The Impact of Intent in the Characterization Analysis of a Worker

Transcription

1 The Impact of Intent in the Characterization Analysis of a Worker by Nabeel Peermohamed A thesis submitted in conformity with the requirements for the degree of Master of Laws Faculty of Law University of Toronto Copyright by Nabeel Peermohamed 2013

2 The Impact of Intent in the Characterization Analysis of a Worker Abstract Nabeel Peermohamed Master of Laws Faculty of Law University of Toronto 2013 The Tax Court of Canada and the Federal Court of Appeal are regularly asked by taxpayers and the Canada Revenue Agency to determine whether a worker is an employee or an independent contractor. The distinction has significant tax consequences. The analysis and various legal tests used by the courts to determine the characterization of a worker have been through significant transformations over the last 15 years. The analysis remained objective for several years. However, in 2002, courts began to consider the common intent held between the taxpayer and the worker when characterizing that worker s status as either an employee or an independent contractor. Since its introduction, the courts have placed various levels of importance on this common intent in the characterization process. This paper seeks to quantify the varied emphasis placed by the courts on the intent held between a taxpayer and its worker. ii

3 Table of Contents List of Tables... v List of Appendices... vi Part 1 Introduction... 1 Part 2 The Characterization Process The Objective Factors The Fall of Integration An Introduction to the Evolution of Intent A Detailed Account of the Evolution of Intent The Inconsistency caused by Intent Part 3 The Study Inspiration from the Wintermute Study Extrapolating Wintermute to the Present The More Strongly than Royal Winnipeg Standard Methodology for Study The TCC or FCA s Characterization (employee/independent contractor) The Characterization of the MNR or TCC Below Finding of Common Intent (employee/independent contractor/none) Finding Based on Factors (employee/independent contractor) The Courts Finding After an Application of each of the Four Wiebe Door factors (Control/Financial Risk/Ownership of Tools) Judge Gender of the Judge Province or Territory Personal Service Business (PSB) Gender of the worker (male/female) Nature of Organization (profit/non- profit) Industry of Organization iii

4 5 Assumptions How to Interpret the Results Results and Interpretation Part 4 Implications Analysis is Mostly Objective Emphasis and De- emphasis of Intent Property Management Reversed Decisions Gender of Judge Part 5 Conclusions Bibliography Appendix: Additional STATA 12.0 Date Output Tables iv

5 List of Tables Table 1: Findings based on Common Intent Table 2: Court Findings based on Common Intent and Objective Factors Table 3: Example Table 4: The Probability of the Courts Characterization by Era Table 5: The Courts Emphasis on Intent by Era Table 6: The Courts Emphasis on Financial Risk by Era Table 7: The Courts Emphasis on Control by Era Table 8: The Courts Emphasis on Integration by Era Table 9: The Courts Emphasis on Ownership of Tools by Era Table 10: The Courts Emphasis in the Pre-Wolf Era Table 11: The Courts Emphasis in the Wolf to Tremblay Era Table 12: The Courts Emphasis in the Tremblay to Royal Winnipeg Era Table 13: The Courts Emphasis in the Royal Winnipeg to B-Pro Grooming Era Table 14: The Courts Emphasis in the B-Pro Grooming to Kilbride Era Table 15: The Courts Emphasis in the Kilbride to D.W. Thomas Era Table 16: The Courts Emphasis in the D.W. Thomas to TBT Personnel Era Table 17: The Courts Emphasis in the Post-TBT Personnel Services Era v

6 List of Appendices Appendix: Additional STATA 12.0 Data Output Tables vi

7 1 Part 1 Introduction The Tax Court of Canada (TCC) and the Federal Court of Appeal (FCA) are routinely called upon to characterize a worker as an employee or an independent contractor for tax purposes. More precisely, these courts have been asked to review such characterizations made by the Minister of National Revenue (the Minister or the MNR ) when assessing taxpayers under the Income Tax Act 1 (the Act ). The characterization of a worker determines the deductions available to the worker, the existence of a personal services business, and the liability of an alleged employer to remit Employment Insurance (EI) premiums and Canada Pension Plan (CPP) contributions. The introduction of common intent into the analytical process of characterizing a worker as an independent contractor or an employee has caused a significant amount of inconsistency in the characterization approach taken by the courts. The 1986 decision in Wiebe Door v. MNR 2 provided a four-fold objective test to characterize a worker. The four tests established were control, financial risk, integration, and ownership of tools. Several subsequent decisions from the FCA have resulted in litigation uncertainty for both taxpayers and the taxing authorities. The 2002 FCA decision in Wolf v. MNR 3 introduced the concept that the common intention held between contracting parties was important in the characterization process. The court said the common intent element could break a tie that results after the application of the four objective factors. In 2006, the role of intention was elevated by the FCA in Royal Winnipeg Ballet v. MNR 4 such that intent was an additional important factor when characterizing a worker, not only as a tie-breaker. Finally, in 2011, the FCA in TBT Personnel Services Inc. v. MNR 5 characterized 1 RSC 1985, c 1 (5 th Supp), as amended. 2 (1986) 87 DTC 5025 (FCA), [1986] 3 FC FCA 96, 2002 DTC FCA 87, [2007] 1 FCR FCA 256, (2011) 343 DLR (4 th ) 100.

8 2 a set of workers based on the four Wiebe Door factors alone. Thus, the last ten years of jurisprudence has yielded significant variance regarding the role of intention in the characterization process. I explore here the trends in Canadian jurisprudence with respect to the characterization of a worker. Beginning five years prior to the introduction of intent into the characterization process in Wolf and including the ten years following, I analyze the jurisprudence according to several variables such as the outcome, the judge, the province, the emphasis placed on intent, the emphasis placed on each of the four objective factors, the gender of the worker, and the corporate nature of the business. This analysis sheds light on this dynamic area of tax litigation and helps to answer the question: how do the courts characterize a worker as an employee or an independent contractor? The paper proceeds as follows. Part 2 describes the characterization process by providing the history of the four factors, the courts reduced emphasis on the integration test, the evolution of intent, and the courts continued struggle with intent. Part 3 describes my study and the results in detail. Part 4 discusses the implications of these results. Finally, Part 5 offers conclusions.

9 3 Part 2 The Characterization Process In the majority of cases where the court is asked to characterize a worker as an employee or an independent contractor, the taxpayer involved in the litigation unambiguously operates a business. The worker whose status must be characterized is one who has entered into a contract with the taxpayer s business to provide services. The Minister usually characterizes the worker as an employee and thus assesses the taxpayer for its failure to remit EI and CPP payments that are due. The taxpayer invariably argues the worker is an independent contractor who is in business on his or her own account and as such there is no obligation to make the EI and CPP payments. Before intention was introduced into the characterization process, the courts solely relied on so-called objective factors in its analysis. 1 The Objective Factors Since 1997, the TCC and FCA have been asked to characterize a worker as an employee or an independent contractor in more than 540 cases. Four objective factors have emerged in the jurisprudence. The four factors, namely control, ownership of tools, chance of profit, and risk of loss, were originally articulated in the 1947 case of Montreal v. Montreal Locomotive Works. 6 In Montreal Locomotive, the respondent entered into a number of contracts with the appellant for the design, construction, and equipment of a government plant. 7 The issue was whether the appellant could charge the respondent for taxes owed in respect of the plant. In order to decide the respondent s tax liability, the court needed to determine whom the occupant of the plant was. The court noted that previous cases had relied on the single test of control. 8 However, the court said that control was not always conclusive and in the complex conditions of modern industry, a 6 [1947] 1 DLR 161, [1946] 3 WWR 748, 1946 CarswellQue 231 (Quebec Privy Council). 7 Ibid, at para 3. 8 Ibid, at para 19.

10 4 fourfold test has often been applied. 9 Therefore, the court decided to apply the four factors: control, ownership of tools, chance of profit, and risk of loss. The court found, based on the four factors, that the respondent was the appellant s agent, and that the appellant was the occupant of the plant. Therefore, the respondent could not be held liable for the taxes levied against it by the appellant. Montreal Locomotive marked the birth of the four objective factors used to characterize a worker as an employee or an independent contractor. In 1986, the four factors were changed in Wiebe Door Services Ltd. v. MNR. 10 In Wiebe Door, the integration test was introduced as a factor in the characterization process. The taxpayer operated a door-installation business and hired workers to assist. The Minister characterized 12 of the taxpayer s workers as employees and thus, assessed the taxpayer for owing EI premiums. The taxpayer argued that the workers were independent contractors such that no premiums were owed. The TCC below based its decision on four tests: control, ownership of tools, financial risk, and the integration test. In applying the integration test, the TCC cited the decision of Lord Denning in Stevenson, Jordan and Harrison Ltd. v. MacDonald and Evans. 11 In Stevenson, the English House of Lords was called upon to distinguish an employee (under a contract of service) from an independent contractor (under a contract for service). Lord Denning stated: 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 to it, but is only accessory to it. 12 The TCC, relying on this integration test, stated the taxpayer s business could not function without the door-installers. Thus, the court found the workers were integral to the taxpayer s door-installation business rather than incidental to it. As a result, the TCC characterized the 9 Ibid. 10 Supra note [1952] TLR 101, 69 RPC 10 (House of Lords). 12 Ibid, at 111, as cited in supra note 10, at para 3.

11 5 workers as employees. The taxpayer appealed to the FCA. The FCA said that the TCC s decision was in error as the TCC failed to apply the integration test from the point of view of the workers and sent the matter back to the TCC for a determination consistent with the reasoning of the FCA. After Wiebe Door, the four factors used to characterize a worker have been control, financial risk, integration, and ownership of tools. Chance of profit and risk of loss were combined into a single financial risk factor. The Supreme Court of Canada (SCC) in Ontario Ltd. v. Sagaz Industries Canada Inc., 13 approved of this approach to characterizing a worker and set the precedent for the use of the total relationship test. In Sagaz, Ontario Ltd., (the respondent ) lost one of its major clients to Sagaz (the appellant ). The client s president terminated the business relationship with the respondent because of a bribery scheme with the appellant. As part of the scheme, the marketing firm (AIM), retained by the appellant, paid a bribe to the client s president. The respondent alleged that but for the bribes, it would have maintained its relationship with the client. The issue before the court was whether the appellant was vicariously liable to the respondent for the actions of AIM. The trial court held that AIM was an independent contractor and that the appellant was not vicariously liable for the actions of an independent contractor. 14 The Ontario Court of Appeal reversed, finding AIM was an employee and thus part of the Sagaz sales team. 15 On appeal to the SCC, the court had to characterize AIM as either an employee of the appellant or an independent contractor. Applying the Wiebe Door factors the court found AIM was an independent contractor, and thus the appellant was not vicariously liable for AIM s actions. 16 Thus, the SCC confirmed that the objective factors were to be used when characterizing a worker as an employee or an independent contractor. The total relationship test was to be used such SCC 59, [2001] 2 SCR Ibid, at para Ibid, at para Ibid, at para 57.

12 6 that a court was to consider all the objective factors to characterize a worker. However the SCC did not apply the integration test. Since Sagaz, the courts emphasis on the integration test has declined significantly. 2 The Fall of Integration Over the last decade, the courts have reduced their reliance on the integration test, and as a result placed a greater emphasis on the other factors. In Preddie v. The Queen, 17 the court decided not to apply the integration test when characterizing the worker as an employee or an independent contractor. In Preddie, the taxpayer was engaged by a tutoring service. He tried to deduct motor vehicle expenses from his income as business expenses. The Minister regarded the taxpayer as an employee of the tutoring service and denied these expenses. The Minister argued the taxpayer earned employment income, and that section 8 of the Act limited the deductions available against employment income. Specifically, the Minister argued that section 8 made no provision for the deduction of motor vehicle expenses from employment income. The taxpayer argued he was an independent contractor in business on his own account. He argued that he earned business income and that motor vehicle expenses could be deducted from business income under section 9 of the Act. Therefore, the issue before the court was whether the taxpayer was an employee or an independent contractor. The court applied the factors. Control and financial risk indicated the taxpayer was an independent contractor while an application of the ownership of tools test was inconclusive. The court then turned its mind to the integration test and said: TCC 181, 2004 DTC 2427.

13 7 It is my understanding that Sagaz does not apply the integration test, formerly included as one of the four tests set out in Montreal v. Montreal Locomotive Works Ltd., [1947] 1 D.L.R. 161 and adopted by MacGuigan J. in Wiebe Door Services Ltd. v. M.N.R., 87 DTC To do so is to answer the question of whose business was it and that is the primary question before me. The tests referred to are simply to be used as evidence in deciding whose business it was. As stated, Sylvan's business was to attract the students, provide a premise and promote a learning environment, the Appellant's business was to tutor independently. 18 The court did not apply the integration test, but instead regarded the factors as a whole to answer the question, whose business was it? The court found that the taxpayer was in business on his own account. Thus, the court found the taxpayer was an independent contractor and allowed the motor vehicle expenses to be deducted from the taxpayer s income. In so doing, the court disregarded the integration test in its analysis. In a subsequent decision, the court refused to apply the integration test. In Royal Winnipeg Ballet v. MNR, 19 the TCC was charged with characterizing ballet dancers and other performers as employees or independent contractors. The Minister characterized the performers as employees and assessed the ballet company for its failure to remit EI and CPP payments. The ballet company argued that the performers were independent contractors. Upon a review of the factors, the court found the performers were employees. However, the court s comments about the integration test are noteworthy: Secondly, with respect to the integration test, whatever clarity can be attributed to that term, there has been considerable confusion as to whether it was part of the Wiebe Door Services Ltd. v. M.N.R test, a stand-alone test, or even an appropriate test at all. The Supreme Court of Canada has not offered the integration test as a factor to consider. I interpret this as the death knoll of this particular test, and will refer to it no more Ibid, at para TCC 390, 2004 CarswellNat Ibid, at para 32.

14 8 The court said the integration test was the death knoll of the characterization process and refused to apply it. The court based this decision on the fact that the SCC in Sagaz had not referred to the integration test. As a result, the emphasis placed on the integration test was further reduced. Three years later, the TCC described the danger of the integration test, and in its warning, urged future courts to avoid applying the test. In Lang v. MNR, 21 the court said that, the integration or organization test is of no assistance and is substantially discredited and any trial judge who relies upon it does so at his or her peril. 22 In Lang, the taxpayers carried out a furnace and duct cleaning business. The taxpayers hired workers to help provide these services. The issue before the court was whether the workers were employees or independent contractors. The Minister concluded the workers were employees and that the taxpayers were liable to remit EI and CPP contributions. The taxpayers argued the workers were independent contractors. After a review of the evidence and application of the factors, namely control, financial risk, and ownership of tools, the court found the workers were independent contractors and allowed the appeal. The court did not apply the integration test, finding the test was not helpful at all to the characterization process. Since Lang, the courts have placed very little emphasis on the integration test. Coinciding with the fall of integration, over the last 10 years, the subjective element of intention has emerged as a factor in the jurisprudence and its relative weight given by the courts has varied significantly. 3 An Introduction to the Evolution of Intent In the majority of cases over the last 15 years when the court has been called upon to characterize a worker as an independent contractor or an employee, the ultimate result reached by the court has determined whether a taxpayer is obligated to remit EI premiums and CPP payments to the CRA. As a result, we find taxpayers who are assessed as employers by the CRA appealing to the TCC, and subsequently to the FCA, arguing that their workers are independent TCC 547, 2007 DTC Ibid, at para 14.

15 9 contractors. As previously mentioned, there is no obligation to remit EI premiums or CPP payments on behalf of an independent contractor. However, since there is an obligation to remit EI premiums and CPP payments on behalf of an employee, we usually find the CRA arguing that a worker is an employee, such that the taxpayer is under an obligation to remit EI premiums and CPP payments to the CRA. As a result, the courts are called upon to characterize a worker. The manner in which the courts do that has changed repeatedly over the last 15 years. The role of intent in the characterization process has evolved multiple times in the case law and can be attributed to seven landmark cases: Wolf, Tremblay, Royal Winnipeg Ballet, B-Pro Grooming, Kilbride, D.W. Thomas Holdings, and TBT Personnel Services. In each of these cases, the court treated intent differently than in the previous landmark case. Therefore, we can track the evolution of intent by analyzing these landmark cases. The following is a detailed historical account of the evolution of intent in the jurisprudence. 4 A Detailed Account of the Evolution of Intent Before 2002, the courts had kept the characterization process of a worker purely objective. The courts made their decisions, solely based on the four objective factors (with varying degrees of weight), as to whether a worker was an employee or an independent contractor. However, that changed after the FCA s decision in Wolf. The FCA in Wolf introduced the common intent held by the contracting parties into the characterization process on March 15, The court said that if the objective four-fold test was inconclusive, the subjective intention held by the contracting parties should be used to break the tie. In Wolf, the taxpayer was an aerospace mechanical engineer who provided consulting services to a corporation called Kirk-Mayer of Canada. Kirk-Mayer was able to subcontract personnel to Canadair. Through this contract, the taxpayer was subcontracted by Kirk-Mayer to Canadair. The taxpayer tried to deduct business expenses from his income. However, the Minister characterized the taxpayer as an employee and denied these expenses. Therefore, the issue before the FCA was whether the taxpayer was an employee or an independent contractor.

16 10 The TCC below found that the taxpayer was an employee of Kirk-Mayer when he worked for Canadair. The TCC found that the factors of control, integration, and ownership of tools indicated the taxpayer was an employee. The TCC also found that financial risk indicated the taxpayer was an independent contractor. However, on balance, the TCC found the taxpayer was an employee and disallowed the business expenses. On appeal, the FCA said that the Wiebe Door factors overlooked an important element that captured the essence of the working relationship between contracting parties. The court said: I say, with great respect, that the courts, in their propensity to create artificial legal categories, have sometimes overlooked the very factor which is the essence of a contractual relationship, i.e. the intention of the parties. 23 Therefore, the FCA paid careful attention to the contract between the taxpayer and Kirk-Mayer and found the contracting parties intended the taxpayer would provide his services as an independent contractor. The court said: Taxpayers may arrange their affairs in such a lawful way as they wish. No one has suggested that Mr. Wolf or Canadair or Kirk-Mayer are not what they say they are or have arranged their affairs in such a way as to deceive the taxing authorities or anybody else. When a contract is genuinely entered into as a contract for services and is performed as such, the common intention of the parties is clear and that should be the end of the search. Should that not be enough, suffice it to add, in the case at bar, that the circumstances in which the contract was formed, the interpretation already given to it by the parties and usage in the aeronautic industry all lead to the conclusion that Mr. Wolf is in no position of subordination and that Canadair is in no position of control. The central question was defined by Major J. in Sagaz as being whether the person who has been engaged to perform the services is performing them as a person in business on his own account. Clearly, in my view, Mr. Wolf is performing his professional services as a person in business on his own account. 24 The court found that there was a bona fide contract between the contracting parties stating the taxpayer was an independent contractor. The court found that the control and integration tests FCA 96, at para 117, 2002 DTC Ibid, at para 119.

17 11 were neutral, financial risk indicated the taxpayer was an independent contractor, and ownership of tools indicated the taxpayer was an employee. Since the objective factors on balance yielded a neutral result, the court relied on the contract. With regard to the objective factors and the subjective intent gathered from the contract, the court found the taxpayer was an independent contractor. Thus, Wolf set the precedent that the subjective intent gathered from a contract could be used alongside the four objective factors to characterize a worker. Since Wolf, the FCA has released six other landmark judgments. Each of these treats intent differently in the characterization process. First, on May 3, 2004, the FCA decided Canada v. Tremblay 25 and used the common intent held between the contracting parties when deciding the outcome of the integration test. In Tremblay, the taxpayers worked for a forestry management business. The workers performed general labor for the business. The TCC below held the taxpayers were employees. On appeal, the Minister argued the taxpayers were independent contractors, and the FCA agreed. In its decision, the FCA analyzed the contract between the workers and the business. The FCA found the contract was akin to an equipment rental contract and thus indicated the workers were independent contractors. The court then went on to apply the Wiebe Door factors. The court found control, ownership of tools, and financial risk indicated the workers were independent contractors. With respect to integration, the court relied on the contract. Specifically, as the contract provided for the rental of the equipment necessary for the work to be completed, the court found the workers were not integrated into the business. 26 Therefore, the court found the integration test indicated the workers were independent contractors, as well. Thus, the court found the workers were independent contractors. In so doing, the court promoted the role of intent in the characterization process, such that this subjective factor could be used when deciding the outcome of the objective factors FCA 175, [2004] FCJ No 802 (FCA). 26 Ibid, at para 29.

18 12 Second, on March 2, 2006, the FCA decided Royal Winnipeg Ballet 27 and stated that intention was determinative of the relationship between the contracting parties insofar as it reflected the reality of their relationship. On appeal from the TCC decision described above, the FCA was tasked with characterizing the ballet performers as employees or independent contractors. In the majority, Justices Sharlow and Desjardins of the FCA found the TCC s decision was unreasonable for failing to address the intent between the contracting parties, which indicated the workers were independent contractors. The TCC relied on the proposition in Wolf, that the intention of the parties is to be considered only to break a tie yielded by the Wiebe Door factors. The majority of the FCA disagreed and said: In these circumstances, it seems to me wrong in principle to set aside, as worthy of no weight, the uncontradicted evidence of the parties as to their common understanding of their legal relationship, even if that evidence cannot be conclusive. The Judge should have considered the Wiebe Door factors in the light of this uncontradicted evidence and asked himself whether, on balance, the facts were consistent with the conclusion that the dancers were self employed, as the parties understood to be the case, or were more consistent with the conclusion that the dancers were employees. Failing to take that approach led the Judge to an incorrect conclusion. 28 The court found that when there is uncontradicted evidence regarding the intention between contracting parties as to the nature of their relationship, that evidence should be regarded alongside the Wiebe Door factors in the characterization analysis. The court described the correct approach when characterizing a worker: if the intention of the parties is uncontested, save by third parties, as in the case at bar, the common-law judge has nevertheless the responsibility to look to see if the terms used and the surrounding circumstances are compatible with what the parties say their contract is. The common-law judge must make sure that what the parties say they have agreed upon is in fact what is contained in the contract they have signed Supra note Ibid, at para Ibid, at para 72.

19 13 The court said that the Wiebe Door factors were generally not inconsistent with the intent of the parties. The majority thus reversed the decision of the TCC below and found the workers were independent contractors. In doing so, the court elevated the role of intent even higher than that done in Tremblay, to the extent that intent could be used as a standard against which the Wiebe Door factors were applied when determining the nature of a worker as either an employee or an independent contractor. Third, on October 24, 2007, the FCA decided B-Pro Grooming v. MNR 30 and said that intention was not determinative but rather an element of consideration in addition to the four objective tests. In B-Pro Grooming, the taxpayer operated a pet-grooming store and hired several workers to assist with the business. The Minister, characterizing the workers as employees, assessed the taxpayer for its failure to remit EI and CPP payments. The taxpayer argued the workers were independent contractors. On appeal, the FCA upheld the reasons of the TCC. In particular, the FCA supported the TCC s determination on intent that the expressed intention of the parties is not determinative of their relationship. 31 The court said that intention was not determinative and that the Wiebe Door factors were to be considered when characterizing a worker. In dismissing the appeal, the FCA demoted the role of intent in the characterization process below that which it was given in Royal Winnipeg Ballet. Fourth, on October 29, 2008, the FCA decided Kilbride v. Her Majesty the Queen 32 and said that the common intention between contracting parties was to be discarded when such intention was not supported by the four objective tests. In Kilbride, the taxpayer worked as a bookkeeper for a company that manufactured heating systems. He tried to deduct business expenses under section 18 of the Act. However, the Minister characterized the taxpayer as an employee and denied the deductions. On appeal to the FCA, the issue was whether the taxpayer was an employee or an independent contractor. Justice Sexton delivered a unanimous judgment dismissing the appeal, FCA 334, (2007) 371 NR Ibid, at para FCA 335, 2009 DTC 5002.

20 14 thus characterizing the worker as an employee. The TCC below found control was inconclusive, but that ownership of tools and financial risk indicated the worker was an employee. The TCC did not apply the integration test, because of its criticism of the test in the jurisprudence, but noted the test indicated the taxpayer was an employee, as well. The TCC found these factors did not reflect the intent of the parties to treat the worker as an independent contractor. The FCA upheld the TCC s reasoning and dismissed the appeal. The FCA said: This is not a close case where the Wiebe Door test is inconclusive, requiring the court to give greater weight to the intention of the parties. Although the trial judge found that the parties may have intended the appellant to be an independent contractor, she concluded that the actual relationship did not reflect that understanding and their subjective intention must be disregarded. 33 The FCA supported the finding that the taxpayer was an employee, denied the expenses, and dismissed the appeal. By doing so, the court demoted the role of intent below that given to it in B-Pro Grooming, stating that the intent between contracting parties was to be discarded if not congruent with the finding upon which the application of the Wiebe Door factors was based. Fifth, on December 14, 2009, the FCA decided D.W. Thomas Holdings v. Canada 34 and said that a worker was to be characterized based on the intention of the parties if such intention was reflected by the factors. In D.W. Thomas, the taxpayer operated a commercial fishing business and hired a worker to assist in its business. The Minister characterized the worker as an employee and assessed the taxpayer for its failure to remit EI and CPP payments. The taxpayer argued the worker was an independent contractor. The TCC found the worker was an employee. The TCC found the intention indicating the worker was an independent contractor was not supported by the Wiebe Door factors. The TCC thus disregarded the intention and characterized the worker based on the factors alone. On appeal, the FCA also found the worker was an employee. The FCA supported the TCC s finding and dismissed the taxpayer s appeal. The court 33 Ibid, at para FCA 371, 2009 CarswellNat 4307.

21 15 further demoted the role of intention in the characterization process to say that the intent between contracting parties will be disregarded if not supported by the Wiebe Door factors. Sixth, on September 22, 2011, the FCA decided TBT Personnel Services Inc. v. MNR. 35 In this case, the FCA went through the characterization process for the workers involved. The court split the workers into two groups based on whether or not they signed an agreement describing the workers as independent contractors. The court said: Such intention clauses are relevant but not conclusive. The Wiebe Door factors must also be considered to determine whether the contractual intention suggested by the intention clauses is consistent with the remaining contractual terms and the manner in which the contractual relationship operated in fact. 36 Therefore, the court applied the Wiebe Door factors to determine if the contractual intent was reflective of the true nature of the working relationship. For the first group, the court found the conclusions drawn from the objective factors contradicted the intention in the agreement. For the second group, the court found no common intention and classified the workers as employees based on the objective factors. In the end, the court found the workers were employees and effectively disregarded the common intention held between the parties. In doing so, the FCA demoted the role of intent to a secondary factor that simply confirmed the true character of a worker determined primarily by the Wiebe Door factors. Since TBT Personnel Services Inc. the courts have grappled with the role of intention when characterizing a worker. 37 There are three possible scenarios for the consideration of intent in the jurisprudence. There is either no evidence of intention presented to the court, conflicting evidence of intention, or evidence of a common intention held between the contracting parties Supra note Ibid, at para Nabeel Peermohamed, The Role of Intent in Characterizing a Worker (2013) 3:1 Canadian Tax Focus. 38 Ibid.

22 16 In cases such as Dean v. MNR, 39 where there is no evidence of intention, or in cases such as A&T Tire & Wheel Limited v. MNR, 40 and Ontario Inc. v. MNR, 41 where there is conflicting evidence of intention, the court characterizes workers as employees or independent contractors based on the Wiebe Door factors alone. 42 In Dean, the taxpayer operated a business, which provided home care services to seniors and hired four caregivers. The Minister characterized the caregivers as employees and assessed the taxpayer for delinquent EI and CPP payments. The taxpayer argued the caregivers were independent contractors. The tax court applied the Wiebe Door factors and found control indicated the caregivers were employees. The court also found ownership of tools and financial risk were neutral factors. The court did not apply the integration test. Lastly, the court turned its mind to intention. The court found the application of the Wiebe Door factors led to the conclusion that the caregivers were employees and thus it was unnecessary to consider the intention of the contracting parties. Also, the court acknowledged the record showed there was no evidence of a common intention between the parties so that intention was not a relevant factor. The court said: In any event, the evidence suggests that there was no common intention between the parties. There is little evidence that the Workers put their mind to the nature of the relationship or that Ms. Dean discussed it with them. The Workers who testified were not sophisticated in business matters and they may not have understood that Ms. Dean was treating them as independent contractors by not taking source deductions. Intention is not a relevant factor in this case. 43 Thus, the court disregarded intention as a relevant factor because there was no evidence of common intention and characterized the workers based on the Wiebe Door factors alone TCC 370, 2012 CarswellNat TCC 150, 2012 CarswellNat TCC 214, 2012 CarswellNat Supra note Supra note 39, at para 28.

23 17 In A&T Tire, the taxpayer operated a small tire sales, installation, and service business. The taxpayer hired five workers who were characterized by the Minister as employees. The Minister further assessed the taxpayers for failure to remit EI and CPP payments. The taxpayer argued the workers were independent contractors. The court analyzed the evidence regarding intent before applying the Wiebe Door factors. There were significant discrepancies in the evidence regarding the intent of the parties. Some workers felt they were employees while others said they agreed to work as independent contractors. There was also evidence that the taxpayer initially hired the workers through a verbal contract and later had the workers sign a written contract after the Minister began an audit of the taxpayer s business. The court relied on TBT Personnel Services and said: The Wiebe Door factors must be applied to determine whether the workers declared intentions, if any, conform to the true nature of their relationship with the employer. Applying these tests, does the evidence show that a particular worker is performing his services in the course of a business conducted for his benefit? 44 Thus, the court relied exclusively upon the Wiebe Door factors, except integration, in its characterization of the workers. The court found control and financial risk indicated the workers were employees, while ownership of tools could be viewed as a neutral factors. Presented with conflicting evidence of intention, the court characterized the workers as employees, relying exclusively on the Wiebe Door factors. In Ontario Inc., the taxpayer manufactured and sold customized wooden signs bearing the names of children. The taxpayer hired a sales agent. The Minister characterized the sales agent as an employee and assessed the taxpayer for its failure to remit EI and CPP payments. The taxpayer argued the sales agent was an independent contractor. The court first analyzed the intention between the parties, and found the taxpayer intended the sales agent to work as an independent contractor, while the sales agent assumed she was an employee. The court thus 44 Supra note 40, at para 25.

24 18 found, the parties did not have a mutual intention as to the nature of the relationship 45 and proceeded to characterize the sales agent based on the Wiebe Door factors alone. The court found control indicated the sales agent was an employee while the other factors were neutral. Therefore, the court found the sales agent was an employee and dismissed the taxpayer s appeal. Thus, in cases where there is conflicting evidence of intention or no evidence of common intention, the courts rely on the Wiebe Door factors when characterizing a worker. However, where there is evidence of a common intent held between the contracting parties, the courts struggle to apply that intent in the characterization process. Between 2011 and 2012, the TCC seems to have applied several of the approaches from the evolution of intent described above in the span of only one year. On October 5, 2011, the TCC in Integrated Automotive Group v. MNR 46 characterized the worker on the four factors alone, as done in Wiebe Door. In Integrated Automotive, the taxpayer operated a marketing business in the automotive industry. The taxpayer hired a project manager. The Minister argued the project manager was an employee and that the taxpayer was liable for EI and CPP payments. The taxpayer argued the project manager was an independent contractor. The evidence supported it was the common intent of the contracting parties that the project manager would provide work as an independent contractor. The issue before the court was whether that intent was reflected in the reality of the working relationship. The court decided that the Wiebe Door factors must be applied first. The court found control and ownership of tools indicated the project manager was an independent contractor and that financial risk was neutral. Since the factors indicated the project manager was an independent contractor, it was unnecessary to consider intent. The court thus characterized the worker based on the objective factors alone, as was done prior to Wolf. 45 Supra note 41, at para TCC 468, 2011 CarswellNat 4048.

25 19 On August 8, 2012 the TCC in Zoltan v. MNR 47 revitalized the tiebreaker approach originally stated in Wolf. In Zoltan, the taxpayer operated an electrical installation and maintenance business, and hired an electrician to assist. The Minister characterized the electrician as an employee and assessed the taxpayer for its failure to remit EI and CPP payments. The taxpayer argued the electrician was an independent contractor. The court decided to analyze intent first and found the contracting intended the electrician to work as an independent contractor. The court then applied the Wiebe Door factors, after which, it said: The parties agreed to an independent contractor relationship at the outset of their relationship. Their intention should be respected unless the application of the Wiebe Door factors shows that the facts are inconsistent with that intention. The control factor points to an independent contractor relationship. The chance of profit/risk of loss criterion is more indicative of an employee-employer relationship. I place greater weight on intention and on the control factor. 48 Therefore, the court found the objective factors resulted in a tie, but in an effort to respect the intent of the contracting parties, placed more weight on the control factor, which led to a decision congruent with that intent. The court thus characterized the electrician as an independent contractor. On October 19, 2012, the TCC in North Delta Real Hot Yoga v. MNR 49 based the characterization of the worker on the objective factors alone and found that the intent between the contracting parties did not reflect the reality of their relationship, as was done in Kilbride. In North Delta, the taxpayer operated a yoga studio and hired a worker. The Minister characterized the worker as an employee and assessed the taxpayer for delinquent EI and CPP payments. The taxpayer argued the worker was an independent contractor. The court turned its mind to the Wiebe Door factors first. The court found control indicated the worker was an employee while TCC 286, 100 C.C.E.L. (3d) 218, 2012 CarswellNat Ibid, at para TCC 369, 2012 CarswellNat 4036.

26 20 the other factors were neutral. The court then found the intent of the parties was not consistent with this finding. The court said: The actual dealings between the parties, however, were not consistent with an independent contractor relationship. If parties wish to have an independent contractor relationship respected for purposes of the Employment Insurance Act and the Canada Pension Plan, their actions need to be consistent with their intent. Unfortunately for the appellant in this case, the evidence as a whole suggests that the parties did not act in a manner consistent with an independent contractor relationship. 50 Therefore, the court found the intent between the taxpayer and the worker did not reflect the reality of their relationship, and thus characterized the worker on the factors alone. A review of these recent cases demonstrates that the introduction of intent into the characterization process has given rise to several varied approaches to characterizing a worker, which has resulted in several inconsistent characterization approaches prescribed by the FCA. 5 The Inconsistency caused by Intent The problem with the introduction of intent into the characterization process is that over the last decade, the courts treatment of intention has varied significantly creating substantial uncertainty in tax litigation for both taxpayers and the tax authorities. The court s frustration with the varied approaches prescribed in previous FCA decisions was evident in Lang. 51 After a review of the relevant jurisprudence, Chief Justice Bowman of the TCC (as he then was) expressed his frustration with the FCA s inconsistent approach to the characterization process. The court summarized the four approaches observed over time. The first approach observed was that intention is irrelevant to the characterization process, as done in Wiebe Door. The second approach observed was that intention served as a tiebreaker, as done in Wolf. The third approach observed was that intention was determinative, as done in Royal Winnipeg Ballet. The final 50 Ibid, at para Supra, note 21.

27 21 approach observed was that the weight to be placed on intention depended on the circumstances. Fortunately, all four approaches yielded the same result in Lang so the Chief Justice did not have to decide among the four. However, his expressed frustration with the emergence of four approaches from the FCA struggling to place common intention alongside the four objective factors in the characterization process is reflective of the litigation uncertainty caused by the introduction of intent. The magnitude of the impact of intent on the characterization process can be determined through an empirical study.

28 22 Part 3 The Study 1 Inspiration from the Wintermute Study In his study, Wintermute 52 conducted a trend analysis between 2000 and 2007 regarding the role of intent in the characterization process. He took a random sample of 40 cases in each of the four periods he studied: , , , and He characterized each case based on whether the decision made reference to a common intention held by the contracting parties and on the ultimate decision reached. 54 He found that after Royal Winnipeg Ballet was decided, the courts reliance on contractual intent increased significantly. 2 Extrapolating Wintermute to the Present If Wintermute s study were extrapolated to analyze the present case law from the TCC and FCA, we find a marked emphasis on intent after Royal Winnipeg Ballet and a significant de-emphasis on intent placed afterwards. Following Wintermute, I selected a random sample of 40 cases in each of eight periods demarked by the landmark cases from the FCA described above. I analyzed each case based on the previous ruling, the ultimate decision, and reference to a common intention between the contracting parties. However, I also analyzed the cases for incidents where the factors and common intent pointed in opposite directions. In such cases, I recorded whether the factors or common intent prevailed. 52 Kurt G Wintermute, A Worker s Status as Employee or Independent Contractor: Recent Case Law, Trends, and Planning, Report of Proceedings of Fifty-Ninth Tax Conference, 2007 Tax Conference (2008) 34:1. 53 Ibid, page Ibid.

29 23 Table 1: Findings based on Common Intent Era Common Intent of Independent Contractor Found and Independent Contractor Found Common Intent of Independent Contractor Found and Employee Found January 1, 2000 to March 15, 2002 (Wolf) 50% 50% March 16, 2002 to May 3, 2004 (Tremblay) 73% 27% May 4, 2004 to March 2, 2006 (Royal Winnipeg Ballet) 71% 29% March 3, 2006 to October 24, 2007 (B-Pro Grooming) 86% 14% October 25, 2007 to October 29, 2008 (Kilbride) 57% 43% October 30, 2008 to December 14, 2009 (D.W. Thomas) 53% 47% December 15, 2009 to September 22, 2011 (TBT) 65% 35% September 23, 2011 to December 31, 2012 (Present) 50% 50% As seen from Table 1, prior to Wolf and the introduction of intention as a consideration in the characterization process, whether a common intent was found or not made no difference to the court the court was 50% likely to characterize a worker as an independent contractor and 50% likely to characterize a worker as an employee. Over the years however, that trend grew significantly one-sided up to March 2, This makes sense because Tremblay said common intention could be implemented into the four-factor test and specifically deployed common intention into the integration test. As seen from the review of the case law above, taxpayers generally argue their intention to treat their workers as independent contractors to avoid EI and CPP payments. A melding of intention and the four factors explains the increased likelihood for a court to find in favor of that intention. The next period shows an even greater likelihood of the court to find in favor of a common intent. After Royal Winnipeg Ballet, which said a common intention was determinative of the characterization of a worker, the trend shows the courts were 86% likely to find in favor of the intention held between contracting parties. Subsequent courts then started to apply Royal Winnipeg Ballet as a standard to assess the degree of factors indicating an employment relationship.