Intent in Service Contract

Reproduced from the May 2013 edition of the Canadian Tax Highlights:

Wiebe Doors (87 DTC 5025 (FCA)) sets out four factors to determine a service provider’s status as an independent contractor or an employee: control, ownership of tools, chance of profit or risk of loss, and integration. More recently the parties’ expressed intent has been added as a factor (Wolf, [2002] 4 FCA 96, and The Royal Winnipeg Ballet, 2006 FCA 87), but the evidentiary weight attached to intent has been unclear. The FCA decision in 1392644 Ontario Inc. O/A Connor Homes (2013 FCA 85) clarifies the impact of the parties’ expressed intent.

Connor Homes operated foster homes and group homes and provided care for children with serious behavioral and development disorders via child and youth workers, social workers, certified therapists, and psychologists. Written contracts stipulated that those individuals were independent contractors and not “entitled to any benefits” and were responsible for payments such as Canada pension, employment insurance, and taxes. Connor Homes unsuccessfully argued that the contract alone should determine the classification of an individual rendering services, without reference to the four factors of Wiebe Doors. 

The SCC in Sagaz Industries Canada Inc. ([2001] 2 SCR 983) upheld the four-prong test in Wiebe Doors and never considered the agreement’s expressed intent. However, several years later and after  intent had been established as a relevant consideration, Bowman, J. in Lang et al (2007 TCC 547) summarized four different approaches to the treatment of intent:  

(a)    Intent is determinative (Royal Winnipeg Ballet). (Bowman, J. himself said that the decision did not suggest that the matter was that simple.)

(b) Wiebe Door is all that is needed and intent need not be considered (Sagaz,

     Wiebe Door and Precision Gutters).

(c) The Wiebe Door test does not point conclusively in any direction and so

      intent is a tie-breaker (Wolf and City Water).

(d) Common sense, instinct and a consultation with the man 

     on the Clapham omnibus.

The characterization of an employee-employer relationship has far-reaching legal and practical ramifications as stated both by the full FCA in Connor Homes and by the FCA dissent in Royal Winnipeg Ballet. The latter pointed out that the parties’ statement in the contract can be viewed as self-serving and made with a view to achieve their ultimate objective such as an EI premium exemption.  However, the dissent went on to say:

… parties to contracts… are often not in equal bargaining positions. To attribute appreciable weight to a statement in the contractual document signed by the parties that the contract is one for the supply of services may disadvantage the more vulnerable party…[whose] contractual status and consequently her statutory rights may also be prejudiced by the stronger party’s legal characterization of the contract…[Moreover] the legal characterization of a contract may have an impact on third parties, such as the victim of a tort committed by a service provider in the course of performing the contract or, as in this case, Revenue Canada. Not to base legal characterization squarely on the terms of the contract, interpreted contextually, may jeopardize those interests and undermine non‑voluntary protective statutory programs, such as EI and CPP.

The FCA in Connor Homes clarifies that characterization of the relationship is very important in diverse areas such as tort law, social programs, labour relations, and taxation, and therefore the determination cannot be left to the sole subjective discretion of the parties. Thus intent is not determinative. The court summarizes a passage from its majority decision in Royal Winnipeg Ballet:

As a result, Royal Winnipeg Ballet stands for the proposition that what must first be considered is whether there is a mutual understanding or common intention between the parties regarding their relationship. Where such a common intention is found, be it as independent contractor or employee, the test set out in Wiebe Door is then to be applied by considering the relevant factors in light of that mutual intent for the purpose of determining if, on balance, the relevant facts support and are consistent with the common intent.

The FCA in Connor Homes sets out two steps to determine whether an individual is performing services as an employee or as an independent contractor. (1) Establish each party’s subjective intent, determined by the written contractual relationship or by their actual behaviour, such as invoices for services rendered, registration for GST purposes, and filing for income tax as an independent contractor. (2) Determine whether objective reality supports the parties’ subjective intent by applying the four factors in Wiebe Door.

On the facts in Connor Homes the FCA concluded that the parties’ subjective intent as expressed in the contracts was to enter into independent contractor relationships; however, application of the factors in Wiebe Door showed that employee-employer relationships had been established. The FCA found the taxpayer exerted significant control over the activities of the individuals rendering services. Service providers had to strictly adhere to a policy and procedures manual. Furthermore the taxpayer dictated the individuals’ duties daily and guided and instructed the service providers on managing difficult situations with clients. The use of a personal vehicle to transport some of the children was not an overweighing factor.

Sunita Doobay

TaxChambers, Toronto

Darcy L. MacPherson

Faculty of Law, University of Manitoba