The Federal Court of Appeal has recently clarified the test to be applied in determining whether a worker is an employee or an independent contractor, in 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85 (CanLII).
The appellant, Connor Homes, operated a group home for children. To carry out its services, Connor Homes retained individuals to perform the roles of child care workers and supervisors. The Canada Revenue Agency ruled that three individuals who performed such roles were employed in insurable and pensionable employment. This ruling was despite the fact that they had all signed contracts with Connor Homes, which specified that they were working as independent contractors.
Connor Homes appealed CRA’s decision to the Tax Court of Canada. The Tax Court judge concluded that Connor Homes exercised significant control over the workers, there was no chance for the workers to increase their income by reducing expenses or producing more and that most of the required tools were provided by Connor Homes. The express contractual provision stating that the workers were independent contractors was not consistent with the reality of the employment relationship. Connor Homes then appealed to the Federal Court of Canada.
The Federal Court upheld the decision of the Tax Court. In reaching its decision, the Court reviewed the various tests set out in the prior case law, including the leading decision of Wiebe Door Services Ltd. v. M.N.R.,  3 F.C. 553, which was later approved by the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 (CanLII). The Court also considered the recent jurisprudential trend which has seen courts give substantial weight to the stated intention of the parties with respect to the nature of the relationship.
The ultimate question in determining if an individual is working as an employee or as an independent contractor is whether or not the individual is performing the services as a person in business on his own account. Although the subjective intention of the parties is relevant, the Court confirmed that it, “cannot trump the reality of the relationship as ascertained through objective facts."
The correct test to be applied is a two-step test. Under the first step, “the subjective intent of each party must be ascertained”. Examples of subjective intent can be found in written contracts, registration for GST purposes, provision of invoices for services rendered, and income tax filings as an independent contractor.
The second step is to ascertain “whether an objective reality sustains the subjective intent of the parties.” At this step, the Court applied the factors discussed in Weibe Door and Sagaz, including the significant degree of control Connor Homes exerted over the individuals with respect to their tasks, the limits on their ability to profit, and the absence of any significant financial risks or investments.
Despite the parties’ express intention that the workers were to be independent contractors, the reality was that the workers’ duties were the same as those of regular Connor Homes’ employees. The relationship between Connor Homes and the three individuals was that of employer-employee.
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For more information, please contact Meaghan Hughes at coxandpalmer.com.