TaxMatters@EY - March 2013
Can an owner-manager be considered an independent contractor?
Pluri Vox Media Corp. v The Queen, 2012 FCA 295
Jennifer Smith, Ottawa, and Daniel Sandler, Toronto
While there is an abundance of jurisprudence on the issue of taxation of employees versus independent contractors, few cases address the role of the owner-manager of a corporate taxpayer.
In this case, although the taxpayer was unsuccessful in its appeal to both the Tax Court of Canada (TCC) and Federal Court of Appeal (FCA), the FCA decision in particular addressed some important issues:
- First, it is possible, though unusual, for an owner-manager to be simultaneously an independent contractor and an employee of the company he owns. If that’s the case, it’s necessary to apportion the amounts paid between the services performed in each capacity.
- Second, in applying the “control” test, it is not appropriate to “pierce the corporate veil.” The question to be considered is whether the company has the legal power to control the worker, not whether the worker feels subject to that control.
Martin Reesink is a practising lawyer and also the sole shareholder of the taxpayer, Pluri Vox Media Corp. At the relevant time, Pluri Vox carried on the business of media monitoring and translation. In the usual course of carrying on its business, Pluri Vox hired independent contractors to perform media monitoring and translation services for its clients. The status of these individuals was not in dispute, but Mr. Reesink’s role was.
Mr. Reesnik was the “directing mind” of Pluri Vox. He made all decisions for the company, including determining contractors’ pay and the terms of their engagement. He was not a director of the company, but he chaired directors’ meetings and signed cheques on behalf of the company.
There was no written contract between Mr. Reesink and Pluri Vox. There was no hourly rate of pay assigned to the time he devoted to the company’s business. He determined how much he would be paid in a particular month based on the company’s volume of business. Although registered for GST purposes, Mr. Reesink did not charge GST on the amounts Pluri Vox paid to him.
Mr. Reesink supervised Andrew Baldwin, a project manager who was treated as an independent contractor, but who had the authority to sign contracts on behalf of the taxpayer and appeared to have significant input into marketing decisions, hiring contractors and assessing the quality of their work. Mr. Baldwin’s status as an independent contractor was not at issue in this case.
The Canada Revenue Agency (CRA) took the view that Mr. Reesink was an employee of Pluri Vox. It reassessed the company on the basis that it had failed to withhold and remit taxes on the amounts paid to Mr. Reesink under the provisions of the Income Tax Act, and that it had failed to make Canada Pension Plan contributions on his behalf.
The taxpayer appealed to the TCC, but was dismissed, as was his further appeal to the FCA.
Tax Court decision
Mr. Reesink’s main argument was that Pluri Vox did not direct his functions in the company and that he was at financial risk based on the company’s performance. Presumably he relied on the tests set out in the leading cases of Wiebe Door Services Ltd. v M.N.R. (87 DTC 5025) and Sagaz Industries Canada Inc. (2001 SCC 59).
Tax Court Chief Justice Gerald Rip noted that the traditional control test is difficult to apply when the worker is also the sole shareholder of the company. He stated, “The question of who controlled whom has no answer.”(para 22).
After a brief review of the case law, including Wiebe and Sagaz, the TCC concluded that Mr. Reesink was an employee for the following reasons:
- Mr. Reesink’s financial risk in Pluri Vox was as a shareholder and not as a worker.
- The business he was participating in was not his business, but that of Pluri Vox.
- Mr. Reesink was also a de facto director of Pluri Vox: the de jure directors followed his wishes. As such, he was an officer of the company as defined in subsection 248(1) of the Income Tax Act.
Federal Court of Appeal decision
The taxpayer’s main argument at the FCA was that Mr. Reesink was an independent contractor, because that is what the parties intended. Presumably, that argument was based on cases such as Wolf v The Queen (2002 DTC 6853 (FCA)) and Royal Winnipeg Ballet v MNR (2006 FCA 87), which stressed the importance of contractual intent in making the employee/independent contractor determination.
Justice Wyman Webb of the FCA gave the taxpayer’s argument short shrift, noting that the fact that Mr. Reesink had not charged GST for the services he rendered to Pluri Vox was inconsistent with this alleged common intention.
However, the FCA felt that there were some other issues that arose from the TCC decision that needed to be addressed.
Although the TCC did not explicitly say so, its decision implied that Mr. Reesink could not be both an independent contractor and officer of Pluri Vox. Justice Webb disagreed, citing the following statement from Zupet v The Queen (2005 TCC 89):
If the courts are to use a willing suspension of disbelief to hold that an individual can enter into a contract of service with that individual’s own company, there is no reason why the same willing suspension of disbelief cannot allow the court to find that the same individual can enter into a contract for services with his or her company. (para. 16)
In Justice Webb’s view, it followed that an individual who is a director or officer of a company can provide other services to the company as an independent contractor, and the amounts paid could be apportioned between the services performed in each capacity.
However, in this case, the FCA held that the facts pointed to an employment relationship. The Court appeared to be particularly persuaded by the fact that Mr. Reesink supervised Mr. Baldwin, who was himself an independent contractor in circumstances where no contractual relationship existed between the two individuals.
The FCA was also concerned with the TCC judge’s apparent “piercing of the corporate veil” by concluding that the control test could not be meaningfully applied to an owner-manager situation because “the question of who controlled whom has no answer.”
In Justice Webb’s view, it was not appropriate to pierce the corporate veil absent a “sham” or a corporation being used as a vehicle for wrongdoing on the part of shareholders. In his view, the key factor is the corporation’s legal power to control the employee, not whether the employee feels subject to that control (citing Groupe Desmarais Pinsonneault & Avard Inc., (2002 FCA 144)).
The FCA dismissed the taxpayer’s appeal with costs. The decision is fairly brief, and somewhat unsatisfying in terms of its analysis of the employee/independent contractor determination, even though it addresses some important concepts.
The taxpayer has sought leave to appeal to the Supreme Court of Canada. It is hoped that the Supreme Court will take this opportunity to provide additional guidance on the employee/independent contractor distinction, particularly in the owner-manager context.