Court disagrees with revenue agency’s view of contractor’s status
The evolution of work arrangements in an increasingly fluid world of work has been the focus of practical innovation and academic musings. The courts have also wrestled with it. A recent income tax case heard by the Federal Court of Appeal illustrates the current state of uncertainty about the law regarding the boundary between employees and independent contractors.
Lawrence Wolf, a mechanical engineer specializing in aerospace testing, was placed at Montreal aircraft manufacturer Canadair Ltd. by Calgary technical placement firm Kirk-Mayer of Canada. Wolf, who came to Canada from Florida, worked under four contracts between 1990 and 1995.
The contracts were explicit that the relationship was one with a consultant and not an employee; however, taxes and premiums were withheld by Kirk-Mayer. Wolf filed his income tax return in the U.S. but the Canada Customs and Revenue Agency claimed Wolf was effectively an employee of Kirk-Mayer, a resident of Canada and assessed him as such. The Tax Court of Canada found in favour of the revenue department in an appeal of the assessments in 2000. Wolf appealed to the Federal Court of Appeal.
The question Justice Alice Desjardins posed to herself at the outset of the decision was: “Must … the oft-quoted principles elaborated by Lord Wright in … Montreal v. Montreal Locomotive Works … to distinguish a contract of employment from a contract of enterprise or for services, be revisited in light of the globalization phenomenon which increases the mobility of workers?”
The four-fold test in Montreal involves:
•control over the individual’s work;
•ownership of the tools that the individual uses;
•the chance of profit; and
•the possibility of loss.
The Federal Court of Appeal basically disagreed with the tax court judge on the weight and importance that the answers to the four tests should be given in the overall characterization of the relationship between Wolf and Canadair.
First, the tax judge felt Wolf should be classified as an employee because he had work assigned to him on a day-to-day basis and could not delegate the work to someone else, and was therefore under the control of Canadair. He was paid by the hour, with extra for overtime, and not based on defined projects. The appeal judge found his working conditions to be “compatible with either status.”
Equally, ownership of tools was found to be neutral. Wolf had no choice but to use Canadair’s computers, technical drawings and facilities.
Finally, on the question of profit and loss, there was “little weight” given to this consideration by the tax judge. It was of more concern to the appeal judge. Rather than looking to the traditional notion of risk based on efficiency, speed and margins of price over cost, Desjardins identified it in the risk that Wolf took by choosing to work on contract rather than as an employee. “In consideration for higher pay, the appellant … took all the risks of the activities he was engaged in. He had no job security, no union protection, no educational courses he could attend, no hope for promotion. The profit and the risk factors were his.” Evidence to suggest he was an independent contractor.
Left with what was effectively a tie on the evidence, the court saw no reason to disturb the understanding the parties had made. Wolf was, in fact, an independent contractor not an employee.
(Oddly, according to legal experts, the court concentrated on the relationship between Wolf and Canadair and did not find that he was an employee of Kirk-Mayer, which is all but universally the case in similar situations.)
Lucas Corwin an employment lawyer with Fasken Martineau DuMoulin in Vancouver, said he was not surprised by the decision.
The regulatory authorities who administer tax collection, employment insurance and employment standards, for example, apply a more conservative and stringent definition of contractor than have the courts, he points out.
Most human resources professionals, who deal regularly with these authorities and have to face their wrath, wisely abide by this definition. The courts, however, have been more liberal.
Corwin was particularly cheered by Justice Décary who, in his concurring reasons, stated that “Taxpayers may arrange their affairs in such a lawful way as they wish. When a contract is genuinely entered into … the common intention of the parties is clear and that should be the end of the search.”
The lesson to be taken from this case, Corwin suggests, is that businesses and individuals should not be intimidated from arranging their relationship as best serves their needs and interests. The courts will not look negatively on a carefully and properly constituted contract that is not designed simply as a sham to avoid paying taxes.
Gordon Sova is the editor of CHRR’s companion publication CLV Reports, a newsletter that reports on collective bargaining and other issues in labour relations. He can be reached at [email protected].
Lawrence Wolf, a mechanical engineer specializing in aerospace testing, was placed at Montreal aircraft manufacturer Canadair Ltd. by Calgary technical placement firm Kirk-Mayer of Canada. Wolf, who came to Canada from Florida, worked under four contracts between 1990 and 1995.
The contracts were explicit that the relationship was one with a consultant and not an employee; however, taxes and premiums were withheld by Kirk-Mayer. Wolf filed his income tax return in the U.S. but the Canada Customs and Revenue Agency claimed Wolf was effectively an employee of Kirk-Mayer, a resident of Canada and assessed him as such. The Tax Court of Canada found in favour of the revenue department in an appeal of the assessments in 2000. Wolf appealed to the Federal Court of Appeal.
The question Justice Alice Desjardins posed to herself at the outset of the decision was: “Must … the oft-quoted principles elaborated by Lord Wright in … Montreal v. Montreal Locomotive Works … to distinguish a contract of employment from a contract of enterprise or for services, be revisited in light of the globalization phenomenon which increases the mobility of workers?”
The four-fold test in Montreal involves:
•control over the individual’s work;
•ownership of the tools that the individual uses;
•the chance of profit; and
•the possibility of loss.
The Federal Court of Appeal basically disagreed with the tax court judge on the weight and importance that the answers to the four tests should be given in the overall characterization of the relationship between Wolf and Canadair.
First, the tax judge felt Wolf should be classified as an employee because he had work assigned to him on a day-to-day basis and could not delegate the work to someone else, and was therefore under the control of Canadair. He was paid by the hour, with extra for overtime, and not based on defined projects. The appeal judge found his working conditions to be “compatible with either status.”
Equally, ownership of tools was found to be neutral. Wolf had no choice but to use Canadair’s computers, technical drawings and facilities.
Finally, on the question of profit and loss, there was “little weight” given to this consideration by the tax judge. It was of more concern to the appeal judge. Rather than looking to the traditional notion of risk based on efficiency, speed and margins of price over cost, Desjardins identified it in the risk that Wolf took by choosing to work on contract rather than as an employee. “In consideration for higher pay, the appellant … took all the risks of the activities he was engaged in. He had no job security, no union protection, no educational courses he could attend, no hope for promotion. The profit and the risk factors were his.” Evidence to suggest he was an independent contractor.
Left with what was effectively a tie on the evidence, the court saw no reason to disturb the understanding the parties had made. Wolf was, in fact, an independent contractor not an employee.
(Oddly, according to legal experts, the court concentrated on the relationship between Wolf and Canadair and did not find that he was an employee of Kirk-Mayer, which is all but universally the case in similar situations.)
Lucas Corwin an employment lawyer with Fasken Martineau DuMoulin in Vancouver, said he was not surprised by the decision.
The regulatory authorities who administer tax collection, employment insurance and employment standards, for example, apply a more conservative and stringent definition of contractor than have the courts, he points out.
Most human resources professionals, who deal regularly with these authorities and have to face their wrath, wisely abide by this definition. The courts, however, have been more liberal.
Corwin was particularly cheered by Justice Décary who, in his concurring reasons, stated that “Taxpayers may arrange their affairs in such a lawful way as they wish. When a contract is genuinely entered into … the common intention of the parties is clear and that should be the end of the search.”
The lesson to be taken from this case, Corwin suggests, is that businesses and individuals should not be intimidated from arranging their relationship as best serves their needs and interests. The courts will not look negatively on a carefully and properly constituted contract that is not designed simply as a sham to avoid paying taxes.
Gordon Sova is the editor of CHRR’s companion publication CLV Reports, a newsletter that reports on collective bargaining and other issues in labour relations. He can be reached at [email protected].
