Commission Trust Between Independent Contractor and Agent, Validity & Personal Property Security Act Involvement #266

By Gerry Neely
B.A. LL.B

An investment made by BCREA and the Victoria Real Estate Board, of legal fees towards the cost of a claim made by a Victoria licensee, that payment of her commission had priority over the receiver/manager of a bankrupt agent, paid a quick dividend when the British Columbia Court of Appeal (BCCA) handed down its reasons for judgment on February 19th, 1997.

The decision, although leaving the licensee with one more hurdle to overcome, strengthens the priority for commissions earned under an independent contractor relationship, over the claims of unsecured creditors of the agent. The Victoria licensee’s case was chosen for support, because it provided the first opportunity to have the BCCA hear arguments that the judge who decided the Homelife/Realty (Victoria) Ltd. case in 1992 erred in holding that an Independent Contractor Contract (ICC), and the commission trust created by it were illegal and unenforceable.

The latter case also involved a commission claim arising from an ICC for priority over the claims of the receiver and other creditors of Homelife. The first reason priority was denied was that an independent contractor relationship was a contravention of the Real Estate Act, which by definition allows only a true employment (employer/employee) relationship.

The second reason was that the commission trust in the ICC could not be enforced because it was in breach of sections 16 and 48 of the Real Estate Act. The reasoning in the Homelife case was accepted and followed in three subsequent cases in the Supreme Court of British Columbia, in which the same issues of priority were argued.

The BCCA was inclined to agree with the Homelife trial judge that an independent contract relationship was illegal under the Real Estate Act. It decided however, that even assuming that there was an illegal relationship, this would not prevent the creation of a valid commission trust in favour of the salesperson. The trust would take effect after the agent paid from the trust account the amounts due to persons entitled under section 16 of the Real Estate Act. The agent was then a trustee for the salesperson for the remaining funds in the trust account, namely the commission monies.

The BCCA did say that, at least in theory, a commission trust arising from an employer/employee relationship would be valid and enforceable. Despite this, only those licensees who have independent contractor status can be certain of benefiting from this decision.

It is important for income tax purposes that both the terms of the ICC and the conduct of the parties support the claim that the relationship is one of independent contractor. Revenue Canada has made the point on a number of occasions, that deviations from the terms of the ICC may result in the rejection of the income tax return filed by a licensee claiming to be an independent contractor. One cannot be certain that the courts will not look at the conduct of the parties to determine whether independent contractor status existed.

A discussion of the tests for determining independent contractor/employee status can be found in column No. 228. In addition, the BCCA reasons for judgment contain both the commission clause found in the ICC, and some of the factors which supported independent contractor status.

The hurdle which the licensee still must overcome, is that the case has been referred back to the Supreme Court of British Columbia, to hear the argument of counsel for the receiver/manager that section 2 of the Personal Property Security Act applies to this trust, because it created a security instrument which must be registered to establish a priority over other claims.

The opposing argument may rest upon section 4(d) of the PPSA which states that it does not apply to, "the creation or transfer of an interest in present or future wages, salary, pay, commission or any other compensation for labour or personal services other than fees for professional services."

If a licensee’s commission is a fee for professional services then the Act applies to it. However, a decision based upon an identical sub-section in the equivalent Alberta statute, held that a commission paid to a real estate agent is not a fee paid for professional services. How helpful this case will be remains to be seen, since the facts differ from those of the B.C. case.¹

Pending a decision by the SCBC, a licensee who wants to hedge his or her bets as to the outcome, could file a financing statement in the PPSA registry. The date and time establishes the priority for the commission claim amongst other secured creditors and before unsecured creditors.

The procedure and cost is minimal and does not require the consent of the agent. The second step to perfect this trust would be to obtain the agreement of the agent to establish a separate commission trust for the salesperson, or a pooled commission trust for all salespersons, with ICC’s. The pros and cons and complexities of these suggestions will be discussed in a following column.²

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