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Citation: 2003TCC492
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Date: 20030722
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Dockets: 2002-3102(EI)
2002-3104(CPP)
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BETWEEN:
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1391288 ONTARIO LIMITED,
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Appellant,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent.
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REASONS FOR JUDGMENT
MacLatchy,
D.J.
[1] These
appeals were heard on common evidence, on consent, at Toronto, Ontario on June
18, 2003.
[2] The
Appellant appealed a ruling to the Minister of National Revenue
(the "Minister") for the determination of the question whether
or not Cynthia McPhee (the "Worker") was employed in insurable
and pensionable employment while engaged by it during the period April 1 to
June 1, 2001 within the meaning of the Employment Insurance Act (the
"Act") and the Canada Pension Plan (the "Plan")
respectively.
[3] By
letter dated February 20, 2002 the Minister informed the Worker and the
Appellant that it had been determined that the Worker was employed in both
insurable and pensionable employment during the period in question, pursuant to
paragraph 5(1)(a) of the Act and paragraph 6(1)(a) of the Plan
respectively.
[4] In
making his decision, the Minister relied on the following assumptions of facts
that were not disputed by the Appellant:
(a) the Appellant's business
operation is to publish a weekly magazine that offers advertisement space for
sale of used cars from dealers and private owners in the Peterborough area;
(b) the Worker's duties were to
format ad pages based on automobile pictures and written descriptions provided
by the Appellant's sales persons on a weekly basis;
(c) the worker performed her duties
at an office provided by the Appellant, located next door to the Appellant's
place of business;
(d) the Worker's rate of pay was $10
per page with a minimum of $250 and the magazine had 24 to 32 pages depending
on the volume of business received by the Appellant for that week;
(e) the Worker's rate of pay was set
by the Appellant and determined by the standard in this very competitive
business, the rate being acceptable by the Worker;
(f) the Worker was paid by cheque on
a weekly basis;
(g) the Worker could set her own
hours each week to perform her duties provided a Thursday night deadline was
complied with as required by the printer;
[5] The
Worker and the Appellant agreed that there was little, if any, supervision of
the Worker's performance. The Worker received the necessary information and
photography from a salesman from which she prepared the design graphics for the
customer. The salesman reviewed the advertisement as prepared by the Worker
then presented it (by fax) to the customer for final approval. Subsequently,
the Worker prepared the final laser print that was sent to the publisher for
printing. The Worker used the computer software program and other minor items
supplied by the Appellant at an office next door to the Appellant's premises.
She could have performed her services elsewhere but it was more convenient for
contact with the salesmen and others that the Worker would have to deal with
during her working hours. She usually did not work until the Tuesday each week
as the salesmen would not have sufficient work for her until then. The Worker
was given a key to the premises to allow her access at anytime but the building
was usually open from 7 a.m. each day.
[6] The
question to be answered by this Court is whether the Worker was engaged
pursuant to a contract for services and was an independent contractor or
whether she was engaged as an employee pursuant to a contract of service.
[7] In
the first instance it is necessary to apply the test as set forth by the
Federal Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., 87 DTC
5025, to the facts presented and give each test an appropriate weight to
attempt to determine the overall relationship that existed between the
Appellant and the Worker.
[8] Control
– This generally described the control that a master has over its servant. If
clear control can be established, it is a very valuable test.
[9] In
these circumstances, the Appellant appeared to have little, if any, control
over the Worker. The Worker could set her own hours of the day or week so long
as a deadline of Thursday evening was met. This deadline was not set by the
Appellant but by the outside publisher; it was a fact of life in the industry.
The Worker could come and go as she wished.
[10] The Worker was not supervised by the Appellant. Her work was approved
by the salesmen for the Appellant but ultimately approved by the customer. If
changes were required, it was the customer who would make the changes, not the
Appellant.
[11] The rate of payment to the Worker was that commensurate to others in
the industry. The business was described as being very competitive and the rate
of pay equal to others in that business.
[12] No training was given to the Worker by the Appellant as she was
trained in College in the graphic design field. There may have been about one
hour given to the Worker to explain retrieval of photos from the salesmen's
camera equipment. This would have been necessary for any person to learn the
exigencies of the equipment used by the Appellant. Equipment varies with the
manufacturer. There was no training required by the Worker to learn how to
perform her function in the overall operation of this business.
[13] Although the question never arose, the parties seemed to agree that
the Worker could have substituted anyone else to perform her services so long
as that person had the necessary skill and expertise to do the work. The Worker
gave evidence that she took a week off during the period in question but
ensured that one of the principals in the business would perform her services
in her absence.
[14] The evidence presented showed little control was ever exercised by the
Appellant and further that there was little ability to control in the hands of
the Appellant. This test would seem to indicate the existence of the Worker as
an independent contractor.
[15] Tools – This test, in this day and age of sophisticated
electronic equipment, does not seem to be of much value. The Worker used an
office in a building next to that of the Appellant because it was a convenient
location to interact with the salesmen who provided the information and photo
material required by the Worker. The Appellant had the computer and software
program that the Worker used in her graphic design preparation. She stated she
could have used her own computer and by installing the software required, she
could have performed her work at her own establishment. Convenience prevailed.
Contact with the customers of the business was more easily made at the office.
Little weight should be given to this test.
[16] Profit – The Worker stated she had her own business. The
flexible hours enabled her to come and go as she pleased. She stated she could
have other clients and perform services for others if she felt she wanted to
increase her income. She was not reimbursed for any of her expenses whatever
they might be. It was her business and she ran it as she pleased. The only
requirement was the above referred to deadline for publication.
[17] Loss – This is a difficult test to apply from the point of view
of the Worker. She had some expenses and if they were not curtailed she would
suffer a loss. She received no health or life insurance benefits and was her
own insurer. This could result in a severe loss in income should she suffer ill
health. There was no vacation benefits available to her as there would have
been had she been an employee.
[18] There were no deductions of any kind taken from her income and it was
her responsibility to prepare her income and expense statements herself. This
required time and effort away from her business to perform this function.
[19] These tests appear to support the existence of a contract for services
between the Appellant and the Worker.
[20] The parties themselves set the conditions that established their
relationship. A contract was entered into between them, as their relationship
developed, a copy of which was entered as Exhibit A-1. The contract clearly
stated that the agreement established that the Worker was to be an independent
contractor. All terms contained in the contract clearly supported the parties'
intention to establish the independent contractor and principal relationship.
[21] The law referred to by counsel clearly supported the proposition that
absent clear evidence of a "sham" attempt, the Court nor the Minister
should "rewrite the contract entered into between the parties".
[22] The Court in Saskatchewan Deaf & Hard of Hearing Services Inc.
v. Minister of National Revenue, [2001] T.C.J. No. 38, the Court stated in
paragraph 29 of the decision:
It was quite clear that
the law requires the Court to look at the substance of the arrangement between
the parties and not just the title. If the substance of the arrangement is not
in accord with the label put upon it by the parties, it is the substance which
must prevail. However, where the parties have clearly indicated to each other
the nature of the contract they wish to enter into and there is no compelling
evidence leading to a contrary conclusion, I am of the view that the Court
should give due deference to the initial intention of the parties. It is not
for the Court or for the Minister to rewrite the contract entered into by the
parties, absent clear evidence of the substance differs from the stated
intention.
[23] I am of the view that the Court should give due deference to the
initial intention of the parties. It is not for the Court or for the Minister
to rewrite the contract entered into by the parties, absent clear evidence of
the substance differs from the stated intention.
[24] References were made to the decisions in an attempt to indicate the
"modern approach" to taxation statutes. In the Sara Consulting
& Promotions Inc. v. Minister of National Revenue, [2001] T.C.J. No.
773, decision, paragraphs 57 to 61 are of great assistance and should be
quoted accordingly:
Counsel then devoted
some time to the "modern approach" to taxation statutes, quoting from
Antosko v. Minister of National Revenue (1994), 94 D.T.C. 6314 (S.C.C.),
at 6320:
...In the absence of
evidence that the transaction was a sham or an abuse of the provisions of the
Act, it is not the role of the court to determine whether the transaction in
question is one which renders the taxpayer deserving of a deduction. If the
terms of the section are met, the taxpayer may rely on it, and it is the option
of Parliament specifically to preclude further reliance in such situations.
He then quoted from the
Supreme Court of Canada's decision in Continental Bank of Canada v. R.
(1998), 98 D.T.C. 6505 (S.C.C.) with respect to whether an otherwise validly
constituted partnership ought to be denied a tax advantage given that the
partnership was expressly created to gain that advantage. The majority of the
Court held at page 6518 that:
...The underlying premise
of this reasoning is also that a transaction that is motivated by the securing
of tax benefits is not a valid transaction. This reasoning cannot be supported.
A taxpayer who fully
complies with the provisions of the Income Tax Act ought not to be denied
the benefit of such provisions simply because the transaction was motivated for
tax planning purposes. In Stubart Investments, ..., this Court
unanimously rejected the "business purpose test" and affirmed the
proposition that it is permissible for a taxpayer to take advantage of the
terms of the Income Tax Act by structuring a transaction that is solely
motivated by the desire to minimize taxation.
Counsel then said that
this modern approach was reinforced in Duha Printers (Western) Ltd. v. R.
(1998), 98 D.T.C. 6334 (S.C.C.) and in Neuman v. Minister of National
Revenue (1998), 98 D.T.C. 6297 (S.C.C.).
He then submitted that
the issue was dealt with most recently and forcefully in Shell Canada Ltd.
v. R. (1999), 99 D.T.C. 5669 (Eng.) (S.C.C.) in which McLachlin, J.
(as she then was) said at page 5676:
...First this Court has
never held that the economic realities of a situation can be used to
recharacterize a taxpayer's bona fide legal relationships. To the
contrary, we have held that, absent a specific provision of the Act to the
contrary or a finding that they are a sham, the taxpayer's legal relationships
must be respected in tax cases. Recharacterization is only permissible if the
label attached by the taxpayer to the particular transaction does not properly
reflect its actual legal effect: ...
Inquiring into the
"economic realities" of a particular situation, instead of simply
applying clear and unambiguous provisions of the Act to the taxpayer's legal
transactions, has an unfortunate practical effect. This approach wrongly
invites a rule that where there are two ways to structure a transaction
with the same economic effect, the court must have regard only to the one without
tax advantages. With respect, this approach fails to give appropriate weight to
the jurisprudence of this Court providing that, in the absence of a specific
statutory bar to the contrary, taxpayers are entitled to structure their
affairs in a manner that reduces the tax payable.
Counsel submitted that
in the particular context of this appeal the Agency cannot, in the absence of a
sham or express statutory language, deem a bona fide contractor
relationship to be otherwise, even if this form was purposely entered into to
obtain a tax benefit. He then said that if the parties intended to create a
contractor relationship and entered into their relationship believing it to be
so and conducted themselves according to that belief, it is not the job of the
Agency to deem it to be other than a contractor relationship.
[25] Paragraphs 77 and 92 of that judgment are also helpful:
This case departs
somewhat from the ritualistic and unadorned recitation of the four tests in Wiebe
Door having become an inalterable juristical formula for the determination
of insurable employment. Such tests alone may not contemplate a number of
factors weighing upon such determination. Control exists not only in contracts
of service but in contracts for service. Ownership of tools is an
inappropriately revered primary test, looking to objects, equipment and space.
The risk of profit or loss test, as applied, often takes a "shoe
horn" approach only, considering simply whether a service provider
receives a fixed formula amount and occasionally paying little attention to
potential elements of risk. With respect, there seems to be little usefulness
in what is described as the integration test...
... I accept the direction as
expressed in Shell, that the recharacterization of legal relationships
is only permissible if the label attached by the taxpayer to the transaction
does not properly reflect its actual legal effect. Admittedly, this statement
by the Supreme Court of Canada was in respect of tax cases. However, 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 those parties must stand. There is no such clear and credible evidence
in this case.
[26] The decision in Wolf v. Her Majesty the Queen, 2002 F.C.A. 96,
2002 D.T.C. 6853, provides guidance, especially paragraphs 113, 117, 120, 122
and 124:
My colleague has
explained through the case law how a contract of employment is to be
distinguished from a contract for services. Whether one adopts the words I used
in Charbonneau, ...,
We must not pay so much attention to the
trees that we lose sight of the forest ... The parts must give way to the
whole. (At p. 301)
those used by MacGuigan J.A. in Wiebe Door Services
Ltd. v. Minister of National Revenue, [1986] 3 F.C. 553 (Fed. C.A.),
What must always remain of the essence is
the search for the total relationship of the parties. (At p. 563)
or those used by Major J. in 671122 Ontario Ltd. v.
Sagaz Industries Canada Inc., 2001 SCC 59 (S.C.C.),
The central question is whether the person
who has been engaged to perform the services is performing them as a person in
business on his own account. (At para. 47)
one ends up in the final analysis, in civil law as
well as in common law, looking into the terms of the relevant agreements and
circumstances to find the true contractual reality of the parties.
...
The test, therefore, is whether, looking
at the total relationship of the parties, there is control on the one hand and
subordination on the other. I say, with great respect, that the courts, in their
propensity to create artificial legal categories, have sometimes overlooked the
very factor which is the essence of a contractual relationship, i.e. the
intention of the parties. Article 1425 of the Civil Code of Quebec
establishes the principle that "[t]he common intention of the parties
rather than the adherence to the literal meaning of the words shall be sought
in interpreting a contract". Article 1426 C.C.Q. goes on to say that
"[i]n interpreting a contract, the nature of the contract, the circumstances
in which it was formed, the interpretation which has already been given to it
by the parties or which it may have received, and usage, are all taken into
account".
...
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 work and when the terms of the contract and its performance reflect those
intentions, the contract should generally be characterised as a contract for
services. If specific factors have to be identified, I would name lack of job
security, disregard for employee-type benefits, freedom of choice and mobility
concerns.
...
Noël J.A. (concurring in result):
I too would allow the appeal. In my view,
this is a case where the characterization which the parties have placed on
their relationship ought to be given great weight. I acknowledge that the
manner in which parties choose to describe their relationship is not usually
determinative particularly where the applicable legal tests point in the other
direction. But in a close case such as the present one, where the relevant
factors point in both directions with equal force, the parties' contractual
intent, and in particular their mutual understanding of the relationship cannot
be disregarded.
...
This is not a case where the parties
labelled their relationship in a certain way with a view of achieving a tax
benefit. No sham or window dressing of any sort is suggested. It follows that
the manner in which the parties viewed their agreement must prevail unless they
can be shown to have been mistaken as to the true nature of their relationship.
In this respect, the evidence when assessed in the light of the relevant legal
tests is at best neutral. As the parties considered that they were engaged in
an independent contractor relationship and as they acted in a manner that was
consistent with this relationship, I do not believe that it was open to the Tax
Court Judge to disregard their understanding (Compare Montreal (City) v.
Montreal Locomotive Works Ltd. (1946), [1947] 1 D.L.R. 161 (Canada P.C.),
at 170).
[27] This Court has examined the total relationship existing between the
parties from the evidence provided and in light of the guidance of the case law
referred as above, its conclusion is that these appeals must be allowed and the
decisions of the Minister vacated.
Signed at Toronto, Ontario, this 22nd day of
July 2003.
MacLatchy,
D.J.
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