Richard Bass v. Minister of National Revenue, [1988] 1 CTC 2022, 87 DTC 666

Goetz, T.C.J.: —This is an appeal by Richard Bass with respect to reassessments for his 1977, 1978, 1979 and 1980 taxation years. The Minister of National Revenue reassessed the appellant on the basis that the income derived by him in the relevant taxation years was income from employment and disallowed certain deductions sought to be made by the appellant of various business expenses. The appellant maintained that he was a business consultant and as such that was his source of income and that he was not an employee but rather he was an independent contractor and consequently the expenses deducted by him with respect to his consulting business were proper.

Facts

Mr. Serge Darkozanli (Darkozanli), Vice-President of Kelly, Douglas & Co. Ltd., gave evidence as follows: Kelly, Douglas & Co. Ltd. ("the Company") dealt with food, general merchandise and the wholesale and retail drug business. The Company owned Tamblyn Drugmarts (Tamblyn) which had 50 stores in Canada. He knew the appellant's father, Sam Bass, who was highly qualified in the drug store business, and whom he approached with a view to retaining his services. Sam Bass suggested that his son, the appellant, might be interested in being retained as a consultant. As a result the Company retained the appellant to assist it in the establishing of the photofinishing business aspect of the operation.

The appellant's expertise was in the general drug store business, merchandising, personnel training, photo development services in drug stores, and in marketing. It was for these attributes that he was retained as a consultant by the Company. The Company assigned the appellant the projects and studies that he was to do and which were controlled by the Company.

In 1978-1979 the Company sold Tamblyn to Boots Drug Stores and decided to establish combination stores dealing in food and drugs. It was Dar kozanli’s responsibility to get it started and it was on this basis that he sought the assistance of the appellant to advise him. He needed an intelligent and qualified person to examine and study the whole aspect of the new operation.

The appellant was retained in 1977 as a consultant with a per diem allowance of $120. No formal agreement of this arrangement was entered into until 1978 at the request of the appellant. The appellant had no set hours although he would come to work around 9:00 in the morning and work well beyond the hours of a regular day. The appellant was paid every two weeks after having submitted a bill for his services. He was entitled to certain expenses incurred during his billable time doing consulting work for the Company. Although the Company had company cars, the appellant used his own car. The Company had certain benefit plans such as a medical service plan, extended health benefit and dental care plan and group life insurance. The appellant was entitled to these benefits provided he paid a monthly premium therefor, whereas employees of the Company (there being 4,000 or more) received them as part of their employment benefits at no cost to them. The appellant had no vacation time or statutory holidays nor could he participate in the Company pension plan.

Bass had an office in his home, with stationery, business cards and bank cheques in the name of Bass Management Consultants. He was also provided with office space at the Company's offices where there was available to him photocopying and typing facilities but he never in actual fact had any office space assigned to him and usually shared office space with two or three other consultants. Bass was available to be consulted with with respect to various projects of the Company and he would make suggestions to the Company's management team. Darkozanli regarded the appellant as a valued source of information and for contacts in the industry. Their oral arrangements were formalized by written contract in 1978 and there was filed in evidence a contract dated September 1,1979, the other contract not being available. This contract is set out as follows:

Bass Management Consultants 6791 Balsam Street Vancouver, B.C. V6P 5W9

This contract between Bass Management Consultants (referred to as BMC) and Kelly, Douglas (referred to as the Company), is in force between September 1, 1979 to August 31, 1980. This agreement can be terminated at any time during this period by either party. BMC will be reimbursed for any completed work not invoiced at that time.

BMC will be retained to advise the Company on the Winnipeg Project, which includes the following areas:

1) Purchasing of product

2) Marketing of combination stores

3) Initial store set up and fixturing

4) Identifying potential store staff

5) Training of store staff

BMC will, however, not be responsible for any operating or marketing functions. Further, BMC is not liable for any losses incurred by the Company in following recommendations laid out by BMC.

Fee Structure

— BMC will invoice the Company bi-weekly

— BMC will receive no bonus and can lay no claims to the financial success of the Winnipeg Project.

— BMC will be allowed to renegotiate the present fee in May 15, 1980

Benefits

— BMC will be allowed to purchase from the Company, a benefit package. However, BMC will not be allowed into the Company's Pension Plan.

Expenses

— BMC will be fully reimbursed on all expenses directly incurred on behalf of the Company.

Conflict of Interest

— BMC can consult for other companies except when there would be a direct conflict of interest.

Office Space

— BMC will be provided with office space within the Company confines, as well as use of a secretary and photocopying facilities.

Date:	Sept. 1, 1979
Kelly, Douglas representative:		(Signature)
Bass Management Consultants:		(Signature)

The appellant gave evidence that when he was approached by the Company to work for them, he preferred to work as a management consultant and it is at that time that he set up Bass Management Consultants. He wanted to avoid what he termed as "on line duties" because of the heavy pressure involved and he wanted to retain his flexibility. The office that he used in his home was equipped with a desk and a desk lamp, telephone, filing cabinets, shelves and chairs. He did not claim these expenses in the relevant taxation years. He paid all of his own travel expenses except airfare which he billed to the Company. Though he did most of his consulting work for the Company, he was retained as a consultant by other companies, retail stores, construction firms, etc. which composed about 15 per cent of his gross income.

Findings

A perusal of the contract between the appellant and the Company fairly well sets out their mutual relationship. He was entitled to consult for any other business as long as it was not in direct conflict of interest with that of the Company. He would only be paid after he rendered a statement of account for services rendered. He was precluded from taking advantage of the Company's pension plan or obtaining bonuses as a result of the advice he gave and he would not be liable for any losses sustained by the Company in following his recommendations with respect to (1) purchasing of product;

(2) marketing of combination stores; (3) initial store set up and fixturing; (4) identifying potential store staff; and (5) training of store staff.

To determine the true working relationship between the appellant and the Company it is necessary to look at the whole scheme of operations. One of the factors to be considered is the independence of the appellant. In the case of The Queen v. Walker (1858), 27 L.J.M.C. 207 at 208, Bramwell, B. expressed the criterion thus:

It seems to me that the difference between the relations of master and servant and of principal and agent is this: — a principal has the right to direct what the agent has to do; but a master has not only that right, but also the right to say how it is to be done.

This view has been discerned as being too simplistic and the “control factor” by itself can be misleading and ineffective when dealing, for instance, with professional or highly qualified workers.

Lord Wright in Montreal v. Montreal Locomotive Works Ltd. et al., [1947] 1 D.L.R. 161 at 169; [1946] 3 W.W.R. 748 at 756 said:

. . . In earlier cases a single test, such as the presence or absence of control, was often relied on to determine whether the case was one of master and servant, mostly in order to decide issues of tortious liability on the part of the master or superior. In the more complex conditions of modern industry, more complicated tests have often to be applied. It has been suggested that a fourfold test would in some cases be more appropriate, a complex involving (1) control; (2) ownership of the tools; (3) chance of profit; (4) risk of loss. Control in itself is not always conclusive. . . . In many cases the question can only be settled by examining the whole of the various elements which constitute the relationship between the parties. In this way it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior.

Denning, L.J. (as he then was), in Stevenson, Jordan & Harrison, Ltd. v. MacDonald and Evans, [1952] 1 T.L.R. 101 at 110-11, indicated that although the right of control is a common criterion it is not always determinative when he said:

It (the case) raises the troublesome question of the distinction between a contract of service and a contract for services. The test usually applied is whether the employer has the right to control the manner of doing the work.

In Cassidy v. Minister of Health ([1951] 1 The Law Times L.R. 539, [1951] 2 K.B. 343, at pp. 352-3) Lord Justice Somervell pointed out that the test is not universally correct. There are many contracts of service where the master cannot control the manner in which the work is to be done, as in the case of a captain of a ship. Lord Justice Somervell went on to say: "One perhaps cannot get much beyond this: ‘Was the contract a contract of service within the meaning which an ordinary person would give under the words?' ”. I respectfully agree. As my Lord has said, it is almost impossible to give a precise definition to the distinction. It is often easy to recognize a contract of service when you see it, but difficult to say wherein the difference lies. A ship's master, a chauffeur, and a reporter on the staff of a newspaper are all employed under a contract of service, but a ship’s pilot, a taximan, and a newspaper contributor are employed under a contract for services. One feature which seems to run through the instances is that, under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.

The principles stated by Lord Wright in Montreal v. Montreal Locomotive Works Ltd. et al. (supra) and by Denning, L.J. in Stevenson Jordon & Harrison, Ltd. v. MacDonald and Evans (supra) have been collated by Cook, J. in Market Investigations Ltd. v. Minister of Social Security, [1969] 2 W.L.R. 1 at 9-10, as follows:

The observations of Lord Wright, of Denning, L.J. and of the judges of the Supreme Court suggest that the fundamental test to be applied is this: “Is the person who was engaged himself to perform these services performing them as a person in business on his own account?" If the answer to that question is "yes", then the contract is a contract for services. If the answer is “no”, then the contract is a contract of service. No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of importance are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.

In the instant case the appellant from the outset asserted his wish not to be an employee of the Company but rather to have his freedom and independence as a consultant. Though he was not an integral part of the Company's operations, he was certainly a valuable and necessary asset. His expert advice assisted and guided management personnel of the Company. His part in the whole plan of operations was peripheral and not integral to it. He did not participate in the Company pension plan as did employees of the Company. He could only participate in "fringe benefits" if he paid for them himself, whereas employees received them as part of their remuneration package. He was precluded from benefiting from the gains, if any, made by the Company from following his advice. Likewise, he was not liable for any losses. He had no statutory holidays or vacation pay.

Examining all the facets of the appellant’s conduct and the scenario of the operation of the Company, and in light of the criteria enunciated by Lord Wright and Denning, L.J., it appears that the appellant was an independent contractor and that his contract with the Company was a contract for services rather than a contract of service.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.