Date: 20000302
Docket: 1999-2447-EI
BETWEEN:
CAROLYN MCKAY,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
BING HOLDINGS LTD.,
Intervenor.
Reasons for Judgment
Porter, D.J.T.C.C.
[1] This appeal was heard at Regina, Saskatchewan, on the 19th of January 2000. The Appellant was present and represented by counsel. The Intervenor was represented by its President, Brian Barber, who was called as a witness on behalf of the Respondent.
[2] The Appellant has appealed the decision of the Minister of National Revenue (hereinafter called the “Minister”) dated February 10, 1999, that the employment of the Appellant with Bing Holdings Ltd. (“Bing”) from March 9, 1992 to November 30, 1995 was not insurable employment. The reason given was:
“...You were not employed under a contract of service and, therefore, you were not an employee.”
The decision was said to be issued pursuant to subsection 93(3) of the Employment Insurance Act (the “EI Act”) and was based on paragraph 3(1)(a) of the former Unemployment Insurance Act (the “UI Act”).
[3] The established facts reveal that the Appellant managed the Regina Beach Hotel owned by Bing, commencing on the 9th of March 1992 through November 30, 1995. She did so under a verbal contract from the 9th of March 1992 until June 1993. On an unknown date, but agreed by counsel to be treated as the 30th of June 1993, the Appellant and her husband, of the one part, and Bing of the other part, entered into a written agreement relating to her future working arrangements at the hotel and incorporating provisions whereby she and her husband might buy the hotel pursuant to an option to purchase.
[4] The Minister has taken the position that the working arrangement in its entirety was a contract for services and thus she was not an employee, neither before or after the written agreement in June 1993. The Appellant to the contrary, has maintained that throughout the whole period, she was working under a contract of service and thus was an employee in insurable employment. Bing has intervened on the side of the Minister. That then is the nature of the issue between the parties.
The Law
[5] The manner in which the Court should go about deciding whether any particular working arrangement is a contract of service and thus an employer/employee relationship or a contract for services and thus an independent contractor relationship, has been clearly laid out by the Federal Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025. The test to be applied has been further explained by that Court in Moose Jaw Kinsmen Flying Fins Inc. v. M.N.R., 88 DTC 6099. There are, following these cases, numerous decisions of this Court, some of which have been cited by counsel, which demonstrate how these appellate guidelines have been applied. In the Moose Jaw Kinsmen Flying Fins Inc. case, above, the Federal Court of Appeal said this:
"[Analysis]
The definitive authority on this issue in the context of the Act, is the decision of this Court in Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025. MacGuigan J. speaking on behalf of the Court, analyzed Canadian, English and American authorities, and, in particular, referred to the four tests for making such a determination enunciated by Lord Wright in City of Montreal v. Montreal Locomotive Works Ltd., [1974] 1 D.L.R. 161 at 169-70. He concluded at page 5028 that:
Taken thus in context, Lord Wright's fourfold test [control, ownership of tools, chance of profit, risk of loss] is a general, indeed an overarching test, which involves "examining the whole of the various elements which constitute the relationship between the parties". In his own use of the test to determine the character of the relationship in the Montreal Locomotive Works case itself, Lord Wright combines and integrates the four tests in order to seek out the meaning of the whole transaction.
At page 5029 he said:
...I interpret Lord Wright's test not as the fourfold one it is often described as being but rather as a four-in-one test with emphasis always retained on what Lord Wright, supra, calls "the combined force of the whole scheme of operations," even while the usefulness of the four subordinate criteria is acknowledged.
At page 5030 he had this to say:
What must always remain of the essence is the search for the total relationship of the parties.
He also observed "there is no escape for the trial judge, when confronted with such a problem, from carefully weighing all the facts."
...like MacGuigan J. we view the tests as being useful subordinates in weighing all of the facts relating to the operations of the Applicant. That is now the preferable and proper approach for the very good reason that in a given case, and this may well be one of them, one or more of the tests can have little or no applicability. To formulate a decision then, the overall evidence must be considered taking into account those of the tests which may be applicable and giving to all the evidence the weight which the circumstances may dictate."
[6] The nature of the tests referred to by the Court can be summarized as follows:
a) The degree or absence of control exercised by the alleged employer;
b) Ownership of tools;
c) Chance of profit and risk of loss;
d) Integration of the alleged employee's work into the alleged employer's business.
[7] I also take note of the further words of MacGuigan, J. in the Wiebe case, above, where he approved the approach taken in the English courts:
"Perhaps the best synthesis found in the authorities is that of Cooke J. in Market Investigations, Ltd. v. Minister of Social Security, [1968] 3 All E.R. 732, 738-9:
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. No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors, which may be of importance, are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk be taken, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task. The application of the general test may be easier in a case where the person who engages himself to perform the services does so in the course of an already established business of his own; but this factor is not decisive, and a person who engages himself to perform services for another may well be an independent contractor even though he has not entered into the contract in the course of an existing business carried on by him."
[8] To this I would add the words of Décary J.A. in Charbonneau v. Canada (MNR) [1996] F.C.J. No. 1337, where speaking for the Federal Court of Appeal he said this:
“The tests laid down by this Court ... are not the ingredients of a magic formula. They are guidelines which it will generally be useful to consider, but not to the point of jeopardising the ultimate objective of the exercise, which is to determine the overall relationship between the parties. The issue is always, once it has been determined that there is a genuine contract, whether there is a relationship of subordination between the parties such that there is a contract of employment ... or, whether there is ..., such a degree of autonomy that there is a contract of enterprise or for services. ...In other words, we must not pay so much attention to the trees that we lose sight of the forest. ...The parts must give way to the whole.”
The Facts
[9] The Minister in coming to his decision is said in the Reply to the Notice of Appeal signed by the Deputy Attorney General of Canada, to have relied upon the following assumptions of fact:
"(a) the facts as admitted above;
(b) the Appellant was not related to the Payor;
(c) the Payor was in the hotel business which included a restaurant and bar;
(d) Wayne McKay (hereinafter the "spouse") is the Appellant's spouse;
(e) the Appellant and her spouse signed an agreement with the Payor in 1993 wherein they agreed as follows;
i) the Appellant and Wayne McKay were responsible for the day-to-day operation of the hotel including but not limited to purchasing inventory, hiring and firing personnel, renting of rooms, cleaning and maintaining the rooms and premises and operating a steak pit;
(ii) the Appellant and her spouse agreed to seek the approval of the Payor before making a single expenditure exceeding $2,500.00;
(iii) the Appellant and her spouse agreed to pay to the Payor a monthly rent of 15% of gross sales for the month, excluding the liquor vendor, such payment not to exceed $32,500.00 annually;
(iv) the Appellant and her spouse agreed to pay to the Payor the monthly interest charge for a $50,000 operating loan, the rate being set at 10% per year and to pay down the principal on the loan by $10,000 by September 30, 1993;
(v) the Appellant and her spouse agreed to provide to the Payor a monthly sales report and monthly financial statements and cancelled cheques upon request;
(vi) if the Appellant and her spouse were not in default of the agreement, they have the option of purchasing the hotel within an 18-month period;
(vii) the option to purchase could be extended a further 12 months;
(viii) the Appellant and her spouse were required to maintain a liquor inventory of $15,000.00;
(ix) once the Appellant and her spouse had paid off the $50,000.00 operating loan, ownership of the liquor inventory would revert to the Appellant and her spouse;
(x) the Appellant and her spouse are entitled to the remaining profits of the hotel after payment of all obligations contained in the agreement and all day-to-day operating expenses including, but not limited to, payment of staff wages, purchase of inventory, payment of all utility bills, payment of insurance premiums, payment of Liquor Consumption Tax, payment of Canada Pension Plan premiums, payment of Unemployment Insurance premiums, all such other payments as may be required by the Federal or Provincial Government and any payments required for repair, maintenance and the like, excluding structural repairs;
(xi) the Appellant, her spouse and the Payor are joint guarantors of a line of credit in the amount of $10,000.00;
(xii) any use of the line of credit will be discussed with the Payor prior to obtaining funds;
(xiii) the line of credit will not exceed $10,000.00 without mutual consent;
(f) the Appellant worked between 40 to 70 hours per week depending on the time required;
(g) the Appellant's hours of work were not recorded;
(h) the Appellant performed the functions of the manager;
(i) the Appellant and her spouse were not supervised by the Payor."
[10] Item 9(a) relates to the following admissions of fact set out in the Notice of Appeal:
“(1) On March 9, 1992, I was hired by Bing Holdings Ltd. as General Manager to manage the day-to-day operations of the Regina Beach Hotel.
(3) ...I was paid an annual salary remuneration with benefits.
(4) All administrative decisions regarding the financial position of the company with the banking institutions were the responsibility of the directors (shareholders) of Bing Holdings Ltd.
(5) Any major decisions regarding repairs or purchases (equipment, etc.) had to be approved by Bing Holdings.
(6) ...This prompted the management agreement which was signed in June/93 by Wayne McKay and myself.
...
(1) My role as General Manager was no different than any other General Managers of other operations. I was there to manage the day-to-day operations of the hotel only. I was not involved in Bing Holdings decision making, only the operation itself.
(2) [I was not a shareholder or director of Bing Holdings Ltd.]...
(6) All purchases of equipment or major repairs over $2,500.00 had to be approved by the shareholders.
(7) Monthly reports were required to be supplied to Bing Holdings in order for them to analyse their operations. Wayne McKay prepared these financial statements from my daily registers.
(8) My tasks were an integral part of the hotel business without a separate business name, letterheads, or office location. I was not a separate business operation or endeavor – Bing paid me a regular salary.
(10) ...The $50,000 operating loan had to be paid down by $10,000 within the first four months.
(12) I had Bing Holdings include in the agreement an option to buy the hotel as we knew of their interest to sell in the near future. This purchase never materialized.”
[11] The Appellant in giving her evidence agreed with the following assumptions of fact contained in the Reply to the Notice of Appeal: (a), (b), (c) (she added that the liquor license remained in the name of Bing), (d), (e)(i) (she says all these duties were the same and nothing changed in this respect), (e)(ii) (she maintained that her husband Wayne was not involved in the day-to-day operations except when she was absent in 1993 for a number of months for medical reasons), (e)(iii) (she agreed this provision was in the agreement, but in practice it was a question of paying the mortgage on the premises to the Credit Union in the annual amount of $32,500.00), (e)(iv) (she maintained that she had no knowledge of the details of the loan), (e)(v), (e)(vi), (e)(vii), (e)(viii), (f), (g), (h), and (i).
[12] The Appellant disagreed or had extensive commentary upon items (e)(ix), (e)(x), (e)(xi), (e)(xii) and (e)(xiii).
[13] The Appellant gave evidence on her own behalf, as did Brian Barber on behalf of the Minister.
[14] The Appellant was initially engaged to manage the hotel which was in a run-down state and not in a particularly viable financial situation. It is unclear who actually hired her. Nonetheless, it seemed completely obvious that at the outset she was hired as an employee by Bing. She was paid a starting salary of $25,000.00 per annum, which was quickly increased to $30,000.00 per annum. There is not a thread of a suggestion in the evidence that she was anything but an employee at this stage. Deductions were taken from her salary, she was under the supervision of Brian Barber, who in fact quickly left her to her own resources, but nonetheless retained the right to supervise her. Everything relating to the business belonged to Bing or its creditors and there is no question in my mind but that she was a regular employee from March 1992 when she started until June 30, 1993, the agreed date of the written agreement.
[15] The question then arises as to what changes, if any, the signed written agreement made. The Appellant argued that it made no change. She says things went on exactly as before. However, that is a superficial approach, in my view, and the terms of the agreement which I attach to this Judgment as Appendix “A”, along with the events which transpired in the management of the hotel thereafter, bear some deeper consideration.
[16] The Appellant says she was not really aware of the terms of the agreement, did not understand them, and interpreted them in ways which differ from the meaning of the words on their face. Brian Barber, on the other hand, maintained that the agreement was the agreement and how she interpreted the manner in which she carried out her responsibilities was up to her, but the substance of the agreement always remained in effect.
[17] This is important, because counsel for the Appellant urged upon me to accept that where the parties agreed in fact to carry out their arrangement in terms different to the written terms to which they had bound themselves, the Court should look at the factual substance of the arrangement and not just the written terms. Unfortunately for the Appellant, there does not seem to be any common mind between her and Bing that the terms of the written agreement were not to be honoured in fact. Thus, this argument in my opinion holds no water. The written agreement entered into between the parties remained at all times the agreement between them.
[18] The agreement at the outset purports to be a management agreement between the Appellant and her husband of one part and Bing of the other part. Clause 1 sets out the duties of herself and her husband in general terms. The fact that on the whole, these duties were principally carried out by the Appellant rather than by her husband was a matter of arrangement between them. They could arrange that under the terms of the agreement, however they wished without resort to Bing. In fact, they did do this. When the Appellant became unable to work for medical reasons, her husband took over and Bing was not involved.
[19] In managing the hotel, they agreed in Clause 2 not to make any capital expenditures on the hotel in excess of $2,500.00 without seeking the prior approval of Bing.
[20] There was no provision in their written agreement to remunerate the Appellant or her husband by way of any salary. To the contrary, in exchange for the right to operate the hotel, the Appellant and her husband committed to pay to Bing 15% of the gross sales per month, excluding liquor sales, and leaving aside property taxes and GST, up to a maximum of $32,500.00 per annum. The first 15% payment was to be made on June 1, 1993. The situation was not therefore one whereby they would receive a salary for their work as had theretofore been the case of the Appellant, but rather that thereafter they would pay rent for the privilege of managing the hotel. Whether it was rent in the true sense or a fee for the privilege of managing the hotel is neither here nor there. The essence is that they paid Bing for the privilege of managing the hotel based on a percentage of gross sales up to an annual maximum of $32,500.00. In fact, what transpired was a payment out of the “trust” funds to the mortgagee on behalf of Bing, rather than to Bing directly. In my view, this changes nothing.
[21] At the end of the day, it seems clear to me that there were substantial differences in the working arrangements of the Appellant after the written agreement. The fact that she chose to operate the hotel in a continuing seamless way, does not change the legal right she obtained, nor the legal obligation she incurred under the written agreement.
Application of the Four Aspects of the Test to the Evidence
[22] Control: The Court is always concerned, not with whether the control was in fact exercised, but whether the payor or purported employer had the right to control the work of the person providing the service. In this case, clearly before June 30, 1993, Bing had the right to supervise and control the daily activities of the Appellant. In point of fact, they tended not to exercise that right, except with regard to some financial matters as the Appellant obviously proved her worth and competence as a manager quite quickly. Nonetheless, they had the right to control up to that point.
[23] After the written contract on June 30, 1993, it is equally clear that they did not have the right to control her working activities. They had clearly entered into a separate and distinct management contract, in which she had a beneficial ownership in potential profits and was obligated to make payments to Bing for the right to manage the hotel. She was no longer a payee of Bing. Her salary was in reality a series of advances set by herself. She had the right to handle or change that situation as she saw fit. Further by agreement, certain financial security measures were put into place to protect all parties. That did not involve control over her management duties. Similarly, the right reserved to Bing to approve capital expenditures did not mean that they had control over day-to-day management activities of the Appellant. It simply meant that she could not incur liabilities on their behalf for capital improvements over and above the specified limit. In my view, the Appellant was free to manage the hotel with her husband as they saw fit without supervision or control from Bing. This aspect of the test clearly points, after June 1993, to a contract for services.
[24] Tools and Equipment: All the equipment belonged to Bing. It was of a capital nature. Bing purported to lease it all to the Appellant. The arrangement was not at all inconsistent in the circumstances with a contract for services.
[25] Profit and Loss: The Appellant clearly stood to gain a great deal from the efficient and effective management of the hotel. Whatever was left over after expenses belonged to her and her husband. There was also potential for a downside for them with respect to the guarantees. By the terms of the contract, she was supposed to have signed the guarantee, but in fact it was only her husband who signed it. Nonetheless from a joint point of view, there was a potential for loss. This aspect of the test also favours an interpretation that the arrangement was a contract for services.
[26] Integration: The Court must ask the question “Whose business was it?”. The hotel clearly belonged to Bing. The management of the hotel was clearly in the hands of the Appellant and her husband after June 1993. Any profits were to be theirs. The business of managing the hotel was their business. The physical premises were made available to them to do so, subject to loans being paid off. This was classified as rent in the contract. From June 1993 onwards, I have no hesitation in concluding that the Appellant was in business for herself in an entrepreneurial sense and this aspect of the test clearly points to a contract for services after June 1993.
Conclusion
[27] Despite the very able and well presented arguments of counsel for the Appellant, when I stand back and look at these arrangements, look at the forest as a whole so as to speak, as well as when I consider all the individual aspects of the four stage test enunciated by the Federal Court of Appeal, I see a very clear employment arrangement up to June 30, 1993 and a very clear contract for services entered into with the Appellant and her husband as independent contractors after June 1993. The entrepreneurial nature of the latter arrangement was not at all consistent with an employer/employee arrangement, but was highly consistent with an independent contractor arrangement. Beneficial interest in the profits is particularly significant in my mind.
[28] In the result, the appeal is allowed on the basis that the employment is held to be insurable up to June 30, 1993. The decision of the Minister is varied accordingly.
Signed at Calgary, Alberta, this 2nd day of March 2000.
"Michael H. Porter"
D.J.T.C.C.
APPENDIX "A"
THIS AGREEMENT made this _________ day of __________________, A.D. 1993
BETWEEN:
BING HOLDINGS LTD.
(hereinafter called "Bing")
OF THE FIRST PART
- and -
WAYNE MCKAY and CAROLYN DEMPSEY
(hereinafter "McKay" and "Dempsey")
OF THE SECOND PART
WHEREAS Bing is the owner of certain hotel premises, buildings and equipment situate on that real property set forth in Schedule "A" (the "Hotel");
AND WHEREAS Bing, McKay and Dempsey are desirous of entering into a Management Agreement whereby McKay and Dempsey agree to manage the Hotel on the terms and conditions hereinafter set forth;
NOW THEREFORE in consideration of the mutual promises and covenants herein contained the parties hereto agree as follows:
1. McKay and Dempsey agree to faithfully and diligently fulfil the duties of managers of the Hotel with the day-do-day operation of the Hotel being the responsibility of Dempsey. The duties of McKay and Dempsey shall include but not be limited to: purchasing inventory as required; hiring and firing personnel as reasonably required; renting of rooms; cleaning and maintaining the rooms and premises; operating a steak pit; and such other duties incidental to the day-to-day operation of the Hotel as may be agreed to by the parties.
2. McKay and Dempsey agree to seek the approval of Bing before making any single capital expenditure exceeding $2,500.00.
3. In return for the right to operate and manage the Hotel McKay and Dempsey agree to pay to Bing on or before the 10th day of each and every month rent based upon 15% of gross sales for the month, plus the appropriate goods and services tax, excluding the Liquor Vendor, such payment not to exceed $32,500.00 per annum, exclusive of property taxes and goods and services tax, with the first payment to be made on the first day of June, 1993.
4. In addition to the payment obligations contained herein McKay and Dempsey agree to pay to Bing Holdings the monthly interest charge for a $50,000.00 operations loan from Dave Dunn to Bing, which interest rate has been set at 10% per annum. McKay and Dempsey further agree that they will pay down the principal on the said loan by $10,000.00 by September 30, 1993 out of the revenues of the Hotel.
5. McKay and Dempsey agree to provide to Bing a monthly sales report by the 10th day of each and every month recording all sales by Department and monthly financial statements comprising a statement of income and expenses, statement of change in financial position and an internally prepared balance sheet. Upon request Bing shall also be entitled to see all cancelled cheques issued through Bing.
6. If McKay and Dempsey are not in default of the provisions of this agreement either or both of them shall have the option to purchase the Hotel by purchasing all outstanding shares of Bing together with all inventory and equipment within an 18-month period from the date hereof for a total price of $250,000.00 plus payment of any amount remaining outstanding on the operations loan from Dave Dunn to Bing.
7. In the event the option provided for in paragraph 6 hereof is exercised by McKay and Dempsey, Bing agrees to credit to McKay and Dempsey any overpayment of rent as calculated in accordance with paragraph 3 hereof, such that McKay and Dempsey shall only be responsible for that proportion of rent due and owing from the annual rent for the months prior to the month in which the option is exercised.
8. The parties agree that the option to purchase the Hotel as contained in paragraph #6 hereof may be extended by an additional period of 12 months. In the event such extension is made, the parties hereto agree that the amount of the operations and management payment made by MacKay and Dempsey to Bing in accordance with paragraph #3 hereof shall be calculated and will reflect the balance remaining by Bing on the small business loan taken to purchase the Hotel such that Bing will receive the same return from the operations and management payment on the balance then remaining on the small business loan as it currently receives on the balance now outstanding by payment of the $32,500.00 in accordance with paragraph #3 hereof.
9. McKay and Dempsey hereby acknowledge that the liquor inventory in the Hotel amounts to $15,000.00 as at the date hereof and McKay and Dempsey agree that they will not let the inventory level drop below $15,000.00 without prior approval of Bing. McKay and Dempsey further acknowledge that the $15,000.00 in inventory is the sole property of Bing; provided, however, that as soon as McKay and Dempsey have paid off the $50,000.00 operations loan from Dave Dunn to Bing, ownership of the inventory will revert to McKay and Dempsey.
10. The parties hereto agree that McKay and Dempsey shall be entitled to the remaining profits of the Hotel after payment of all obligations contained herein and all day-to-day operating expenses which McKay and Dempsey are obligated to make including, but not limited to, payment of staff wages, purchase of inventory, payment of all utility bills, payment of insurance premiums, payment of Liquor Consumption Tax, payment of Canada Pension Plan premiums, Unemployment Insurance premiums, all such other payments as may be required by the Federal or Provincial Government and any payments required for repair, maintenance and the like, excluding structural repairs.
11. The parties hereto acknowledge that they are the joint guarantors of a line of credit in the amount of $10,000.00 with the Sherwood Credit Union in Lumsden, Saskatchewan. McKay and Dempsey agree that before drawing on the said line of credit any such draw and the reasons therefore shall be discussed with the principals of Bing and a consent of Bing to such a draw shall be secured. In no event shall the line of credit at the Sherwood Credit Union in Lumsden, Saskatchewan, exceed $10,000.00 without the mutual agreement of the parties hereto.
IN WITNESS WHEREOF these presents have been executed by the parties hereto on the day and year first above written.
BING HOLDINGS LTD.
Corporate Seal Per: B. Barber
D. Dempsey
Witness
Wayne McKay
Wayne McKay
D. Dempsey
Witness
Carolyn Dempsey
Carolyn Dempsey