Date: 20000104
Docket: 1999-3637-EI
BETWEEN:
CERTIFIED VERBATIM REPORTING SERVICES LTD.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal was heard at Saskatoon, Saskatchewan on November 30, 1999. The Appellant has appealed decisions that its three shareholders and directors, namely, Loraine Smith, Cheryl Feader and Merle Chovin, were employed under contracts of service, were employees and that they were at arm's length to the Appellant and therefore were not in excluded employment. The decisions were issued under subsection 93(3) and based on paragraph 5(1)(a) of the Employment Insurance Act.
[2] Paragraphs 8 to 10 of the Reply read:
8. On August 25, 1998 the Appellant appealed the ruling to the Minister.
9. In response to an appeal, the Minister decided that the employment for the period January 1, 1997 to May 29, 1998 was insurable as the Workers/Shareholders were employed under a contract of service and were dealing at arm's length with the Appellant.
10. In so deciding as he did, the Minister relied on the following assumptions of fact:
a) the facts as admitted above;
b) the Appellant owns and operates a Court Reporting business;
c) the services provided by the Appellant include court reporting, preparation of transcripts, and evidence recording services;
d) the Appellant is under contract with the Government of Alberta to cover criminal and civil court;
e) the Appellant's business is not seasonal;
f) the Appellant was incorporated in 1984;
g) the voting share structure of the Appellant is as follows:
|
Name |
Share Percentage |
|
Loraine Smith |
33 1/3% |
|
Merle Chovin |
33 1/3% |
|
Cheryl Feader |
33 1/3% |
h) the Workers/Shareholders are also directors of the Appellant;
i) the Workers/Shareholders are not related to each other and have been working for the Appellant for many years;
j) in addition to the Workers/Shareholders, the Appellant employed other workers as court reporters;
k) the Workers/Shareholders were hired as court reporters and office managers;
l) the Workers/Shareholders duties included mainly court reporting and a rotation as the office manager;
m) the office manager's duties included customer relations, payroll, bookkeeping, hiring, training, supervision, paper work, ordering supplies, liaison with the Government and management duties;
n) other workers hired performed services similar to the Workers/Shareholders except they did not perform any administrative or management duties;
o) the Workers/Shareholders performed their duties at the Appellant's premises and at the client's premises;
p) each Worker/Shareholder received a monthly wage of $2,500.00 which was paid by cheque;
q) the Workers/Shareholders determined a reasonable annual wage to be $30,000.00 which was reported on a T4 slip;
r) the Workers/Shareholders are each entitled to receive their own actual court reporting earnings;
s) the other workers earned wages similar to the Workers/Shareholders but only received a percentage of the court reporting income they generated;
t) the Workers/Shareholders' wages in excess of the annual $30,000.00 wage were reported on a T4A slip;
u) the other workers' wages in excess of their annual amount were also reported on a T4A slip;
v) the Appellant issued the following information slips to the Workers/Shareholders in respect of the 1997 taxation year:
|
Workers/Shareholders |
T4 Amounts |
T4A Amounts (Commissions) |
|
Loraine Smith |
$30,000.00 |
$31,703.00 |
|
Merle Chovin |
$30,000.00 |
23,333.00 |
|
Cheryl Feader |
$30,000.00 |
19,300.00 |
w) deductions for Canada Pension Plan, Employment Insurance and Income Tax were withheld from all the workers wages;
x) the Workers/Shareholders normally worked about 45 hours per week from 8:30 a.m. to 5:30 p.m.;
y) the Workers/Shareholders were not required to keep track of their hours or submit timesheets but hours were recorded in order to invoice clients;
z) the other workers worked scheduled hours each day, they were required to record their hours and the client invoices were prepared from these hours;
aa) if a Worker/Shareholder was unavailable for work the other Workers/Shareholders would perform the work;
bb) the Appellant owned and provided the necessary tools, equipment and furnished work location;
cc) the Workers/Shareholders were not supervised or instructed and they helped run the Appellant's business;
dd) the Workers/Shareholders did not incur any expenses in the performance of their duties.
[3] Loraine Smith testified with respect to the assumptions in paragraph 10. The Court finds as follows:
b) Correct.
c) The word "evidence" is wrong, "testimony" would be correct. In addition, without making any finding as to the services provided by the Appellant,, from the evidence, it may be that the Appellant is a broker of court reporting services rather than a "provider".
d) The contract is with the Government of Saskatchewan.
e), f), g), h) and i), correct.
j) "Retained" may be more probable than "employed"
k) "Hired as" should be removed to make it correct.
l) Correct.
m) Correct, but the title of "office manager" should read "shareholders".
n) Correct, but the pay system is different, and the word "hired" should be removed.
o) The shareholders also worked in their own home offices where they did most of their transcriptions.
p) The shareholders received a monthly "draw" (not "wage") which varied in different years. The draw was against their earnings as Court Reporters. There is no evidence that the drawing account was ever in a deficit position in respect to any of the shareholders.
q) Wrong, see p).
r) Correct.
s) Correct, but the word "wages" is wrong; it should read "fees".
t) See p). The excess of each shareholder's gross court reporting fees over the draw was paid as it was earned and then T4A'd to her.
u) The word "wage" may be incorrect. See below.
v) The slips may read this way but Exhibit A-5 indicates different numbers. The word "commissions" is wrong.
w) Correct, but the word "wages" should be "incomes".
x) Wrong. Each shareholder worked as long as it took to complete her court reporting work.
y) Correct.
z) Each other worker billed her hours of retained attendances through Certified Verbatim to the client (usually a law firm). Those hours were the only ones recorded.
aa) Correct.
bb) Wrong. Each court reporter's equipment is sophisticated and self owned and costs, more or less, $20,000. The Appellant supplied an answering and appointment service, letterhead, and one examining room for examinations for discovery. A few transcriptions were done at the Appellant's premises; most were done at the reporters' home offices. Most reporting was done at clients' premises.
cc) "Helped run" should be changed to "jointly administered" and it is correct.
dd) Wrong. All court reporter's expenses incurred by that shareholder for herself were hers alone.
[4] Paragraph 5(1)(a) of the Employment Insurance Act reads:
5(1) Subject to subsection (2), insurable employment is:
(a) employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise; ...
[5] In Wiebe Door Services Ltd. v. M.N.R. (F.C.A.) 87 DTC 5025, the Court stated at the following pages:
at page 5026 and 5027:
Case law has established a series of tests to determine whether a contract is one of service or for the provision of services. While not exhaustive the following are four tests most commonly referred to:
(a) The degree or absence of control, exercised by the alleged employer.
(b) Ownership of tools.
(c) Chance of profit and risk of loss.
(d) Integration of the alleged employees' work into the alleged employer's business.
...
at 5030:
Perhaps the best synthesis found in the authorities is that of Cooke J. in Market Investigations, Ltd. v. Minister of Social Security, [1968] 3 All E.R. 732, 738-9:
The observations of Lord Wright, of Denning L.J., and of the judges of the Supreme Court in the U.S.A. suggest that the fundamental test to be applied is this: "Is the person who has engaged himself to perform these services performing them as a person in business on his own account?" If the answer to that question is "yes", then the contract is a contract for services. If the answer is "no" then the contract is a contract of service.
[6] Using these criteria respecting the court reporting aspect of the three shareholders' services, the Court finds:
(a) The Appellant did not exercise control over the shareholders. The shareholders arranged appointments for themselves. During all the work, any billing was prepared by the individuals.
(b) The court reporters supplied their own tools except for the one examining room.
(c) The court reporters/shareholders each had a chance of profit and risk of loss. They each received their gross billings from the Appellant.
(d) Anyone could have done their work who was a court reporter and they freely interchanged jobs. They were not integrated with the appellant when they acted as court reporters.
[7] Thus, in respect to their court reporting services, the Court finds that they were not under contracts of service and they were not employees. None of them, separately, controlled the Appellant; nor were any of them controlled by the Appellant respecting their court reporting services. As court reporters, the shareholders were each in business for themselves. The Appellant was a bare trustee of the shareholders/reporters in respect to these services. The Court adopts the decision of Rowe, Deputy T.C.C.J. in Juby v. Canada [1995] T.C.J. #984, 95 518 (U.I.) and his reasoning respecting this finding. The appeal is allowed respecting the shareholders' court reporting services and incomes.
[8] It is in respect to their administrative duties that the Court has a greater problem. Each shareholder administered the Appellant for a full week during every third week in the period. For this they divided the annual net profit of the Appellant which was derived from a fee the Appellant charged other court reporters. That fee consisted of a percentage of court reporting charges levied by other court reporters who worked through the Appellant. Out of this the Appellant paid rent for its office, copying charges, telephone and utility charges and whatever other office expenses there were. What was left at the end of its August fiscal year was divided evenly among the three shareholders and T4A'd to them. It was usually about $1,000 each, but in 1997 it was about $13,000 each. For this each shareholder administered the office every third week in turn. This involved answering the phone, paying bills, arranging appointments and being there throughout office hours each week. In any spare time, the administrator that week could attend to personal matters, type her own transcripts and do anything else she pleased, so long as the Appellant's administration was done by her for that week. The week of administration was usually rotated, but the three shareholders have traded weeks freely from time to time.
[9] The three shareholders work in complete harmony. They draw their excess court reporter fees above the $30,000 by simply signing their own cheques on the Appellant's account; often the cheque stub is the only evidence of that. They refer to each other as partners and among themselves they disregard the corporate structure completely. They operate and act together like a very agreeable small partnership. Thus, the question is whether, in fact, they were at arm's length to the Appellant and therefore were not in excluded employment respecting their administrative tasks.
[10] Paragraph 5(2)(i) and subsection 5(3) of the Employment Insurance Act read:
5(2) Insurable employment does not include
...
(i) employment if the employer and employee are not dealing with each other at arm's length.
5(3) For the purposes of paragraph (2)(i),
(a) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the Income Tax Act; and
(b) if the employer is, within the meaning of that Act, related to the employees, they are deemed to deal with each other at arm's length if the Minister of National Revenue is satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.
The evidence is that each shareholder separately did her administrative duties as required and otherwise operated completely separate from the other shareholders and from the Appellant. Thus, the shareholders, who are not related to each other, were at arm's length to each other and to the Appellant.
[11] With respect to their administrative duties the tests set out in Wiebe Door established the following:
(a) Control. The Shareholders had to attend in the Appellant's premises for fixed hours and deal with the Appellant's business as their primary tasks.
(b) Tools. The tools for administration were all in the office premises and the work was done there.
(c) Risk. The chance of profit or risk of loss on their non-court reporting tasks was entirely the Appellant's. The shareholders did not risk a loss (except for time spent) but they could receive income if the Appellant made profits. Risk was placed in the corporate structure.
(d) Integration. In their administrative tasks, the shareholders were an integral part of the Appellant's business. They had to be in the premises to answer the phone and to deal with whatever occurred. Moreover, contrary to their court reporting work, where any other reporter could and did substitute for another, only the shareholders did the administrative weeks.
[12] Thus, the shareholders chose a corporate structure to operate the administrative aspect of the Appellant and they administered it in that structure. The business of administration was the Appellant's and the shareholders' administrative work was done as employees of the Appellant. In performing these tasks they were employed by the Appellant under contracts of service.
[13] The appeal is allowed and the matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
Signed at Ottawa, Canada, this 4th day of January 2000.
"D.W. Beaubier"
J.T.C.C.