EMPLOYEE vs. INDEPENDENT CONTRACTOR CONSIDERATIONS

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1 EMPLOYEE vs. INDEPENDENT CONTRACTOR CONSIDERATIONS This issue of the Legal Business Report provides current information to the clients of Alpert Law Firm on the rules relating to the tax treatment of independent contractors. Alpert Law Firm is experienced in providing legal services to its clients in tax dispute resolution and tax litigation, tax and estate planning matters, corporate-commercial transactions and estate administration. Howard Alpert has been certified by the Law Society as a Specialist in Estates and Trusts Law, and also as a Specialist in Corporate and Commercial Law. A. EMPLOYEE vs. INDEPENDENT CONTRACTOR The issue of whether an individual is an employee of a business or whether the individual is an independent contractor performing services for the business is an important distinction for tax purposes for both parties. The Income Tax Act permits independent contractors to deduct business expenses from their taxable income whereas there are strict limitations on the deductions that are available to employees. On the other hand, an employer may be required to make contributions for its employees under the Canada Pension Plan. The employer may also be required to remit premiums under the Employment Insurance Act. Neither of these requirements would apply to a relationship between an independent contractor and its client. These are some of the reasons that many businesses and the individuals working for them strive to characterize their relationship as that of client and independent contractor. B. RECENT CASELAW 1. Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025 This decision of the Federal Court of Appeal is the leading tax case for characterizing the relationship between a business and workers. Although the ultimate determination is based on the total relationship between the parties this decision LEGAL BUSINESS REPORT / FEBRUARY

2 confirmed that the following four factors should be considered: (i) control test; (ii) ownership of tools; (iii) chance of profit; and (iv) risk of loss Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] S.C.J. No. 61 This Supreme Court of Canada case dealt with vicarious liability where the key issue was the determination of whether an individual is an employee or an independent contractor. The Court stated that a worker is an independent contractor when they are engaged to perform services as a person in business on their own account. The Supreme Court adopted the test from Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025 confirming that each of the four factors listed in Wiebe Door should be considered although they may not all have the same weight in all cases. The Supreme Court considered additional factors such as whether the workers provided their own equipment, whether they hired their own helpers, the degree of financial risk taken by the workers, the degree of responsibility for investment and management held by the workers, and the workers' opportunity for profit. In this case, the Supreme Court found the workers were independent contractors. The Court noted that the worker was free to contract with other parties, controlled its own allocation of resources, and had an opportunity for profit or loss based on its commission. 3. The Royal Winnipeg Ballet v. The Minister of National Revenue, 2006 DTC 6323 In this case, the Federal Court of Appeal held that the dancers engaged by the taxpayer were independent contractors rather than employees, overturning a decision of the Tax Court of Canada. The dancers were engaged for limited periods within a season. The taxpayer exercised a significant amount of control over the dancers, since the dancers were not free to dance their assigned roles in a manner that departed from the choreography or the vision of the artistic director. The Tax Court had found that the dancers were employees based on these and other factors from Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025, and Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] S.C.J. No. 61. The Federal Court of Appeal held that the Tax Court erred in not considering the parties' common understanding that the dancers were independent contractors. In this LEGAL BUSINESS REPORT / FEBRUARY

3 case, this understanding was present in the contractual agreements between the parties and all the factors considered in their entirety were consistent with this mutual understanding. As well, the dancers charged GST for their services and the taxpayer did not withhold any tax from their remuneration except at a dancer's request. Therefore, the Court found that the dancers were not employees of the Royal Winnipeg Ballet Tation Event Catering Inc v. The Minister of National Revenue, 2008 TCC 562 A large catering business, which was represented by Alpert Law Firm, engaged 91 workers as freelance servers, chefs and bartenders. The Minister decided that the workers were employees and assessed the taxpayer for arrears of contributions under the Canada Pension Plan and premiums under the Employment Insurance Act. The catering business appealed to the Tax Court of Canada on the grounds that all of the workers were independent contractors. The Tax Court of Canada allowed the catering business' appeal on the basis that all of the workers were independent contractors. The Tax Court examined the four factors listed in Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025: control, ownership of tools, chance of profit and risk of loss. In examining the control factor, the Tax Court noted that all of the workers were experienced individuals who were not trained by the business. These workers were not supervised in the performance of their duties. They were assigned their duties by one of the workers designated as a "supervisor," but they were not told how to do the work. The workers were understood to provide their own tools, such as clothing, lighters, pins, corkscrews, and bar kits, even though some large tools, such as ovens were provided by the taxpayer. The workers had a chance of profit and a risk of loss since they were free to turn down any given assignment and negotiate their hourly rates. As well, the intention of the parties as evidenced by the agreement was that the parties were independent contractors. The Tax Court found that all four factors indicated that the workers were independent contractors. 5. Salcross Industries Ltd. v. Canada, [1996] T.C.J. No In this Tax Court of Canada decision, the taxpayer was a commercial janitorial cleaning company which sometimes used its salaried cleaners to do the work and LEGAL BUSINESS REPORT / FEBRUARY

4 sometimes subcontracted the work to other cleaners. The issue under appeal was whether the subcontracted cleaners were employees or independent contractors. The Tax Court allowed the appeal holding that the workers were independent contractors. Whenever work was contracted out the taxpayer required the subcontractor to sign a standard form of contract which stated that the relationship between the taxpayer company and the subcontractor was that of independent contractors, and that the subcontractor was solely responsible for compliance with legal obligations such as payment of taxes. The taxpayer also required the subcontractors to register under the Business Names Act. The Tax Court confirmed that this clause and the registration were good indication of the wishes of the parties, although not conclusive. The workers were not subject to the company's control as to the manner in which they did the work. The workers were free to determine their own time of work though the clients occasionally dictated the time at which the work was to be done for security reasons. Only infrequent inspections were carried out by the company's staff. The taxpayer did not provide any training to the contractors. It did not provide any employee benefits to the contract cleaners while it had a benefit plan for its employed workers. The workers could hire other people to do the work. They were also free to work elsewhere in addition to these cleaning contracts and often did so. For these reasons, the Tax Court held that the subcontracting cleaners were independent contractors. 6. TBT Personnel Services Inc. v. The Minister of National Revenue, 2011 FCA 256 In this case, the Federal Court of Appeal held that truck drivers engaged by the taxpayer were employees, overturning a decision of the Tax Court of Canada. The taxpayer was a Canadian corporation in the trucking service business. The taxpayer explained that in a typical trucking business arrangement, a trucking business would contract with the taxpayer to provide a trucking service. In turn, the taxpayer would enter into a subcontract with a driver for the provision of the trucking service. The taxpayer engaged 96 truck drivers (the workers ).The Tax Court found that 43 of those workers, who were incorporated, were independent contractors, and the other 53 workers were employees. The taxpayer appealed, and the Minister cross-appealed. The Federal Court found that the Tax Court had misapprehended the facts, and that only four of the workers were incorporated. Of the 96 total workers, 43 had entered into written contracts with the taxpayer, and 53 had not. The Crown conceded that the LEGAL BUSINESS REPORT / FEBRUARY

5 four incorporated workers were independent contractors, but argued that the remaining 92 workers were employees. The Court applied the factors in Wiebe Door and Sagaz. The Court found that although the taxpayer did not directly supervise the workers, they were highly skilled professionals who would need little supervision. Thus, the control factor was neutral. Since the workers did not provide their own trucks, the ownership of equipment factor favoured the conclusion that the workers were employees. The financial risk factor favoured employee status, as the workers bore no financial risk. The degree of responsibility for investment and management factor also favoured employee status, as the workers bore no management responsibility. The opportunity for profit factor also favoured employee status, as the workers could not negotiate their rates of pay. The Court also noted that although the drivers were permitted to hire substitutes, there was no evidence that any driver did so. Thus, the court held that this factor should be given little weight. On the balance, the Court held that all workers were employees, with the exception of the four incorporated workers, regardless of the intention clauses in the agreements signed. The Supreme Court of Canada dismissed the taxpayer's application for leave to appeal the Federal Court of Appeal's decision. 7. Pro-Pharma Contract Selling Services Ltd. v. The Minister of National Revenue, 2012 TCC 60 In this case, the Tax Court of Canada considered whether medical sales representatives were employees or independent contractors. The taxpayer company contracted with clients, which were multinational pharmaceutical companies. The representatives visited doctors to introduce and explain and promote the clients' pharmaceutical products, using samples, brochures and research data provided by the clients. They were able to set their own hours and negotiate remuneration with the taxpayer, and provided their own vehicles. They were also paid for each appointment rather than an hourly wage, and thus had a chance of profit if they worked efficiently. Applying the factors from Wiebe Door and Sagaz, the Court determined that all of the factors supported the conclusion that the representatives were independent contractors. They were monitored only once a month, and not directly supervised, and their tools were supplied either by themselves or by the pharmaceutical companies. They had a chance of profit and a risk of loss. In addition, the parties expressed a clear intention in their contracts that the representatives would be independent contractors. LEGAL BUSINESS REPORT / FEBRUARY

6 Finally, the Court considered whether the taxpayer company placed the representatives under the control of its clients, the pharmaceutical companies, and found that the clients only coached the representatives in how to encourage doctors to prescribe the clients' products, and did not supervise them. 8. Ronald S. Craigmyle v. The Minister of National Revenue, 2011 TCC 128 In this case, a certified driving instructor worked for the taxpayer, who operated a driving school. The instructor was offered the option of working as an independent contractor or employee, but agreed to work as an independent contractor. The parties signed a contract that stated that the instructor was a contractor. After the instructor was terminated, she approached the Canada Revenue Agency and indicated that she had been an employee. The Minister determined that the instructor was an employee, and the taxpayer appealed. The Tax Court of Canada applied the factors in Wiebe Door and Sagaz, and determined that the balance of the factors favoured the conclusion that the instructor was an independent contractor. The taxpayer exercised little control over the instructor, as she scheduled lessons herself, determined her own hours, and the taxpayer only provided guidance. Although the taxpayer provided the specialized driving vehicle used by the instructor, the Court held that this factor was not significant in this context, and noted that the instructor had her own computer, office and cell phone. The Court also found that the instructor had a chance for profit and a risk of loss, but appeared to combine these factors into one. The Court noted that if a student did not attend a lesson, the instructor bore the financial loss. Thus, the Court held that all the factors, combined with the parties' clear intention expressed in the contract, indicated that the instructor was an independent contractor. 9. Vijay Mehta v. The Minister of National Revenue, 2011 TCC 558 In this case, the Tax Court of Canada considered whether a medical diagnostic imaging technician was an employee or an independent contractor. The taxpayer operated a number of health care clinics providing diagnostic imaging services. The technician's hours could vary but were confined to the clinic's hours of operation. He submitted timesheets, and was paid an hourly wage on a bi-weekly basis, and was permitted to hire helpers but only the taxpayer was permitted to hire a substitute for the technician. The taxpayer provided the premises as well as all diagnostic tools and supplies at no cost to the technician. The parties' contract referred to the technician's status as a contractor. LEGAL BUSINESS REPORT / FEBRUARY

7 The Court determined that the control factor was neutral, since the technician was a highly skilled professional with specialized knowledge, who would require very little supervision. The ownership of tools factor favoured the conclusion that the technician was an employee, since he did not provide any tools. The Court found that although the technician's skills and expertise may have brought patients to the clinic, the taxpayer had the ultimate chance of profit, and the technician could only request a higher hourly wage. Thus, the chance of profit factor favoured employee status. The technician also assumed no risk of loss, and had no right to hire a replacement. The Court held that the balance of the factors indicated that the technician was an employee. 10. Brenda Nightingale v. Her Majesty the Queen, 2012 TCC 218 In this Tax Court of Canada case, the Court determined that a bookkeeper engaged by the taxpayer was an employee. The bookkeeper was initially hired as an employee and requested an increase in salary. The taxpayer granted this on the condition that her employment status change from employee to independent contractor. The bookkeeper believed that she had to accept this change to keep her job. The Court determined that the taxpayer had a high degree of control over the bookkeeper, assigning her tasks with deadlines on a daily basis, and requiring her to report to him daily. Thus, the control factor favoured employee status. The ownership of tools factor also favoured the conclusion that she was an employee, since she worked from the taxpayer's premises and used his equipment. The chance of profit and risk of loss factor was neutral, since she had no maximum number of hours and could thus work more hours and earn more profit, but she bore no financial risk. The Court also noted that she did not have the ability to subcontract or hire assistants, which suggested that she was an employee. The Court also considered the integration of the bookkeeper into the taxpayer's business, and found that her services were an integral part of the business. Finally, the Court noted that the parties did not have a common intention. Although the taxpayer intended that the bookkeeper should be self-employed, she intended to be an employee, and only signed the contract that stated that she was an independent contractor because she believed she was required to do so in order to keep her job and to get a pay increase. Thus, the Court held that the balance of the factors showed that the bookkeeper was an employee. LEGAL BUSINESS REPORT / FEBRUARY

8 11. Surinder Hayer v. Her Majesty the Queen, 2012 TCC 392 In this case, the Tax Court of Canada determined that taxi drivers engaged by the taxpayer were employees. The taxpayer merged with another taxi company, Kelowna, which provided dispatch services to the taxpayer. Kelowna was able to track each driver s route, speed, and earnings. The taxpayer exercised control over the drivers schedules, and in some situations the geographical areas in which they could work. The taxpayer also supplied the vehicles, GPS systems, record-keeping sheets and fuel, although the drivers used their personal cell phones in connection with their work. Although the taxpayer considered the drivers to be independent contractors, a driver testified that he considered himself to be an employee. The Tax Court found that since the drivers and the taxpayer did not have a shared intention with regards to whether the drivers were employees or independent contractors, this was a neutral factor. Applying the Wiebe Door factors, the Tax Court found that the taxpayer exercised significant control over the drivers with regards to scheduling and areas, as well as the computer tracking system, so the control factor weighed in favor of a finding that the drivers were employees. In addition, since almost all of the tools were provided by the taxpayer, and the drivers had no opportunity for profit or loss, those factors also indicated an employee-employer relationship. The Tax Court noted that although other similar cases had found that taxi drivers were independent contractors, those cases were distinguishable. They involved either a common intention with regards to the employment relationship, a factor the Court gave considerable weight to, or that in the particular business in question, the drivers exercised much greater control over their shifts and were not instructed where to drive. C. PLANNING In order to assess the true relationship between worker and payer, the courts place emphasis on the intention of the parties which is determined from the terms of the contract and the performance of the contract. In A Worker's Status as Employee or Independent Contractor: Recent Case Law, Trends and Planning, Kurt G. Wintermute explains that the common intention of the parties is often a determinative factor in assessing a worker's status as an employee or an independent contractor (page 34:20). In order to reinforce a worker's status as an independent contractor the following factors should be given consideration: LEGAL BUSINESS REPORT / FEBRUARY

9 (1) Control In a contract of service (i.e. employment relationship), the employer has the right to direct not only what must be done but also how the work is to be done or the worker's performance. Control over the result and the quality of work does not necessarily constitute control over performance. Specifically, a payer may monitor an independent contractor which is not to be confused with an employer who controls an employee's performance. For example, a payer may control an independent contractor over such matters as the premises and specific places of work, materials that are required, and time and work schedules. (2) Chance of Profit/Risk of Loss The chance of profit and risk of loss are always considered from the worker's perspective. A worker who is an independent contractor should demonstrate a greater potential to profit from the engagement but should also bear an increased risk. For instance, if the worker is able to negotiate the terms of a contract or to accept or decline a job, it is an indication of an increased chance of profit and risk of loss for the worker. (3) Ownership of Tools If the workers provide their own tools that are reasonably required for the performance of their tasks it is indicative that workers are independent contractors even if special tools are provided by the payer. This issue of the Legal Business Report is designed to provide information of a general nature only and is not intended to provide professional legal advice. The information contained in this Legal Business Report should not be acted upon without further consultation with professional advisers. Please contact Howard Alpert directly at (416) if you require assistance with tax and estate planning matters, tax dispute resolution, tax litigation, corporate-commercial transactions or estate administration. No part of this publication may be reproduced by any means without the prior written permission of Alpert Law Firm Alpert Law Firm. All rights reserved. LEGAL BUSINESS REPORT / FEBRUARY