Macleod v. R., [1999] 4 CTC 2223 (Informal Procedure)

Sarchuk T.C.J.:

These are appeals by Jacqueline B. MacLeod (Marwick) (the Appellant) from assessments made by the Minister of National Revenue (the Minister) with respect to her 1993 and 1994 taxation years. These assessments were made on the basis that the Appellant failed to remit income tax deductions from employees’ wages as required by subsection 153(1) of the Income Tax Act (the Act) pursuant to the provisions of subsection 108(1) of the Income Tax Regulations as authorized by paragraph 221(1)(a) of the Act. In addition, the Minister levied a penalty in accordance with the provisions of paragraph 227(8)(a) of the Act. In so assessing, the Minister acted on the basis that Minda Perez (Perez) and Esmenia Paeste (Paeste) were employed by the Appellant under contracts of service from March 1993 to October 1993, and from November 1993 to October, respectively.

The Appellant’s position is that in assessing, the Minister acted on the basis of two fundamentally flawed assumptions. First, the Appellant con- tends that Paeste and Perez were independent contractors and not employees as assumed by the Minister and that accordingly, the Appellant had no obligation to withhold any amount from the wages paid to them for their work and is not liable for any of the tax, interest or penalties assessed.

In the alternative, the Appellant contends that if they were employees, the Minister further erred in assuming that there was also an agreement between the Appellant and each of Paeste and Perez that the amounts that they would be paid for their services were to be regarded as net amounts and that accordingly, the Appellant, in addition to paying those amounts, was obliged to pay amounts equal to the source deductions for income tax, Canada Pension Plan contributions and unemployment insurance premiums.

Furthermore, the Appellant contends that if Paeste and Perez are found to have been employed by her then it would follow that she is liable for penalties under paragraph 227(8)(a) of the Act and for interest under subparagraph 227(8.3)(a)(ii) of the Act. But, the Appellant contends, because Paeste and Perez were resident in Canada, she is not liable to pay any amount of tax on their behalf which the Minister incorrectly assessed under subsection 227(8.4) of the Act and is not liable to pay the greater amount of interest which the Minister incorrectly assessed under subparagraph 227(8.3)(fl)(i) of the Act.

Appellant’s testimony

Since 1989, the Appellant has carried on a business, Fine Design Corporate Promotions, from her residence. [1] In July 1992, she gave birth to a daughter, Rachel, and took some time off from work. In March 1993, the Appellant decided to resume working and it became necessary to obtain a babysitter. In order to do so, the Appellant contacted an agency and in due course, interviewed and hired Minda Perez. She testified that the initial plan was to have a “live-in caregiver”. To that end, she informed Perez that she had a two-bedroom apartment and since the child was in the second bedroom, Perez would have to live in the solarium. The Appellant says that since this arrangement was admittedly inadequate, they agreed it would not be a live-in situation. In exchange, the Appellant agreed to provide Perez with a Toronto Transit Commission (TTC) pass. The Appellant maintained that she offered to pay Perez $5.50 per hour with payment to be made every two weeks. Perez agreed and commenced work on March 5, 1993. The Appellant dismissed Perez in October 1993 alleging that she caught her mistreating the child by yelling at her.

The Appellant met Paeste through a friend. She interviewed her, discussed the job requirements and also offered Paeste the sum of $5.50 per hour to be paid every two weeks. According to the Appellant, Paeste accepted those terms but insisted on being paid in cash. Paeste babysat for the Appellant from October 1993 to the middle of October 1994 when she was fired for failing to advise the Appellant that her child had fallen and had injured herself while playing on a playground slide.

With respect to both Perez and Paeste, the Appellant maintains that the agreements required her to pay them $5.50 per hour to be calculated on the actual number of hours of babysitting. She specifically denied that the amounts paid were net pay or that she had agreed to pay income tax, CPP and UI premiums on their behalf. She further testified that neither Perez nor Paeste were provided with a TD-I form by her since she did not consider them to be her employees [2] and that for the same reason, she refused Perez’s request for a T4. Severance was not paid in either case nor were unemployment insurance certificates provided.

The Appellant testified that both Paeste and Perez were experienced babysitters, required virtually no instructions as to how they attended to their duties and maintains that she did not brief them with respect to such matters as what the child was to be fed, when she was to be fed or bathed and so forth, other than giving them “some basic guidelines”. She testified that each brought children’s toys and books for toddlers which they used in the course of babysitting. She further alleged that both Paeste and Perez were looking after other children (as paid nannies) during the periods that they were working for her and that each often babysat her daughter at her sister- in-law’s, at her mother’s, and at their own homes without seeking or obtaining her permission to do so.

Evidence was adduced on behalf of the Respondent from Minda Perez and Esmenia Paeste.

(a) Perez testified that she obtained her employment with the Appellant through the auspices of a babysitting agency, Dear Nanny. Her hours of work were to be from 8:00 a.m. to 6:00 p.m., five days per week. Perez claims that she asked for $700 per month and the Appellant countered by offering $650 per month with the promise of a raise after three months. Perez accepted and says that after three months, her wages were increased as promised. According to Perez, she was to be paid every two weeks with payment being a net amount after the Appellant deducted and remitted the income tax, CPP and UI as required. Perez also maintains that on several occasions after she left the Appellant’s employ, she asked for a T4 slip but never received one. Perez received instructions from the Appellant with respect to the manner in which she was to attend to the child’s needs; as to how she was to do other work around the apartment, and was provided with all items necessary to attend to the Appellant’s child. Perez did not work for any other employers during that period of time and says that in fact she was not entitled to do so under the terms and conditions of her Immigration Employment Authorization [3] which was obtained for her by the Appellant. Perez denied being fired and says she left the Appellant’s employ because she obtained employment at a higher rate of pay.

(b) Esmenia Paeste testified that she was hired in November 1993 to look after the Appellant’s daughter as well as to do light housecleaning, laundry and light cooking. The rate of pay which was set by the Appellant was $650 per month which, according to Paeste, was to be a net amount after income tax, CPP and UI deductions. Her hours of work were to be 8:00 a.m. to 6:00 p.m., five days per week. The Appellant spent the first day with Paeste instructing her as to the manner she wished the child to be cared for. She did not bring any toys or other necessary material since all such items were provided by the Appellant. The Appellant also provided her with a TTC pass because a term of her employment authorization was that she live in but the Appellant “told me I didn’t have no room at her apartment. She would prefer me to live out”. Paeste maintained that she was paid $325 twice a month, in cash as she preferred, without fail, and flatly disagreed with the testimony of the Appellant with respect to the amount of wages she had received and specifically rejected the suggestions made by Counsel for the Appellant that at certain times, she was paid less than the agreed upon amount. [4] She also maintained that although she met other babysitters who were looking after other children, she never babysat any other child during the period of her employment by the Appellant. At the time her employment was terminated, Paeste asked for and received a letter of reference from the Appellant.

The Respondent also adduced evidence from Frederick Thomas Burgess (Burgess) who is a payroll auditor with Revenue Canada and performed the audit in these appeals. The audit flowed from a complaint made by Paeste to the effect that she was unable to obtain T4’s for 1993 and 1994 from the Appellant. The initial T4 for Paeste was prepared by Burgess based on the complaint and his discussion with her. He then communicated with the Appellant, had several meetings with her and as a result of information received included Perez in his audit. After completing his review Burgess proceeded to assess the Appellant and for that purpose assumed that the amounts paid to each of Perez and Paeste were net amounts and therefore, simply grossed up those amounts to include income tax, CPP and UI, the value of the TTC passes and initially, in the case of Paeste, the value of board and lodging. With respect to the latter, Burgess says he acted on the basis of statements made by Paeste to the effect that her arrangement was as a live-in nanny. However, after further investigation, he concluded that the initial T4 he prepared for Paeste was wrong and issued an amended T4 to delete the value of the board and lodging. This change was also reflected in the ultimate assessments against the Appellant.

Appellant’s position

It is the Appellant’s position that both Perez and Paeste were independent contractors and not employees. This position is premised on the Appellant’s assertions that there was no supervision by her of their work in the traditional sense; that she exercised virtually no control over the manner in which both took care of her daughter; that each of them provided their own “tools of the trade” such as children’s books and toys which they used to amuse and educate the child in her care; that they took the child on trips to parks, to other homes and to their own respective homes; and that they re- served the right on short notice to decline to work on any given day, all of which are factors establishing that each of Perez and Paeste are to be regarded as self-employed. [5] The Appellant also alleges that both Perez and Paeste took care of other children at other places and thus, it can be said that they carried on a babysitting service and were in business for themselves.

Conclusion

In Wiebe Door Services Ltd. v. Minister of National Revenue f [6] MacGui- gan J.A. after reviewing a number of decisions with respect to the distinction between a contract for services and a contract of service made the following comment:

Perhaps the best synthesis found in the authorities is that of Cooke J. in Market Investigations, Ltd. v. Minister of Social Security, [1968] 3 All E.R. 732, 738-9:

The observations of Lord Wright, of Denning L.J., and of the judges of the Supreme Court in the U.S.A. suggest that the fundamental test to be applied is this: “Is the person who has 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 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 be taken, 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. The application of the general test may be easier in a case where the person who engages himself to perform the services does so in the course of an already established business of his own; but this factor is not decisive, and a person who engages himself to perform services for another may well be an independent contractor even though he has not entered into the contract in the course of an existing business carried on by him.

There is no escape for the trial judge, when confronted with such a problem, from carefully weighing all of the relevant factors, as outlined by Cooke J.

Emphasis added

I agree with Counsel for the Appellant that factors such as babysitting in the home of the sitter, caring for the children of multiple families at once, providing books and toys for the children and performing the services outside of the parent’s home could indicate a substantial degree of independence and might signify self-employment. However, in my view, much of the Appellant’s testimony to that end has been contradicted by both Perez and Paeste. The determination of the true nature of the contractual arrangements in these particular appeals is complicated by the fact that portions of the testimony of each of these three witnesses is questionable and in the case of the Appellant in several instances, not credible. In addition, with respect to the testimony of Perez and Paeste, a further difficulty arises from the fact that English obviously was not their principal language. In fact, there were a number of occasions when it appeared from their responses that both, but particularly Perez, did not fully comprehend the question being put to them.

A number of factors lead me to conclude that the Appellant’s testimony with respect to the nature of the employment of Perez and Paeste cannot be relied upon.

(a) I am unable to accept her testimony that no specific directions were given to them with respect to the manner in which they were to attend to her daughter’s needs. Having heard and observed the Appellant in the course of the trial, it is a fair inference that she would have been a hands-on employer and would not in any circumstances, leave her child with a nanny without being precise and unequivocal in her instructions to them.

(b) The Appellant testified that while employed by her, both Paeste and Perez babysat a number of other children. In cross-examination she conceded that she “believed” that Paeste took care of one other child, a two-year old, whose name she did not remember and that Perez looked after the same child. Both Perez and Paeste maintained they were not employed by any other persons to babysit during the rele- vant periods. I accept their testimony in preference to that of the Appellant.

(c) With respect to the Appellant’s assertions that they babysat her child at other homes (and more specifically that Paeste babysat the child at the Appellant’s mother’s home on a number of occasions) the Appellant’s testimony is equally unconvincing. I add that in the course of her testimony that Paeste only took the child to the mother’s home on those occasions when she was specifically directed to do so by the Appellant.

(d) Both Perez and Paeste required and obtained employment authorization from the Immigration Department. These authorizations describe the Appellant as the employer and indicated that Paeste and Perez were not authorized to work in any occupation other than that stated (Paeste as a servant/domestic, and Perez as housekeeper) and were not permitted to work for any employer other than the Appellant. The Appellant conceded that she had applied to the Immigration Department for these employment authorizations but denied having seen the actual documents. On balance, whether she saw these documents or not, I am satisfied that the Appellant was aware of the terms and restrictions under which Paeste and Perez were permitted to work in Canada.

(e) The evidence also established that in 1993, the Appellant opened a payroll account for payroll deductions with Revenue Canada. She says she did so “to have it properly in the event I ended up having employees” in her marketing business but “it never worked out that way”. She maintained that the account was not opened for potential babysitters but in cross-examination, said it was opened for “any, you know, potential live-in caregiver in addition to any employees that I may have for my business”. These statements were contradicted by Burgess who testified that the Appellant had advised him that two separate payroll accounts had been opened, one for the babysitter and another with respect to her business. [7]

(f) One further portion of the Appellant’s testimony warrants review. On or about September 30, 1994, the Appellant wrote a reference letter for Paeste in which she stated:

This letter will acknowledge that Jasmine Paeste was employed to babysit my daughter for approximately one year and two months.

During that time she performed regular childcare duties that included feeding, bathing, changing, and playing with my daughter. My daughter was in Jasmine’s care from the age of 13 months. Jasmine also performed light housekeeping duties and prepared some of the household meals. She is particularly good with domestic work. I no longer require the services that Jasmine has provided because my daughter has been enrolled in pre-school.

1 recommend Jasmine for another babysitting position (particularly with a child under two years of age) or a position involving domestic work that is in a private home or the hospitality industry. [8]

The Appellant testified that she had no recollection of writing this letter albeit conceding that: “It looks like my signature”. This letter contradicts her testimony that Paeste was not required to perform any household duties. Furthermore, the Appellant specifically makes reference in the letter that Paeste’s services were no longer required because her daughter was enrolled in pre-school, a statement totally at odds with her testimony that she fired Paeste for her failure to advise her of her daughter’s playground accident.

The cumulative effect of these and other inconsistencies in the Appellant’s testimony is that I am unable to accept the Appellant’s version regarding the nature of the employment.

On balance, I am satisfied that neither Perez nor Paeste engaged themselves to perform these services for the Appellant as persons in business for themselves. Each of them entered into an agreement with the Appellant whereby they agreed to work on a full-time basis for an indeterminate period of time in return for wages. Taking into consideration the overall evidence, I am satisfied that the Appellant exercised “control” with respect to where, when and how the work was to be performed to the degree required under these particular circumstances. In addition, there is no acceptable evidence before me to establish that either Perez or Paeste were employed by others as babysitters during the relevant periods of time, another factor which leads to the conclusion that they were not independent contractors. I find, therefore, that the relationship between the Appellant and the two babysitters constituted in each case a contract of services.

Alternative Submission

Counsel for the Appellant argues that if Paeste and Perez were employees, then the taxpayer would concede that there should have been source deductions. Counsel then, and quite correctly, posed the further question: on what amounts, on the amounts that were actually paid, or on the amounts that Revenue Canada alleges were constructively paid?

The question raised by the Appellant is a valid one. There is no dispute between the parties regarding the amounts which were paid to each of Perez and Paeste [9] nor is there any dispute that the auditor prepared the assessments on the assumption that there was an agreement between the Appellant and the employees to gross-up. The Appellant’s position quite simply is that she paid each of Perez and Paeste the gross amount and agrees that she should have withheld the required deductions from that gross amount and she did not.

It is fair to say that there is a good deal of confusion surrounding the agreement which was reached between the babysitters and the Appellant regarding the basis on which they were to be paid. Counsel for the Appellant argued that any misunderstanding may have arisen from language and communication problems and there is some merit in his position. Most certainly, both Perez and Paeste had difficulty in understanding and responding to questions both in-chief and in cross-examination. On the evidence, I am not satisfied that the amounts received by Perez and Paeste were net amounts as asserted. Furthermore, their testimony with respect to “net pay” suggests that it might have been the product of discussions with Revenue Canada and perhaps some after-the-fact rationalization.

I have therefore concluded that a gross-up agreement did not exist between the Appellant and the two babysitters. In result, I also conclude that the Appellant failed to withhold source deductions from their pay and that these source deductions should be calculated based on the gross amounts the nannies received. As was observed by Counsel for the Appellant, the rules which apply when an employer fails to withhold source deductions from an employee differs from the rules which apply when an employer withholds source deductions and does not remit them. [10] These provisions dictate that where an employer withholds source deductions but fails to remit the employer is responsible for the taxes together with any interest and penalties. However, if the employer does not withhold from a resident employee, the employer is not liable for the tax that should have been withheld. [11]

Where the taxpayer has paid the gross amount and has failed to withhold source deductions, the consequences are that she is liable to pay a penalty equal to 10% of the amount that should have been withheld and is liable for interest on that amount as provided by paragraph 227(8)(a). As well, she would also be liable for interest pursuant to subparagraph 227(8.3)(tz)(ii).

Accordingly, the appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that both Perez and Paeste were employed by the Appellant under contracts of service and that the amounts paid to both of them by the Appellant were gross amounts in respect of which the Appellant failed to withhold the tax deductions as required by the Act.

Appendix

Income Tax Act

153(1)Every person paying at any time in a taxation year

(a) salary or wages or other remuneration,

shall deduct or withhold therefrom such amount as is determined in accordance with prescribed rules and shall, at such time as is prescribed, remit that amount to the Receiver General on account of the payee’s tax for the year under this Part or Part XI.3, as the case may be, and, where at that prescribed time the person is a prescribed person, the remittance shall be made to the account of the Receiver General at a financial institution (within the meaning that would be assigned by the definition “financial institution” in subsection 190(1) if that definition were read without reference to paragraphs (d) and (e) thereof).

221(l)The Governor in Council may make regulations

(a) prescribing anything that, by this Act, is to be prescribed or is to be determined or regulated by regulation;

227(8)Subject to subsection (8.5), every person who in a calendar year has

failed to deduct or withhold any amount as required by subsection 153(1) or section 215 is liable to a penalty of

(a) 10% of the amount that should have been deducted or with held; or

227(8.3) A person who fails to deduct or withhold any amount as required by subsection 135(3), 153(1) or 211.8(2) or section 215 shall pay to the Receiver General interest on the amount at the prescribed rate, computed

(a) in the case of an amount required by subsection 153(1) to be deducted or withheld from a payment to another person, from the fifteenth day of the month immediately following the month in which the amount was required to be deducted or withheld or from such earlier day as may be prescribed for the purposes of subsection 153(1), to,

(i) where that other person is not resident in Canada, the day of payment of the amount to the Receiver General,

and

(ii) where that other person is resident in Canada, the earlier of the day of payment of the amount to the Receiver General and April 30 of the year immediately following the year in which the amount was required to be deducted or withheld;

227(8.4) A person who fails to deduct or withhold any amount as required under

(a) subsection 135(3) in respect of a payment made to another person, or

(b) subsection 153(1) in respect of an amount paid to another person who is non-resident or who is resident in Canada solely because of paragraph 250(1)(a)

is liable to pay as tax under this Act on behalf of the other person the whole of the amount that should have been so deducted or withheld and is entitled to deduct or withhold from any amount paid or credited by the person to the other person or otherwise to recover from the other person any amount paid by the person as tax under this Part on behalf of the other person.

Regulations

108(1)Subject to subsections (1.1), (1.11) and (1.12), amounts deducted or

withheld in a month under subsection 153(1) of the Act shall be remitted to the Receiver General on or before the 15th day of the following month.

Appeals allowed.