Of the many topics that come before the Tax Court of Canada on a regular basis, the issue of whether an individual is considered to be an employee or an independent contractor is one that has been on the top 10 list for years.
The most recent case involved Ralph Watzke, who ended up in court to appeal the Canada Revenue Agency’s decision that he was not actually an employee of Merchant Law Group LLP. Mr. Watzke claimed he was, while both the CRA and the law firm took the position that he was an independent contractor.
To answer this question, the courts first look at the intention of the parties and then whether the terms of their relationship support that intention. The common terms often considered include control over work and the chance of profit (or risk of loss.)
In 2008, Mr. Watzke, a senior lawyer with over 38 years of practice, joined Merchant Law Group as an associate of the firm. While the offer letter didn’t specifically say he was to join as an independent contractor, Mr. Merchant testified that he told Mr. Watzke that all associates with the firm are independent contractors and he recalled “discussing the tax benefits that result from being an independent contractor” with the firm.
The judge accepted that Mr. Watzke was indeed hired as an independent contractor and that it was his intention to be an independent contractor. After all, he received GST on his law-firm earnings, which he neither questioned (nor reported to the CRA.) In addition, no source deductions, such as income tax, CPP contributions or EI premiums, were withheld from his earnings and he never questioned this.
In fact, the court found that he never questioned his employment status until after he was dismissed by the law firm and he tried to collect employment insurance benefits.
After concluding that the intention was to be an independent contractor, the court then turned to the terms of their relationship to see if they supported that intention.
On the control test, the testimony revealed that Mr. Merchant did not manage or supervise any of the lawyers in the office. Mr. Watzke was free to accept or to refuse to work on files offered by Mr. Merchant or any of the other lawyers. He had no set hours of work and he could take vacation whenever he chose. These facts support a lack of control indicative of an independent contractor relationship.
Finally, Mr. Watzke was paid a percentage of his cash receipts from his work billed. As a result, unlike an employee who is generally paid a fixed salary, Mr. Watzke was found to have “had both a chance of profit and a risk of loss” since his remuneration was wholly dependent both on the amount billed and the resultant cash collected.
This factor, combined with the other evidence, led the court to side with the CRA and conclude that he was indeed an independent contractor.