Date: 20000324
Docket: 1999-2298(GST)I
BETWEEN:
RANDY ZIVKOVIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Mogan J.T.C.C.
[1] In 1997, the Appellant was the
owner and operator of Annabella's Massage Studio, a body rub
parlour in Kitchener, Ontario. The Appellant described the
services provided at his studio as non-therapeutic massages. The
issue in this appeal is to determine the manner in which the
Appellant is liable for goods and services tax ("GST")
with respect to the operation of Annabella's Massage Studio
("Annabella's") in the period from May 22, 1997 to
December 31, 1997.
[2] The Appellant described his
operation of Annabella's as follows. He purchased
Annabella's in February 1997. He was required to hold a
business licence from the City of Kitchener in order to operate
the studio. The licence actually authorized the operation of an
"adult entertainment parlour". The massage services
were provided by adult women whom the Appellant referred to as
"the ladies". In order to work at the studio, each lady
had to be licensed by the City of Kitchener as an "adult
entertainment attendant". In order to obtain such a licence,
a lady had to provide three photographs and have local police
clearance. The studio operates from 11:00 in the morning until
midnight each day of the week but does not operate on weekends.
The Appellant tries to have two ladies in attendance whenever the
studio is open so that a customer will have a choice as to which
lady will provide the massage. His arrangement with the ladies is
that they will agree to work either the day shift from 11:00 in
the morning until 6:00 in the afternoon or the evening shift from
6:00 in the afternoon until midnight. He does not guarantee that
there will be any customers for the ladies to serve if they
attend at the studio for a particular shift.
[3] The times when the ladies attend
at the studio are arranged by mutual convenience to the ladies
and to the Appellant. In other words, certain ladies may phone in
and say that they will work only afternoon shifts or only evening
shifts or a combination of afternoons and evenings depending upon
their circumstances. Also, if the Appellant has gaps where there
are either no ladies in attendance or only one lady in
attendance, he may phone one or more of the ladies on his list to
see if they could attend at specific times so that he will be
able to meet his target of having two ladies available for each
shift. As stated, his policy was to have two ladies in attendance
at his studio at all times from 11:00 in the morning until
midnight.
[4] The fee structure for the massage
services was as follows: $40 for a regular half hour; $50 for a
special half hour; and $80 for one hour. The higher fee for the
special half hour required the massage to be done in lingerie. At
the end of each massage, the customer would pay the lady
directly. It was an all-cash business and there were no credit
cards. The lady would split the fee with the Appellant on a 50/50
basis. She would keep one-half of the fee and she would pay the
other half to the Appellant. He would not be in attendance when
the fee was actually paid by the customer to the lady and so he
relied on her honour to recover his 50% of each fee.
[5] The Appellant regarded each lady
as an independent contractor. As far as he was concerned, he
simply provided a place for her to do a massage and he regarded
the basic contract as made between the lady and the customer. The
Appellant was visited by a GST auditor from Revenue Canada who
asked to see the Annabella books and records. The Appellant
explained that there had been a break and enter and theft at the
studio and so he did not have a full set of records. The GST
auditor examined what records were available and reached certain
conclusions as to the volume of business at the studio from May
22, 1997 to December 31, 1997. The relevant amounts are discussed
below.
[6] The Appellant reported GST
collected of $5,869 and claimed input tax credits of $4,248
leaving him with a net liability of $1,621. The Respondent
reassessed on the basis that (i) the Appellant made taxable
supplies in the aggregate amount of $126,345 in respect of which
he should have collected the 7% GST of $8,844; and (ii) the
Appellant did not prove his entitlement to input tax credits
exceeding $1,422. According to the assessment, the Appellant was
required to remit $7,422 ($8,844 minus $1,422). In evidence, the
Appellant did not dispute the fact that, in the relevant period,
the gross amount of fees collected by the ladies at his studio
was $126,345.
[7] The Appellant concedes that goods
and services tax is payable with respect to the massages provided
at Annabella's but he states that the primary contract is
between each lady as an independent contractor and her customer.
Therefore, GST should be collected on the gross amount of the fee
by the lady. The Appellant admits that GST is payable on the
services which he provides and for which he is paid half of the
fees. According to the Appellant, it is important to each lady
that she have safe premises like his studio with him in
attendance so that she can do a massage without disclosing to the
customer either her home address or her home telephone
number.
[8] If the Appellant's argument is
well-founded, each customer makes his primary contract with one
of the ladies and should pay GST on the gross fee. By the same
token, each lady needs certain services provided by the Appellant
and she should pay the 7% GST on the amount she pays to the
Appellant (one-half of her fee) for the services which he
provides. In accordance with this argument, the Appellant has a
tax liability of $4,422 (7% of $63,172) with respect to the GST
he should have collected on one-half of the fees as
determined by the GST auditor from Revenue Canada. This liability
is acknowledged by the Appellant subject to his input tax credits
for the assessed period. In summary, the Appellant claims that
the ladies collectively should collect GST on the gross fees of
$126,345 and that they collectively should claim input tax
credits of $4,422 on the GST payable for his services.
[9] In my opinion, the result of this
appeal depends on whether the ladies were employees of the
Appellant or independent contractors. On that question, the facts
run both ways. Concerning the idea of independent contractor,
each lady must be licensed by the City of Kitchener as an
"adult entertainment attendant". Each lady will agree
to be in attendance at the Appellant's studio for a
particular shift not knowing whether she will have a single
customer during that shift. If she does not have a customer
during that shift, she receives no remuneration whatsoever. On
the other hand, if she does have a customer, she provides the
only service which the customer wants and she collects the entire
fee from that customer. Each lady has wide discretion as to what
days she will work in a given week and which shift she will work.
The principal qualification on this discretion is the fact that
the Appellant has facilities for only two ladies on any
particular shift but he wants to have two ladies available for
both shifts each day when the business is open.
[10] According to the Appellant, the ladies
can pick and choose when they want to work and where they want to
work. For example, they could work at another massage studio on
those days when they are not working at Annabella's. Also,
they can dress as they like while attending at his studio. They
are required to pay for their own supplies like oils and
powders.
[11] Considering the idea of employment,
although each lady is personally licensed by the City of
Kitchener, she is required to provide her "attendant"
services at a licensed premises like the Appellant's. The
Appellant provides the place of business, the business name
("Annabella's Massage Studio"), a private room and
a table or pad on which the massage may be performed. I assume
that he also provided a business telephone number although that
particular fact was not canvassed in evidence. The Appellant
provides a degree of protection to each lady in the sense that
her services are provided on his premises where she could obtain
help if needed. If as the Appellant stated, the ladies want
anonymity from the customers in terms of no customer knowing the
home address or home phone number of a particular lady, then it
seems to me that the goodwill of the business resides in its
location and the name "Annabella's" because that is
the only connection which a customer has with the massage
services offered by the Appellant.
[12] The Appellant stated that when a lady
had booked a particular shift, if she could not attend he
expected her to send a replacement. This indicates a sense of
community among the ladies who provided services at
Annabella's in that they would know how to contact each other
if one of them had to get a replacement. The Appellant also
stated that if a lady booked a certain number of shifts but did
not attend, he would not schedule her for any more shifts. This
indicates a control on his part over who could work at
Annabella's.
[13] At first blush, I would say that the
ladies are employees of the Appellant and not independent
contractors. His Notice of Appeal alleges that he owns and
operates Annabella's and that allegation is admitted. He has
the last say in deciding which ladies will work which shifts
because he needs two ladies on duty for each shift. They come to
his place of business to work. Although they must be licensed by
the City of Kitchener as an "adult entertainment
attendant", they are required to provide their
"attendant " services at a licensed premises like
Annabella's. They are not like a plumber or hairdresser who
can operate his/her business out of the home. The fact that each
lady requires a personal licence may be a red herring. Many
individuals who work in special areas like investment banking and
horse racing may require personal licences from a securities
commission or racing commission but, at the same time, they are
employees in the performance of their respective services.
[14] None of the ladies testified in this
appeal but I believe the Appellant when he states that,
generally, they do not want the customers to know their home
address or phone number. This means that they do not develop a
personal clientele apart from the Appellant's location and
business name "Annabella's". The goodwill of the
business attaches more to the Appellant than to any of the
ladies.
[15] The Appellant described some of the
restrictions which the City of Kitchener imposed on the licensing
of his "adult entertainment parlour". He could not
locate his business within 100 meters of a daycare centre,
primary school or religious institution. Also, he could not have
a residential property bordering on the site of his business.
Because the ladies could offer their "attendant"
services only at a licensed premises like Annabella's, they
were tied to the same restrictions which applied to the
Appellant. In a very real sense, they were not independent
contractors but dependent contractors because they needed a
person like the Appellant with a licensed place like
Annabella's to offer their services.
[16] Following the decision of the Federal
Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., 87
DTC 5025, the tests most commonly used to distinguish an employee
from an independent contractor are control, ownership of tools,
and chance for profit or risk of loss. In my opinion, the
Appellant had a measure of control over the ladies. They need a
licensed premises like Annabella's to do massages and he
provided that premises. They had to come to his location to
perform their services. They could not freelance on their own
without working at Annabella's or at a similarly licensed
business. He had the last word with respect to the hours they
worked because he needed two ladies for each shift. The control
test points toward employment.
[17] The basic tools in the massage business
are a private room, a table or mat or cot, and clean sheets. The
Appellant certainly provided the first two and probably the
sheets as well because the only supplies which the ladies were
described as providing were oils and powders. The ownership of
tools points toward employment.
[18] The Appellant was the owner of a
business. He started with certain overhead costs. The city
licence cost approximately $500 per year. He had to equip his
studio and pay current expenses like rent, telephone and
advertising. By contrast, the ladies had only the cost of a
licence and lesser expenses like oils and powders. No uniforms
were provided and they could dress as they pleased. Any lady ran
the risk that no customers would come to Annabella's during
her shift or that no customer would choose her for a massage. In
either event, she would receive no fee. There was no evidence
that the Appellant paid a "standby" fee to a lady for
any shift if she had no customers on that shift. The
Appellant's evidence is that, on average, there would be
seven or eight massages per shift; and so I assume that it would
be a rare occasion when a lady had no customer at all on a
particular shift. On balance, I conclude that each lady ran the
risk of receiving no remuneration on a particular shift but the
Appellant had a much greater chance for profit or risk of
loss.
[19] Considering the evidence and the law, I
find that the ladies were employees of the Appellant and not
independent contractors. The Appellant owned and operated
Annabella's; and the customers who came there were his
customers. It was his obligation to collect GST from his
customers for the services which he provided to them at his
studio. He has not proven that he was entitled to input tax
credits in excess of $1,422. The appeal is dismissed.
Signed at Ottawa, Canada, this 24th day of March, 2000.
J.T.C.C.
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