T-132-78
T-133-78
Joseph Marotta, M.D. (Plaintiff)
v.
The Queen (Defendant)
INDEXED AS: MAROTTA V. R.
Trial Division, McNair J.—Toronto, November
26, 1985; Ottawa, March 7, 1986.
Income tax — Income calculation — Nature of income —
Plaintiff physician-in-chief with professorial rank at Univer
sity — Member of partnership of physicians engaged in teach
ing activities — Including in income share of partnership's
profits — Minister adding to income remuneration received
from University for teaching — Whether remuneration from
University income from office or employment or business
income from partnership — Tests distinguishing contract of
service from contract for services — Control, organization or
integration, economic reality, specified result — Plaintiff
employee of University, not independent contractor — Ulti
mate control and risk of profit or loss with University —
Plaintiff's work not limited to specified objective in contractu
al sense — Work fully integrated with University's teaching
system — Remuneration salary — Appeal dismissed —
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3, 4, 5(1), 6(3),
9(1), 11(2), 96(1)(f), 248(1).
The plaintiff was appointed physician-in-chief of St. Micha-
el's Hospital, a teaching hospital affiliated with the medical
faculty of the University of Toronto. The appointment carried
with it professorial rank at the University. In 1971, the plaintiff
joined a partnership of physicians at St. Michael's. The part
nership performed medical functions including the teaching of
medical students. In calculating his income for the years 1972
and 1973, the plaintiff included his share of the partnership's
profits. This is an appeal from reassessments whereby the
Minister added the salaried remuneration received by the plain
tiff from the University. The issue is whether the remuneration
received for teaching is income from an office or employment
with the University or business income from the partnership.
Held, the appeal should be dismissed.
The fundamental issue is whether the plaintiff's services had
been rendered under a contract of service or under a contract
for services. The law has recognized four tests to determine this
issue.
(1) Control test: An individual will be seen as working under
a contract of service if the ultimate authority over the perform
ance of the work rests with the employer. Under a contract for
services, the manner of performance of the work is left to the
individual. In many cases, it is the existence of the right of
control that is vital rather than its exercise. Although superin-
tendence and control is an important determinative test, it
cannot be the decisive test in the case of professionals with
particular skills and expertise. Resort must be had to other
tests.
(2) Organization or integration test: According to this test,
the determinative factor is whether the person is employed as
part of the business with his work forming an integral part
thereof. Where the work, although done for the business, is not
integrated into it but is only accessory thereto, the individual is
considered an independent contractor. Coordinational control
as to "where" and "when" the work is to be done may be a
more important factor in determining whether the individual is
part of his employer's organization than the factor of "how"
the work is to be performed.
(3) Economic reality test: The question asked here is whether
the person is carrying on business for himself or for a superior.
Implicit in this is the question of who runs the risk of profit or
loss.
(4) Specified result test: This test was stated by Jackett P. in
Alexander v. M.R.N., [1970] Ex.C.R. 139 in the following
terms: "a contract of service does not normally envisage the
accomplishment of a specified amount of work but does nor
mally contemplate the servant putting his personal services at
the disposal of the master" while "a contract for services does
normally envisage the accomplishment of a specified ... task
and normally does not require that the contractor do anything
personally".
In the case at bar, the weight of evidence showed that the
plaintiffs relationship with the University was that of an
employee. The control test could not be decisive because of the
high professional attainments of the plaintiff and the degree of
latitude afforded him by the University and the hospital.
Nevertheless, ultimate control rested with the University. Had
the plaintiff failed to meet expectations, the necessary measures
would have been taken to remove him from his post.
The features common to a contract of service greatly out
weighed the features of a contract for services. The business in
which the plaintiff was principally engaged was the University's
and not his own and the work done was fully integrated within
the teaching system of the University. The risk of profit or loss
was on the University. The plaintiff placed his professional skill
at the disposal of the University in return for recompense. The
work was not defined by or limited to a specified task or
objective in any contractual sense.
CASES JUDICIALLY CONSIDERED
CONSIDERED:
Alexander v. M.R.N., [1970] Ex.C.R. 139; (1969), 70
DTC 6006; Rosen, H.L. v. The Queen (1976), 76 DTC
6274 (F.C.T.D.).
REFERRED TO:
Simmons v. Heath Laundry Company, [1910] 1 K.B. 543
(C.A.); Stagecraft, Limited v. Minister of National In-
surance, [1952] S.C. 288; Morren v. Swinton and Pen-
dlebury Borough Council, [1965] 2 All E.R. 349
(Q.B.D.); Short v. J. W. Henderson, Limited (1946), 62
T.L.R. 427 (H.L.); Argent v. Minister of Social Security,
[1968] 1 W.L.R. 1749 (Q.B.D.); Humberstone v. North
ern Timber Mills (1949), 79 C.L.R. 389 (H.C.A.); Sim,
James v. Minister of National Revenue, [1966] Ex.C.R.
1072; 66 DTC 5276; Market Investigations Ltd. v. Min
ister of Social Security, [1969] 2 Q.B. 173; Stevenson
Jordon and Harrison, Ltd. v. Macdonald and Evans,
[1952] 1 T.L.R. 101 (C.A.); Co-Operators Insurance
Association v. Kearney, [1965] S.C.R. 106; (1964), 48
D.L.R. (2d) 1; Montreal v. Montreal Locomotive Works
Ltd., [1947] 1 D.L.R. 161 (P.C.); R. v. Mac's Milk Ltd.
(1973), 40 D.L.R. (3d) 714 (Alta. C.A.); Boardman v.
The Queen, [1979] 2 F.C. 422; 79 DTC 5110 (T.D.).
COUNSEL:
B. R. Carr and C. Campbell for plaintiff.
L. P. Chambers, Q.C. and E. Thomas, Q.C.
for defendant.
SOLICITORS:
Davies, Ward & Beck, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
MCNAIR J.: This is an appeal by the plaintiff
from the Minister's reassessments with respect to
the 1972 and 1973 taxation years whereby certain
remuneration was treated as income from an office
or employment and not as earnings from a profes
sional partnership. A statement of claim was filed
for each of the taxation years in issue and a
statement of defence was delivered in response
thereto. An order was made at the commencement
of trial, pursuant to agreement of counsel, that
both cases be heard and tried together based on
common evidence.
The issue is whether remuneration paid to the
plaintiff by the University of Toronto for the
teaching of medical students was income from an
office or employment with the University so as to
constitute income during the calendar year in
which the remuneration was received, or whether
it was business income from a partnership that
should be included in his income for the fiscal
years of the partnership in which it was received.
The plaintiff graduated from the Faculty of
Medicine of the University of Toronto in 1949. In
1956, after completing his internship and further
medical specialization, he joined the staff of St.
Michael's Hospital in Toronto as a neurologist. St.
Michael's was, and still is, a teaching hospital
affiliated with the medical faculty of the Universi
ty of Toronto. The plaintiff's appointment to St.
Michael's carried with it an appointment to the
University—Dr. Marotta became a lecturer. In
1969, the plaintiff became physician-in-chief at
the hospital. That position was accompanied by a
professorial rank at the University. As physician-
in-chief, the plaintiff was considered the Universi-
ty's delegate for teaching functions at
St. Michael's, and he was responsible to the chair
man of the Department of Medicine for the qual
ity of teaching of medical students at the hospital.
In December of 1971 the plaintiff joined with
some other doctors at St. Michael's to form a
professional partnership under the name and style
of "St. Michael's Hospital Physicians Associa
tion". There was a written partnership agreement.
A preamble to the agreement depicts the relation
ship with the University in this way:
AND WHEREAS the Hospital is a teaching hospital in affilia
tion with the University of Toronto and particularly with the
Faculty of Medicine of the said University;
The business of the partnership is said to be "the
performance of the Medical Functions". These are
taken to encompass three other functions, namely,
"teaching", "patient" and "hospital". Collectively,
they entail the teaching of medical students and
the conducting of related medical research, provid
ing medical advice and treatment to private
patients and to patients of the teaching unit of the
hospital, and the conducting of laboratory and
medical testing as well as research and other
activities ancillary thereto.
The professional income of the partners is
allocated as income of the partnership. The part
nership's Executive Committee is given power,
inter alia, to determine the division of profits or
losses. Notwithstanding this, the chief of medicine
of the hospital has the ultimate authority to deter
mine the allocation and distribution of all salaried
remuneration and other revenues received from the
University of Toronto in connection with the part
ners' teaching functions as well as the development
and implementation of all academic policies and
programs relating to the hospital and its Depart
ment of Medicine. All cheques from the University
of Toronto for teaching salaries are paid directly
to the individual recipients rather than to the
partnership. The partnership operates on the prin
ciple of "overage". Each professional partner is
given an "income ceiling". Any excess of profes
sional income over the ceiling amount is withheld
from the individual partner and put in a pool.
From here it is reallocated among those other less
favoured members of the partnership whose total
income happens to fall short of their respective
ceilings. Some of the pool surplus is also made
available for academic enrichment.
The partnership's fiscal year ends on the last
day of February in each year. Its first fiscal year
end was February 29, 1972. In calculating his
income for the 1972 taxation year, the plaintiff
included his share of the partnership profits for the
two-month period ended February 29, 1972. He
included in his income for the 1973 taxation year,
his share of the profits for the partnership fiscal
year ended February 28, 1973.
By notices of reassessment dated December 5,
1975, the Minister reassessed the plaintiffs tax
able income for the 1972 and 1973 taxation years
by adding in the salaried remuneration of
$32,569.86 and $34,103.88 received by the taxpay
er from the University of Toronto for those respec
tive years. It is these reassessments that the plain
tiff now appeals.
The relevant provisions of the Income Tax Act
[R.S.C. 1952, c. 148 (as am. by S.C. 1970-71-72,
c. 63, s. 1)] are sections 3 and 4, subsections 5(1),
6(3), 9(1), 11(2), 248(1) and paragraph 96(1)(J).
Subsection 5(1) of the Act reads:
5. (1) Subject to this Part, a taxpayer's income for a taxation
year from an office or employment is the salary, wages and
other remuneration, including gratuities, received by him in the
year.
It is unnecessary to reproduce the others
verbatim.
The fundamental issue is whether the taxpayer's
remuneration was income from an office or
employment or income from a business or, viewed
objectively from the standpoint of the actual hiring
or engagement, whether the services in question
were rendered under a contract of service or a
contract for services.
Each case must be determined on its particular
facts but the law has generally recognized four
tests for determining whether the engagement
under scrutiny is one of service or for services.
Traditionally, the courts have focussed on the
"control test" in classifying an employment rela
tionship. Under this test, the individual performing
the service is a servant, or seen to be working
under a contract of service, if the ultimate author
ity over the performance of his work reposes with
his employer in the sense that the individual is
subject to his employer's orders and direction. On
the other hand, when an individual is working
under a contract for services the manner of
performance of his work is left to him; the employ
er can direct the objective to which the individual's
skill is to be addressed but he is relatively power
less to control the manner in which the individual's
skill is exercised in the circumstances. In many
cases, it is the existence of the right of control that
is vital rather than its exercise: see Simmons v.
Heath Laundry Company, [1910] 1 K.B. 543
(C.A.); Stagecraft, Limited v. Minister of Nation
al Insurance, [1952] S.C. 288; Morren v. Swinton
and Pendlebury Borough Council, [1965] 2 All
E.R. 349 (Q.B.D.); Short v. J. W. Henderson,
Limited (1946), 62 T.L.R. 427 (H.L.); Argent v.
Minister of Social Security, [1968] 1 W.L.R.
1749 (Q.B.D.); Humberstone v. Northern Timber
Mills (1949), 79 C.L.R. 389 (H.C.A.) per Dixon
J., at page 404; Sim, James v. Minister of Nation
al Revenue, [1966] Ex.C.R. 1072; 66 DTC 5276;
and Market Investigations Ltd. v. Minister of
Social Security, [1969] 2 Q.B. 173.
Short v. Henderson, supra, held that a union
stevedore employed by the respondent to unload
their ship was the latter's employee and, even
though the employer's right of selection was cur
tailed and its control over wages, supervision and
dismissal was limited, this did not necessarily
mean that the employee was an independent con
tractor. Here the respondent retained superintend
ence and control over the method of doing the
work and this was the decisive factor in the
circumstances.
It follows therefore that the fact that the deci
sion to hire or fire the physician-in-chief must be
jointly made by St. Michael's Hospital and the
University of Toronto does not necessarily lead to
the inevitable conclusion that the contract here
was one for services.
Superintendence and control is an important,
determinative test but it cannot be the decisive test
in the case of a professional man of particular skill
and expertise. In such cases, there can be no
question of the employer telling him how he must
do his work: Morren v. Swinton, etc., supra.
Resort must often be had to other tests.
One that is often applied in the case of profes
sionals is the organization or integration test. Here
the determinative factor in distinguishing the con
tract of service from the contract for services is
whether the person is employed as part of the
business with his work forming an integral part
thereof or whether his work, although done for the
business, is not integrated into it but is only acces
sory to it: Stevenson Jordon and Harrison, Ltd. v.
Macdonald and Evans, [ 1952] 1 T.L.R. 101
(C.A.).
In Rosen, H.L. v. The Queen (1976), 76 DTC
6274 (F.C.T.D.) Marceau J., applied Lord Den-
ning's decisive test of integration in the Stevenson
Jordon case to find that the part-time university
lecturer was an employee and not an independent
contractor in that the subjects taught were an
integral part of the curriculum of the university so
that the business in which he was actively par
ticipating was its business and not his own. The
case turned on this point but the learned Judge
nevertheless rejected the taxpayer's argument that
the university did not have a sufficient degree of
control to create the employee relationship, stating
at page 6276:
On the other hand, the degree of control that the universities
could exercise over the plaintiffs lecturing activities appears to
me to have been no different than the degree of control a
modern university today exercises over the experienced and
specialized members of its teaching staff, who are undoubtedly
employees. The general freedom he was given in the teaching
and examination of his students is certainly not exceptional
today, specially at the postgraduate level or in a continuing
education division.
Coordinational control as to "where" and
"when" the work is to be done may loom larger in
determining whether the alleged servant was part
of his employer's organization than the factor of
"how" the work is to be performed: Co -Operators
Insurance Association v. Kearney, [1965] S.C.R.
106, at pages 111-113; (1964), 48 D.L.R. (2d) 1,
at pages 22-23.
The third test is that of economic reality, where
in most cases the issue must be decided by posing
the crucial question of whose business or undertak
ing it is in the sense of whether that person is
carrying on business for himself or on his own
behalf and not merely for a superior. Implicit in
this is the question of who runs the risk of profit or
loss; Montreal v. Montreal Locomotive Works
Ltd., [1947] 1 D.L.R. 161 (P.C.) per Lord Wright,
at pages 169-170; R. v. Mac's Milk Ltd. (1973),
40 D.L.R. (3d) 714 (Alta. C.A.), at pages 727-
729; and Boardman v. The Queen, [1979] 2 F.C.
422; 79 DTC 5110 (T.D.).
The final test is the relatively novel one of the
specified result test, which found expression in
Alexander v. M.R.N., [1970] Ex.C.R. 139;
(1969), 70 DTC 6006. The case involved a profes
sional radiologist under contract with a hospital to
act as departmental head and provide professional
services in his field of competence. A fact that was
found to be not entirely irrelevant was that the
hospital authority did not treat the radiologist as
an employee for purposes of pension and income
tax deductions at the source, unlike other depart
mental heads.
Jackett P., stated the test in these terms at page
153 Ex.C.R.; page 6011 DTC:
It seems evident that what is an appropriate approach to
solving the problem in one type of case is frequently not a
helpful approach in another type. On the one hand, a contract
of service is a contract under which one party, the servant or
employee, agrees, for either a period of time or indefinitely, and
either full time or part time, to work for the other party, the
master or the employer. On the other hand, a contract for
services is a contract under which the one party agrees that
certain specified work will be done for the other. A contract of
service does not normally envisage the accomplishment of a
specified amount of work but does normally contemplate the
servant putting his personal services at the disposal of the
master during some period of time. A contract for services does
normally envisage the accomplishment of a specified job or task
and normally does not require that the contractor do anything
personally. If, in this case, the appellant had been given a post
to work as a radiologist in the Hospital full time for an
indefinite period of time at an annual salary there could, I
should have thought, have been little doubt that he was an
officer or employee of the Hospital. If, on the other hand, the
appellant had had an ordinary medical practice and had under
taken to do exactly the same things that he was in fact bound
by the present contract to do, but to do the office part of the
work in his own office as and when he could find time to do it,
and on the same terms as to payment as we find in the present
contract, I do not think that any one would have doubted that it
was the ordinary work of a practising doctor, which is a typical
example of work done under contracts for services.
The problem arises in these cases because, in fact, there can
be a contract of service that has features ordinarily found in a
contract for services and there can be a contract for services
that has features ordinarily found in a contract of service.
Collier J., quoted these comments in Boardman
v. The Queen, supra, but held that the government
psychiatrist was from the standpoint of business
and economic reality an employee, despite the
mutual intention of the parties to create the
employment status of independent contractor.
By the terms of an agreement dated June 30,
1972 between the University and the hospital the
appointment of physician-in-chief or head of the
Department of Medicine teaching service at the
hospital is to be made by the hospital but only on
the recommendation of a joint search committee
and with the approval of a joint relations commit
tee. Both committees are comprised of hospital
and university representatives. The plaintiff had
been appointed to that post in 1969 before the
agreement came into effect but there can be no
doubt that the appointment was jointly made by
the University and the hospital. Dr. K. J. R.
Wightman, Sir John and Lady Eaton Professor of
Medicine at the University of Toronto, wrote Dr.
Marotta to confirm that he had been recommend
ed for the post of physician-in-chief and requesting
his acceptance. The second and third paragraphs
of the letter summarize the terms of engagement:
The appointment carries with it the University rank of
Professor, and a full-time University post with tenure. The
basic University salary is $30,000. per annum with an addition
al $1,500. available on presentation of vouchers for expenses
incurred in necessary travel or entertaining. The appointment is
full-time in the sense that an office and one or two secretaries
will be provided for you in the Hospital. However it is
anticipated that you would be in a position to continue with
some private practice. However this should be limited to a point
where your net income from private practice should be no more
than $15,000.
If you are willing to accept this post on these terms, I will
forward my recommendation to the Hospital and to the Dean. I
think it would be wise, when the appointment is made, to
arrange for a review committee to be set up after you have held
the post five years to give an opportunity for you and the
University and the Hospital to assess the progress which is
being made. I am sure you are aware that all hospital appoint
ments are annual appointments. However if at the end of five
years you feel that you do not wish to remain as Head of the
Hospital Department of Medicine it would be possible then to
step down without loss of rank or salary from the University.
The agreement between the University and the
hospital for the establishment of the latter as a
teaching hospital did not materially change these
terms of engagement. Dr. Marotta continued to be
provided with an office and secretarial facilities in
the hospital. The University remitted his salary by
cheques made payable to him directly. The T-4
supplementaries showed him as an employee of the
University of Toronto. There were deductions at
source for Canada pension, unemployment insur
ance and income tax. In addition, the plaintiff
participated in the University's registered pension
plan and in its group life and long term disability
insurance plans. Clearly, the University envisaged
the position as that of a full-time professor of
medicine teaching clinically at an affiliated teach
ing hospital, and with a strict limitation of $15,000
on private practice income. In the eyes of the
University, they had not contracted for the part-
time services of a private practitioner. The busi
ness at hand from the standpoint of the University
was the best teaching of medicine. Dr. Marotta
took up the challenge with dedication and zeal.
The plaintiff was given much latitude. He was
not held to a strict syllabus or curriculum and
seems to have been given a free hand with respect
to the subject matter, method and manner of
teaching. The plaintiff was free to take vacations
when he chose and he was not required to strictly
account for his time. The position of physician-in-
chief was one of great responsibility. Besides the
important teaching role, there were administrative
duties to perform such as preparing schedules and
syllabuses and monitoring the performance of his
teaching colleagues. The plaintiff admitted in his
testimony that his own performance was undoubt
edly subject to some monitoring by the heads of
his Department at the University and that the
Dean of the Faculty was the one ultimately
responsible for ensuring that the proper admixture
of medical subjects or specialties was being taught.
Dr. Marotta's duties were performed on a day to
day basis, unfettered by the trammels of niggling
supervision and control. This freedom from super
visory restraint is not at all unusual in modern day
university circles. The appointment to the post of
physician-in-chief was reviewable at the end of five
years. It is true that any decision to remove him
from the position would have to be made jointly by
the University and tue hospital. The control test
could not be decisive in his case because of his
high professional attainments and the degree of
latitude afforded him by the University and the
hospital. Nevertheless, it can be logically inferred
that had he failed abysmally to live up to the high
expectations held of him, the necessary ways and
means would have been quickly found to ease him
from the post. There can be no doubt but that the
ultimate control rested with the University. While
the relationship between the plaintiff and the Uni
versity may have possessed some of the features of
a contract for services, especially from the stand
point of control, it is my view that the features
common to a contract of service greatly outweigh
them in terms of the other three so-called tests.
The work facilities were provided by the Univer
sity through the medium of the hospital. The risk
of profit or loss was on the University rather than
the plaintiff. Dr. Marotta placed his eminent
professional skill and competence at the disposal of
the University in return for recompense. The busi
ness in which he was principally engaged was the
University's and not his own and the work done
was fully integrated within the teaching system or
organization of the University. Finally, the work
was not defined by or limited to a specified task or
specific objective in any contractual sense.
In my opinion, the weight of evidence shows that
the plaintiffs relationship with the University of
Toronto was that of an employee and not that of
an independent contractor. The nature of the
remuneration received was salary and the mode of
its application by the partnership does not change
it into business income for tax purposes.
The plaintiffs appeal is therefore dismissed,
with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.