The “Common Intention” Test in Independent Contractor Tax Cases
In a recent Tax Court of Canada decision, the court found that an employer and a worker’s common intention prevailed in determining whether the worker was an employee or an independent contractor.
Contracts Designated Worker as an Independent Contractor
The employer is a non-profit organization that, among other things, provides professional and continuing education to the insurance industry in Ontario.
From January 1, 2015 to March 31, 2018, the worker was hired as an instructor by the employer, where he taught classes to individuals on a part-time basis.
The employer and the worker entered into a series of contracts, which clearly set out that the employer and the worker both intended that the worker would be an independent contractor.
By designating the worker as an independent contractor, the employer did not have tomake contributions for CPP and EI. In turn, the worker was able to make certain tax deductions.
However, the Minister of National Revenue (the “Minister”) disagreed and concluded that the worker was an employee, not an independent contractor.
The employer appealed that ruling.
Employer and Minister Disagree on Interpretation Issues
The employer and the Minister agreed that the central question should be resolved in accordance with the two-step test set out by the Federal Court of Appeal in 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue) (“Connor Homes”).
However, the parties disagreed on how that two-step test was to be applied.
The Connor Homes Two-Step Test
The first step in the Connor Homes two-step test is to ascertain the subjective intent of each party to the relationship, which can be determined either by the written contractual relationship the parties have entered into or by the actual behaviour of each party, such as invoices for services rendered, registration for GST purposes and income tax filings as an independent contractor.
While the Minister agreed that the employer and the taxpayer shared a common intention that the worker be an independent contractor, the Minister argued that the objective reality was that he was an employee under the Wiebe Door and Sagaz factors, as set out in case law.
The Wiebe Door and Sagaz factors require courts to look at control, ownership of tools, chance of profit, and risk of loss as between the worker and the employer.
Court Finds Common Intention Between Employer and Worker
The court concluded that the second step of the Connor Homes test should be applied as follows:
1) Where the payor and the worker do not share a common intention, their relationship will be the relationship indicated by the Wiebe Door and Sagaz factors.
2) Where the payor and the worker share a common intention:
- if the Wiebe Door and Sagaz factors are consistent with that common intention, then their relationship will be the relationship that they intended;
- if the Wiebe Door and Sagaz factors are completely inconsistent with that common intention, then their relationship will be the relationship indicated by those factors; and
- if the Wiebe Door and Sagaz factors are inconsistent with that common intention but the parties nonetheless act and carry on their relationship in a manner that is similar to what one would expect from their intentions, then their relationship will be the relationship that they intended.
After reviewing the evidence, the court found that, objectively applied, the Wiebe Door and Sagaz factors indicated that the worker was an employee. While the court found that the control and ownership of tools factors were neutral, it concluded that the worker had no real risk of loss and no true ability to profit.
However, the court concluded that for there to be meaning to the two-step test in Connor Homes, a different test must be applied when the worker and the payor share a common intention, stating:
“I conclude that because [the worker] and the [employer] shared a common intention, I am to apply a lesser standard and consider whether the [employer] and [the worker] acted and carried on their relationship in a manner that was similar to an independent contractor relationship. I find that they did. [The worker]’s level of control, ownership of tools, risk of loss and chance of profit are similar to what one would expect from an independent contractor. He conducted his affairs in an entrepreneurial and business-like manner.”
As a result, the court allowed the appeals and referred the matter back to the Minister on the basis that the worker was an independent contractor in the periods in question.
Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.
Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.
With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.
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