http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/111225/index.do
C.J. McCarty Inc. v. The Queen (August 12, 2015 – 2015 TCC 201, Lyons J.).
Précis: Bruce McCarty was the principal of C.J. McCarty Inc. (“CJ”) which provided construction management services on large construction projects. Mr. McCarty had more than 35 years experience in the industry. In 2007 and 2008 CJ provided construction management services to MEG Energy Corp. (“MEG”) in connection with the construction of refinery facilities at Christina Lake, British Columbia. CRA took the position that CJ was a “personal services business”, e.g., that Mr. McCarty was an “incorporated employee”. This resulted in the denial of many deductions CJ had claimed. CJ appealed to the Tax Court.
The Court reviewed the familiar tests used to determine the distinction between employees and independent contractors and concluded that Mr. McCarty could not reasonably have been regarded as an employee of MEG but for the interposition of CJ As a result the appeals were allowed with costs.
Decision: Bruce McCarty was very experienced in construction management and had prior dealings with MEG:
[4] Between 1996 to 2000, Bruce McCarty was a consultant working on a large-scale project in Indonesia, however, he returned to Canada because of political unrest.
[5] CJ was incorporated on June 5, 2001. It is owned by Bruce McCarty, his spouse, Nancy McCarty, and their daughter. According to Mr. McCarty, he and Nancy were employees of CJ with his daughter working occasionally. He is the president and sole director of CJ and has 35 years’ experience in construction management working on large national and international projects. Its head office is located in Thunder Bay, Ontario. At the relevant time, CJ was a Canadian‑controlled private corporation.
[6] Between 2001 to 2004, Mr. McCarty worked with Bantrel to carry out phase 1 of a construction project for Suncor to build a plant for a steam‑assisted gravity drain (“SAGD” – a new process that removes sand, previously mixed with bitumen and water, to produce a flowable liquid that is deposited into the pipeline). His role was to develop a construction management team by recruiting personnel and develop systems and procedures to proceed with construction. Whilst employed at Suncor, he met Bryan Weir, the Assistant Manager of the Projects Group.
[7] Subsequently, CJ assisted Access Pipeline CJ (“Access”) with a “stumble” that occurred in the same vicinity as the Suncor project. MEG was a partner and 50% shareholder of Access.
[8] In need of experienced personnel, Bryan Weir, now VP Growth Projects for MEG, contacted Bruce McCarty to ascertain his availability relating to the construction of a refining facility at Christina Lake which is 130 kilometres from Fort McMurray, Alberta. Mr. Weir wanted to have a similar arrangement with Mr. McCarty as he did at Suncor. At the relevant time, MEG employed 150 people.
[9] CJ decided that it would provide the construction management services (“services”) to MEG on the formation of three written “Consulting Agreements” effective from December 8, 2005 to January 3, 2007, April, 1, 2007 to March 31, 2008 and March 1, 2008 to December 31, 2008 (“Agreement 1”, “Agreement 2” and “Agreement 3”, respectively). In each Agreement, a Principal Agreement, with the same date as the Agreement, is appended as Schedule “B.”
[Footnotes omitted]
CRA assessed CJ for 2007 and 2008 on the basis that Mr. McCarty was an “incorporated employee”:
[21] The respondent’s position is that CJ was a personal services business within the meaning of subsection 125(7). As such, CJ is prohibited from deducting the Expense Amounts as business expenses and is restricted to the types of expenses set out in paragraph 18(1)(p).
[Footnote omitted]
The Court extensively reviewed the well known tests used to distinguish between employees and independent contractors. One of the main factors it considered was “control”:
[51] Although Mr. McCarty spoke with Mr. Weir twice monthly, met him on site when visiting Calgary and a three or four-page monthly progress report went to his desk plus specific reports for awarding contracts. He said that Mr. Weir was inexperienced, often absent and provided little direction. Article 3.2 of each Agreement states that MEG only directed the results to be achieved from the provision of services and not the method nor manner of achieving such results. This is borne out by Mr. McCarty’s evidence that he was told to “go build it” and “get it built” but was not told what to do nor how to accomplish the desired results. He said “No one told him what to do”. The reporting mechanism is a form of control and suggestive of an employee, however, in moving to the desired results, he was left largely to his own devices. This is more conducive with an independent contractor carrying on business on his own account.
[52] Overall, I find that there was no meaningful degree of control by MEG over Mr. McCarty’s work activities. This factor tilts in favour of an independent contractor.
The Court concluded that based on those tests Mr. McCarty would not have been an employee of MEG but for the interposition of CJ:
[83] On the totality of the evidence, the weight of factors is tipped towards an independent contractor and it would not be reasonable to conclude that, but for the existence of CJ, that Mr. McCarty would have provided his services to MEG as an employee.
As a result the appeals were allowed with costs.