Employee or Independent Contractor

Saturday, January 26, 2013

Case Citation

Hire Roller Inc. v. Canada (National Revenue) (2013 TCC 10) [TCC] [CanLII]

Summary

Many cases before the Tax Court of Canada deal with the issue of whether an individual is an employee or an independent contractor. In this case the employer seemed to wish an independent contractor status on an employee instead of creating such an arrangement.

While courts look to the intentions of the parties, they cannot ignore the facts of an employee-employer relationship as happened here.

Issue

[1] These are appeals from determinations by the Minister of National Revenue (the “Minister”) that Greg Wolski (the “Worker”) was an employee of Hire Roller Inc. (the “appellant”) during the period from January 1, 2010 to January 13, 2011 (the “Period”) for the purposes of the Employment Insurance Act (the “EIA”) and the Canada Pension Plan (the “CPP”).

ITA / ETA

None.

Cases Cited

TBT Personnel Services Inc. v The Queen (2011 FCA 256)
Wiebe Door Services Ltd. v M.N.R. (1986 FCA) (87 DTC 5025)

Analysis

[4] I do not agree with the appellant’s assertion that the evidence shows that the Worker accepted the independent contractor status given to him by the appellant. Mr. Wolski testified that he did not understand what the appellant meant when it declared that he was to be treated as a self-employed person. He explained that he had always been an employee in his prior positions. His day-to-day working arrangement with the appellant was similar to the arrangement in his previous positions. When he was presented with a written agreement prepared by the appellant, he refused to sign it. This agreement sought to confirm that the Worker was a contract driver.

[5] Be that as it may, it is not a question of whether the Worker accepted or not the appellant’s description of their relationship. It is well accepted that the parties’ description of their relationship is not in and of itself determinative of the issue. In TBT Personnel Services Inc. v. Canada, 2011 FCA 256 (CanLII), 2011 FCA 256, the Federal Court of Appeal cautions that the factors outlined in Wiebe Door[1] must nonetheless be applied to discern the true nature of the parties’ relationship. Employers cannot avoid their contribution obligations under the EIA and the CPP simply by informing new workers that they will be treated as self-employed persons. If, in practice, the arrangement is not consistent with the existence of an independent contractor relationship, the label used to describe the relationship will be ignored.

[9] The appellant’s witness failed to convince me that the Worker was not subject to the appellant’s direction and control. This factor points to an employer-employee relationship.

[10] The evidence shows that the appellant provided the Worker with the vehicles, trip log sheets, GPS, maps, pens, clipboard, pass key, etc. necessary to perform his duties, and that it did so at no cost to the Worker. The appellant paid all of the operating costs of the vehicles and was responsible for their maintenance. This factor also points to an employer-employee relationship.

Decision

[15] In light of the evidence and on the basis of the application of the Wiebe Door tests, I conclude that the Worker was an employee of the appellant throughout the period under review.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.

Arm’s Length Test For Employment Insurance

Saturday, January 26, 2013

Case Citation

Smagh v. Canada (National Revenue) (2013 TCC 9) [TCC] [CanLII]

Summary

To avoid abuse or fraud of the EI system, there are rules in places that deal with the situation where an employer hires a family member. In order to contribute and receive EI benefits, the employment contract must be a “substantially similar contract of employment would have been entered into if the parties had been dealing with each other at arm’s length.”

In this case, the employee-employer relationship was between a husband and wife and while the base relationship was considered normal for the industry, the appellants went offside with a loan to pay damages that resulted from a car accident. It’s unlikely the loan would have occurred between parties dealing at arm’s length.

Issue

[1] The appellant Kulwant Kaur Smagh (Kulwant Kaur) and the appellant Roop Singh Smagh (Roop Singh) each appealed from a decision – dated April 12, 2012 – by the Minister of National Revenue ( the “Minister”) in which the employment of Kulwant Kaur with Roop Singh for the period June 22, 2009 to September 11, 2009 was held not to constitute insurable employment because the Minister was not satisfied pursuant to paragraph 5(2)(i) of the Employment Insurance Act ( the “Act”) that a substantially similar contract of employment would have been entered into if the parties had been dealing with each other at arm’s length.

ITA / ETA

None.

Cases Cited

Bélanger v. Canada (Minister of National Revenue), 2003 FCA 455 (CanLII)
Birkland v. M.N.R., 2005 TCC 291 (CanLII)
Massignan v. Canada (Minister of National Revenue), 2003 FCA 172 (CanLII)
Porter v. M.N.R., 2005 TCC 364 (CanLII)

Analysis

[17]…The arrangement between Roop Singh and Kulwant Kaur does not fit within the pattern of the loans made - or advance wages paid - to non-related workers and other parties. That agreement was unique and would not have existed if the parties had not been related. Would a non-related worker have agreed that an employer could apply every cent of net wages - earned from 720 hours of work – to discharge a debt? To ask the question is to answer it.

[18] The appellants acted in good faith to resolve a thorny issue.

[19] Were I clothed with the jurisdiction to decide these appeals de novo, I may have been tempted to find in favour of the appellants in light of their longstanding employer/employee relationship and the otherwise normal nature of the employment during the relevant period in the context of the orchard industry. Because the within fact situation constituted a one-off, that alone could have fuelled such an inclination. However, these musings are simply speculative, of the sort indulged in by those armchair quarterbacks or wannabe skips who – from the comfort of their couches – would have targeted a different receiver in the dying seconds of the 4th quarter or called a different shot in the 10th end of a Brier final.

Decision

[21] Each decision of the Minister is confirmed and each appeal is dismissed.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.

Due Diligence Defence for GST Input Tax Credits

Saturday, January 26, 2013

Case Citation

9183-2899 Québec Inc. c. La Reine [TCC] [CanLII]

Summary

The facts of this case are many and murky.

The appellant claimed input tax credits for the purpose of its GST account from invoices from 9183-7302 Quebec Inc. CRA didn’t believe the invoices were valid. The murky nature of the business lead the court to believe the invoices were questionable; however, it did not view it as a scheme to illegally benefit from an improper ITC but as a mistake of the appellant. Its conclusion rested on the question: did the company exercise due diligence to avoid the error?

For reasons based on case law of this issue, the court decided the taxpayer did exercise reasonable due diligence and allowed the ITC.

Note: The case is reported in French. This write-up is based on my translation.

Issue

[1] The appellant appeals from an April 6, 2010 assessment and a total amount of $5,398.35 (including interest) for the period 1 July 2007 to 28 February 2009. The respondent was denied (possibly) an input tax credit (ITC) of $4,861.62 for the purchase of spare parts and car accessories from 9183-7302 Quebec Inc. (Supplier). As indicated on invoices: this Supplier was unable to deliver these supplies to the appellant and they were therefore mere bills of convenience and the appellant had no right to the ITC.

ITA / ETA

None.

Cases Cited

Amiante Spec Inc. v. Canada (2009 FCA 139) [FCA] [CanLII]
Comtronic Computer Inc. v. The Queen, 2010 TCC 55
Corporation polytechnic v. Canada , 2004 FCA 127
Joseph Ribkoff Inc. c. The Queen , 2003 CCI 397
Systematix technology consultants inc. v. Canada , 2007 FCA 226
Orly Automobiles Inc. v. Canada (2005 FCA 425) [TCC] [CanLII]

Analysis

[14] The respondent does not deny that these transactions took place and that these car parts have changed hands, it simply says that the supplier was not 9183-7302 Quebec Inc., but some other supplier who remains unknown to him since that 9183-7302 Québec Inc. lacked the physical means to do this kind of business or transaction. It had no warehouse or employee, or administrative services or transportation, or sub-processing, and it was only supplier invoices of convenience, therefore the GST number attached to 9183-7302 Québec Inc. is invalid for these transactions. In fact, this number has been removed in December 2009 as a result of this audit investigation began in March 2009 by Mr. Serge Giroux.

[21] There is no evidence or suggestion that the appellant was in collusion with the supplier in a scheme of convenience described by the respondent. From the point of view of Mr. Laferrière [appellant owner], the company had trade relations with the Supplier for almost 18 months, fundamental work, a supplier of required goods, cheap, by cheque, without credit or guarantee.

[22] Justice Trudel in Amiante Spec Inc. v. Canada, 2009 FCA 139 (CanLII) , 2009 FCA 139, states, in paragraph 23:

A prima facie case is one “supported by evidence which raises such a degree of probability in its favour that it must be accepted if believed by the Court unless it is rebutted or the contrary is proved. It may be contrasted with conclusive evidence which excludes the possibility of the truth of any other conclusion than the one established by that evidence” (Stewart v. Canada, [2000] T.C.J. No. 53, paragraph 23).

In paragraph 24, Justice Trudel, referring to Orly Automobiles Inc. v. Canada, 2005 FCA 425 (CanLII) , 2005 FCA 425, said:

[...] The burden of proof on the taxpayer should not be overturned lightly or arbitrarily [...]

and that the taxpayer:

[...] Know how and why his company works as it is and not otherwise. He knows and has information that the Minister does not have. It has information [...] which are within his reach and over which it has control (ibid.).

[26] These facts amply demonstrate the assumptions of the respondent, the basis of the assessment in this case: 9183-7302 Québec Inc. provided invoices of accommodation or convenience, and could not be described as invoices issued to the appellant. The appellant has made a mistake.

The court then addresses this question: did the company exercise due diligence to avoid the error?

Decision

[46] Given the circumstances existing at the time of these transactions, the appellant exercised reasonable due diligence to avoid the mistake which has now been charged by the respondent, relying on the representations of them.

[47] The appeal is allowed.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.

Purchase Price Allocation Between Land And Building

Friday, January 25, 2013

Case Citation

Sunrise Realty Investments Limited v. The Queen (2013 TCC 5 [TCC] [CanLII]

Summary

The taxpayer purchased commercial property for one price and allocated $150,000 to land and the remaining amount to various depreciable property. There’s no one amount for the value of the land, but the taxpayer’s allocation wasn’t reasonable in the circumstances and hence the reassessment and court case. The judge put a value of $731,081 to the land. Quite a change.

Issue

[1] Sunrise Realty Investments Limited ("Sunrise") appeals its assessments for 2005, 2006, 2007, 2008, 2009 and 2010. The issue in each of the assessments is the allocation of the purchase price of real property acquired in 2004 as to the cost of the land and capital cost of assets, specifically a building on the land.

ITA / ETA

None.

Cases Cited

None.

Analysis

A comparative analysis of sales of similar properties.

Decision

[27] The appeal will therefore be allowed and the matter referred back to Minister of National Revenue for reconsideration and reassessment on the basis that the value of the vacant land at time of acquisition was $25.05 per square foot, or $731,081, and the building value was $948,916.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.

Splitting Pension Income, Pension Tax Credit

Friday, January 25, 2013

Case Citation

Talbot c. La Reine (2013 CCI 2) [TCC] [CanLII]

Summary

A taxpayer who hadn’t reached 65 years of age received a lump sum pension payment from his former employer. The amount isn’t eligible for either the split-income provisions between spouses or the pension tax credit.

For a taxpayer who isn’t 65, the only eligible pension income is

a payment in respect of a life annuity out of or under a superannuation plan, a pension plan or a specified pension plan.

There is an exception if the amount was received as a consequence of the death of a spouse.

Note: The case is reported in French. This write-up is based on my translation to English.

Issue

[4] The appellant subsequently received a T4A from the Hydro-Québec pension fund reporting that a lump sum payment of $13,691 had been paid in 2009. The appellant and his wife jointly elected to split the income in question and each claimed a pension credit of $2000. The issue is whether the lump sum payment of $13,691 paid to the appellant in 2009 as pension income can be split and give the rise to a pension credit.

ITA / ETA

paragraph 56(1)(a.2)
subsection 60(c)
section 60.03 [See below]
subsection 118(3) [See below]
subsection 118(7) “eligible pension income” [See below]
subsection 118(7) “qualified pension income” [See below]
subsection 118(8)
subsection 118(8.1)
248(1) “annuity”

Cases Cited

None.

Analysis

[11] Section 60.03 sets out the rules that determine the amount of pension that can be attributed to the spouse. This amount is included in the transferee spouse's income under paragraph 56(1)(a.2) and is deducted from the income of pensioner’s spouse under paragraph 60(c). Finally, subsection 118(3) provides that the transferee spouse may receive a pension credit under the formula.

[15] The amount of pension that can be split is established pursuant to paragraph 60.03(1) of the ITA. Under this paragraph, the "split pension amount" depends on a formula that takes into account the "eligible pension income" of the pensioner. According to this paragraph, "eligible pension income" has the meaning assigned by subsection 118(7) of the ITA.

[16] Under subsection 118(7) of the ITA, the "eligible pension income" of an individual under the age of 65 years is his "qualified pension income" received during the tax year.

[17] Under subsection 118(7) of the ITA, the "qualified pension income" received in a particular year is the total of the amounts referred to in subparagraph(a)(i) of the definition of "pension income" as well as the amounts referred to in subparagraphs (a)(ii) to (vi) and paragraph (b), the latter being, however, only included if they are received as a consequence of the death of a spouse. Therefore, in this case, the appellant's only income that may be split under subsection 60.03(1) of the Act is that referred to in subparagraph (a)(i) of the definition of "pension income", that is, a payment in respect of a life annuity out of or under a superannuation plan, a pension plan or a specified pension plan.

[18] Subsection 118(8) of the Act excludes certain pension income as defined in subsection 118(7). Paragraph (e) excludes a payment:

a payment received out of or under a salary deferral arrangement, a retirement compensation arrangement, an employee benefit plan or an employee trust;

[19] In my opinion, any payment received under a retirement compensation arrangement is expressly excluded from the application of the splitting of pension income.

Decision

[22] In this case, the annual benefit received by the appellant is not an annuity, so the lump sum payment of $13,691 paid for the 2009 tax year cannot be split between spouses.

[24] In my opinion, the annual payment received by the appellant under the agreement between him and his employer is not subject to pension income splitting between spouses and does not qualify for the pension credit.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.

Tax Courts Cases in 2013

Saturday, January 19, 2013

As of Saturday, January 19, 2013, the Tax Court of Canada has released 6 decisions. None of the cases have brought forth any new issues or new twists in interpreting tax law.

The Federal Court of Appeal and the Supreme Court of Canada have released 5 and 3 decisions or motions respectively. None deal with tax law.

Joint Liability of Spouses Under Section 160

Thursday, January 17, 2013

Case Citation

Bashir v. The Queen (2013 TCC 6) [TCC] [CanLII]

Summary

As often happens in cases like this one, the facts are murky. The taxpayer was caught not paying taxes on cash sales of a restaurant business then appears to create a sham in an attempt to avoid paying the taxes he agreed were owing.

How to avoid paying the tax debt? Transfer property that is in his name to his spouse and say they are separated.

While this case dealt with section 325 of the Excise Tax Act, it is similar to section 160 of the Income Tax Act. Both provisions create a joint liability for tax debt when, in certain circumstances, property is transferred between non-arm’s length persons. As a matter of tax law, a taxpayer and spouse don’t deal at arm’s length.

Normally, the tax debts of each spouse are kept separate as each person files a separate tax return, that is to say, the government can’t go after property of one spouse to satisfy a tax debt of the other, but there are exceptions.

If a spouse transfers property to the other for consideration that is less than fair market value, the spouse receiving the property becomes jointly liable for certain tax debts of the other spouse.

But there are exceptions, including the situation where the taxpayer and spouse are separated and living apart. If they are truly separated, a transfer can happen at no consideration and no joint liability exists. This is what the taxpayer claims happened, but the judge didn’t agree.

Issue

[1] This is an appeal from an assessment dated September 17, 2009 and confirmed on July 28, 2010 whereby the appellant was assessed for an amount of $26,707.92 with respect to the transfer of various properties to her by her husband Bashir Munshi (the transferor). The assessment was issued under section 325 of the Excise Tax Act (ETA) on the basis that, at the time of the transfer of the various properties, the transferor was liable to pay the amount now assessed against the appellant and that, as a result of the said transfer, the appellant became jointly and severally liable with the transferor to pay that amount.

ITA / ETA

Excise Tax Act (ETA) section 325
ITA 160(1)—Tax liability re property transferred not at arm’s length
ITA 160(4)—Special rules re transfer of property to spouse or common-law partner

Cases Cited

Yates v. The Queen (2009 FCA 50) [FCA] [CanLII]

Analysis

[18] The appellant’s counsel submits that subsection 325(4) of the ETA is applicable in this case: the transfer of the four properties was made under a written separation agreement and the appellant and the transferor (the husband) were separated and living apart at the time as a result of the breakdown of their marriage. In the alternative, the appellant’s counsel argues that there was a consideration given by the appellant in that she renounced her right to child support for her children, who were four and ten years old at the time. Although this fact is not in evidence, counsel submits that child support for both children adds up to $25,000 a year and that it represents sufficient consideration for the transfer.

[19] The respondent’s counsel questions the timing of the separation agreement as it was signed one day before the transferor signed an agreement with Revenu Québec concerning his personal income tax and a little more than two months after he had signed another agreement with Revenu Québec respecting the GST amount he owed. Counsel for the respondent further argues that no mention of the separation is made in the deed of transfer of the four properties and that the address for both the appellant and the transferor is the same more than three months after they say they separated. As an alternative argument, counsel for the respondent submits that the only exception to the application of section 325 is found in subsection 325(4), and it is an exception with regard to any payments made for child support. One must therefore meet the requirements set out in subsection 325(4) if one is to avoid the application of section 325, and therefore the matter of the consideration given and of fair market value with respect to the transferred properties becomes irrelevant.

[20] There is no doubt that the facts of this case leave many questions unanswered. Many of the facts and situations referred to are questionable, particularly with regard to the sequence of events and the reasons given for what was done. It appears strange to me that the transferor never spoke to his wife about his tax problems at any time prior to the transfers; moreover, the appellant was never made aware of the audit taking place at her husband’s restaurant. Yet she testified that the four properties were mortgaged in January 2008 to pay her husband’s debts. She did not specify which debts and I suppose one could conclude that they did not include the tax debt as no tax debt payment was made. We do not know which debts needed to be paid. We do not know how the appellant was able to mortgage the four properties on January 22, 2008 when she in fact became their owner only on February 18, 2008, almost a month later.

[23] The other inconsistency that the existence of these four mortgages creates is that the appellant stated that she mortgaged the four properties so that the transferor could pay his debts, but the Agreement states that the transfer to her is made for child support. It seems to me that the amount that these four properties were mortgaged for leaves little room for child support in that the income from the rents would necessarily be applied to the mortgage payments and that, in the event of their sale, there would be hardly any equity in the four properties when one compares the mortgage amounts with their assessed value for property tax purposes.

[30] On considering all of the evidence and the many incongruities it contains, I find as well that the testimony of the transferor's sister and her husband is inconsistent with the documentary evidence and raises other unanswered questions; hence I cannot give any weight to their evidence.

[31] In order to meet her burden of proof, the appellant must, on a balance of probabilities, satisfy this Court that one of the exceptions stated in subsection 325(4) of the ETA exists here. I am not satisfied that the evidence adduced permits me to conclude that when the transfer occurred or when the Agreement was signed there had been a breakdown of the marriage in that the appellant and the transferor were living separate and apart, nor do I find that the deed of transfer was a logical extension of the Agreement.

Decision

[33] The appeal is dismissed with costs.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.

Tax Motion Yawn

Wednesday, January 16, 2013

Tax Court case #4 of 2013: Devon Canada Corporation v. The Queen, 2013 TCC 4.

Not all tax cases are of interest to a tax accountant like me. This one fits as it relates to procedural motions about how the court works. Boring.

The decision was delivered on January 8th, 2013 but not posted on the Tax Court of Canada web site until the 15th. A one week delay. Given the speed of information these days I’m surprised it takes a week.

Tax Credit for Student Loan

Wednesday, January 16, 2013

Tax Court case #3 of 2013: Mueller v. The Queen (2013 TCC 3).

As far as court cases go, this one couldn’t get any easier. The taxpayer borrowed money through a line of credit at a bank and sought to claim a personal tax credit on interest under section 118.62 of the Income Tax Act. The provision allows for a credit on interest related to student loans. While the taxpayer’s borrowing related to education, it didn’t fit into the limited borrowing requirements of the section and hence the credit was denied.

The judge writes,

[9] The difficulty in this case is the requirement that the loans be provided under one of the following: “the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students.”
[10] In the notices of appeal, the appellants acknowledge that the loans were not eligible under any government program. This is fatal to their claim.
[12] Since the loans do not satisfy the conditions set out in section 118.62 of the Act, there is no relief that this Court can give.

Note: The tax court’s web site lists cases 1 and 3, but not 2. What happened to 2? Will it appear later?

First Tax Case of 2013

Wednesday, January 16, 2013

The first Tax Court of Canada decision of 2013 is out: Jack v. The Queen (2013 TCC 1).

The case deals with the application of a penalty under subsection 163(1) of the Income Tax Act. The taxpayer failed to report income. The penalty is 10% of the unreported income and is on top of whatever taxes are owing on that income. Nothing the taxpayer presented in court swayed the judge to reverse the penalty and the assessment was allowed. Her defence seems to be ignorance with a touch of indifference plus putting blame on her tax return preparer.

The judge writes,

[19] Ms. Jack did not exercise a reasonable degree of due diligence in the filing of her 2009 tax return or of her 2008 tax return. The amount of income that Ms. Jack failed to report, $60,000, was not an insignificant amount that the failure of which, as in Symonds v. R., 2001 TCC 274 (sic), would be innocent.
[20] There is a difference between innocent and careless. I have no doubt Ms. Jack's failure to report $60,000 was not deliberate but it was due to her reckless or careless disregard of her obligation to report all of her income in a tax return for an appropriate year.

Note the case reference should be 2011 not 2001.