FCA Rules on Employee vs. Independent Contractor Status
Arthur Drache, March 10, 2006
In a major decision which should have an impact on the general law, and most significantly, the income tax laws, dealing with employment status, the Federal Court of Appeal has held that dancers with the Royal Winnipeg Ballet (“RWB”) are independent contractors.
We have been taking the position for quite some time that a new approach was needed to determine whether workers were employees or independent contractors. In today’s world, the old tests that have been applied, simply have limited relevance, but they are still applied regularly by the Canada Revenue Agency. They attempt to shoehorn assessments into tests that really don’t fit.
We have suggested that in close cases, the intention of the parties should be a major determinant. In the RWB case, the Court split. This case dealt with the issue of whether dancers for the RWB were employees or independent contractors. There has been a large debate for years in the arts community regarding musicians playing for various orchestras.
Outside the arts community, the issue most often arises when companies are contracted by government or industry to supply consultants for specific projects. CRA has been very aggressive in determining that these consultants are employees, again, using tests that really don’t fit. The RWB case came before the FCA on appeal from the Tax Court of Canada which held that the dancers in question were employees of the RWB and not independent contractors.
The legal relationship between the RWB and each dancer is determined and governed by the Canadian Ballet Agreement in force for that season, which may in some cases be supplemented by an individual contract between the dancer and the RWB. The Minister did not argue, and there is no evidence, that the RWB or the dancers have acted in any way that is inconsistent with any of those contracts.
A key point in the decision is that the understanding of the Canadian Actors’ Equity Association (“CAEA”), the dancers, and the RWB is that dancers covered by the Canadian Ballet Agreement are independent contractors and not employees of the RWB. As an aside, it is also generally understood that stage managers engaged by the RWB under the Canadian Ballet Agreement are employees of the RWB. Madame Justice Sharlow states that: “For all fiscal purposes, the dancers and the RWB have acted consistently with their understanding that the dancers are independent contractors. The dancers are registered for GST purposes, and charge GST to the RWB for their services. The RWB does not withhold tax from the remuneration paid to a dancer, except at the dancer’s request. If a dancer requests that tax be withheld, the dancer also stipulates the amount to be withheld. The RWB complies with any such request by a dancer. Sharlow notes that the trial judge did not take into account the intention of the parties. After reviewing the jurisprudence in great detail, Sharlow continues: “The control factor in this case, as in most cases, requires particular attention. It seems to me that while the degree of control exercised by the RWB over the work of the dancers is extensive, it is no more than is needed to stage a series of ballets over a well planned season of performances. If the RWB were to stage a ballet using guest artists in all principal roles, the RWB’s control over the guest artists would be the same as if each role were performed by a dancer engaged for the season. If it is accepted (as it must be), that a guest artist may accept a role with the RWB without becoming its employee, then the element of control must be consistent with the guest artist being an independent contractor. Therefore, the elements of control in this case cannot reasonably be considered to be inconsistent with the parties’ understanding that the dancers were independent contractors.”
This is an important observation for those involved in performing arts companies and perhaps more important in dealing with consultants to industry and in our view will open the door to some considerable changes in how performers and consultants are to be treated for tax purposes. In conclusion, Sharlow says: “The same can be said of all of the factors, considered in their entirety, in the context of the nature of the activities of the RWB and the work of the dancers engaged by the RWB. In my view, this is a case where the common understanding of the parties as to the nature of their legal relationship is borne out by the contractual terms and the other relevant facts.” The factors to which Sharlow refers are the old standard tests still being applied by CRA to determine employee or contractor status.
In the last few years, CRA has been particularly active in assessing contractors as employees. One can only hope that this decision will go a long way to clearing the backlog of files at the Assessment, Objection and Appeals stages across the country.
As a planning and compliance matter, it will also have a large impact on assessments of consulting companies as Personal Services Businesses. If the principal would, under the RWB test, be a contractor, then his or her company will not be a Personal Services Business.
We look forward to working with you in applying this decision to your contract relationships.