Tax Court of Canada Clarifies Role of Parties’ Intentions in Worker Classification

In Insurance Institute of Ontario v. M.N.R., 2020 TCC 69, the Tax Court of Canada clarified that where a payor and a worker share a common intention regarding the nature of their relationship, that intention may prevail — even where the objective indicia point in a different direction — provided the parties conduct themselves in a manner consistent with that shared intention.

Specifically, the court held that when both parties share a common intention that is inconsistent with certain objective factors, that intention remains relevant if the parties act in a way that objectively reflects their intended relationship.

The CRA characterized the working relationship as employer-employee in spite of independent contractor agreement

The Insurance Institute of Ontario (the “Institute”) entered into a series of contracts with a taxpayer, Peter Barlow, for instructional services. Each contract expressly stated that Mr. Barlow was engaged as an independent contractor. The CRA nevertheless determined that Mr. Barlow was an employee for tax purposes, and the Institute appealed. The appeal turned on the application of the second step of the two-step test articulated by the Federal Court of Appeal in 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85.

The parties agreed that the classification issue was governed by the test set out by the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, which asks whether the worker is performing services as a person in business on their own account. They also agreed that this inquiry must be conducted using the two-step framework from Connor Homes: first, identifying the subjective intention of the parties; and second, determining whether the objective facts support that intention. The dispute concerned the second step. The CRA argued that it should be conducted independently of the parties’ subjective intentions. The Institute, by contrast, argued that where the parties share a common intention, that intention must inform the objective analysis.

Tax Court clarified how the mutual intention affects the parties’ working relationship

The Tax Court allowed the appeal, adopting the Institute’s interpretation of the Connor Homes framework. The Court held that the outcome of the first step—whether the parties share a common intention—directly affects the application of the second step.

Where the parties do not share a common intention, the objective factors (level of control, ownership of tools, chance for profit/risk of losses) set out in Sagaz and Wiebe Door Services Ltd. v. The Queen, [1986] 3 FC 553, determine the nature of the relationship. However, where a shared intention exists, that intention is relevant even if the objective factors point in a different direction(e.g. there was an agreement between the parties that worded the working relationship as employee/employee but the worker essentially worked as an independent contractor), so long as the parties act in a manner consistent with what one would expect from their intended relationship.

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

1. Where the payor and worker do not share a common intention, the relationship is determined by the Wiebe Door and Sagaz
2. Where the payor and worker share a common intention:
   1. If the Wiebe Door and Sagaz factors are consistent with that intention, the relationship will be as intended;
   2. If those factors are completely inconsistent with the intention, the relationship will be determined by the objective factors; and
   3. If the factors are inconsistent with the intention but the parties nevertheless conduct themselves in a manner consistent with their shared intention, the intended relationship will prevail.

Pro tax tips – parties should properly draft their agreement to reflect their mutual intention of the working relationship

The Insurance Institute decision clarifies when the parties’ shared subjective intention will be relevant in worker classification disputes. A common intention may influence the outcome where objective factors are inconsistent with that intention, provided the parties’ conduct aligns with what would objectively be expected from their intended relationship.

Although the decision arose in a tax context, it may also be relevant to worker classification issues in other legal contexts. Organizations engaging independent contractors should ensure that the parties’ shared intentions are clearly documented and reflected in practice by having a top Canadian tax lawyer draft an independent contractor agreement. While not a definitive solution in all classification disputes, the reasoning in Insurance Institute may provide useful support where intention and conduct are aligned, and it is highly recommended that taxpayers should consult with an experienced Canadian tax lawyer to make sure the mutual intention is properly reflected in the independent contractor or employee relationship.

FAQ:

What is the legal test to determine employee vs independent contractor relationship?

The legal test is a two-step test,

1. What is the mutual intention of the parties?
2. What is the working relationship based on objective factors (the list is not exhaustive) such as:
   1. The level of control of the work,
   2. Ownership of working tools,
   3. Chance for profit and
   4. Risk of losses.

How does the mutual intention of the parties impact the 2nd step of the legal test?

The Court interpreted the test as requiring a more flexible application of the second step where the parties share a clear common intention. While that intention will not prevail where the Wiebe Door and Sagaz factors are completely inconsistent with it, the intention may govern where the factors are merely inconsistent, provided the parties nevertheless conduct themselves in a manner consistent with what would objectively be expected from their shared intention.

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.