007
|
CMHC
|
May 1, 2007
|
December 31, 2007
|
|
June 1, 2008
|
CRA
|
June 16, 2008
|
March 31, 2009
|
e.
the Clients authorized the work to be done (admitted)
f.
the Clients authorized the ours to be spent on
the work (denied)
g.
Luis Gomez Almeida was required to report to the
Clients’ premises (admitted)
h.
Luis Gomez Almeida performed the work under the
Clients’ control and direction (denied)
i.
the services provided were to be provided by
Luis Gomez Almeida and could not be assigned (denied)
j.
Luis Gomez Almeida recorded his hours on
timesheets (admitted)
k.
the Clients approved Luis Gomez Almeida’s
timesheets (admitted)
l.
the Clients had to authorize any overtime that
was worked (admitted)
m. Luis Gomez Almeida was paid at a specific daily rate for
7.5 hours worked per day (denied)
n.
Luis Gomez Almeida was provided with office
space, telephone and network access on the Clients’ site (admitted)
o.
Luis Gomez Almeida did not incur operating
expenses in order to provide the services (denied)
p.
Neither Luis Gomez Almeida nor the appellant
bore any financial risk (denied)
q.
Neither Luis Gomez Almeida nor the appellant was
required to make any investment in order to provide the services (denied)
r.
Luis Gomez Almeida was solely dependant on the
income he received with the contracts with the Clients (denied)
s.
Luis Gomez Almeida did not have more than one
client at the same time during the Relevant Period (admitted)
t.
Luis Gomez Almeida did not solicit any
additional business while he was contracted to the Clients (admitted)
u.
ARQ was not associated with the appellant during
the Relevant Period (admitted)
v.
the appellant deduction $4,983, $3,894 and
$3,545 on account of payments for GST/HST remittance for the 2007, 2008 and
2009 taxation years, respectively (admitted)
w. the GST/HST remittances were included in the disallowed deduction
expenses as set out in paragraph 6 above under the headings “Business,
Taxes, licences and membership” and “Withholding taxes” (admitted)
x.
the appellant used the quick method of
accounting to calculate GST/HST remittances (admitted)
Appellant’s position
[3]
The appellant submits
that it was not a “personal services business” as per the test in
subsection 125(7) of the Act during the relevant period, and, therefore,
all expenses and deductions should be allowed as claimed. The appellant relies
strongly upon the intention of the parties in this case, as evidenced by the
terms and conditions of the contracts entered into between the appellant and
AQR Management Services Inc. (“AQR”) during the relevant period (Exhibit A‑1)
(the “Contracts”). The appellant points out that several cases of this Court
have focused on the importance of this consideration since the Federal Court of
Appeal’s decision in Royal Winnipeg Ballet v. M.N.R., 2006 FCA 87,
2006 D.T.C. 6323 (Eng.) (F.C.A.) (“Royal Winnipeg Ballet”). In
other words, the appellant submits that the intention of the parties and the
entire relationship at hand should be paramount in qualifying the relationship.
Respondent’s position
[4]
The respondent submits
essentially that, on the basis of the test propounded in Wiebe Door Services
Ltd v. M.N.R., 87 DTC 5025 (“Wiebe Door”), Mr. Almeida
would, if it were not for the existence of the appellant, reasonably be
regarded as an employee of the Clients, the entities to which the services were
provided. In other words, the respondent submits that the appellant has not
shown that he was an independent entrepreneur. Finally, the respondent submits
that intent is not a relevant consideration in a case involving a “personal
services business” determination under subsection 125(7) of the Act.
[5]
The appellant has
called three witnesses: Mr. Luis Gomez Almeida, Mr. Mario Ma and Mr.
Jorge Arrozo.
[6]
Mr. Almeida’s
testimony essentially revealed the following:
a.
Mr. Almeida is an
“Applications Analyst Programmer” where he built programs for clients involving
the inputting and extracting of data;
b.
Mr. Almeida’s work
for the Clients could only be done on the Clients’ site. The appellant
explained that he had access to the Clients’ site 24 hours a day, although
he could not sign anyone in;
c.
Mr. Almeida had to
fill out timesheets for the Clients without which the appellant would not have
been paid;
d.
Mr. Almeida worked
as part of team. There was a team leader who made sure the team collaborated
properly. Mr. Almeida had to report to the team leader who evaluated the
progress of the work he had done;
e.
the appellant was paid
on a per diem basis for every 7.5 hours worked by Mr. Almeida and
authorized by the Clients. If, on a given day, Mr. Almeida worked more or
less than 7.5 hours, the per diem basis was increased or decreased on a
pro rata basis. In other words, the appellant was remunerated on an hourly
basis. Mr. Almeida added that neither the appellant nor he ever received
bonuses for his work. He also explained that there had been some negotiations
as to the per diem rate;
f.
there was a workstation
provided for Mr. Almeida at the Client’s site;
g.
the appellant obtained
contracts on the basis of Mr. Almeida’s knowledge;
h.
the only operating
expenses the appellant incurred (cell phone, etc) were not operating expenses
incurred (or required by the Clients) in relation to the provision of services
to the Clients;
i.
the only risk of loss
to Mr. Almeida and the appellant lay in an eventual insolvency of the
Clients or AQR, a very unlikely prospect according to the evidence;
j.
neither the appellant
nor Mr. Almeida had the right to subcontract the work without the Client’s
approval.
[7]
Mr. Ma's testimony
essentially revealed the following:
i.
during the relevant
period, Mr. Ma was also providing information technology consulting
services (“IT services”) to CRA, Mr. Ma added that he and Mr. Almeida
were working at some point on the same team for the CRA and were essentially
providing the same IT services;
ii.
the CRA (the appeals
division) recognized that Mr. Ma was an independent contractor while he
was providing IT services to the CRA. I want to point immediately that
Mr. Ma’s situation differs significantly from that of Mr. Almeida in
that the latter had his own corporation.
Discussion
[8]
The relevant sections
of the Act read as follows:
(125)7
“personal services business” carried on by a corporation
in a taxation year means a business of providing services where
(a) an
individual who performs services on behalf of the corporation (in this definition
and paragraph 18(1)(p) referred to as an “incorporated employee”), or
(b) any
person related to the incorporated employee
is a
specified shareholder of the corporation and the incorporated employee would
reasonably be regarded as an officer or employee of the person or partnership
to whom or to which the services were provided but for the existence of the
corporation, unless
(c) the
corporation employs in the business throughout the year more than five
full-time employees, or
(d) the
amount paid or payable to the corporation in the year for the services is
received or receivable by it from a corporation with which it was associated in
the year;
248(1)
“specified shareholder” of a corporation in a taxation
year means a taxpayer who owns, directly or indirectly, at any time in the
year, not less than 10% of the issued shares of any class of the capital stock
of the corporation or of any other corporation that is related to the
corporation and, for the purposes of this definition, […]
125(7)
“active business carried on by a corporation” means any business carried on by the corporation other than a
specified investment business or a personal services business and includes an
adventure or concern in the nature of trade;
125(1)
Small business deduction -- There may be deducted from the tax otherwise
payable under this Part for a taxation year by a corporation that was,
throughout the taxation year, a Canadian-controlled private, an amount equal to
the corporation's small business deduction rate for the taxation year
multiplied by the least of
(a)
the amount, if any, by which the total of
(i)
the total of all amounts each of which is the income of the corporation for the
year from an active business carried on in Canada (other than the income of the
corporation for the year from a business carried on by it as a member of a
partnership), and
(ii)
the specified partnership income of the corporation for the year exceeds the
total of
(iii)
the total of all amounts each of which is a loss of the corporation for the
year from an active business carried on in Canada (other than a loss of the
corporation for the year from a business carried on by it as a member of a
partnership), and
(iv)
the specified partnership loss of the corporation for the year,
(b)
the amount, if any, by which the corporation's taxable income for the year
exceeds the total of
(i)
10/3 of the total of the amounts that would be deductible
under subsection 126(1) from the tax for the year otherwise payable under this
Part by it if those amounts were determined without reference to sections 123.3
and 123.4,
(ii)
10/4 of the total of the amounts that would be deductible
under subsection 126(2) from the tax for the year otherwise payable under this
Part by it if those amounts were determined without reference to section 123.4,
and
(iii)
the amount, if any, of the corporation's taxable income for the year that is
not, because of an Act of Parliament, subject to tax under this Part, and
(c)
the corporation's business limit for the year.
18.(1)
In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of
[…]
(p) an
outlay or expense to the extent that it was made or incurred by a corporation
in a taxation year for the purpose of gaining or producing income from a
personal services business, other than
(i) the
salary, wages or other remuneration paid in the year to an incorporated
employee of the corporation,
(ii) the
cost to the corporation of any benefit or allowance provided to an incorporated
employee in the year,
(iii) any
amount expended by the corporation in connection with the selling of property
or the negotiating of contracts by the corporation if the amount would have
been deductible in computing the income of an incorporated employee for a
taxation year from an office or employment if the amount had been expended by
the incorporated employee under a contract of employment that required the
employee to pay the amount, and
(iv) any
amount paid by the corporation in the year as or on account of legal expenses
incurred by it in collecting amounts owing to it on account of services
rendered
that
would, if the income of the corporation were from a business other than a
personal services business, be deductible in computing its income;
[9]
Each case where the
issue is whether a person is an employee or an independent contractor must be
decided according to its own facts. Each of the four components (control
ownership of the tools, chance of profit and risk of loss) of the composite
test propounded in Wiebe Door and 671122 Ontario Ltd. v. Sagaz
Industries Canada, [2001] 2 S.C.R.983 (S.C.C.), must be assigned its
appropriate weight according to the circumstances of the case. Moreover, the
intention of the parties to the contract has, in recent cases of the Federal
Court of Appeal, become a significant factor, whose weight, however, seems to
vary from case to case (Royal Winnipeg Ballet; Wolf v. Canada,
[2002] 4 FC 396; City Water International Inc. v. M.N.R., 2006 FCA
350; National Capital Outaouais Ski Team v. M.N.R., 2008 FCA 132).
[10]
The appellant invokes
strongly the intention of the parties as evidenced by the terms of the
Contracts. In the context of a personal services business determination, I
agree with Boyle J. and V.A. Miller J. when they decided in 609309
Alberta Ltd. v. Canada, 2010 TCC 166 and in 1166787 Ontario Ltd. v.
Canada, 2008 TCC 93, 2008 D.T.C 2722 (T.C.C. [General
Procedure]) respectively, that they did not view intent as a relevant
consideration in a case involving a personal services business determination
under subsection 125(7) of the Act. I also note that McArthur J. did
not consider the parties’ intentions in making his personal services business
determination in 758997 Alberta Ltd. v. Canada, 2004 TCC 755,
2004 D.T.C. 3689 (T.C.C. [General Procedure]), I also note that the
Federal Court of Appeal in Dynamic Industries Ltd. v. Canada,
2005 FCA 211, 2005 D.T.C. 5293 (F.C.A.) did not consider the
intentions of the parties in making its personal services determination.
[11]
Turning now to the
facts, what factors suggest that, if it was not for the existence of the
appellant, Mr. Almeida could reasonably be regarded as a person operating
his own business?
[12]
The opportunity for
profit of the appellant and Mr. Almeida was a limited to $69,33 per hour
worked (in the case of the contracts signed on the 11th day of March 2006 and
on 1st day of May 2006), to $80,00 per hour worked (in the case of the contract
signed on the 1st day of May 2007), and to $68,00 per hour worked (in the case of
the contract signed on the 1st day of June 2008). Mr. Almeida did not
incur operating expenses in order to provide the IT services. The only risk of
loss to Mr. Almeida and the appellant was getting caught up in a potential
insolvency of AQR or of the Clients, a very unlikely prospect according to the
evidence.
[13]
With respect to the
ownership of the tools, the Clients provided all the tools. The evidence
reveals that Mr. Almeida was provided with office space, telephone and
network access on the Clients’ site. No other tools were needed or required by
the Clients. I want to point out that Mr. Almeida has not persuaded me
that he was required by the Clients to own a cell phone.
[14]
The control test is
quite relevant in the instant case. Mr. Almeida, under his contract with
AQR, was required to work for the Clients on location. Mr. Almeida could
not decide to work outside the Client’s sites. He had to be present on the
Clients’ sites, working as part of a team organized by the Clients on specific
projects ordered by the Clients. Mr. Almeida did not conduct his
activities independently. He was directed to use his professional skills as
directed by the project’s leader. Mr. Almeida reported to the team’s
leader who evaluated the progress of the work done. The projects were for a
specific period of time and to be completed by Mr. Almeida personally, in
a specific period of time, under the direction of the Clients, using their
tools and office. And finally, I recall that the appellant was paid an hourly
rate for the work performed by Mr. Almeida.
[15]
On balance, in view of
the Wiebe Door factors, I conclude that, if it were not for the
existence of the appellant, Mr. Almeida could reasonably be regarded as an
employee of the Clients and, consequently, the appellant was “a personal
services business” in the relevant period and, as such, the Appellant’s claim
for small business deduction in calculation of its tax liability for the 2007
and 2008 taxation years was properly disallowed by the Minister.
[16]
Having concluded that the
appellant was a “personal services business”, I am of the opinion that the
Minister properly disallowed in the amount of $10,660, $8,341 and $9,613 for
the 2007, 2008 and 2009 taxations years, respectively in accordance under
paragraph 18(1)(p) of the Act.
[17]
For these reasons, the
appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of April 2013.
“Paul Bédard”
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