Dynamic Industries Ltd. v. The Queen

Dynamic Industries Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2004-04-13
Neutral citation
2004 TCC 284
File numbers
2002-1707(IT)G
Judges and Taxing Officers
Theodore E. Margeson
Subjects
Income Tax Act
Decision Content
Docket: 2002-1707(IT)G
BETWEEN:
DYNAMIC INDUSTRIES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on common evidence with the appeals of
Steven Martindale (2002-1688(IT)I) on September 19, 2003
at Cranbrook, British Columbia.
Before: The Honourable Justice Theodore E. Margeson
Appearances:
Counsel for the Appellant:
Kenneth R. Hauser
Counsel for the Respondent:
Karen A. Truscott
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997, 1998 and 1999 taxation years are dismissed, with costs.
Signed at Vancouver, British Columbia, this 13th day of April, 2004.
"T.E. Margeson"
Margeson, J.
Docket: 2002-1688(IT)G
BETWEEN:
STEVEN MARTINDALE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on common evidence with the appeals of
Dynamic Industries Ltd. (2002-1707(IT)G) on September 19, 2003
at Cranbrook, British Columbia.
Before: The Honourable Justice Theodore E. Margeson
Appearances:
Counsel for the Appellant:
Kenneth R. Hauser
Counsel for the Respondent:
Karen A. Truscott
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1998 and 1999 taxation years are dismissed, with costs.
Signed at Vancouver, British Columbia, this 13th day of April, 2004.
"T.E. Margeson"
Margeson, J.
Citation: 2004TCC284
Date: 20040413
Docket: 2002-1707(IT)G
BETWEEN:
DYNAMIC INDUSTRIES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket 2002-1688(IT)I
AND BETWEEN:
STEVEN MARTINDALE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson, J.
[1] These are the reasons for judgment in two cases, Dynamic Industries Ltd. v. Her Majesty the Queen, 2002-1707(IT)G, hereinafter referred to as "Dynamic" and Steven Martindale v. Her Majesty the Queen, 2002-1688(IT)I hereinafter referred to as "Martindale".
[2] In computing income for its 1997, 1998 and 1999 taxation years, Dynamic deducted certain expenditures as business expenses. By Notice of Reassessment dated March 21, 2001, the Minister of National Revenue ("Minister") reassessed Dynamic for the 1997, 1998 and 1999 taxation years, respectively, and in doing so, disallowed certain expenses claimed by Dynamic, and included certain amounts in the company's income. The amounts of the adjustments were $45,392.07, $42,868.68 and $59,178.93, respectively.
[3] In so reassessing Dynamic, the Minister took the position that it was a "personal services business" as defined by the Income Tax Act ("Act") and therefore would only be eligible to deduct certain specified expenditures.
[4] The issues as quite succinctly put by counsel for the Respondent and not disagreed with by counsel for the Appellant are:
(a) Whether Dynamic was a corporation carrying on a personal services business, as defined by subsection 125(7) of the Act, during the 1997, 1998 and 1999 taxation years;
(b) Whether the Minister properly disallowed a portion of the expenses claimed by Dynamic for those years, on the basis that the company was precluded from deducting such amounts, as they were restricted expenditures, pursuant to the limitations set out in paragraph 18(1)(p) of the Act; and
(c) Whether the Minister correctly reassessed Martindale to include automobile benefits in his income for the 1998 and 1999 taxation years, pursuant to paragraphs 6(1)(e) and (k) and subsection 6(2) of the Act.
Evidence
[5] Martindale testified that he was the construction manager of Dynamic. He graduated from high school in 1978 and then attended welding college and received a certificate. He then went to ironworkers' school in Vancouver and took courses in construction estimating. He first became involved in Dynamic in 1983 as a result of some advice received from a former employer.
[6] Exhibit A-1 was introduced, by consent, subject to any specific objections made during the hearing. Martindale said that between November 1, 1996 and October 31, 1999 his wife and one Michael Baxter were shareholders of Dynamic. In 1995 Martindale ceased to be a shareholder of Dynamic. In 1998 his wife, Sherry, became a shareholder so that Martindale could be a worker for the union. Michael Baxter ceased to be active in Dynamic's day-to-day operations in 1996, but is still a shareholder because he gives a lot of work to Dynamic when his company is unable to do it.
[7] Before l995, Martindale had earlier worked for Dynamic on and off. He worked more for Dynamic because he could pursue jobs himself which an ironworker through the union hall could not and he could accept the contract jobs that an ironworker could not. Ironworkers cannot pursue work themselves but must go on a sign-up list and wait until their turn comes up to be called. However, he, as Dynamic, could pursue these contracts personally.
[8] He would give a set price to do a certain job whereas the ironworker could only accept an hourly wage. Dynamic secured work on a cost plus basis, contract price basis and a daily rate basis plus expenses. In a cost plus contract, there is a set rate per hour but there is no limit on the number of hours worked. The cost plus type of contract was the most prevalent. There was a fixed profit margin of ten per cent.
[9] Dynamic could work on non-union jobs even though they must hire union workers through Local 97. Dynamic could negotiate any rate with a general contractor depending on the conditions existent at any time. Ironworkers cannot negotiate their rate. Martindale was free to work when he wanted to, and could pursue the types of jobs that he wanted to do. Between 1984 and 1995 Dynamic provided welding services, fabrication and erection services. They started doing construction management projects in 1998. Between 1984 and 1995 Dynamic also provided subcontracting service to two other companies. He compiled a list of those companies from the company's books. They are shown at Tab 2 in Exhibit A-1.
[10] He referred to Tab 3 of Exhibit A-1 with reference to G & R Industries Ltd. and he said that between 1988 and 1991 some of the jobs referred to therein had time penalties. The penalty comes off of the contract price per week. They had six to seven persons to do this work for G & R Industries Ltd. to a value of $95,000.
[11] He was familiar with the documents at Tab 3 and said that those were invoices from Dynamic to other general contractors. He referred to other parts of the exhibit with respect to the different rates and means of remuneration that were used with different companies.
[12] Martindale was referred to the invoice from Dynamic to Southern Interior Installation Ltd. ("S.I.I.L.") dated November 1, 1993 and the reference therein to wages for $7,970.50. He was asked why he used the term "wages". He said they were wages but he did not know whether they were for him alone. A cheque would have been issued to Dynamic. To him, wages and labour meant the same thing.
[13] Between 1983 and 1995 Dynamic had a few dozen employees in total but at any one time there would be one to eight employees depending on the contracts that they had. They had a payroll book (time book), which is at Tab 4 and referable to the period from May 1988 to 1994. This was accepted into evidence. These were the amounts paid to Dynamic's employees during that time.
[14] Tab 5 contained a list of employees of Dynamic, which was accurate for the period between 1983 to 2003. This was accepted into evidence. Roy Magee, who was referred to in the time book, worked for Dynamic between 1985 and 1991. Earl Welch, also referred to in the time book, was mostly an ironworker for S.I.I.L.
[15] Martindale was referred to the period of November 1, 1996 to October 31, 1999 and he said there were very limited skilled trades available in the Elk Valley area for this ironwork project. For that project they needed to bring in employees. There was not much accommodation available in Sparwood or elsewhere in the Elk Valley area.
[16] S.I.I.L. did maintenance in the coal mines. Between the period November 1, 1996 to October 31, 1999 most of their work was in the coal mines. Dynamic also worked for S.I.I.L. in 1999. In 1994 Dynamic did a small amount of work for S.I.I.L. or its predecessors. In 1994 this witness worked for Dynamic and also for another company, Construction Management Limited. He did not want to subcontract to Dynamic although he was asked to do so. It was a good chance for this witness to get experience as a construction manager.
[17] In 1995 Dynamic went back to doing contract work with S.I.I.L. who had picked up large contracts with Fording Coal ("Fording"). Between 1995 and 1999 Dynamic worked for no one else except S.I.I.L. who had the lion's share of Fording's projects and was busy enough working for them. Dynamic did project work for S.I.I.L. If S.I.I.L. did not get the job and Dynamic had provided contract work for it, they did not get paid. Sometimes Fording did not provide much management on the job to S.I.I.L. That prompted this witness to look after S.I.I.L.'s best interests. He got along well with Fording's engineers and employees with one exception.
[18] From October 1993 their services to S.I.I.L. were based upon a cost plus basis, $45 per hour, plus living expenses, plus G.S.T. This was agreed upon in 1993.
[19] He signed the invoices from Dynamic to S.I.I.L. located at Tab 6. After January 27, 1997 Dynamic did not rent their truck to S.I.I.L. They obtained their own. All invoices are similar. The billing date was not regular. He referred to the invoices at Tab 7 from November 1997 to September 1998 as invoices to S.I.I.L. Further invoices at Tab 8 were to S.I.I.L. and were from November 1998 to October 1999. These were based upon cost, plus living allowance, plus G.S.T. These were accepted into evidence.
[20] From November 1, 1996 to October 31, 1999 Martindale was familiar with other sub-contracts with S.I.I.L. He knew their terms and he saw the invoices. The invoices at Tab 9, to S.I.I.L. from various other sub-contractors were identified and accepted into evidence. He reviewed this work referred to in the invoices. Sub-contractors would be paid by S.I.I.L. This was on a cost plus basis. These were not all of the invoices from S.I.I.L. as there could have been some that were not on a cost plus basis. S.I.I.L. paid Dynamic's invoices fairly regularly. The documents found at Tabs 10 and 19 were identified by this witness and placed into evidence.
[21] It was well understood that Fording would pay all invoices of S.I.I.L. but there may have been some delay, especially during shut downs. Steve Martindale and Sherry Shkwarok typically loaned money to Dynamic until S.I.I.L. paid their accounts. This witness was a member of the Local 97 Trade Union as were S.I.I.L.'s employees. The 1998 agreement carried on until the 2000 agreement was signed. As this witness had worked as a foreman he would have received $23 plus per hour. Dynamic was not paid by S.I.I.L. every week.
[22] He was asked what security there was to ensure that Dynamic would be paid by S.I.I.L. His answer was that the ironworkers had the pick of the jobs and the backing of Local 97. The agreement required the posting of funds in some cases to ensure payment of wages to the workers. Living out allowance would be paid to him if he worked Fridays and Mondays and it would be paid for seven days per week. If he had been an ironworker he would have received a certain amount and he also received a certain amount from Dynamic as shown at Tab 19 which he prepared. This was a spread sheet of Dynamic with respect to profit.
[23] Referring to Tab 17 he said that the wage scale for journeymen in 1998 was $24.36 and for a foreman it was $24.36 plus 10%. If he had been an ironworker employee acting as foreman of S.I.I.L. in 1999 he would have received $23.91 plus 10% per hour plus a holiday pay of 12%. Twenty-nine dollars and forty-six cents was the highest rate he could have received as an ironworker.
[24] Dynamic's charge-out rate was $45 per hour but there were deductions that had to be taken by Dynamic from this amount and the net profit to Dynamic as shown at Tab 19 of $4.07 was really the gross profit. Their hourly rate was set in 1995.
[25] He was asked what calculations he had made for the year 1993 with respect to the relevant wages he would have received as an ironworker and those he received from Dynamic. He said that he received information from the union as to what the rate was and it almost corresponded to what he used. In 1993 Dynamic's gross profit was much higher. In fact its expenses were lower (the remittances to ironworkers also went up).
[26] Tab 20 was not accepted into evidence. Tab 21 was accepted into evidence. This was the payroll book between 1995 and 2000 prepared by Dynamic. He referred to the month of November 1996 with respect to the wages plus the living out allowance of Martindale for a certain period. Tabs 22 and 23 were accepted into evidence and these were cheques from S.I.I.L. to Dynamic. He analysed the amounts paid between November 1996 and November 1, 1999. Tab 24 contained the yearly breakdown of the living out allowance and the monthly pay (gross wages plus living out allowance paid by Dynamic). Tab 25 was an auditor's report prepared by Jeff Orlik, which was given to this witness by his counsel and it was accepted into evidence. If Dynamic workers were negligent, Dynamic paid for the changes which resulted therefrom. However, there was no warranty work done in the years in question. The travel allowance amounts shown in 1999 were not correct. In 1998, living out allowance was not included (he said he did not have this explained to him).
[27] In 1998 and 1999 he spent five days a week or more at Sparwood for 50 weeks per year. In Sparwood he rented an apartment. There was no other reasonable place for him to live. He leased it monthly. The distance between Cranbrook and Sparwood was 80 miles. In 1998 and 1999 he spent several weekends in Sparwood.
[28] In 1998 and 1999 he drove the "Jimmy". He drove it from Cranbrook to Sparwood. He drove it to work. Mine sites are in terrible condition. You cannot get into a vehicle that has been there without having it cleaned.
[29] In 1998 and 1999 they had a Camaro, a Chevrolet pick-up and a motor home. During this period of time when he was at home he drove the Jimmy on some occasions but had better vehicles at home. He needed a four-wheel-drive to go to the mine. He did not need the Jimmy on a regular basis. He did not drive it a whole lot.
[30] In cross-examination Exhibit R-1 was admitted by consent. Martindale said that he was a member of Local 97 and has been a member since 1982. It is advantageous for him to be a member. There is no restriction on Dynamic in obtaining union jobs so long as Dynamic uses union members. The unit bargains for the union members but this witness bargains independently for Dynamic. If a member turns down a job his name goes to the bottom of the list. If Dynamic turns down work it may affect him later on.
[31] He was referred to Exhibit A-1, Tab 2 and said that that was a list of the companies that Dynamic did work for. Sherry did the word processing. He was referred to Tab 3 for the year 1999 and he said that Sherry and he did the minutes. The writing is in Jim Paul's handwriting. Dynamic's invoices do not show a breakdown of the services. There is no reason to do so. Some did daily time cards and some did not.
[32] Tab 5 was a list of employees of Dynamic between the years 1983 and 2003. His two sons are listed as assistants. They were originally cleaners and then became employees when they were old enough. Between 1997 and 1999 they were 13 and 16 years of age. They did casual work. None of the names on the list were full-time employees except himself and Sherry. She was full-time/part-time. She was an accountant, bookkeeper, loaned money to Dynamic, was a driver, was a safety coordinator and helped on the truck as well. Between 1997 and 1999 she was doing payroll, accounting and banking. The work was mostly administrative in nature. She helped him transport equipment. They did not rent much equipment over those three years.
[33] Between the years 1995 and 1999 Dynamic worked continually for S.I.I.L. and in 1995 and 1996 it worked only for S.I.I.L. If S.I.I.L. did not get the bids, then Dynamic did not get paid. In 1993 they set the rate at $45 plus 10% mark-up. There was no hourly rate change between the years 1995 and 1999. They were not greedy and did not want to "kill the golden goose". He is familiar with the rates that S.I.I.L. charges the mines.
[34] The documents at Tab 9 were other invoices submitted to S.I.I.L. other than their own. He reviewed them. There was no reason for more or less detail in the invoices. Between 1997 and 1999 S.I.I.L. had dozens of sub-contractors and Dynamic as well. Some of them would have invoiced S.I.I.L. for all three years.
[35] He referred to Tab 10 which was a cheque drawn on the account of S.I.I.L. made payable to Steve Martindale and then the name was changed to Dynamic Industries. The amount was for $5,000 and was dated September 15, 1997 and referred to the term "bonus". He said this was a mistake. The $5,000 bonus should have been put in as income. He never did any work on the payroll for S.I.I.L.
[36] He was referred to Tab 12 and he said that these were delayed payments from S.I.I.L. to Dynamic. All of these were paid in the end without interest. The same thing can be seen at Tab 14 for 1993. He did not do the same thing for the intervening years. Things had slowed down in 1998.
[37] He was referred to Tab 19 which was a spread sheet for Dynamic for the year 1999. This sheet reflected the most money that he could get out of S.I.I.L. as an employee. If S.I.I.L. went broke, Dynamic may not have been paid. He was referred to Tab 24 which was a payroll for Dynamic showing the living out allowance and the gross pay in 1996 and 1997. They decided to pay him a round figure of $4,500 rather than having it vary. Dynamic sometimes received a bonus from S.I.I.L. He did not know if other subcontractors did. It was 80 miles to Sparwood. He rented an apartment there first in 1997 and 1998. He still leases it.
[38] Tab 25 was the auditor's report for 1997 to 1999. The wages paid to him were allowed and the wages paid to Sherry were not. Tab 1 of Exhibit R-1 was an income tax return for the year 1995 and 1996 for Dynamic. Tab 2 was an income tax return for Dynamic for the period November 1, 1996 to October 31, 1997. This return showed that the major job with the company was contract welding although he said that there was a change to project management.
[39] Tab 3 contained a return for October 31, 1998. The office was in his residence that year. Tab 4, the return for the year ending October 31, 1999 showed that promotion expenses for season tickets for hockey.
[40] With respect to the Declaration of Conditions of Employment forms, this was a mistake and they used the wrong form. The employment expenses related to the use of the Jimmy.
[41] He identified the documents from Tab 6 to Tab 10. With respect to Tab 8 for 1998, the wrong information was provided. This was submitted in 1999 for the year 1998. Tab 16 was a computer printout reference for Dynamic from the general ledger dated October 31, 1997. This would have been given to CCRA by Dynamic. Tab 17 was a general ledger excerpt as at October 31, 1998 for Dynamic. Tabs 1, 2, 3, 4, 5, 6, 7, 8, 9, 16 and 17 were all accepted into evidence. Tab 15 was not.
[42] He is still employed through Dynamic as a construction manager. The S.I.I.L. projects may last from two days to six months. He provides knowledge of the industry, his own specific skills and his expertise of construction projects to clients. When there was no work for S.I.I.L. he looked elsewhere for work but did not obtain any in the years in question. He may have had to divide his time between different sites. S.I.I.L. employees and sub-contractors all reported to him.
[43] During 1997, 1998 and 1999 S.I.I.L. received 90% of the work from Rawding. It was very rare that he was not at the work sites for any reason. He could have hired someone else to come and work for him. Dynamic was doing work in British Columbia that was fairly unique to Dynamic but this witness could still hire someone else to replace him. However, he did not have to in 1997, 1998 or 1999. He had no decision making authority with respect to what S.I.I.L. was going to pursue. He had no written contract with S.I.I.L. or Dynamic. He stayed in Sparwood during the week. The general contractors were liable for all sub-trades but it is their decision as to whether S.I.I.L. covers them or not. The last time that Dynamic had its own coverage was in 1997 and 1998.
[44] At the site anyone could bring a problem to Dynamic's attention. He had no regular meetings with S.I.I.L. It was always ad hoc. They were not on site. It was a group effort as to who was in charge when the Larsons were away. There was no Declaration of Conditions of Employment for 1995 due to an incompetent accountant.
[45] Gayle Edith Larson was from Fruitvale and indicated that she was self-employed. She is the owner of S.I.I.L. and she does all of the books herself. Her husband is an ironworker and not a shareholder.
[46] Between 1995 and 1999 S.I.I.L. did most of the work for Fording, to the extent of 95% and upwards. It rated projects, targeted the price and calculated the time involved. There is no assurance of obtaining a job. Dynamic played an important role in them getting the work. She sits down with "Jim" and discusses matters. They valued Dynamic's opinion. If they do not get the contract they would not bill Fording for the time spent.
[47] Ironworkers are paid weekly for the hours worked. S.I.I.L. paid the subs once per month, 30 days after receipt of the invoice.
[48] They used Dynamic and other sub-contractors between November 1, 1996 and October 31, 1999. They treated Dynamic the same as other subs. Dynamic would oversee the ironworkers' who are the mine's employees and also would oversee S.I.I.L.'s employees. Those employees were told where and when to go. Dynamic was not told. Dynamic had no specific hours to work. The ironworkers did. The ironworkers only were involved in getting the job done and were not involved in construction. They were not involved in completing forms or doing accounting, etc.
[49] S.I.I.L. would give her a time card so she could send a bill with respect to the right job. Between November 1, 1996 and October 31, 1999 their relationship with Fording and Dynamic was the same. Almost every day Steve checked in with them. He may not have checked in every day. He would also check in with Fording, probably more than with them. S.I.I.L. was audited and Phil was reassessed for his living out allowance as well as others. In April 2003 Jim's case went to court and he won it.
[50] She was referred to Exhibit A-1, Tab 26 which was admitted into evidence. These were the Reasons for Judgment in the case of Larson v. Canada, [2003] T.C.J. No. 447. The Court found that it was temporary work and there was no chance of permanence.
[51] In 1997, 1998 and 1999 her husband drove a 1997 diesel to work and did use it for personal purposes. It was filthy.
[52] In cross-examination, she said that she was the sole shareholder of S.I.I.L. and her husband has never been a shareholder. She was referred to Exhibit R-1, Tab 15 with respect to the bonus payable by S.I.I.L. and she said that reference was in her accountant's handwriting. The bonus was payable by S.I.I.L. to Dynamic. Dynamic was integral to the operation of S.I.I.L. They were helpful to S.I.I.L. There were no employees. This was a way of showing their appreciation. No other sub-contractor except Dynamic was paid a bonus.
[53] Then she agreed that Dynamic may not have been treated the same as other subcontractors because the others were not so keen to work with S.I.I.L. Dynamic and Mr. Martindale were key to the sub-contractors' work. Other employees of S.I.I.L. would have been subject to lay-off if no contracts were coming in.
[54] The first work done by Dynamic for S.I.I.L. would have been in 1993. However, in the years in issue Dynamic was probably not working for anyone else. S.I.I.L. was very busy. If needed, Mr. Martindale would have been there. Part of Dynamic's job was to watch the dollars.
Argument on Behalf of the Appellant Re Dynamic Industries Ltd.
[55] With respect to the first issue as to whether or not the Appellant was a corporation carrying on a personal services business, the Appellant referred to the provisions of paragraph 18(1)(p) of the Act. This provision limits the expenses that a personal services business might claim in any taxation year. In particular, this allows the deduction of
(i) salary, wages or other remuneration paid in the year to an incorporated employee of the corporation;
(ii) the cost to the corporation of any benefit or allowance provided to an incorporated employee in the year.
[56] He referred to the provisions of subsections 248(1); paragraphs 125(7)(a) and (b) as being the relevant provisions regarding the definition of "personal services business". The question is whether or not during the period from November 1, 1996 to October 31, 1999 Mr. Steven Martindale would "reasonably have been regarded as an officer or employee" of S.I.I.L.
[57] He submits that the answer to that question is "no" in light of the Federal Court of Appeal's decision in Wolf v. The Queen, [2002] CarswellNat 556 and in light of the Tax Court of Canada's decision in Sara Consulting and Promotional Limited v. The Queen, [2001] T.C.J. No. 773, dockets 2000-3982(EI) and 2000-3984(CPP), and in TSS-Technical Service Solutions Inc. v. Canada, [2002] T.C.J. 101, dockets 2000-3366(EI) and 2000-3367(CPP). The issue in the present case, according to him, is the same as in Wolf (supra).
[58] The facts as found by Desjardins, J.A. in Wolf (supra), are substantially similar to the facts set out in the testimony of Mr. Steve Martindale and Ms. Gayle Larson in the present case. Here, the contract between Dynamic and S.I.I.L. was an oral one and not in writing. If in the opinion of S.I.I.L. or Fording, Steve Martindale did not provide his services in a workman-like and professional manner, S.I.I.L. could terminate its agreement with Dynamic. Furthermore, as in Wolf (supra), the renewal of the contract between S.I.I.L. and Dynamic was dependent entirely on the workload available at Fording, i.e. if S.I.I.L. had no work orders from Fording then S.I.I.L.'s contract with Dynamic could, and would, be terminated.
[59] Payment to Dynamic was much the same in the present case as in Wolf (supra), in that during the years in question, S.I.I.L.'s contracts with Fording were usually on a "cost plus" basis which was a pre-negotiated amount per hour plus a 10% mark up and Dynamic's contract with S.I.I.L. was on a similar "cost plus" basis. Dynamic was paid at a rate of $45 per hour for straight time, $63 for overtime and $85 per hour for double time. This rate was more than what S.I.I.L.'s ironworkers were paid, both on a gross and net basis. S.I.I.L. paid Dynamic a living out allowance, although for fewer days than the living out allowance S.I.I.L. paid its ironworkers.
[60] On some occasions Dynamic was also paid a bonus subject to the successful completion of Fording work orders. Further, the method of the payment in the case was similar to the method of payment in Wolf (supra) although here Dynamic billed its hours plus living out allowance to S.I.I.L. who in turn billed Fording by marking up Dynamic's billed amount by 10%. Once S.I.I.L. had a sufficient cash flow as a result of Fording paying its bills, S.I.I.L. would pay Dynamic's bills.
[61] The working conditions were basically similar. In the present case, Mr. Martindale and Ms. Larson both testified that Mr. Martindale discussed the progress and problems of the projects which he was managing with representatives of Fording (either Fording staff engineer or Fording's owner representative) and with Jim and Gayle Larson of S.I.I.L. During the years in question, Dynamic/Steve Martindale worked on a variety of Fording projects at all of Fording's mine sites. As in Wolf (supra), Dynamic and Steve Martindale were subject to minimal supervision by S.I.I.L. or Fording. No one told Mr. Martindale how to manage each specific project. Once Mr. Martindale accepted management of a project he pursued it on his own. Mr. Martindale was often called upon to interact, not only with Jim Larson from S.I.I.L., but also with a supervising engineer or owner's representative from Fording.
[62] Similar to Wolf (supra), during the years in question, the Appellant used tools and equipment provided by S.I.I.L. except for the vehicle which Dynamic provided. In prior years, Dynamic had used its own tools for which it had charged S.I.I.L. and Dynamic had rented other tools and equipment to S.I.I.L. Given the profit associated with this activity, Dynamic would have liked to continue this equipment rental. However, once S.I.I.L. was financially capable of purchasing its own tools and equipment it stopped renting tools and equipment from Dynamic. Furthermore, the vast majority of the work performed by Dynamic/Steve Martindale could only be performed at the mine site using materials provided by S.I.I.L. or Fording.
[63] Similar to Wolf (supra), Dynamic/Steve Martindale was treated differently from S.I.I.L.'s employees in that "S.I.I.L.'s employees were members of Local 97 of the Ironworkers Union and as such were required to be paid a specified amount per hour for each hour they were at a mine site. They had to be paid once a week. In contrast, Dynamic/Steve Martindale were not paid for anything that S.I.I.L. could not in turn bill Fording for (i.e. work not done at Fording's work site such as going through drawings and planning workloads for the next day, contract estimates and for contracts not already ordered to S.I.I.L., etc.).
[64] Dynamic/Steve Martindale were required to fix any errors in their work without charge. None of S.I.I.L.'s employees did this non-payable "warranty" work.
[65] S.I.I.L. had to provide sufficient security to the union that it was capable of meeting its ironworkers payroll. S.I.I.L. only paid Dynamic and other subcontractors when S.I.I.L. had sufficient cash flow to do so.
[66] S.I.I.L. employees' standard work day was from 8:00 a.m. to 4:30 p.m. Mr. Martindale worked those hours which were necessary to complete a project. This might entail working less than eight hours per day or working more than eight hours per day, with the start time for such working days at Mr. Martindale's choosing.
[67] S.I.I.L.'s ironworker foremen were not concerned with how much a particular project cost nor with documenting such projects. In contrast, Dynamic/Steve Martindale were concerned with project cost overruns and properly documenting project steps.
[68] As in Wolf (supra), Dynamic/Steve Martindale were in an identical position as the worker there. Furthermore, Dynamic was at risk of being sued by S.I.I.L. for damages resulting from Mr. Martindale's negligence on a project. There was a risk that S.I.I.L. might not be able to pay Dynamic's bills. S.I.I.L.'s steel workers did not face such litigation risks nor a risk of non-payment. Further, in this case, given the nature and depth of skilled trade persons available in the Sparwood and Elkford area and the nature of the Fording projects, S.I.I.L. would hire numerous other sub-contractors needed for a given Fording project (i.e. plumbers, electricians, instrument control specialists, etc.). Dynamic/Steve Martindale were treated the same as these other sub-contractors. Dynamic's invoices to S.I.I.L. during 1997, 1998 and 1999 which are set out in Exhibits A-6, A-7 and A-8 are substantially similar to those sample invoices issued by other sub-contractors to S.I.I.L., which were set out behind Exhibit A-9.
[69] In the present case, Dynamic's contract with S.I.I.L. lasted only as long as S.I.I.L.'s contract with Fording, which could range from a few days to a few months, depending on the project. In Wolf (supra), the taxpayer worked on Canadair projects for six years between January 31, 1990 and 1995. In the present case, Dynamic/Steve Martindale worked on S.I.I.L.'s Fording projects continuously and exclusively since 1995. It should also be noted that 90% of S.I.I.L.'s work during this period of time was for Fording. Dynamic/Steve Martindale's continuity of work, and S.I.I.L.'s continuity of work, was attributable to the fact that Fording undertook considerable capital expenditures commencing in 1995. Neither Dynamic nor S.I.I.L. had to look for work elsewhere. This has all changed recently with Fording's sale and the reduction of capital expenditures at the mine sites.
[70] Counsel submitted that the factual conclusion in the present case is substantially similar to the facts in Wolf (supra) and consequently the reasons for the decision in Wolf (supra) are equally applicable in the present case.
[71] Similar to the findings in Wolf (supra), the present case indicates that Mr. Martindale was assigned a project, he knew what had to be accomplished and he was a master of "how to do it", even though this alone does not establish a lot of subordination. Further, the ownership of tools test was found to be a neutral factor in Wolf (supra) and that should equally be true here.
[72] With respect to the financial risk and opportunity for profit test, Madam Justice Desjardins concluded that this test indicated an independent contractor relationship since Mr. Wolf (supra) did take risks. This is exactly the same situation that Dynamic/Steve Martindale were in. For example, in 1999 Dynamic's charge outright to S.I.I.L. was the same as when it was first negotiated in 1993, $45 per hour. Even so, in 1999 Dynamic still made $4.07 more than when Mr. Martindale had been an ironworker employed by S.I.I.L. In 1993 this profit component was higher. Furthermore, Dynamic was at risk for being sued for negligence, not getting paid for work on unsuccessful bids and not getting paid for issued invoices. Dynamic and Mr. Martindale had no job security - Dynamic only had work from S.I.I.L. as S.I.I.L. had work from Fording. However, Dynamic and Mr. Martindale did have greater flexibility in finding work than when he was an ironworker employee since he could avoid the union call-out list and he could work on non-union jobs. Furthermore, Dynamic and Mr. Martindale could work on a basis other than an hourly rate and when work was done at an hourly rate, they were free to negotiate a rate higher than that stipulated by the union. The risk factors in this case were Mr. Martindale's and his wife's, which was similar to the factual situation in Wolf (supra).
[73] Regarding the integration test, although they were found to be inconclusive in Wolf (supra), in the case at bar, although Dynamic and Mr. Martindale were an integral part of S.I.I.L.'s business activities during the years in question, this is not relevant. What is relevant is to consider the integration test from Dynamic/Mr. Martindale's perspective. Dynamic and Mr. Martindale were at S.I.I.L. to provide a temporary helping hand in the limited field of expertise, namely, Mr. Martindale's project management expertise. In the present case, Dynamic's business stood independent of S.I.I.L.'s and Mr. Martindale made sure they looked after Dynamic's best interests first, before S.I.I.L. For example, Mr. Martindale testified that in one project he advised Fording not to proceed with its intended course of action of contracting with S.I.I.L. to undertake the project since the project was not necessary. Mr. Martindale advised Fording in this manner so as not to imperil his and Dynamic's position with Fording, even though it meant less work for S.I.I.L. Once S.I.I.L. completed a Fording project, Dynamic was out of a job until another project came along or until Dynamic was successful in pursuing another contract with another general contractor.
[74] As in Wolf (supra) Dynamic/Mr. Martindale had "non-standard" employment. As a result of his many years of running Dynamic, Mr. Martindale's work routine emphasized higher profit coupled with higher risk, mobility and independence. This is an even stronger argument in the present case than in Wolf (supra) since Mr. Wolf did not have a long history of running his own business but Martindale did. Given the similarity in facts with Wolf (supra) Mr. Martindale cannot "reasonably" be regarded as being an employee of S.I.I.L. having regard to the "traditional" analysis used by Madam Justice Désjardins. Dynamic is therefore not a personal services corporation.
[75] Counsel also discussed the reasons for the decision of Décary, J.A. in Wolf, (supra), who set out the difference between a contract of service and a contract for services when discussing the ruling case of Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553 (F.C.A.) and the most recent case of 671122 Ontario Limited v. Sagaz Industries Canada Inc., [2001] F.C. 59 as to whether the person who has been engaged to perform the services is performing them as a person in business on his own account. The learned Justice then indicated in the final analysis, in civil law as well as in common law, one ends up looking into the terms of the relevant agreements and circumstances to find the true contractual reality of the parties.
[76] The Court must look at the total relationship of the parties and conclude what the intention of the parties is. Was Martindale performing his professional service as a person in business on his own account? Décary, J. said, "In our day and age, when a worker decides to keep his freedom to come in and out of a contract almost at will, when the hiring person wants to have no liability towards a worker other than the price of the work and when the terms of the contract reflect those intentions, contracts can generally be characterized as contracts for services". He referred to some of these characteristics such as a lack of job security, disregard for employee-type benefits, freedom of choice and mobility concerns.
[77] In the present case, counsel argued that the intent of Dynamic and S.I.I.L. was that Dynamic be an independent contractor. Dynamic has always maintained that this was their intent, as evidenced by the following statement from page 7 of the Respondent's audit report which comprises Exhibit A-1, Tab-25:
The representative Randall Ball and the shareholder Sherry Shkwarok were unaware of the possibility that the corporation activities were considered a personal services business. They mentioned that it was not their intent to fall into these tax ramifications as the corporation had numerous clients in the past. The auditor has countered (that) intent has little bearing in the circumstances.
However, it is clear that commencing in 1983, particularly since 1988, Dynamic/Steve Martindale was used to and wanted the freedom of running his own business and the opportunity of making more money and was willing to sacrifice security in return. S.I.I.L. wanted the flexibility of being able to terminate the relationship at will and avoid the fixed benefit costs associated with employees. Thus, the contract between Dynamic and S.I.I.L. was a contract for services and not a contract of service. Using Mr. Justice Décary's analysis, Mr. Martindale cannot reasonably be regarded as an employee of S.I.I.L.
[78] Counsel referred to the analysis in Sara Consulting, supra and TSS-Technical Service Solutions, supra and the Supreme Court of Canada decision in Shell Canada v. The Queen, 99 DTC 5669 in support of his position that the Court should not re-characterize legal relationships in the absence of clear and credible evidence that the description of a relationship is other than as agreed between arm's length parties. The description agreed upon by the parties must stand.
[79] In the present case, S.I.I.L. and Dynamic/Martindale considered Dynamic/Martindale to be an independent contractor and there is no clear and credible evidence that this description does not properly reflect its actual legal effect.
[80] Counsel referred to the Reasons of Noël, J.A. in Wolf (supra), where the learned Justice considered the traditional analysis and the non-traditional analysis and concluded that where the parties labelled the relationship in a certain way in the hope of achieving a tax benefit, where was no sham or window dressing of any sort in the case and where the parties' action reflected their understanding of the relationship as being that of an independent contractor and their actions were consistent therewith, the Court should not disregard their understanding.
[81] In the present case Dynamic and S.I.I.L. labelled the relationship in a certain way with a view to achieving a tax benefit. There was no sham or window dressing. Mr. Martindale had operated Dynamic for 12 years as an independent business prior to providing services to S.I.I.L. On commencing to provide services to S.I.I.L. in 1995 Mr. Martindale and S.I.I.L. continued to view Dynamic as an independent contractor with all the risks and benefits.
[82] In conclusion, based upon the facts and reasons in Wolf (supra), and given the similarity of facts between the present case and the facts in Wolf (supra), counsel submitted that Mr. Martindale cannot "reasonably" be regarded as an employee of S.I.I.L. during the years in question, regardless of whether the "traditional analysis" in Wiebe Door Services Ltd, supra, is used or the non-traditional analysis as adopted by Décary, J.A. As a result, Dynamic does not fall within the definition of a "personal services business" set out in subsection 125(7) of the Act which in turn precludes the application of paragraph 18(1)(p) of the Act. The Appellant's appeal should be allowed in full, with costs in that regard.
Deductions Allowed if Dynamic is a Personal Services Business
[83] Counsel argued that the provisions of subparagraph 18(1)(p)(ii) refers to "the cost to the corporation" of the benefit or allowance. It is therefore submitted that the "benefit" or "allowance" provided to the incorporated employee need not be taxable to that employee in order for the cost of that benefit or allowance to be deductible by the company.
[84] The Minister apparently did allow the deduction of the wages which were paid to Mr. Martindale but not the "cost" to Dynamic of the benefit of providing an automobile to Mr. Martindale, nor has Dynamic been allowed to deduct the amount of living out allowances provided to Mr. Martindale during the years in question.
[85] For its fiscal year ended October 31, 1997 the cost to Dynamic of providing Mr. Martindale with an automobile, set out on page 4 of Exhibit A-1, Tab 25, amounted to $9,786.71. In addition to this amount, Dynamic should be allowed to deduct its living out allowance payments of $19,565.00 which are established by Exhibits A-1, Tab 21 and Tab 22 and summarized in Tab 24.
[86] For its fiscal year ended October 31, 1998 the cost to Dynamic of providing Mr. Martindale with an automobile as set out on page 5 of Exhibit A-1, Tab 25 amounted to $10,286.81. In addition to this amount, Dynamic should be allowed to deduct its living out allowance payments of $16,800 which are established by Exhibits A-1, Tab 21 and Tab 23 and summarized in Exhibit A-1, Tab 24.
[87] For its fiscal year ended October 31, 1999 the cost to Dynamic of providing Mr. Martindale with an automobile, as set out on page 5 of Exhibit A-1, Tab 25, amounted to $7,316.58.
[88] In addition to this amount, Dynamic should be allowed to deduct its living out allowance payments of $19,100 which are established by Exhibit A-1, Tab 21 and summarized in Exhibit A-1, Tab 24.
[89] The Appellant also asks for costs.
Argument by the Appellant - Steven Martindale
[90] The Appellant has been reassessed to Tax pursuant to the provision of paragraphs 6(1)(e) and 6(1)(k) of the Act for his 1998 and 1999 taxation years to include in his income a standby charge and operating benefit which totalled $7,416 in each of the taxation years as a result of the Appellant's employer, Dynamic making available to the Appellant the use of a 1994 GMC Jimmy automobile.
[91] This liability for a standby charge, under paragraph 6(1)(e) depends upon the calculation of a "reasonable standby charge". The issue before the Court in this case is whether:
1) the Appellant was required by Dynamic in that particular year to use a 1994 GMC Jimmy in connection with or in the course of his employment with Dynamic;
2) all or substantially all of the distance travelled with the 1994 GMC Jimmy in that particular taxation year was in connection with or in the course of the Appellant's employment with Dynamic.
[92] In order for the Appellant to claim the deduction he must be able to answer in the affirmative to both of these questions.
[93] The Respondent in the Reply has not set out any assumptions with respect to this issue which the Respondent relied on in assessing the Appellant. In each of the 1998 and 1999 years, Dynamic was providing project management services to S.I.I.L. with respect to construction repair contracts which Fording had awarded to S.I.L.L. at Fording's three mine sites located in the Elk Valley in south-eastern British Columbia.
[94] In order for Dynamic to provide these project management services, its employee, the Appellant, was required to travel to Sparwood, as well as from Sparwood to any of Fording's three mine sites. The Appellant and Mrs. Gayle Larson both testified that given the road conditions on the highway between Cranbrook and Sparwood, a four-wheel-drive was a necessity. Also, the Appellant and Mrs. Larson testified that the Appellant needed a four-wheel-drive vehicle to travel to and around the three Fording mine sites located in the Elk Valley.
[95] In the present case, the distance travelled by the Appellant between his residence and Cranbrook and Sparwood meets both of the requirements since the distance travelled was "in connection with or in the course of the office of employment". As the Appellant testified, in any given day he would have to drive around a particular mine site and may have to be at more than one site. To do these duties he needed a 1994 GMC Jimmy and its four-wheel-drive capabilities.
[96] Due to the distance involved and the road conditions and travelling between Sparwood and Cranbrook, it was not feasible for the Appellant to drive to and from his home in Cranbrook every day. Thus, the Appellant's travel between Cranbrook and Sparwood was "in connection with" his employment with Dynamic.
[97] Because the Appellant was working at more than one Fording mine site in each of the 1998 and 1999 years, the Appellant's travel between Cranbrook and Sparwood was also "in the course of" the Appellant's employment with Dynamic. Travel which occurs "in the course of employment" has specifically been dealt with by the Courts in connection with employee travel expense deductions set out in paragraph 8(1)(h) of the Act. The Federal Court Trial Division dealt with such travel in The Queenv. Wright, (1980) Carswell Nat. 520.
[98] In Wright, supra, the Federal Court, Trial Division, reviewed the case law and it was generally held that an employee going to and returning from his work is not considered to be travelling "in the course of his employment". In paragraph 6, the Federal Court, Trial Division, did note one exception of this general rule: [t]he result is different where the employee is obliged to perform his duties in more than one place. In such case he comes within the words of the statute namely: "He is ordinarily required to carry out the duties of his employment in different places." Such situation is dealt with by Cattanach, J. in The Queen v. E. E. Deimart, [1976] C.T.C. 301, 76 DTC 6187 where he states at page 310 [DTC at 6193]:
It is a variant on the category of itinerant jobs that the concept of two places of work had been introduced particularly in Owen v. Pook, (1969) 2 All E.R. 1, and Taylor v. Provan, (1973) 1 All E.R. 1201, both decided by the House of Lords. Basically, that variant is that if a man has to travel from one place of work to another place of work he may deduct the expense of this travel because he is travelling on his work, but not those of travelling from either place of work to his home or vice versa unless his home happens to be a place of work. For this concept to apply, the facts must be that the work or the job must be done in two places. It is not enough that the man might choose to do part of the work in a place separate from where the job is objectively located.
[99] In the present case, the Appellant, in 1998 and in 1999, was employed at all three of Fording's coal mine sites and had to be able to travel to these various mine sites. The Appellant testified that some of these mine sites were up to 50 miles (80 km) apart. It is submitted that the Appellant's requirement to work at different places of work brings him within the exception identified above and results in the Appellant's travel between Cranbrook and Sparwood in the mine sites to be considered travel "in the course of" his employment.
[100] Furthermore, it was the Appellant's unc