Sometimes my clients like to tell me that “in tax, intention is everything”. In fact, the courts have always been quite careful to limit the role that mere subjective intention plays in determining the tax consequences of a transaction. For a recent example, see my article on Makuz v. The Queen, 2006 TCC 263. Royal Winnipeg Ballet v. M.N.R., 2006 FCA 87, rev’g 2004 TCC 390, however, seems to mark something of a new direction in this regard.
Before Royal Winnipeg Ballet it was generally thought that, at least in common law jurisdictions, the intention of the parties to a personal services contract did not have much importance for determining whether it was an employment contract for CPP and EI purposes. Royal Winnipeg Ballet seems to have changed that, and the impact has already been felt locally: see Community Living Burlington v. M.N.R., 2006 TCC 316.
The Federal Court of Appeal decision repays careful reading because it presents well both sides of an important question: what role should intention play in the interpretation of a services contract for CPP and EI purpose. The majority held that the common intention of the parties should be considered:
[61] I emphasize, again, that this does not mean that the parties’ declaration as to the legal character of their contract is determinative. Nor does it mean that the parties’ statements as to what they intended to do must result in a finding that their intention has been realized. To paraphrase Desjardins J.A. (from paragraph 71 of the lead judgment in Wolf), if it is established that the terms of the contract, considered in the appropriate factual context, do not reflect the legal relationship that the parties profess to have intended, then their stated intention will be disregarded.
[62] It is common for a dispute to arise as to whether the contractual intention professed by one party is shared by the other. Particularly in appeals under the Canada Pension Plan and the Employment Insurance Act, the parties may present conflicting evidence as to what they intended their legal relationship to be. Such a dispute typically arises when an individual is engaged to provide services and signs a form of agreement presented by an employer, in which she is stated to be an independent contractor. The employer may have included that clause in the agreement in order to avoid creating an employment relationship. The individual may later assert that she was an employee. She may testify that she felt coerced into signifying her consent to the written form of the contract because of financial need or other circumstances. Or, she may testify that she believed, despite signing a contract containing such language, that she would be treated like others who were clearly employees. Although the court in such a case may conclude, based on the Wiebe Door factors, that the individual is an employee, that does not mean that the intention of the parties is irrelevant. Indeed, their common intention as to most of the terms of their contract is probably not in dispute. It means only that a stipulation in a contract as to the legal nature of the relationship created by the contract cannot be determinative.
[63] What is unusual in this case is that there is no written agreement that purports to characterize the legal relationship between the dancers and the RWB, but at the same time there is no dispute between the parties as to what they believe that relationship to be. The evidence is that the RWB, the CAEA and the dancers all believed that the dancers were self-employed, and that they acted accordingly. The dispute as to the legal relationship between the dancers and the RWB arises because a third party (the Minister), who has a legitimate interest in a correct determination of that legal relationship, wishes to assert that the evidence of the parties as to their common understanding should be disregarded because it is not consistent with the objective facts.
[64] In these circumstances, it seems to me wrong in principle to set aside, as worthy of no weight, the uncontradicted evidence of the parties as to their common understanding of their legal relationship, even if that evidence cannot be conclusive. The judge should have considered the Wiebe Door factors in the light of this uncontradicted evidence and asked himself whether, on balance, the facts were consistent with the conclusion that the dancers were self-employed, as the parties understood to be the case, or were more consistent with the conclusion that the dancers were employees. Failing to take that approach led the judge to an incorrect conclusion.
What is interesting about the foregoing is that neither Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553, [1986] 2 C.T.C. 200, 87 D.T.C. 5025 (F.C.A.) nor 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 mentioned intention as a factor to be considered, as Evans J.A. pointed out in his dissent (at ¶95).
Mr. Justice Evans’ powerful dissent lists four reasons why the intention of the parties ought to be disregarded:
- The parties’ view of the legal nature of their contract begs the question of what that contract is. How is their intention relevant? How much weight should it be given and in what circumstances?
- The parties’ view of their relationship is often self-serving. Put another way, the parties may intend that their contract avoid CPP and EI, but that intention should not determine whether they have in fact avoided them. Both programs are (or are supposed to be) involuntary after all.
- Giving weight to intention could prejudice the rights and interests of the more vulnerable members of our society. Such persons might believe they have no choice but to sign contracts that call them independent contractors. It might be difficult to repudiate that intention later in the absence of clear evidence of duress or misrepresentation. The CPP and EI are mandatory regimes that are supposed to protect such persons from just that kind of vulnerability.
- The characterization of a contract could impact third parties. Does it make sense that those third parties could be affected by intentions they did not share? Or what if, for example, other dancers at the Winnipeg Ballet did not share the intention of the dancers before the Federal Court of Appeal? Should the results vary with the subjective intentions of the parties before the court?
In his dissent, Mr. Justice Evans even went so far as to question the utility of the factors set out Wiebe Door and Sagaz for determining whether an individual is an employee for the purposes of the CPP and EI legislation:
[111] The four factors enumerated in Wiebe Door are drawn largely from the law of tort. The issue in the Montreal Locomotive case, on which Wiebe Door also relied, was whether a government contractor was liable to pay tax as a result of its occupation of certain land. The answer turned on whether it was operating on the land as an agent of the Crown, or was carrying on its own business. No contract of employment was involved.
[112] When legislation attaches consequences to whether work is being performed under a contract of employment, it is reasonable to attribute a legislative intention that the concept of employment should be interpreted and applied in light of its meaning in other areas of the law. However, it is out of keeping with current legal methodology to interpret and apply the term, “contract of employment”, when used in a statute to define the scope of a social programme, by reference only to the law of vicarious liability in tort, which has its own policy considerations, without any regard to the context and purposes of the statutory scheme in question. These issues are thoroughly discussed by Lara Friedlander, “What Has Tort Law Got To Do With It?” (2003), 51 Can. Tax J. 1467.
[113] It is also appropriate to question the utility of a test devised before both the rapid growth of outsourcing and privatization of work had occurred, and the effects of the globalization of the economy had become so apparent. The changing nature of the workplace, and the increasing complexity and diversity of the relationships under which labour is supplied, are apt to reduce further whatever value the Wiebe Door test may once have had to determine who is an employee for EI and CPP purposes and thus entitled to the benefits that these statutory schemes provide.
One wonders whether, the face of these policy concerns, the Supreme Court of Canada will approve the reasoning of the majority in Royal Winnipeg Ballet. In the mean time, however, it appears that the Minister will now be required at least to consider the common intentions of the parties to a contract before characterizing it for CPP and EI purposes.
