Date: 19981029
Docket: 96-2155-UI
BETWEEN:
2993678 CANADA INC.,
O/A CHELSEA FRESHMART,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
DEAN PRONOVOST,
Intervener.
Reasons for Judgment
Rip, J.T.C.C.
[1]
The appellant, 2993678 Canada Inc., which operates a grocery
business under the firm name Chelsea Freshmart ("Chelsea
Freshmart"), is objecting to assessments made by the
Minister of National Revenue ("Minister") on
October 24, 1995, in respect of unemployment insurance
premiums for the period from March 2 to May 29, 1994. The
Minister determined that Dean Pronovost's employment with
Chelsea Freshmart during the relevant period was insurable
employment pursuant to paragraph 3(1)(a) of the
Unemployment Insurance Act ("Act"); in
other words, Mr. Pronovost worked for Chelsea Freshmart under a
contract of service. The appellant denies that allegation.
[2]
John Jauvin, the appellant's majority shareholder and
a businessman with over 20 years' experience, testified on
behalf of the appellant. He is involved mainly in financing young
entrepreneurs, helping them start businesses and advising them on
their affairs. He explained that his practice is to obtain small
business loans for the entrepreneurs who come to him and then to
provide them with financing for the rest of what they need. These
entrepreneurs generally incorporate a company through which they
engage in their business activities. Mr. Jauvin's financing
activities are carried on by a numbered company, 102118 Canada
Inc., operating under the firm name Laurier Financing.[1] That company also owns
a shopping centre, Chelsea Plaza ("Plaza"), in
Aylmer, Quebec, in which the premises of the appellant,
Chelsea Freshmart, are located.
[3] A
Mr. Chartrand used to operate a grocery store in the Plaza. Mr.
Jauvin had loaned him money to start the business. Mr. Chartrand
went bankrupt and abandoned the grocery store. Mr. Jauvin, or
Laurier Financing, purchased all the property, including
equipment located on the premises, left behind by
Mr. Chartrand.
[4]
Mr. Jauvin also testified that he had no experience in the
grocery business and that he purchased all the grocery
store's equipment so that he could sublet the premises to
someone else. He then put the grocery store premises up for rent.
The equipment was to be included in the rent. Dean Pronovost
expressed an interest in renting the premises and opening a
grocery store. He had acquired experience as a grocer at Loeb and
Métro. Mr. Jauvin decided to help him by financing the
grocery store.
[5]
Mr. Pronovost incorporated the appellant. He was the president
and the first director of the corporation. Mr. Pronovost admitted
that he initially held 100 percent of the appellant's
shares.
[6]
Mr. Pronovost and Mr. Jauvin had agreed that Mr. Pronovost would
set up a corporation to operate the grocery store while Mr.
Jauvin would try to obtain a small business loan from the
government. However, Mr. Pronovost was unable to obtain the loan.
Mr. Jauvin therefore obtained a small business loan for
Chelsea Freshmart from a bank. He secured the loan himself.
According to Mr. Pronovost, Mr. Jauvin asked him to say that
he was the owner of the grocery store because it was good for the
store's image. Mr. Pronovost said moreover that he intended
to purchase the store if it was profitable.
[7]
There are four businesses in the Chelsea Plaza: a bank, a
restaurant, a hardware store and a grocery store. Mr. Jauvin
explained that the restaurant was also financed on terms similar
to those for the grocery store. Mr. Jauvin provided all the
equipment and inventory. The restaurant was to belong to the
lessee once the loan was repaid to Mr. Jauvin. The same financing
agreement was entered into with the hardware store. However, Mr.
Jauvin stated that he does not hold any shares in the
corporations that operate the hardware store and the
restaurant.
[8]
For the purposes of the loan, Mr. Jauvin became the majority
shareholder in Chelsea Freshmart with 95 percent of its shares.
He explained that the reason he held these shares was that the
terms of the loan required him to be the corporation's
majority shareholder. At the hearing, Mr. Jauvin said that he
held 95 percent of Chelsea Freshmart's shares, but he
testified that he was holding them in trust for Mr. Pronovost. In
a loan agreement dated February 1, 1994, between
Laurier Financing, the lender, Chelsea Freshmart, the
borrower, and Mr. Pronovost, the surety, the borrower and the
surety acknowledged that the lender was loaning the borrower
$230,000. On the same date, Mr. and Mrs. Pronovost signed a note
in favour of Laurier Financing for a $220,000 loan. To
secure repayment of the loan, all the surety's shares in
Chelsea Freshmart were pledged to the lender in trust until
the loan had been repaid in full. If the borrower defaulted on
the payment of interest or on any other obligation, the shares
would be transferred to the lender.
[9]
When the small business loan was approved, Laurier Financing was
repaid. At that time, Chelsea Freshmart owed the bank $200,000 on
the small business loan. Mr. Jauvin continued to hold shares in
Chelsea Freshmart. Mr. Pronovost began working at the
grocery store.
[12] The
grocery store's equipment still belongs to the Plaza and
has not been transferred to Chelsea Freshmart. That equipment
remains the property of Laurier Financing.
[10] The
appellant filed an agreement dated February 16, 1994, in which
the parties — Laurier Financing and Chelsea Freshmart
— stated that Laurier Financing was leasing all the
equipment in the grocery store to Chelsea Freshmart. The parties
also stated that Mr. Jauvin was transferring to Mr. Pronovost all
his right, title and interest in Chelsea Freshmart in respect of
the business of the same name. The agreement referred to a copy
of the lease appended thereto. However, no lease was appended to
the copy of the agreement filed in Court. Unfortunately, the
agreement was signed only by Laurier Financing and
Mr. Jauvin in his personal capacity. Neither Chelsea
Freshmart nor Mr. Pronovost signed it.
[11] According
to Mr. Jauvin, Mr. Pronovost never signed the agreement because
it was prepared so that a liquor permit could be obtained quickly
from the Régie des alcools du Québec. Mr.
Jauvin therefore signed the agreement and sent it to
Mr. Pronovost to be signed by him. The application for the
liquor permit (Exhibit A-4) stated that the person in charge
of running the business was Mr. Pronovost. It was likewise
stated that Mr. Pronovost was the sole shareholder, with
100 percent of Chelsea Freshmart's shares.
[13] The
application for the liquor permit was prepared by Mrs. Pronovost,
Mr. Pronovost's wife, who was responsible for the
grocery store's accounting. She had called the Régie
des alcools du Québec, which had told her that the
application had to be made by the person holding 100 percent of
the shares. She thereupon called Mr. Jauvin, who told her to put
down Mr. Pronovost as the sole shareholder and to go and see a
notary. He said that he would take care of the rest.
[14] Moreover,
Mr. Pronovost testified that he had no knowledge of the loan
agreement between Chelsea Freshmart and Laurier Financing or of
the agreement recording the transfer of Mr. Jauvin's shares
to him. Mr. Pronovost said that it was quite natural for him not
to recognize the exhibits in question, since he had confidence in
Mr. Jauvin and trusted his word.
[15] An
accountant's report on Chelsea Freshmart's income was
also sent to Mr. Jauvin monthly. According to Mr. Jauvin,
Mr. Pronovost did not take his advice and lost $20,000 a month as
a result. As well, Mr. Jauvin had to pay additional money to make
up for the losses each month.
[16] Mr.
Jauvin spent several months of the winter in Florida. When he got
back, he decided that Mr. Pronovost would have to work with two
other employees of the grocery store and that the three of them
would be equal owners of the store. Mr. Pronovost refused and
left the business. Since Mr. Jauvin was holding Chelsea
Freshmart's shares as security, he took over the business.
He found two other young entrepreneurs to run the grocery store,
which he financed for them also.
[17] Mr.
Pronovost listed the duties he performed at Chelsea Freshmart and
the other grocery stores where he had worked as an employee
manager. Basically, he said that his work at Chelsea Freshmart
was the same as it had been at Loeb and Métro. He did not
have a fixed schedule.
[18] According
to Mr. Jauvin, Mr. Pronovost and his wife set their own salaries.
He had suggested to them that these were too high. Likewise, in
the monthly report on Chelsea Freshmart's operations
(Exhibit I-2), Mr. Jauvin wrote Mr. Pronovost a note saying
that Mr. Pronovost had no choice but to reduce expenses if the
business was to break even. In this regard, Mr. Jauvin explained
that it was his duty to keep an eye on and advise the
Pronovosts.
[19] Mr.
Jauvin testified that Mr. Pronovost did not invest anything in
the business during the entire period at issue. However, he did
say that if the business had been profitable, the profits would
have been Mr. Pronovost's. According to Mr. Jauvin, all that
mattered was that Mr. Pronovost repay him the loan. In that
connection, Mr. Pronovost admitted that he had not invested
anything in the grocery store, but he said that he would not have
been entitled to the profits if the store had generated any.
[20] Decisions
on expenses were always made by Mr. Jauvin. Mr. Pronovost added
that he had to ask Mr. Jauvin for permission to take holidays.
Mr. Jauvin further claimed that he never signed any
documents, cheques or orders for the grocery store and did not
know about the employees' payroll deductions or the taxes
remitted.
[21]
Renovations to the store were paid for by Chelsea Freshmart.
Since he had no money, Mr. Pronovost always informed Mr.
Jauvin of any intention he had to make changes to the store.
[22] Mr.
Jauvin did not go to the store often, since he was in Florida the
first six months it was open. However, he called Mr. Pronovost
frequently and came to the store regularly once he got back from
Florida. Mr. Jauvin said that the only reason he called from
Florida was to find out the monthly figures for the store.
[23] Mr.
Jauvin insisted that his interest in the business was based on
the fact that he was the one financing it. However, he said that
he would not have become involved if the payments had been made
and the business had been profitable. On the other hand, Mrs.
Pronovost testified that Mr. Jauvin was at the grocery store
fairly often. At first, it was almost every day. When Mr. Jauvin
left for Florida, he called regularly, sometimes twice a day. She
also said that she had pointed out to Mr. Jauvin several
times that she and Mr. Pronovost were just employees.
[24] A
newspaper article dated July 3, 1995, sought to correct a mistake
in an earlier newspaper article that had described Mr. Pronovost
as the owner of Chelsea Freshmart. It stated that the owner had
always been Mr. Jauvin. According to Mr. Jauvin, the
Pronovosts were the ones who spoke to the newspapers to make sure
they could be eligible for unemployment insurance.
Mrs. Pronovost said the opposite when she testified, namely
that it was Mr. Jauvin who had demanded the correction. She
added that the newspaper publisher had told her that the
correction had been requested by Mr. Jauvin.
[25] Finally,
counsel for the respondent filed a letter dated May 25, 1995,
from Mr. Jauvin to a Mr. Whelan of National Grocers. In the
letter, Mr. Jauvin offered to sell all his shares in Chelsea
Freshmart to National Grocers and referred to Mr. Pronovost as
the manager. However, there was a discrepancy in the letter: it
stated that the Chelsea Freshmart grocery store was owned by
2957159 Canada Inc. and not by 2993678 Canada Inc., as
alleged at trial and in the pleadings. The identity of 2957159
was not disclosed during the examination. Nevertheless, in his
testimony, Mr. Jauvin explained that it was Mr. Pronovost who had
approached Mr. Whelan. He (Mr. Jauvin) wrote the letter because
he was the one who held Chelsea Freshmart's shares. In
short, he insisted that Mr. Pronovost was always the true
owner.
[26] Ms.
Faucher is the appellant Chelsea Freshmart's accountant. She
reported to Mrs. Pronovost and was paid by Mr. Pronovost.
According to her, Mr. Pronovost owned Chelsea Freshmart in
1994. She did not meet Mr. Jauvin until June 1994. It was the
Pronovosts who hired staff. She received no instructions from Mr.
Jauvin. Mrs. Pronovost was also the one who told her that
Mr. Pronovost did not have to pay unemployment insurance
premiums because he was the owner. It was not until February 1995
that she noticed that Mr. Pronovost's take-home
pay had changed. She asked Mrs. Pronovost about it, and Mrs.
Pronovost told her that Mr. Pronovost had started paying
unemployment insurance premiums in case things went bad. Mrs.
Pronovost was already making unemployment insurance
contributions.
[27] According
to Mr. Pronovost, Mr. Jauvin had told him that he did not have to
make unemployment insurance contributions because he owned five
percent of the company's shares. It was not until the end
of the year that he approached his accountant, who told him that,
with only five percent of the shares, he had to make unemployment
insurance contributions. It would seem that his accountant told
him that a bill would be sent to him by the government for the
earlier premiums he had not paid. Mr. Pronovost did not consider
it important to inform Mr. Jauvin of this problem. He admitted
that things were not going well and that the payment of premiums
was merely a security blanket. Likewise, he said that his salary
was not dependent on the profitability of the grocery store.
[28]
Nicole Perrier, the head cashier at Chelsea Freshmart,
testified that she continued working for the new owners when Mr.
Pronovost left the grocery store. They told her that they were
going to purchase the store. Even when Chelsea Freshmart
changed owners, Mr. Jauvin still came to the store quite
often.
[29] The issue
in the case at bar is as follows: did Mr. Pronovost hold
insurable employment within the meaning of paragraph
3(1)(a) of the Act?[2]
[30] The two
main witnesses, Mr. Jauvin and Mr. Pronovost, gave their versions
of the situation as it stood during the relevant period.
Unfortunately, in this case, they gave very different accounts.
My decision is therefore based essentially on the testimony that
seems the most credible, or perhaps the least lacking in
credibility.
[31] In
Wiebe Door Services v. M.N.R., [1986] 3 F.C. 553,
87 DTC 5025, the Federal Court of Appeal set out the tests that
apply in determining whether an employer-employee relationship
exists. In fact, it adopted in principle the test laid down by
Lord Wright in Montreal v. Montreal Locomotive Works
Ltd. et al., [1947] 1 D.L.R. 161. Lord Wright
stated the following at p. 169:
In earlier cases a single test, such as the presence or
absence of control, was often relied on to determine whether the
case was one of master and servant, mostly in order to decide
issues of tortious liability on the part of the master or
superior. In the more complex conditions of modern industry, more
complicated tests have often to be applied. It has been suggested
that a fourfold test would in some cases be more appropriate, a
complex involving (1) control; (2) ownership of the tools;
(3) chance of profit; (4) risk of loss.
[32] MacGuigan
J. interpreted Lord Wright's test not as a fourfold test
but rather as a four-in-one test, with emphasis
always retained on what Lord Wright called "[t]he combined
force of the whole scheme of operations", even while the
usefulness of the four subordinate criteria is acknowledged.
[33] MacGuigan
J. ended his ratio by referring, at p. 5030, to what he
considered the best synthesis, namely that of Cooke J. in
Market Investigations, Ltd. v. Minister of Social
Security:[3]
The observations of Lord Wright, of Denning, L.J., and of the
judges of the Supreme Court in the U.S.A. suggest that the
fundamental test to be applied is this: "Is the person who
has engaged himself to perform these services performing them as
a person in business on his own account?". If the answer to
that question is "yes", then the contract is a
contract for services. If the answer is "no" then the
contract is a contract of service. No exhaustive list has been
compiled and perhaps no exhaustive list can be compiled of
considerations which are relevant in determining that question,
nor can strict rules be laid down as to the relative weight which
the various considerations should carry in particular cases. The
most that can be said is that control will no doubt always have
to be considered, although it can no longer be regarded as the
sole determining factor; and that factors, which may be of
importance, are such matters as whether the man performing the
services provides his own equipment, whether he hires his own
helpers, what degree of financial risk he takes, what degree of
responsibility for investment and management he has, and whether
and how far he has an opportunity of profiting from sound
management in the performance of his task. The application of the
general test may be easier in a case where the person who engages
himself to perform the services does so in the course of an
already established business of his own; but this factor is not
decisive, and a person who engages himself to perform services
for another may well be an independent contractor even though he
has not entered into the contract in the course of an existing
business carried on by him.
[34] Thus, it
is well settled that "the whole of the various elements
which constitute the relationship between the parties"[4] must be
examined.
[35] In the
case at bar, counsel for the appellant referred to the Federal
Court of Appeal's decision in Roland Navennec v.
M.N.R., [1992] F.C.J. 1005, in support of her argument. In
that case, the appellant was the owner of a lodge business. He
set up a corporation to carry on his activities. His son was the
president of the corporation and the appellant was the
vice-president. The appellant also sold shares of his to the
other members of his family so as to hold only 20 percent of the
company's shares and thereby meet unemployment insurance
requirements. The Minister therefore argued that there was no
genuine contract of employment between the appellant and the
corporation. The Federal Court of Appeal, per Desjardins
J.A., stated the following at p. 11:
It is true that in Stubart the question was whether a
company could, for the avowed purpose of reducing its tax,
conclude an agreement by which its future profits were
transferred to a subsidiary in order to take advantage of the
latter's loss carry-forward; but the rules are still
applicable to the case at bar when it must be determined whether
the applicant has, in short, arranged his affairs so as to be
able to collect unemployment insurance benefits; and whether
despite appearances he nevertheless remains the true owner of all
his property, despite its sale to the company, and the sole
holder of the shares despite their sale to his wife and sons.
[36] Finally,
at p. 12 of the judgment, Desjardins J.A. set out what she viewed
as the real questions to be asked:
. . . but what matters is to establish whether by their
agreements they did what they said they intended to do. Did the
applicant in fact intend to make the company a family business or
did he retain control of it? Did his wife and children in fact
intend to pay off their promissory notes by the profits they
received from the business or by other income? - or
did they never intend to do so? Were these legal obligations
clear and executory, or was it a façade?
[37] In the
instant case, the appellant tried to refute the Minister's
allegations, made through Mr. Jauvin's testimony, that Mr.
Pronovost was the real owner. However, I do not find the
testimony of Mr. Jauvin and Mr. Pronovost very credible. It must
accordingly be borne in mind that the burden of proof is always
on the appellant. The appellant must prove that the
Minister's allegations are false. In the case at bar, the
appellant bears that burden in relying on Navennec,
supra, and in arguing the existence of a façade.
However, in view of the documents filed as evidence, the
appellant has not discharged the burden in this case. In my
opinion, the appellant has not been able to show that what was
recorded in the documents did not reflect reality.
[38] It is
certainly true that a few of the documents filed by the appellant
— including the loan agreement between Mr. Pronovost and
Laurier Financing and the certificate of incorporation —
seem to indicate that Mr. Pronovost was the owner of Chelsea
Freshmart. Likewise, Mr. Pronovost even testified that his
initial intention was in fact to become the owner of Chelsea
Freshmart. However, an intention to become the owner is not
conclusive in determining whether there is a contract of
service.
[39] The
testimony of Mr. Jauvin and Mr. Pronovost shows that that initial
intention changed. Despite his willingness, Mr. Pronovost did not
have the financial means to start the business. He incorporated a
company in his name. In his testimony, he explained that he tried
to obtain a loan but failed, which meant that the grocery store
would not open as planned. That was when Mr. Jauvin decided to
open the store and employ Mr. Pronovost as its manager. Moreover,
Mr. Pronovost transferred his shares to Mr. Jauvin. The
explanation provided by Mr. Jauvin as to the necessity of his
owning the majority of the shares is commendable, but was it
necessary to transfer 95 percent of the shares and to leave
Mr. Pronovost with just 5 percent? A reasonable man would never
have accepted such a difference in their respective interests in
the business.
[40] The
existence and validity of the loan agreement between
Laurier Financing and Chelsea Freshmart are not in dispute.
However, the circumstances surrounding the agreement must be
examined. Mr. Jauvin testified that the loan in question was
repaid in full by Chelsea Freshmart after the approval of the
small business loan to it. The only loan remaining is that from
the bank to Chelsea Freshmart, whose principal shareholder
is Mr. Jauvin, who also stood surety for the loan.
[41] All that
remains, therefore, is to apply the four parts of the
four-in-one test. As regards the first part,
ownership of the tools, Mr. Pronovost had no rights in the
grocery store's equipment. It is clear from Mr.
Jauvin's testimony that the equipment belonged to Chelsea
Plaza, which he also owns. Moreover, the renovations to the store
were paid for by Mr. Jauvin.
[42] The
second part, the chance of profit, is somewhat relevant in this
case, since the appellant never made a profit. Mr. Jauvin argued
that the profits would have belonged to Mr. Pronovost if he had
made the necessary loan payments. I cannot accept that argument,
since no payments or attempts to pay were made. It seems to me
that the usual and standard practice is for the company to make
the payments to the creditor even if it is losing money. This
would translate into a loss on the balance sheet. Another
alternative is for the owner to pay the creditor out of his or
her own money, even if it means receiving no salary. However, in
the case at bar, Mr. Pronovost continued to receive his salary,
and the payments alleged by Mr. Jauvin are not shown in the
grocery store's balance sheet. Moreover, it would have been
absurd for Mr. Pronovost to receive the profits if he never
invested anything in the company.
[43] As
regards the third part, the risk of loss, Mr. Pronovost assumed
no such risk. He did not spend a penny. When the grocery store
incurred losses, Mr. Jauvin was the one who injected money
into it. If the grocery store had closed, Mr. Jauvin would
also have been liable for the loan made by the bank. In short, he
assumed a substantial risk of loss, but that risk did not affect
Mr. Pronovost at all.
[44] Lastly,
there is the question of control. In Gallant v. M.N.R.,
[1986] F.C.J. No. 330, Pratte J. stated the following for the
Federal Court of Appeal:
In the Court's view, the first ground is based on the
mistaken idea that there cannot be a contract of service unless
the employer actually exercises close control over the way the
employee does his work. The distinguishing feature of a contract
of service is not the control actually exercised by the employer
over his employee but the power the employer has to control
the way the employee performs his duties. If this rule is
applied to the circumstances of the case at bar, it is quite
clear that the applicant was an employee and not a contractor.
[Emphasis added.]
[45] In the
case at bar, the fact that Mr. Jauvin was on vacation in Florida
during a large part of the period at issue and the fact that he
was not at the store every day are of no help to the
appellant's case. As Pratte J. so aptly put it, the control
contemplated by the test set out in Montreal Locomotive
Works, supra, refers not to close control but rather
to the power an employer has over an employee. In short, I am
satisfied that Mr. Jauvin exercised such power in the case at
bar. Moreover, it is not in dispute that Mr. Jauvin went to the
store and required Mr. Pronovost to manage it along with two
other managers. The correspondence between Mr. Jauvin and Mr.
Pronovost shows that Mr. Jauvin had control, since he oversaw the
operation of the grocery store. As well, Mr. Pronovost had
to ask Mr. Jauvin for permission to take holidays.
Undoubtedly, Mr. Jauvin had control and Mr. Pronovost was merely
a manager.
[46] I do not
give much weight to the testimony of Ms. Faucher and
Ms. Perrier. They were employees of the appellant. Most of
their testimony was hearsay. Mr. Pronovost was the manager of the
grocery store, and I believe that that was why Ms. Faucher
received her wages directly from him. Finally, Ms. Perrier
was not in a position to be aware of the arrangements between
Mr. Jauvin and the "new owners", so her
testimony is of little relevance.
[47] It is my
opinion that Mr. Pronovost held insurable employment. There was a
genuine contract of service, since there was a relationship of
subordination, work was performed and remuneration was paid.[5]
[48]
Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 29th day of October 1998.
"Gerald J. Rip"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 11th day of May
2000.
Erich Klein, Revisor
Email this Content