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Morris Meadows: Judge Declines Job Offer and Workers Were Employees

In Morris Meadows Country Holidays and Seminars Ltd. v. M.N.R. (2014 TCC 191), the Tax Court considered whether certain hospitality workers were employees or independent contractors for the purposes of the Employment Insurance Act and the Canada Pension Plan.

Morris Meadows offered meeting facilities, sleeping facilities and dining facilities. In doing so it hired workers, as required, to perform certain duties such as cleaning, gardening, maintenance, cooking and serving food.

The CRA classified the workers as employees, and assessed the taxpayer for additional CPP contributions and EI premiums. The taxpayer appealed on the basis that the workers were (i) independent contractors or (ii) casual employees not employed for the purposes of Morris Meadows’ business.

In respect of the evidence, the Tax Court made this comment on a witness’s testimony:

[3] Mr. Morris, the moving force behind Morris Meadows, was the only witness for the Appellant. He was refreshingly forthright in his testimony to the point of offering me work as a cook at Morris Meadows. I declined the offer.

On the issue of the classification of the workers, the Tax Court considered the applicable tests in 671122 Ontario Ltd. v Sagaz Industries Canada Inc. (2001 SCC 59) and 1392644 Ontario Inc. o/a Connor Homes v Minister of National Revenue (2013 FCA 85) (see our previous post on Connor Homes).

In the present case, the Court held there was no written agreement expressing intent and thus no mutual intent (as per the Connor Homes analysis). The Court then pursued the traditional Sagaz/Wiebe Door analysis to determine whether the workers performed their services in business on their own account. On this point, the Court concluded that all but one of the workers were employees.

On the issue of whether the workers were engaged in employment of a casual nature other than for the purpose of the employer’s trade or business (see subsection 5(2) of the Employment Insurance Act and subsection 6(2) of the Canada Pension Plan), the Tax Court cited the Federal Court of Appeal’s decision in Roussy v Minister of National Revenue ([1992] F.C.J. No. 913), which stated:

[7] … the duration of the time a person works is not conclusive in categorizing employment as casual; the length of time may be a factor to be considered, but a more important aspect is whether the employment is “ephemeral” or “transitory” or, if you will, unpredictable and unreliable. It must be impossible to determine its regularity. In other words, if someone is spasmodically called upon once in a while to do a bit of work for an indeterminate time, that may be considered to be casual work. If, however, someone is hired to work specified hours for a definite period or on a particular project until it is completed, this is not casual, even if the period is a short one.

The Tax Court held that the workers were engaged in unpredictable “part-time” work rather than casual employment. Further, the Court noted that Morris Meadows advertised its dining facilities (available for business meetings or weddings), hired workers to serve the food, and profited from such commerce. In the Court’s view, Morris Meadows was in a business to which the employment related, and the casual employment was for the purpose of Morris Meadows’ business. The Court held the workers were not engaged in casual employment for the purposes of the EI Act and the CPP.

The Court allowed the appeals only in respect of the one worker who was an independent contractor.

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Morris Meadows: Judge Declines Job Offer and Workers Were Employees

Roitelman: Fraud and the Due Diligence Defence

In Roitelman v. The Queen (2014 TCC 139), the Tax Court considered whether a director could establish that he had been duly diligent in his attempts to prevent his company’s failure to remit source deductions where he had delegated responsibility for the company’s bookkeeping and tax filings to an employee.

Background

The taxpayer owned an electrical contracting business that focused primarily on commercial and industrial contracting, installations and service work. Initially, the taxpayer personally completed all payroll and remittance filings. As his business expanded, the taxpayer was required to travel more frequently, thus spending less time in his office. Consequently, the taxpayer hired and trained a bookkeeper. He oversaw her work and at the outset ensured remittances were made in a timely fashion. After the employee assumed responsibility for the bookkeeping, the corporation did not remain current in its remittance obligations.  From August 2005 to March 2008, the CRA sent five letters to the corporation regarding repeated failures to remit. From October 2006 to March 2008, the CRA sent seven Notices of Assessment in respect of the unremitted source deductions. The taxpayer did not receive nor was he personally aware of many of these letters and assessments. Later, after the bookkeeper had been dismissed, the taxpayer discovered hidden documents and unsent remittance cheques in various locations in the office.

For 2006 and 2007, the CRA assessed the taxpayer for directors’ liability for unremitted source deductions under subsection 227.1(1) of the Income Tax Act. The taxpayer appealed to the Tax Court and relied on the due diligence defence under subsection 227.1(3) of the ITA.

Tax Court

The Tax Court allowed the appeal. The Court found the taxpayer established a due diligence defence and thus he was not personally liable for the unremitted amounts.

The Court reviewed the key decisions on the issue, and noted that the applicable test from Buckingham v. The Queen (2011 FCA 142) is objective and contemplates the degree of care, diligence and skill exercised by the director in preventing a failure to remit. The Court also cited Balthazard v. The Queen (2011 FCA 331) for the proposition that after-the-fact behavior and corrective measures can be relevant in certain circumstances.

In Roitelman, the Court compared the personal actions of the taxpayer to the reasonably prudent person and emphasized that the director’s interaction with the bookkeeper should not be analyzed on in hindsight but, rather, with a view of the circumstances that existed during the relevant period:

[28] The test does not dictate that the positive steps taken must be effective in ensuring future compliance but only that a director takes those steps and that those steps would be the proactive steps that a reasonably prudent person would have exercised in comparable circumstances.

The Court stated that it was reasonable for the taxpayer to expect his bookkeeper to bring any essential correspondence to his attention, and it was reasonable for him to believe that when he signed remittance cheques that they were being forwarded to the Receiver General. There was no evidence that the taxpayer benefited or intended to benefit in any way from the company’s failure to remit.

Despite his actions (i.e., hiring and training the bookkeeper, delegating responsibility, etc.), the taxpayer was unable to discover or ascertain the extent of the remittance failures. The bookkeeper thwarted his attempts to ensure compliance. The Court held that the taxpayer could not reasonably have known that the bookkeeper would engage in fraudulent and misleading activities.

Roitelman is an interesting case because there are very few decisions in which a taxpayer is able to establish a due diligence defence where he/she delegates responsibility for bookkeeping/remittances and relies on the work of that other person. In Kaur v. The Queen (2013 TTC 227), the Tax Court stated, “… The director’s oversight duties with respect to [remittance obligations] cannot be delegated in their entirety to a subordinate, as was done in the present case.” In Roitelman, the taxpayer had admitted that he relied on “blind faith” that the remittances had been made in a timely fashion. However, the result in Roitelman reminds us that such reliance may still be reasonable where there was deceit and fraud perpetrated on the director by a subordinate.

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Roitelman: Fraud and the Due Diligence Defence

Is a graduate student performing research an employee?

In Rizak v. M.N.R. (2013 TCC 273), the Tax Court of Canada considered this question and determined, on the facts, that a graduate student performing research at the University of British Columbia was an employee for the purposes of the Employment Insurance Act.

In Rizak, the taxpayer was a grad student in neuroscience at UBC. Before starting his studies, the taxpayer was hired as an employee by a professor who needed assistance with lab research. After his grad studies commenced, the taxpayer performed the same lab research but, instead, received an annual stipend rather than an hourly wage. After he withdrew from the grad program, the taxpayer was once again hired as an employee to perform the same lab research for several months.

Subsequently, the Minister of National Revenue determined the taxpayer’s work while he was a grad student was not insurable employment for the purposes of subsection 5(1) of the Employment Insurance Act. The taxpayer appealed to the Tax Court.

The Tax Court considered a collection of cases on the classification of graduate students and post-doctoral fellows (see Bekhor v. M.N.R., 2005 TCC 443; Chabaud v. The Queen, 2011 TCC 438; Caropreso v. The Queen, 2012 TCC 212; Hammell v. M.N.R., [1994] T.C.J. No. 921; Hospital for Sick Children v. M.N.R., [1993] T.C.J. No. 388; Nabet v. M.N.R., [1999] T.C.J. No. 79; and Charron v. M.N.R., [1994] T.C.J. No. 47). The parties had also referred to the traditional four-in-one test from Wiebe Door Services Ltd. ([1986] 3 F.C. 553 (C.A.)) and Sagaz Industries Canada Inc. (2001 SCC 59) regarding the classification of a worker. In this case, however, the Tax Court stated,

I am not required to determine whether Mr. Rizak was an employee or an independent contractor as neither party took the position that Mr. Rizak was an independent contractor. I simply have to determine whether the dominant characteristic of the payments that Mr. Rizak received was compensation for the work he did or student assistance. I do not find [the Wiebe Door factors] to be useful in reaching that determination.

The Tax Court concluded that the dominant characteristic of the stipend paid to the taxpayer was compensation for work and, thus, he was an employee. There was a clear correlation between the stipend and the work performed by the taxpayer and he received the money because he agreed to work in the professor’s lab. The taxpayer was required to do the specific work expected of him. Further, the taxpayer performed the same work as an employee both before and after his time as a grad student.

In obiter, the Tax Court also noted that, for the purposes of the Income Tax Act, the taxpayer had earned employment income rather that exempt (or partially exempt) scholarship income and the Court, therefore, suggested that the taxpayer had tried to “have his cake and eat it too” by claiming not to be an employee for income tax purposes while at the same time claiming to be an employee for employment insurance purposes.

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Is a graduate student performing research an employee?

Just as Intended: 1392644 Ontario Inc. et. al. v. The Queen

The role of intent in the determination of whether a worker is an employee or independent contractor has taken on greater significance in the last decade or so.

The Federal Court of Appeal has considered the role of intent in the classification analysis in Wolf v. The Queen, Royal Winnipeg Ballet v. The Queen, City Water International Inc. v. M.N.R., Combined Insurance Co. of America v. M.N.R.National Capital Outaouais Ski Team v. M.N.R., Kilbride v. The Queen and TBT Personnel Services v. M.N.R. 

In Lang and Lang v. M.N.R., Chief Justice Bowman of the Tax Court of Canada reviewed the underlying principles and stated that (i) intent is a test that cannot be ignored but its weight is as yet undetermined, and (ii) trial judges who ignore intent stand a very good chance of being overruled by the Federal Court of Appeal.

In the June 6, 2013 issue of Tax Topics, I discuss the Federal Court of Appeal’s recent decision in 1392644 Ontario Inc. et. al. v. The Queen, where the Court clarifies (i) the role of intent and (ii) the manner in which the classification analysis should be undertaken.

Just as Intended: 1392644 Ontario Inc. et. al. v. The Queen

Provincial Income Allocation: Salaries and Wages to Include All Taxable Benefits

In the Provincial Income Allocation Newsletter No. 4 (March 2013), the Canada Revenue Agency notes that the Allocation Review Committee (“ARC”) has changed its position on amounts previously excluded in calculating “salary and wages paid in the year” for provincial income allocation purposes:

Effective for the 2013 tax year, the amount of salaries and wages paid in the year for the purpose of provincial income allocation calculations will include all taxable benefits that are to be included in the employees’ income in the year. This includes deemed amounts such as stock option benefits under section 7 of the Income Tax Act (Canada), regardless of whether these benefits are deductible in calculating the employer’s income.

Corporations having a permanent establishment in more than one province will need to consider the ARC’s change in position when preparing their next income tax return.  Applying the previous year’s method of calculation salaries and wages may fail to include all of the amounts now required to be included in the calculation.

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Provincial Income Allocation: Salaries and Wages to Include All Taxable Benefits

FCA provides guidance on role of intent in determining status of worker

The role of intent in the determination of whether a worker is an employee or independent contractor has taken on greater significance in the last decade or so. However, despite a series of decisions on the issue from the Tax Court and the Federal Court of Appeal, there appeared to be some inconsistency in respect of how and when intent was to be considered when applying the “four-in-one” test from Wiebe Door Services Ltd. v. The Queen ([1986] 3 F.C. 553) and 1671122 Ontario Ltd. v. Sagaz Industries Canada Inc. (2001 SCC 59).

In 1392644 Ontario Inc. (o/a Connor Homes) et al. v. The Queen (unreported; see court files 2010-948(CPP)I, 2010-949(CPP)I, 2010-950(EI)I, 2010-951(EI)I, 2011-237(EI)I, 2011-239(CPP)I, 2011-241(EI)I, 2011-242(CPP)I), the Tax Court held that several workers were employees of the appellant companies.

In the Federal Court of Appeal (2013 FCA 85), the taxpayers argued that the Tax Court judge had erred by (i) placing weight on the findings of fact made in other judgments involving the same appellants before the Tax Court, and (ii) not considering and misapplying the test for determining whether a worker is an employee or an independent contractor, particularly by not giving proper weight to the intention of the parties as expressed in their contracts.

On the first issue, the Federal Court of Appeal held that the lower court had noted that the facts in the present appeal were essentially the same as those considered previously in three separate appeals before three other judges of the Tax Court. However, in this case, the lower court judge had reviewed the parties’ evidence, weighed it, and reached his own conclusions based on it. Thus, there was no error committed by the lower court judge.

On the second issue – the role of intent – the Federal Court of Appeal noted the jurisprudential trend towards affording substantial weight to the stated intention of the parties (see, for example, Wolf v. The Queen (2002 FCA 96)Royal Winnipeg Ballet v. The Queen (2006 FCA 87)). However, the Court of Appeal noted, there was some difficulty in the application of the approach described in Wolf and Royal Winnipeg Ballet. The Court of Appeal emphasized that the parties’ may describe their relationship as they see fit, but the legal effect that results from the relationship is not to be determined at the sole subjective discretion of the parties. The Federal Court of Appeal stated:

[38] Consequently, Wolf and Royal Winnipeg Ballet set out a two-step process of inquiry that is used to assist in addressing the central question, as established in Sagaz and Wiebe Door, which is to determine whether the individual is performing or not the services as his own business on his own account.

[39] Under the first step, the subjective intent of each party to the relationship must be ascertained. This can be determined either by the written contractual relationship the parties have entered into or by the actual behavior of each party, such as invoices for services rendered, registration for GST purposes and income tax filings as an independent contractor.

[40] The second step is to ascertain whether an objective reality sustains the subjective intent of the parties. … the subjective intent of the parties cannot trump the reality of the relationship as ascertained through objective facts. In this second step, the parties’ intent as well as the terms of the contract may also be taken into account since they color the relationship. … the relevant factors must be considered “in the light of” the parties’ intent. However, that being stated, the second step is an analysis of the pertinent facts for the purposes of determining whether the test set out in Wiebe Door and Sagaz has been in fact met, i.e., whether the legal effect of the relationship the parties have established is one of independent contractor or of employer-employee.

The Court of Appeal noted that, in the present case, the lower court judge had proceeded in an inverse order (i.e., dealing with the parties’ intent at the end of his analysis). The Court of Appeal stated that the first step of the analysis should always be to determine the intent of the parties. However, despite the lower court’s inverse analysis, the judge had reached the correct conclusion regarding the status of the workers.

The Federal Court of Appeal dismissed the taxpayers’ appeals.

This is helpful guidance from the Federal Court of Appeal on the manner and stage at which intent should be considered when determining whether a worker is an employee or independent contractor.

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FCA provides guidance on role of intent in determining status of worker