REASONS
FOR JUDGMENT
Bocock J.
I. Introduction
[1]
The circumstances surrounding the dispute
between the parties are well known and well litigated before this Court; the positions
taken by the parties before the Court are more unique. An original determination
was made by the Minister of National Revenue that Mr. Kraus, the Intervenor,
and the Appellant, Royal Columbia Development Corp. (“Royal Columbia”) were
engaged in a contract for services as independent contractors. In response, Mr. Kraus
provided information to the Minister to assist the investigation. This caused
the Minister to alter her view of the relationship to that of a contract of service
or employee/employer.
[2]
In response, Royal Columbia appealed the matter
before this Court. Just prior to the originally scheduled hearing of the appeal,
the Minister agreed with the Appellant, once again, that the relationship was
one of a contract for services or independent contractor. Accordingly, the
Minister then resiled from participating further in the hearing before the Court.
Instead, Respondent’s counsel simply indicated to the Court that the Minister
is in agreement with the Appellant. On the other hand, Mr. Kraus continues to
dispute that the relationship is one of a contract for services and argues
instead that the relationship is one of a contract of service or employee/employer.
II. The
Overarching Legal Test
[3]
There is no dispute with respect to the legal
test that ought to be applied in the determination of whether there is a
contract for services or a contract of service. While the facts are more or
less emphasized or nuanced, as between the parties, the process for the
determination of the central question remains constant: whether a person has
been engaged to perform the services is performing them as a person in business
on his or her own account (Weibe Door Services Ltd. v. M.N.R., [1986] 3
F.C. 553, (“Weibe Door”)) as approved by the Supreme Court of Canada in 671122
Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59?
[4]
The two-step process for such a determination is
firstly to evaluate the subjective intention of the parties established or
reflected in writing or by action at the outset, and secondly, to analyze the
factual situation concerning the conduct of the parties to determine whether it
supports or disavows the subjective intention (TBT Personnel Services Inc v.
Canada, 2011 FCA 256; 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85). In comparing the objective reality to the
subjective intention, the Court is required to look through the window of the Weibe
Door factors: control, ownership of tools, ability to subcontract,
opportunity to profit and risk of loss. After conducting that examination, the
Court must determine on balance whether the person is in business on his or her
own account.
III. Facts
A. Initial Hiring of the Worker
[5]
Mr. Gu was the primary shareholder and
controlling mind of Royal Columbia. Mr. Gu testified that, originally,
Mr. Kraus was an employee with Hikea Homes, but after that company experienced
financial difficulties, Mr. Kraus was hired to provide his work to Royal
Columbia. Mr. Kraus had experience in factory design and pre-fabricated
framing. He was primarily interviewed by and negotiated with Mr. Gu. Mr. Gu
testified that the parties intended that Mr. Kraus would attend to the design,
operations, and technology while Mr. Gu would attend to the marketing of the new
business. In advance of formulating and rendering that business into an
operational state, it was first necessary to construct and assemble a building
truss and framing factory equipped with a production line. Mr. Gu
testified that it was in this context that he formulated an intended business
relationship with Mr. Kraus. Mr. Gu further testified that Mr. Kraus
was to receive a draw or advance of $4,000 a month, later, at Mr. Kraus’
request, raised to $5,000 a month. Such amounts would be the subject of
invoices rendered by Mr. Kraus, upon which GST was charged. That process
commenced in September of 2011 and by October or November of 2011, the parties
commenced procuring and assembling the factory and the respective rendering and
paying of invoices which tracked the various labour contributions of
Mr. Kraus.
[6]
Mr. Kraus, in his testimony, indicated that
there was no written contract, but his services were simply a continuation of
his previous employment with Hikea Homes. His service and basis of retainer
were very similar to that of any other employee employed by the Appellant (one
of whom included Mr. Kraus’ wife). Mr. Kraus was adamant that there
was no initial discussion surrounding a business relationship and that any
discussions which did occur were inchoate and gave rise to no identifiable commercial
or business establishment steps being undertaken. In contrast, when completing a
questionnaire for the Canada Revenue Agency, Mr. Kraus did indicate that,
at the outset, he thought he was self-employed and in the process of establishing
a partnership with the Appellant. Mr. Kraus also provided in his
questionnaire evidence of an intention that his ownership share in any new
business was to be 15%. A limited company would be ultimately formed in which
Mr. Kraus would own a 50% interest, with Mr. Gu owning the balance.
B. During the Work Term
[7]
Similar to the disparate view of the relationship
at the outset, testimony by Mr. Gu and Mr. Kraus described differently the
work during its currency. In the context of each of the relevant Weibe Door
factors, the following facts were offered by either Mr. Gu or Mr. Kraus:
(1) Control
[8]
From a photograph of the seating arrangement on
the floor of the factory, it would seem that Mr. Kraus and Mr. Gu sat
in very close proximity to each other as opposed to their joint proximity to
other employees. Mr. Kraus’ hours of work were extensive and extra hours were
given volitionally. There were no additional wages paid for the considerable
hours related to the greater-than-normal work week contributed by Mr. Kraus.
Mr. Kraus was partially a supervisor of the production process, retaining
and reserving unto himself elements of discretionary approval related to
various production stages of the manufacturing processes at the business premises.
To that end, Mr. Kraus would independently attend trade shows for the
purposes of marketing the business. He engaged in continuous provision of
uninterrupted service during the period for which he rendered invoices. Upon
the rendering of invoices by Art Technology (a business name under which Mr. Kraus
undertook his services), cheques paid by Royal Columbia to Mr. Kraus
referenced “contract work” on their face. Such practice is consistent with the
reference line in other cheques issued to third party contractors engaged in contracts
for service with Royal Columbia.
[9]
In contrast, the ostensible operations manager
for Royal Columbia clearly perceived that Mr. Kraus was subject to the
operation manager’s overall supervision when present in the plant. A chart
outlining the reporting requirements of employees prepared by the operations
manager clearly envisaged that he supervised Mr. Kraus. In contrast, a
much more general production flow chart indicated that it was Mr. Kraus
who was effectively a lead decision maker in the work process, reposed with
approval during at least two distinct and separate lock-steps in the work flow.
(2) Ownership of Tools
[10]
In respect of ownership of tools, the evidence
was that Mr. Kraus provided his own hand tools, but that large equipment and
vehicles were supplied by Royal Columbia, including Mr. Kraus’s computer
required for the purposes of design. On the other hand, Mr. Kraus provided
testimony that he provided certain tools he owned to Royal Columbia in order
for Royal Columbia to carry on and complete the business. These tools provided by
Mr. Kraus were utilized by other workers of Royal Columbia.
(3) Ability to Subcontract
[11]
The issue of subcontracting was not in issue. On
balance, the evidence indicated that neither party directed a mind to such an
issue.
(4) Opportunity to Profit
[12]
It is within this key factor, that the facts
relating to the inchoate business venture must be analyzed. There was evidence
that a name search was undertaken by Mr. Kraus with respect to the proposed
business. Mr. Kraus testified that he had input into the construction of
the plant and also with respect to the hiring of employees for the ultimate company.
During business negotiations, which became more pointed towards the end of the
relationship between he and Mr. Gu, Mr. Kraus expressed in writing
that he ought to have been allowed more latitude “to continue making money for
both himself and Mr. Gu.” There was evidence that Mr. Kraus received
quotations in his own name related to Royal Columbia’s truss business. This is
also consistent with the fact that third parties occasionally generated
invoices in favour of Mr. Kraus on behalf of Royal Columbia. Similarly,
although the evidence was not entirely clear, business cards were produced, at
least in draft, in which the company described Mr. Kraus as a director of
Royal Columbia. As well, during the work period a draft partnership agreement
was prepared by Mr. Kraus outlining proposed business terms. Additionally,
upon cross-examination Mr. Kraus indicated that he had anticipated receipt
of profit in relation to the planned new business.
(5) Risk of Loss
[13]
Mr. Kraus admitted on cross examination, through
the questionnaire he had provided to the Minister, that he had accepted lower
wages in consideration of a share of profits in the new business and thereby in
the process placed an otherwise greater salary at risk. This was consistent
with Mr. Kraus’ admission that another employee had refused to become a
prospective business partner of Mr. Gu and instead received a higher
salary.
IV. Analysis
A. Subjective
Intention of the Parties
[14]
Mr. Gu’s evidence was unequivocal that, at the
outset, the parties had intended to form an inchoate business relationship
culminating in the formulation of a partnership in which Mr. Gu and
Mr. Kraus would be partners. Mr. Kraus grudgingly admitted this on
cross examination. Notwithstanding that no agreement existed from Mr. Kraus’
perspective, Mr. Kraus nonetheless indicated in the CRA questionnaire which
he completed that there was an intention to earn business profit both for he
and Mr. Gu within their new mutual business relationship.
B. Objective
Reality during the Course of Work
[15]
While the initial intention of the parties may
have been that the parties would be engaged in a contract for services or
independent contractor relationship, the question remains: what does the
objective reality do to either disavow or support this subjective intention? On
the issue of control, there is evidence that Mr. Kraus was treated as an
employee by the operations manager who believed that his own supervision was
necessary for the services and work being provided by Mr. Kraus to Royal
Columbia. On the other hand, there were dealings between Mr. Gu and
Mr. Kraus regarding the development of the new framing plant and the
business related to it. There is also evidence that Mr. Kraus had the
power on behalf of the fledgling business to enter into contractual negotiations
and order various component parts and equipment for the new factory.
Mr. Kraus’ salary draw, the method of billing, the fact the salary was
invoiced by his own business, the nature of the salary increase upon request,
all reflect the tracking of contributions of capital to, and withdrawal of
capital from, the proposed business. On balance and in the factual context,
this suggests that Mr. Gu and Mr. Kraus were engaged during the work
term in, under the auspices of support from Royal Columbia, in the formulization
and establishment of a new business rather than the retainer by Royal Columbia
of Mr. Kraus as its employee.
C. Tools
[16]
In terms of the evidence related to tools, use
of large tools and computers were provided by Royal Columbia. On the other
hand, there was a contribution of certain tools for the business by Mr. Kraus
and use of those by other workers. On balance, this particular Weibe Door
factor would appear to be equivocal.
D. Subcontract of Services
[17]
While this issue was largely not anticipated by
the parties, it is noted that Mr. Kraus was instrumental in having his
wife and others hired as employees of Royal Columbia. This is not customarily
consistent with an employer/employee relationship unless someone is primarily employed
within a human resources or personnel role for an employer, which Mr. Kraus
clearly was not.
E. Opportunity to Profit and Risk of Loss
[18]
With this particular factor, clarity comes to
bear on the issue of whether Mr. Kraus was an employee or an independent
contractor. By Mr. Kraus’ own admission, at the outset the parties had
intended to establish a relationship of entity to entity for the purposes of
constructing and formalizing an ongoing business relationship. During the
interim building phase, Mr. Kraus admitted that he was to be paid 15% of
the profits and that he compromised the quantum of his base salary in anticipation
of those future profits. Once the facility was completed, the inchoate business
relationship would become settled and a new entity, either a corporation or
partnership, would be established under which Mr. Gu and Mr. Kraus
would have equal ownership. Moreover, in the context of the operations manager
and his relationship with Mr. Kraus, it is not clear from any of the
documentation that the operations manager was ever intended to be a part owner
of the new business, either at the outset or upon its full establishment after
the construction of the framing plant. This treatment of Mr. Kraus by the
operations manager is perhaps explained because an interim relationship had to
exist within Royal Columbia because the new business itself was a recipient of
capital and in-kind contributions from Mr. Gu, through Royal Columbia. It
was in this light that one may see the quantifiable capital contributions of
Mr. Gu, on one hand, and the quantifiable labour contributions of
Mr. Kraus, on the other.
[19]
The final convincing fact for the Court, which
points towards a contract for services, is that the arrangement did not ultimately
proceed because Mr. Kraus failed to tender or commit the additional capital
contributions at the final stages of the business launch. During this start-up
period, Mr. Kraus was extracting from the potential business a draw or salary
which was to be tallied during the final reconciliation of capital contributions
and percentages of profit. This is consistent with Mr. Gu’s recollection
of the need to track invoices and contributions. This practice is also
buttressed by Mr. Kraus’ own admission that a business was intended and
respective interim contributions would be tracked. As further evidence,
Mr. Kraus admitted that he was providing equal and perhaps lopsided in-kind
contributions in the formation of the business, not just at the outset, but
during the work period.
[20]
In summary, this objective reality is not an
instance where a worker’s tasks were dictated by manuals and carried out under the
supervision of the employer, where rates of pay were fixed and hours scheduled
by Royal Columbia and where there were no financial risks imposed on, or
investments required of, this particular worker. On the contrary, the Court
finds that the worker and Mr. Gu through Royal Columbia, at the very
inception, had a subjective intention to engage in a relationship of equals (or
close to equals) for the purposes of establishing, after an interim period, a
business relationship culminating in the finalization of a formalized business
structure after construction of a framing plant and production line. While
there were some factual inconsistencies, the evidence on balance indicates that
the legal relationship between Royal Columbia and Mr. Kraus was that of an
independent contractor relationship as opposed to that of employee-employer.
Mr. Kraus was, in fact, engaged on his own account in the business of
working, admittedly within the existing business structure of Royal Columbia,
with Mr. Gu in a business venture.
[21]
For these reasons, the appeal is allowed and the
original decision of the Minister appealed from is vacated based upon the facts
now before the Court.
Signed at Ottawa, Canada, this 16th day of January 2015.
“R. S. Bocock”
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