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Citation: 2005TCC89
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Date: 20050203
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Dockets: 2004-2536(CPP)
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BETWEEN:
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MARGO ZUPET,
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Appellant,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent.
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REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] The sole issue in this appeal is
whether the appellant, as a sole shareholder, director and
officer of her company can be in a contract for services as
opposed to a contract of service with her company.
[2] The respondent ruled that the
appellant was employed in pensionable employment pursuant to
paragraph 6(1)(a) of the Canada Pension Plan
("CPP") for the period January 1, 2002 to
May 29, 2003 in respect of amounts received by her from
her company, Starcycle Management Inc. ("Starcycle").
"Employment" is defined in section 2 of the CPP as
follows:
"employment" means the performance of services under an
express or implied contract of service or apprenticeship, and
includes the tenure of an office;
[3] The appellant holds a Bachelor of
Commerce degree from the University of Alberta and also became a
chartered accountant in 1983. The following statements in the
notice of appeal are admitted:
1. At all material times,
Starcycle carried on various businesses including without
limitation, installing computer information systems, operating
several rental properties and holding land as a long-term
investment.
2. At all material times, the
Appellant owned all of the issued and outstanding shares in the
capital stock of Starcycle.
3. At all material times, the
Appellant was the sole director and the President of
Starcycle.
6. The appellant is a registrant
for purposes of the goods and services tax ("GST").
11. Starcycle did not provide any training
to or for the benefit of the Appellant.
13. The Appellant was able to come and go
for personal errands as she chose during the workday.
15. The Appellant owned the following
equipment and used it when providing services to Starcycle:
a. computer equipment (including monitor,
keyboard, removable hard drive, printer) and software;
18. On June 2, 2003, the
Respondent issued the Ruling wherein it was determined that the
Appellant was engaged in excluded and pensionable employment with
Starcycle for the period from January 1, 2002 to
May 29, 2003.
19. The Appellant appealed the Ruling
sometime between June 2, 2003 and
June 25, 2003 and the Respondent confirmed the Ruling
by its decision dated February 23, 2004.
[4] The following statements in
the notice of appeal are denied in the reply.
4. At all material times, the
Appellant carried on a business of operating and renting computer
systems, separate and apart from any business carried on by
Starcycle.
12. The Appellant was not required to
contact Starcycle if she was going to be unable to provide
services to Starcycle and Starcycle did not, in any way, dictate
the hours that the Appellant worked for Starcycle.
14. The appellant was always at liberty to
provide a replacement service provider to Starcycle if she was
personally absent or could not provide services to Starcycle
during the relevant period (however, this was never
necessary).
16. The Appellant was responsible for
providing all computer equipment at her own cost without
additional compensation by Starcycle.
[5] The respondent states that
he had no knowledge of and puts in issue the following statements
in the notice of appeal:
5. At all material times, the
Appellant and Starcycle's intention and belief was that
considered the Appellant was providing her services to Starcycle
as an independent contractor and not as an employee.
10. The Appellant was not required to attend
meetings with Starcycle.
15. The Appellant owned the following
equipment and used it when providing services to Starcycle:
. . .
b. computer desk and chair, filing cabinet,
fax machine, telephone, calculator, garbage cans, lamp, shelving;
and
c. computer storage discs, stationery,
including pens, highlighters, file folders, hanging folders,
paper, etc.
17. The Appellant paid for all required
repairs and maintenance to the computer equipment used in
providing services to Starcycle. The Appellant was not reimbursed
by Starcycle for any repairs or maintenance costs for the
computer.
Paragraph 7 of the notice of appeal reads as follows:
7. At all material times, the
Appellant personally rented certain computer equipment to
Starcycle and also provided computer operating services to
Starcycle.
The respondent admits only that the appellant provided
computer operating services to Starcycle but denies the rest of
paragraph 7.
Paragraph 8 of the notice of appeal is as follows:
8. The Appellant invoiced
Starcycle for the time she spent providing services to it at a
rate of $40.00 per hour plus GST.
[6] The respondent admits that, at
times, the appellant invoiced Starcycle at a rate of $40 per hour
plus GST, but otherwise denies paragraph 8.
Paragraph 9 of the notice of appeal reads:
9. The Appellant was, at all
times, responsible for setting her own schedule and hours of work
and was not required to work set hours during the relevant
period.
All that the respondent admits is that the appellant was
responsible for setting her own schedule and hours of work. The
rest of paragraph 9 is denied.
[7] There was no written agreement
between the appellant and Starcycle. The appellant carried on a
business of providing various clients with information system
solutions. The word "solutions" is a buzz word that seems to be
currently in vogue in the field of technology. It presumably has
something to do with consultation or advisory services.
[8] In other words, the appellant
carried on business as a technology consultant to various clients
and also provided her expertise to Starcycle for use in its
business. The services provided to Starcycle clients were
provided personally to them by the appellant. One thing is clear,
the appellant intended her relationship with Starcycle to be one
of independent contractor. She is sufficiently sophisticated in
these matters to be broadly familiar with the difference between
being an employee and an independent contractor.
[9] The case raises a conceptual issue
that has not, to my knowledge, been decided before. It is well
settled that one can be an employee of one's own company. Whether
one is an employee of a company or an independent contractor,
whether it be a one person company or a widely held public
corporation, depends at least in part upon the nature of the
contract between the individual and the company and a number of
other factors which I shall discuss below.
[10] It must be admitted that there is a
certain air of unreality to saying that an individual can be an
employee of a company which is wholly owned and controlled by
that individual. For an employer-employee relationship (or if you
prefer a term that is more consonant with 19th century
thinking, master-servant) there has to be at least a
certain element of control or subordination. Yet who controls
whom? I have no particular problem saying that the sole
shareholder and director of a corporation controls the
corporation. This idea fits very easily into accepted legal
concepts of corporate control. See Buckerfield's Ltd.
et al. v. M.N.R., 64 DTC 5301 at 5303:
. . . I am of the view, however, that in section 39 of
the Income Tax Act, the word "controlled" contemplates the
right of control that rests in ownership of such a number of
shares as carries with it the right to a majority of the votes in
the election of the Board of Directors. See British American
Tobacco Co. v. I.R.C. [1943] 1 A.E.R. 13, where Viscount
Simon T., C., at page 15, says:
The owners of the majority of the voting
power in a company are the persons who are in effective control
of its affairs and fortunes.
See also Minister of National Revenue v. Wrights' Canadian
Ropes Ltd., [1947] A.C. 109 [2 DTC 927], per Lord
Greene M. R., at page 118, where it was held that the mere
fact that one corporation had less than 50 per cent of the shares
of another was "conclusive" that the one corporation was not
"controlled" by the other within section 6 of the Income
War Tax Act.
[11] I should think that even lawyers who
are accustomed to juggling in their heads a variety of
inconsistent legal fictions that bear no resemblance to reality
might have some philosophical difficulty with the idea that an
artificial person of which the only mind is the mind of an
individual that owns it exercises a degree of control over that
individual sufficient to establish a master-servant
relationship.
[12] Yet that is exactly what the courts
have done.
[13] One starts with Salomon v.
Salomon [1897] A.C. 22 which established the principle that
the owner of all the shares of a corporation and the corporation
are separate legal entities. The logical progression from this
principle is that a sole shareholder can enter into contractual
relations with his or her company. This is an accepted fact of
commercial reality (or, if you will, commercial unreality). One
can sell to one's company, buy from one's company, and lease to
or from one's company. And one can be an employee of one's own
company. I understand it to be generally accepted that a meeting
of the minds is an essential ingredient in a contract. One might
wonder how there can be a meeting of the minds when we have only
one mind - in essence, an identity or fusion of minds. This
seems, however, to bother no one.
[14] A recent example is found in the
decision of the Federal Court of Appeal in Meredith v.
Canada, 2002 F.C.A. 258, 2002 DTC 7190, where
Malone J.A. said at paragraphs 11-15.
[11] In my analysis, the Judge committed several errors
in the disposition of this case. First of all, the Judge
"pierced the corporate veil" insofar as he looked
beyond the corporate entity itself to assess the applicant's
actions. Examples are sprinkled thought the reasons for judgment.
For instance, he held that, notwithstanding the contractual
relationship between the third parties and Stem, that it was
"obvious that Roeslein and Ball were hiring [Meredith's]
expertise and not retaining the Company as such in that it had no
other workers." He also stated that "it is apparent
that [Meredith] controls the Company and uses it for his own
benefit from time to time when it is convenient. The Company does
not use him." Further, he also made reference to the methods
by which Meredith was paid by Stem, as well as arrangements Stem
had with its bank, including personal guarantees provided by
Meredith.
[12] Lifting the corporate veil is contrary to
long-established principles of corporate law. Absent an
allegation that the corporation constitutes a "sham" or
a vehicle for wrongdoing on the part of putative shareholders, or
statutory authorisation to do so, a court must respect the legal
relationships created by a taxpayer (see Salomon v. Salomon
& Co., [1897] A.C. 22; Kosmopoulos
v. Constitution Insurance Co. of Canada,[1987] 1 S.C.R.
2). A court cannot re-characterize the bona fide
relationships on the basis of what it deems to be the economic
realities underlying those relationships (see Continental
Bank Leasing Corp. v. The Queen,[1998] 2 S.C.R. 298;Shell
Canada Ltd. v. The Queen, [1999] 3 S.C.R. 622 ; Ludco
Enterprises Limited v. the Queen, 2001 SCC 62 at para. 51).
It follows, therefore, that the Judge erred in law by inquiring
into the economic realities of the relationship as between Stem
and Meredith, when he was not authorised by statute or common law
to do so.
[13] I am also satisfied that the Judge committed a
further error in concluding that the applicant was not an
employee of Stem. In applying the Wiebe Door Services
Ltd. v. MNR, 87 DTC 5025 (FCA) analysis (which has been
approved in 671122 Ontario Limited v. Sagaz Industries Canada
Inc., 2001 SCC 59), the Judge did not take into account the
well established principle that a corporation has its own
juridical identity distinct from its shareholders (see
Salomon, supra; Kosmopoulos,
supra.). This principle applies equally to closely-held
corporations such as Stem (Salomon, supra).
[14] The Judge was correct to conclude that the tools
and equipment were held by Stem, and that this indicated an
employment relationship; however, with respect to his findings
regarding control, chance of profit and risk of loss, he fell
into error.
[15] The recent decision of this Court in Groupe
Desmarais Pinsonneault & Avard Inc. v. Canada (MNR),
2002 FCA 144 is instructive on the issue of control. There,
Noël J.A. writing for the Court indicated that the question
is not whether the corporation did or did not exercise control,
but whether it was in a position to do so. The importance lies in
the corporation's legal power to control the employees, not
whether the employees feel subject to that control. That is the
case here, where Stem has contracted with arms-length third
parties. It is Stem, not the applicant, with whom the third
parties contracted for Meredith's expertise, and it is within
Stem's legal power, as a corporation, to control Meredith.
Therefore, given the corporate structure in place, it is
irrelevant that Meredith is the sole shareholder and director.
Based on the above authority, the Judge erred in finding that
control lay in the hands of the applicant in his personal
capacity.
[15] In Lee v. Lee's Air Farming
Ltd., [1961] A.C. 12, the question was whether the deceased
sole shareholder could be an employee of his company at the time
of his death. Lord Borth-Y-Gest said at pages
24-27:
The Court of Appeal recognised
that a director of a company may properly enter into a service
agreement with his company, but they considered that, in the
present case, inasmuch as the deceased was the governing director
in whom was vested the full government and control of the company
he could not also be a servant of the company. After referring in
his judgment to the delegation to the deceased of substantially
all the powers of the company, North J. said: "These powers
were moreover delegated to him for life and there remained with
the "company no power of management whatsoever. One of his first
acts was to appoint himself the only pilot of the company, for,
although article 33 foreshadowed this appointment, yet a
contract could only spring into existence after the company had
been incorporated. Therefore, he became in effect both employer
and worker. True, the contract of employment was between himself
and the company: see Booth v. Helliwell, but on him lay
the duty both of giving orders and obeying them. In our view, the
two offices are clearly incompatible. There could exist no power
of control and therefore the relationship of master-servant was
not created."
The substantial question which
arises is, as their Lordships think, whether the deceased was a
"worker" within the meaning of the Workers' Compensation Act,
1922, and its amendments. Was he a person who had entered into or
worked under a contract of service with an employer? The Court of
Appeal thought that his special position as governing director
precluded him from being a servant of the company. On this view
it is difficult to know what his status and position was when he
was performing the arduous and skilful duties of piloting an
aeroplane which belonged to the company and when he was carrying
out the operation of top-dressing farm lands from the air. He was
paid wages for so doing. The company kept a wages book in which
these were recorded. The work that was being done was being done
at the request of farmers whose contractual rights and
obligations were with the company alone. It cannot be suggested
that when engaged in the activities above referred to the
deceased was discharging his duties as governing director. Their
Lordships find it impossible to resist the conclusion that the
active aerial operations were performed because the deceased was
in some contractual relationship with the company. That
relationship came about because the deceased as one legal person
was willing to work for and to make a contract with the company
which was another legal entity. A contractual relationship could
only exist on the basis that there was consensus between two
contracting parties. It was never suggested (nor in their
Lordships' view could it reasonably have been suggested) that the
company was a sham or a mere simulacrum. It is well established
that the mere fact that someone is a director of a company is no
impediment to his entering into a contract to serve the company.
If, then, it be accepted that the respondent company was a legal
entity their Lordships see no reason to challenge the validity of
any contractual obligations which were created between the
company and the deceased. In this connection reference may be
made to a passage in the speech of Lord Halsbury L.C. in
Salomon v. Salomon & Co.: "My Lords, the learned
judges appear to me not to have been absolutely certain in their
own minds whether to treat the company as a real thing or not. If
it was a real thing; if it had a legal existence, and if
consequently the law attributed to it certain rights and
liabilities in its constitution as a company, it appears to me to
follow as a consequence that it is impossible to deny the
validity of the transactions into which it has entered." A
similar approach was evidenced in the speech of
Lord MacNaghten when he said: "It has become the fashion to
call companies of this class 'one man companies.' That is a
taking nickname, but it does not help one much in the way of
argument. If it is intended to convey the meaning that a company
which is under the absolute control of one person is not a
company legally incorporated, although the requirements of the
Act of 1862 may have been complied with, it is inaccurate and
misleading: if it merely means that there is a predominant
partner possessing an overwhelming influence and entitled
practically to the whole of the profits, there is nothing in that
that I can see contrary to the true intention of the Act of 1862,
or against public policy, or detrimental to the interests of
creditors."
Nor in their Lordships' view
were any contractual obligations invalidated by the circumstance
that the deceased was sole governing director in whom was vested
the full government and control of the company. Always assuming
that the company was not a sham then the capacity of the company
to make a contract with the deceased could not be impugned merely
because the deceased was the agent of the company in its
negotiation. The deceased might have made a firm contract to
serve the company for a fixed period of years. If within such
period he had retired from the office of governing director and
other directors had been appointed his contract would not have
been affected. The circumstance that in his capacity as a
shareholder he could control the course of events would not in
itself affect the validity of his contractual relationship with
the company. When, therefore, it is said that "one of his first
acts was to appoint himself the "only pilot of the company," it
must be recognised that the appointment was made by the company,
and that it was none the less a valid appointment because it was
the deceased himself who acted as the agent of the company in
arranging it. In their Lordships' view it is a logical
consequence of the decision in Salomon's case that one person may
function in dual capacities. There is no reason, therefore, to
deny the possibility of a contractual relationship being created
as between the deceased and the company. If this stage is reached
then their lordships see no reason why the range of possible
contractual relationships should not include a contract for
services, and if the deceased as agent for the company could
negotiate a contract for services as between the company and
himself there is no reason why a contract of service could not
also be negotiated. It is said that therein lies the
difficulty, because it is said that the deceased could not both
be under the duty of giving orders and also be under the duty of
obeying them. But this approach does not give effect to the
circumstance that it would be the company and not the deceased
that would be giving the orders. Control would remain with the
company whoever might be the agent of the company to exercise it.
The fact that so long as the deceased continued to be governing
director, with amplitude of powers, it would be for him to act as
the agent of the company to give the orders does not alter the
fact that the company and the deceased were two separate and
distinct legal persons. If the deceased had a contract of service
with the company then the company had a right of control. The
manner of its exercise would not affect or diminish the right to
its exercise. But the existence of a right to control cannot be
denied if once the reality of the legal existence of the company
is recognised. Just as the company and the deceased were separate
legal entities so as to permit of contractual relations being
established between them, so also were they separate legal
entities so as to enable the company to give an order to the
deceased.
(Emphasis added)
At pages 29-30 he said:
In the present case their
Lordships see no reason to doubt that a valid contractual
relationship could be created between the respondent company and
the deceased even though the deceased would act as the agent of
the company in its creation. If such a relationship could be
established their Lordships see no reason why it should not take
the form of a master and servant relationship. The facts of the
present case lend no support for the contention that if a
contract existed it was a contract for services. Article 33,
recited above, shows that what was designed and contemplated was
that after its incorporation the respondent company would, as a
master, employ the deceased, as a servant, in the capacity of
chief pilot of the company. All the facts and all the evidence as
to what was actually done point to the conclusion that what
purported to be a contract of service was entered into and was
operated. Unless this was an impossibility in law, then the
deceased was a worker within the statutory definition as referred
to above. It is said that the deceased could not both give orders
and obey them and that no power of control over the deceased was
in existence. It is true that an inquiry as to whether a person
is or is not employed upon the terms that he will, within the
scope of his employment, obey his master's orders may constitute
an important inquiry if it is being tested in a particular case
whether there is a contract of service as opposed to a contract
for services: see Simmons v. Heath Laundry Co. and
Short v. J. & W. Henderson Ltd. But in the present
case their Lordships can find nothing to support the contention
that there was or may have been a contract for services but not a
contract of service.
Ex facie there was a contract
of service. Their Lordships conclude, therefore, that the real
issue in the case is whether the position of the deceased as sole
governing director made it impossible for him to be the servant
of the company in the capacity of chief pilot of the company. In
their Lordships' view, for the reasons which have been indicated,
there was no such impossibility. There appears to be no greater
difficulty in holding that a man acting in one capacity can give
orders to himself in another capacity than there is in holding
that a man acting in one capacity can make a contract with
himself in another capacity. The company and the deceased were
separate legal entities. The company had the right to decide what
contracts for aerial top-dressing it would enter into. The
deceased was the agent of the company in making the necessary
decisions. Any profits earned would belong to the company and not
to the deceased. If the company entered into a contract with a
farmer, then it lay within its right and power to direct its
chief pilot to perform certain operations. The right to control
existed even though it would be for the deceased in his capacity
as agent for the company to decide what orders to give. The right
to control existed in the company, and an application of the
principles of Salomon's case demonstrates that the company
was distinct from the deceased. As pointed out above, there might
have come a time when the deceased would remain bound
contractually to serve the company as chief pilot though he had
retired from the office of sole governing director. Their
Lordships consider, therefore, that the deceased was a worker and
that the question posed in the case stated should be answered in
the affirmative.
[16] If the courts are to use a willing
suspension of disbelief to hold that an individual can enter into
a contract of service with that individual's own company, there
is no reason why the same willing suspension of disbelief cannot
allow the court to find that the same individual can enter into a
contract for services with his or her company. Indeed the portion
of Lord Borth-Y-Gest's speech in Lee that I have
italicized recognizes that very possibility.
[17] Which do we have here? In determining
whether a person is an independent contractor or an employee, the
first question is "What is the contract between the parties?"
Frequently there is no specific written contract but, if there
is, it is of course relevant but not determinative if the conduct
of the parties indicates that the real relationship is not that
which is set out in the written agreement. The second question is
whether the stated legal relations are genuine and binding or are
mere window dressing or, in other words, a sham. The next
important question is what in fact did the parties do? With what
type of relationship is their behaviour more consistent? This is
important whether or not there is a written agreement but it is
of even greater significance where there is none because it is
the best and possibly only evidence of the real relationship.
Finally - and this is a criterion that appears in recent years to
be assuming an increasingly greater significance - what type of
relationship did the parties intend? These questions often cannot
be answered separately. They overlap and the answer to one may be
influenced by the answer to another. In the final analysis one
must look at all of the facts and assign to each one the
importance that is requisite in the context of the overall
picture.
[18] There is no suggestion that the company
was a sham or that the legal relations between the appellant and
her company were ineffectual just because there was no written
contract. Indeed the Crown could hardly argue this given that the
premise upon which the Minister's decision was made was that the
appellant had a contract of service with her company. The
question is the nature of the contract that the appellant had
with her company.
[19] Clearly, the contract is a contract for
services. The appellant supplied her own tools (essentially
computer equipment). I accept as having been established in
evidence by the appellant the assertions in paragraphs 4, 5, 7,
10, 12, 15, 16 and 17. She carried on a consulting business in
her own name and on her own behalf and one of the persons to whom
she provided services was her company. She kept her own hours and
set her own schedule. She rented computer equipment to Starcycle.
She invoiced Starcycle for her services at the rate of $40 per
hour. She could set the rates that were negotiated between
herself and the company. She was free to have another person
supply services to Starcycle if she was unavailable.
[20] She was in business on her own and she
had a chance of profit or risk of loss. If the company's business
did not generate income this was directly reflected in the
business she obtained from the company. Indeed, she could
determine how much business the company gave her. If the
company's business was good it generated more business for
her.
[21] The application of the tests in
Wiebe Door Services Ltd. v. M.N.R. [1986]
2 C.T.C. 200, and in 671122 Ontario Ltd. v. Sagaz
Industries Canada Inc. [2001] 4 C.T.C. 139, all
point to a contract for services. It is, as the Federal Court of
Appeal and the Supreme Court of Canada in those cases observed,
difficult to apply the integration test in these circumstances
but certainly the other tests indicate that there was no
employment contract.
[22] To the extent that intent is a relevant
consideration - and it appears to be in light of Poulin
v. M.N.R., [2003] FCA 50 and Wolf v. Canada, 2002
DTC 6853, - clearly Ms. Zupet both in her personal capacity
and in her capacity of the controlling mind of the company
intended that she would be an independent contractor. One piece
of evidence that supports this conclusion, in addition to her own
testimony, is the fact she charged her company GST. I am aware
that intent is a factor that has been emphasized in cases arising
under the Civil Code of Quebec. Nonetheless, I believe that it is
a consideration that cannot be ignored in cases arising in common
law provinces. The intention of the parties can be determined
from the contract itself, from the conduct of the parties and
indeed from the parties' own testimony.
[23] In the result the decision that the
appellant was employed in pensionable employment is vacated.
Signed at Ottawa, Canada this 3rd day of February
2005.
Bowman, A.C.J.
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