T-3189-79
T-3275-80
T-3276-80
Modern Miss Sportswear Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J.—Montreal, November 18;
Ottawa, November 25, 1980.
Income tax — Income calculation — Deductions — Appeal
from Minister's decision to disallow contracting costs claimed
by plaintiff on the ground that they are not part of plaintiff's
"cost of labour" nor "cost of manufacturing and processing
labour" — Plaintiff a manufacturer, farms out its sewing
operations to contractors who in turn hire sewing operators —
Submission by plaintiff that manufacturer exercises a degree
of control over the operators and is ultimately responsible for
their unpaid wages — Whether for these reasons the
employees of the contractors become those of the manufactur
er — Income Tax Act, S.C. 1970-71-72, c. 63, as amended, s.
125.1 — Income Tax Regulations, SOR/73-495, s. 5202.
These are appeals from a decision of the Minister to disallow
contracting costs claimed by the plaintiff on the ground that
these costs were not part of plaintiff's "cost of labour" nor of its
"cost of manufacturing and processing labour" within the
meaning of section 5202 of the Income Tax Regulations. The
plaintiff, a manufacturer of ladies' garments, employs workers
most of whom are directly involved in the manufacturing and
processing functions, and parcels out sewing contracts to sever
al contractors who in turn hire the sewing machine operators.
Pursuant to section 125.1 of the Income Tax Act, plaintiff
claimed for its 1973, 1974 and 1975 taxation years, deductions
based on its manufacturing and processing costs including the
cost of contracting. Plaintiff contends that because there is a
degree of control exercised by the manufacturer over the
operators and because the manufacturer is ultimately legally
responsible for the operators' unpaid wages and benefits, the
employees of the contractors become the employees of the
manufacturer when they work on the garments of the latter.
Held, the appeals are dismissed. There does not exist a
master and servant relationship between the manufacturer and
the sewing operators. (1) There is no oral or written contractual
link between them. The workers are hired and fired by the
contractors. (2) The operators' salaries are paid by the contrac
tors. Hence, this is not a case where the servant agrees to
provide his skill and work to a master in exchange for a wage.
(3) The equipment used by the operators is usually owned by
the contractors. (4) All the usual deductions from the
employees' pay cheques are made by the contractors. (5) The
operators basically take their general instructions from the
contractor who hired them. Furthermore, contractors are not
agents of the manufacturers. They file their own income tax
returns, wherein they claim their own deductions for the costs
in question. Finally, section 5202 of the Regulations cannot
apply: the manufacturer paid the contractors' invoices with
respect to the garments, not the operators' wages.
INCOME tax appeal.
COUNSEL:
Carl M. Ravinsky for plaintiff.
Deen Olsen and Wilfrid Lefebvre for defend
ant.
SOLICITORS:
Spiegel & Kravetz, Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
Dust J.: These three appeals dealing with the
plaintiffs 1973, 1974 and 1975 taxation years
have been heard together on common evidence.
The plaintiff is a Quebec corporation engaged in
the business of manufacturing garments for
women in Montreal since 1966. It employs about
25 persons, some 20 of whom are directly involved
in the manufacturing and processing functions.
Those employees, however, do not perform the
sewing operations which are farmed out by the
plaintiff to several contractors. There were some
25 such contractors in 1975, mostly located in the
Montreal garment district, with one in Nicolet and
others as far away as the Beauce region.
The plaintiff claimed manufacturing and proc
essing deductions pursuant to section 125.1 of the
Income Tax Act, S.C. 1970-71-72, c. 63, as
amended, for the three taxation years in question.
The amounts of the deductions claimed were cal
culated on the plaintiffs manufacturing and proc
essing costs including the cost of contracting.
The contracting costs were disallowed by the
Minister on the ground that they were not part of
plaintiff's "cost of labour" nor of its "cost of
manufacturing and processing labour" within the
meaning of section 5202 of the Income Tax Regu
lations [SOR/73-495].
The relevant portion of the definition of "cost of
labour" under section 5202 reads as follows:
5202... .
"cost of labour" of a corporation for a taxation year means an
amount equal to the aggregate of
(a) the salaries and wages paid or payable during the year to
all employees of the corporation for services performed
during the year, and
(b) all other amounts each of which is an amount paid or
payable during the year for the performance during the year,
by any person other than an employee of the corporation, of
functions relating to
(i) the management or administration of the corporation,
(ii) scientific research as defined in section 2900, or
(iii) a service or function that would normally be per
formed by an employee of the corporation,
In its income tax report plaintiff claimed the
contracting costs as amounts paid for "a service or
function that would normally be performed by an
employee of the corporation" under subparagraph
(b)(iii), but counsel at the hearing did not contend
that the sewing was normally performed at the
plaintiff's plant. He argued that the employees of
the several contractors were employees of the
plaintiff as well when they performed sewing oper
ations upon the plaintiff's garments (paragraph
(a)).
According to the evidence at the hearing, the
Quebec garment industry, or the needle trade as it
is called, is differently structured from most of the
other manufacturing businesses. With a view to
minimize their liability and increase their efficien
cy, most manufacturers limit themselves to key
operations at their own plant and parcel out
sewing contracts to several small contractors who
employ local women to operate their sewing
machines.
According to Lazar Peters, the executive direc
tor of The Montreal Dress and Sportswear Manu
facturers' Guild, the contractors become "an
extension" of the manufacturer and the latter con
trols to a very high degree the activities of the
former. The manufacturer sends technical people
"to supervise, train and instruct" the operators
who work on their garments at the contractors'
plants.
Javier Montero, now president of the plaintiff
and its secretary-treasurer during the taxation
years in question, personally visited the contrac
tors' plants and monitored the sewing operations
during the relevant period, and still does at times.
Normally, contractors provide their own equip
ment, but on occasions the manufacturer loans
sewing machines or other tools to the contractors
at no costs, or at costs to be recovered from the
contracts. On one occasion Montero made a per
sonal loan to one specific contractor to allow her to
launch her own business.
Generally speaking, the role of the manufactur
er is to seek fabric information, to design new lines
of clothing for each season, to obtain new styles
from Europe or elsewhere, to prepare patterns, to
produce samples, to purchase fabric from suppliers
and to cut the fabric. At that stage the fabric is
taken to the contractors by an independent carrier
rented by the manufacturer. The parcels are
accompanied by "markers" (patterns), cutting
slips and trimming check-out sheets. The latter
documents, made in three copies, allow the manu
facturer to check the work performed on the
garments.
The manufacturer pays the contractor by the
unit, upon completion, according to prices agreed
to orally by the two parties.
The sewing operators are hired by the contrac
tor, but if any particular operator is not efficient,
or satisfactory to the manufacturer, the latter may
use his considerable power of persuasion upon the
contractor to have that person fired.
Wages, of course, are paid by the contractor to
the operators and he deducts from their paychecks
the standard payments for unemployment insur
ance, income tax, pension, etc. The manufacturer,
however, has an ultimate responsibility in the
matter, as prescribed by the Decree relating to the
Dress Industry. Section 14 of Annexe C of the said
Decree reads as follows:
14. Every professional employer contracting with a sub-entre
preneur or a sub-contractor, directly or through an intermedi
ary, shall be jointly and severally responsible with such sub-
entrepreneur or sub-contractor and any intermediary, for the
payment of the wage fixed by the decree.
The responsibility of the manufacturer for the
contractor is also outlined in the "convention col
lective de travail" [collective labour agreement]
between The Montreal Dress and Sportswear
Manufacturers' Guild and the Joint Commission
(Comité conjoint de Montréal, Union des ouvriers
de la robe) [Montreal Joint Board Dressmakers'
Union], and the Union internationale des ouvriers
du vêtement pour dames [International Ladies'
Garment Workers' Union], which stipulates as
follows:
50.02 Each Employer, a member of the Guild, shall be
jointly and severally responsible together with each contractor
and sub-contractor to which each such Employer shall furnish
work falling under the jurisdiction of this Agreement, for the
payment of wages, and for payments into the Welfare Funds,
and for due compliance with working conditions, the whole as
set out in the present Agreement.
Article 50.01 of the agreement provides that the
manufacturer, described as the "Employer-Sup
plier" who supplies a contractor with work to be
performed by such contractor, called "Employer-
Contractor", shall, at the request of the Union,
make two separate payments for such work to the
contractor, that is 90% to be paid to the contractor
and the balance of 10% payable to the Trustees of
the Union Welfare Funds.
Should contractors fail to pay their employees,
or should they go bankrupt (and it would appear
that the latter occurrence is not uncommon in the
silk trade), then the manufacturer is notified by
the Joint Commission and he has to pay the Com
mission moneys owing to the sewing operators.
There is evidence that the plaintiff has had to pay
factory wages and holidays unpaid by contractor
Dopinjay Fashions Inc.
It is obvious, therefore, that there is a close
rapport between the manufacturers and the con
tractors: their respective successes and failures are
almost inextricably enmeshed. The contractors
look up to the manufacturers as their source of
revenue; the manufacturers rely totally on the
production of the contractors. This high degree of
interdependence and mutual reliance is vital to
such a fragile industry as the Quebec textile trade.
The plaintiff invites the Court to conclude from
such a close business intimacy that the employees
of the contractors become the employees of the
manufacturer when they work on the garments of
the latter.
Although there is a degree of control exercised
by the manufacturer over the sewing machine
operators and although he is ultimately legally
responsible for their unpaid wages and benefits, I
cannot find that there exists a master and servant
relationship between them.
Firstly, there is no contract of service, no con
tractual link whatsoever, oral or written, between
the two. The workers are hired by the contractors
and fired by them. Of course, because of the
economic dependence of the contractors upon the
manufacturer, the latter may carry sufficient
leverage to obtain the firing of an incompetent
operator. That result is not obtained by the exer
cise of a legal right. It is the reality of economic
clout.
Secondly, the salaries are not paid to the opera
tors by the manufacturer, but by the contractors.
One essential condition to the existence of a con
tract of service is that the servant agrees to provide
his skill and work to a master in exchange for a
wage or other remuneration (vide A Ready Mixed
Concrete (South East), Ltd. v. Minister of Pen
sions and National Insurance [1968] 1 All E.R.
433 at pp. 439 and 440).
Thirdly, the equipment and the tools used by the
operators are usually owned by the contractors,
not by the manufacturer.
Fourthly, all the usual deductions from the
employees' paychecks are made by the contractors.
Fifthly, the operators basically take their gener
al instructions from the contractor who hired
them, not from the manufacturer. The contractor
decides which manufacturer's garments will be
sewed in his shop. On any given day his employees
may be working on the merchandise of several
different manufacturers. It is difficult to conceive
how these operators would successively become the
servants of different masters in the course of a
week, or even within a day, most likely without the
knowledge of either the masters or the servants.
If the contractors were deemed to be agents of
the manufacturers, then one might consider the
sewing operators as being in reality the employees
of the principals, the manufacturers. Such is not
the case. Contractors do not consider themselves
agents of the manufacturers. They file their own
income tax reports, wherein they claim their own
deductions for manufacturing and processing
costs. The scheme of the Act does not contemplate
such a double deduction.
In any event, even if I were to consider the
employees of the several contractors as servants of
the plaintiff, which I do not, still the cost of labour
in relation to them could not be considered as
"cost of labour" as defined under section 5202 of
the Regulations. Under that definition such costs
relate only to "the salaries and wages" paid to the
employees, whereas the plaintiff has not paid sal
aries and wages to the sewing operators in ques
tion. It has paid to the contractors invoices submit
ted by the contractors, which invoices charge the
total costs for units of garments completed, not the
wages paid to sewing operators.
It is a well-established rule that the exempting
provisions of a taxing statute must be construed
strictly and that the burden is on the taxpayer to
place himself squarely within the four corners of
the exemption.
Under the circumstances the three appeals must
be 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.