Contractor or Agent? A Crucial Difference When it Comes to Taxation
January 24, 2020
If there’s a lesson to be learned when it comes to contract law, it’s that language and details matter. Even a seemingly straightforward contract between two parties can lead to serious tax consequences if certain aspects of the business relationship are not properly addressed in the contract. In a recent case heard by the Tax Court of Canada, a taxpayer found himself in hot water after failing to collect HST during a home building project.
Ambiguity in the Contract as to the Role of the Taxpayer
The taxpayer entered into a contract with a homeowner who was building a custom home. The contract stated that the taxpayer was serving in the role of project manager, but also included an overall budget for the project. The taxpayer also hired a contractor on the project. The taxpayer and his wife, who worked as an equal partner on the project, understood that they were hired to provide project management and interior design services. Over the course of the project, they were also tasked with:
(1) the establishment of a budget;
(2) the hiring of qualified trades-people;
(3) the sourcing of all materials and supplies;
(4) supervision of the execution of the work over the planned construction period; and
(5) the interior design of the home
In addition to the duties set out above, the taxpayer also purchased some materials himself.
After the completion of the project, the CRA assessed that the taxpayer had acted in the role of general contractor due to his role in purchasing the materials and hiring the subcontractors, and therefore should have collected and remitted $178,318.59 in GST/HST on the contract amount.
The Taxpayer’s Role Does Not Align With the Terms of the Contract
The taxpayer agreed to construct the home for just over $1.5 million, inclusive of GST/HST. The contract contained a breakdown of services, which allotted $150,000 to the taxpayer and his wife for project management and interior design services. Further, the contract stated that the taxpayer “and the sub-trades” would provide the homeowner with various services. Typically a contract with a contractor will engage only the contractor, who will then be responsible for budgeting the funds provided to pay the sub-trades they hire to complete the work. The contractor will then suffer a loss if the budget goes over the original estimate. In this case, the taxpayer and his wife were guaranteed their fee of $150,000 under the contract. This gave credence to the fact that the taxpayer had not acted as a contractor, despite the ambiguous language and terms.
The taxpayer asserted that he had not read the contract through fully before signing, and the homeowner further backed his position that he had not intended for the taxpayer to fulfil the role of contractor on the project. The court allowed the taxpayer to submit parol evidence to bolster his claim that he had not served in the capacity of a contractor. This evidence included invoices that were addressed directly to the homeowners with respect to materials and services performed by other trades, as well as an accounting of the funds that had been given to the taxpayer to pay other invoices.
Considering All Evidence, the Contract Was Not an Accurate Representation of the Relationship
The taxpayer’s position was that he was acting as an agent of the homeowner and therefore did not have an obligation to collect or remit HST. In answering whether it would consider the taxpayer to be a contractor or agent, the court looked at case law from the Federal Court of Appeal, which stated that agency required three elements. They are:
(a) the principal’s control of the agent’s action,
(b) the consent of both the agent and the principal, and
(c) the authority of the agent to affect the principal’s legal position
After reviewing the conduct of the parties, the court came to the conclusion that the contract did not accurately represent the intentions of the parties, and that the taxpayer had not acted as a general contractor, writing,
“I am of the opinion that the Appellant did not agree to act as a general contractor. Instead, he acted as a project manager. In this capacity, he represented the Homeowners when he hired, paid and supervised subcontractors on their behalf, as well as when he purchased materials used in the Home Construction Project. In both cases, the Appellant was reimbursed for these expenses by the Homeowners. In other words, an implied agency relationship existed as the Appellant acted as a conduit between the suppliers and the Homeowners.”
As a result of this finding, the taxpayer was not obligated to have collected GST/HST on the value of the contract.
At Feigenbaum Law we have extensive experience in the administration and litigation of tax matters both in the United States and Canada. If you are facing an unfair assessment, we can help. Contact us online or by phone at (905) 695-1269 or toll-free at (877) 275-4792 to speak with a skilled lawyer and get a qualified assessment of your position.