Date: 20010808
Docket: 97-1023-UI-, 97-113-CPP,
97-1024-UI, 97-114-CPP
BETWEEN:
ROBERT McCANN and
DONALD C. LITTLE
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasonsfor Judgment
Mogan J.
[1] The appeals of Robert McCann v. The Minister of National Revenue (Court File 97-1023(UI)) and Donald Little v. The Minister of National Revenue (Court File 97-1024(UI)) were heard together on common evidence. Counsel agreed, however, that the results need not be consistent. It would be possible for one appeal to be allowed while the other was dismissed. Each Appellant had a separate agreement in writing with Prestressed Systems Incorporated ("PSI") under which each agreed to provide certain personal services to PSI in return for a defined level of remuneration. The issue in both appeals is the same: whether the Appellant is an independent contractor or an employee of PSI. Because Donald Little was the first witness to testify at the hearing, I will consider first his status as independent contractor or employee.
[2] Before setting out the particular facts relating to Donald Little, I shall describe PSI. It carries on business in Windsor, Ontario manufacturing hollow core precast concrete floor slabs, bridge girders for overpasses, columns, beams and other large precast structural components. The business was first started by two brothers, Mario and Valentino Collavino. They operated a successful construction company for many years before manufacturing prestressed concrete products. From 1988 to 1991, PSI was in financial difficulty. It seemed to come out of that difficulty and, around 1991, Valentino Collavino and his son Loris bought out the one-half interest owned by Mario Collavino so that, after 1991, the only shareholders of PSI were Valentino (over 60 years of age in 1991) and his son Loris who was a graduate engineer in his 30s.
Donald Little
[3] Mr. Little obtained a Bachelor of Commerce degree from the University of Windsor in 1985. He articled at Price Waterhouse in Windsor and became a chartered accountant in 1989. He left Price Waterhouse in 1988 to accept a position as comptroller of PSI. He worked there as a comptroller until the spring of 1991 when he moved to Brantford, Ontario to start a consultant/accounting practice. He did consulting work for an architectural construction group of companies in the Brantford area and, in December 1991, he became director of finance and administration for a telecommunications science center. In April 1993, the telecommunications industry was cutting back and funding for the science center was reduced. Accordingly, Mr. Little's position at the science center ended.
[4] Around the same time (April 1993), Loris Collavino called from Windsor to ask if Mr. Little would come back to PSI on a short-term basis because PSI was having financial difficulties. For the second time in five years, PSI was in trouble. It owed substantial amounts to creditors; cash flow was poor; and it could not get bonding. In Mr. Little's opinion, PSI was on the path to bankruptcy. At first, he was thinking of working only five months because PSI had retained a consultant (Dan Kotwicki) who had helped PSI though its prior financial trouble in 1988. Mr. Little learned, however, that Mr. Kotwicki had come to PSI with a high price tag; and that he had a negative effect on the morale of the PSI staff. Mr. Kotwicki left PSI soon after Mr. Little arrived in 1993; and Mr. Little realized that he would be needed for much longer than five months.
[5] Exhibit A-1 is an eleven-page agreement between Donald Little and PSI made as of July 1, 1994. It is entitled a "Management Consultancy Agreement" and Mr. Little is referred to as the "Management Consultant". It had a term of three years from July 1, 1994 to June 30, 1997. Mr. Little had a fixed remuneration of not less than $95,000 per year plus a bonus equal to 5% of annual pre-tax operating income to a maximum of $20,000. His extensive management-type duties were set out in Schedule "A" to the agreement. Article 14.06 of the agreement specified that Mr. Little undertook his duties as an independent contractor and not as an employee but the following articles indicate that the relationship between him and PSI could have been employment:
1.02 Attention to Business
During the period of his retainer, the Management Consultant shall devote his entire working time and attention to duties as may be assigned to him by the Company, and shall faithfully and diligently serve and endeavor to further the interests of the Company. ...
3.01.02 Rate Based Upon Forty-Eight Weeks
The fixed remuneration rate set forth above is based upon and refers to consulting services provided for forty-eight (48) weeks in any fifty-two (52) weeks consecutive period during the term hereof. Any adjustment in the number of weeks of service during such period shall result in a corresponding adjustment in the fixed remuneration.
3.01.03 In addition to the fixed remuneration, the Management Consultant shall receive from the Company a bonus payment for his services for each year during the period of his retainer under this contract, in accordance with Schedule "B" annexed hereto and forming a part of this Agreement.
4.01 Benefits
4.01.01 Automobile. The Company shall pay the sum of Six Hundred ($600.00) Dollars per month, plus applicable taxes to the Management Consultant as reimbursement to the Management Consultant for use and mileage by the Management Consultant of the Management Consultant's Ford Aerostar motor vehicle.
4.01.03 Club Fees. Recognizing the extra requirement for customer entertainment by the Management Consultant, the Company will provide for initiation and annual dues payments for one health or luncheon club, not to exceed Five Hundred ($500.00) Dollars annually.
[6] There is some conflict between Articles 1.05 and 5.01.01 concerning the extent of Mr. Little's authority with respect to PSI.
1.05 Limitation of Authority
Notwithstanding anything contained in this Agreement, nothing contained herein shall confer upon the Management Consultant any authority however limited to bind or agree to bind or otherwise enter into any commitment in respect of the Company, and the Management Consultant's duties hereunder are accordingly restricted.
5.01 Authority
5.01.01 The Management Consultant shall have, subject always to the general or specific instructions and directions of the Board of Directors of the Company, full power and authority over all operating decisions with respect to the Company and such affiliated and associated companies or persons as are controlled by the Company or its Board of Directors.
[7] Notwithstanding Mr. Little's obligation to devote "his entire working time and attention" to the business of PSI (Article 1.02), I have concluded for the reasons set out below that Mr. Little was at the relevant time (January 1, 1996 to September 9, 1996) an independent contractor and not an employee of PSI. When he started to work at PSI in April 1993, he expected to be finished by August. Soon after he started, Mr. Kotwicki was let go. After a few weeks, he knew from his prior experience at PSI in 1988/1989 that it would take more than five months for PSI to be on a sound financial basis and operating well. His first task was to meet with creditors - to get them on side - to get some breathing room - and to determine how they would be paid. He had to meet with customers to see if he could increase cash flow. He had to see if he could get bonding so that PSI could bid on certain projects. And internally, he had to advise the directors and shareholders (Valentino and Loris Collavino) concerning what expenses could be reduced.
[8] PSI obtained its primary financing from the Bank of Nova Scotia ("BNS") and, in 1993/1994, it was seeking support from the Ontario Development Corporation ("ODC"). Mr. Little stated that his consultancy agreement with PSI was prepared at the request of the BNS and ODC:
A. It's a document prepared by the lawyers, the corporate lawyers for Prestressed Systems Incorporated. It was prepared at the request of the Ontario Development Corporation through out attempts at financing. We were finally able to convince the Bank of Nova Scotia and through support from the Ontario Development Corporation to finance the operation of Prestressed Systems Incorporated. One of the financing conditions was that I sign a three year agreement with Prestressed Systems.
Q. One of the conditions of who?
A. Of the Ontario Development Corporation.
Q. All right.
And were you involved in those negotiations with the Ontario Development Corporation?
A. Yes.
Q. And do you have any information as to why they wanted you to sign a three year agreement?
A. The lending institutions and other creditors were still uneasy with Mr. Loris Collavino's ability to continue on with the restructuring that we had started through 1993. He was still I guess reluctant, is a better word for it, to agreeing with regards to all the procedures and dealing with operational issues that needed to be dealt with.
(Transcript, pages 22 and 23)
[9] According to Mr. Little, Loris Collavino was an engineer; his strength was in the practical side of the business, construction and production, whereas Mr. Little's strength was in financing and administration. Because BNS and ODC wanted Mr. Little to make a three-year commitment to PSI as a condition to their financing, he was in a strong bargaining position with respect to PSI. He wanted to continue his consulting/bookkeeping practice in Brantford. He did not want to move his family from Brantford to Windsor. He wanted access to a health or fitness club in Windsor during the week because he would commute home to Brantford on weekends. He wanted an automobile allowance to cover part of the cost of commuting. And finally, he wanted to be an independent contractor and not an employee of PSI. He negotiated all of these terms in his consultancy agreement (Exhibit A-1).
[10] Mr. Little explained that his obligation to devote his entire working time and attention to PSI did not prevent him from maintaining his professional practice in Brantford. Exhibit A-4 is a series of approximately 30 invoices sent by Mr. Little to his Brantford clients in 1996 for accounting services and for preparing income tax returns. He had a goods and services tax ("GST") registration number from 1991 when GST first started and he was operating his consulting practice in Brantford. He charged GST to his Brantford clients and his GST number appears on all of the invoices in Exhibit A-4.
[11] Exhibit A-2 is a series of monthly invoices sent by Mr. Little to PSI in 1996 charging one-twelfth of his fixed annual remuneration plus his $600 auto reimbursement plus GST. Exhibit A-3 is a series of invoices sent by Mr. Little to PSI in 1996 for Bell Mobility charges with a specific list of calls, and also charging GST. Mr. Little filed GST returns (Exhibit A-5) reporting the GST he collected from all sources (including PSI) and claiming certain input tax credits. PSI did not withhold any source deductions (income tax or unemployment insurance premiums) from the fixed remuneration paid each month to Mr. Little.
[12] In Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025, the Federal Court of Appeal reviewed the four tests commonly referred to when attempting to distinguish between an employee and independent contactor: (i) control; (ii) ownership of tools; (iii) chance of profit and risk of loss; and (iv) integration of the worker's services into the payor's business. In my view, these test are more difficult to apply to someone like Mr. Little who came to PSI in 1993 as an already established professional consultant. Nevertheless, the tests do deserve comment. PSI had virtually no control over Mr. Little with respect to his duties from 1993 to 1996 because he knew precisely what had to be done with creditors, customers, the bonding company and the bank. Indeed, there was no one at PSI who was as competent as Mr. Little at those negotiations. The control test would strongly favour Mr. Little as an independent contractor.
[13] Mr. Little's "tools" were virtually all contained within himself: his intelligence, his professional training as a chartered account; his business experience both previously with PSI in 1988/1989 and in Brantford in his consultancy practice. His use of a PSI computer or automobile was only incidental to the use of his real tools which were part of his being. He had no risk of loss because his remuneration was fixed but he had a chance of profit because his bonus was 5% of the PSI pre-tax profit up to an annual maximum of $20,000. His work was pretty well integrated into the PSI business because his three-year contract to perform his duties was a condition for BNS and ODC to continue their financing of PSI.
[14] Over and above the four tests which, on balance, favour independent contractor over employment, there are two particular circumstances which persuade me to allow the appeal of Donald Little. First, he had the stronger bargaining position in 1993/1994. PSI needed him more than he needed PSI. This is evident from the terms of Exhibit A-1 in which he obtained a generous fixed remuneration plus a bonus based on pre-tax profit. In those circumstances, he bargained to be an independent contractor (Article 14.06) and PSI agreed. I realize that such a term in such an agreement is not conclusive. Frequently, such a term will be set aside when a payor corporation has imposed it on a payee worker. But when the payee worker has at least equal bargaining strength with the payor, I am more inclined to permit the parties to define their relationship.
[15] The second circumstance is Mr. Little's change in status at the end of 1997. The term of the consultancy agreement (Exhibit A-1) was extended from June 30, 1997 to December 31, 1997 by Change Order #1 dated May 31, 1996. By 1997, PSI had totally recovered from its financial troubles of 1993/1994 and Mr. Little could see that his services would no longer be needed unless there was a change in the business. He had a number of discussions with Loris Collavino. He was prepared to stay on at PSI and grow with the Company if Loris was prepared to expand into Michigan and seek projects in Ohio and north Pennsylvania. Otherwise, if PSI was to remain a Windsor operation, then Mr. Little was not needed.
[16] Loris Collavino agreed that PSI could expand into the USA if Mr. Little was prepared to become a permanent part of the PSI team. Mr. Little agreed to change his role. At the end of 1997, he became the vice-president and general manager of PSI. He moved his family from Brantford to Windsor and gave up his professional practice in Brantford. PSI expanded its business into the USA. Mr. Little produced his own handwritten notes of PSI consolidated sales for the period 1993 to 2000 (Exhibit A-9) showing significant growth after 1997 with the impact of the US business. The consolidated PSI sales in 1996 were doubled in 1998 and tripled in 1999.
[17] From and after January 1, 1998, Mr. Little and PSI regarded him as an employee. Prior to that date, he was regarded as an independent contractor. I accept the manner in which the two parties most directly concerned characterized Mr. Little's function in the relevant period from January 1 to September 9, 1996. The appeal of Donald Little is allowed.
Robert McCann
[18] Mr. McCann has a Bachelor of Commerce degree from the University of Windsor (1969) and an M.B.A. degree from the University of Michigan (1971). He became a chartered accountant in Ontario in 1972. He practised his profession as a public accountant in the Windsor office of a national firm from 1972 to 1975 when he joined a construction company as comptroller. He was there for 13 years until 1988 when he commenced working for two or three different companies in succession helping to rescue them from near insolvency. Through these years, he had been developing a public accounting practice as a sideline business. In 1991, he opened an office in Tecumseh, Ontario and started a fulltime public accounting practice.
[19] In February 1993, Mr. McCann was called by Dan Kotwicki from PSI to see if he (Mr. McCann) could be engaged to perform as an independent contractor the comptroller's duties at PSI. After meeting with Mr. Kotwicki and Loris Collavino, Mr. McCann accepted an engagement letter on PSI letterhead dated February 16, 1993 (Exhibit B-1). Because the letter is important and brief, I will set it out in full.
Mr. Robert McCann, C.A.
Box 1181
Tilbury, Ontario
N0P 2L0
Re: Engagement Letter
Dear Mr. McCann:
In a follow up to our conversation, we would appreciate it if you would execute a copy of this letter indicating our relationship which we have agreed will be as follows:
1. Your billing rate will be $27.50 per hour, plus GST on a not to exceed 30 hour per week basis.
2. You have all the duties and responsibilities of the controller and will put in whatever time is necessary and this specifically means that if 30 hours is not sufficient you will still put in the time to ensure that all PSI controllership responsibilities in accordance with past practices are fulfilled on a timely and accurate basis.
3. You will bill us on a weekly basis the first part of the week and will be paid not later than Thursday for the week ending the previous Saturday. Please provide time sheets with your billing.
4. The accounting department has been informed that they report to you and that you are an independent contractor.
5. We recognize that you have an independent C.A. practice and have other clients. We do not have a problem with you bringing your personal computer in and working on other client materials so long as you do not put in less than 30 hours per week on PSI business or if you do than (sic) bill us less. You may receive phone calls and make outgoing local calls only, not long distance, to your clients. However, we would not want you to have these calls interrupt the flow of business or any meetings that you might be required to participate in. Additionally, we recognize that you may have to from time to time attend to other client matters but we do expect you to be in the office generally between 8:00 a.m. and 5:30 p.m. I recognize that these hours are more than 30 hours per week, however, we assume some of the time will be spent on other client's matters or that you may from time to time be absent yourself from the office (you estimated 5 or 6 days per month you may be not in at our location) during the day for your other responsibilities. Ensure that we are at all times aware of your schedule.
6. If time permits and you need access to typing support for your other business practices we can likely provide that to you so long as PSI business comes first. We would ask our secretary, Claire, to be the judge of whether or not she has time to devote to your personal business and she would track her time and PSI would bill you for her typing at $18.00 per hour plus GST.
7. When Dan Kotwicki is in the office you will report to him and in his absence take direction from myself. Dan will set your priorities and I believe he has briefed you on a brief training/familiarization program.
8. Major and unusual projects such as financial projections may result in time over and above the 30 hours and if approved in advance will be paid in addition to the 30 hours.
I hope this adequately summarizes our agreement and should you have any questions, please contract Dan or myself.
Yours very truly
Feb. 16/93 "Loris Collavino"
President
Feb. 16/93
"Robert McCann"
Signed and Accepted
LC/cmm
[20] Mr. McCann's evidence is that, with few exceptions, the terms of the engagement letter (Exhibit B-1) were followed from February 1993 until September 1997 when he became a fulltime employee of PSI. One of the exceptions was that he was ordinarily required to devote more than 30 hours each week to the affairs of PSI. He stated that he ordinarily invoiced PSI for more than 30 hours per week and his invoices were always paid without challenge. Notwithstanding the amount of time he spent each week on PSI affairs, he continued his public accounting/bookkeeping practice from his home in Tilbury, Ontario (about 45 kilometers east of Windsor on Highway 401).
[21] In February 1993, when Mr. McCann was retained by PSI, he had about six clients for whom he did bookkeeping, annual financial statements (some audited), corporate tax returns and general accounting advice. He had another 55 to 60 clients for whom he did annual income tax returns. Exhibit A-3 contains copies of various invoices sent by Mr. McCann to his public accounting clients in the years 1994, 1995 and 1996. Many of those invoices show Mr. McCann's address at 4955 Walker Road, Windsor which is the address of PSI. Other invoices show his personal address in Tilbury where he had an office in his home. The remaining invoices show both his home address and the PSI address. He explained that PSI had no objection to his use of the PSI address for his public accounting practice. In fact, his use of the PSI premises for his public accounting practice is contemplated in the engagement letter (Exhibit B-1).
[22] Exhibit B-2 contains copies of various invoices sent by Mr. McCann to PSI with respect to the hours he worked in certain weekly periods during 1994, 1995 and 1996. He had a GST registration number from 1991 in connection with his public accounting practice. Each invoice sent to PSI (Exhibit B-2) and to his other clients (Exhibit B-3) contained a charge for GST with Mr. McCann's GST registration number. Exhibit B-4 contains a copy of the GST return filed by Mr. McCann for the period October 1, 1993 to December 31, 1993 in which he reported the GST collected from all persons including PSI. In the weekly amounts paid by PSI to Mr. McCann there were no source deductions for income tax or unemployment insurance premiums.
[23] In February 1993, when Mr. McCann signed his engagement letter with PSI, his bargaining position was not as strong as Mr. Little's a few months later when Mr. Little agreed to provide professional services to PSI. It is clear, however, from Mr. McCann's evidence and from his engagement letter (Exhibit B-1) that he saw the risk of PSI becoming insolvent and going out of business; and that he wanted to distance himself from PSI in 1993 by retaining his professional status and not becoming an employee of PSI. That is what he bargained for in the terms of his engagement letter. His unchallenged evidence is that the terms of the engagement letter were followed from February 1993 to September 1997 when he agreed to become the comptroller (employee) of PSI.
[24] In my opinion, Mr. McCann achieved his objective. I find that he was an independent contractor and not an employee of PSI at all relevant times; particularly the period from January 1 to July 18, 1996. Although he preformed almost all of the functions of the comptroller of PSI after February 1993, he was not subject to the control of any senior employee of PSI. As a professional accountant in public practice, he was free to perform those functions as he saw fit consistent with the best interest of PSI. With respect to "tools", like Mr. Little, Mr. McCann's tools were virtually all contained within himself: his professional training and public practice as a chartered accountant; his business experience in helping other companies which had been near insolvency; and his knowledge of what a comptroller should do. Regarding tools as hardware, when Mr. McCann first came to PSI in February 1993, he brought his own computer because it had a good program and PSI had not yet developed a modern accounting program for a company of its size.
[25] Having regard to the tests of control and tools, those tests favour Mr. McCann as an independent contractor. With respect to the other two tests, he had an opportunity for profit or loss because he was on fee for service basis. According to the engagement letter, his billing rate was $27.50 per hour; there was no guaranteed minimum number of hours; and his maximum hours were not intended to exceed 30 hours per week but, in fact, they ordinarily did exceed 30. On Mr. Kotwicki's advice, Mr. McCann submitted his bill for services on a weekly basis (paid each Thursday for all work up to the prior Saturday) so that he would be paid regularly and never have a large receivable from PSI when it was financially fragile. The services performed by Mr. McCann were integrated into the business of PSI. The profit or loss test favours Mr. McCann as an independent contractor but the integration test favours employment.
[26] On balance, the four classic tests favour independent contractor rather than employment. Over and above the four tests, however, as with Mr. Little, Mr. McCann had a strong bargaining position vis-à-vis PSI in February 1993. He had a public accounting practice in Tilbury. He insisted on the right to retain his clients and serve them, if necessary, from the PSI office. In that circumstance, I am more inclined to permit Mr. McCann and PSI to define their relationship. They have done that in paragraph 4 of the engagement letter where Mr. McCann is identified as an "independent contractor".
[27] And finally, there was a real change in status in September 1997 when Mr. McCann stopped billing PSI for his time at an hourly rate and commenced to work as an employed comptroller at a fixed salary. This change in status was made with the obvious consent of both Mr. McCann and PSI. The appeal of Robert McCann is allowed.
[28] Both Mr. Little and Mr. McCann have corresponding appeals under the Canada Pension Plan with respect to the same question as to whether they were independent contractors or employees. Both of the appeals under the Canada Pension Plan are allowed.
Signed at Ottawa, Canada, this 8th day of August, 2001.
"M.A. Mogan"
J.T.C.C.
COURT FILE NO.: 97-1023(UI) and 97-113(CPP) and
97-1024(UI) and 97-114(CPP)
STYLE OF CAUSE: Robert McCann and Donald C. Little and
The Minister of National Revenue
PLACE OF HEARING: London, Ontario
DATE OF HEARING: August 3, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge M.A. Mogan
DATE OF JUDGMENT: August 8, 2001
APPEARANCES:
Counsel for the Appellant: Claudio Martini
Counsel for the Respondent: Carole Benoit
COUNSEL OF RECORD:
For the Appellant:
Name: Claudio Martini
Firm: Guttman, Martini, Barile
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
97-1023(UI)
97-113(CPP)
BETWEEN:
ROBERT McCANN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Appeals heard on common evidence with the appeals of Donald C. Little (97-1024(UI) and 97-114(CPP)) on August 3, 2000, at London, Ontario, by
the Honourable Judge M.A. Mogan
Appearances
Counsel for the Appellant: Claudio Martini
Counsel for the Respondent: Carole Benoit
JUDGMENT
The appeal under section 70 of the Unemployment Insurance Act for the period January 1, 1996 to July 18, 1996 is allowed; and the determination of the Minister of National Revenue on the application made to him under section 61 of that Act is reversed.
The appeal pursuant to section 28 of the Canada Pension Plan for the period January 1, 1996 to July 18, 1996 is allowed; and the determination of the Minister of National Revenue on the application made to him under section 27 of that Plan is vacated.
Signed at Ottawa, Canada, this 8th day of August, 2001.
|
"M.A. Mogan" |
J.T.C.C.
97-1024(UI)
97-114(CPP)
BETWEEN:
DONALD C. LITTLE,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Appeals heard on common evidence with the appeals of Robert McCann (97-1023(UI) and 97-113(CPP)) on August 3, 2000, at London, Ontario, by
the Honourable Judge M.A. Mogan
Appearances
Counsel for the Appellant: Claudio Martini
Counsel for the Respondent: Carole Benoit
JUDGMENT
The appeal under section 70 of the Unemployment Insurance Act for the period January 1, 1996 to September 9, 1996 is allowed; and the determination of the Minister of National Revenue on the application made to him under section 61 of that Act is reversed.
The appeal pursuant to section 28 of the Canada Pension Plan for the period January 1, 1996 to September 9, 1996 is allowed; and the determination of the Minister of National Revenue on the application made to him under section 27 of that Plan is vacated.
Signed at Ottawa, Canada, this 8th day of August, 2001.
|
"M.A. Mogan" |
J.T.C.C.