Royal Columbia Development Corp. v. M.N.R. – TCC: Corporation and worker involved in joint business venture not an employment contract

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Royal Columbia Development Corp. v. M.N.R. (January 16, 2015 – 2015 TCC 12, Bocock J.).

Précis: The taxpayer hired Mr. Kraus as the manager of a project to start up a new framing plant. The sole question before the court was whether he was an employee or an independent contractor for EI and CPP purposes. The Crown was prepared to consent that he was an independent contractor but Mr. Kraus argued that he was an employee. The Court concluded that Mr. Kraus and the appellant were engaged in a joint venture to start the new plant and that, on the evidence, he was not an employee.

Decision:  This is a decision in two appeals, one an EI appeal and one a CPP appeal. The worker in question, Mr. Kraus, had been originally determined to be an independent contractor but the Minister then determined that he was an employee. Royal Columbia appealed that determination and the Crown, prior to trial, advised that it was prepared to consent to the appeal. Mr. Kraus however wanted to be treated as an employee so the trial proceeded. The factual background was not complex:

[5] Mr. Gu was the primary shareholder and controlling mind of Royal Columbia. Mr. Gu testified that, originally, Mr. Kraus was an employee with Hikea Homes, but after that company experienced financial difficulties, Mr. Kraus was hired to provide his work to Royal Columbia. Mr. Kraus had experience in factory design and pre-fabricated framing. He was primarily interviewed by and negotiated with Mr. Gu. Mr. Gu testified that the parties intended that Mr. Kraus would attend to the design, operations, and technology while Mr. Gu would attend to the marketing of the new business. In advance of formulating and rendering that business into an operational state, it was first necessary to construct and assemble a building truss and framing factory equipped with a production line. Mr. Gu testified that it was in this context that he formulated an intended business relationship with Mr. Kraus. Mr. Gu further testified that Mr. Kraus was to receive a draw or advance of $4,000 a month, later, at Mr. Kraus’ request, raised to $5,000 a month. Such amounts would be the subject of invoices rendered by Mr. Kraus, upon which GST was charged. That process commenced in September of 2011 and by October or November of 2011, the parties commenced procuring and assembling the factory and the respective rendering and paying of invoices which tracked the various labour contributions of Mr. Kraus.

[6] Mr. Kraus, in his testimony, indicated that there was no written contract, but his services were simply a continuation of his previous employment with Hikea Homes. His service and basis of retainer were very similar to that of any other employee employed by the Appellant (one of whom included Mr. Kraus’ wife). Mr. Kraus was adamant that there was no initial discussion surrounding a business relationship and that any discussions which did occur were inchoate and gave rise to no identifiable commercial or business establishment steps being undertaken. In contrast, when completing a questionnaire for the Canada Revenue Agency, Mr. Kraus did indicate that, at the outset, he thought he was self-employed and in the process of establishing a partnership with the Appellant. Mr. Kraus also provided in his questionnaire evidence of an intention that his ownership share in any new business was to be 15%. A limited company would be ultimately formed in which Mr. Kraus would own a 50% interest, with Mr. Gu owning the balance.

The most interesting aspect of this decision is that the Court held that Mr. Kraus and Royal Columbia were essentially involved in the early stages of what was to be a jointly owned business venture. As a result the Court held that Mr. Kraus was not an employee:

[18] With this particular factor, clarity comes to bear on the issue of whether Mr. Kraus was an employee or an independent contractor. By Mr. Kraus’ own admission, at the outset the parties had intended to establish a relationship of entity to entity for the purposes of constructing and formalizing an ongoing business relationship. During the interim building phase, Mr. Kraus admitted that he was to be paid 15% of the profits and that he compromised the quantum of his base salary in anticipation of those future profits. Once the facility was completed, the inchoate business relationship would become settled and a new entity, either a corporation or partnership, would be established under which Mr. Gu and Mr. Kraus would have equal ownership. Moreover, in the context of the operations manager and his relationship with Mr. Kraus, it is not clear from any of the documentation that the operations manager was ever intended to be a part owner of the new business, either at the outset or upon its full establishment after the construction of the framing plant. This treatment of Mr. Kraus by the operations manager is perhaps explained because an interim relationship had to exist within Royal Columbia because the new business itself was a recipient of capital and in-kind contributions from Mr. Gu, through Royal Columbia. It was in this light that one may see the quantifiable capital contributions of Mr. Gu, on one hand, and the quantifiable labour contributions of Mr. Kraus, on the other.

[19] The final convincing fact for the Court, which points towards a contract for services, is that the arrangement did not ultimately proceed because Mr. Kraus failed to tender or commit the additional capital contributions at the final stages of the business launch. During this start-up period, Mr. Kraus was extracting from the potential business a draw or salary which was to be tallied during the final reconciliation of capital contributions and percentages of profit. This is consistent with Mr. Gu’s recollection of the need to track invoices and contributions. This practice is also buttressed by Mr. Kraus’ own admission that a business was intended and respective interim contributions would be tracked. As further evidence, Mr. Kraus admitted that he was providing equal and perhaps lopsided in-kind contributions in the formation of the business, not just at the outset, but during the work period.

[20] In summary, this objective reality is not an instance where a worker’s tasks were dictated by manuals and carried out under the supervision of the employer, where rates of pay were fixed and hours scheduled by Royal Columbia and where there were no financial risks imposed on, or investments required of, this particular worker. On the contrary, the Court finds that the worker and Mr. Gu through Royal Columbia, at the very inception, had a subjective intention to engage in a relationship of equals (or close to equals) for the purposes of establishing, after an interim period, a business relationship culminating in the finalization of a formalized business structure after construction of a framing plant and production line. While there were some factual inconsistencies, the evidence on balance indicates that the legal relationship between Royal Columbia and Mr. Kraus was that of an independent contractor relationship as opposed to that of employee-employer. Mr. Kraus was, in fact, engaged on his own account in the business of working, admittedly within the existing business structure of Royal Columbia, with Mr. Gu in a business venture.

[21] For these reasons, the appeal is allowed and the original decision of the Minister appealed from is vacated based upon the facts now before the Court.