Canada: Common Intention An Important Factor In Determining Independent Contractor Status, Tax Court Rules

Tax Court of Canada clarifies that in situations where a payor and a worker share a common intention regarding the classification of their relationship, their relationship will be the relationship that they intended, even if the objective indicia are inconsistent with that common intention, provided that the parties act and carry on their relationship in a manner that is similar to what one would expect from their intentions: Insurance Institute of Ontario v. M.N.R., 2020 TCC 69.

The Tax Court of Canada has recently rendered a decision clarifying the role that an employer's and a worker's subjective intentions will play in the test used to determine the nature of the relationship (i.e., whether the worker is an independent contractor). In particular, in circumstances where the parties share a common intention that is inconsistent with the objective indicia of the intended relationship, the parties subjective intentions will be relevant if the parties act in a manner that is similar to what would be objectively expected.  

Facts

The Insurance Institute of Ontario (the "Institute") entered into a series of contracts with PB regarding his work as an instructor with the Institute. The contracts clearly stated that the Institute and PB intended that PB would be an independent contractor. The Minister of National Revenue (the "MNR") disagreed that PB was an independent contractor and classified him as an employee. The Institute appealed the ruling. The main issue in the appeal was the application of the second step of the two-step test set out by the Federal Court of Appeal in 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85, as outlined below.

Both the Institute and the MNR agreed that the question of whether PB was an independent contractor or an employee had to be addressed in accordance with the test set out by the Supreme Court of Canada (the "SCC") in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59. In Sagaz, the SCC concluded that although there is no universal test for determining whether a person is an independent contractor or an employee, the "central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account".

The parties also agreed that the central question, as set out in Sagaz, was to be answered in accordance with the two-step test set out by the Federal Court of Appeal in Connor Homes. The first step of the Connor Homes test is to determine the subjective intent of each party regarding the relationship. The second step is to objectively determine whether the facts support the subjective intent of the parties. The Institute and the MNR disagreed on the application of this second step. The MNR submitted that the second step should be entirely independent of the results of the first step, while the Institute submitted that the analysis conducted during the second step should differ depending on whether or not the contracting parties share a common intention to classify the worker as an independent contractor or an employee. 

Decision

The Tax Court of Canada allowed the appeal, favouring the Institute's interpretation of the second step in the Connor Homes test. The Court concluded that the results of the first step, whether or not the parties share a common intention, affect the application of the second step. Therefore, if the first step of the test determines that the parties do not share a common intention, then the factors set out in Sagaz, and Wiebe Door Services Ltd. v. The Queen, 3 FC 553, are to be used to objectively determine whether the facts support an independent contractor or employee classification. However, if the first step of the test determines that the parties share a common intention, then the shared common intention would be "relevant when the Wiebe Door and Sagaz factors indicate that the relationship is one thing, but the parties intended it to be another thing and their relationship is similar to what they intended".

The Court summarized its conclusion regarding the second step of the Connor Homes test as follows:

a) Where the payor and the worker do not share a common intention, their relationship will be the relationship indicated by the Wiebe Door and Sagaz

b) Where the payor and the worker share a common intention:

Kay Takeaways

The Insurance Institute decision clarifies the situations in which the subjective intentions of the party will be considered to be relevant. In particular, a shared common intention will be relevant in circumstances where the Wiebe Door and Sagaz factors are inconsistent with the common intention, but the parties nonetheless act and carry on their relationship in a manner that is similar to what one would expect from their intentions. While this is a decision from the Tax Court of Canada, where a worker was being classified for tax purpose, the Insurance Institute decision may be of interest when classifying workers as independent contractors or employees for other purposes. Accordingly, organizations should ensure that when entering into relationships with independent contractors, the subjective and shared intentions of the parties be readily ascertainable. While not likely to be a silver bullet in classification disputes, the analysis underpinning the Insurance Institute decision could be referenced in the context of such disputes.

Originally published by Stikeman Elliott, August 2020

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