Law Clerks' Review

Electronic Registration Procedures Guide

Closure of Land Registry Offices

As of October 13, 2020, in-person land registration counter services at all 54 Land Registry Offices (LROs) will no longer be available. Read more in ILCO News OR click on Electronic Registration Procedures Guide -Paper Documents Procedures. 

Contact information and mailing addresses for LROs available at: https://www.ontario.ca/page/land-registry-offices-lro

The Paper Document Submission Request Form is also available on OnLand.ca and Teraview.ca

By Sandra Barton and Kavi Sivasothy - Gowling WLG 

Supreme Court of Canada Rejects Waiver of Tort as Cause of Action

The Supreme Court of Canada emphatically rejected the doctrine of waiver of tort as a cause of action and as a gains-based remedy in Atlantic Lottery Corp Inc. v Babstock, 2020 SCC 19.[1] This decision will have a direct and significant impact on class actions, as it shuts down plaintiffs' ability to certify claims which, absent waiver of tort, would not be certifiable.

Background

Atlantic Lottery is an appeal from a decision of the Newfoundland and Labrador Court of Appeal. The Court of Appeal had upheld the motion court's decision granting certification and dismissing an application to strike the plaintiffs' claim on the basis that it disclosed no reasonable cause of action. In this proceeding, the plaintiffs alleged that video lottery terminal games licensed by the Atlantic Lottery Corporation were inherently dangerous and deceptive, and sought to recover the profits gained by the lottery corporation on the basis of unjust enrichment and waiver of tort.

Waiver of tort as a gains-based remedy of "disgorgement".

The Supreme Court held that the plaintiffs failed to meet the criteria for certification because they failed to establish a cause of action that would have a reasonable chance of succeeding at trial. In particular, the Court held that waiver of tort is not a valid cause of action.[2]

In reaching this conclusion, the Supreme Court reviewed prior jurisprudence and scholarship, including a 2015 article penned by Gowling WLG lawyers Sandra Barton, Mark Hines, and Shawn Therien[3] in which the authors argued that waiver of tort should not be recognized as a stand-alone cause of action or as a remedy. The authors urged courts to abandon the term waiver of tort altogether, and instead to focus on defining circumstances in which disgorgement (or other gains-based remedies) might be awarded to a plaintiff. Barton et al. noted that certifying class actions premised on a waiver of tort claim makes little sense, particularly in a post-Hryniak era in which the Court has sent a clear message that inefficient, unnecessarily complex civil proceedings are no longer acceptable.[4]

The Court agreed, and concluded that the term "waiver of tort" should be abandoned as a stand-alone cause of action, and should not be used to describe the remedy of disgorgement.[5] The Court also confirmed that although disgorgement can be awarded as a remedy, it is not itself a standalone cause of action, but instead can only be awarded if "all the constituent elements of one or more causes of action (specifically, breach of a duty in tort, contract, or equity)" have been proven.[6]

The Court also held that with respect to breach of contract claims, disgorgement is only available in exceptional circumstances where other remedies are inadequate, and the circumstances themselves justify such an award. Because disgorgement requires only that the defendant gained a benefit (with no proof of deprivation to the plaintiff required) the Court noted that a plaintiff must establish a "legitimate interest in preventing the defendant's profit-making activity" before this exceptional remedy will be awarded.[7]

The consequences of Atlantic Lottery

The Supreme Court of Canada's decision in Atlantic Lottery will have broad implications in class actions in Canada. Plaintiffs can no longer certify class actions based on a plea of waiver of tort. By confirming that waiver of tort is not a recognized cause of action, the Supreme Court of Canada has taken a meaningful step towards ensuring that only those claims that disclose a valid cause of action and are well-suited to proceeding as a class action will survive certification.

______________________________________________________________________
[1] Atlantic Lottery Corp v Babstock, 2020 SCC 19 at paras 23 and 28 (majority opinion by Brown J) and para 107 (dissenting opinion of Karakatsanis J).
[2] Ibid at paras 15 and 27.
[3] See S Barton, M Hines, and S Therien, "Neither Cause of Action nor Remedy: Doing Away with Waiver of Tort", in TL Archibald and RS Echlin, eds, Annual Review of Civil Litigation, 2015 (2015).
[4] Atlantic Lottery, supra, at para 17.
[5] Ibid at para 23.
[6] Ibid at para 25.
[7] Ibid at para 53.

______________________________________________________________________

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

Law Society of Upper Canada

Remote Commissioning

Please see the following helpful links from The Law Society of Ontario which may assist you in your day-to-day tasks as you continue to work remotely/away from the office:

• Remote Commissioning: https://lso.ca/lawyers/practice-supports-and-resources/topics/the-lawyer-client-relationship/commissioner-for-taking-affidavits-and-notary-publ/l%e2%80%99attestation-a-distance 
• Mobile Commissioning: https://lso.ca/lawyers/practice-supports-and-resources/topics/working-with-others/mobile-commissioning 
• Technology Guide: https://lso.ca/lawyers/practice-supports-and-resources/practice-management-guidelines/technology 

*Please note: The above links have been reprinted with permission from The Law Society of Ontario. This information is not meant to provide, or be a substitute for, legal advice. It is intended for general information purposes only.

By Linda Fuerst, Randy Sutton, Ted Brook - Norton Rose Fulbright 

Ontario passes significant amendments to Class Proceedings Act

July 14, 2020

On July 8, Bill 161, the Smarter and Stronger Justice Act, 2020 (the SSJA), passed a third reading in the Ontario provincial legislature and received royal assent, becoming law.

The SSJA includes significant amendments to Ontario’s Class Proceedings Act, 1992 (CPA), marking the first time that Ontario’s class action legislation has undergone major changes since its enactment over 27 years ago.

Some of the key changes to the CPA are summarized below.

Background

The SSJA was introduced by the Ontario attorney general in December 2019. In addition to the CPA, the SSJA amends 18 different statutes in Ontario as part of a broad program of civil justice reform.

According to the attorney general, the changes to the CPA are aimed at making class actions more fair, transparent and efficient for people and businesses in Ontario by, among other things: requiring settlements to be fair, reasonable and in the best interests of class members, resolving cases faster so that class members receive compensation sooner, and enhancing transparency regarding class counsel fees and third-party litigation funding.

The amendments to the CPA reflect some of the recommendations made by the Law Commission of Ontario (the commission) in its July 2019 final report, “Class Actions: Objectives, Experiences and Reforms,” which was published following two years of study and consultation with various stakeholders across Ontario’s justice system. However, some of the amendments included in the SSJA were specifically considered and rejected by the commission.

Although the SSJA has now received royal assent, Schedule 4 of the SSJA, which contains the amendments to the CPA, will come into force at a later date to be named by proclamation of the Lieutenant Governor of Ontario. Once in force, nearly all of the amendments to the CPA will apply to class actions commenced in the future.

Key changes

More stringent certification test

The SSJA modifies the statutory test for certification of a proposed class action.

Under the new test, the certification of a class action will be preferable only if (a) it is superior to reasonably available alternative means of determining entitlement of class members to relief; and (b) questions of fact or law common to the class members predominate over any questions affecting only individual class members. This test raises the bar for the preferability requirement under section 5(1)(d) of the CPA.

Streamlined appeals for certification orders

The SSJA eliminates the asymmetrical appeal process in which plaintiffs currently have an automatic right of appeal from orders denying certification to the Ontario Divisional Court whereas defendants are required to seek leave to appeal from orders granting certification.

Under the new legislation, both plaintiffs and defendants will now be able to appeal certification orders directly to the Court of Appeal.

Availability of defence motions to strike or dismiss prior to certification

The SSJA requires courts to hear early dispositive motions and motions that may narrow the issues before the certification motion (unless the court specifically orders a motion to be heard with the certification motion.)

In contrast, under the existing framework, dismissal motions are typically heard together with certification motions or following certification. The SSJA also introduces mandatory dismissal for delay whereby the court, on a motion, shall dismiss a class action unless certain steps have been taken to advance the proceeding by the first anniversary of its commencement. For pre-existing class actions, commenced before the amendments to the CPA come into force, the steps in question must be taken by the first anniversary of section 35 of Schedule 4 of the SSJA coming into force.

Coordination of multi-jurisdictional class actions

The SSJA introduces provisions for the coordination of multi-jurisdictional class actions.

If a class action has been commenced in a Canadian jurisdiction other than Ontario involving the same or similar matters, and some or all of the class members, the court will be required to determine whether it would be preferable for some or all of the claims or common issues of the class members to be resolved in the proceeding commenced in the jurisdiction outside of Ontario. This will reduce the expense of duplicative class actions.

Stricter requirements for settlement approval

The SSJA introduces new statutory requirements for securing court approval of a class action settlement.

Plaintiffs seeking court approval will be required to make full disclosure of all material facts and file an affidavit detailing the method used for valuing the settlement and the plan for allocating and distributing settlement funds. Evidence demonstrating that the settlement is fair, reasonable, and in the best interests of class members will be required. A court will not approve a settlement unless those with subrogated claims have had a chance to consider the settlement and have approved it in writing.

Speedier disposition of carriage disputes

Carriage motions will be required to be made no later than 60 days of commencement of the first proposed class action, and heard as soon as practicable. A court’s decision on a carriage motion will be final and not subject to appeal.

Statutory framework for third-party funding

The SSJA introduces new statutory requirements regarding third-party funding arrangements.

Notably, third-party funding agreements will have to be disclosed to defendants and will be contingent upon court approval. A court will not approve an agreement unless it is satisfied that, among other things, the agreement is fair and reasonable and that the funder is financially able to satisfy an adverse costs award in the proceeding. A defendant will be able to recover a costs award made against the representative plaintiff directly from the third-party funder, to the extent of the indemnity provided under the approved funding agreement.

In addition, disclosure of third-party funding arrangements will have to be included in the notice of certification to class members. Consistent with the Ontario Superior Court’s decision in Dugal v. Manulife Financial Corp. [2011] O.J. No. 1239; Supplementary Reasons [2011] O.J. No. 3493, the court will have the ability to order that a non-resident provide security for costs to the defendants.

Reallocation of certain costs and fees

The SSJA changes how costs and fees are awarded in relation to certification.

Under the new regime, the plaintiff will be responsible for the costs of providing any notice of certification under section 17 of the CPA and will only be permitted to recover those costs from the defendant in the event of success in the class proceeding, unless the defendant consents to their payment in whole or in part at an earlier time.

Further, the SSJA introduces mandatory considerations for a court when assessing agreements respecting fees and disbursements between a representative plaintiff and class counsel. A court will not approve such an agreement unless it determines that the fees and disbursements to be paid under the agreement are fair and reasonable, taking into account, among other things, the results achieved for the class members, the degree of risk assumed by class counsel, and the proportionality of fees and disbursements in relation to the amount of any monetary award or settlement.

In addition, a court will be empowered to hold back a portion of fees and disbursements owing to class counsel until, among other things, it is satisfied with distribution of the monetary award or settlement funds in the circumstances.

Takeaways

The SSJA has introduced significant amendments to Ontario’s class action legislation. Generally speaking, these amendments will in all likelihood make the certification test more rigorous. Although the SSJA is now in force, the amendments to the CPA will come into force on a day to be named by proclamation. Almost all of the amendments to the CPA only apply to new class actions. As a result, it may be some time before the full impact of these changes becomes evident.

By Stikeman Elliott 

OBCA Corporations Reminded of Extended Annual Meeting Deadlines

August 7, 2020

Corporations incorporated under the Business Corporations Act (Ontario) (OBCA) that delayed their annual meetings due to the COVID-19 pandemic are reminded of the relevant extended meeting deadlines as the provincial declaration of emergency has come to an end.

 OBCA incorporated companies that were required to hold their annual meetings of shareholders on or before July 24, 2020 now have until October 22, 2020 to hold their annual meetings.

 OBCA incorporated companies that were required to hold their annual meetings of shareholders between July 25, 2020 and August 23, 2020 (inclusive) now have until November 23, 2020 to hold their annual meetings.

Meeting Deadlines

As previously discussed, in light of the state of emergency that was declared in Ontario in response to the COVID-19 pandemic, the deadline to hold annual meetings of shareholders for OBCA corporations was temporarily extended through the addition of Part XIX to the OBCA. With the Ontario declaration of emergency having come to an end on July 24, 2020, the extended meeting deadlines are now fixed as follows:

 OBCA incorporated companies that were required to hold annual meetings on or before July 24, 2020 now have until October 22, 2020 to hold their annual meetings (being the 90th day after the day the declaration of emergency was terminated).

 OBCA incorporated companies that were required to hold annual meetings between July 25, 2020 and August 23, 2020 (inclusive) must hold their annual meetings before November 23, 2020 (being the 120th day after the day the declaration of emergency was terminated).

The date on which an OBCA corporation was required to hold its annual meeting of shareholders for the purpose of determining whether an extended meeting deadline will apply to the corporation should be based upon both the meeting date described in section 94 of the OBCA (i.e., within 15 months from the corporation’s last annual meeting) and the financial statements required to be placed before the meeting (i.e., within 6 months of the issuer’s year-end). For OBCA corporations with a December 31 year-end, this would generally require that a meeting be held by no later than June 30, and therefore an extended deadline of October 22, 2020 would apply.

Financial Statement Requirements

Under the temporary provisions of Part XIX of the OBCA, the directors of offering corporations must place before annual meetings held before the 120th day after the termination of the declared emergency (November 23, 2020) the financial statements required to be filed under the Securities Act (Ontario) and the regulations thereunder relating to the most recently completed annual period and the immediately preceding financial year, if any. The requirement that the financial information placed before an annual meeting pertain to a period ended not more than six months before the meeting is suspended until November 23, 2020. This clarifies that OBCA corporations holding their annual meetings by November 23, 2020 will be able to place their annual financial statements for the 2019 fiscal year before their shareholders at their 2020 annual meeting.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at https://www.stikeman.com/legal-notice.

By Stikeman Elliott

CBCA Shareholder Meeting Deadlines Extended by New Federal Order

August 7, 2020

Corporations incorporated under the Canada Business Corporations Act (CBCA) may now take advantage of extended deadlines for their annual general meetings of shareholders in 2020.

The Minister of Innovation, Science and Industry has issued an order (the Order) extending the deadlines for calling an annual general meeting of shareholders and presenting financial statements for corporations incorporated under the CBCA.

CBCA incorporated companies are generally required to call an annual general meeting of shareholders not later than 15 months following the corporation’s previous annual general meeting and within 6 months of the corporation’s year-end.

Pursuant to the Order, the deadline for calling an annual general meeting has been extended to the earlier of:

 21 months after the corporation’s previous annual general meeting and no more than 12 months after the last financial year-end; and

 December 31, 2020.

The Order also temporarily extends the deadline for the CBCA requirement to place annual financial statements for an annual period ended no more than 6 months before the meeting date to 12 months. Directors may now present financial statements to shareholders at the corporation’s annual general meeting no more than 12 months after the corporation’s last financial year-end.

The Order is retroactive to March 13, 2020 and will remain in force until December 31, 2020.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at https://www.stikeman.com/legal-notice.

By Michael Chow, Craig Garbe, Chris Porter, Samantha Lush and Michelle Yung - Bennett Jones LLP 

Canada Emergency Commercial Rent Assistance

Updated August 18, 2020: This blog is a further update to our previous blogs of April 27, 2020, April 30, 2020, May 20, 2020, and June 17, 2020.

On April 24, 2020, the Prime Minister announced the federal government reached an agreement in principle with all provinces and territories to implement the Canada Emergency Commercial Rent Assistance (CECRA) for qualifying commercial property owners and small business tenants.

The Prime Minister's Office and the Canada Mortgage and Housing Corporation (CMHC) have released further details on CECRA and eligible landlords can now apply for the program. Each province may establish additional criteria and conditions for CECRA, which is referenced below.

What Is CECRA?

CECRA provides financial assistance to certain commercial property owners which provide rent forgiveness to small business tenants affected by the COVID-19 pandemic. The government will provide unsecured forgivable loans to qualifying commercial property owners who agree with eligible small business tenants to forgive rent by a minimum of 75 percent per month for the months of April, May and June of 2020. CECRA is a program that is optional and not mandatory for property owners.

(Updated) On June 30, 2020, the federal government announced that CECRA will be extended by one month to cover eligible small business rents for July 2020. Both existing and new applicants are now able to opt-in for that period of time.

On July 31, 2020, the federal government announced that CECRA will be further extended to include August 2020.

Existing applicants are required to reapply for the months of July and August and have until September 14, 2020, to do so. New applicants have the choice of applying for the three-month initial period, four months or five months. The deadline to apply for CECRA remains August 31, 2020.

Who Is Eligible to Apply for and Receive CECRA?

Qualifying commercial property owners may apply for and receive financial assistance from CECRA. Commercial property owners include owners who own property which generates rental revenue from solely commercial tenants or a combination of commercial and residential tenants.

On June 1, 2020, the Government of Canada announced that CECRA would be made available to over 700 businesses who operate in Canada's national parks. These businesses were previously excluded from the program because the properties are located on federal lands. The Government of Canada has announced that it will waive up to 75 percent of eligible commercial rents for the months of April, May and June 2020, or equivalent amounts of annual rents from businesses that are renters in Parks Canada. Parks Canada will be contacting all holders of commercial leases and licenses of occupation in national parks, historic sites and national marine conservation areas to provide additional details on this CECRA relief. It remains to be seen if Parks Canada will administer CECRA for businesses operating in Canada's national parks or whether such newly eligible businesses will be directed to the CECRA portal operated by MCAP and or First Canadian Title (FCT).

What Is the Criteria for Small Business Tenants?

For a qualifying commercial property owner to receive financial assistance from CECRA, the small business tenant must:

1. be paying no more than $50,000 in monthly gross rent per location pursuant to and as defined by a valid and enforceable lease agreement. Gross rent includes: basic rent (in a net lease) or gross rent (in a gross lease), operating and management costs, utilities, property taxes and percentage rent (if applicable). CMHC has provided a detailed list of inclusions and exclusions for the calculation of gross rent at the CMHC website at the link provided below;

2. have experienced at least a 70 percent reduction in pre-COVID-19 revenues. Revenue reduction may be calculated based on revenues of April, May and June of 2019 or, for businesses which were not in operation in May through June 2019, the average of revenues from January and February of 2020; and

3. generate no more than $20 million in gross annual revenues on a consolidated basis (at the ultimate parent level). Gross annual revenues are calculated based on the tenant’s 2019 financial revenues (using the 12-month period used to calculate the tenant's financials). If the tenant or its ultimate owner produces consolidated statements, then the tenant would use revenues reported for the group level of companies. If the tenant does not produce consolidated statements, then it is the specific revenue of the tenant that applies for the $20-million gross revenue test. Small business tenants also include not for profit and charitable organizations. Ground lessors and ground lessees also appear to be eligible. Small business tenants who are in sub-tenancy arrangements are also eligible provided the other program requirements are satisfied. Assuming the property owner is required to apply for the loan (and not the sublandlord), it is not clear how this will reconcile with an application for a loan for the tenant in a sub-tenancy and whether both the tenancy and sub-tenancy under the same lease would be eligible for the loan.

(Updated) New applicants and tenants already approved in the April, May and June application are eligible for the July and August extensions.

If a business had an average revenue decline of 70 percent or more in April, May and June 2020, they are deemed eligible for the July and August rent relief and will not have to show a revenue decline of 70 percent or more in those two additional months.

No additional documentation is required to be signed by the tenant(s) for opting into rent relief for July and August.

Small business tenants also include not for profit and charitable organizations. Ground lessors and ground lessees are also eligible. Small business tenants who are in sub-tenancy arrangements are also eligible; however, only property owners can apply for CECRA (and not sublandlords).

What Are the Other CECRA Terms and Conditions?

1. The loans would be forgiven if the owner agrees to: (i) forgive the tenant's rent by a minimum of 75 percent for the months of April, May and June and, if applicable, July and August 2020; and
(ii) not evict the tenant during the months in which the rent forgiveness applies. Not all tenants in an original application need to be included in the July and August extensions (updated).

2. Owners would be eligible to receive forgivable loans from the government to cover up to 50 percent of three, four or five months' rent (April, May and June, and if applicable, July and August 2020) of the applicable tenant (updated).

3. The owner's property does not need to be mortgaged by a lender. Property owners with or without a mortgage on the applicable property may apply for CECRA provided the other programs requirements are satisfied.

4. The owner must have declared rental income on its tax return for the 2018 and/or 2019 tax years.

5. If gross rent has already been collected from the tenant for the qualifying months, a credit to the tenant for a future month’s rent must be agreed upon between the owner and the tenant.

6. For CECRA loans to remain forgivable, owners are prohibited from seeking recovery for rent abatement amounts to tenants after CECRA program expires.

7. The owner and the tenant must submit the following documents to CMHC to apply for the CECRA loan:

a. Rent Reduction Agreement (owner and tenant).

b. Attestation (owner and tenant (and/or subtenant, if applicable).

c. Forgivable Loan Agreement (owner and CMHC).

CMHC has provided sample forms of the above documents and should be reviewed by all owners and tenants prior to execution and submission. These forms can be viewed at the CMHC website at the link below.

8. Other information required:

a. Property: property address, property type, property tax statement, latest rent roll for each property and the number of commercial units.

b. Owner: banking information (including bank statement), property owner contact information, co-ownership information and contact details for co-owners, if applicable.

c. Tenant: tenant contact information, registered business name, lease area and the monthly gross rent for the period of April, May and June 2020.

Where to Apply for CECRA?

Property owners who qualify can register for CECRA online at the Government of Canada website. Once a property owner has registered for the program, the CMHC portal will be available for applicants to input the required data and upload necessary documents to apply and satisfy the requirements of the program.

Who Is Administering CECRA?

CECRA will be a collaboration between the federal, provincial and territorial governments and will be administered by CMHC. CMHC has engaged MCAP and FCT to deliver CECRA to the eligible owners and small business tenants. Owners and tenants may be contacted by either MCAP or FCT throughout the applicant validation and funding processes. More information on CECRA can be found on the CMHC website.

Certain provinces and territories are introducing additional or supplemental terms to CECRA:

Ontario

The Province of Ontario has passed Bill 192 – Protecting Small Business Act, 2020, which prevents landlords who are eligible under CECRA from evicting tenants or seizing any goods as a distress due to the non-payment of rent. The restrictions apply retroactively effective from May 1, 2020, to August 31, 2020.

British Columbia

On May 29, 2020, the BC Government issued an emergency act order (Ministerial Order No. M179), effective immediately, which prevents landlords who are eligible under CECRA from evicting tenants due to unpaid rent payments. This emergency act order also restricts the termination of lease agreements and the repossession of goods and property, as a result of the tenant's failure to pay rent when due. The emergency act order will remain in effect until the earlier of the termination of the CECRA program (currently August 31, 2020) or the date on which the BC state of emergency (as extended from time to time) expires (updated).

Alberta

(Updated) The Province of Alberta has passed the Commercial Tenancies Protection Act (CTPA) to restrict applicable landlords from evicting tenants or charging penalties for non-payment of rent due to the COVID-19 pandemic. The CTPA applies to commercial premises where: (i) the landlord and tenant are eligible for CECRA, but the landlord has not entered into a rent reduction agreement with the tenant that includes a moratorium on eviction; or (ii) the rent for the commercial premises is less than $50,000/month, the tenant's gross annual revenues are less than $20 million/year, and either the tenant has suffered at least a 25 percent loss of revenue or the tenant was ordered to close its business in the commercial premises pursuant to the public health emergency declared by the Alberta government. The restrictions are largely retroactively effective from March 17, 2020, and will be in effect until August 31, 2020.

We will provide further updates if further information is released by each province.

Who Will Fund CECRA?

The federal government and applicable provinces or territories will fund 50 percent of the monthly rent for the applicable three, four or five months. Commercial property owners will be responsible for 25 percent and the tenants will be responsible for the remaining 25 percent unless otherwise agreed to between the owner and the tenant.

What Is Next?

An additional rent forgiveness program for large business tenants which presumably pay more than $50,000 per month in gross rent has been mentioned by the federal government but no formal announcement has been made.

Assistance/Questions?
Please contact any of the authors by email or phone should you or any of your clients have any questions regarding CECRA or require any assistance in registering or applying for CECRA.

By Peter Spiro - Principal of Spiro Law P.C.

A Creative Compromise on Common Intention in the Tax Test for Independent Contractors

One of the important issues in the gig economy is whether workers are to be taxed as employees or as independent contractors. Tax Court decisions have gone back and forth about the extent to which the intention of the parties should be taken into account.

If the worker is classified as an independent contractor, the employer does not have to make contributions for CPP and EI. In some situations, the claim that the worker is an independent contractor is a self-serving and one-sided decision imposed by the employer to avoid these taxes and other legal obligations under Employment Standards legislation.

However, sometimes the intention is mutual. Being an independent contractor gives the worker access to additional expense deductions. Sometimes, both the employer and worker will prefer to have the worker taxed as an independent contractor.

That was the situation in the present case. Mr. Barlow worked as an insurance sales professional as his full-time occupation. In the evenings, he worked part-time teaching courses to prepare future insurance agents for the required licensing exams. These courses were provided through the Insurance Institute of Ontario, which had retained Mr. Barlow under an independent contractor agreement.

The curriculum was set by the Institute, and Mr. Barlow was paid a fee per course that gave him no meaningful opportunity for profit or loss. Thus, he failed to satisfy the main criteria usually applied for determining that a person is an independent contractor. On the other hand, there was no direct monitoring of his work, and it was up to him whether he wanted to teach a course or not in any particular semester.

Mr. Barlow testified at the trial, and so there was no doubt that he also intended to be an independent contractor. That is an important factor, as in some other cases employers have simply imposed that status on the workers, and courts have ruled that "grudging acceptance" or "acquiescence" does not represent common intention. In the present case, the Tax Court judge found that there was a common intention, Mr. Barlow should be considered an independent contractor.

The Obscure Reasoning in Connor Homes

The parties in a true employer-employee situation cannot just declare that it is an independent contractor relationship when this is clearly contradicted by the facts: “it is insufficient to simply state in a contract that the services are provided as an independent contractor to make it so.” (Connor Homes, at para. 36). There is jurisprudence defining the factual criteria that need to be examined in order to determine whether somebody is an employee or not.

On the other hand, the courts have generally stated that the subjective intention of the parties should be taken into account in taxation.[1] How are these two principles to be reconciled?

The Federal Court of Appeal’s most widely cited decision on this topic is 1392644 Ontario Inc. v. The Queen (“Connor Homes”), 2013 FCA 85. That was a case in which an operator of foster care and group homes classified its care staff as independent contractors, but exercised considerable control over them, providing detailed manuals of operating procedure. They were paid by the hour and had no opportunity for profit. The court sided with the Minister, finding that the workers were in fact employees and should be taxed as such.

The reasoning in Connor Homes laid out a two-step procedure:

[39] Under the first step, the subjective intent of each party to the relationship must be ascertained. This can be determined either by the written contractual relationship the parties have entered into or by the actual behaviour of each party, such as invoices for services rendered, registration for GST purposes and income tax filings as an independent contractor.

[40] The second step is to ascertain whether an objective reality sustains the subjective intent of the parties…. In this second step, the parties [sic] intent as well as the terms of the contract may also be taken into account since they colors [sic] the relationship.

If the Court of Appeal had kept paragraph 40 to a single sentence, the direction might be clearer. However, the problem is that it went on to say that intent may also be taken into account at the second step. That has been used in various ways in previous cases.

In the Ontario Insurance Institute decision, Justice Graham has taken this concern to a new level by noting the logical difficulty that is inherent in the two-step test set out in Connor Homes:

[18] ….If the outcome of the first step had no bearing on the second step, then what purpose would the first step serve? If the sole question to be determined was what the Wiebe Door and Sagaz factors indicated the relationship was, then why bother considering what the parties believed the relationship to be? For the first step to mean something, the outcome of the first step has to affect the application of the test in the second step.

A Creative Compromise by the Judge in Ontario Insurance Institute

Justice Graham, having determined that common intention must have some impact, then set himself the task of deciding how it is to have an impact. In looking at the different possibilities of what the Court of Appeal may have intended, he concluded that it must be a requirement that the relationship should at least be “similar” to an independent relationship, even though it does not strictly meet the criteria:

[23] … At the same time, since the Federal Court of Appeal was clear that intention was not to govern, it must not apply in a situation where the Wiebe Door and Sagaz factors strongly indicate that the relationship is one thing but the parties intended otherwise. Based on the foregoing, I conclude that intention must be relevant when the Wiebe Door and Sagaz factors indicate that the relationship is one thing but the parties intended it to be another thing and their relationship is similar to what they intended.

[60] … If I were looking at this factor from a purely objective standpoint, I would conclude that it favoured an employment relationship. However, since I am to apply a lower standard, I need to consider whether the Institute and Mr. Barlow acted and carried on their relationship in a manner that was similar to an independent contractor relationship.

Based on this new “lower standard” of similarity test, Justice Graham concluded that Mr. Barlow should qualify as being independent, rather than being taxed as an employee. He was sufficiently similar to an independent contractor.

It is a creative compromise, and it will be interesting to see if it survives on appeal. It is likely that the Minister will appeal, in which case the Court of Appeal will have a good opportunity to say more clearly what it meant by the somewhat obscure criteria set out in the Connor Homes case. If that happens, this decision will have served an important function in bringing some clarity to a tax subject that is frequently litigated and appears to have inconsistent decisions.

Peter Spiro is Principal of Spiro Law P.C. and counsel to www.rogersonlaw.com for tax and estate litigation. This article is for general information purposes and you should seek specific advice for your particular case.

[1] It should be noted that this principle only applies to tax issues. Under most Employment Standards legislation, the employee is expressly forbidden from waiving his or her rights, and so an intention to be an independent contractor has no effect. Therefore, a person who is an independent contractor for tax purposes could still be classified as an employee for entitlement to overtime, vacation pay, etc.