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Citation: 2004TCC284
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Date: 20040413
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Docket: 2002-1707(IT)G
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BETWEEN:
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DYNAMIC INDUSTRIES LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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Docket 2002-1688(IT)I
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AND BETWEEN:
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STEVEN MARTINDALE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Margeson, J.
[1] These are the reasons for judgment
in two cases, Dynamic Industries Ltd. v. Her Majesty the
Queen, 2002-1707(IT)G, hereinafter referred to as
"Dynamic" and Steven Martindale v. Her Majesty the
Queen, 2002-1688(IT)I hereinafter referred to as
"Martindale".
[2] In computing income for its 1997,
1998 and 1999 taxation years, Dynamic deducted certain
expenditures as business expenses. By Notice of Reassessment
dated March 21, 2001, the Minister of National Revenue
("Minister") reassessed Dynamic for the 1997, 1998 and
1999 taxation years, respectively, and in doing so, disallowed
certain expenses claimed by Dynamic, and included certain amounts
in the company's income. The amounts of the adjustments were
$45,392.07, $42,868.68 and $59,178.93, respectively.
[3] In so reassessing Dynamic, the
Minister took the position that it was a "personal services
business" as defined by the Income Tax Act
("Act") and therefore would only be eligible to
deduct certain specified expenditures.
[4] The issues as quite succinctly put
by counsel for the Respondent and not disagreed with by counsel
for the Appellant are:
(a) Whether Dynamic was a
corporation carrying on a personal services business, as defined
by subsection 125(7) of the Act, during the 1997, 1998 and
1999 taxation years;
(b) Whether the Minister properly
disallowed a portion of the expenses claimed by Dynamic for those
years, on the basis that the company was precluded from deducting
such amounts, as they were restricted expenditures, pursuant to
the limitations set out in paragraph 18(1)(p) of the
Act; and
(c) Whether the Minister correctly
reassessed Martindale to include automobile benefits in his
income for the 1998 and 1999 taxation years, pursuant to
paragraphs 6(1)(e) and (k) and subsection 6(2) of
the Act.
Evidence
[5] Martindale testified that he was
the construction manager of Dynamic. He graduated from high
school in 1978 and then attended welding college and received a
certificate. He then went to ironworkers' school in Vancouver
and took courses in construction estimating. He first became
involved in Dynamic in 1983 as a result of some advice received
from a former employer.
[6] Exhibit A-1 was introduced, by
consent, subject to any specific objections made during the
hearing. Martindale said that between November 1, 1996 and
October 31, 1999 his wife and one Michael Baxter were
shareholders of Dynamic. In 1995 Martindale ceased to be a
shareholder of Dynamic. In 1998 his wife, Sherry, became a
shareholder so that Martindale could be a worker for the union.
Michael Baxter ceased to be active in Dynamic's
day-to-day operations in 1996, but is still a
shareholder because he gives a lot of work to Dynamic when his
company is unable to do it.
[7] Before l995, Martindale had
earlier worked for Dynamic on and off. He worked more for Dynamic
because he could pursue jobs himself which an ironworker through
the union hall could not and he could accept the contract jobs
that an ironworker could not. Ironworkers cannot pursue work
themselves but must go on a sign-up list and wait until their
turn comes up to be called. However, he, as Dynamic, could pursue
these contracts personally.
[8] He would give a set price to do a
certain job whereas the ironworker could only accept an hourly
wage. Dynamic secured work on a cost plus basis, contract price
basis and a daily rate basis plus expenses. In a cost plus
contract, there is a set rate per hour but there is no limit on
the number of hours worked. The cost plus type of contract was
the most prevalent. There was a fixed profit margin of ten per
cent.
[9] Dynamic could work on non-union
jobs even though they must hire union workers through Local 97.
Dynamic could negotiate any rate with a general contractor
depending on the conditions existent at any time. Ironworkers
cannot negotiate their rate. Martindale was free to work when he
wanted to, and could pursue the types of jobs that he wanted to
do. Between 1984 and 1995 Dynamic provided welding services,
fabrication and erection services. They started doing
construction management projects in 1998. Between 1984 and 1995
Dynamic also provided subcontracting service to two other
companies. He compiled a list of those companies from the
company's books. They are shown at Tab 2 in
Exhibit A-1.
[10] He referred to Tab 3 of
Exhibit A-1 with reference to
G & R Industries Ltd. and he said that
between 1988 and 1991 some of the jobs referred to therein had
time penalties. The penalty comes off of the contract price per
week. They had six to seven persons to do this work for
G & R Industries Ltd. to a value of
$95,000.
[11] He was familiar with the documents at
Tab 3 and said that those were invoices from Dynamic to other
general contractors. He referred to other parts of the exhibit
with respect to the different rates and means of remuneration
that were used with different companies.
[12] Martindale was referred to the invoice
from Dynamic to Southern Interior Installation Ltd.
("S.I.I.L.") dated November 1, 1993 and the
reference therein to wages for $7,970.50. He was asked why he
used the term "wages". He said they were wages but he
did not know whether they were for him alone. A cheque would have
been issued to Dynamic. To him, wages and labour meant the same
thing.
[13] Between 1983 and 1995 Dynamic had a few
dozen employees in total but at any one time there would be one
to eight employees depending on the contracts that they had. They
had a payroll book (time book), which is at Tab 4 and referable
to the period from May 1988 to 1994. This was accepted into
evidence. These were the amounts paid to Dynamic's employees
during that time.
[14] Tab 5 contained a list of employees of
Dynamic, which was accurate for the period between 1983 to 2003.
This was accepted into evidence. Roy Magee, who was referred
to in the time book, worked for Dynamic between 1985 and 1991.
Earl Welch, also referred to in the time book, was mostly an
ironworker for S.I.I.L.
[15] Martindale was referred to the period
of November 1, 1996 to October 31, 1999 and he said
there were very limited skilled trades available in the Elk
Valley area for this ironwork project. For that project they
needed to bring in employees. There was not much accommodation
available in Sparwood or elsewhere in the Elk Valley area.
[16] S.I.I.L. did maintenance in the coal
mines. Between the period November 1, 1996 to October 31,
1999 most of their work was in the coal mines. Dynamic also
worked for S.I.I.L. in 1999. In 1994 Dynamic did a small amount
of work for S.I.I.L. or its predecessors. In 1994 this witness
worked for Dynamic and also for another company,
Construction Management Limited. He did not want to
subcontract to Dynamic although he was asked to do so. It was a
good chance for this witness to get experience as a construction
manager.
[17] In 1995 Dynamic went back to doing
contract work with S.I.I.L. who had picked up large contracts
with Fording Coal ("Fording"). Between 1995 and 1999
Dynamic worked for no one else except S.I.I.L. who had the
lion's share of Fording's projects and was busy enough
working for them. Dynamic did project work for S.I.I.L. If
S.I.I.L. did not get the job and Dynamic had provided contract
work for it, they did not get paid. Sometimes Fording did not
provide much management on the job to S.I.I.L. That prompted this
witness to look after S.I.I.L.'s best interests. He got along
well with Fording's engineers and employees with one
exception.
[18] From October 1993 their services to
S.I.I.L. were based upon a cost plus basis, $45 per hour, plus
living expenses, plus G.S.T. This was agreed upon in 1993.
[19] He signed the invoices from Dynamic to
S.I.I.L. located at Tab 6. After January 27, 1997
Dynamic did not rent their truck to S.I.I.L. They obtained their
own. All invoices are similar. The billing date was not regular.
He referred to the invoices at Tab 7 from November 1997 to
September 1998 as invoices to S.I.I.L. Further invoices at Tab 8
were to S.I.I.L. and were from November 1998 to
October 1999. These were based upon cost, plus living
allowance, plus G.S.T. These were accepted into evidence.
[20] From November 1, 1996 to October 31,
1999 Martindale was familiar with other sub-contracts with
S.I.I.L. He knew their terms and he saw the invoices. The
invoices at Tab 9, to S.I.I.L. from various other sub-contractors
were identified and accepted into evidence. He reviewed this work
referred to in the invoices. Sub-contractors would be paid by
S.I.I.L. This was on a cost plus basis. These were not all of the
invoices from S.I.I.L. as there could have been some that were
not on a cost plus basis. S.I.I.L. paid Dynamic's invoices
fairly regularly. The documents found at Tabs 10 and 19 were
identified by this witness and placed into evidence.
[21] It was well understood that Fording
would pay all invoices of S.I.I.L. but there may have been some
delay, especially during shut downs. Steve Martindale and
Sherry Shkwarok typically loaned money to Dynamic until S.I.I.L.
paid their accounts. This witness was a member of the Local 97
Trade Union as were S.I.I.L.'s employees. The 1998 agreement
carried on until the 2000 agreement was signed. As this witness
had worked as a foreman he would have received $23 plus per hour.
Dynamic was not paid by S.I.I.L. every week.
[22] He was asked what security there was to
ensure that Dynamic would be paid by S.I.I.L. His answer was that
the ironworkers had the pick of the jobs and the backing of Local
97. The agreement required the posting of funds in some cases to
ensure payment of wages to the workers. Living out allowance
would be paid to him if he worked Fridays and Mondays and it
would be paid for seven days per week. If he had been an
ironworker he would have received a certain amount and he also
received a certain amount from Dynamic as shown at Tab 19
which he prepared. This was a spread sheet of Dynamic with
respect to profit.
[23] Referring to Tab 17 he said that the
wage scale for journeymen in 1998 was $24.36 and for a foreman it
was $24.36 plus 10%. If he had been an ironworker employee acting
as foreman of S.I.I.L. in 1999 he would have received $23.91 plus
10% per hour plus a holiday pay of 12%. Twenty-nine dollars and
forty-six cents was the highest rate he could have received as an
ironworker.
[24] Dynamic's charge-out rate was $45
per hour but there were deductions that had to be taken by
Dynamic from this amount and the net profit to Dynamic as shown
at Tab 19 of $4.07 was really the gross profit. Their hourly
rate was set in 1995.
[25] He was asked what calculations he had
made for the year 1993 with respect to the relevant wages he
would have received as an ironworker and those he received from
Dynamic. He said that he received information from the union as
to what the rate was and it almost corresponded to what he used.
In 1993 Dynamic's gross profit was much higher. In fact its
expenses were lower (the remittances to ironworkers also went
up).
[26] Tab 20 was not accepted into evidence.
Tab 21 was accepted into evidence. This was the payroll book
between 1995 and 2000 prepared by Dynamic. He referred to the
month of November 1996 with respect to the wages plus the living
out allowance of Martindale for a certain period. Tabs 22 and 23
were accepted into evidence and these were cheques from S.I.I.L.
to Dynamic. He analysed the amounts paid between November 1996
and November 1, 1999. Tab 24 contained the yearly breakdown of
the living out allowance and the monthly pay (gross wages plus
living out allowance paid by Dynamic). Tab 25 was an
auditor's report prepared by Jeff Orlik, which was given to
this witness by his counsel and it was accepted into evidence. If
Dynamic workers were negligent, Dynamic paid for the changes
which resulted therefrom. However, there was no warranty work
done in the years in question. The travel allowance amounts shown
in 1999 were not correct. In 1998, living out allowance was not
included (he said he did not have this explained to him).
[27] In 1998 and 1999 he spent five days a
week or more at Sparwood for 50 weeks per year. In Sparwood
he rented an apartment. There was no other reasonable place for
him to live. He leased it monthly. The distance between Cranbrook
and Sparwood was 80 miles. In 1998 and 1999 he spent several
weekends in Sparwood.
[28] In 1998 and 1999 he drove the
"Jimmy". He drove it from Cranbrook to Sparwood. He
drove it to work. Mine sites are in terrible condition. You
cannot get into a vehicle that has been there without having it
cleaned.
[29] In 1998 and 1999 they had a Camaro, a
Chevrolet pick-up and a motor home. During this period of time
when he was at home he drove the Jimmy on some occasions but had
better vehicles at home. He needed a four-wheel-drive to go to
the mine. He did not need the Jimmy on a regular basis. He did
not drive it a whole lot.
[30] In cross-examination Exhibit R-1 was
admitted by consent. Martindale said that he was a member of
Local 97 and has been a member since 1982. It is advantageous for
him to be a member. There is no restriction on Dynamic in
obtaining union jobs so long as Dynamic uses union members. The
unit bargains for the union members but this witness bargains
independently for Dynamic. If a member turns down a job his name
goes to the bottom of the list. If Dynamic turns down work it may
affect him later on.
[31] He was referred to Exhibit A-1, Tab 2
and said that that was a list of the companies that Dynamic did
work for. Sherry did the word processing. He was referred to
Tab 3 for the year 1999 and he said that Sherry and he did
the minutes. The writing is in Jim Paul's handwriting.
Dynamic's invoices do not show a breakdown of the services.
There is no reason to do so. Some did daily time cards and some
did not.
[32] Tab 5 was a list of employees of
Dynamic between the years 1983 and 2003. His two sons are listed
as assistants. They were originally cleaners and then became
employees when they were old enough. Between 1997 and 1999 they
were 13 and 16 years of age. They did casual work. None of the
names on the list were full-time employees except himself and
Sherry. She was full-time/part-time. She was an accountant,
bookkeeper, loaned money to Dynamic, was a driver, was a safety
coordinator and helped on the truck as well. Between 1997 and
1999 she was doing payroll, accounting and banking. The work was
mostly administrative in nature. She helped him transport
equipment. They did not rent much equipment over those three
years.
[33] Between the years 1995 and 1999 Dynamic
worked continually for S.I.I.L. and in 1995 and 1996 it worked
only for S.I.I.L. If S.I.I.L. did not get the bids, then Dynamic
did not get paid. In 1993 they set the rate at $45 plus
10% mark-up. There was no hourly rate change between
the years 1995 and 1999. They were not greedy and did not want to
"kill the golden goose". He is familiar with the rates
that S.I.I.L. charges the mines.
[34] The documents at Tab 9 were other
invoices submitted to S.I.I.L. other than their own. He reviewed
them. There was no reason for more or less detail in the
invoices. Between 1997 and 1999 S.I.I.L. had dozens of
sub-contractors and Dynamic as well. Some of them would
have invoiced S.I.I.L. for all three years.
[35] He referred to Tab 10 which was a
cheque drawn on the account of S.I.I.L. made payable to Steve
Martindale and then the name was changed to Dynamic Industries.
The amount was for $5,000 and was dated
September 15, 1997 and referred to the term
"bonus". He said this was a mistake. The $5,000 bonus
should have been put in as income. He never did any work on the
payroll for S.I.I.L.
[36] He was referred to Tab 12 and he said
that these were delayed payments from S.I.I.L. to Dynamic. All of
these were paid in the end without interest. The same thing can
be seen at Tab 14 for 1993. He did not do the same thing for the
intervening years. Things had slowed down in 1998.
[37] He was referred to Tab 19 which was a
spread sheet for Dynamic for the year 1999. This sheet reflected
the most money that he could get out of S.I.I.L. as an employee.
If S.I.I.L. went broke, Dynamic may not have been paid. He was
referred to Tab 24 which was a payroll for Dynamic showing the
living out allowance and the gross pay in 1996 and 1997. They
decided to pay him a round figure of $4,500 rather than having it
vary. Dynamic sometimes received a bonus from S.I.I.L. He did not
know if other subcontractors did. It was 80 miles to Sparwood. He
rented an apartment there first in 1997 and 1998. He still leases
it.
[38] Tab 25 was the auditor's report for
1997 to 1999. The wages paid to him were allowed and the wages
paid to Sherry were not. Tab 1 of Exhibit R-1 was an income
tax return for the year 1995 and 1996 for Dynamic. Tab 2 was an
income tax return for Dynamic for the period November 1, 1996 to
October 31, 1997. This return showed that the major job
with the company was contract welding although he said that there
was a change to project management.
[39] Tab 3 contained a return for October
31, 1998. The office was in his residence that year. Tab 4, the
return for the year ending October 31, 1999 showed that promotion
expenses for season tickets for hockey.
[40] With respect to the Declaration of
Conditions of Employment forms, this was a mistake and they used
the wrong form. The employment expenses related to the use of the
Jimmy.
[41] He identified the documents from Tab 6
to Tab 10. With respect to Tab 8 for 1998, the wrong information
was provided. This was submitted in 1999 for the year 1998. Tab
16 was a computer printout reference for Dynamic from the general
ledger dated October 31, 1997. This would have been given to CCRA
by Dynamic. Tab 17 was a general ledger excerpt as at October 31,
1998 for Dynamic. Tabs 1, 2, 3, 4, 5, 6, 7, 8, 9, 16 and 17 were
all accepted into evidence. Tab 15 was not.
[42] He is still employed through Dynamic as
a construction manager. The S.I.I.L. projects may last from two
days to six months. He provides knowledge of the industry, his
own specific skills and his expertise of construction projects to
clients. When there was no work for S.I.I.L. he looked elsewhere
for work but did not obtain any in the years in question. He may
have had to divide his time between different sites. S.I.I.L.
employees and sub-contractors all reported to him.
[43] During 1997, 1998 and 1999 S.I.I.L.
received 90% of the work from Rawding. It was very rare that he
was not at the work sites for any reason. He could have hired
someone else to come and work for him. Dynamic was doing work in
British Columbia that was fairly unique to Dynamic but this
witness could still hire someone else to replace him. However, he
did not have to in 1997, 1998 or 1999. He had no decision making
authority with respect to what S.I.I.L. was going to pursue. He
had no written contract with S.I.I.L. or Dynamic. He stayed in
Sparwood during the week. The general contractors were liable for
all sub-trades but it is their decision as to whether S.I.I.L.
covers them or not. The last time that Dynamic had its own
coverage was in 1997 and 1998.
[44] At the site anyone could bring a
problem to Dynamic's attention. He had no regular meetings
with S.I.I.L. It was always ad hoc. They were not on site.
It was a group effort as to who was in charge when the Larsons
were away. There was no Declaration of Conditions of Employment
for 1995 due to an incompetent accountant.
[45] Gayle Edith Larson was from Fruitvale
and indicated that she was self-employed. She is the owner of
S.I.I.L. and she does all of the books herself. Her husband is an
ironworker and not a shareholder.
[46] Between 1995 and 1999 S.I.I.L. did most
of the work for Fording, to the extent of 95% and upwards. It
rated projects, targeted the price and calculated the time
involved. There is no assurance of obtaining a job. Dynamic
played an important role in them getting the work. She sits down
with "Jim" and discusses matters. They valued
Dynamic's opinion. If they do not get the contract they would
not bill Fording for the time spent.
[47] Ironworkers are paid weekly for the
hours worked. S.I.I.L. paid the subs once per month, 30 days
after receipt of the invoice.
[48] They used Dynamic and other
sub-contractors between November 1, 1996 and October 31,
1999. They treated Dynamic the same as other subs. Dynamic would
oversee the ironworkers' who are the mine's employees and
also would oversee S.I.I.L.'s employees. Those employees were
told where and when to go. Dynamic was not told. Dynamic had no
specific hours to work. The ironworkers did. The ironworkers only
were involved in getting the job done and were not involved in
construction. They were not involved in completing forms or doing
accounting, etc.
[49] S.I.I.L. would give her a time card so
she could send a bill with respect to the right job. Between
November 1, 1996 and October 31, 1999 their relationship with
Fording and Dynamic was the same. Almost every day Steve checked
in with them. He may not have checked in every day. He would also
check in with Fording, probably more than with them. S.I.I.L. was
audited and Phil was reassessed for his living out allowance as
well as others. In April 2003 Jim's case went to court and he
won it.
[50] She was referred to Exhibit A-1, Tab 26
which was admitted into evidence. These were the Reasons for
Judgment in the case of Larson v. Canada, [2003] T.C.J.
No. 447. The Court found that it was temporary work and
there was no chance of permanence.
[51] In 1997, 1998 and 1999 her husband
drove a 1997 diesel to work and did use it for personal purposes.
It was filthy.
[52] In cross-examination, she said that she
was the sole shareholder of S.I.I.L. and her husband has never
been a shareholder. She was referred to Exhibit R-1, Tab 15
with respect to the bonus payable by S.I.I.L. and she said that
reference was in her accountant's handwriting. The bonus was
payable by S.I.I.L. to Dynamic. Dynamic was integral to the
operation of S.I.I.L. They were helpful to S.I.I.L. There were no
employees. This was a way of showing their appreciation. No other
sub-contractor except Dynamic was paid a bonus.
[53] Then she agreed that Dynamic may not
have been treated the same as other subcontractors because the
others were not so keen to work with S.I.I.L. Dynamic and
Mr. Martindale were key to the sub-contractors' work.
Other employees of S.I.I.L. would have been subject to lay-off if
no contracts were coming in.
[54] The first work done by Dynamic for
S.I.I.L. would have been in 1993. However, in the years in issue
Dynamic was probably not working for anyone else. S.I.I.L. was
very busy. If needed, Mr. Martindale would have been there. Part
of Dynamic's job was to watch the dollars.
Argument on Behalf of the Appellant Re Dynamic Industries
Ltd.
[55] With respect to the first issue as to
whether or not the Appellant was a corporation carrying on a
personal services business, the Appellant referred to the
provisions of paragraph 18(1)(p) of the Act. This
provision limits the expenses that a personal services business
might claim in any taxation year. In particular, this allows the
deduction of
(i) 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.
[56] He referred to the provisions of
subsections 248(1); paragraphs 125(7)(a) and (b) as
being the relevant provisions regarding the definition of
"personal services business". The question is whether
or not during the period from November 1, 1996 to October 31,
1999 Mr. Steven Martindale would "reasonably have been
regarded as an officer or employee" of S.I.I.L.
[57] He submits that the answer to that
question is "no" in light of the Federal Court of
Appeal's decision in Wolf v. The Queen, [2002]
CarswellNat 556 and in light of the Tax Court of Canada's
decision in Sara Consulting and Promotional Limited v. The
Queen, [2001] T.C.J. No. 773, dockets 2000-3982(EI) and
2000-3984(CPP), and in TSS-Technical Service Solutions
Inc. v. Canada, [2002] T.C.J. 101, dockets 2000-3366(EI)
and 2000-3367(CPP). The issue in the present case, according to
him, is the same as in Wolf (supra).
[58] The facts as found by Desjardins, J.A.
in Wolf (supra), are substantially similar to the facts
set out in the testimony of Mr. Steve Martindale and
Ms. Gayle Larson in the present case. Here, the
contract between Dynamic and S.I.I.L. was an oral one and not in
writing. If in the opinion of S.I.I.L. or Fording, Steve
Martindale did not provide his services in a workman-like and
professional manner, S.I.I.L. could terminate its agreement with
Dynamic. Furthermore, as in Wolf (supra), the renewal of
the contract between S.I.I.L. and Dynamic was dependent entirely
on the workload available at Fording, i.e. if S.I.I.L. had no
work orders from Fording then S.I.I.L.'s contract with
Dynamic could, and would, be terminated.
[59] Payment to Dynamic was much the same in
the present case as in Wolf (supra), in that during the
years in question, S.I.I.L.'s contracts with Fording were
usually on a "cost plus" basis which was a
pre-negotiated amount per hour plus a 10% mark up and
Dynamic's contract with S.I.I.L. was on a similar "cost
plus" basis. Dynamic was paid at a rate of $45 per hour for
straight time, $63 for overtime and $85 per hour for double time.
This rate was more than what S.I.I.L.'s ironworkers were
paid, both on a gross and net basis. S.I.I.L. paid Dynamic a
living out allowance, although for fewer days than the living out
allowance S.I.I.L. paid its ironworkers.
[60] On some occasions Dynamic was also paid
a bonus subject to the successful completion of Fording work
orders. Further, the method of the payment in the case was
similar to the method of payment in Wolf (supra) although
here Dynamic billed its hours plus living out allowance to
S.I.I.L. who in turn billed Fording by marking up Dynamic's
billed amount by 10%. Once S.I.I.L. had a sufficient cash flow as
a result of Fording paying its bills, S.I.I.L. would pay
Dynamic's bills.
[61] The working conditions were basically
similar. In the present case, Mr. Martindale and Ms. Larson
both testified that Mr. Martindale discussed the progress
and problems of the projects which he was managing with
representatives of Fording (either Fording staff engineer or
Fording's owner representative) and with Jim and Gayle Larson
of S.I.I.L. During the years in question,
Dynamic/Steve Martindale worked on a variety of Fording
projects at all of Fording's mine sites. As in Wolf
(supra), Dynamic and Steve Martindale were subject to minimal
supervision by S.I.I.L. or Fording. No one told Mr. Martindale
how to manage each specific project. Once Mr. Martindale accepted
management of a project he pursued it on his own. Mr. Martindale
was often called upon to interact, not only with Jim Larson
from S.I.I.L., but also with a supervising engineer or
owner's representative from Fording.
[62] Similar to Wolf (supra), during
the years in question, the Appellant used tools and equipment
provided by S.I.I.L. except for the vehicle which Dynamic
provided. In prior years, Dynamic had used its own tools for
which it had charged S.I.I.L. and Dynamic had rented other tools
and equipment to S.I.I.L. Given the profit associated with this
activity, Dynamic would have liked to continue this equipment
rental. However, once S.I.I.L. was financially capable of
purchasing its own tools and equipment it stopped renting tools
and equipment from Dynamic. Furthermore, the vast majority of the
work performed by Dynamic/Steve Martindale could only be
performed at the mine site using materials provided by S.I.I.L.
or Fording.
[63] Similar to Wolf (supra),
Dynamic/Steve Martindale was treated differently from
S.I.I.L.'s employees in that "S.I.I.L.'s employees
were members of Local 97 of the Ironworkers Union and as such
were required to be paid a specified amount per hour for each
hour they were at a mine site. They had to be paid once a week.
In contrast, Dynamic/Steve Martindale were not paid for anything
that S.I.I.L. could not in turn bill Fording for (i.e. work not
done at Fording's work site such as going through drawings
and planning workloads for the next day, contract estimates and
for contracts not already ordered to S.I.I.L., etc.).
[64] Dynamic/Steve Martindale were required
to fix any errors in their work without charge. None of
S.I.I.L.'s employees did this non-payable
"warranty" work.
[65] S.I.I.L. had to provide sufficient
security to the union that it was capable of meeting its
ironworkers payroll. S.I.I.L. only paid Dynamic and other
subcontractors when S.I.I.L. had sufficient cash flow to do
so.
[66] S.I.I.L. employees' standard work
day was from 8:00 a.m. to 4:30 p.m. Mr. Martindale worked those
hours which were necessary to complete a project. This might
entail working less than eight hours per day or working more than
eight hours per day, with the start time for such working days at
Mr. Martindale's choosing.
[67] S.I.I.L.'s ironworker foremen were
not concerned with how much a particular project cost nor with
documenting such projects. In contrast, Dynamic/Steve Martindale
were concerned with project cost overruns and properly
documenting project steps.
[68] As in Wolf (supra),
Dynamic/Steve Martindale were in an identical position as the
worker there. Furthermore, Dynamic was at risk of being sued by
S.I.I.L. for damages resulting from Mr. Martindale's
negligence on a project. There was a risk that S.I.I.L. might not
be able to pay Dynamic's bills. S.I.I.L.'s steel workers
did not face such litigation risks nor a risk of non-payment.
Further, in this case, given the nature and depth of skilled
trade persons available in the Sparwood and Elkford area and the
nature of the Fording projects, S.I.I.L. would hire numerous
other sub-contractors needed for a given Fording project (i.e.
plumbers, electricians, instrument control specialists, etc.).
Dynamic/Steve Martindale were treated the same as these
other sub-contractors. Dynamic's invoices to S.I.I.L. during
1997, 1998 and 1999 which are set out in Exhibits A-6, A-7 and
A-8 are substantially similar to those sample invoices issued by
other sub-contractors to S.I.I.L., which were set out behind
Exhibit A-9.
[69] In the present case, Dynamic's
contract with S.I.I.L. lasted only as long as S.I.I.L.'s
contract with Fording, which could range from a few days to a few
months, depending on the project. In Wolf (supra), the
taxpayer worked on Canadair projects for six years between
January 31, 1990 and 1995. In the present case, Dynamic/Steve
Martindale worked on S.I.I.L.'s Fording projects continuously
and exclusively since 1995. It should also be noted that 90% of
S.I.I.L.'s work during this period of time was for Fording.
Dynamic/Steve Martindale's continuity of work, and
S.I.I.L.'s continuity of work, was attributable to the fact
that Fording undertook considerable capital expenditures
commencing in 1995. Neither Dynamic nor S.I.I.L. had to look for
work elsewhere. This has all changed recently with Fording's
sale and the reduction of capital expenditures at the mine
sites.
[70] Counsel submitted that the factual
conclusion in the present case is substantially similar to the
facts in Wolf (supra) and consequently the reasons for the
decision in Wolf (supra) are equally applicable in the
present case.
[71] Similar to the findings in Wolf
(supra), the present case indicates that Mr. Martindale
was assigned a project, he knew what had to be accomplished and
he was a master of "how to do it", even though this
alone does not establish a lot of subordination. Further, the
ownership of tools test was found to be a neutral factor in
Wolf (supra) and that should equally be true here.
[72] With respect to the financial risk and
opportunity for profit test, Madam Justice Desjardins
concluded that this test indicated an independent contractor
relationship since Mr. Wolf (supra) did take risks. This
is exactly the same situation that Dynamic/Steve Martindale were
in. For example, in 1999 Dynamic's charge outright to
S.I.I.L. was the same as when it was first negotiated in 1993,
$45 per hour. Even so, in 1999 Dynamic still made $4.07 more than
when Mr. Martindale had been an ironworker employed by S.I.I.L.
In 1993 this profit component was higher. Furthermore, Dynamic
was at risk for being sued for negligence, not getting paid for
work on unsuccessful bids and not getting paid for issued
invoices. Dynamic and Mr. Martindale had no job security -
Dynamic only had work from S.I.I.L. as S.I.I.L. had work from
Fording. However, Dynamic and Mr. Martindale did have greater
flexibility in finding work than when he was an ironworker
employee since he could avoid the union call-out list and he
could work on non-union jobs. Furthermore, Dynamic and
Mr. Martindale could work on a basis other than an hourly
rate and when work was done at an hourly rate, they were free to
negotiate a rate higher than that stipulated by the union. The
risk factors in this case were Mr. Martindale's and his
wife's, which was similar to the factual situation in Wolf
(supra).
[73] Regarding the integration test,
although they were found to be inconclusive in Wolf
(supra), in the case at bar, although Dynamic and
Mr. Martindale were an integral part of S.I.I.L.'s
business activities during the years in question, this is not
relevant. What is relevant is to consider the integration test
from Dynamic/Mr. Martindale's perspective. Dynamic and Mr.
Martindale were at S.I.I.L. to provide a temporary helping hand
in the limited field of expertise, namely, Mr. Martindale's
project management expertise. In the present case, Dynamic's
business stood independent of S.I.I.L.'s and Mr. Martindale
made sure they looked after Dynamic's best interests first,
before S.I.I.L. For example, Mr. Martindale testified that in one
project he advised Fording not to proceed with its intended
course of action of contracting with S.I.I.L. to undertake the
project since the project was not necessary. Mr. Martindale
advised Fording in this manner so as not to imperil his and
Dynamic's position with Fording, even though it meant less
work for S.I.I.L. Once S.I.I.L. completed a Fording project,
Dynamic was out of a job until another project came along or
until Dynamic was successful in pursuing another contract with
another general contractor.
[74] As in Wolf (supra) Dynamic/Mr.
Martindale had "non-standard" employment. As a result
of his many years of running Dynamic, Mr. Martindale's
work routine emphasized higher profit coupled with higher risk,
mobility and independence. This is an even stronger argument in
the present case than in Wolf (supra) since Mr. Wolf
did not have a long history of running his own business but
Martindale did. Given the similarity in facts with
Wolf (supra) Mr. Martindale cannot
"reasonably" be regarded as being an employee of
S.I.I.L. having regard to the "traditional" analysis
used by Madam Justice Désjardins. Dynamic is
therefore not a personal services corporation.
[75] Counsel also discussed the reasons for
the decision of Décary, J.A. in Wolf, (supra),
who set out the difference between a contract of service and a
contract for services when discussing the ruling case of Wiebe
Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553 (F.C.A.) and
the most recent case of 671122 Ontario Limited v. Sagaz
Industries Canada Inc., [2001] F.C. 59 as to whether the
person who has been engaged to perform the services is performing
them as a person in business on his own account. The learned
Justice then indicated in the final analysis, in civil law as
well as in common law, one ends up looking into the terms of the
relevant agreements and circumstances to find the true
contractual reality of the parties.
[76] The Court must look at the total
relationship of the parties and conclude what the intention of
the parties is. Was Martindale performing his professional
service as a person in business on his own account?
Décary, J. said, "In our day and age, when a worker
decides to keep his freedom to come in and out of a contract
almost at will, when the hiring person wants to have no liability
towards a worker other than the price of the work and when the
terms of the contract reflect those intentions, contracts can
generally be characterized as contracts for services". He
referred to some of these characteristics such as a lack of job
security, disregard for employee-type benefits, freedom of choice
and mobility concerns.
[77] In the present case, counsel argued
that the intent of Dynamic and S.I.I.L. was that Dynamic be an
independent contractor. Dynamic has always maintained that this
was their intent, as evidenced by the following statement from
page 7 of the Respondent's audit report which comprises
Exhibit A-1, Tab-25:
The representative Randall Ball and the shareholder Sherry
Shkwarok were unaware of the possibility that the corporation
activities were considered a personal services business. They
mentioned that it was not their intent to fall into these tax
ramifications as the corporation had numerous clients in the
past. The auditor has countered (that) intent has little bearing
in the circumstances.
However, it is clear that commencing in 1983, particularly
since 1988, Dynamic/Steve Martindale was used to and wanted the
freedom of running his own business and the opportunity of making
more money and was willing to sacrifice security in return.
S.I.I.L. wanted the flexibility of being able to terminate the
relationship at will and avoid the fixed benefit costs associated
with employees. Thus, the contract between Dynamic and S.I.I.L.
was a contract for services and not a contract of service. Using
Mr. Justice Décary's analysis, Mr. Martindale
cannot reasonably be regarded as an employee of S.I.I.L.
[78] Counsel referred to the analysis in
Sara Consulting, supra and TSS-Technical Service
Solutions, supra and the Supreme Court of Canada decision in
Shell Canada v. The Queen, 99 DTC 5669 in support of his
position that the Court should not re-characterize legal
relationships in the absence of clear and credible evidence that
the description of a relationship is other than as agreed between
arm's length parties. The description agreed upon by the
parties must stand.
[79] In the present case, S.I.I.L. and
Dynamic/Martindale considered Dynamic/Martindale to be an
independent contractor and there is no clear and credible
evidence that this description does not properly reflect its
actual legal effect.
[80] Counsel referred to the Reasons of
Noël, J.A. in Wolf (supra), where the learned Justice
considered the traditional analysis and the non-traditional
analysis and concluded that where the parties labelled the
relationship in a certain way in the hope of achieving a tax
benefit, where was no sham or window dressing of any sort in the
case and where the parties' action reflected their
understanding of the relationship as being that of an independent
contractor and their actions were consistent therewith, the Court
should not disregard their understanding.
[81] In the present case Dynamic and
S.I.I.L. labelled the relationship in a certain way with a view
to achieving a tax benefit. There was no sham or window dressing.
Mr. Martindale had operated Dynamic for 12 years as an
independent business prior to providing services to S.I.I.L. On
commencing to provide services to S.I.I.L. in 1995 Mr. Martindale
and S.I.I.L. continued to view Dynamic as an independent
contractor with all the risks and benefits.
[82] In conclusion, based upon the facts and
reasons in Wolf (supra), and given the similarity of facts
between the present case and the facts in Wolf (supra),
counsel submitted that Mr. Martindale cannot
"reasonably" be regarded as an employee of S.I.I.L.
during the years in question, regardless of whether the
"traditional analysis" in Wiebe Door Services Ltd,
supra, is used or the non-traditional analysis as adopted by
Décary, J.A. As a result, Dynamic does not fall
within the definition of a "personal services business"
set out in subsection 125(7) of the Act which in turn
precludes the application of paragraph 18(1)(p) of the
Act. The Appellant's appeal should be allowed in full,
with costs in that regard.
Deductions Allowed if Dynamic is a Personal Services
Business
[83] Counsel argued that the provisions of
subparagraph 18(1)(p)(ii) refers to "the cost to
the corporation" of the benefit or allowance. It is
therefore submitted that the "benefit" or
"allowance" provided to the incorporated employee need
not be taxable to that employee in order for the cost of that
benefit or allowance to be deductible by the company.
[84] The Minister apparently did allow the
deduction of the wages which were paid to Mr. Martindale but not
the "cost" to Dynamic of the benefit of providing an
automobile to Mr. Martindale, nor has Dynamic been allowed to
deduct the amount of living out allowances provided to Mr.
Martindale during the years in question.
[85] For its fiscal year ended October 31,
1997 the cost to Dynamic of providing Mr. Martindale with an
automobile, set out on page 4 of Exhibit A-1, Tab 25,
amounted to $9,786.71. In addition to this amount, Dynamic should
be allowed to deduct its living out allowance payments of
$19,565.00 which are established by Exhibits A-1, Tab 21 and Tab
22 and summarized in Tab 24.
[86] For its fiscal year ended October 31,
1998 the cost to Dynamic of providing Mr. Martindale with an
automobile as set out on page 5 of Exhibit A-1, Tab 25
amounted to $10,286.81. In addition to this amount, Dynamic
should be allowed to deduct its living out allowance payments of
$16,800 which are established by Exhibits A-1, Tab 21 and Tab 23
and summarized in Exhibit A-1, Tab 24.
[87] For its fiscal year ended October 31,
1999 the cost to Dynamic of providing Mr. Martindale with an
automobile, as set out on page 5 of Exhibit A-1, Tab
25, amounted to $7,316.58.
[88] In addition to this amount, Dynamic
should be allowed to deduct its living out allowance payments of
$19,100 which are established by Exhibit A-1,
Tab 21 and summarized in Exhibit A-1, Tab 24.
[89] The Appellant also asks for costs.
Argument by the Appellant - Steven Martindale
[90] The Appellant has been reassessed to
Tax pursuant to the provision of paragraphs 6(1)(e) and
6(1)(k) of the Act for his 1998 and 1999 taxation
years to include in his income a standby charge and operating
benefit which totalled $7,416 in each of the taxation years as a
result of the Appellant's employer, Dynamic making available
to the Appellant the use of a 1994 GMC Jimmy automobile.
[91] This liability for a standby charge,
under paragraph 6(1)(e) depends upon the calculation of a
"reasonable standby charge". The issue before the Court
in this case is whether:
1) the Appellant was required by
Dynamic in that particular year to use a 1994 GMC Jimmy in
connection with or in the course of his employment with
Dynamic;
2) all or substantially all of the
distance travelled with the 1994 GMC Jimmy in that particular
taxation year was in connection with or in the course of the
Appellant's employment with Dynamic.
[92] In order for the Appellant to claim the
deduction he must be able to answer in the affirmative to both of
these questions.
[93] The Respondent in the Reply has not set
out any assumptions with respect to this issue which the
Respondent relied on in assessing the Appellant. In each of the
1998 and 1999 years, Dynamic was providing project management
services to S.I.I.L. with respect to construction repair
contracts which Fording had awarded to S.I.L.L. at Fording's
three mine sites located in the Elk Valley in south-eastern
British Columbia.
[94] In order for Dynamic to provide these
project management services, its employee, the Appellant, was
required to travel to Sparwood, as well as from Sparwood to any
of Fording's three mine sites. The Appellant and
Mrs. Gayle Larson both testified that given the road
conditions on the highway between Cranbrook and Sparwood, a
four-wheel-drive was a necessity. Also, the Appellant and
Mrs. Larson testified that the Appellant needed a
four-wheel-drive vehicle to travel to and around the three
Fording mine sites located in the Elk Valley.
[95] In the present case, the distance
travelled by the Appellant between his residence and Cranbrook
and Sparwood meets both of the requirements since the distance
travelled was "in connection with or in the course of the
office of employment". As the Appellant testified, in any
given day he would have to drive around a particular mine site
and may have to be at more than one site. To do these duties he
needed a 1994 GMC Jimmy and its four-wheel-drive
capabilities.
[96] Due to the distance involved and the
road conditions and travelling between Sparwood and Cranbrook, it
was not feasible for the Appellant to drive to and from his home
in Cranbrook every day. Thus, the Appellant's travel between
Cranbrook and Sparwood was "in connection with" his
employment with Dynamic.
[97] Because the Appellant was working at
more than one Fording mine site in each of the 1998 and 1999
years, the Appellant's travel between Cranbrook and Sparwood
was also "in the course of" the Appellant's
employment with Dynamic. Travel which occurs "in the course
of employment" has specifically been dealt with by the
Courts in connection with employee travel expense deductions set
out in paragraph 8(1)(h) of the Act. The Federal
Court Trial Division dealt with such travel in
The Queenv. Wright,
(1980) Carswell Nat. 520.
[98] In Wright, supra, the Federal
Court, Trial Division, reviewed the case law and it was generally
held that an employee going to and returning from his work is not
considered to be travelling "in the course of his
employment". In paragraph 6, the Federal Court, Trial
Division, did note one exception of this general rule: [t]he
result is different where the employee is obliged to perform his
duties in more than one place. In such case he comes within the
words of the statute namely: "He is ordinarily required to
carry out the duties of his employment in different places."
Such situation is dealt with by Cattanach, J. in The Queen v.
E. E. Deimart, [1976] C.T.C. 301, 76 DTC 6187
where he states at page 310 [DTC at 6193]:
It is a variant on the category of itinerant jobs that the
concept of two places of work had been introduced particularly in
Owen v. Pook, (1969) 2 All E.R. 1, and Taylor v.
Provan, (1973) 1 All E.R. 1201, both decided by the House of
Lords. Basically, that variant is that if a man has to travel
from one place of work to another place of work he may deduct the
expense of this travel because he is travelling on his work, but
not those of travelling from either place of work to his home or
vice versa unless his home happens to be a place of work. For
this concept to apply, the facts must be that the work or the job
must be done in two places. It is not enough that the man might
choose to do part of the work in a place separate from where the
job is objectively located.
[99] In the present case, the Appellant, in
1998 and in 1999, was employed at all three of Fording's coal
mine sites and had to be able to travel to these various mine
sites. The Appellant testified that some of these mine sites were
up to 50 miles (80 km) apart. It is submitted that the
Appellant's requirement to work at different places of work
brings him within the exception identified above and results in
the Appellant's travel between Cranbrook and Sparwood in the
mine sites to be considered travel "in the course of"
his employment.
[100] Furthermore, it was the Appellant's
unchallenged testimony in 1998 and 1999 that he only used the
1994 GMC Jimmy in respect of his employment duties as set out
above. For personal travelling, the Appellant used either a
Chevrolet pick-up, a Camaro or a motor-home personally
owned by the Appellant and his wife. The Appellant also
testified, as did Gayle Larson, that given the condition of
the coal mines, specifically that coal dust covered the interior
and exterior of the vehicles, vehicles driven at the mine sites
were not suitable for personal use.
[101] In conclusion, it is respectfully submitted that
in each of the 1998 and 1999 taxation years, all mileage
driven by the Appellant in the 1994 GMC Jimmy were in connection
with or in the course of his employment with Dynamic and with the
result that the amount applicable to item A in the formula set
out in calculating the reasonable standby charge in subsection
6(2) of the Act is zero. The result is that there was no
reasonable standby charge during the years in question and
therefore no taxable benefit under paragraph 6(1)(e) and
(k) of the Act.
[102] The Appellant's appeal should be allowed with
costs.
Argument on Behalf of the Respondent
[103] Counsel took the position that it is undisputed
that Martindale is the incorporated employee of Dynamic, that his
spouse Sherry Shkwarok is a specified shareholder of Dynamic,
that Dynamic did not employ, throughout the years under appeal,
more than five full-time employees (as it employs only
Mr. Martindale full-time and Ms. Shkwarok part-time), and
that Dynamic is not associated with S.I.I.L., the corporation to
which it provides services.
[104] The only remaining issue is whether Martindale, as
the incorporated employee of Dynamic, "would reasonably be
regarded as an officer or employee of the person or partnership
to whom or to which services were provided but for the existence
of the corporation".
[105] It is unreasonable and artificial to categorize
Martindale's services to S.I.I.L. through Dynamic as those of
an independent contractor. In providing his services as a project
manager, Martindale was in fact the equivalent to an employee of
S.I.I.L. Therefore Dynamic is a "personal services
business" as defined by subsection 125(7) of the
Act. Consequently, the Appellant is limited to the
deductions described in paragraph 18(1)(p) of the
Act. A personal services business falls on a continuum,
with each entity being entitled to a certain level of
deductibility of expenses:
|
Employee
|
Personal Services Business
|
Independent Contractor
|
|
|
|
|
|
No deduction
|
Limited expense deduction
|
Full expense deduction
|
[106] She agreed that Dynamic is entitled to deductions
for salary, wages or other remuneration paid to its incorporated
employee Martindale during their 1997, 1998 and 1999 taxation
years, and that indeed those amounts were allowed by the Minister
upon reassessment.
[107] Counsel referred to the case of David T.
McDonald Company Limited v. M.N.R., 92 DTC 1917 (T.C.C.) in
reference to the purpose of the legislation which in general was
to remove the income advantages previously available to
"incorporated employees" such as low tax rates, the
deferral of tax at personal rates on that income and the
possibility of splitting income among family members.
[108] It is clear that Dynamic has been involved in
income splitting. The Notice of Appeal at paragraphs 15, 16 and
17 contain the detailed listing of the expenses claimed by the
company for each of the three taxation years, and by far the
greatest expense claim was for wages and benefits. Comparison of
this expense as against the total amount of expenses claimed for
each year show that in 1997 wages and benefits were 72.5% of the
total expenses; in 1998 it was 53.9% and in 1999 they were
47.0%.
[109] Furthermore, the T-4 amounts reported were evenly
split between Martindale and Sherry Shkwarok, each reporting 50%
of the wages and benefits paid by Dynamic, even though the
evidence established that the respective contributions to the
workings of the company were not at all equal. Clearly this is
income splitting - the very situation that the legislation was
designed to address and prevent.
[110] In the taxation year 1997 the Minister disallowed
$32,912; in 1998 $23,108.04 and in 1999 $27,822.50 which was the
difference between the total wages paid and those wages paid to
Sherry Shkwarok.
[111] Whether or not Dynamic is a "personal
services business" is a question of fact. The narrow
question is whether, without the interposition of Dynamic between
S.I.I.L. and Martindale, in light of the services provided by
Martindale to S.I.I.L., would Martindale be reasonably regarded
as a self-employed individual carrying on a business on his own
account?
[112] Counsel relied upon the case of Tedco Apparel
Management Services Inc. v. The Queen, 91 DTC 1391
(T.C.C.) at page 35 to support the proposition that the word
"reasonably", even in a taxing statute, should not be
strictly construed but be construed in light of all the
circumstances. She reviewed cases such as Wiebe Door Services
Ltd., supra, with respect to the master-servant relationship;
and pointed out that, as she put it, "the four-in-one test
should not be slavishly applied" and what one must look for
at all times is the total relationship of parties. Upon this
relationship one must carefully weigh all of the relevant
factors.
[113] As referred to in Moose Jaw Kinsmen Flying Fins
Inc. v. M.N.R., 88 DTC 6099 (F.C.A.) the components
of the four-in-one test are "useful subordinates in weighing
all of the facts" but different weight must be given to
different circumstances as the facts dictate.
[114] She discussed the various elements of the
four-in-one test set out in Wiebe Door Services Ltd.,
supra. Here, Martindale was a highly skilled professional who
did not need much control or supervision. The nature of the tasks
required that he be given a great deal of latitude to perform his
work but he was still subject to the overall direction of
S.I.I.L., the company holding the projects with Fording. This is
entirely typical for persons occupying managerial positions.
[115] The control test is somewhat inconclusive.
Ownership of Tools (Equipment and Knowledge)
[116] She submitted that the "tools" analysis
is not determinative on its own but tends to tip the scale in
favour of the Respondent's position. Without the
interposition of Dynamic, Martindale would be reasonably seen as
an employee of S.I.I.L. Martindale attended at the offices of
S.I.I.L. to perform work for them and for Dynamic and he used
their office facilities while on site and Dynamic paid no rent
for such use. Further, S.I.I.L. had acquired the type of
equipment that had once been supplied by Dynamic and they owned
the tools and equipment made available to Martindale for his use,
which is consistent with the relationship that evolved into an
employment situation.
[117] It is unreasonable that S.I.I.L. would not provide
Martindale with office space in which to perform his employment
duties or would even fail to provide to him, at its own cost, the
usual accessories commensurate to his position with the company,
such as parking, administrative, technical or maintenance
services.
[118] If one applies the "tools" test to
Martindale himself, the equipment that he used as officer and
director of S.I.I.L. are indistinguishable from those he employed
in his capacity as an incorporated employee of Dynamic.
[119] Martindale was attractive to S.I.I.L. because of
his extensive experience related to construction project
management and his knowledge of S.I.I.L.'s business and his
own contacts within the industry since he had provided services
to S.I.I.L. through Dynamic prior to the years under appeal,
commencing in 1993, then working exclusively for S.I.I.L. as of
1995. His experience and training made him just as marketable as
an employee as he would have been as a contractor. His
specialized knowledge of S.I.I.L.'s business made him
particularly desirable as an employee to that company.
[120] In summation on the so-called "tools"
test, counsel said that the result is not definitive but an
analysis of the evidence supports the Respondent's submission
that without the interposition of Dynamic, he would reasonably
have been seen as an employee of S.I.I.L.
Chance of Profit/Risk of Loss
[121] In this case, as in Placements Marcel Lapointe
Inc. v. M.N.R., 93 DTC 821 (T.C.C.) Martindale was to be
reimbursed for his employment expenses by Dynamic. S.I.I.L. would
reimburse Dynamic for all travelling and other expenses actually
and properly incurred in connection with Martindale's duties.
Since all expenses of Martindale were reimbursed to him, there
was no chance of loss. The evidence showed that Dynamic was
actually reimbursed by S.I.I.L. for its expenses in 1997, 1998
and 1999.
[122] The risk of loss to both Martindale and Dynamic
were significantly diminished because of the insurance and
indemnification protection through S.I.I.L. If this is so, even
though Dynamic might have been vulnerable as a result of
Martindale's gross negligence, this is not a real risk of
loss. Risk of loss is a term used in the analysis of
employee/independent contractor and bears on the notion of a
person's risk or chance of participating in profits and
exposure to the risk of loss. These are true indicia of
business conducted on one's own account and not merely as the
employee of another. The more likely the chance to share in
profits and the larger the share of the loss, the more likely is
there to be an independent contractor relationship.
[123] Dynamic received substantial annual remuneration
and the arrangement was indefinite. These are factors in support
of the Respondent's submission that Dynamic had no risk of
loss in its relationship with S.I.I.L. as that term is understood
in the context of an employee/independent contractor
relationship.
[124] Further, the lack of insurance indemnification
coverage for Martindale and Dynamic for gross negligence is more
reflective of coverage available in the insurance industry and
the standards imposed by the union on its members than as
indicia of any risk of loss as that term must be
understood in that context.
[125] The long-term relationship with S.I.I.L. supports
the Respondent's view that, but for the interposition of
Dynamic, Martindale would be seen as providing services directly
to S.I.I.L. The type of remuneration paid by S.I.I.L. to Dynamic
is more consistent with a salary than it is with a contract for
services. In fact, the existence of a long-term relationship is
completely incompatible with the entire notion of risk of loss.
If it could be said that Dynamic faced any loss of opportunity as
a result of its operations, then that is a loss of profit but not
a risk of loss.
[126] She pointed out that Exhibit R-15 contemplates a
discretionary payment of a bonus and this form of remuneration is
more indicative of an employer/employee relationship than an
independent contract relationship.
[127] There was no revenue risk to Dynamic. There were
no amounts at risk because the payment structure was based on a
standard monthly invoice and a definite amount, billed monthly,
with a possibility of bonuses, and this is far more indicative of
an employer/employee relationship.
[128] Similarly, there was no chance of profit to
Dynamic in its dealings with S.I.I.L. given the remuneration and
bonus model chosen by the parties. This supports the
Respondent's position that, for the interposition of Dynamic,
Martindale would reasonably be seen as an employee of
S.I.I.L.
[129] In the end result, a fair analysis of the evidence
on the chance of profit and risk of loss factors, indicate a
contract of service rather than an independent contractor
situation.
Integration
[130] From the prospective of Dynamic, it cannot be said
that Martindale's work performance through Dynamic, was only
an accessory to S.I.I.L.'s business. Martindale was
instrumental in the operations of S.I.I.L. and played a key role
in the company. He was an integral part of its business and
services provided by him were essential to the business
operations of S.I.I.L. and Fording. S.I.I.L.'s business was
an integral part of Dynamic's activities in 1997, 1998 and
1999, as 100% of the company's income for those years was
derived from that source. However, it is clear that there was a
high degree of integration, even from the "employee"
prospective.
[131] Other considerations have to be taken into account
during the years in question including the fact that Martindale
and his spouse were the only employees of Dynamic during those
years. S.I.I.L. relied on the specialized and particular
knowledge and skills that only Martindale could supply.
[132] Although the arrangement with S.I.I.L. did not
prohibit Dynamic's right to hire employees other than
Martindale, in reality it was Martindale's work and skill
that was its focus. Ass confirmed in Alexander v. M.N.R.,
70 DTC 606 at page 10, "Normally the servant must be obliged
to provide his own work and skill, and perform the tasks
personally without the ability to delegate". In the case at
bar there was no evidence that any employee of Dynamic other than
Martindale could be capable of performing his particular
functions. This is tantamount to the requirement that he provide
his own work and skill.
[133] Even though there was no amount paid to Martindale
as a straight salary, the remuneration paid by S.I.I.L. to
Dynamic was calculated on a regular basis and most closely
resembles a "salary". If it were not for the existence
of Dynamic, Martindale would reasonably be seen as receiving that
salary for his services to S.I.I.L.
[134] The flat remuneration, reimbursement for expenses,
indemnification and insurance provisions, plus the bonus
arrangement between Dynamic and S.I.I.L., all approximate salary,
wages or other remuneration paid to an employee, rather than fees
paid to an independent contractor.
[135] In spite of the argument of the Appellant that
Dynamic's services were available to the public, there were
very few indications that Dynamic was actively engaged in
expanding its business. The Respondent submits that to third
parties, there was no Dynamic Industries Ltd., there was only
Martindale as a de facto employee of S.I.I.L.
[136] Renewal of the contract between Dynamic and
S.I.I.L. was dependent on the workload available at Fording.
However, that is also true for ironworker employees from the
union. All would be subject to lay-off over lack of work, and
therefore it does not assist in distinguishing an independent
contractor from an employee. Lay-offs are a risk of the industry
and do not mark Martindale as self-employed.
[137] The remuneration paid to Martindale as an employee
of Dynamic at $45 per hour would have been comparable to a
package of wages and benefits for a similarly situated person in
a unionized position such as the employee.
[138] It is common for senior level employees in
supervisory or managerial positions to perform work for which
they are not paid or to work at irregular hours. If it was an
independent contractor situation, Dyamic would be more likely to
be able to bill S.I.I.L. for the work done by Martindale or
otherwise limit his hours of work.
[139] The difference between Martindale's
accountability on the job site versus that of the other workers,
does not arise from the fact that he was allegedly
self-employed and the other persons were employees, but
this arises from the fact that he was in a unique managerial
position held in common with no other person, whereas the other
employees were not. Further, risk of liability or non-payment
flowed from the union versus non-union arrangement, not from the
absence of an employment relationship.
[140] One of the most compelling parts of the evidence
at trial was the payment of bonuses to Dynamic by S.I.I.L. (e.g.
$15,000 bonus in 1997, as shown in Exhibit R-15). These
bonuses were paid to Dynamic just as they were paid to
S.I.I.L.'s own employees, many of whom were family members.
Such significant payments cannot be ignored, as they set Dynamic
apart from any other sub-contractors involved with S.I.I.L. on
its projects. Indeed, in cross-examination, Gayle Larson admitted
that Dynamic was treated differently from all of the
sub-contractors in this respect. It is also important to
note the regularity and consistency of the billing of $4,500 on a
monthly basis in the year under appeal as compared to the
billings in earlier years. The recent payment system is more
similar to regular pay cheques in its nature than to true
invoices, which may partly explain the generality of the
invoices, as they do not specify particular tasks or
projects.
Respondent's Argument re: Martindale
[141] Counsel referred to Wright, supra.
and disagreed that this stood for the proposition that Martindale
was travelling "in the course of" or "in
connection with" his employment with Dynamic. This was not a
special work site as defined by the Act. Therefore, there
is no statutory provision that would allow him to claim that he
was in receipt of a non-taxable allowance. Travel to and from the
employee's home and the place of employment is considered to
be personal. Therefore, the Minister properly included automobile
benefits in his income for the 1998 and 1999 taxation years and
correctly calculated the amount of such benefits at $7,416 in
each year.
[142] The Minister conceded that he should have allowed
a corresponding deduction to Dynamic with respect to the
automobile benefits assessed to Martindale for the 1998 and 1999
taxation years. That deduction is predicated upon the fact that
Mr. Martindale has been properly reassessed to include the
automobile benefits in his income for those years, and therefore
they constitute permissible deductions to the company, pursuant
to paragraph 18(1)(p) of the Act.
[143] The Appellant conceded at the hearing that Dynamic
was required to include the amount of $4,672.90 in its income for
the 1998 taxation year, as such amount represents a bonus of
$5,000 (less GST) received by the company which it had failed to
report during that year.
Living Out Allowance
[144] With respect to this matter counsel took the
position that this is not properly before the Court. This was not
an audit adjustment processed by the Minister, nor was it
objected to after the assessments were issued. It was not
included as an issue in the Notice of Appeal and the pleadings
were never amended to put this matter in issue. This Court should
not consider this matter further.
Conclusion
[145] Mr. Martindale would reasonably be perceived as
providing services to S.I.I.L. as an employee and not as an
independent contractor based upon the totality of the evidence
with respect to the relationship between the parties, as required
by Wiebe Door Services Ltd., supra but for the existence
of Dynamic. He was not an independent contractor. As a
"personal services business", Dynamic is restricted to
those deductions set out in paragraph 18(1)(p) of the
Act. The appeals for the Appellant's 1997 and 1998 and
1999 taxation years must be dismissed.
[146] What was involved here was income splitting. This
should be guarded against. The most substantial expenses were
wages and benefits. They were apportioned equally to the two
unequally contributing employees of Dynamic.
[147] The most important factors in this particular case
are the integration and control factors. These give the best
indication of lack of independence of Dynamic with regards to
S.I.I.L. It is clear that the decision-making was primarily
S.I.I.L.'s and that the financial ties between Dynamic and
S.I.I.L. were extremely close.
[148] S.I.I.L. was the only client of Dynamic during the
years in question, and Dynamic derived 100% of its revenue from
S.I.I.L. for all three years under appeal.
[149] The Appellant places too much reliance upon the
decision in Wolf (supra). One should not compare that case
and the case at bar on a fact-to-fact basis. It is more
appropriate to derive legal principles and apply them to the
facts at hand. Secondly, in Wolf (supra) the Federal Court
of Appeal did not create any point of departure from the standard
tests outlined in Wiebe Door Services Ltd., supra. Very
importantly, the two cases can be distinguished.
[150] In Wolf (supra), the Court was not called
upon to consider subsection 125(7) of the Act. That case
was strictly an employee versus independent contractor situation
and the Court did not have the option of considering the
"middle ground" of a personal services business, as Mr.
Wolf (supra) was an individual operating in his own right,
not operating through a corporation. To him, success in his
appeal was an all or nothing proposition. In the case at bar,
Dynamic most clearly matches the "middle ground". It is
a personal services corporation, which entitles it to certain
deductions (e.g. Mr. Martindale's own wages and
benefits), but not to all of the other amounts claimed as
business expenses, especially wages and benefits paid to the
spouse.
[151] The Respondent submitted that a "personal
services business" status is not a permanent designation.
Status may change depending upon the circumstances. However, in
the circumstances of this case, Dynamic came to work exclusively
for S.I.I.L. in 1995. Martindale's relationship with Dynamic
changed, and Dynamic and S.I.I.L. became highly interdependent.
The previous temporary, uncertain, project situation became the
permanent, steady, long-term working relationship, no longer
limited to specific projects.
[152] The Minister did not reassess Dynamic for the 1995
or 1996 taxation years, but any transition in its status to a
personal services business was completed by 1997, 1998 and 1999
which are the years under appeal. Neither Martindale nor Dynamic
worked for anyone else but S.I.I.L. at any point during those
years. This change occurred as a matter of objective facts. The
intentions of the parties were demonstrated, even if the tax
consequences may have been unintended.
Rebuttal
[153] Counsel for the Appellant said that the
legislation in question was clearly focused on the situation
where the taxpayer in question was already an employee of someone
and then converts to an incorporated entity. That is not the
situation here. Dynamic had been carrying on business since 1983
and extensively since 1988. Dynamic and Martindale's
relationship with S.I.I.L. during the years in question and
before that time was consistent with Dynamic's operations as
an independent contractor since 1983 and did not involve any
conversion.
[154] The Respondent's submission that Dynamic was
involved in income splitting as evidenced by the percentage that
the denied wages are of the total denied amount, is flawed in two
respects. First, that line of argument would lead to the
absurdity that any company which has paid employees could be said
to be "involved in income splitting". Second, this
makes no allowance for the fact that many businesses will have
wage expenses as being the bulk of their total expenses.
[155] Even though the T-4 amounts of Martindale and
Sherry Shkwarok were similar, it has never been argued that she
did not provide legitimate services and that the amounts that she
received were unreasonable. There was evidence given with respect
to what services she provided to the business and these were
numerous and significant. She discussed the business operations
with Mr. Martindale on a daily business. These were all
necessary for Dynamic's successful operation. She was
entitled to receive a reasonable salary.
[156] Counsel took issue with the submission that the
majority of Martindale's duties were performed from
S.I.I.L.'s office. The testimony indicated that he spent the
vast majority of his time at the Fording mine sites where
particular projects were being carried out. Further, the
ownership of tools (equipment and knowledge) analysis does not
tip the scales towards the position of the Respondent. As in
Wolf (supra), the tools were a neutral factor.
[157] The fact that S.I.I.L. acquired the same type of
equipment that had once been supplied by Dynamic is not evidence
that the relationship evolved into an employment situation. It is
only consistent with the fact that S.I.I.L. had become profitable
and could buy its own equipment. Dynamic wanted to rent equipment
to S.I.I.L. to maximize its profits but S.I.I.L. wanted to use
its own equipment to maximize its own profit.
[158] The argument that Mr. Martindale's experience
in training made him just as marketable as an employee as he
would be as a contractor and that this specialized knowledge made
him understandably desirable as an employee supports the
Appellant's argument that Dynamic was an independent
contractor. Both the Appellant and Martindale knew he was a
valuable resource (tool) and the only way to fully capitalize on
this resource was to be in business on his own account and not
just as an employee of S.I.I.L. He took the position that this
was an example of the "tools test" supporting his
submission of an independent contractor rather than as an
employee of S.I.I.L.
[159] Since the relevant issue is whether Martindale
could reasonably be considered an employee of S.I.I.L., it is the
amount and timing of payments between Dynamic and S.I.I.L. which
are relevant, not the timing and payments between Dynamic and
Martindale and Sherry Shkwarok. Therefore, the decision in
Placements Marcel Lapointe Inc., supra, and the
importance of a fixed and definite wage supports the
Appellant's arguments that it was an independent contractor
situation because even though Martindale and Sherry Shkwarok
received what might be considered a "fixed and definite
wage" from Dynamic, Dynamic did not have "fixed and
definite wages" from S.I.I.L. This can be seen from Exhibits
A-6, A-7 and A-8, which varied as to amounts and the timing of
their issue.
[160] With respect to reimbursement of expenses, the
only relevant reimbursement of expenses are between Dynamic and
S.I.I.L. This was based upon the "cost plus" contracts
between Dynamic and S.I.I.L. Most of the other contracts of
S.I.I.L. were likewise. There was evidence that S.I.I.L. could
potentially sue Dynamic for any damages S.I.I.L. suffered as a
result of Martindale's negligence and that such a risk did
not exist for S.I.I.L.'s ironworkers' union employees.
This economic reality results from the operation of the market
place. To use the Respondent's own words, the risk of being
sued, with no insurance coverage, is a "vulnerability of
loss" and a "true indicia of business conducted
on one's own account and not merely as the employee of
another. This risk of loss source should be relevant in applying
the chance of profit, risk of loss test.
[161] Dynamic's arrangement with S.I.I.L. was not
indefinite in term. Dynamic worked for S.I.I.L. on a project by
project basis dependent entirely upon S.I.I.L. getting purchase
orders for work from Fording. The fact that Dynamic received a
series of contracts from S.I.I.L. is only indicative of the large
amount of work S.I.I.L. received from Fording. This fact is only
consistent with Dynamic and S.I.I.L. and all other contractors in
the Elk Valley benefiting from a positive business cycle which is
completely compatible with the notion of chance of profit or risk
of loss since positive business cycles are usually followed by
negative business cycles.
[162] The payment of a discretionary bonus is not a form
of remuneration which is inconsistent with an independent
contractor relationship.
[163] Counsel would not admit that invoices to S.I.I.L.
which comprise Exhibits A-6, A-7 and A-8, involve a
"standard monthly invoice, in a definite amount, billed
monthly" and there was always a possibility that S.I.I.L.
would not be able to pay these amounts without any recourse to a
surety bond.
[164] The remuneration and bonus models chosen by the
parties are virtually the same as remuneration models which
existed between S.I.I.L. and its other sub-contractors and
between S.I.I.L. and Fording.
[165] The Respondent is not applying the integration
test properly. The integration test must be applied from
Dynamic/Martindale's perspective.
[166] It is not particularly relevant that Dynamic
relied on the particular skills of one employee, Martindale. Many
small business depend upon the skills of one particular
person.
[167] Counsel described as factually incorrect the
Respondent's position that the remuneration paid by S.I.I.L.
to Dynamic was calculated on a regular basis and that this most
closely resembles a "salary" component one would
reasonably expect to be accorded to someone in Martindale's
position. He argued that what Dynamic paid to its employees was a
salary per month plus the applicable living out allowance amount
for the month. On rare occasions it also paid a bonus to its
employees. However, Dynamic's bills to S.I.I.L. and
S.I.I.L.'s payment of these bills were not consistent in
amount or timing (see Exhibits A-6, A-7, A-8, A-10 and A-11).
[168] The fact that Dynamic was not actively engaged in
expanding its business by engaging new clients, is nothing more
than a reflection of the fact that the company was busy enough
doing work for S.I.I.L. With respect to the Respondent's
argument that the remuneration payable to Martindale as an
employee of Dynamic at $45 would have been comparable to a
package of wages and benefits for a similarly situated person in
a unionized position as employee, the Appellant said that
Dynamic's rate with S.I.I.L. involved a gross profit before
other operating expenses of $8.03 when compared with what the
highest paid unionized ironworker would receive. There was always
a gross margin even though it may have declined between 1997 and
1999.
[169] The reality of the marketplace is that independent
businesses incur marketing expenses, including non-remunerated
prospecting efforts, in order to get business. Counsel took issue
with the Respondent's position that as to an independent
contractor's situation Dynamic would be more likely to bill
S.I.I.L. for all tasks done by Martindale or to limit his hours
of work.
[170] The Respondent was confused on the matter of the
$4,500 per month amounts as these were amounts paid by Dynamic to
its employees, not amounts billed and paid between Dynamic and
S.I.I.L.
[171] The decision-making with respect to Dynamic's
business and what was best for it was Martindale's and
Sherry Shkwarok's and no one else's. S.I.I.L. did
not have primary decision-making power for Dynamic even though
100% of Dynamic's revenues were obtained from S.I.I.L., no
more than it could be argued that Fording had primary
decision-making over S.I.I.L. and Dynamic since S.I.I.L. derived
the vast majority of its revenue from Fording.
[172] Counsel reiterated that the decision in the
Wolf (supra) case was equally applicable to the facts in
the present appeal. Further, the decision in Wolf (supra)
and the reasons therefore are of more relevance than Wiebe
Door Services Ltd., supra, since it was decided in 1987 and
Wolf (supra) was decided in 2002. There has been a
considerable change in commercial practices between 1986 and
2002. He again relied upon the comments of Décary, J.A. at
paragraph 118 of the Wolf (supra) case.
Analysis and Decision
[173] The Court has found this to be a difficult case.
It has been made difficult because, as counsel for the Respondent
suggests, this is not a simple case of deciding whether the
worker was an employee or an independent contractor. The factual
situation is clouded because there was an intervening entity. The
worker in this case was an incorporated employee of Dynamic. None
of the other cases referred to were in the same category and
consequently when deciding the remaining issue, that is, whether
Martindale as the incorporated employee of Dynamic, "would
reasonably be regarded as an officer and employee of the person
or partnership to whom or to which services were provided but for
the existence of the corporation", this must be taken into
account. Further, unlike other cases which have been cited, and
unlike the cases where the provisions of
paragraph 125(7)(b) of the Act are not
involved, in this case the Court must interpret the word
"reasonably", in light of all the circumstances and not
in a restrictive way.
[174] The Court must take into account the purpose of
subsection 125(7), which generally was to remove the income tax
advantages which had been available to the "incorporated
employee" before the implementation of this section. This
analysis is referred to by Mogan, J. in David T. McDonald
Company Limited, supra.
[175] Both counsel here have made detailed, weighty and
substantial submissions. Each has interpreted the factual
situation as they see it in support of their equally opposite
positions and they come to equally opposite conclusions.
[176] In so far as counsel for the Appellant is
concerned, he took the view that the factual situation in the
case at bar is identical to the factual situation in Wolf
(supra), but it is always dangerous to rely on this
proposition because it is very rare that any two situations are
identical. They may be similar, they may be close, but very
rarely are they identical.
[177] In the case at bar, unlike the case in Wolf
(supra), what is involved is an incorporated employee and an
interpretation of a "personal services business". The
Court in Wolf (supra) did not have to make such a
consideration. This is a substantial difference. Further, counsel
for the Appellant seemed to be suggesting that the Federal Court
of Appeal, in Wolf (supra), was departing from legal
principles established by Wiebe Door Services Ltd., supra,
and the cases that have followed since that time and believed
that this Court should be more influenced by the Wolf
decision than by the principles laid out in Wiebe Door
Services Ltd, supra. This Court is not of the opinion that
the Federal Court of Appeal in Wolf was creating any new
law or was intending to depart from the principles as set out in
Wiebe Door Services Ltd. supra, and followed thereafter,
and most recently confirmed by the Supreme Court of Canada in
Sagaz, supra. In that case, the Court confirmed that there
is no single test for determining the proper relationship that
exists but one must examine all of the possible factors bearing
on the nature of the relationship between the parties. As this
Court has always held, not all of these factors will be relevant
in all cases, or have the same weight in all cases. Equally,
there is no magic formula for trying to determine which factor
will control any particular case.
[178] The Supreme Court did confirm that the central
question is whether or not "the person 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 that the employer has over the worker's activities
will always be a factor but other factors to consider include
"whether or not 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 task". It is clear from these statements that the
analysis set out in Wiebe Door Services Ltd., supra, is
alive and well and indeed this Court has always found that in
most cases an analysis of those various factors go a long way to
allowing the Court to answer the question properly. Again,
though, the case at bar is a hybrid where the Court has to
consider factors that the Court in Wiebe Door Services Ltd.,
supra, and Sagaz, supra, did not have to consider.
That makes the analysis more complicated in this case.
[179] In so far as the effect of the reasoning in
Wolf is concerned, even though it was decided long after
Wiebe Door Services Ltd, supra, this Court does not
believe that Wolf stands for the proposition proposed by
counsel for the Appellant that the reasons are far more relevant
than Wiebe Door Services Ltd., supra, since it was decided
in 1978 and Wolf was decided in 2002. He suggested that
there has been a considerable change in commercial practices
between 1986 and 2002.
[180] It may also be pointed out that in Wolf,
the Appellant had a signed contract with Kirk-Mayer in
which he was described as a consultant and independent contractor
and in which he agreed to provide the service to Canadair
Limited. Although this is not essential, it is certainly a
differentiating factor from the present case. In the present case
we have only the indication of the incorporated employee as to
the status that the Appellant and S.I.I.L. intended to create. In
Wolf, Desjardins, J. A. was convinced, obviously
relying considerably on the written contract, that the Appellant
was more interested in higher profit, higher risk, mobility and
independence. That is why he claimed the status of a contractor
in the provision of his services. Further in the decision of
Décary, J.A., he concurred in the result, although
for different reasons and said that one must not lose sight of
the forest because of the trees and what must always remain the
essence is the search for the total relationship of the
parties.
[181] His recitation of the non-exhaustive list of
categories, is a clear reference to the reasoning in Wiebe
Door Services Ltd., supra, that the weight of each factor
will depend on the particular facts and circumstances of the
case. He took a great deal of consolation from the fact that the
parties had gone to the effort of creating a written contract in
which they clearly set out their intention and he was able to say
with certainty that Wolf, was performing his professional
services as a person in business on his own account. This was not
a departure from the principles developed in earlier cases.
[182] Noel, J. A. also concurred in the result only
but he again placed a great deal of weight on the relationship
which the parties had created. He acknowledged that it was a
close case where the relevant factors pointed in both directions
with equal force, and in such a situation, the parties'
contractual intent, and in particular, their mutual understanding
of their relationship could not be disregarded. However, he also
considered the tests set out in Wiebe Door Services Ltd.,
supra, and determined that they were not conclusive either
way. He was satisfied that the Appellant had given up benefits
which usually accrue to an employee including job security and
hopes of a better pay.
[183] This Court cannot come to such a definitive
conclusion on the basis of a written contract because one does
not exist here and the only indicia of what the intentions
of the parties were was the viva voce evidence of the
incorporated employee.
[184] Counsel for the Respondent seemed to place a great
deal of weight on the fact that the legislation was intended to
prevent the situation of income splitting which she contended was
what the Appellant in the present case was doing. The Court
agrees that that is a factor to be considered in the present case
but it is not conclusive. If a person purports to be an
independent contractor, the person who employs him likewise
purports to hire an independent contractor rather than an
employee, if the parties go about acting in the relationship in
conformity with such an avowed intention and one of the results
of that independent contractor situation is to allow the parties
to divide their income in such a way that it resembles income
splitting, that factor alone does not change a relationship from
one of independent contractor to that of employee based upon the
legislation alone, although it must certainly be borne in mind
when considering the total situation.
[185] It is necessary to review the facts in relation to
the tests set out in Wiebe Door Services Ltd., supra,
the conditions of employment which existed at the time as borne
out by the evidence and how they bear on the nature of the
relationship between the parties. As indicated in Sagaz,
supra, there is no magic formula in determining which factors
will be treated as the determining ones. However, with respect to
the most important question the Court asked in
Sagaz, supra, "whether the person who has been
engaged to perform those services is performing them as a person
in business on his own account", in light of the existence
of the incorporated employee here, the answer to that question is
at best elusive.
[186] The case at bar is a prime example of a situation
where no one single test or even a combination of tests would be
sufficient to answer the question posed. We must go further and
examine the conditions of employment, the purported intention of
the parties, the absence of a written contract setting out
specifically the relationship between the parties and the
legislation involved in this case. Where the Appellant has
indicated that the real intention was to create an independent
contractor situation, one must ask, has he done otherwise?
[187] The Court will now proceed to analyze the various
factors that have been referred to in Wiebe Door Services
Ltd., supra, and the other cases.
Ownership of tools (equipment)
[188] An analysis of this factor, although not
determinative on its own, does tend to tip the scale in favour of
the position of the Respondent. It is true that the witness
called on behalf of the Appellant did not testify that he used
the office facilities of S.I.I.L. while on site to perform work
for them but it is more probable that he used their facilities
and there was no evidence that Dynamic paid any rent for such
use. It was admitted by counsel for the Appellant that Dynamic
used none of its own tools or equipment performing work for
S.I.I.L. as S.I.I.L. had acquired its own tools and equipment
which had formerly been rented to it by Dynamic.
[189] The Court does not accept the argument of counsel
for the Appellant that it was only business reality that S.I.I.L.
had wanted to improve its own financial situation and
consequently it was no longer desirous of renting tools and
equipment from Dynamic as it had done earlier. This is indicative
of S.I.I.L. providing the tools and equipment which were made
available to Martindale for his use and is consistent with the
Respondent's conclusion that the relationship, which in
earlier years had been that of independent contractor had evolved
into an employment situation during the years in question.
[190] As indicated, there was no specific evidence
before the Court with respect to S.I.I.L. providing Martindale
with office space, parking facilities, administrative facilities,
technical or maintenance services but they had to be provided by
someone. The only reasonable conclusion would be that these
services were indeed provided by S.I.I.L.
[191] The skill, training and ability to provide certain
services by Martindale would have made him equally desirable
whether he was a contractor or an employee so nothing is
determined by that factor.
Chance of Profit and Risk of Loss
[192] Martindale and Dynamic were both reimbursed by
S.I.I.L. for all of the travelling and other expenses which were
incurred by Martindale in the performance of his duty so that
there was no real chance of loss in that regard by either
Martindale or Dynamic. That factor is consistent with an
employer-employee relationship. The Court is satisfied that there
was some risk of loss by Martindale/Dynamic because they would
have been responsible if they suffered damages as a result of the
actions of Martindale/Dynamic but this burden was somewhat
lessened because of the insurance and indemnification protection
through S.I.I.L. This becomes a non-factor. On the other
hand, there was no chance that Dynamic/Martindale stood to share
in the profits of S.I.I.L. It was a set form of remuneration
provided for services provided by Dynamic through Martindale and
the only way they could increase their remuneration would be to
work harder or longer or change the rate. This is not a real
"chance of profit" as that term has come to be
understood in the Wiebe Door Services Ltd., supra,
analysis.
[193] Even though Dynamic's arrangement with
S.I.I.L. was not definite in term and Dynamic worked for S.I.I.L.
on a project by project basis, the Court is still satisfied that
there was a stability of relationship that existed for the whole
period of time that is in issue here and that Dynamic/Martindale
basically worked only for S.I.I.L. during that period of
time.
[194] This is indicative not only of the large amount of
work that S.I.I.L. was receiving from Fording but is more
indicative of the non-likelihood of Dynamic/Martindale having to
search for work, new contracts, and compete against other
contractors as one would expect in a competitive market such as
that which existed during the period in question.
[195] This situation would appear to be contrary to the
Appellant's argument that Dynamic/Martindale was giving up
the degree of security that he might otherwise have had if he
were an employee.
[196] The Court is satisfied that the type of
remuneration paid by S.I.I.L. to Dynamic is more consistent with
a salary than it was with a contract for services. Further, of
significance, is the fact that a discretionary bonus was paid by
S.I.I.L. to Dynamic. The Appellant argued that this was not
indicative of an employer/employee relationship but it was clear
from the evidence given that in respect to a bonus, Dynamic was
treated differently than other subcontractors who did not receive
such a bonus. The Court is satisfied that the payment of such a
bonus here is more indicative of an employer/employee
relationship than that of an independent contractor. If this had
been part of the alleged contract for services it would not have
been discretionary, it would have been included in the
agreement.
[197] Even though the receipt of revenue by Dynamic
depended upon the completion of a series of contracts from
S.I.I.L., these in turn depended upon S.I.I.L. obtaining
contracts from Fording. The invoices to S.I.I.L. from Dynamic
more closely resembled standard monthly invoices rather than
completion of a certain amount of work under a set contract even
though they might have been similar to the remuneration models
which existed between S.I.I.L. and other subcontractors and
between S.I.I.L. and Fording. They still projected a regular
monthly billing more than they did production of an invoice sent
upon the completion of a set amount of work in accordance with a
previously conceived contract.
[198] On the balance of probabilities, an analysis of
the risk of loss and chance of profit factors indicate a contract
of service rather than an independent contractor situation.
Integration
[199] The Court is convinced that Martindale's work
through Dynamic for S.I.I.L. made him an integral part of
S.I.I.L.'s operations. His services were essential to the
business operations of S.I.I.L. and Fording. Even though it might
be argued that in many small business where there are independent
contractors, they rely heavily on the particular skills of one
employee, in this case, during the period in question Martindale
was the only employee of Dynamic and his skills and abilities
were an important and integral part of the operations of
S.I.I.L.
[200] Martindale testified that he was free to hire
other persons to provide his work and skill. He did not have to
perform the tasks personally. He indicated that on another
occasion, not during the years in question, he was able to hire
himself out to other persons. However, it is significant that in
the years in question he provided all of the services and skill
personally and there was no indication that he intended to have
someone else provide those skills nor indeed was there any
evidence that he was free to do so. It is the years in question
that are at the root of the issues here, not other years. The
Court is satisfied that it was unlikely that either party
contemplated Martindale substituting the service of someone else
for him even if such a person could be found. On the balance of
probabilities, the Court is satisfied that he was required to
provide his own skill and ability.
[201] With respect to the method of payment to
Martindale, the Court is satisfied that the remuneration paid by
S.I.I.L. to Dynamic did resemble to a large extent, salary,
rather than amounts billed on the basis of a contract for
services and if Dynamic did not exist, Martindale could
reasonably have been seen to have been receiving a salary for his
service to S.I.I.L.
[202] Again, we are dealing with the specific years in
question and not what happened in other years. During the years
in question Dynamic was not involved in seeking out any new
business. Indeed it did not have time to seek out any new
business because it was involved completely in the work of
S.I.I.L. and Fording. For all intents and purposes there was no
indication that during the period in issue, Dynamic's
services were available to the public. Again, the only employee
of Dynamic during the years in question was Martindale and he had
all of the appearances of an employee of S.I.I.L.
[203] It was argued that Martindale had to work
irregular hours and that he might work without pay. It is true
that many supervisory or managerial people might work likewise
and not be paid even if they are employees. However, if
Martindale were working under a contract of service, one would
have thought that this would have been a clear term of the
contract for services.
[204] When one considers all of these factors taken
together, one must conclude that they are tilted in favour of an
employee relationship rather than that of an independent
contractor.
[205] If one goes further and takes into account the
legislation with respect to a personal services corporation, the
intention of the legislation against income splitting and the
fact that what was accomplished here was in fact income
splitting, the case is even more compelling. It is clear that for
each of the three taxation years in issue, the greatest expense
claim was for wages and benefits and these T4 amounts were evenly
split between Martindale and Sherry Shkwarok, each reporting 50
percent of the wages and benefits paid by Dynamic.
[206] Counsel for the Appellant argued that Sherry
Shkwarok was very important to Dynamic and that she deserved the
salary that she got but the evidence was very general The
description of the work that she did was very general. There was
no evidence presented from which the Court could safely conclude
that the value of her work was equal to that of Martindale. The
only other reason she would receive equal remuneration for
unequal work would be to accomplish income splitting which the
legislation was designed to prevent.
[207] As the Court has already indicated, the issues in
question are relative to the years 1997, 1998 and 1999 and not
before or after. The Court is satisfied that if Dynamic was not a
"personal services business" prior to the years in
question, there was a change in the relationship between
Martindale, Dynamic and S.I.I.L. so that the Court has to
conclude, in light of the services provided by Martindale to
S.I.I.L., that Martindale could not be reasonably regarded as a
self-employed individual carrying on a business on his own
account. That is the answer to the first issue.
[208] With respect to the second issue, in light of the
answer to the first question, the Court concludes that the
Minister properly disallowed a portion of the expenses claimed by
Dynamic for those years, on the basis that the company was
precluded from deducting such amounts, as they were restricted
expenditures, pursuant to the limitations set out in paragraph
18(1)(b) of the Act.
[209] The third issue is whether or not the Minister
correctly reassessed Martindale to include automobile expenses in
his income for the 1998 and 1999 taxation years, pursuant to
paragraphs 6(1)(e) and (k) and subsection 6(2) of
the Act. In order for the Appellant to be successful here,
he must satisfy the Court, on the balance of probabilities, that
he was required by Dynamic for the years 1998 and 1999 to use the
1994 GMC Jimmy in connection with and in the course of his
employment with Dynamic. Further, he must satisfy the Court, on
the balance of probabilities, that all, or substantially all of
the distance travelled by the 1994 GMC Jimmy in those particular
taxation years were in connection with or in the course of his
employment with Dynamic.
[210] The Court is satisfied that the Appellant has not
been successful in this regard. The Court is satisfied that all,
or substantially all of the use to which the vehicle was put in
the years in question, was related to the Appellant's travel
to and from his work. It may well be that the work site was a
dirty one and that a vehicle similar to the vehicle in question
may have been required for the Appellant to travel to and from
his work but when he was travelling to his place of work, he was
travelling from home or his office to the place of work.
Therefore, the travel is considered to have been personal.
[211] Further, there was insufficient evidence for the
Court to conclude that the Appellant was required by Dynamic in
that particular year to use a 1994 GMC Jimmy in
connection with or in the course of his employment with Dynamic.
Indeed, no evidence was given on that point. The Court can only
conclude that although it was convenient for the Appellant to
make use of the vehicle for the purpose of going back and forth
to his work, this was not required by Dynamic.
[212] It is true that the Appellant, during the years in
question, had the use of either a Chevrolet pick-up, a
camaro or motor home and that they were used by both himself and
his wife. This does not in any way establish on the balance of
probabilities that the use made by the Appellant of the GMC Jimmy
provided by Dynamic was anything other than personal.
[213] Counsel referred to Wright, supra, and
argued that the Federal Court, Trial Division, reviewed the case
law and decided that an employee going to and returning from his
work is not considered to be travelling "in the course of
his employment". However, the Federal Court noted one
exception to this general rule and that was that where an
employee is obliged to perform his duties in more than one place,
he is ordinarily required to carry out the duties of his
employment in different places. In the present case he argued,
the Appellant, in 1998 and 1999 was employed at all three of
Fording's coal mine sites and had to be able to travel to
these various mine sites. Some of these mine sites were up to 50
miles (80 kilometers) apart. Counsel believed that the Appellant
met the exception identified above. He travelled between
Cranbrook and Sparwood.
[214] The Court is satisfied that the present factual
situation does not permit such an interpretation and the
exception referred to in the case above does not assist the
Appellant here. The appeal in that regard is dismissed.
[215] The Minister did concede that he should have
allowed a corresponding deduction to Dynamic with respect to the
automobile benefits assessed to Martindale for the 1998 and 1999
taxation years and that such an allowance was given upon
reassessment. They were held to be permissible deductions to the
company, pursuant to paragraph 18(1)(p) of the
Act.
[216] As indicated, the Appellant conceded at the
hearing that Dynamic was required to include the amount of
$4,672.90 in its income for the 1998 taxation year, such amount
representing the bonus of $5,000 (less Goods and Services Tax)
received by the company which it had failed to report during that
year.
[217] The only remaining issue is the question of the
living out allowance. The Court is satisfied that this matter is
not properly before the Court. This was not an audit adjustment
processed by the Minister as indicated by counsel for the
Respondent. It was not objected to after the assessments were
issued and it was not included as an issue in the Notice of
Appeal. Further, the pleadings were never amended to put this
matter in issue. The Court will not consider this matter further.
The appeal in that regard is dismissed.
[218] The end result then is the appeals are dismissed
and the Minister's assessments are confirmed, with costs.
Signed at Vancouver, British Columbia, this 13th
day of April, 2004.
Margeson, J.
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