For many years, Canadian lawyers and tax advisors have cautioned that a shared desire to have a worker treated as an independent contract is not relevant to avoiding the tax and other implications of being an employee. Indeed, the common refrain which has been repeated for years is that tax status will be determined by the Canada Revenue Agency using a “substance over form” approach, with the legal test of worker status determined after reviewing the actual facts as opposed to stated or intended working relationship.
Subjective intent is, however, relevant and this has been confirmed by a recent decision from the Tax Court of Canada which opens up the prospect of companies and workers relying upon a shared common intention to classify the relationship as one of independent contractor. This may be the case even if all of the usual “employee vs. contractor” indicia are not all consistent with that common intent. Provided the parties carry on business in a manner consistent with the shared common intention, then there may be scope to rely upon that intent and avoid being classified as an employee.
In Insurance Institute of Ontario v. M.N.R. 2020 TCC 69, the Court was asked to review the legal status of Peter Barlow, who had worked for the Institute as an instructor from January 1, 2015 to March 31, 2018. During this period, Barlow signed a series of contracts which expressly said that he and the Institute intended the relationship to be an independent contractor.
Canada’s Minister of National Revenue disagreed and classified Barlow as an employee. The Ministry’s position was based on the accepted tests for employment, including integration into the organization and the degree of control which the Institute had over Barlow’s work. This included the fact that the Institute set course content and a right to audit the classes he was teaching. The Ministry also noted that the leading cases on employment status supported a finding that Barlow was not actually carrying on business on his own account.
The Institute appealed, with the focus being on the shared subjective intention that the parties wished the relationship to be one of independent contractor.
In allowing the appeal, the Court noted that Barlow did not have any risk of loss or true ability to profit like a commercial contractor would. That is not, however, sufficient to deem the worker an employee. What is still required in cases where there is a shared intent to be an independent contractor is a review of whether or not the parties acted in a manner consistent with their stated intention. In other words, the inquiry involves a review of whether the parties acted in a manner similar to an independent contractor relationship.
The Court noted that Barlow had scope to act independently and worked in a manner which might otherwise be expected of an independent contractor. He was not subject to performance reviews and had some scope to perform other work and decide how to perform his work. This was sufficient to be considered an independent contract.
This decision essentially outlines the following rules for determining worker status under Canadian tax law:
- If a company and a worker do not share a common intention, then the relationship will be reviewed using the accept tests for “employee vs. contractor” issues (the “CRA Tests”), including from the leading cases (Wiebe Door, Sagaz and Connor Homes).
- If there is a shared common intention, then there are three possible outcomes:
- If the CRA Tests are consistent with the common intention, then the worker’s relationship will be classified as the parties intended;
- If the CRA Tests are completely inconsistent with the common intention, then the outcome will be based on the CRA Tests; and
- If the CRA Tests are inconsistent with common intention, but the parties act in a manner similar to what would be reasonably expected from the common intention, then the worker’s relationship will be classified as the parties intended.
Takeaways for “Non-Employers”
The Court’s ruling in the Insurance Institute case provides very helpful clarification about how the subjective intention of the parties may become relevant to classifying workers. In this regard, a shared common intention that a worker be an independent contractor will be an important factor in certain cases where the CRA Tests are only partially satisfied. This will of course be subject to the important qualifier that the parties must also demonstrate a course of conduct which is consistent with the shared common intention. In other words, if a company and a worker want to claim that they both agreed to an independent contractor arrangement, they will need evidence that they also acted like you would expect when dealing with a contractor. This decision does at least suggest that expressing the shared common intention in the contractor agreement will be helpful. While this ruling does not allow for an entirely clear path to addressing classification issues, it does provide some support for companies.