Date: 20020703
Docket: A-443-01
Neutral citation: 2002 FCA 258
CORAM: DÉCARY J.A.
BETWEEN:
STEVEN G. MEREDITH
Applicant
and
HER MAJESTY THE QUEEN
as represented by the ATTORNEY GENERAL OF CANADA
Respondent
Heard at Calgary, Alberta, on May 28, 2002.
Judgment delivered at Ottawa, Ontario, on July 3, 2002.
REASONS FOR JUDGMENT BY: MALONE J.A.
CONCURRED IN BY: DÉCARY J.A.
ROTHSTEIN J.A.
Date: 20020703
Docket: A-443-01
Neutral citation: 2002 FCA 258
CORAM: DÉCARY J.A.
BETWEEN:
STEVEN G. MEREDITH
Applicant
and
HER MAJESTY THE QUEEN
as represented by the ATTORNEY GENERAL OF CANADA
Respondent
REASONS FOR JUDGMENT
[1] This is an application for judicial review of a judgment rendered on July 6, 2001 by a judge of the Tax Court of Canada (the Judge), cited as [2001] T.C.J. No. 591 (QL). The Judge upheld the Minister's refusal to grant Steven Meredith (the applicant) an overseas employment tax credit (OETC) in the 1997 taxation year. The Minister's refusal was based on his determination that the applicant did not comply with section 122.3 of the Income Tax Act (the Act), because he was an independent contractor and not an employee of Stem Applications Inc. (Stem). Stem was a corporation which Meredith had incorporated in 1993 for business purposes.
[2] The central issues in this application are as follows:
a. Did the Judge err in disregarding the contractual and legal relationships between Meredith, Stem, and arms-length third parties in determining that Stem "is not an entity separate and apart from [the applicant]"; and
b. Did the Judge err in determining that Meredith was an independent contractor as opposed to an employee of Stem for the purposes of the OETC?
[3] The applicant is a highly specialized engineer who has an expertise in the installation and maintenance of computers and related machinery used in the manufacture of cans. Over the years, the applicant has built up a reputation as being highly qualified in this narrow field.
[4] In 1997, Stem bid to perform services for two American companies, Roeslein and Associates Inc. and Ball Corporation, and entered into contracts with both companies. The services under both contracts were to be performed in the United States. The applicant performed these services, and, in doing so, lived outside Canada for more than six months. Stem invoiced these third parties and was paid for the services that Meredith provided.
[5] Residents of Canada are generally taxed on their world-wide income. Provided that certain conditions are met in paragraphs 122.3(1)(a) and (b) of the Act, an OETC is available to reduce the Canadian tax liability of individuals who perform work duties as an employee of a Canadian corporation in a foreign country. Under the OETC scheme, an individual can earn up to $80,000.00 free of Canadian tax liability.
[6] The relevant portions of subsection 122.3(1) for the purposes of this application are as follows:
| 122.3 (1) Where an individual is resident in Canada in a taxation year and, throughout any period of more than 6 consecutive months that commenced before the end of the year and included any part of the year (in this subsection referred to as the "qualifying period") (a) was employed by a person who was a specified employer, other than for the performance of services under a prescribed international development assistance program of the Government of Canada, and
(b) performed all or substantially all the duties of the individual's employment outside Canada (i) in connection with a contract under which the specified employer carried on business outside Canada with respect to ... (B) any construction, installation, agricultural or engineering activity, ... there may be deducted, from the amount that would, but for this section, be the individual's tax payable under this Part for the year, an amount equal to that proportion of the tax otherwise payable under this Part for the year by the individual that the lesser of (c) an amount equal to that proportion of $80,000 that the number of days |
122.3 (1) Lorsqu'un particulier réside au Canada au cours d'une année d'imposition et que, tout au long d'une période de plus de 6 mois consécutifs ayant commencé avant la fin de l'année et comprenant une fraction de l'année (appelée la « _période admissible_ » au présent paragraphe)_: a) d'une part, il a été employé par une personne qui était un employeur déterminé, dans un but autre que celui de fournir des services en vertu d'un programme, visé par règlement, d'aide au développement international du gouvernement du Canada; b) d'autre part, il a exercé la totalité, ou presque, des fonctions de son emploi à l'étranger_: (i) dans le cadre d'un contrat en vertu duquel l'employeur déterminé exploitait une entreprise à l'étranger se rapportant à, selon le cas_:
... (B) un projet de construction ou d'installation, ou un projet agricole ou d'ingénierie, ... peut être déduite du montant qui serait, sans le présent article, l'impôt à payer par le contribuable pour l'année en vertu de la présente partie une somme égale à la fraction de l'impôt qu'il est par ailleurs tenu de payer pour l'année en vertu de la présente partie que représente le moindre des éléments suivants_: c) la fraction de 80_000_$ que représente par rapport à 365 le nombre de jours_: |
| (i) in that portion of the qualifying period that is in the year, and (ii) on which the individual was resident in Canada is of 365 ... |
(i) d'une part, compris dans la partie de la période admissible qui est au cours de l'année, (ii) d'autre part, au cours desquels le particulier résidait au Canada; ... |
[7] Meredith was paid $47,560.00 by Stem, and in filing his 1997 tax return, claimed an OETC in the amount of $6239.30. Relying on section 122.3, the Minister disallowed the OETC claim.
[8] At trial, a procedural irregularity arose from the pleadings in this case. The Minister's assessment did not indicate the assumption that Meredith was not an employee of Stem. This assumption was, however, pleaded in the Minister's Reply to Notice of Appeal. The Minister had originally assessed the applicant on the basis that the income was "excluded income" under subsection 122.3(1.1) of the Act, a provision which, as conceded by the Minister at the Tax Court hearing, did not apply to the applicant. Accordingly, the Minister was placed in the unusual circumstance before the Tax Court of having to accept the burden of proof to establish that Meredith was not an employee of Stem.
[9] Upon hearing the parties, the Judge concluded that the taxpayer "intermingle[d] the company and himself personally, emphasising that he treats them as one and the same. [Stem] is not an entity separate and apart from [Meredith]....It was the [applicant's] business and the [applicant] cannot be considered an employee of [Stem] during the 1997 taxation year."
[10] The applicant now seeks judicial review of that finding.
ANALYSIS
[11] In my analysis, the Judge committed several errors in the disposition of this case. First of all, the Judge "pierced the corporate veil" insofar as he looked beyond the corporate entity itself to assess the applicant's actions. Examples are sprinkled thought the reasons for judgment. For instance, he held that, notwithstanding the contractual relationship between the third parties and Stem, that it was "obvious that Roeslein and Ball were hiring [Meredith's] expertise and not retaining the Company as such in that it had no other workers." He also stated that "it is apparent that [Meredith] controls the Company and uses it for his own benefit from time to time when it is convenient. The Company does not use him." Further, he also made reference to the methods by which Meredith was paid by Stem, as well as arrangements Stem had with its bank, including personal guarantees provided by Meredith.
[12] Lifting the corporate veil is contrary to long-established principles of corporate law. Absent an allegation that the corporation constitutes a "sham" or a vehicle for wrongdoing on the part of putative shareholders, or statutory authorisation to do so, a court must respect the legal relationships created by a taxpayer (see Salomon v. Salomon & Co., [1897] A.C. 22; Kosmopoulos v. Constitution Insurance Co. of Canada, [1987] 1 S.C.R. 2). A court cannot re-characterize the bona fide relationships on the basis of what it deems to be the economic realities underlying those relationships (see Continental Bank Leasing Corp. v. The Queen, [1998] 2 S.C.R. 298;Shell Canada Ltd. v. The Queen, [1999] 3 S.C.R. 622 ; Ludco Enterprises Limited v. the Queen, 2001 SCC 62 at para. 51). It follows, therefore, that the Judge erred in law by inquiring into the economic realities of the relationship as between Stem and Meredith, when he was not authorised by statute or common law to do so.
[13] I am also satisfied that the Judge committed a further error in concluding that the applicant was not an employee of Stem. In applying the Wiebe Door Services Ltd. v. MNR, 87 DTC 5025 (FCA) analysis (which has been approved in 671122 Ontario Limited v. Sagaz Industries Canada Inc., 2001 SCC 59), the Judge did not take into account the well established principle that a corporation has its own juridical identity distinct from its shareholders (see Salomon, supra; Kosmopoulos, supra.). This principle applies equally to closely-held corporations such as Stem (Salomon, supra).
[14] The Judge was correct to conclude that the tools and equipment were held by Stem, and that this indicated an employment relationship; however, with respect to his findings regarding control, chance of profit and risk of loss, he fell into error.
[15] The recent decision of this Court in Groupe Desmarais Pinsonneault & Avard Inc. v. Canada (MNR), 2002 FCA 144 is instructive on the issue of control. There, Noël J.A. writing for the Court indicated that the question is not whether the corporation did or did not exercise control, but whether it was in a position to do so. The importance lies in the corporation's legal power to control the employees, not whether the employees feel subject to that control. That is the case here, where Stem has contracted with arms-length third parties. It is Stem, not the applicant, with whom the third parties contracted for Meredith's expertise, and it is within Stem's legal power, as a corporation, to control Meredith. Therefore, given the corporate structure in place, it is irrelevant that Meredith is the sole shareholder and director. Based on the above authority, the Judge erred in finding that control lay in the hands of the applicant in his personal capacity.
[16] Likewise, with respect to chance of profit and risk of loss, any profits or loss accrue to Stem, and not to the applicant. By attempting to trace monies paid by third parties through Stem to the applicant, the Judge once again pierced the corporate veil by ignoring the bona fide legal relationships created by the taxpayer. Accordingly the Minister has not met the evidenciary burden placed upon him in this application.
[17] Finally, having reviewed the representations of both parties concerning costs, I would allow the applicant his costs in this Court and in the Tax Court of Canada in the lump sum amount of $8,000.00 inclusive of disbursements.
[18] This application for judicial review should be allowed, the decision of the Tax Court of Canada should be set aside, and the assessment referred back to the Minister for reconsideration and reassessment on a basis consistent with these reasons. The applicant should have his costs both here and below in the lump sum amount of $8.000.00 inclusive of disbursements.
"B. Malone"
J.A.
"I agree
Robert Décary
J.A."
"I agree
Marshall Rothstein
J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-443-01
STYLE OF CAUSE: Steven G. Meredith and Her Majesty the Queen
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: May 28, 2002
REASONS FOR JUDGMENT BY: MALONE J.A.
CONCURRED IN BY: DÉCARY J.A.
ROTHSTEIN J.A.
DATED: July 3, 2002
APPEARANCES:
Mr. Jehad Haymour
Mr. Denny Kwan FOR THE APPLICANT
Mr. R. Scott McDougall FOR THE RESPONDENT
SOLICITORS OF RECORD:
Fraser Milner Casgrain LLP FOR THE APPLICANT
Barristers & Solicitors
Mr. Morris Rosenberg FOR THE RESPONDENT
Deputy Attorney General of Canada