Ontario Real Estate Association v MNR, 2014 TCC 190
Canadian Tax Haiku of the week:
Am I Contractor?
Or Employee? If unsure
Just follow the test
Introduction
A trend emerging within the Canadian workforce has been the increase of out-sourcing and short-term contracts. This has been the source of much litigation at the Tax Court of Canada (“TCC”) due to the legal distinction between an “employee” and an “independent contractor”.[1] Employment status directly affects a taxpayer’s entitlement to employment insurance benefits under the Employment Insurance Act[2] and has a considerable impact on how the taxpayer is treated under the Canada Pension Plan,[3] the Income Tax Act,[4] and various other legislative provisions.[5]
The TCC, had jurisdiction over these matters until a new specialized EI/CPP/OAS tribunal began hearing cases as of April 3, 2013[6]. In one of what is likely one its last decisions with respect to these issues[7], the TCC recently dealt with this important issue in Ontario Real Estate Association.[8]
Facts
The Ontario Real Estate Association (“OREA”) provides registration courses for real estate professionals in Ontario on behalf of the Real Estate Council of Ontario. OREA engages workers, designated as Test Centre Operators (“TCOs”), to operate the various test centres across the province. The TCOs may obtain the services of Assistant Test Centre Operators (“ATCOs”) to assist with operating the test centres.
After an audit, the CRA took the position that TCOs and ACTOs (“the workers”) were employees, not independent contractors, and were engaged in pensionable employment with OREA on the basis that they were engaged under a contract of service within the meaning of paragraph 6(1)(a) of the CPP and paragraph 5(1)(a) of the EI.
This led to assessing a total of 99 instructors TCOs, and ATCOs for the CPP and the EI, including interest and penalties against OREA, for the 2008 through the 2010 taxation years.
Issue
The issue in this appeal was whether the workers engaged by OREA were independent contractors or employed in pensionable employment with OREA under a contract for services for the purposes of the CPP and the EI.
Common Law Test
The Federal Court of Appeal (“FCA”) has established a two-step test to determine whether the employment relationship is that of employer-employee or independent contractor.[9]
Step 1: The subjective element
Any analysis of whether a worker is an employee or an independent contractor for purposes of the CPP and the EI must first consider whether there is a mutual understanding or common intention between the parties regarding their relationship.[10] Under the first step of this test, the subjective intent of each party to the relationship must be ascertained.[11]
The common intention of the parties, if it can be determined, is a very important aspect of determining the nature of the employment relationship.[12] This can be determined either by the written contractual relationship the parties have entered into or by the actual behaviour of each party, such as invoices for services rendered, registration for GST purposes and income tax filings as an independent contractor.[13]
Step 2: The objective reality
Where such a common intention is found, be it as independent contractor or employee, the second step is to establish whether an “objective reality” sustains the subjective intent of the parties.[14] The test set out in Wiebe[15] is applied by considering the relevant factors in light of that mutual intent for the purpose of determining if the relevant factors support and are consistent with the common intent.[16]
The parties’ intention as well as the terms of the contract may also be taken into account since they color the relationship.[17] This involves “examining the whole of the various elements which constitute the relationship between the parties.”[18] This four-part test in Wiebe involves the consideration of: (1) control; (2) ownership of tools; (3) chance of profit; and (4) risk of loss.[19]
In determining if a worker is an employee or an independent contractor, the court is required to combine and integrate these four factors in order to seek out the meaning of the whole transaction.[20] However, these factors constitute a non-exhaustive list, and there is no set formula as to their application. The relative weight of each will depend on the particular facts and circumstances of the case.[21]
The TCC also noted that the subjective intent of the parties cannot trump the reality of the relationship as ascertained through objective facts.[22]
Judgement
Of the factors considered, Justice Masse stated that i) the parties’ common intention; and ii) control and subordination were very important to the analysis of whether or not the workers were performing services as their own business or on their own account. Justice Masse also stated that equipment and tools, investment and management, and integration into OREAs operation were of little importance to this analysis.[23]
The Parties’ Common Intention
The TCC found that OREA and the workers mutually intended and understood that the workers were engaged as independent contractors and not as employees of OREA. The TCOs and the ATCOs did not have any written or oral employment agreements with OREA. Two TCOs testified that they always regarded themselves as being independent contractors and not employees, and the director of the OREA Real Estate College also testified that he never intended to hire TCOs or ATCOs as other than independent contractors.[24]
Control and Subordination
A consideration of this factor indicated that the workers were independent contractors. The TCC held that OREA exercised little control over the workers so long as the integrity of the examination process was respected. No one from OREA ever exercised any control over the manner in which the workers performed their work at the test centres.[25]
The Hiring of Helpers
This factor indicated that the workers were independent contractors. The TCOs had full discretion to hire assistants to help in with the administration of the exams from a pool of ATCOs without any interference from OREA.[26]
Conclusion
Justice Masse concluded that the workers in this case were independent contractors and were not employees of OREA. None of the TCOs or ATCOs were engaged in pensionable employment while engaged by OREA during the period under consideration.[27] The key facts in this case were that the TCOs were given a specific task to do on a very occasional basis (maintain integrity of the exams), and were not supervised in the execution of this task and were free to chose their own helpers.
This was one of the few cases in which the organization/employer won. Very often, based on a non-scientific survey of the EI/CPP cases out of the TCC in recent years, have shown that the supposed contractors were usually employees subject to income tax withholding, CPP and EI.
Granted, the parties almost always have an initial mutual intent to engage in a contractor arrangement, because it is cheaper for the “employer” to have contractors and opens up the potential for the “contractors” to deduct a lot of expenses as the cost of doing business, which would otherwise not be available if they were an employee. Then as was the case in OREA, the company gets audited and the CRA goes after the company for failure to withhold, or just as often one of the contractors gets fired or gets sick or hurt or wants to retire, and then, all of a sudden they realize that being a contrctor means they get nothing in terms of benefits, and so want to have been considered to have been an employee so they can get their EI/CPP etc.
But why does the “employee” usually win? Because on the facts, the so-called contractors are usually employees, that’s why. Take for example a situation common in the software industry that I was asked to review a while back (facts changed to protect the innocent and the guilty): a contractor in the computer software business supervised a team of other contractors, all of whom were contracted by the company, and the “lead contractor” had no control over who was on her team. The contractors all used company-provided computers and software tools, and were all paid, including the “lead contractor”, every two weeks regardless of whether their assigned projects were completed or not. The “lead contractor” had to report on the progress of the projects on a routine basis to the company, and held meetings about that process with the company weekly or more often, at the company’s request. The lead contractor provided her own phone, and worked a lot of irregular hours often from home or remotely, but that had zero impact on her take-home pay every month. The lead contractor also routinely met with and kept track of the progress of all the other “contractors”. She had incorporated, and filed HST returns on her income. In my view, the facts just weighed too heavily in favour of an employee relationship; she was more of a middle manager than a contractor. Certainly none of her team, who were much more closely supervised, would be contractors. Unlike the OREA decision, the “control and subordination” and “hiring of helpers”, and “tools and equipment” factors all went the wrong way. But more importantly, again unlike the OREA case, the work was steady, and she was regularly paid like an employee; without any “opportunity for profit” by being more or less efficient. And the fact that “everybody does it this way”, just like the fact that she was incorporated and paying HST, is more or less irrelevant.
The take away from this case and the more typical example cited above, is that if companies and their contractors want the TCC to respect their arrangements, they have to walk the walk as well as talk the talk. This means that contractors have to be paid for per projects on a flat fee, so that they can increase or decrease their profit based on efficiency. Contractors decide who works for them, and provide all of their own tools and equipment. Contractors determine their own hours, come and go as they please and are judged entirely on outcomes and results, not hours put in. If a company is not willing to allow someone to work on that basis, then they are probably hiring an employee regardless of wether the parties want to be in that relationship or not.
by Jonathan N. Garbutt, Barrister & Solicitor, and Raminder Pandher, Student-at-law
[1] 1392644 Ontario Inc (Connor Homes) v Canada (National Revenue), 2013 FCA 85 at para 24 [Connor Homes].
[2] Employment Insurance Act, SC 1996, c 23 [EI].
[3] Canada Pension Plan, RSC 1985, c C-8 [CPP].
[4] Income Tax Act, RSC 1985, c 1 (5th Supp) [the Act].
[5] Connor Homes, supra note 1 at para 24.
[6] See http://www.canada.ca/en/sst/ for information about the new Social Security Tribunal (SST), which will take over EI, CPP and OAS cases from the TCC.
[7] TCC case law is likely to have a significant impact on the decision-making of the new tribunal, so it is not a situation where new tribunal will mean a change in the law. But we will be watching the new SST tribunal closely for developments.
[8] Ontario Real Estate Association v MNR, 2014 TCC 190 [Ontario Real Estate Association].
[9] Wolf v R, 2002 FCA 96 [Wolf] and Royal Winnipeg Ballet v MNR, 2006 FCA 492 [Royal Winnipeg Ballet].
[10] Royal Winnipeg Ballet, supra note 7.
[11] Connor Homes, supra note 1 at para 39.
[12] Ontario Real Estate Association, supra note 6 at para 41.
[13] Connor Homes, supra note 1 at para 39.
[14] TBT Personnel Services Inc v MNR, 2011 FCA 256 at para, 9
[15] Wiebe Door Services Ltd. v. M.N.R., [1986] 2 C.T.C. 200 (F.C.A.) [Wiebe].
[16] Royal Winnipeg Ballet, supra note 7.
[17] TBT Personnel Services Inc. v. Minister of National Revenue, 2011 FCA 256 at para 9.
[18] Ontario Real Estate Association, supra note 6 at para 39.
[19] Wiebe, supra note 13.
[20] Ibid.
[21] 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 at para 48 [Sagaz].
[22] Connor Homes, supra note 1.
[23] Ontario Real Estate Association, supra note 6.
[24] Ibid at paras 44-46
[25] Ibid at paras 47-51.
[26] Ibid at paras 55-56.
[27] Ibid at paras 63 and 64.