Date: 20010808
Docket: 97-1023-UI-,
97-113-CPP,
97-1024-UI, 97-114-CPP
BETWEEN:
ROBERT McCANN and
DONALD C. LITTLE
Appellants,
and
THE MINISTER OF NATIONAL
REVENUE,
Respondent.
Reasonsfor Judgment
Mogan J.
[1]
The appeals of Robert McCann v. The Minister of National Revenue
(Court File 97-1023(UI)) and Donald Little v. The Minister of
National Revenue (Court File 97-1024(UI)) were heard together on
common evidence. Counsel agreed, however, that the results need
not be consistent. It would be possible for one appeal to be
allowed while the other was dismissed. Each Appellant had a
separate agreement in writing with Prestressed Systems
Incorporated ("PSI") under which each agreed to provide
certain personal services to PSI in return for a defined level of
remuneration. The issue in both appeals is the same: whether the
Appellant is an independent contractor or an employee of PSI.
Because Donald Little was the first witness to testify at the
hearing, I will consider first his status as independent
contractor or employee.
[2]
Before setting out the particular facts relating to Donald
Little, I shall describe PSI. It carries on business in Windsor,
Ontario manufacturing hollow core precast concrete floor slabs,
bridge girders for overpasses, columns, beams and other large
precast structural components. The business was first started by
two brothers, Mario and Valentino Collavino. They operated a
successful construction company for many years before
manufacturing prestressed concrete products. From 1988 to 1991,
PSI was in financial difficulty. It seemed to come out of that
difficulty and, around 1991, Valentino Collavino and his son
Loris bought out the one-half interest owned by Mario Collavino
so that, after 1991, the only shareholders of PSI were Valentino
(over 60 years of age in 1991) and his son Loris who was a
graduate engineer in his 30s.
Donald
Little
[3]
Mr. Little obtained a Bachelor of Commerce degree from the
University of Windsor in 1985. He articled at Price Waterhouse in
Windsor and became a chartered accountant in 1989. He left Price
Waterhouse in 1988 to accept a position as comptroller of PSI. He
worked there as a comptroller until the spring of 1991 when he
moved to Brantford, Ontario to start a consultant/accounting
practice. He did consulting work for an architectural
construction group of companies in the Brantford area and, in
December 1991, he became director of finance and administration
for a telecommunications science center. In April 1993, the
telecommunications industry was cutting back and funding for the
science center was reduced. Accordingly, Mr. Little's
position at the science center ended.
[4]
Around the same time (April 1993), Loris Collavino called from
Windsor to ask if Mr. Little would come back to PSI on a
short-term basis because PSI was having financial difficulties.
For the second time in five years, PSI was in trouble. It owed
substantial amounts to creditors; cash flow was poor; and it
could not get bonding. In Mr. Little's opinion, PSI was on
the path to bankruptcy. At first, he was thinking of working only
five months because PSI had retained a consultant (Dan Kotwicki)
who had helped PSI though its prior financial trouble in 1988.
Mr. Little learned, however, that Mr. Kotwicki had come to PSI
with a high price tag; and that he had a negative effect on the
morale of the PSI staff. Mr. Kotwicki left PSI soon after Mr.
Little arrived in 1993; and Mr. Little realized that he would be
needed for much longer than five months.
[5]
Exhibit A-1 is an eleven-page agreement between Donald Little and
PSI made as of July 1, 1994. It is entitled a "Management
Consultancy Agreement" and Mr. Little is referred to as the
"Management Consultant". It had a term of three years
from July 1, 1994 to June 30, 1997. Mr. Little had a fixed
remuneration of not less than $95,000 per year plus a bonus equal
to 5% of annual pre-tax operating income to a maximum of $20,000.
His extensive management-type duties were set out in Schedule
"A" to the agreement. Article 14.06 of the
agreement specified that Mr. Little undertook his duties as an
independent contractor and not as an employee but the following
articles indicate that the relationship between him and PSI could
have been employment:
1.02
Attention to Business
During the period of his retainer, the Management Consultant
shall devote his entire working time and attention to duties as
may be assigned to him by the Company, and shall faithfully and
diligently serve and endeavor to further the interests of the
Company. ...
3.01.02
Rate Based Upon Forty-Eight Weeks
The fixed remuneration rate set forth above is based upon and
refers to consulting services provided for forty-eight (48) weeks
in any fifty-two (52) weeks consecutive period during the term
hereof. Any adjustment in the number of weeks of service during
such period shall result in a corresponding adjustment in the
fixed remuneration.
3.01.03
In addition to the fixed remuneration, the Management Consultant
shall receive from the Company a bonus payment for his services
for each year during the period of his retainer under this
contract, in accordance with Schedule "B" annexed
hereto and forming a part of this Agreement.
4.01
Benefits
4.01.01
Automobile.
The Company shall pay the sum of Six Hundred ($600.00) Dollars
per month, plus applicable taxes to the Management Consultant as
reimbursement to the Management Consultant for use and mileage by
the Management Consultant of the Management Consultant's Ford
Aerostar motor vehicle.
4.01.03
Club
Fees.
Recognizing the extra requirement for customer entertainment by
the Management Consultant, the Company will provide for
initiation and annual dues payments for one health or luncheon
club, not to exceed Five Hundred ($500.00) Dollars
annually.
[6]
There is some conflict between Articles 1.05 and 5.01.01
concerning the extent of Mr. Little's authority with respect
to PSI.
1.05
Limitation of Authority
Notwithstanding anything contained in this Agreement, nothing
contained herein shall confer upon the Management Consultant any
authority however limited to bind or agree to bind or otherwise
enter into any commitment in respect of the Company, and the
Management Consultant's duties hereunder are accordingly
restricted.
5.01
Authority
5.01.01
The Management Consultant shall have, subject always to the
general or specific instructions and directions of the Board of
Directors of the Company, full power and authority over all
operating decisions with respect to the Company and such
affiliated and associated companies or persons as are controlled
by the Company or its Board of Directors.
[7]
Notwithstanding Mr. Little's obligation to devote "his
entire working time and attention" to the business of PSI
(Article 1.02), I have concluded for the reasons set out below
that Mr. Little was at the relevant time (January 1, 1996 to
September 9, 1996) an independent contractor and not an employee
of PSI. When he started to work at PSI in April 1993, he expected
to be finished by August. Soon after he started, Mr. Kotwicki was
let go. After a few weeks, he knew from his prior experience at
PSI in 1988/1989 that it would take more than five months for PSI
to be on a sound financial basis and operating well. His first
task was to meet with creditors - to get them on side
- to get some breathing room - and to determine how
they would be paid. He had to meet with customers to see if he
could increase cash flow. He had to see if he could get bonding
so that PSI could bid on certain projects. And internally, he had
to advise the directors and shareholders (Valentino and Loris
Collavino) concerning what expenses could be reduced.
[8]
PSI obtained its primary financing from the Bank of Nova Scotia
("BNS") and, in 1993/1994, it was seeking support from
the Ontario Development Corporation ("ODC"). Mr. Little
stated that his consultancy agreement with PSI was prepared at
the request of the BNS and ODC:
A.
It's a document prepared by the lawyers, the corporate
lawyers for Prestressed Systems Incorporated. It was prepared at
the request of the Ontario Development Corporation through out
attempts at financing. We were finally able to convince the Bank
of Nova Scotia and through support from the Ontario Development
Corporation to finance the operation of Prestressed Systems
Incorporated. One of the financing conditions was that I sign a
three year agreement with Prestressed Systems.
Q.
One of the conditions of who?
A.
Of the Ontario Development Corporation.
Q.
All right.
And were you involved in those negotiations with the Ontario
Development Corporation?
A.
Yes.
Q.
And do you have any information as to why they wanted you to sign
a three year agreement?
A.
The lending institutions and other creditors were still uneasy
with Mr. Loris Collavino's ability to continue on with
the restructuring that we had started through 1993. He was still
I guess reluctant, is a better word for it, to agreeing with
regards to all the procedures and dealing with operational issues
that needed to be dealt with.
(Transcript, pages 22 and 23)
[9]
According to Mr. Little, Loris Collavino was an engineer; his
strength was in the practical side of the business, construction
and production, whereas Mr. Little's strength was in
financing and administration. Because BNS and ODC wanted Mr.
Little to make a three-year commitment to PSI as a condition to
their financing, he was in a strong bargaining position with
respect to PSI. He wanted to continue his consulting/bookkeeping
practice in Brantford. He did not want to move his family from
Brantford to Windsor. He wanted access to a health or fitness
club in Windsor during the week because he would commute home to
Brantford on weekends. He wanted an automobile allowance to cover
part of the cost of commuting. And finally, he wanted to be an
independent contractor and not an employee of PSI. He negotiated
all of these terms in his consultancy agreement (Exhibit
A-1).
[10]
Mr. Little explained that his obligation to devote his entire
working time and attention to PSI did not prevent him from
maintaining his professional practice in Brantford. Exhibit A-4
is a series of approximately 30 invoices sent by Mr. Little to
his Brantford clients in 1996 for accounting services and for
preparing income tax returns. He had a goods and services tax
("GST") registration number from 1991 when GST first
started and he was operating his consulting practice in
Brantford. He charged GST to his Brantford clients and his GST
number appears on all of the invoices in Exhibit A-4.
[11]
Exhibit A-2 is a series of monthly invoices sent by Mr. Little to
PSI in 1996 charging one-twelfth of his fixed annual remuneration
plus his $600 auto reimbursement plus GST. Exhibit A-3 is a
series of invoices sent by Mr. Little to PSI in 1996 for Bell
Mobility charges with a specific list of calls, and also charging
GST. Mr. Little filed GST returns (Exhibit A-5) reporting the GST
he collected from all sources (including PSI) and claiming
certain input tax credits. PSI did not withhold any source
deductions (income tax or unemployment insurance premiums) from
the fixed remuneration paid each month to Mr. Little.
[12]
In Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025, the
Federal Court of Appeal reviewed the four tests commonly referred
to when attempting to distinguish between an employee and
independent contactor: (i) control; (ii) ownership of tools;
(iii) chance of profit and risk of loss; and (iv) integration of
the worker's services into the payor's business. In my
view, these test are more difficult to apply to someone like Mr.
Little who came to PSI in 1993 as an already established
professional consultant. Nevertheless, the tests do deserve
comment. PSI had virtually no control over Mr. Little with
respect to his duties from 1993 to 1996 because he knew precisely
what had to be done with creditors, customers, the bonding
company and the bank. Indeed, there was no one at PSI who was as
competent as Mr. Little at those negotiations. The control test
would strongly favour Mr. Little as an independent
contractor.
[13]
Mr. Little's "tools" were virtually all contained
within himself: his intelligence, his professional training as a
chartered account; his business experience both previously with
PSI in 1988/1989 and in Brantford in his consultancy practice.
His use of a PSI computer or automobile was only incidental to
the use of his real tools which were part of his being. He had no
risk of loss because his remuneration was fixed but he had a
chance of profit because his bonus was 5% of the PSI pre-tax
profit up to an annual maximum of $20,000. His work was pretty
well integrated into the PSI business because his three-year
contract to perform his duties was a condition for BNS and ODC to
continue their financing of PSI.
[14]
Over and above the four tests which, on balance, favour
independent contractor over employment, there are two particular
circumstances which persuade me to allow the appeal of Donald
Little. First, he had the stronger bargaining position in
1993/1994. PSI needed him more than he needed PSI. This is
evident from the terms of Exhibit A-1 in which he obtained a
generous fixed remuneration plus a bonus based on pre-tax profit.
In those circumstances, he bargained to be an independent
contractor (Article 14.06) and PSI agreed. I realize that such a
term in such an agreement is not conclusive. Frequently, such a
term will be set aside when a payor corporation has imposed it on
a payee worker. But when the payee worker has at least equal
bargaining strength with the payor, I am more inclined to permit
the parties to define their relationship.
[15]
The second circumstance is Mr. Little's change in status at
the end of 1997. The term of the consultancy agreement (Exhibit
A-1) was extended from June 30, 1997 to December 31, 1997 by
Change Order #1 dated May 31, 1996. By 1997, PSI had totally
recovered from its financial troubles of 1993/1994 and Mr. Little
could see that his services would no longer be needed unless
there was a change in the business. He had a number of
discussions with Loris Collavino. He was prepared to stay on at
PSI and grow with the Company if Loris was prepared to expand
into Michigan and seek projects in Ohio and north Pennsylvania.
Otherwise, if PSI was to remain a Windsor operation, then
Mr. Little was not needed.
[16]
Loris Collavino agreed that PSI could expand into the USA if Mr.
Little was prepared to become a permanent part of the PSI team.
Mr. Little agreed to change his role. At the end of 1997, he
became the vice-president and general manager of PSI. He moved
his family from Brantford to Windsor and gave up his professional
practice in Brantford. PSI expanded its business into the USA.
Mr. Little produced his own handwritten notes of PSI consolidated
sales for the period 1993 to 2000 (Exhibit A-9) showing
significant growth after 1997 with the impact of the US business.
The consolidated PSI sales in 1996 were doubled in 1998 and
tripled in 1999.
[17]
From and after January 1, 1998, Mr. Little and PSI regarded him
as an employee. Prior to that date, he was regarded as an
independent contractor. I accept the manner in which the two
parties most directly concerned characterized Mr. Little's
function in the relevant period from January 1 to September 9,
1996. The appeal of Donald Little is allowed.
Robert
McCann
[18]
Mr. McCann has a Bachelor of Commerce degree from the University
of Windsor (1969) and an M.B.A. degree from the University of
Michigan (1971). He became a chartered accountant in Ontario in
1972. He practised his profession as a public accountant in the
Windsor office of a national firm from 1972 to 1975 when he
joined a construction company as comptroller. He was there for 13
years until 1988 when he commenced working for two or three
different companies in succession helping to rescue them from
near insolvency. Through these years, he had been developing a
public accounting practice as a sideline business. In 1991, he
opened an office in Tecumseh, Ontario and started a fulltime
public accounting practice.
[19]
In February 1993, Mr. McCann was called by Dan Kotwicki from PSI
to see if he (Mr. McCann) could be engaged to perform as an
independent contractor the comptroller's duties at PSI. After
meeting with Mr. Kotwicki and Loris Collavino, Mr. McCann
accepted an engagement letter on PSI letterhead dated February
16, 1993 (Exhibit B-1). Because the letter is important and
brief, I will set it out in full.
Mr. Robert
McCann, C.A.
Box
1181
Tilbury,
Ontario
N0P
2L0
Re:
Engagement Letter
Dear Mr.
McCann:
In a follow up
to our conversation, we would appreciate it if you would execute
a copy of this letter indicating our relationship which we have
agreed will be as follows:
1.
Your billing rate will be $27.50 per hour, plus GST on a not to
exceed 30 hour per week basis.
2.
You have all the duties and responsibilities of the controller
and will put in whatever time is necessary and this specifically
means that if 30 hours is not sufficient you will still put in
the time to ensure that all PSI controllership
responsibilities in accordance with past practices are
fulfilled on a timely and accurate basis.
3.
You will bill us on a weekly basis the first part of the week and
will be paid not later than Thursday for the week ending the
previous Saturday. Please provide time sheets with your
billing.
4.
The accounting department has been informed that they report to
you and that you are an independent contractor.
5.
We recognize that you have an independent C.A. practice and have
other clients. We do not have a problem with you bringing your
personal computer in and working on other client materials so
long as you do not put in less than 30 hours per week on PSI
business or if you do than (sic) bill us less. You may
receive phone calls and make outgoing local calls only, not long
distance, to your clients. However, we would not want you to have
these calls interrupt the flow of business or any meetings that
you might be required to participate in. Additionally, we
recognize that you may have to from time to time attend to other
client matters but we do expect you to be in the office generally
between 8:00 a.m. and 5:30 p.m. I recognize that these hours
are more than 30 hours per week, however, we assume some of the
time will be spent on other client's matters or that you may
from time to time be absent yourself from the office (you
estimated 5 or 6 days per month you may be not in at our
location) during the day for your other responsibilities. Ensure
that we are at all times aware of your schedule.
6.
If time permits and you need access to typing support for your
other business practices we can likely provide that to you so
long as PSI business comes first. We would ask our secretary,
Claire, to be the judge of whether or not she has time to devote
to your personal business and she would track her time and PSI
would bill you for her typing at $18.00 per hour plus
GST.
7.
When Dan Kotwicki is in the office you will report to him and in
his absence take direction from myself. Dan will set your
priorities and I believe he has briefed you on a brief
training/familiarization program.
8.
Major and unusual projects such as financial projections may
result in time over and above the 30 hours and if approved in
advance will be paid in addition to the 30 hours.
I hope this
adequately summarizes our agreement and should you have any
questions, please contract Dan or myself.
Yours very truly
Feb.
16/93
"Loris Collavino"
President
Feb. 16/93
"Robert
McCann"
Signed and
Accepted
LC/cmm
[20]
Mr. McCann's evidence is that, with few exceptions, the terms
of the engagement letter (Exhibit B-1) were followed from
February 1993 until September 1997 when he became a fulltime
employee of PSI. One of the exceptions was that he was ordinarily
required to devote more than 30 hours each week to the affairs of
PSI. He stated that he ordinarily invoiced PSI for more than 30
hours per week and his invoices were always paid without
challenge. Notwithstanding the amount of time he spent each week
on PSI affairs, he continued his public accounting/bookkeeping
practice from his home in Tilbury, Ontario (about 45 kilometers
east of Windsor on Highway 401).
[21]
In February 1993, when Mr. McCann was retained by PSI, he had
about six clients for whom he did bookkeeping, annual financial
statements (some audited), corporate tax returns and general
accounting advice. He had another 55 to 60 clients for whom he
did annual income tax returns. Exhibit A-3 contains copies of
various invoices sent by Mr. McCann to his public accounting
clients in the years 1994, 1995 and 1996. Many of those invoices
show Mr. McCann's address at 4955 Walker Road, Windsor which
is the address of PSI. Other invoices show his personal address
in Tilbury where he had an office in his home. The remaining
invoices show both his home address and the PSI address. He
explained that PSI had no objection to his use of the PSI address
for his public accounting practice. In fact, his use of the PSI
premises for his public accounting practice is contemplated in
the engagement letter (Exhibit B-1).
[22]
Exhibit B-2 contains copies of various invoices sent by Mr.
McCann to PSI with respect to the hours he worked in certain
weekly periods during 1994, 1995 and 1996. He had a GST
registration number from 1991 in connection with his public
accounting practice. Each invoice sent to PSI (Exhibit B-2) and
to his other clients (Exhibit B-3) contained a charge for GST
with Mr. McCann's GST registration number. Exhibit B-4
contains a copy of the GST return filed by Mr. McCann for
the period October 1, 1993 to December 31, 1993 in which he
reported the GST collected from all persons including PSI. In the
weekly amounts paid by PSI to Mr. McCann there were no source
deductions for income tax or unemployment insurance
premiums.
[23]
In February 1993, when Mr. McCann signed his engagement letter
with PSI, his bargaining position was not as strong as Mr.
Little's a few months later when Mr. Little agreed to provide
professional services to PSI. It is clear, however, from Mr.
McCann's evidence and from his engagement letter
(Exhibit B-1) that he saw the risk of PSI becoming insolvent
and going out of business; and that he wanted to distance himself
from PSI in 1993 by retaining his professional status and not
becoming an employee of PSI. That is what he bargained for in the
terms of his engagement letter. His unchallenged evidence is that
the terms of the engagement letter were followed from February
1993 to September 1997 when he agreed to become the comptroller
(employee) of PSI.
[24]
In my opinion, Mr. McCann achieved his objective. I find that he
was an independent contractor and not an employee of PSI at all
relevant times; particularly the period from January 1 to July
18, 1996. Although he preformed almost all of the functions of
the comptroller of PSI after February 1993, he was not subject to
the control of any senior employee of PSI. As a professional
accountant in public practice, he was free to perform those
functions as he saw fit consistent with the best interest of PSI.
With respect to "tools", like Mr. Little, Mr.
McCann's tools were virtually all contained within himself:
his professional training and public practice as a chartered
accountant; his business experience in helping other companies
which had been near insolvency; and his knowledge of what a
comptroller should do. Regarding tools as hardware, when Mr.
McCann first came to PSI in February 1993, he brought his own
computer because it had a good program and PSI had not yet
developed a modern accounting program for a company of its
size.
[25]
Having regard to the tests of control and tools, those tests
favour Mr. McCann as an independent contractor. With respect
to the other two tests, he had an opportunity for profit or loss
because he was on fee for service basis. According to the
engagement letter, his billing rate was $27.50 per hour; there
was no guaranteed minimum number of hours; and his maximum hours
were not intended to exceed 30 hours per week but, in fact, they
ordinarily did exceed 30. On Mr. Kotwicki's advice, Mr.
McCann submitted his bill for services on a weekly basis (paid
each Thursday for all work up to the prior Saturday) so that he
would be paid regularly and never have a large receivable from
PSI when it was financially fragile. The services performed by
Mr. McCann were integrated into the business of PSI. The profit
or loss test favours Mr. McCann as an independent contractor but
the integration test favours employment.
[26]
On balance, the four classic tests favour independent contractor
rather than employment. Over and above the four tests, however,
as with Mr. Little, Mr. McCann had a strong bargaining
position vis-à-vis PSI in February 1993. He had a
public accounting practice in Tilbury. He insisted on the right
to retain his clients and serve them, if necessary, from the PSI
office. In that circumstance, I am more inclined to permit
Mr. McCann and PSI to define their relationship. They have done
that in paragraph 4 of the engagement letter where Mr. McCann is
identified as an "independent contractor".
[27]
And finally, there was a real change in status in September 1997
when Mr. McCann stopped billing PSI for his time at an
hourly rate and commenced to work as an employed comptroller at a
fixed salary. This change in status was made with the obvious
consent of both Mr. McCann and PSI. The appeal of Robert McCann
is allowed.
[28]
Both Mr. Little and Mr. McCann have corresponding appeals under
the Canada Pension Plan with respect to the same question
as to whether they were independent contractors or employees.
Both of the appeals under the Canada Pension Plan are
allowed.
Signed at
Ottawa, Canada, this 8th day of August, 2001.
"M.A. Mogan"
J.T.C.C.
COURT FILE
NO.:
97-1023(UI) and 97-113(CPP) and
97-1024(UI) and 97-114(CPP)
STYLE OF
CAUSE:
Robert McCann and Donald C. Little and
The Minister of National Revenue
PLACE OF
HEARING:
London, Ontario
DATE OF
HEARING:
August 3, 2000
REASONS FOR JUDGMENT
BY: The Honourable Judge M.A.
Mogan
DATE OF
JUDGMENT:
August 8, 2001
APPEARANCES:
Counsel for the Appellant: Claudio
Martini
Counsel for the
Respondent:
Carole Benoit
COUNSEL OF RECORD:
For the
Appellant:
Name:
Claudio Martini
Firm:
Guttman, Martini, Barile
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
97-1023(UI)
97-113(CPP)
BETWEEN:
ROBERT McCANN,
Appellant,
and
THE
MINISTER OF NATIONAL REVENUE,
Respondent.
Appeals heard on common evidence with the appeals of Donald C.
Little (97-1024(UI) and 97-114(CPP)) on August
3, 2000, at London, Ontario, by
the
Honourable Judge M.A. Mogan
Appearances
Counsel for the
Appellant:
Claudio Martini
Counsel for the
Respondent:
Carole Benoit
JUDGMENT
The appeal
under section 70 of the Unemployment Insurance Act for the
period January 1, 1996 to July 18, 1996 is allowed; and the
determination of the Minister of National Revenue on the
application made to him under section 61 of that Act
is reversed.
The appeal pursuant to
section 28 of the Canada Pension Plan for the period
January 1, 1996 to July 18, 1996 is allowed; and the
determination of the Minister of National Revenue on the
application made to him under section 27 of that Plan is
vacated.
Signed at Ottawa, Canada, this 8th day of
August, 2001.
J.T.C.C.
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