http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/142825/index.do
Ivan Cassell Limited v. The Queen (March 3, 2016 – 2016 TCC 53, Own J.).
Précis: This was a “personal services business” case framed in the narrowest of possible terms (normally a sign of very seasoned counsel):
[1] This is an appeal by Ivan Cassell Limited (“ICL”) of the reassessment of its 2008, 2009 and 2010 taxation years by notices of reassessment dated May 7, 2013 for 2008 and 2009 and June 3, 2011 for 2010 (collectively, the “Reassessments”). During these three taxation years (collectively, the “Taxation Years”), Mr. Ivan Cassell provided services to Western Petroleum Newfoundland Limited (“WPNL”) in his capacity as president of ICL.
[2] The Reassessments denied ICL’s claim for the small business deduction provided for by subsection 125(1) of the Income Tax Act (the “ITA”) and also applied paragraph 18(1)(p) of the ITA to deny the deduction of certain expenses incurred by ICL, all on the grounds that ICL’s business of providing services to WPNL was a “personal services business” (“PSB”) as defined in subsection 125(7) of the ITA.
[3] ICL concedes that Mr. Cassell was an incorporated employee and a specified shareholder of ICL for the purposes of the PSB definition and that the exceptions in paragraphs (c) and (d) of the PSB definition do not apply. The sole issue in this appeal is whether Mr. Cassell would reasonably be regarded as an officer or employee of WPNL but for the existence of ICL.
[Footnote omitted]
Unfortunately for Mr. Cassell the facts were simply not in his favour. The Tax Court concluded that but for the existence of ICL he would have been regarded as an employee of WPNL. As a result the appeal as dismissed with costs.
Decision: Justice Owen’s summation of the fact was simply fatal to the taxpayer’s case:
[44] I also note that while the PSB definition asks whether Mr. Cassell would reasonably be regarded as an officer or employee of WPNL but for the existence of ICL, the base test in the jurisprudence asks whether the individual is performing the services in issue as a person in business on his own account. I believe, however, that it is a simple matter to adapt this test to the language of the PSB definition by asking whether, taking into consideration all the circumstances, Mr. Cassell would reasonably be regarded as carrying on a business on his own account if ICL did not exist.
[45] In this case, the circumstances lead me to the inexorable conclusion that if the existence of ICL were ignored, Mr. Cassell would reasonably be considered to be an employee of WPNL. I reach this conclusion on the basis of the following considerations:
1. The stated objective of Mr. Cassell in providing services to WPNL was to grow the business of WPNL. Mr. Cassell made no mention of growing the services business of ICL and no evidence was provided suggesting that growing ICL’s services business was a material objective of Mr. Cassell. If ICL were ignored, the objective of providing the services would be the growth of WPNL’s business and not the growth of a services business of Mr. Cassell.
2. For the taxation years in issue, ICL did not conduct its services business in a business-like manner. Specifically, ICL did not have a written agreement with WPNL; ICL did invoice WPNL for the services it provided to WPNL; ICL did not charge or collect HST on the fees paid to it by WPNL; and ICL did not advertise its services business. If the existence of ICL were ignored, there is no evidence of business-like activity to support the conclusion that Mr. Cassell would reasonably be regarded as providing the services as a person in business on his own account.
3. Mr. Cassell testified that he also provided management services to WCEL in his capacity as president of ICL. However, ICL had no written agreement with WCEL and did not invoice WCEL. As well, no evidence was provided that ICL was in fact paid by WCEL for any services it may have provided. Consequently, the provision of services to WCEL does not support the conclusion that Mr. Cassell would reasonably be considered to be conducting a management services business on his own account if the existence of ICL were ignored.
4. ICL leased properties to arm’s length third parties. This activity was distinct from the provision of management services by ICL. Nevertheless, the earning of rent by ICL was clearly subordinated to the profitability of WPNL’s business, as demonstrated by the failure of Mr. Cassell to pursue any action regarding defaults in paying rent when to have done so would have negatively affected the profitability of WPNL’s business. These facts only serve to confirm that Mr. Cassell’s focus was solely on the profitability of WPNL’s business. An individual in business on his own account would not have such a focus.
5. Mr. Cassell confirmed that the functions he performed for WPNL following the transfer of the Western Petroleum business to WPNL were the same as the functions he had performed as a senior employee of ICL when the Western Petroleum business was owned by ICL. He also confirmed that the objective of these functions was to grow the Western Petroleum business.
6. The compensation received by ICL was similar to the compensation that might have been paid to a senior employee of WPNL – a fixed monthly amount and an additional amount (which I will call a “performance bonus”) based on the profitability of WPNL’s business. In addition, the performance bonus appears to have been at the discretion of WPNL as there is no provision for this bonus in the written agreement between ICL and WPNL. If the existence of ICL is ignored, the compensation structure is consistent with Mr. Cassell being an employee of WPNL rather than an independent contractor. In particular, an independent contractor is unlikely to negotiate a performance bonus that is at the discretion of the service recipient.
7. The compensation structure was such that any opportunity to profit from the provision of services to WPNL was tied to the success of WPNL’s business and not to the services that ICL provided to WPNL through Mr. Cassell. This is consistent with the conclusion that any profit earned by ICL resulted from the business of WPNL, not from a business that Mr. Cassell would reasonably be regarded as conducting on his own account, if the existence of ICL were ignored.
8. The compensation structure also ensured that ICL was not exposed to a risk of loss. If one disregards the salary paid to Mr. Cassell’s spouse, the expenses of ICL’s business were miniscule in comparison to the monthly fees it received from WPNL. Moreover, the only substantive economic risk faced by ICL was the risk inherent in WPNL’s business, which governed WPNL’s ability to pay the monthly fees. If the existence of ICL were ignored, Mr. Cassell would not bear any real risk of loss under the compensation arrangements with WPNL. The fact that WPNL may have failed to pay a “success fee” in one or more years does not alter this conclusion given the nature and magnitude of the expenses incurred to provide services to WPNL and the magnitude of the monthly fees paid by WPNL for those services.
9. Mr. Cassell was not subject to significant control by WPNL. However, he did have weekly meetings with Mr. Reynolds to discuss the direction of WPNL’s business for the following week. This is consistent with the degree of control that might be exerted over a senior employee of WPNL.
10. The nature of Mr. Cassell’s activities for WPNL did not require Mr. Cassell to supply any tools. However, Mr. Cassell was provided with the non-exclusive use of WPNL vehicles consistent with his need to travel to conduct WPNL’s business.
11. Mr. Cassell did not have a dedicated office at WPNL’s premises. However, he did have a makeshift space available to him as the need arose.
12. Mr. Cassell maintained a home office but that can be explained by the fact that ICL also had rental properties to manage.
[Footnote omitted]
As a consequence the appeal was dismissed with costs.