Tax Court of Canada Judgments

Date: 19990907

Dockets: 98-433-UI; 98-71-CPP

BETWEEN:

H.J. JONES-SONS LIMITED,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Taylor, D.J.T.C.C.

[1] These are appeals heard in London, Ontario, on July 12, 1999 against a decision made by the Respondent under the Employment Insurance Act (the "Act") and the Canada Pension Plan (the "Plan") that the John DeBoer, the Worker, was employed under a contract of service by the Appellant – H.J. Jones - Sons Limited (Jones) during the period January 1, 1997 to October 27, 1997.

[2] The Notice of Appeal contains the following Statement of Facts:

"John DeBoer works as a management consultant providing the appellant with quality management advice through J & D Quality Systems, a business he operates in partnership with his wife. He provides similar services to competitors in the local market.

J & D Quality Systems operates under Revenue Canada Business Account #R13667567.

John DeBoer works from the offices of J & D Quality Systems. He determines his own work methods and hours of work. He controls and manages each assignment and J & D Quality Systems supplies all his equipment and stationery.

John DeBoer has control over the management of his business including who he hires and who he performs work for. The business has the potential to grow regardless of the fortunes of H.J. Jones-Sons Limited.

On August 11, 1997, a Revenue Canada Rulings Officer, ruled that Revenue Canada was of the opinion the (sic) John DeBoer is an employee of H.J. Jones-Sons Limited because he is employed under a contract of service. Reasons for the decision were not provided at that time, although subsequently the Rulings Officer stated that the decision was based on court decisions in Wiebe Door Services Ltd. and Montreal Locomotive.

On appeal, the Assistant Director, Appeals Division, provided a letter dated February 4, 1998, stating that John DeBoer was employed under a contract of service and is therefore considered to have been in an employer/employee relationship with H.J. Jones-Sons Limited. Reasons for the decision were not provided.

Reasons which the Appellant Intends to Submit

We have been informed by Dale Baskett that the Revenue Canada decision was based on the court decisions in Wiebe Door Services Ltd. and Montreal Locomotive. We respectfully submit that the principles enunciated in those cases have either been misinterpreted or misapplied to the particular facts of this case. Mr. DeBoer is operating under a contract for services, not of service.

The Federal Court of Appeal in Wiebe Door Services described the test as a "four-in-one" test with emphasis always retained on the "combined force of the whole scheme of operations". The four criteria are: control, ownership of tools etc., risk of opportunity for profit or loss, and "integration".

Control:

The control test was described in the cases as "the difference between the relations of master and servant and of principal and agent is this: - A principal has the right to direct what the agent has to do; but a master has not only that right, but also the right to say how it is to be done".

Mr. DeBoer operates as J & D Quality Systems. He provides H.J. Jones-Sons and other clients with advice. Mr. DeBoer has control of the manner in which he completes his work. H.J. Jones-Sons has no control over how Mr. DeBoer's work is to be done.

It should be pointed out that, while the contract is for Mr. DeBoer's expert advice, he is free to hire whomever he may choose to fulfil any clerical, administrative or other function within his business. Such employment expenses would be Mr. DeBoer's alone.

The "Control" test indicates a contract for service.

Ownership of Tools:

Mr. DeBoer works from his own premises. He supplies all of the stationery and equipment he uses. Mr. DeBoer's primary tool is his intellectual property, i.e. his expertise in quality management. H.J. Jones-Sons has no ownership interest in any of Mr. DeBoer's tools.

The "Ownership of Tools" test indicates a contract for service.

Risk and Opportunity for Profit or Loss:

The contract guarantees $300 per week (a minimum of 10 hours at $30/hour) for maintaining the Quality Management System, regardless of time actually spent. If Mr. DeBoer could adequately maintain the system in less time, he would profit by his efficiency.

Mr. DeBoer has held himself out as an expert in his field. H.J. Jones-Sons relies on his expertise and advice. Should Mr. DeBoer negligently advise H.J. Jones-Sons and they rely on that advice to their detriment, he would be at risk for damages due to negligent misrepresentation.

The "Risk and Opportunity for Profit or Loss" test indicates a contract for service.

Integration:

Also called the "organization test", it is a test to establish the existence of economic dependence of the alleged employee. According to the decision in Wiebe Door, the integration test must be applied from the persona of the alleged employee. If the business of the alleged employee is totally integrated with the operations of a particular customer, there is an indication that he actually is an employee, i.e. "whose business is it?".

The business, J & D Quality Systems, is Mr. DeBoer's and his wife's. J & D Quality Systems is economically independent from H.J. Jones-Sons. His business has other clients and has the potential for growth regardless of the fortunes of H.J. Jones-Sons. If H.J. Jones-Sons ceased operation tomorrow, J & D Quality Systems would continue to operate, minus one customer. Mr. DeBoer's business is not totally integrated with that of H.J. Jones-Sons.

The "Integration" test indicates a contract for services.

Conclusion:

The "four in one" test does not require that each criterion indicate a contract for services. Rather each criterion is looked at in combination with the other criteria in order to ascertain the entire scheme of operations. In this particular case every test indicates a contract for services. The entire scheme then clearly shows that the contract between H.J. Jones-Sons and Mr. DeBoer is a contract for services and not of services. Mr. DeBoer is not an employee."

[3] For the Respondent the situation was represented in the Reply to the Notice of Appeal as:

"He admits the fact stated in the Notice of Appeal that the Appellant was notified by letter dated August 11, 1997, that it was ruled that John DeBoer (the "Worker") is the Appellant's employee for purposes of the Canada Pension Plan (the "Plan") and the Employment Insurance Act (the "Act") and further states that the said letter speaks for itself.

He admits the fact stated in the Notice of Appeal that the Appellant was notified by letter dated February 4, 1998, that it was decided that Canada Pension Plan contributions and employment insurance premiums were payable on the earnings paid to the Worker by the Appellant for the period from January 1, 1997 to October 27, 1997 and further states that the said letter speaks for itself.

He admits the fact stated in the Notice of Appeal that J & D. Quality Systems is a partnership business which was registered in 1993 to the Worker and his wife, Dolores DeBoer, and further states that it was operated by them at the same time but separate from the Worker's engagement by the Appellant on a full-time basis in 1995 and 1996 and on a part-time basis in 1997.

He has no knowledge of the facts stated in the Notice of Appeal concerning the Worker's control of the day-to-day operation of the partnership business and further submits that the facts concerning the operation of J & D Quality Systems are irrelevant to the present appeal.

He denies all other allegations of fact contained in the Notice of Appeal.

The Appellant appealed to the Respondent from the ruling that the Worker was employed in insurable employment while engaged by the Appellant during the period from January 1, 1997 to October 27, 1997 within the meaning of the Act.

The Respondent confirmed the ruling that the Worker's engagement with the Appellant during the period in question was insurable employment for the reason that he was employed pursuant to a contract of service.

In so confirming the ruling, the Respondent relied on the following facts:

(a) the facts hereinbefore stated and admitted;

(b) the Appellant is an incorporated business, the sole shareholders thereof are Michael and Douglas Jones;

(c) Michael and Douglas Jones make the major business decisions for the Appellant and control the day-to-day operation of the Appellant's business;

(d) the Appellant is in the non-seasonal business of printing and converting of paperboard for packaging;

(e) the Worker is fully qualified in the field of quality management and as such was originally hired by the Appellant as a Quality Manager;

(f) there was no predetermined period of time that his engagement as Quality Manager was to last;

(g) the Worker was to work either full time or part time depending on the need for his services;

(h) the Work provided his services on a full-time basis prior to the period in question and on a part-time basis during the period in question with no indication that there was an actual break in employment;

(i) both prior to and during the period in question, the Worker's services were rendered personally;

(j) prior to the period in question, the Worker provided his services on a full-time basis and was paid a salary of $500.00 per week;

(k) during the period in question, the Worker provided his services on a part-time basis and was paid a minimum salary of $300.00 per week plus $30.00 per hour for each hour worked over 10 hours per week;

(l) both prior to and during the period in question, the Worker was compensated for the use of his automobile and was also reimbursed for any other expenses incurred in the performance of his duties as Quality Manager;

(m) both prior to and during the period in question, the Worker provided his services under substantially similar terms and conditions of employment;

(n) as Quality Manager for the Appellant, the Worker reported directly to management on an ongoing basis;

(o) the Appellant had the right to control the Worker but since he was fully qualified as a Quality Manager, he required little, if any, direct control or supervision from the Appellant;

(p) as Quality Manager for the Appellant, the Worker was required to do his on-site work at the Appellant's plant but could do his paperwork either in the Appellant's office or his own office;

(q) the Worker's services as a Quality Manager constitute an integral part of the Appellant's business;

(r) any profits or losses from the operation of the Appellant's business accrued to the Appellant and not to the Worker;

(s) while remitting unemployment insurance premiums with respect to the Worker in prior years, the Appellant failed to do so for the period in question;

(t) both prior to and during the period in question, the Worker was employed by the Appellant pursuant to a contract of service."

[4] Mr. J.H. Jones, President of the Appellant corporation, testified to the Court, and was cross-examined on his evidence, including the detailed documentation he presented. Mr. John DeBoer then testified regarding the circumstances of his relationship with the Appellant, and in turn was cross-examined thereon. The Respondent presented no witnesses.

[5] I find no valid reason to review in any great detail the testimony noted above. In my view, the facts as outlined by the witnesses – both highly credible as I assess them – supported the information provided in the Notice of Appeal, and the Reply to the Notice of Appeal. It is only the disparate conclusions reached by the two parties that are at issue.

[6] The three critical time points are simply that – first for a period ending in 1994, (as part of his ongoing business operation) Mr. DeBoer was under a contract for services to the Appellant to do a specific task, and I heard no challenge to that status from the Respondent; second that during the years 1995 and 1996 he was employed by the Appellant under a contract of service, for which documentation was provided and again the facts support that situation; third in 1997 he reverted to his first role as an independent contractor again according to the documentation and testimony. It is this last change to which the Respondent has taken objection, that is the Worker reverting to the status of independent contractor, even though that had been the case for years prior to 1995 and 1996. It was interrupted only, according to the Appellant, by the "employee" status during those two years – an interruption and a status agreed upon because of incorrect information. The Appellant and the Worker both realized in the latter part of 1996 that the "employee" status had been established in error. It is not to say that the Worker was not an employee during 1995 and 1996. It is however to say that neither party for those two years desired nor would have so determined voluntarily that status – merely that it was the understanding of the Worker, and accepted as such by the Appellant, that it was necessary by regulation of the International Standards Organisation (I.S.O.) that Mr. DeBoer be an employee to continue the work he had done during 1994 for the Appellant but now in the role of monitoring the procedures he had developed and instituted. This brings us to the crux of the problem before the Court.

[7] In 1994, the Appellant wished seriously to be accredited in the printing field by the above noted (I.S.O.), and to accomplish this it was necessary that the Appellant have reviewed and if necessary upgraded some of the procedures. The I.S.O. designation is apparently highly regarded and diligently sought in the printing field. Mr. DeBoer, from many years experience in industry, and in 1994 in partnership with his wife was eminently qualified to perform that function for the Appellant, and did so to the satisfaction of both the Appellant and I.S.O. It was at this juncture that there was an ongoing requirement to monitor the system now installed and both the Appellant and the Worker wished Mr. DeBoer to perform this function – now necessarily only a certain number of visits or hours each week. Both parties wished that Mr. DeBoer continue as an independent contractor – but it was the understanding of Mr. DeBoer – mistakenly as it turned out later in 1996 – that I.S.O. would only accept as a "monitor" an employee of the company involved. As I follow the evidence, Mr. DeBoer reluctantly accepted to perform in a contract of service role all the while maintaining his own business – practically in the same field for other clients – and an agreement was reached between the parties. The requirement was for 20 hours per week to fulfil his obligation to Jones, and for this he received $500 per week subject to all the usual deductions, including the reimbursement of travel expenses. It is important here to note that neither the Appellant nor the Worker are before the Court now, claiming that the period 1995 and 1996 should be in effect reversed and treated as if Mr. DeBoer were an independent contractor. At the same time it might be argued that the functions he described and the role he filled probably could have been performed well under either status – employee or independent contractor – during the years 1995 and 1996. They accept that the documented arrangements they made and followed lead to the conclusion that he was an employee – and they leave that alone. Whether they could succeed in reversing that status – if they chose to have that issue tried at Court is not one with which I need to deal. However, having found out – albeit belatedly and through a new client he had obtained, that he was not by I.S.O. rules required to be an employee, but could have continued to monitor the system he had established in his normal role as an independent contractor, Mr. DeBoer was anxious to cease his role as an employee discussed it with the Appellant who apparently eagerly agreed and Mr. DeBoer reverted to his role as an independent contractor in 1997 – admittedly performing essentially the same services for Jones that he had provided in 1995 and 1996. As noted above, it is this with which the Respondent disagrees – claiming basically that since Mr. DeBoer was by contract an employee in 1995 and 1996, and continued to perform the same work in 1997, he cannot in 1997 be regarded as an independent contractor. The Respondent takes the position that we should not be concerned with what Mr. DeBoer did prior to and in 1994, but only what services he provided in 1997 and relate these to the case law. The services gradually decreased in time required from the Worker, due to improving capabilities of some of Jones internal staff who had learned from Mr. DeBoer and that suited both parties. Both counsel relied on the standard case law – particularly Wiebe Door Services Ltd. v. M.N.R. (1986 3 C.F. 553). Counsel for the Appellant also noted with favour some of the comments from Bradford v. M.N.R. (1988 D.T.C. 1661) which although it dealt with an income tax appeal did have some relevance to this matter, for counsel.

[8] Counsel for the Appellant stated his position as:

"We're here because he voluntarily agreed to be an employee by mistake. When those facts came to light he had discussions with his then employer, Mr. Jones, and subsequently over time that position was changed and he went back to what he would have been but for that mistake."

For the Respondent, counsel concluded:

"Mr. DeBoer was happy in 1995 and 1996 to be an employee and everything that happened during those two years show that he was an employee. He was on the payroll at this time and what changed in 1997 apart from the fact that he was working a little bit less hours and he said he had more flexibility. His duties was still the same. Nothing changed. There was no breach in the employment link between the employer and the employee.

So whose business is this, Your Honour? This is H.J. Jones' business."

Conclusion

[9] I do not agree with the Respondent that the mere fact the active role of Mr. DeBoer continued from 1995 through 1996 and into 1997 in a similar manner should identify him as an employee in 1997. I have stated before, and I repeat that due deference should be paid to the agreed upon and enacted roles of independent parties who come together voluntarily to have a task performed. [1] In this instance, I am satisfied that Mr. DeBoer, if properly aware in 1995 and 1996, could have fulfilled the functions needed by Jones as an independent contractor, and he would have continued to do so. Perhaps this trial would not have been necessary. I can think of no reason the two parties should be estopped from renewing that role given the newly acquired accurate information in 1997. Mr. DeBoer was an independent contractor in 1997. The separate business he conducted during 1997 with other clients, his wife's activity in that business, his long experience in this field, his own equipment, his clear opportunity for profit and loss as well as the clear separation between his business and that of Jones all support the Appellant's contention. I would answer the final question from the summation of the Respondent's counsel (above) "So whose business is this your Honour?" by saying the business we are examining was that of providing professional services – independently – to the Appellant and that is the business of Mr. DeBoer.

[10] The appeals are allowed and the decision of the Minister is vacated.

Signed at Ottawa, Canada, this 7th day of September 1999.

"D.E. Taylor"

D.J.T.C.C.

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