Johnston v. M.N.R., docket 96-1942-UI

Date: 19980813

Docket: 96-1942-UI

BETWEEN:

DELMER JOHNSTON,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Porter, D.J.T.C.C.

[1] This appeal was heard at Edmundston, New Brunswick on July 22, 1998.

[2] The Appellant appeals the determination of the Minister of National Revenue (the "Minister") dated June 27, 1996 that his employment with D & B Construction Ltd. (the "Company") from April 24 to October 20, 1995 and November 20 to December 8, 1995 was not insurable employment under the Unemployment Insurance Act (hereinafter referred to as the "Act"). The reason given for the determination was that:

"... a contract of service did not exist between yourself and D & B Construction Ltd. and Delmer Johnston."

The decision was said to be based on paragraph 3(1)(a) of the Act.

[3] The established facts reveal that the Company operated a business of construction repair and renovation of houses in and around New Denmark, New Brunswick. At the material time the shareholding in the company was as follows:

Delmer Johnston (the Appellant) 35%

Blaine Johnston (Son of the Appellant) 35%

Albert Watson (a friend and neighbour) 30%

[4] The issue in this case is whether there existed a genuine contract of employment between the Company and the Appellant. The position of the Minister is that the Appellant was, to such an extent, in control of his own employment, that in effect he was working for himself and in the alternative that the shareholding of Albert Watson was no more than a fiction so that in reality the Appellant controlled more than 40% of the issued shares of the Company.

The Law

[5] In the scheme established under the Act, Parliament has made provision for certain employment to be insurable, leading to the payment of benefits upon termination, and other employment which is "excepted" and thus carrying no benefits upon termination. Employment arrangements made between persons, who are not dealing with each other at arm's length, are categorized as "excepted employment". Parents and their children are deemed not to be dealing with each other at arm's length pursuant to subsection 251(1) of the Income Tax Act. Similarly persons who work for themselves are not included in the scheme nor are persons who are employed by a corporation if they control more than 40% of the voting shares of that corporation. In the same vein the Courts have held that persons wielding such a degree of control over a corporation that effectively they are dealing with themselves, should also be excluded. Quite clearly the purpose of this legislation is to safeguard the system from having to pay out a multitude of benefits based on artificial or fictitious employment arrangements.

[6] The issue of control of a corporation to the extent that the business is, in effect, that of the shareholder has been dealt with in the following cases:

Calogero Gulizia v. M.N.R. [1996] T.C.J. No. 1001

Carmelo Scalia v. M.N.R. [1994] F.C.J. No. 798

Yves P. Therrien v. M.N.R., 95 DTC 5672

Bruno Bouillon v. M.N.R. et al., F.C.A., (1996) 203 N.R. 227

[8] Of particular note are the comments of the Federal Court of Appeal in the Carmelo Scalia and M.N.R. case where at paragraph 4, Marceau, J. says this:

"On analysing the evidence, however, we find that the applicant had such ascendancy over the company, its activities and the decisions of its board of directors, which was composed of himself, his nephew and his sister-in-law, that there could not have been the independent relationship between himself and the company that is necessary to the creation of a true subordinate relationship."

[10] I note also the words of Desjardins, J.A. of the Federal Court of Appeal in the Bruno Bouillon v. M.N.R. case at paragraphs 10 and 11:

"I believe that the trial judge incorrectly defined the issue. It is not a question in this case of determining whether there was a contract of service as opposed to a contract for services, but rather of deciding if there was in reality a contract of any nature whatsoever between the applicant and the payer. According to the evidence, Jean-Pierre Bouillon, Yves Levasseur and Raynald Gaudreau did not pay any money for the purchase of 20% of the payer’s shares...

The perplexing situation thus described casts serious doubt on the payer’s existence as an entity distinct from its main shareholders, Bruno Bouillon and Ghislain Bélanger. These two have acted as if the third "shareholder" did not exist, even to the point of excluding him from the dividend. They had complete control (Carmelo Scalia v M.N.R. ...) over the payer, which played only a role of convenience and served as a screen for their activities. I find that no agreement whatsoever existed between the applicant and the payer, let alone a contract of service. I conclude that the applicant worked for himself during the relevant periods."

[13] Hamlyn, T.C.J. dealt with a similar issue in the Calogero Gulizia and M.N.R. case and was sustained on appeal. He asked himself and answered the following question:

"In answer to the pivotal question whose business is it, I find the business is that of the Appellant and his brother."

[14] These then, are the guidelines which I must use to decide whether there was a sufficiently independent relationship between the Appellant and the Company, that a proper conclusion can be drawn that there was a contract of employment.

The Facts

[15] The sole witness to give evidence was the Appellant whom I found to be perfectly honest and quite evidently an industrious worker. I have no reason to disbelieve what he said in evidence. He and his son had incorporated the Company in May 1984. They had engaged a lawyer to attend to the incorporation and to set up the shareholdings outlined above. The idea of having Albert Watson involved was to act as a sort of mediator or advisor in the event of a dispute between father and son. In this way neither of them could do anything with which the other disagreed, without first securing the agreement of the third party. However in the event of agreement between father and son, the two of them were free to do whatever they chose without reference to the third party, who had no financial stake in the Company. In the event of dissolution, the Appellant maintained that Albert Watson would share in the distribution of assets. However the evidence was clear that he had put no money into the Company and had received no money from the Company over the years.

[16] In point of fact, although it was not realized by the parties beforehand it became apparent in the course of the hearing that no shares had ever in fact been issued to any of the purported shareholders. The signing of the share certificates and the minutes leading to their issuance had been overlooked at the time of incorporation. The same situation prevailed with respect to their appointment as Directors. All three purported to be Directors of the Company but the minutes of their appointment had never in fact been signed. However all the filings of annual returns at the provincial corporate registry showed the three of them as both shareholders and directors. In face of the evidence that this was the original plan and that they had conducted themselves in this manner over the years the Court was of the view that in fact they had held the necessary meetings to effect both the issue of their shareholdings and their appointment as Directors of the Company.

[17] That having been said, it was nevertheless evident that the role of Albert Watson was not one of shareholder, but rather one of adviser and friend. Any interest he had was to be exercised on behalf of his friend and neighbour, the Appellant and his son and not to his own advantage. He was more of a trustee in this respect.

[18] In fact no formal meetings ever did take place although from time to time the three of them did get together around a kitchen table to discuss certain matters or contracts that they were taking on. It is clear that Albert Watson received no financial reward for this. He received no remuneration at all for his directorship and the shareholder's loans, set up in the books of the Company, all belonged to the Appellant and his son.

Conclusion

[19] Over the years it is clear that the Appellant together with his son treated the business as their own. They were in reality contracting with themselves, simply using the third party as an adviser in case of dispute between them. There was no separate economic interest existing with the third party, as a result of which one could conclude in any way that the Appellant was at arm's length from the Company. To all intents and purposes, the Appellant and his son controlled the Company and were contracting with themselves. I am not of the view that the Minister was in error in coming to the decision that he did, that this employment was not insurable.

[20] I do note however that it has become confusing for the Appellant in that in previous years the same situation prevailed and was apparently accepted by Revenue Canada. The Appellant has become further confused by the fact that during the time that his benefits have been curtailed under the claim in question, Revenue Canada has been insisting that he continue to pay the premiums for this and later years. As his counsel pointed out the state cannot have it both ways. In my view, the correct way is that he is not entitled to benefits in these circumstances and further that both he and the Company are entitled to a refund of any premiums so paid.

[21] In the event the appeal is dismissed.

Signed at Ottawa, Canada, this 13th day of August 1998.

"M.H. Porter"

D.J.T.C.C.