REASONS
FOR JUDGMENT
Owen J.
I. Introduction
[1]
This is an appeal by Ivan Cassell Limited (“ICL”) of the
reassessment of its 2008, 2009 and 2010 taxation years by
notices of reassessment dated May 7, 2013 for 2008 and 2009 and June
3, 2011 for 2010 (collectively, the “Reassessments”). During these three
taxation years (collectively, the “Taxation Years”), Mr. Ivan Cassell
provided services to Western Petroleum Newfoundland Limited (“WPNL”) in his
capacity as president of ICL.
[2]
The Reassessments denied ICL’s claim for the
small business deduction provided for by subsection 125(1) of the Income Tax
Act (the “ITA”) and also applied paragraph 18(1)(p) of the ITA to deny the
deduction of certain expenses incurred by ICL, all on the grounds that ICL’s
business of providing services to WPNL was a “personal services business” (“PSB”) as
defined in subsection 125(7) of the ITA.
[3]
ICL concedes that Mr. Cassell was an
incorporated employee and a specified shareholder of ICL for the purposes of
the PSB definition and that the exceptions in paragraphs (c) and (d)
of the PSB definition do not apply. The sole issue in this appeal is whether
Mr. Cassell would reasonably be regarded as an officer or employee of WPNL but
for the existence of ICL.
II. Facts
[4]
Mr. Ivan Cassell testified on behalf of ICL. The
Respondent did not call any witnesses.
[5]
Mr. Cassell’s background is primarily in the
retail side of the oil and gas business. During
the 1970s and early 1980s, he worked for, among others, major oil and gas
companies, typically managing their relationships with independent agents that
sold their products in the retail market.
[6]
Mr. Cassell incorporated ICL in August 1983 to
operate a home comfort centre for Imperial Oil. ICL is owned 75% by Mr. Cassell
and the balance is held by his spouse and daughter. After a couple of years of
conducting that business through ICL, Mr. Cassell went to work for Ultramar for
about six years as a supervisor. In that capacity, he looked after all the
independent retail agents of Ultramar located on the west coast of Newfoundland
and in southern Labrador.
[7]
In 1990, Mr. Cassell left his employment with
Ultramar. At that time, Ultramar was streamlining its retail business and was
offering for sale areas of retail business outside the major urban centres in
Newfoundland. ICL purchased one of these areas in 1990. From that point in time
forward, Mr. Cassell concentrated on growing ICL’s retail oil and gas business,
in large part by having that corporation acquire gas stations in areas that the
major oil companies were leaving. From 1990 until 2005, the retail oil and gas
business of ICL was carried on under the business name Western Petroleum.
[8]
WPNL was incorporated in 2005. The direct
shareholders of WPNL are two other corporations each of which holds 50% of the
common shares and 50% of the preferred shares issued by WPNL. One of the
shareholders of WPNL is Cassell Holdings Ltd. The common shares issued by that
corporation are owned by the Cassell Family Trust (2005) and the preferred
shares are owned 50% by ICL and 50% by Mr. Cassell’s spouse. The other
corporate shareholder of WPNL is owned by persons dealing at arm’s length with
ICL and Mr. Cassell.
[9]
In 2005, ICL transferred the Western Petroleum
business to WPNL. WPNL continued to grow the Western Petroleum business and,
from 2005 to 2010, the business expanded from the west coast of Newfoundland to
the whole of Newfoundland. Mr. Cassell estimated that during the taxation years
in issue WPNL employed from 50 to 67 individuals, depending on the time of
year. Mr. Cassell testified that the functions that ICL performed for WPNL
after the transfer of the Western Petroleum business to WPNL were essentially
the same as the functions that he had performed as an employee of ICL prior to
the transfer of that business.
[10]
Mr. Cassell was the president and a director of
WPNL during the Taxation Years. The vice-president of WPNL during the same
period was Mr. Luke Reynolds, who was also a director of WPNL. Mr.
Reynolds was subsequently bought out and he retired. The head office of WPNL
was in Stephenville, Newfoundland.
[11]
Mr. Cassell testified that he did not have any
specific duties to perform for WPNL in his capacity as president and a director
of WPNL. In addition, he was not paid any remuneration by WPNL, did not have an
office at any of WPNL’s locations and did not hold himself out as an officer or
director of WPNL in his dealings with others. Mr. Cassell did, however, sign
documents in his capacity as a director of WPNL.
[12]
Mr. Cassell personally performed management
services for WPNL in his capacity as president of ICL. According to Mr.
Cassell, ICL did not receive specific direction from WPNL regarding these
services. Typically, Mr. Cassell would meet weekly with Mr. Reynolds to
determine the direction that WPNL should take for the following week. In
cross-examination, Mr. Cassell stated that “anything that we would do on behalf of Western [WPNL] would be
consulted between myself and Luke Reynolds”.
[13]
Mr. Cassell had the use of a car and pick-up
trucks owned by WPNL. These vehicles were also available to the employees of
WPNL. If Mr. Cassell attended the head office of WPNL, he would work at a makeshift
desk that was comprised of a desktop placed on banker’s boxes.
[14]
Mr. Cassell maintained an office in his
residence in Steady Brook, Newfoundland, which is about 90 km from WPNL’s head office
in Stephenville. There he would type letters and receive faxes and e-mails. Any
letter typed for WPNL would be on WPNL letterhead and any letter typed for ICL
would be on ICL letterhead.
[15]
Mr. Cassell testified that after the transfer of
the Western Petroleum business to WPNL, ICL provided “management”
services to WPNL under an oral agreement. In cross-examination, Mr. Cassell
accepted the Respondent’s description of these services as “involvement in negotiations, banking,
negotiating contracts, dealing with suppliers”. Mr. Cassell would travel to meet with the suppliers.
[16]
The oral agreement between ICL and WPNL was
replaced with a written agreement at some point after 2010. A copy of the
written agreement was entered into evidence by ICL as Exhibit A-1. Mr. Cassell
stated that the oral agreement in place prior to the execution of the written
agreement “was basically the
same as right here, as this in writing”. The agreement stated that it
was executed on the “1st day of
February, 2005”. In cross-examination, Mr.
Cassell agreed that the agreement was prepared after 2010 but said that it “had to be backdated for then”.
[17]
WPNL paid ICL a monthly fee for the services
performed by Mr. Cassell. For ICL’s 2008 taxation year, the monthly fee was
$20,000. This was increased to $30,000 a month for ICL’s 2009 and 2010 taxation
years. In addition, WPNL paid ICL a further $400,763 in 2008, $460,310 in 2009
and $536,737 in 2010. Mr. Cassell described the additional lump sum payments as
a “success fee” that was paid only if WPNL had a good year and the payment did not
breach covenants provided by WPNL to its bank.
[18]
During the three Taxation Years, ICL had office
expenses of $2,517, $0 and $121 and paid professional fees of $800, $4,797 and
$12,641. ICL also paid a salary to Mr. Cassell’s spouse of $60,000, $62,000 and
$125,000.
[19]
In cross-examination, Mr. Cassell conceded that
the written agreement (Exhibit A-1) provided for the payment of the monthly fee
but did not provide for the payment of the “success fee”. In addition, while the
written agreement required ICL to submit to WPNL a monthly invoice, in fact no
invoices were submitted by ICL to WPNL in respect of the services provided by
ICL during the Taxation Years. It emerged from Mr. Cassell’s testimony that the
matter of the need for invoices was raised by a Canada Revenue Agency auditor
after 2010.
[20]
Mr. Cassell testified that, as far as he could
recall, at some point in 2008 or 2009, “success fees” were not paid by WPNL
to ICL because of WPNL’s covenants with the bank. He
also stated that these same covenants did not affect bonuses payable to senior
employees of WPNL, such as the operations manager and the sales manager. In
cross-examination, Mr. Cassell was not able to identify the actual year(s) of
non-payment. He agreed, however, that WPNL paid ICL a total of $640,763 in
ICL’s 2008 taxation year and $820,310 in ICL’s 2009 taxation year and that
these totals included the monthly fees payable for those years and success fees
of some $400,763 and $460,310.
[21]
Mr. Cassell testified that ICL also did
management and consulting work for a company called West Coast Excavating
Limited (“WCEL”), of which he was president. He described WCEL as a contracting
company that does municipal work and sand and gravel. In cross-examination, Mr.
Cassell agreed that he was not paid by WCEL in his capacity as president of
that corporation. With respect to the consultancy services provided by ICL, Mr.
Cassell acknowledged that there was no written agreement between ICL and WCEL
and that ICL did not invoice WCEL for its services. He also acknowledged that
no formal distinction was drawn between his appointment as president of WCEL
and WCEL hiring ICL as a management consultant.
[22]
Throughout the Taxation Years, ICL owned six
commercial properties that were leased to arm’s length third parties. Exhibit
A-2 contains copies of four leases identified by Mr. Cassell as pertaining to
four of these properties. Two of the properties were leased by ICL as a gas
bar, restaurant and convenience store, one of the properties was leased by ICL
as a gas bar and convenience store and the fourth property was leased by ICL to
a funeral home. In addition to these properties, Mr. Cassell testified that
there were two other properties, both of which were leased as a gas bar and
convenience store. The six properties were located at or near Crabbes River,
Stephenville, Deer Lake, Springdale, Roddickton and Corner Brook, Newfoundland.
[23]
Mr. Cassell testified that the leased properties
were low maintenance but would require ICL’s attention approximately once every
six weeks to three months “if
there was no problem”, for example, if a gas
pump needed repair. In addition, an ICL representative would visit each property
two or three times a year. All but one of the properties was within an
approximate two-hour drive of Steady Brook. The sixth property was much further
away. Any e-mail communication or preparation of correspondence regarding the
six properties would take place at Mr. Cassell’s home office in Steady Brook.
[24]
In cross-examination, Mr. Cassell acknowledged
that some of the properties owned by ICL generated income for WPNL and that
some of the tenants of these properties were not paying the rent owed to ICL. However,
ICL did not pursue the delinquent tenants for this rent because the properties
generated income for WPNL. In re-examination, Mr. Cassell explained that
provincial regulations limited the margins available to gas station operators
and that it was better for ICL to forgo the rent in favour of potentially
higher management fees than to drive the tenant out of business by demanding
payment of the rent. As well, he testified that some delinquent tenants were
pursued for the rent and that the decision whether or not to pursue a delinquent
tenant was made on a case-by-case basis.
A. The Position of the Appellant
[25]
The Appellant submits that it is not the case
that Mr. Cassell would reasonably be regarded as an officer or employee of WPNL
but for the existence of ICL. Mr. Cassell would not be an officer because the
definitions of “office” and “officer” in the ITA, taken together, require that to be an officer Mr.
Cassell must be entitled to a fixed or ascertainable stipend or remuneration. The
Appellant submits that Mr. Cassell is not so entitled, and that, in the absence
of ICL, he would not be entitled to either a fixed stipend or fixed
remuneration.
[26]
With respect to whether Mr. Cassell would be
considered an employee, the Appellant submits that the factors described in Wiebe
Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553 (FCA) (Wiebe Door
Services) and confirmed by the Supreme Court of Canada in 671122
Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 S.C.R.
983 (Sagaz Industries) are applicable. The Appellant identifies these factors
as the degree of control, ownership of tools, chance for profit and risk of
loss. The Appellant submits that, when these factors are applied to the facts,
it is clear that Mr. Cassell would not have been an employee of WPNL had there
been no ICL. Specifically, Mr. Cassell was not controlled by WPNL in his work;
he worked out of his home office and did not have an office provided by WPNL;
and ICL could profit from the provision of services to WPNL by being efficient.
With respect to the risk of loss, the Appellant pointed to Mr. Cassell’s
testimony regarding WPNL’s failure to pay ICL.
B. The Position of the Respondent
[27]
The Respondent submits that, in a case such as
this, the factors in Wiebe Door Services must be approached with caution
and that the totality of the circumstances must be considered. When that is
done, it is clear that Mr. Cassell would have been an employee of WPNL but for
the existence of ICL. Specifically, the Respondent noted that, in
cross-examination, Mr. Cassell conceded that WPNL did not differentiate between
Mr. Cassell’s role as its president and his role as a provider of services on
behalf of ICL. The Respondent submitted that, by virtue of the decision of
Hershfield J. in W. B. Pletch Company Limited v. The Queen, 2005 TCC 400
(Pletch), the failure to differentiate between the roles played by Mr. Cassell
as president of WPNL and as a service provider through ICL was fatal to the
Appellant’s case.
[28]
The Respondent submitted, that even if the
factors identified in Wiebe Door Services are applied, they still lead
to the conclusion that the business of ICL was a PSB during the Taxation Years.
With respect to control, the Respondent points to the requirement in the
written services agreement that ICL perform the services to the satisfaction of
WPNL and to the weekly meetings between Mr. Cassell and Mr. Reynolds in which
the direction for the following week was discussed. The Respondent also submits
that, as V. Miller J. observed in 1166787 Ontario Limited v. The Queen,
2008 TCC 93 (1166787), there is little expectation that management services provided
by a high-level professional will be closely supervised.
[29]
The Respondent submits that the ownership of
tools is not particularly relevant given the nature of the services provided.
However, the provision of an automobile is consistent with employee status. With
respect to the risk of loss, the Respondent submits that there was little risk
of loss given that ICL was entitled to be compensated for certain expenses. With
respect to the opportunity for profit, the monthly fee and annual bonus payable
to ICL was the same fee arrangement as in 1166787, in which V. Miller J.
describes the payment structure as “not the commercial risk or chance of profit that a proprietor has
for running her own business.” The Respondent
also submits that the lack of investment (other than in time) and the lack of
advertising demonstrate little entrepreneurial risk, and that the only risk was
the potential failure of WPNL.
III. Analysis
[30]
The issue in this case is whether ICL’s business
of providing management services to WPNL is a PSB or “personal services business”. If it is, the income from that business is not eligible for the
small business deduction provided for by subsection 125(1) of the ITA, and
outlays or expenses incurred to gain or produce income from that business are
subject to the limitations on deductibility set out in paragraph 18(1)(p)
of the ITA.
[31]
The definition of “personal services business” in subsection 125(7) of the ITA states:
“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;
[32]
ICL concedes that Mr. Cassell is an “incorporated employee” and a specified shareholder of ICL for the purposes of the PSB
definition and that the exceptions in paragraphs (c) and (d) of
the PSB definition do not apply. ICL denies that Mr. Cassell would reasonably
be regarded as an officer or employee of WPNL but for the existence of ICL.
[33]
The PSB definition was considered by the Federal
Court of Appeal in Dynamic Industries Ltd. v. The Queen, 2005 FCA 211 (Dynamic
Industries). With respect to the history of the relevant provisions of the ITA,
Sharlow J.A. observed (at paragraphs 39 and 44):
The provisions of
the Income Tax Act relating to personal services businesses were enacted
to deny certain tax advantages that may be obtained by providing services
through a corporation, rather than personally. These provisions are directed
primarily at the situation exemplified by Sazio v. Minister of National
Revenue . . . .
. . .
The rejection of
the business purpose test appeared to make it easier for a person to provide
services through a Sazio-type arrangement, rather than personally, thus
obtaining the related tax advantages. The government still believed that such a
result was not reasonable. The enactment of the definition of “personal
services business”, and related provisions such as paragraph 18(1)(p),
was intended to deny, in part, the tax advantages of such arrangements. . .
[34]
Sharlow J.A. went on to state that the issue
raised by the definition – in this case, whether Mr. Cassell would reasonably
be regarded as an officer or employee of WPNL but for the existence of ICL –
required consideration of the decisions in Wiebe Door Services and Sagaz
Industries (at paragraph 50):
This case
requires consideration of Wiebe Door Services Ltd. v. Minister of National
Revenue, [1986] 3 F.C. 553, [1986] 2 C.T.C. 200, 87 D.T.C. 5025 (F.C.A.)
and 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R.
983, the leading cases in which the central question is whether an individual
is providing services to another person as an employee, or as a person in
business on his or her own account. I refer to this as the “Sagaz question”
(Sagaz, paragraph 47). The factors to be taken into account in
determining the Sagaz question will depend upon the particular case, but
normally they will include the level of control the employer has over the worker’s
activities, whether the worker provides his or her own equipment, whether the
worker hires his or her own helpers, the degree of financial risk taken by the
worker, the degree of responsibility for investment and management undertaken
by the worker, and the worker's opportunity for profit in the performance of
his or her tasks.
[35]
For the sake of completeness, I would add to the
two cases cited by Sharlow J.A. the subsequent decision of the Federal Court of
Appeal in 1392644 Ontario Inc. o/a Connor Homes v. M.N.R., 2013 FCA 85 (Connor
Homes).
[36]
In Sagaz Industries, the issue was
whether Sagaz Industries (SI) was vicariously liable for a bribery scheme
perpetrated by a consultant of SI. In the circumstances of the case, this
turned on whether the consultant was an employee of SI or an independent
contractor.
[37]
In considering this issue, Major J. first
described the policy basis for imposing vicarious liability on SI for the acts
of an employee but not for the acts of an independent contractor:
. . . Vicarious
liability is fair in principle because the hazards of the business should be
borne by the business itself; thus, it does not make sense to anchor liability
on an employer for acts of an independent contractor, someone who was in
business on his or her own account. In addition, the employer does not have the
same control over an independent contractor as over an employee to reduce
accidents and intentional wrongs by efficient organization and supervision.
Each of these policy justifications is relevant to the ability of the employer
to control the activities of the employee, justifications which are generally
deficient or missing in the case of an independent contractor. . . . However,
control is not the only factor to consider in determining if a worker is an
employee or an independent contractor. For the reasons discussed below,
reliance on control alone can be misleading, and there are other relevant
factors which should be considered in making this determination.
[38]
It is of particular note that, even though Major
J. identified control as an important policy basis for the imposition of
vicarious liability on employers for the acts of employees, he did not consider
control to be the only basis for determining whether an individual was an
employee or an independent contractor. In fact, he cautioned that “reliance on control alone can be
misleading”. This is particularly so when one is
addressing circumstances involving services provided by a professional or by an
owner or high-level manager of the business receiving the services.
[39]
Major J. then undertook a detailed review of the
distinction between an employee and an independent contractor. He started by
noting that MacGuigan J.A. thoroughly reviewed the relevant case law in Wiebe
Door Services, which decision Major J. cited favourably many times in his
consideration of the issue. MacGuigan J.A.’s review identified the various
tests that had been adopted by the courts since the mid-nineteenth century: the
control test, the entrepreneur test, the organization test and the enterprise
risk test. In the end, however, drawing on the analysis of MacGuigan J.A.,
Major J. concluded that no one test was conclusive:
In my opinion,
there is no one conclusive test which can be universally applied to determine
whether a person is an employee or an independent contractor. Lord Denning
stated in Stevenson Jordan, supra, that it may be impossible to
give a precise definition of the distinction (p. 111) and, similarly, Fleming
observed that “no single test
seems to yield an invariably clear and acceptable answer to the many variables
of ever changing employment relations . . . ” (p. 416). Further, I agree with MacGuigan J.A. in Wiebe Door,
at p. 563, citing Atiyah, supra, at p. 38, that what must always occur
is a search for the total relationship of the parties:
[I]t is exceedingly doubtful whether
the search for a formula in the nature of a single test for identifying a
contract of service any longer serves a useful purpose. . . .
The most that can profitably be done is to examine all the possible factors
which have been referred to in these cases as bearing on the nature of the
relationship between the parties concerned. Clearly not all of these factors
will be relevant in all cases, or have the same weight in all cases. Equally
clearly no magic formula can be propounded for determining which factors
should, in any given case, be treated as the determining ones.
Although there is
no universal test to determine whether a person is an employee or an
independent contractor, I agree with MacGuigan J.A. that a persuasive approach
to the issue is that taken by Cooke J. in Market Investigations, supra.
The central question is whether the person who has been engaged to
perform the services is performing them as a person in business on his own
account. In making this determination, the level of control the
employer has over the worker’s activities will always be a factor. However,
other factors to consider include whether the worker provides his or her own
equipment, whether the worker hires his or her own helpers, the degree of financial
risk taken by the worker, the degree of responsibility for investment and
management held by the worker, and the worker’s opportunity for profit in the
performance of his or her tasks.
[Emphasis added.]
[40]
More recently, in Connor Homes, the
Federal Court of Appeal reaffirmed the correct approach to the employee versus
independent contractor analysis, but also addressed the role of common
intention:
The ultimate
question to determine if a given individual is working as an employee or as an
independent contractor is deceivingly simple. It is whether or not the
individual is performing the services as his own business on his own account .
. . .
. . .
MacGuigan J.A.
redefined the integration test by providing that it applied only from the
worker’s perspective, and he considerably limited its use. Significantly,
however, MacGuigan J.A. established the principle that there are no specific
and determinative criteria that can be used, but rather “[w]hat must always
remain the essence is the search for the total relationship of the parties”: Wiebe
Door at p. 563. He concluded that there is only one test: “I interpret Lord
Wright’s test not as the fourfold one it is often described as being but rather
as a four-in-one test, with emphasis always retained on what Lord Wright, supra,
calls ‘the combined force of the whole scheme of operations’, even while the
usefulness of the four subordinate criteria is acknowledged”: ibid at p.
562. In essence, the question to be addressed is “[w]hose business is it?”: ibid
at p. 563.
Major J., writing
for the Supreme Court of Canada in Sagaz, approved the approach of
MacGuigan J.A. in Wiebe Door, and added that the “central question is
whether the person who has been engaged to perform the services is performing
them as a person in business on his own account.”: Sagaz at para. 47. In
making this determination, no particular factor is dominant and there is no set
formula. The factors to consider may thus vary with the circumstances and
should not be closed. Nevertheless, certain factors will usually be relevant,
such as the level of control held by the employer over the worker’s activities,
and whether the worker provides his own equipment, hires his helpers, manages
and assumes financial risks, and has an opportunity of profit in the
performance of his tasks.
. . .
The central
question at issue remains whether the person who has been engaged to perform
the services is, in actual fact, performing them as a person in business on his
own account. As stated in both Wiebe Door and Sagaz, in making
this determination no particular factor is dominant and there is no set
formula. The factors to consider will thus vary with the circumstances.
Nevertheless, the specific factors discussed in Wiebe Door and Sagaz
will usually be relevant, such as the level of control over the worker’s
activities, whether the worker provides his own equipment, hires his helpers,
manages and assumes financial risks, and has an opportunity of profit in the
performance of his tasks.
[41]
With respect to common intention, the Court
stated:
. . . Royal
Winnipeg Ballet stands for the proposition that what must first be
considered is whether there is a mutual understanding or common intention
between the parties regarding their relationship. Where such a common intention
is found, be it as independent contractor or employee, the test set out in Wiebe
Door is then to be applied by considering the relevant factors in light of
that mutual intent for the purpose of determining if, on balance, the relevant
facts support and are consistent with the common intent. . . .
. . .
. . . properly
understood, the approach set out in Royal Winnipeg Ballet simply
emphasises the well-know[n] principle that persons are entitled to organize
their affairs and relationships as they best deem fit. The relationship of
parties who enter into a contract is generally governed by that contract. Thus
the parties may set out in a contract their respective duties and
responsibilities, the financial terms of the services provided, and a large
variety of other matters governing their relationship. However, the legal
effect that results from that relationship, i.e. the legal effect of the
contract, as creating an employer-employee or an independent cont[r]actor
relationship, is not a matter which the parties can simply stipulate in the
contract. In other words, it is insufficient to simply state in a contract that
the services are provided as an independent contractor to make it so.
[42]
I will first consider the role of common
intention in the application of the PSB definition. As observed by Mainville
J.A. in Connor Homes, the importance of common intention or mutual
understanding is rooted in the principle that parties are entitled to organize
their affairs and relationships as they deem fit. Importantly, however, common
intention or mutual understanding can only be relevant to the analysis if the
parties to the arrangement under scrutiny have an agreement (written or oral)
with one another.
Here, the relevant agreement is between ICL and WPNL. In circumstances such as
these, there can be no mutual understanding or common intent to consider in
assessing whether Mr. Cassell would reasonably be regarded as an employee of
WPNL but for the existence of ICL. The hypothetical circumstance imposed by the
PSB definition in order to achieve its anti-avoidance objective simply
precludes any such analysis.
[43]
As to whether Mr. Cassell would reasonably be
regarded as an officer or employee of WPNL but for the existence of ICL, the
above cases make clear the fact that “no particular factor is dominant”
and that “there is no set
formula”. Instead, the factors to consider are
open-ended and vary with the circumstances. This approach is particularly
appropriate for the interpretation of the PSB definition, which requires the
assessment of the relationship to be made in light of a hypothetical (i.e., the
non-existence of ICL). Such a hypothetical situation can only properly be
addressed by considering all the facts and circumstances to determine whether
the “incorporated employee” was acting in a manner consistent with being an employee of the
entity receiving the services or with being an independent contractor.
[44]
I also note that while the PSB definition asks
whether Mr. Cassell would reasonably be regarded as an officer or employee of
WPNL but for the existence of ICL, the base test in the jurisprudence asks
whether the individual is performing the services in issue as a person in
business on his own account. I believe, however, that it is a simple matter to
adapt this test to the language of the PSB definition by asking whether, taking
into consideration all the circumstances, Mr. Cassell would reasonably be
regarded as carrying on a business on his own account if ICL did not exist.
[45]
In this case, the circumstances lead me to the
inexorable conclusion that if the existence of ICL were ignored, Mr. Cassell
would reasonably be considered to be an employee of WPNL. I reach this
conclusion on the basis of the following considerations:
1.
The stated objective of Mr. Cassell in providing
services to WPNL was to grow the business of WPNL. Mr. Cassell made no mention
of growing the services business of ICL and no evidence was provided suggesting
that growing ICL’s services business was a material objective of Mr. Cassell.
If ICL were ignored, the objective of providing the services would be the
growth of WPNL’s business and not the growth of a services business of Mr.
Cassell.
2.
For the taxation years in issue, ICL did not
conduct its services business in a business-like manner. Specifically, ICL did not
have a written agreement with WPNL; ICL did invoice WPNL for the services it
provided to WPNL; ICL did not charge or collect HST on the fees paid to it by
WPNL; and ICL did not advertise its services business. If the existence of ICL were
ignored, there is no evidence of business-like activity to support the
conclusion that Mr. Cassell would reasonably be regarded as providing the
services as a person in business on his own account.
3.
Mr. Cassell testified that he also provided
management services to WCEL in his capacity as president of ICL. However, ICL
had no written agreement with WCEL and did not invoice WCEL. As well, no
evidence was provided that ICL was in fact paid by WCEL for any services it may
have provided. Consequently, the provision of services to WCEL does not support
the conclusion that Mr. Cassell would reasonably be considered to be conducting
a management services business on his own account if the existence of ICL were
ignored.
4.
ICL leased properties to arm’s length third
parties. This activity was distinct from the provision of management services
by ICL. Nevertheless, the earning of rent by ICL was clearly subordinated to
the profitability of WPNL’s business, as demonstrated by the failure of Mr.
Cassell to pursue any action regarding defaults in paying rent when to have
done so would have negatively affected the profitability of WPNL’s business. These
facts only serve to confirm that Mr. Cassell’s focus was solely on the
profitability of WPNL’s business. An individual in business on his own account
would not have such a focus.
5.
Mr. Cassell confirmed that the functions he
performed for WPNL following the transfer of the Western Petroleum business to
WPNL were the same as the functions he had performed as a senior employee of
ICL when the Western Petroleum business was owned by ICL. He also confirmed
that the objective of these functions was to grow the Western Petroleum
business.
6.
The compensation received by ICL was similar to
the compensation that might have been paid to a senior employee of WPNL – a
fixed monthly amount and an additional amount (which I will call a “performance bonus”) based on the profitability of WPNL’s business. In addition, the
performance bonus appears to have been at the discretion of WPNL as there is no
provision for this bonus in the written agreement between ICL and WPNL. If the existence of ICL is
ignored, the compensation structure is consistent with Mr. Cassell being an
employee of WPNL rather than an independent contractor. In particular, an
independent contractor is unlikely to negotiate a performance bonus that is at
the discretion of the service recipient.
7.
The compensation structure was such that any
opportunity to profit from the provision of services to WPNL was tied to the
success of WPNL’s business and not to the services that ICL provided to WPNL
through Mr. Cassell. This is consistent with the conclusion that any profit
earned by ICL resulted from the business of WPNL, not from a business that Mr.
Cassell would reasonably be regarded as conducting on his own account, if the
existence of ICL were ignored.
8.
The compensation structure also ensured that ICL
was not exposed to a risk of loss. If one disregards the salary paid to Mr.
Cassell’s spouse, the expenses of ICL’s business were miniscule in comparison
to the monthly fees it received from WPNL. Moreover, the only substantive
economic risk faced by ICL was the risk inherent in WPNL’s business, which
governed WPNL’s ability to pay the monthly fees. If the existence of ICL were
ignored, Mr. Cassell would not bear any real risk of loss under the
compensation arrangements with WPNL. The fact that WPNL may have failed to pay
a “success fee” in one or more years does not alter this conclusion given the
nature and magnitude of the expenses incurred to provide services to WPNL and
the magnitude of the monthly fees paid by WPNL for those services.
9.
Mr. Cassell was not subject to significant
control by WPNL. However, he did have weekly meetings with Mr. Reynolds to
discuss the direction of WPNL’s business for the following week. This is
consistent with the degree of control that might be exerted over a senior
employee of WPNL.
10.
The nature of Mr. Cassell’s activities for WPNL
did not require Mr. Cassell to supply any tools. However, Mr. Cassell was
provided with the non-exclusive use of WPNL vehicles consistent with his need
to travel to conduct WPNL’s business.
11.
Mr. Cassell did not have a dedicated office at
WPNL’s premises. However, he did have a makeshift space available to him as the
need arose.
12.
Mr. Cassell maintained a home office but that
can be explained by the fact that ICL also had rental properties to manage.
[46]
In light of all of these considerations, I have
concluded that Mr. Cassell would reasonably be regarded as an employee of WPNL
but for the existence of ICL. Stated in the language of the central question
identified in Wiebe Door, Sagaz and Connor Homes, I find nothing
in the totality of the circumstances to suggest that Mr. Cassell would
reasonably be considered to be carrying on a services business on his own
account if ICL did not exist. The business that is the focus and raison d’etre
of Mr. Cassell’s activities is the business of WPNL. If ICL did not exist, the
only business to which the services relate would be that of WPNL and Mr.
Cassell would reasonably be considered an employee of that business. Accordingly,
ICL’s business of providing management services to WPNL during its 2008, 2009
and 2010 taxation years was a “personal
services business” and the appeal is dismissed
with costs to the Respondent.
Signed
at Ottawa, Canada, this 3rd day of March 2016.
“J.R. Owen”
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