Citation: 2012 TCC 216
Date: 20120618
Docket: 2011-3912(CPP),
2011-3911(CPP) and
2012-1518(CPP)
BETWEEN:
VSEVOLOD FRENKEL, ELENA FRENKEL AND
EFFECTIVE TECHNOLOGIES & IDEAS INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1]
These appeals concern
the employment status of Vsevolod Frenkel and Elena Frenkel with Effective
Technologies & Ideas Inc. ("ETI") for the purposes of determining
whether the Frenkels were in pensionable employment with ETI throughout 2010.
The Minister of National Revenue (the "Minister)" notified the
Frenkels by a letter dated October 24, 2011 that they were in pensionable
employment and subsequently on November 24, 2011 assessed ETI for Canada
Pension Plan ("CPP") contributions ($4,137.60) that ETI
had failed to remit plus penalties. The Frenkels, believing themselves to be
self-employed and not employees of ETI, had personally remitted CPP
contributions in amounts very close to the $4,137.60. The Minister’s position
is that the wrong person has made the contributions. Mr. Frenkel’s frustration
was palpable that ETI might have to make the same payment again, and that he
would then have to seek a refund from the Government for the contributions made
personally.
Facts
[2]
ETI was incorporated in
November 2009. Mr. Frenkel and Ms. Frenkel were 50-50 shareholders and also
directors of ETI. Unfortunately, Ms. Frenkel was not present at the trial and
only Mr. Frenkel testified, but he indicated that the company was established
because Ms. Frenkel had been advised she could only get contracts for her
computer consulting services through a company. There was no suggestion the
company was incorporated for limited liability purposes. Until the
incorporation of ETI, Mr. Frenkel had been carrying on his business of market
research, marketing and selling know-how in innovative products, primarily from
Russia or the Ukraine, as a sole proprietor under the business name
CMT NET Co. ("CMT"). With the incorporation of ETI he decided to
continue the two businesses, his and his wife’s, under one name. What exactly
he means by that is at the bottom of this dispute.
[3]
Mr. Frenkel showed me
some of the products he was attempting to market in North America. It was clear that he carried on what he referred to
as "my business" no differently after the incorporation than before
the incorporation. He stated that in his business dealings in Russia and the Ukraine it was immaterial whether the business name was ETI
or CMT, as it was the individual relationship that was key. Everyone would know
that it was Mr. Frenkel they were dealing with.
[4]
Ms. Frenkel’s business
of computer consulting appears to have been for GSI International
Consulting Group ("GSI"), though the contract presented as evidence
by Mr. Frenkel in support of this arrangement was dated February 2, 2011, the
year after the year in issue. It is an unusual contract, excerpts of which
follow:
AGREEMENT FOR SYSTEMS & PROGRAMMING SERVICES
BETWEEN: GSI International Consulting Group ("GSI
GROUP")
AND: Effective technologies &
Ideas, Inc. (hereafter called the SUB‑CONTRACTOR)
It is understood that this contracts related to services to be
provided by Elena Frenkel as Agent or Principal for the SUB-CONTRACTOR.
…
The SUB-CONTRACTOR acknowledges that they are self-employed and are
not an employee of GSI Group.
…
It is interesting to note that there is no indication
in the agreement as to remuneration.
[5]
Neither Mr. Frenkel nor
Ms. Frenkel entered any written agreement between themselves and ETI. Although
Mr. Frenkel indicated he appreciated ETI was a separate legal entity, he made
it very clear his product market business was his business and that ETI existed
only because it was required for Ms. Frenkel to get contracts. Even ETI’s bank
account was set up jointly between the company and the Frenkels personally. Mr.
Frenkel testified that if Ms. Frenkel was paid for work it could be in her name
or in the company’s name. I am not convinced that Mr. Frenkel truly
appreciated the significance of inserting a corporate entity into his or his
wife’s businesses, as when describing what would happen if the business needed
to hire help, he said the worker would be paid by the company, because you need
to do that to be self-employed. His answer reflects the misunderstanding of
what is meant by self-employment.
[6]
With respect to
remuneration, Mr. Frenkel testified that the Frenkels would simply take money
out as needed. According to an income statement of ETI, Mr. Frenkel took
out approximately $17,000 and Ms. Frenkel took out approximately $31,000
throughout 2010 in irregular payments. The amounts, according to Mr. Frenkel,
were based on the incomes their respective businesses generated. It is also of
note that on the ETI income statement, the $48,000 taken out by the Frenkels
falls under the category of Directors’ Fees. Mr. Frenkel explained that was put
there because it was the only option available in the software program he used.
[7]
According to Mr.
Frenkel, invoices could be issued in ETI’s name or his name, depending on the
wish of his clients, though again he mentioned that big companies want a
corporate name on it. A copy of an ETI invoice to GSI shows:
Business name – Effective Technologies & Ideas Inc.
Contractor: Elena Frenkel
The invoice has ETI’s GST registration number, as
neither Mr. Frenkel nor Ms. Frenkel had GST numbers. The invoice also
stipulated payment was to be made to ETI’s bank account. Mr. Frenkel did
acknowledge that all his business is done under the ETI name but it was clear
he saw no difference between that arrangement and his former arrangement when
simply using the trade name CMT.
[8]
Returning to the income
statement, Mr. Frenkel answered yes to Mr. Oakey’s question whether the
company reimbursed the Frenkels for the operating expenses, as neither Mr.
Frenkel nor Ms. Frenkel personally reported any, or very little, business
expenses on their tax returns. The major expense was rental ($4,821),
presumably of the Frenkels’ home office. However, earlier in his testimony, Mr.
Frenkel had said the company covers a third of the property expenses but
"doesn’t pay".
[9]
Mr. Frenkel was unsure
who would be legally liable if there was a problem with a customer.
[10]
With respect to tools,
Mr. Frenkel indicated he provided the computer, car, printer and fridge (for
storing some potential marketable products that required refrigeration) and
that the company provided a table and chair.
Analysis
[11]
Were the Frenkels
self-employed in 2010, each carrying on their own business, providing services
to ETI or were they ETI’s employees in contracts of service? The usual
analytical path taken in employee versus independent contractor cases based on Wiebe
Door Services Ltd. v. Canada,
671122 Ontario Ltd. v. Sagaz Industries Canada Inc. and the plethora of subsequent
jurisprudence is not readily applicable when dealing with non-arm’s length
owner-managers. As Deputy Judge Rowe put it in MacMillan Properties Inc. v. Canada as follows:
29. … Of course, it is
always a walk on the metaphysical wild side when one begins to speak of a corporation
wholly owned by an individual as having a separate and distinct personality in
everyday terms rather than as a matter of law. …
[12]
This predicament has
been faced in many similar cases. Chief Justice Rip characterized it in Pro-Style
Stucco & Plastering Ltd. v. Canada
as follows:
21. In a situation where one person is the sole director and shareholder of a
corporation and provides services to that corporation, the traditional tests to
determine whether that person is an employee or an independent contractor are
not always useful. How can one measure, for example, the level of control the
employer has over the worker's activities when the person who directs the
employer is the worker? It may well be, as Mr. Marocco implied, that Pro‑Style
was incorporated because he wanted limited liability in carrying on the
business. Therefore he caused all contracts to be taken in the name of Pro‑Style.
Pro‑Style, however, accepted all risk with respect to the quality of the
work. The business carried on was Pro‑Style's, not Mr. Marocco's, and his
services were integral to that business.
[13]
As is clear from
the Supreme Court of Canada’s comments in Sagaz the usual
analytical path suggests that control is always a factor. But as
Mr. Frenkel vigorously put it, as owner of ETI no one controls him, and
certainly the company does not control him. He could at any time liquidate the
company or simply not use it. As he emotionally asked me – how many employees
can liquidate their employer. An attempt to explain the different hats the
owner-manager wears did not seem to resonate with Mr. Frenkel.
[14]
The Supreme Court of
Canada in Sagaz put the penultimate question this way:
… whether the person who has been engaged to perform the services is
performing then as a person in business or on his own account.
[15]
Again, however, this
general test rings somewhat hollow when applied to a situation such as the
Frenkels when the engagement between the payer and the worker is not in writing,
and there is no verbal agreement that can be identified, as the two individuals
who would make any such agreement are one and the same person. The usual
indices of control and intention simply are not helpful where controller and
controllee are the same. And in this particular case, when Mr. Frenkel
says he and the company intended a self-employment arrangement, this is of little
value as it was evident Mr. Frenkel did not fully appreciate what self‑employment
meant. He believed a company was necessary to show self‑employment. It
was difficult to grasp his concept of self-employment.
[16]
To add to the
difficulty of relying on the traditional four-pronged test, the type of
businesses involved required little tools or equipment. Further, the chance of
profit – risk of loss factor would be the same for the Frenkels and the
company: if there was profit, the Frenkels took it out of the company; if there
was no profit from their businesses nothing would be available to take out of
ETI.
[17]
This is one of those
cases where judge-made legal tests only take you so far and you have to step
back and ask whether the Frenkels transferred their business into ETI, such
that ETI operated the business with the Frenkels as their employees or whether
the Frenkels personally continued to carry on operating their respective
businesses, relying on ETI as nothing more than a corporate name to attract
business which it could contract out to the Frenkels and then collect payment
on their behalf – in effect, acting as a form of management agency.
[18]
In attempting to
evaluate the factors that might suggest one relationship versus another, there
is no clear direction. This is attributable, I would suggest, to the extremely
vague nature of the arrangement. In any event, what are some of the opposing
factors:
1. ETI’s income
statement showed the company paid almost all business expenses, but were they
paid on behalf of the Frenkels?
2. The contract with a
third party, GSI, refers to ETI as a sub-contractor but Elena Frenkel as either
agent or principal: an acknowledgment ETI could be acting on Ms. Frenkel’s
behalf.
3. The invoice to GSI
showed the "Business Name" as ETI but the contractor as Elena
Frenkel.
4. While there were no
invoices from the Frenkels to ETI, that might be explained by the view that ETI
simply acted as agent.
5. The Frenkels were
certainly free to use ETI or not; nothing obligated them to be accountable to
ETI for how, where or when time was spent for ETI’s benefit.
6. Effectively, for
Mr. Frenkel nothing changed in how he carried on business after incorporation,
other than using the name ETI instead of CMT.
[19]
This all leads me to
ask exactly what is the contract or the deal between the Frenkels and ETI. I
suggest it is this: that the company acts as the Frenkels’ agent to meet the
requirements of potential customers for the Frenkels’ business, to collect
payment on their behalf, pay the expenses of their businesses from such income
but with the ability to retain some of that income for providing these
management services. I conclude the most accurate way to describe the legal arrangement
is that ETI was established as an agent to manage the Frenkels’ business which
they continued to operate personally. As such, ETI might indeed own some
equipment, but I have been satisfied that the chance of profit and risk of loss
in their respective businesses was borne by the Frenkels. All that changed for
the Frenkels after incorporation was that ETI managed their businesses as an
agent, but did not operate them as such. This seems to be the most commercially
logical way to interpret Mr. Frenkel’s testimony in what in fact was going on.
Given that interpretation, I find the Frenkels were not paid as employees of
ETI but were remunerated for their independent consulting and marketing
services. As owners of ETI they could decide to pay no salary to individuals
performing the management agency services and to retain some profit, as in 2010,
for future dividend distribution perhaps. There is no doubt the Frenkels could
just as readily shift their individual businesses lock, stock and barrel into ETI
and draw salaries from ETI. Indeed, that may logistically be easier for them: I believe,
however, that they did not intend to do that and effectively have not done that
and so have left themselves in this somewhat murky arrangement. I would
encourage them to seek professional accounting and legal advice to determine
the most efficacious route to follow in the future.
[20]
The Minister’s
alternative position was that the amounts paid to the Frenkels in 2010 were
fees for acting as directors and therefore caught by the definition of office
and officer in section 2 of the CPP which specifically includes a
position of a corporation director. The Minister notes that ETI itself
identified the payments to the Frenkels as directors’ fees in the financial
statements. Mr. Frenkel explained that this was the only category in the
software program that he thought was available to identify this payment. I put
little significance on that labelling. The evidence clearly suggested that the
payments to the Frenkels were for the work they performed for customers, albeit
withdrawn on an as-needed basis, and had nothing to do with their role as
directors. It would not reflect the commercial reality of the arrangement to
suggest that any part of this payment was in fact for directors’ fees.
[21]
Finally, I will briefly
address Mr. Frenkel’s argument that the Government did not follow the
provisions of the CPP in that neither the Minister of Social
Development, an employer or employee requested an officer to make a ruling on
this issue, as required by section 26.1 of the CPP. Section 27.3 covers
the situation as it reads:
27.3 Nothing in sections 26.1 to 27.2 restricts
the authority of the Minister to make a decision under this Part on the
Minister’s own initiative or to make an assessment after the date mentioned in
subsection 26.1(2).
[22]
I also dealt with this
same issue in 6005021 Canada Inc. v. Canada and in Zazai Enterprises Inc. v. Canada and
in the latter case said as follows:
17. Looking at these
provisions as a whole, the Minister is unrestricted in assessing as he did in
this case. To put the interpretation on subsection 26.1(4)
that Mr. Sarmiento seeks, would be to completely fetter the Minister’s
authority; indeed, it would render section 27.3 useless
(a result that could not have been intended by the legislators), as it would
allow the Minister to assess but with no ability to hold that non-payment was
not in accordance with the Act. Excuse the triple negative but the
result is nothing to assess. I grant that the wording of these provisions is
not a clarion of clarity, but they must be interpreted to make some sense. And
the sense I make of them is that the lack of a ruling request in no way
handcuffs the Minister. This interpretation is supported further by subsection 26.1(2) of
the CPP which allows
the Minister of Human Resources and Development to request a ruling at any
time; all to say the Government can always overcome Mr. Sarmiento’s hurdle
by simply making the request. My view of this matter appears to be borne out by
the Federal Court of Appeal’s comments in Care Nursing Agency Ltd.
cited earlier.
[23]
As is clear from these
reasons this is a somewhat inelegant solution for the Frenkels. Yet, it
reflects more accurately their intentions and their business arrangement. There
is confusion in the arrangement, and the Frenkels would be well-advised to get
professional help to sort it out. It is clear they are not attempting to shirk
any responsibility, as they personally paid the CPP contributions. The
decision of the Minister that the Frenkels are in pensionable employment is
vacated as is the reassessment of ETI on the basis that the Frenkels are not
employees of ETI.
Signed at Ottawa, Canada, this 18th day of June 2012.
"Campbell J. Miller"
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