1999-2298(GST)I
BETWEEN:
RANDY ZIVKOVIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 24, 2000, at London, Ontario, by
the Honourable Judge M.A. Mogan
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Michelle Farrell
JUDGMENT
The appeal from the reassessment made under the Excise Tax Act (for goods and services tax), notice of which is dated March 31, 1999 and bears number 08EP-116214347, for the period May 22, 1997 to December 31, 1997, is dismissed.
Signed at Ottawa, Canada, this 24th day of March, 2000.
|
"M.A. Mogan" |
J.T.C.C.
Date: 20000324
Docket: 1999-2298(GST)I
BETWEEN:
RANDY ZIVKOVIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Mogan J.T.C.C.
[1] In 1997, the Appellant was the owner and operator of Annabella's Massage Studio, a body rub parlour in Kitchener, Ontario. The Appellant described the services provided at his studio as non-therapeutic massages. The issue in this appeal is to determine the manner in which the Appellant is liable for goods and services tax ("GST") with respect to the operation of Annabella's Massage Studio ("Annabella's") in the period from May 22, 1997 to December 31, 1997.
[2] The Appellant described his operation of Annabella's as follows. He purchased Annabella's in February 1997. He was required to hold a business licence from the City of Kitchener in order to operate the studio. The licence actually authorized the operation of an "adult entertainment parlour". The massage services were provided by adult women whom the Appellant referred to as "the ladies". In order to work at the studio, each lady had to be licensed by the City of Kitchener as an "adult entertainment attendant". In order to obtain such a licence, a lady had to provide three photographs and have local police clearance. The studio operates from 11:00 in the morning until midnight each day of the week but does not operate on weekends. The Appellant tries to have two ladies in attendance whenever the studio is open so that a customer will have a choice as to which lady will provide the massage. His arrangement with the ladies is that they will agree to work either the day shift from 11:00 in the morning until 6:00 in the afternoon or the evening shift from 6:00 in the afternoon until midnight. He does not guarantee that there will be any customers for the ladies to serve if they attend at the studio for a particular shift.
[3] The times when the ladies attend at the studio are arranged by mutual convenience to the ladies and to the Appellant. In other words, certain ladies may phone in and say that they will work only afternoon shifts or only evening shifts or a combination of afternoons and evenings depending upon their circumstances. Also, if the Appellant has gaps where there are either no ladies in attendance or only one lady in attendance, he may phone one or more of the ladies on his list to see if they could attend at specific times so that he will be able to meet his target of having two ladies available for each shift. As stated, his policy was to have two ladies in attendance at his studio at all times from 11:00 in the morning until midnight.
[4] The fee structure for the massage services was as follows: $40 for a regular half hour; $50 for a special half hour; and $80 for one hour. The higher fee for the special half hour required the massage to be done in lingerie. At the end of each massage, the customer would pay the lady directly. It was an all-cash business and there were no credit cards. The lady would split the fee with the Appellant on a 50/50 basis. She would keep one-half of the fee and she would pay the other half to the Appellant. He would not be in attendance when the fee was actually paid by the customer to the lady and so he relied on her honour to recover his 50% of each fee.
[5] The Appellant regarded each lady as an independent contractor. As far as he was concerned, he simply provided a place for her to do a massage and he regarded the basic contract as made between the lady and the customer. The Appellant was visited by a GST auditor from Revenue Canada who asked to see the Annabella books and records. The Appellant explained that there had been a break and enter and theft at the studio and so he did not have a full set of records. The GST auditor examined what records were available and reached certain conclusions as to the volume of business at the studio from May 22, 1997 to December 31, 1997. The relevant amounts are discussed below.
[6] The Appellant reported GST collected of $5,869 and claimed input tax credits of $4,248 leaving him with a net liability of $1,621. The Respondent reassessed on the basis that (i) the Appellant made taxable supplies in the aggregate amount of $126,345 in respect of which he should have collected the 7% GST of $8,844; and (ii) the Appellant did not prove his entitlement to input tax credits exceeding $1,422. According to the assessment, the Appellant was required to remit $7,422 ($8,844 minus $1,422). In evidence, the Appellant did not dispute the fact that, in the relevant period, the gross amount of fees collected by the ladies at his studio was $126,345.
[7] The Appellant concedes that goods and services tax is payable with respect to the massages provided at Annabella's but he states that the primary contract is between each lady as an independent contractor and her customer. Therefore, GST should be collected on the gross amount of the fee by the lady. The Appellant admits that GST is payable on the services which he provides and for which he is paid half of the fees. According to the Appellant, it is important to each lady that she have safe premises like his studio with him in attendance so that she can do a massage without disclosing to the customer either her home address or her home telephone number.
[8] If the Appellant's argument is well-founded, each customer makes his primary contract with one of the ladies and should pay GST on the gross fee. By the same token, each lady needs certain services provided by the Appellant and she should pay the 7% GST on the amount she pays to the Appellant (one-half of her fee) for the services which he provides. In accordance with this argument, the Appellant has a tax liability of $4,422 (7% of $63,172) with respect to the GST he should have collected on one-half of the fees as determined by the GST auditor from Revenue Canada. This liability is acknowledged by the Appellant subject to his input tax credits for the assessed period. In summary, the Appellant claims that the ladies collectively should collect GST on the gross fees of $126,345 and that they collectively should claim input tax credits of $4,422 on the GST payable for his services.
[9] In my opinion, the result of this appeal depends on whether the ladies were employees of the Appellant or independent contractors. On that question, the facts run both ways. Concerning the idea of independent contractor, each lady must be licensed by the City of Kitchener as an "adult entertainment attendant". Each lady will agree to be in attendance at the Appellant's studio for a particular shift not knowing whether she will have a single customer during that shift. If she does not have a customer during that shift, she receives no remuneration whatsoever. On the other hand, if she does have a customer, she provides the only service which the customer wants and she collects the entire fee from that customer. Each lady has wide discretion as to what days she will work in a given week and which shift she will work. The principal qualification on this discretion is the fact that the Appellant has facilities for only two ladies on any particular shift but he wants to have two ladies available for both shifts each day when the business is open.
[10] According to the Appellant, the ladies can pick and choose when they want to work and where they want to work. For example, they could work at another massage studio on those days when they are not working at Annabella's. Also, they can dress as they like while attending at his studio. They are required to pay for their own supplies like oils and powders.
[11] Considering the idea of employment, although each lady is personally licensed by the City of Kitchener, she is required to provide her "attendant" services at a licensed premises like the Appellant's. The Appellant provides the place of business, the business name ("Annabella's Massage Studio"), a private room and a table or pad on which the massage may be performed. I assume that he also provided a business telephone number although that particular fact was not canvassed in evidence. The Appellant provides a degree of protection to each lady in the sense that her services are provided on his premises where she could obtain help if needed. If as the Appellant stated, the ladies want anonymity from the customers in terms of no customer knowing the home address or home phone number of a particular lady, then it seems to me that the goodwill of the business resides in its location and the name "Annabella's" because that is the only connection which a customer has with the massage services offered by the Appellant.
[12] The Appellant stated that when a lady had booked a particular shift, if she could not attend he expected her to send a replacement. This indicates a sense of community among the ladies who provided services at Annabella's in that they would know how to contact each other if one of them had to get a replacement. The Appellant also stated that if a lady booked a certain number of shifts but did not attend, he would not schedule her for any more shifts. This indicates a control on his part over who could work at Annabella's.
[13] At first blush, I would say that the ladies are employees of the Appellant and not independent contractors. His Notice of Appeal alleges that he owns and operates Annabella's and that allegation is admitted. He has the last say in deciding which ladies will work which shifts because he needs two ladies on duty for each shift. They come to his place of business to work. Although they must be licensed by the City of Kitchener as an "adult entertainment attendant", they are required to provide their "attendant " services at a licensed premises like Annabella's. They are not like a plumber or hairdresser who can operate his/her business out of the home. The fact that each lady requires a personal licence may be a red herring. Many individuals who work in special areas like investment banking and horse racing may require personal licences from a securities commission or racing commission but, at the same time, they are employees in the performance of their respective services.
[14] None of the ladies testified in this appeal but I believe the Appellant when he states that, generally, they do not want the customers to know their home address or phone number. This means that they do not develop a personal clientele apart from the Appellant's location and business name "Annabella's". The goodwill of the business attaches more to the Appellant than to any of the ladies.
[15] The Appellant described some of the restrictions which the City of Kitchener imposed on the licensing of his "adult entertainment parlour". He could not locate his business within 100 meters of a daycare centre, primary school or religious institution. Also, he could not have a residential property bordering on the site of his business. Because the ladies could offer their "attendant" services only at a licensed premises like Annabella's, they were tied to the same restrictions which applied to the Appellant. In a very real sense, they were not independent contractors but dependent contractors because they needed a person like the Appellant with a licensed place like Annabella's to offer their services.
[16] Following the decision of the Federal Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025, the tests most commonly used to distinguish an employee from an independent contractor are control, ownership of tools, and chance for profit or risk of loss. In my opinion, the Appellant had a measure of control over the ladies. They need a licensed premises like Annabella's to do massages and he provided that premises. They had to come to his location to perform their services. They could not freelance on their own without working at Annabella's or at a similarly licensed business. He had the last word with respect to the hours they worked because he needed two ladies for each shift. The control test points toward employment.
[17] The basic tools in the massage business are a private room, a table or mat or cot, and clean sheets. The Appellant certainly provided the first two and probably the sheets as well because the only supplies which the ladies were described as providing were oils and powders. The ownership of tools points toward employment.
[18] The Appellant was the owner of a business. He started with certain overhead costs. The city licence cost approximately $500 per year. He had to equip his studio and pay current expenses like rent, telephone and advertising. By contrast, the ladies had only the cost of a licence and lesser expenses like oils and powders. No uniforms were provided and they could dress as they pleased. Any lady ran the risk that no customers would come to Annabella's during her shift or that no customer would choose her for a massage. In either event, she would receive no fee. There was no evidence that the Appellant paid a "standby" fee to a lady for any shift if she had no customers on that shift. The Appellant's evidence is that, on average, there would be seven or eight massages per shift; and so I assume that it would be a rare occasion when a lady had no customer at all on a particular shift. On balance, I conclude that each lady ran the risk of receiving no remuneration on a particular shift but the Appellant had a much greater chance for profit or risk of loss.
[19] Considering the evidence and the law, I find that the ladies were employees of the Appellant and not independent contractors. The Appellant owned and operated Annabella's; and the customers who came there were his customers. It was his obligation to collect GST from his customers for the services which he provided to them at his studio. He has not proven that he was entitled to input tax credits in excess of $1,422. The appeal is dismissed.
Signed at Ottawa, Canada, this 24th day of March, 2000.
|
"M.A. Mogan" |
J.T.C.C.
COURT FILE NO.: 1999-2298(GST)I
STYLE OF CAUSE: Randy Zivkovic and Her Majesty the Queen
PLACE OF HEARING: London, Ontario
DATE OF HEARING: February 24, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge M.A. Mogan
DATE OF JUDGMENT: March 24, 2000
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Michelle Farrell
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada