In January 2011, the Tax Court of Canada (the "TCC") released two judgments, Prue v. M.N.R ("Prue") and Smith v. M.N.R ("Smith") in which it found that the individuals were operating as independent contractors rather than employees. The court examined the intention of the parties, since in both cases the appellants believed that their status had changed from independent contractor to employee over the course of the relationship.
The key question in determining whether an individual is an employee or independent contractor is whether or not the individual was engaged to provide services as a person in business on his or her own account as set out in Wiebe Door Services Ltd. v. M.N.R. ("Wiebe Door"). That case also provided a list of factors that may apply such as: the level of control, the ownership of the equipment, the degree of financial risk and the opportunity for profit. In 2001, the Supreme Court of Canada stated in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., that there is no one conclusive test which can be universally applied to determine whether a person is an employee or an independent contractor and that the total relationship of the parties must be considered.
In determining whether a person is an employee or an independent contractor, intention of the parties may or may not play an important role. As can be seen from the Prue and Smith decisions below, if it is established that the terms of the agreement or arrangement, considered in the appropriate factual context, are consistent with the legal relationship that the parties profess to have intended, then their stated intention will be considered in the context of the relevant jurisprudence.
Prue v. M.N.R., 2011 TCC 9
On January 10th, 2011, the TCC released its decision in Prue. In this case, the appellant, Garee Prue, was a product demonstrator at various grocery stores in the Vancouver area. Prue appealed from two decisions issued by the Minister of National Revenue (the "Minister") pursuant to the Employment Insurance Act and the Canada Pension Plan wherein the Minister decided her employment was neither insurable nor pensionable because the requirements of a contract of service were not met and an employer-employee relationship did not exist. The relevant facts included:
- Prue was not under any supervision while performing her duties as a product demonstrator. She was able to choose the duration of the demos and received only cursory instruction at the outset;
- Prue set up her demonstration table as she saw fit and could remove product from the store shelves.
- Prue used her own car to travel to and transport the necessary materials and equipment to various destinations;
- Prue did not have any investment nor was she exposed to any financial risk resulting from providing her services as a product demonstrator;
- Prue did not have any guarantee of income. She could accept or refuse assignments without suffering any consequences and could charge for the full time allotted for a demo;
- Prue was free to accept other work and provided her services to another company;
- There was no dress code and Prue had obtained her Food Safety Certificate prior to working with the company;
- The company paid for Prue's Workers' Compensation Coverage and liability insurance with respect to her work.
Prue had acknowledged that she considered herself as an independent contractor. By January 2009, however, she came to believe that she must have been an employee from that point onwards because she seemed to be performing some services also performed by regular company employees.
The TCC concluded that in instances where both parties in a working relationship have acted consistently in accordance with a perceived status it is important to take into account the motive one may have for creative revisionism. The TCC held that "the evidence disclosed that Prue acted throughout as a person doing business on her own account." The TCC was satisfied that both parties intended Prue provide her services as an independent contractor and that she did so throughout the entire relevant period. The parties conducted themselves in a manner consistent with that intent. In addition, Rowe D.J. stated "it was perplexing to comprehend how Prue thought a latent desire to become an employee could serve as a magic device to transform her actual working status from independent contractor to that of employee."
The TCC established that the terms of the agreement, considered in the appropriate factual context, did in fact reflect the legal relationship that the parties professed to have intended at the outset and during the relevant period. Therefore, their mutual intentions were relevant factors in the analysis. It was concluded that Prue was an independent contractor and the appeal was dismissed.
Smith v. M.N.R., 2011 TCC 20
On January 14th, 2011, the TCC released a second similar decision in Smith. In that case, the appellant, Stuart Smith, drove a truck for a British Columbia company and was remunerated based on 45% of the revenue produced by the truck in the course of picking up loads at a warehouse and delivering them to various sites. Smith appealed from two decisions issued by the Minister wherein the Minister decided Smith was not employed under a contract of services during the relevant period and was not engaged in either insurable or pensionable employment pursuant to the provisions of the Employment Insurance Act and the Canada Pension Plan. The relevant facts included:
- Smith was an experienced truck driver and did not require supervision;
- Smith was not required to report back to the terminal between deliveries or otherwise account for his time;
- Smith was able to choose the most appropriate routes and to make deliveries in the most efficient sequence;
- Smith was required to perform his services personally and was not permitted to hire an assistant or to arrange directly for a substitute driver;
- All the equipment necessary to carry out the deliveries was provided to him by the company;
- Smith did not run any financial risk except that he had no guarantee of income over the course of any particular period;
- Smith's revenue was tied to the gross revenue of the truck he was driving, which historically had been approximately $12,000 per month.
In July 2008, Smith believed he was an employee following a Union agreement that was entered into which he was certain included him and other replacement drivers.
The TCC emphasized the issue of intention. Rowe D.J. asserted:
"it is less work for the trial judge when the parties agree on the characterization of their purported status. The outcome depends on whether the facts surrounding the working relationship support that status as the law is clear the parties are not free to choose it merely by describing it as such".
Rowe D.J. was satisfied on the evidence that both parties intended throughout the entire relevant period that Smith provide his driving services on the basis he was an independent contractor entitled to receive a fixed percentage of the revenue generated by the truck. Ultimately, based on a finding of mutual intent at the outset that Smith provide his services as an independent contractor, a review of the subsequent conduct of the parties disclosed that it was consistent with that initial intent.
The TCC concluded that once a finding on the issue of intention is made, the intention of the parties assumes its proper place within the framework of the requisite analysis of the evidence in the context of the relevant jurisprudence.
Much emphasis was placed on the intention of the parties in Prue and Smith. This was because the appellants in both cases thought their status changed from independent contractor to employee. In both cases, however, Rowe D.J. concluded that the appellants continued to act in a manner that was consistent with the parties' original intentions, and therefore the intentions were relevant in the analysis.
The intention of the parties is important because the case law suggests that a relationship may not exist merely because the parties choose to describe it to be so regardless of the surrounding circumstances. If the facts do not support the evidence of a relationship described by the parties, that relationship does not necessarily exist.
The recharacterization of legal relationships is only permissible if the label attached by the taxpayer to the transaction does not properly reflect its actual legal effect. In the absence of clear and credible evidence that the description of a relationship is other than as agreed between arm's length parties, the description agreed upon by those parties must stand. Therefore, in Prue and Smith there was clear and credible evidence that the description of the relationship was consistent with the facts, and therefore both appellants were held to be independent contractors.
Even if the evidence is not conclusive, it would still be an error to set aside the uncontradicted evidence of the parties as to their common understanding of their legal relationship. The judge must consider the Wiebe Door factors in the light of the uncontradicted evidence and ask whether, on balance, the facts are consistent with the conclusion that the individual is self-employed or are consistent with the conclusion that the individual is an employee.
Ultimately, these two recent decisions suggest that the evidence of the parties' understanding of their relationship must always be examined and given appropriate weight. In Royal Winnipeg Ballet v. M.N.R., Sharlow J.A. stated:
The evidence of the parties' understanding of their contract must always be examined and given appropriate weight. This does not mean that the parties' declaration as to the legal character of their contract is determinative. If it is established that the terms of the contract, considered in the appropriate factual context, do not reflect the legal relationship that the parties profess to have intended, then their stated intention will be disregarded.
Undoubtedly the intentions of the parties will play a role in determining whether an individual is an employee or independent contractor for taxation purposes. The role of the court is to essentially ensure that the conduct of the parties is consistent with their intentions. In a case where the terms of the agreement or arrangement do not reflect the legal relationship that the parties assert to have intended, then intention will not be a relevant factor and will be disregarded. On the other hand, where the terms of the agreement or arrangement are consistent with the intentions of the parties, much like in Prue and Smith, then their stated intention will be considered in the context of the relevant jurisprudence in determining whether an individual is an employee or independent contractor.
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