Wolf v. The Queen, docket 98-2647-IT-G

Date: 20001023

Docket: 98-2647-IT-G

BETWEEN:

LAWRENCE WOLF,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

(Judgment rendered orally on August 31, 2000, at Montreal, Quebec, and subsequently revised at Ottawa, Ontario, on October 23, 2000)

Lamarre, J.T.C.C.

[1] These are appeals from assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the 1990 through 1995 taxation years. In assessing the appellant, the Minister disallowed the deduction of business expenses (more particularly lodging and travel expenses) on the basis that the appellant earned employment income (and not business income) during those years. The Minister also considered that the appellant was a resident of Canada during all that time.

[2] The appellant challenges those assessments on the basis that he is a citizen and a resident of the United States of America and that according to article IV of the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital (Canada-U.S. Income Tax Convention) as amended, he should not, for tax purposes, be considered a resident of Canada during the years at issue. The appellant also submits that he was working in Canada as an independent contractor during those years. He relies on article XIV of the Canada-U.S. Income Tax Convention in arguing that his income was taxable in the United States and not in Canada on the basis that he did not have a fixed base regularly available to him in Canada.

[3] The appellant is a mechanical engineer specializing in aerospace. He was born in 1961 in Huntington, New York, in the United States and obtained a degree in engineering from a university in the United States. All his family lives in the United States. In 1986, the appellant began working for Grumman, an American company, on Long Island. In 1988, he was transferred by Grumman to Florida where he purchased a condominium in that same year. In 1989, the appellant started to look for consulting work and was referred to a firm of designer-consultants in Canada, Kirk-Mayer of Canada Ltd. ("Kirk-Mayer"), by one of his American relatives.

[4] Kirk-Mayer first hired the appellant in January 1990 to work as a consultant for Canadair Ltd. ("Canadair"). An agreement was signed on January 31, 1990 between the appellant and Kirk-Mayer.

[5] Under that agreement (Exhibit A-9), Kirk-Mayer retained the professional services of the appellant as an independent contractor starting February 26, 1990, for an expected duration of one year renewable at the client's discretion (the client being Canadair). In the same agreement, it is indicated that the appellant was to report to someone at Canadair's place of business in Montreal. It is also stated that the consultant (the appellant) was to provide services to Kirk-Mayer, as required for its business, in a workmanlike and professional manner. If the consultant did not in the opinion of Kirk-Mayer or the client provide services in a workmanlike and professional manner, Kirk-Mayer could terminate the agreement. The appellant was paid a fee of $32 Canadian for each hour of services provided by him to Kirk-Mayer. Hours worked in excess of 40 hours in any one week were to be paid at $48 Canadian for each hour of service. The consultant was also paid a per diem of $190 Canadian per week, based on $38 Canadian per day per five working days while in Canada if his permanent residence was in excess of 50 miles from the client's premises.

[6] The consultant was also paid for statutory holidays, as they occurred, based on the regular rate for eight hours. The consultant could also receive a contract completion bonus paid on an hourly basis if he completed the contract to the satisfaction of the client and Kirk-Mayer. The consultant was entitled as well to a vacation bonus based on four percent of gross fees upon termination of the agreement by Kirk-Mayer. The consultant was also to be reimbursed his travel costs upon submission of a counterfoil. In addition, the consultant was to be paid up to four hours at the regular fee rate for visa renewal and to be reimbursed at cost. The consultant was however responsible for providing at his own cost insurance for medical care and repatriation while in Canada.

[7] Furthermore, the agreement stipulated that to protect Kirk-Mayer's position with clients (such as Canadair) the consultant agreed not to do similar work for a client for three months after finishing work for that client.

[8] In the end, the appellant worked on various projects for Canadair during all the years at issue. His contract was periodically revised to raise the regular and overtime hourly fee and the per diem fee. On the other hand, he no longer received vacation pay, as can be seen from the contract signed on August 23, 1993 (Exhibit A-20), nor was he paid any longer for holiday or vacation shutdown of the client, unless authorized to render services on those days (Exhibits A-21 and A-22). The appellant testified though that all statutory holidays were still paid.

[9] During all the years in question, Kirk-Mayer deducted from the appellant's fees Canada Pension Plan and unemployment insurance premiums together with a 15 percent non-resident withholding tax. Kirk-Mayer issued a T-4 slip for each year stating the appellant's employment income.

[10] The appellant testified that he rented out his condo in Florida with all his furniture when he came to Canada in 1990. Thirty days' notice was required to terminate the lease (Exhibit A-10). He had mandated a rental agent in Florida to make the rental arrangements. He came in Canada with his clothing, his stereo and his video equipment. During the years at issue, he rented a room in Dollard-des-Ormeaux (Quebec) for $375 per month. He did not have a private entrance, nor did he have a private telephone line. He always kept his American insurance for his car which was registered in the United States. His health and property insurance were taken out in the United States. He kept open all his American bank accounts and opened one in Canada for the direct deposit of his pay cheques. He wired all his savings to his American bank accounts. He dealt with a stockbroker in the United States. He never requested the status of landed immigrant in Canada nor Canadian citizenship. He travelled with his American passport. He owned a few American credit cards, and one Canadian MasterCard for his spending here in Canada, and he belonged to clubs and professional associations in the United States but none in Canada.

[11] With respect to his work, the appellant testified that he always reported to a supervisor at Canadair in Montreal, who gave him his job assignments. He was required to work on different projects: design, testing, and production. Nobody told him how to do his job but there were different committees at Canadair that would sign approvals of his work. He did not have specific deadlines to meet but the work had to be done as soon as possible. He was working on a computer, to which he had access on Canadair premises only, and with diagrams and drawings belonging to Canadair. He had an access card for Canadair's buildings and used it to work on evenings and weekends. He did not have a specific office or desk or computer assigned to him at Canadair but he used a computer in the computer room when one was available. He did not have a specific phone line assigned to him but used any phone available.

[12] He completed time sheets which he sent to Kirk-Mayer, with a copy going to the client, for the purpose of billing all his hours worked.

[13] The employees of Canadair were invited to meetings and could take advantage of education opportunities, while this was not the case for consultants.

[14] Eventually, the appellant was granted a United States patent, but he never made any money from it during the years at issue.

[15] The appellant has admitted that he sojourned in Canada for more than 183 days during each of the years at issue. However, he always reported his income and paid his income tax in the United States.

Analysis

I. Residence

[16] Counsel for the appellant admits that the appellant has dual residency in Canada and the United States. He submits however that under the Canada-U.S. Income Tax Convention, the appellant should be considered a resident of the United States and that the convention prevails over the Act. He relies on subsection 3(2) of the Canada-United States Tax Convention Act, 1984 and paragraph 2 of article IV of the Canada-U.S. Income Tax Convention, as applicable for the taxation years at issue, which read as follows:

CANADA-UNITED STATES TAX CONVENTION ACT, 1984

CONVENTION APPROVED

3.(1) The Convention is approved and declared to have the force of law in Canada during such period as, by its terms, the Convention is in force.

INCONSISTENT LAWS

(2) In the event of any inconsistency between the provisions of this Act, or the Convention, and the provisions of any other law, the provisions of this Act and the Convention prevail to the extent of the inconsistency.

CANADA-U.S. INCOME TAX CONVENTION

ARTICLE IV

Residence

1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature, but in the case of an estate or trust, only to the extent that income, derived by such estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

[17] I agree with counsel for the appellant that the Canada-U.S. Income Tax Convention will dispose of the question of the appellant's residency. I also agree that the appellant is a resident of both Canada (as he sojourned for more than 183 days in Canada) and of the United States (as he is an American citizen) and that he is liable to tax in both countries by reason of one of the criteria enumerated in paragraph 1 of article IV. It is common knowledge that American citizens are taxable on their world income. There is no need, in my view, for the appellant to prove this point, as counsel for the respondent submitted he should.

[18] That being said, the appellant's status must be determined in accordance with the tie-breaker rules set out in paragraph 2 of article IV of the Canada-U.S. Income Tax Convention.

[19] Applying those rules, the appellant will be deemed to be a resident of the state in which he has a permanent home available to him; and if he has a permanent home available to him in both states, he shall be deemed to be a resident of the contracting state with which his personal and economic relations are closer (centre of vital interests) or in which he has an habitual abode.

[20] I am of the view that the appellant had a permanent home available to him in both countries. Indeed, he had a place to stay in Canada and with only one month's notice he could return to his condo in Florida. However, I find that the appellant's centre of vital interests was more in the United States than in Canada. The appellant is not married, but still, all his family was in the United States. His bank accounts and savings and his stockbroker were all in the United States. Apart from one bank account and one credit card which he had here in Canada for his day-to-day living expenses, the appellant did not maintain any economic relations with Canada. He obtained his patent in the United States and wired all his savings to the United States. The United States was the country to which he returned with frequency and regularity. Although the appellant's place of work was in Canada, I do not think that this overrides the fact that his centre of vital interests remained in the United States. He came to Canada to work on a temporary basis because the job was here. His contract was in fact extended, but this does not mean however that his personal and economic relations were with Canada. His source of income was in Canada but there were no other ties to this country. In fact, the way he acted shows rather that it was never his intention to stay permanently in Canada or to have an habitual abode here. He never really settled in Canada. He spent all his free time with his family in the United States, took out all his insurance in the United States, was not insured here in Canada, and only kept here a pied-à-terre, a room in Dollard-des-Ormeaux (Quebec). He never requested landed immigrant status nor Canadian citizenship. He is an American citizen and has an American passport only. He declared his world income and paid his income tax in the United States for all the years in question. This is sufficient for me to be able to say that the appellant is deemed to be a resident of the United States within the meaning of paragraph 2 of article IV of the Canada-U.S. Income Tax Convention.

II. Employee or self-employed

[21] The next question to be determined is whether the appellant earned income in respect of independent personal services in Canada, and if so, whether that income was attributable to a fixed base regularly available to him in Canada. Section XIV of the Canada-U.S. Income Tax Convention reads as follows:

Article XIV – Independent Personal Services

Income derived by an individual who is a resident of a Contracting State in respect of independent personal services may be taxed in that State. Such income may also be taxed in the other Contracting State if the individual has or had a fixed base regularly available to him in that other State but only to the extent that the income is attributable to the fixed base.

[22] The parties agree that the main question to be determined is whether the appellant was working as an employee or as an independent contractor. Both parties agree that, if the appellant is considered to be an employee, article XIV of the Canada-U.S. Income Tax Convention does not apply and the assessment must be confirmed.

[23] Article 2085 of the Civil Code of Quebec defines a contract of employment as a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer. A contract for services is defined in article 2098 as a contract by which a person, the contractor or the provider of services, undertakes to carry out physical or intellectual work for another person, the client, or to provide a service, for a price which the client binds himself to pay. Article 2099 provides that a contractor or provider of services is free to choose the means of performing the contract and no relationship of subordination exists between the contractor or provider of services and the client in respect of such performance.

[24] These provisions of the Civil Code of Quebec reiterate the paramount criterion laid down by the case law for determining if there is an employer-employee relationship, and that criterion is control. As for remuneration, it seems to be established in the case law that payment for services on the basis of time sheets submitted is not exclusive to a contract of employment. Fixing the amount of remuneration is as much an element of a contract for services as of a contract of service.

[25] Although the appellant is a professional who was hired for his expertise and his knowledge, I am of the view that some kind of control was exercised over the appellant's work. He testified that he was assigned his work by a supervisor at his workplace and that he could be switched from one project to another at the supervisor's request. The appellant also testified that his work had to be approved by different committees and that for specific difficult projects there was closer supervision by Canadair.

[26] It was the appellant's personal professional services that were made available to Canadair (there is no evidence that the appellant could delegate his work to someone else). The appellant's work was done on a continuing, day-to-day basis, and no set or specified amount of work was assigned to him by contract. Applying the specific result test, one cannot but conclude that the appellant was an employee. Furthermore, it is admitted that although the appellant could choose his hours of work, he was expected to be there during normal working hours to interface with people at Canadair.

[27] It is true that the appellant was not provided with health insurance benefits or a pension plan and received no vacation pay (except for statutory holidays). But in my view, this is not sufficient to override the conclusion that the appellant was in fact an employee. Furthermore, there are other aspects that tend to show the existence of an employer-employee relationship. The appellant was paid for all his hours worked and overtime was paid at a higher rate under his agreement. All statutory holidays were paid even though the appellant did not work on those days. He was entitled to a completion bonus if he performed well. None of this is characteristic of a contract for services. A provider of services will fix his price and will not be remunerated at a higher rate for overtime. He must bear the risk of lower profit if he has to work overtime. In the present case, the appellant bore no such risk. He was paid no matter what. The fact that the appellant was signing temporary agreements does not change my conclusion. Indeed, it is not the duration of the agreement which determines whether there is employment.

[28] Finally, the appellant was working with tools belonging to Canadair in Canadair offices or workshops. All his comings and goings, his working hours and days were integrated with the client's operations. It cannot be said in the present case that the appellant was operating his own business. In his own words, contained in the insurance policy filed in evidence by him (Exhibit A-11), he was a job shopper and his employer was Kirk-Mayer. He did not consider himself to be an independent contractor. Before coming to Canada, he was an employee of Grumman and, in my view, he was an employee of Kirk-Mayer when he worked for Canadair (see Hinkley v. M.N.R., 91 DTC 1336, referred to by counsel for the respondent). I am comforted in this conclusion by the fact that Kirk-Mayer also considered the appellant to be its employee. Indeed, it issued T-4 slips to the appellant, who reported employment income, and all deductions at source were made. If I apply the reasoning of counsel for the appellant, namely that it is the intention of the parties that should govern from a legal standpoint, there is an indication here that Kirk-Mayer treated the appellant as an employee and not as an independent contractor.

[29] I therefore conclude that the appellant has not shown on a balance of probabilities that he was acting as an independent contractor during the years at issue. The appellant was an employee. In view of this conclusion, it is not necessary for me to determine whether the appellant had a fixed base regularly available to him in Canada within the meaning of article XIV of the Canada-U.S. Income Tax Convention, as that article does not apply to employees.

[30] The appeals are dismissed and the assessments are confirmed.

Signed at Ottawa, Canada, this 23rd day of October 2000.

"Lucie Lamarre"

J.T.C.C.