Date: 20010109
Docket: 2000-297-IT-I
BETWEEN:
PHILIP J. O'BRIEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.T.C.C.
[1] This appeal is from an assessment for income tax for the Appellant's 1997 taxation year. In filing his income tax return for that year the Appellant claimed a rebate of Goods and Services Tax (GST) as provided for in section 253 of the Excise Tax Act. This rebate (sometimes called the employee and partner rebate) is available to members of a partnership which is a registrant, and to certain employees of registrants in order to compensate them for GST paid on expenditures they are obliged to make and which are deductible in computing their income for the year. In the present case the only dispute between the parties is as to whether the Appellant earned his income as an employee, or as an independent contractor. If it was as an employee then he qualifies for the rebate; if it was as an independent contractor then he does not.
[2] Since 1990 Mr. O'Brien has been the sole shareholder, a director and the president of McKin Health Care Specialties Inc. (McKin). During 1997, and for some years prior to that, he was also president and a minority shareholder of SurgiTech Canada Inc. (SurgiTech). Both these companies were engaged in selling products related to medical treatment and health care to hospitals, nursing homes and similar end-users. The products are manufactured in the United States and distributed in Canada by McKin and SurgiTech. The industry is highly competitive.
[3] Mr. O'Brien's evidence was that the terms of the contracts between himself and McKin, and between himself and SurgiTech were that he provided his executive services as a director and as president without compensation. His time was devoted approximately 70% to the business of McKin and 30% to the business of SurgiTech, and for each of these companies he worked as a salesperson, in addition to his other duties, and it was only for his sales work that he was paid. His pay was determined entirely by commissions paid on sales made by him, and out of these commissions he was obliged to pay all the expenses associated with making these sales. The expenses included such things as advertising, promotion and trade show costs, the provision of a leased vehicle, a cellular telephone and an office in his home. In 1997, Mr. O'Brien's commission income from the two companies totalled $78,543, and he incurred expenses of $63,903.96.
[4] According to his evidence Mr. O'Brien, on behalf of the companies, entered into these contracts with himself in his personal capacity about 1990. No written contract exists, but he has been compensated on this basis since then. The Respondent does not challenge the existence of this contract, and has accepted it for the purpose of assessing income tax. However, the Respondent takes the position that when the common-law test is applied, Mr. O'Brien, in his capacity as a salesperson, is not an employee of either company, but an independent contractor. The Respondent conceded that Mr. O'Brien is an employee when he acts as president of the companies, for which he receives no pay. His entitlement to the GST rebate must arise out of his relationship with the company in connection with his commission sales activity, or not at all.
[5] The approach to be taken in such cases has been thoroughly reviewed by the Federal Court of Appeal in its judgment in the Wiebe Door case[1]. The trial judge must conduct a careful review of the evidence as to the circumstances of the employment, bearing in mind the factors referred to by the Federal Court of Appeal in that case, with a view to determining whether in the particular case the worker is a servant or an independent contractor. There is no single easy test that will govern every case. The expressed wishes of the worker and the employer are a factor to be considered, but they are not dispositive of the issue.[2] Other significant factors include the degree of control exercised by the employer over the way in which the work is to be done, the ownership of the necessary tools and equipment, the opportunity for both profit and loss by the worker, the degree to which the work and the worker are integrated into the business of the employer, and whether or not the worker is bound to do the work himself, or if he may hire and pay people to help him with it. The Federal Court of Appeal gave specific approval to the following formulation of the issue by Cooke J. in the Market Investigations[3] case:
The observations of Lord Wright, of Denning L.J., and of the judges of the Supreme Court in the U.S.A. suggest that the fundamental test to be applied is this: "Is the person who has engaged himself to perform these services performing them as a person in business on his own account?" If the answer to that question is "yes," then the contract is a contract for services. If the answer is "no" then the contract is a contract of service.
[6] Counsel for the Respondent placed much emphasis on the elements of control, the ownership of the tools, and the opportunity that Mr. O'Brien has to augment his earnings by increasing his volume of sales.
[7] As I appreciated Mr. O'Brien's evidence, his schedule is subject above all to the availability of his customers. He deals with both administrators and medical personnel, and must meet with them when they make time for him. Subject to that constraint, Mr. O'Brien is free to set his own schedule and work in whatever way suits him. It is difficult to say, however, to what extent this freedom results from the fact that as president of both companies he permits himself that freedom, and to what extent it is a normal incidence of the nature of a salesperson's work. There is no written contract spelling out the amount of control that he as president can exercise over himself as salesperson. In my opinion this factor should not be given much weight.
[8] Mr. Sood argued that the salesman's tools are his car, his cellular phone, his home office and his advertising and publicity, all of which are provided by Mr. O'Brien at his own expense. Many commission salespersons bear these same expenses while working as employees. The provision of tools is, I believe, of greater significance in those cases where the tools and equipment required to do the job represent a substantial capital investment. In the present case the car is leased, and the office consists of space in his family home. There is no evidence to suggest any substantial investment in fixed assets by Mr. O'Brien. This factor too, in my opinion, should be given little weight.
[9] The opportunity for profit and risk of loss refers not simply to the opportunity that a piece worker or a commission salesperson has to earn more by working longer hours or more efficiently. It involves an element of entrepreneurship on the part of the worker. Again, in the present case it is difficult to apply this element of the test because of the peculiar relationship that exists between Mr. O'Brien and McKin and SurgiTech. It is likely that both of these companies owe their existence to Mr. O'Brien's entrepreneurship, in his capacities as shareholder, director and president. As a salesperson he sells for the company, and as I understood his evidence the rules that apply to other salespeople apply to him as well. This factor does not, in my view, support the proposition that Mr. O'Brien sells as an independent contractor.
[10] In my opinion the most important factor in this case is the degree of integration of Mr. O'Brien's efforts into the corporate enterprise. His efforts as a salesman are entirely towards the sale of the products of McKin and SurgiTech. It seems likely that there would be a certain amount of overlap between his selling activities and his executive activities. Sales is the whole raison d'être of these companies – it is the only way they make money. In my view an informed but independent observer would identify Mr. O'Brien with the companies when he is selling and when he is doing executive office work. The observer would not consider that when he left the office and went to call on customers he had stepped outside the company to work only on his own account and not on the company's.
[11] Mr. Sood, in his able argument, suggested that Mr. O'Brien should be considered to be self-employed as a salesperson, because on his T1 General Income Tax Return for 1997 he reported his income on the line designated for self-employment income.[4] I do not consider this any more determinative of the legal relationship between the Appellant and his companies than a contractual provision would have been. As the Federal Court of Appeal has held,[5] the relationship must be determined from the facts and the law, not from the agreement of the parties. This is all the more true where, as here, the Appellant signed an income tax return prepared by his accountant. No doubt Mr. O'Brien addressed his mind to whether the form disclosed all his income. It is much less likely that he thought, even momentarily, about the question whether he was an employed commission salesperson, or an independent contractor. In my view the Appellant was employed as a commission salesperson.
[12] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to the GST rebate of $3,566.73 claimed.
Signed at Ottawa, Canada, this 9th day of January, 2001.
"E.A. Bowie"
J.T.C.C.