Date: 19980623
Docket: 96-2207-UI
BETWEEN:
MONA AL-MOSAWER,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1] This is an appeal from a decision of the respondent that
the appellant’s employment for the payer, Rafedain Inc.
(“Rafedain”), for the period of January 2, 1991
to June 7, 1991 was excluded from insurable employment by
virtue of paragraph 3(2)(c) of the Unemployment
Insurance Act (the “UIA”).
[2] In rendering his decision, the respondent relied, inter
alia, on the facts stated in subparagraphs a) to n) of
paragraph 7 of the Reply to the Notice of Appeal. These
subparagraphs read:
a) during the said period, the Payer operated a gift shop
situated at 1482 Ste-Catherine west in Montreal;
b) Ahmad Kazzaz owned 100% of the shares of the Payer;
c) the Appellant is Ahmad Kazzaz’ spouse;
d) during the said period, the Appellant worked as a
saleswoman in the gift shop;
e) during the said period, the Appellant worked approximately
50 hours per week;
f) during the said period, the Appellant was paid 500$ by
week;
g) in this kind of business, a salesman is usually paid the
minimum rate salary;
h) in June 1991, the Payer sold the gifts shop business to
Dhia Salman;
i) during summer 1991, the Payer started another gift shop
situated at 1126 Ste-Catherine west in Montreal;
j) in May 1991, the Payer had engaged 3 other employees to
work at 1126 Ste-Catherine west;
k) the Payer’s financial statement for the period ending
December 31, 1991 shows business losses of 43 000$;
l) the Appellant is related to the Payer within the meaning of
the Income Tax Act;
m) the Appellant is not dealing with the Payer at arm’s
length;
n) having regard to all circumstances of the employment,
including the remuneration paid, the terms and conditions, the
duration and the nature and importance of the work performed, it
is not reasonable to conclude that the Appellant and the Payer
would have entered into a substantially similar contract of
employment if they had been dealing with each other at
arm’s length.
[3] Counsel for the appellant admitted subparagraphs c), d),
e), h) and j), ignored subparagraph k) and denied all other
subparagraphs.
[4] The appellant, who claimed to have had some experience as
a saleswoman in Kuwait testified that she was hired to work in a
souvenir shop located at 1482 Ste-Catherine West in
Montréal, Quebec. She would have been hired by the
accountant, Mr. Azam El-Hafed, and by Mr. Khadem Waly[1] whom she described
as the owner of the store.
[5] According to her testimony she worked from January 2,
1991 up until June 7, 1991 when the business was sold. She
said that she was working six days a week for a salary of $2,000
gross or $1,800 net a month paid in cash. Nevertheless, her
record of employment[2] signed by a Mr. M. Al-Saadi, an individual who
would have been hired by the payer, Rafedain, a few days before
she was laid-off indicates a weekly salary of $500 for
23 weeks of work and total earnings of $10,000. Lack of work
is the reason indicated for the end of employment. The appellant
said that she did not know Mr. Al-Saadi and had never met
him at the store. The application for unemployment insurance
benefit completed by the appellant[3] also mentions a salary of $500 a week
for 50 hours of work from January 2, 1991 to
June 7, 1991. The appellant said that although she was told
that she could continue in her employment after the sale of the
business, she was laid-off at that time as she was not needed
anymore.
[6] The appellant said that Mr. Waly is married to her
husband’s sister and currently lives in Teheran, Iran. In
the fall of 1990, he came to Canada as a visitor. When the shop
opened in January 1991 he was there as was the accountant to
supervise the day-to-day operations up until June 1991 when the
business was sold. Rafedain was constituted in 1990 and the
appellant’s husband, Mr. Ahmad Kazzaz, owned 100% of
the shares. However, the appellant said that her husband had no
financial interest in the company as he was acting simply as a
nominee for Mr. Waly who had invested the money. Also, as Mr.
Waly had only a visitor status in Canada she implied that he
could not invest under his own name. The appellant said that her
husband did sign the cheques for Rafedain but that he never
worked at the store in Montréal as he was, from April 1991
to April 1992, working in Toronto.
[7] Mr. Kazzaz also testified that he had no interest in the
payer Rafedain and that he was only acting for his
brother-in-law, Mr. Waly, who had invested all the money.
[8] A document entitled “Declaration of
Mandate”,[4]
signed by both of them was submitted in evidence. In that
document, Mr. Kazzaz who is described as a
“prête-nom” without any financial interest is
instructed to proceed to the incorporation of Rafedain, to engage
an attorney for that purpose as well as an accountant to look
after the administration of the company. As a
“prête-nom” Mr. Kazzaz was not to be paid
and had no other duty than to sign all the necessary documents
and “permit the attorneys, accountants and managers to
operate and manage any future investments to be made by the
Company”. He was also given the right to change these
people or “any employees” and “to fire and
engage and generally to act as an unpaid overseer as ... [Mr.
Waly’s] prête-nom”.
[9] Mr. Kazzaz admitted that he signed cheques and other
documents for Rafedain. Although he was working in the Toronto
area during part of the period in issue, he would come
periodically to Montréal. He also completed the corporate
tax returns in which it is indicated that he is a 100%
shareholder of the corporation described as a Canadian controlled
private corporation. He said that he does not know whether the
financial statements prepared by Mr. El-Hafed in which a
loss of $43,390 is reported for the 1991 taxation year is exact.
He does not know why Mr. Al-Saadi who was hired to work a
few days before the appellant was laid-off in June 1991 would
have signed her record of employment. He simply stated that
Mr. Al-Saadi was hired to work at the second location
operated by Rafedain, at 1126 Ste-Catherine West.
[10] Mrs. Sonia Dion who investigated in 1992 a potential
fraud by a group of individuals testified that she had found that
some records of employment for the minimum number of
20 weeks or a little more were often signed by employees for
one another. Some of these individuals would have been hired to
replace others that would have been laid-off around the same
time. According to Mrs. Dion, these individuals were highly
paid people working in very small gift or souvenir shops.
Mr. Kazzaz was on Mrs. Dion’s list.
[11] Mrs. Dion, accompanied by a senior investigator,
Mr. Desgroseillers, interviewed Mr. Kazzaz on
November 2, 1993. A record of the interview[5] was completed by Mrs. Dion.
Mr. Kazzaz refused to sign it as he claimed it was
fabricated and did not represent what he had said during the
interview.
[12] Mrs. Dion also stated that she never met with the
appellant as it proved impossible to get an appointment with her.
She did confirm however that the appellant was not involved in
any of the other cases under investigation.
[13] Mr. Jean-Pierre Houle, appeals officer for the
respondent said that he had made a complete revision of the file
but that he had no contact with the appellant. Counsel for the
appellant, Mr. Lawrence Diner, whom he had contacted by telephone
told him that there was no need to meet with the appellant and
that she would call him. Mr. Houle said that she did, at one
point, leave a message that she would call back but she never
did. For her part, the appellant stated that she had phoned twice
and left a message but that no one ever called her back.
[14] In his analysis of the case, Mr. Houle said that he had
obtained information from both, Mr. Diner and Mr. Kazzaz,
particularly on the fact that although the company’s shares
were in the latter’s name he had only invested his
brother-in-law’s money.
[15] As to the appellant’s remuneration, Mr. Houle said
that he was in possession of her record of employment indicating
23 weeks at $500 a week but total earnings of $10,000. The
T-4 information slip completed by the payer also showed total
earnings of $10,000 but only $225 of income tax deducted at
source. Obviously, something was wrong as figures simply did not
add up.
[16] Mr. Houle was also concerned about the level of earnings
for a salesperson in a gift or souvenir shop of the same type as
the one operated by the payer. After personally investigating the
matter by visiting four such shops or boutiques on Ste-Catherine
Street he came to realize that it was invariably the minimum wage
that was offered for salespersons in that type of shop or
boutique.
[17] As the appellant had been paid $10 an hour, almost twice
the minimum wage at that time, and, as her husband was the sole
shareholder of the company, Mr. Houle concluded that the
appellant’s employment was not insurable mainly because he
considered that her salary was too high for 1991. The fact that
she was laid-off during the high season, just after another
employee who had signed her employment record was hired, was also
considered.
[18] Counsel for the appellant basically argued that the
appellant held an insurable employment because she performed many
services for a stated remuneration of $2,000 a month and was
under the control or supervision of Mr. Waly, the real owner
who had invested in the business and who took an active part in
its management for the period in issue.
[19] According to counsel, the fact that the company made
losses does not prove that the salary was too high. He also
argued that the level of salary is a question to be determined
solely between the employer and the employee and that Revenue
Canada has nothing to do with that. Moreover, counsel for the
appellant argued that there was no indication that the appellant
was not dealing at arm’s length with the payer. In his
additional written submissions after the hearing he emphasized
this point by referring to Black’s Law Dictionary in
relation to what is described as factual non-arm’s length
situations. Then referring to paragraph 251(2)(a) of
the Income Tax Act (the “ITA”), counsel
for the appellant acknowledged that individuals connected by
blood relationship, marriage or adoption are defined to be
related persons and therefore deemed not to deal with each other
at arm’s length, but stated the following at paragraph 12
of his submissions:
This word deemed creates a rebuttable presumption, which the
facts of this case support.
[20] Counsel for the appellant then stated the following at
paragraph 13 of his submissions:
13. Although legally or according to our usage of the terms,
Khadem Waly and the Appellant are in-laws, but in-laws in a very
restrictive sense. The Appellant and Khadem Waly are not blood
relatives and never were. They are only the respective spouses of
a brother and sister, neither of whom are directly involved in
the present litigation, Ahmad Kazzaz being employed elsewhere and
Ahmad Kazzaz’s sister being in the Middle East.
[21] Counsel for the respondent’s basic argument is that
the appellant failed to bring sufficient evidence to demonstrate
that the respondent acted capriciously or in an arbitrary manner
when exercising the discretion conferred in subparagraph
3(2)(c)(ii) of the UIA. The argument is based on
the decisions of the Federal Court of Appeal in Tignish Auto
Parts Inc. v. M.N.R., July 25, 1994, A-555-93 (C.A.F.) and
Ferme Emile Richard et Fils Inc. v. M.R.N. et al., (1995)
178 N.R. 361.
[22] According to counsel for the respondent, the appellant
was related to the payer because she was related to her husband
who controlled Rafedain (paragraph 251(2)(a) and
subparagraphs 251(2)(b)(i) and (iii) of the ITA).
According to paragraph 251(1)(a) of the ITA, the
appellant and the payer were deemed not to deal with each other
at arm’s length and, as they were related, the Minister was
empowered to exercise the discretion conferred by subparagraph
3(2)(c)(ii) of the UIA.
[23] Alternatively, counsel for the respondent argued that the
appellant was also related to Rafedain if it was Mr. Waly who
controlled the corporation. She submitted that the appellant was
first related to her brother or sister under paragraph
251(6)(a) of the ITA and that she was also related
to her brother-in-law under 252(2)(b)(ii) of the same act.
As the appellant was related to Mr. Waly who would have been the
individual who controlled Rafedain if one is to accept the
declaration of mandate,[6] the appellant would then also be related to Rafedain
under subparagraph 251(2)(b)(iii) of the ITA. The
decision of this court in the case of Cheryl Lemon v.
M.N.R., 94-1101(UI), is cited in support of that argument.
The situation would thus be the same as if the appellant had been
related to Rafedain because her husband, Mr. Kazzaz, would have
had control of the corporation.
[24] However, counsel for the respondent, relying on sections
1451 and 1452 of the Civil Code of Quebec and on the
Quebec Court of Appeal decision in the case of Deputy Minister
of Revenue (Quebec) v. Zaidi et al., 97 DTC 5549 ((1996) A.Q.
no. 2969), submitted that third parties in good faith may or may
not avail themselves of an apparent contract or a counter letter.
She maintained that the Minister acted correctly in determining
that it was Mr. Kazzaz who controlled Rafedain, based on the
information provided by Mr. Kazzaz in the T-2 tax return
filed for the corporation and signed by him.
[25] First, I have to bring some clarification with respect to
the application of some provisions of the ITA referred to
by both counsel.
[26] The period of employment in issue in this appeal is from
January 2, 1991 to June 7, 1991. By virtue of
subparagraphs 3(2)(c)(i) and (ii) of the UIA the
question of whether persons are not dealing with each other at
arm’s length and the question of whether the employer and
the employee are related is to be determined in accordance with
the provisions of the ITA. This means, in my opinion, in
accordance with these provisions as they applied during the
period in issue. Subparagraph 252(2)(b)(ii) referred to by
counsel for the respondent does not have any application as that
provision applies only after 1992 (see: 1993 S.C. c. 24
subsection 140(1)). For the period in issue, the applicable
provision was paragraph 252(2)(a) of the ITA.
[27] Now, as to the deeming provision found in subparagraph
251(1)(a) of the ITA that “related persons
shall be deemed not to deal with each other at arm’s
length”, I will observe that it has long been established
that the word “deemed” used in paragraph
251(1)(a) created a non-rebuttable presumption.
[28] E.A. Driedger in “Construction of Statutes”
(2nd ed., Toronto, Butterworths, 1983) at page 25 states
that:
The decisions indicate that where a deeming clause states
the legal consequences that are to flow from described
circumstances, it is prima facie conclusive; but where
it merely states a fact that is to be presumed in described
circumstances, it is prima facie rebuttable.
(emphasis added)
[29] Early decisions of the Income Tax Appeal Board in
Francis v. Minister of National Revenue, 51 DTC 329,
No. 25 v. Minister of National Revenue,
51 DTC 331; Western Printers Association Ltd. v.
Minister of National Revenue, 51 DTC 345; No. 116 v.
M.N.R., 53 DTC 344; Benedet v. M.N.R., 54 DTC 51;
Sibbitt v. M.N.R., 54 DTC 65, all indicate one way or
another that the expression “deemed not to deal with each
other at arm’s length” is “inflexible”
and means “conclusively considered”.
[30] Later and more generally, in Scott v. M.N.R., 66
DTC 306 (T.A.B.), at page 308, it was stated:
Deemedseems to be a favourite verb in income
tax legislation. The word has been held to be conclusive in its
import and immune to any attempted modification of its
effect. Its use in the Act affords another instance of the
proposition that black may be white, if Parliament so
legislates.
(emphasis added)
[31] In The Queen v. Alroy Industries Ltd., 76 DTC
6220, Mr. Justice Décary of the Federal Court - Trial
Division stated at page 6224:
I do not believe that in the Income Tax Act the word
“deemed” created a presumption that can be
rebutted because, in my view, to say so would amount to
assert that something that is deemed to be one thing might very
well not be so for income tax and I cannot agree with that
contention unless there are provisions to that import.
(emphasis added)
[32] In Kushnir et al. v. M.N.R., 85 DTC 280 (T.C.C.),
at page 283, Cardin, T.C.J. found that:
The deeming provision of paragraph 251(1)(a), ...,
does state the legal consequences of transactions between related
persons in that, for tax purposes, they shall be deemed not
to deal with each other at arm’s length.
(emphasis added)
[33] He then relied on Mr. Justice Décary’s
decision in the Alroy Industries Ltd. case (supra)
and concluded that:
[T]he “deeming provision” of paragraph
251(1)(a) ... cannot be rebutted and is a conclusive
presumption ....
[34] In the present case, it is clear that the appellant was
related to her employer, Rafedain. This is so whether or not her
husband, Mr. Kazzaz, controlled the company. If one
considers that he did, it is easy to conclude that they were
related by application of paragraph 251(2)(a) and
subparagraphs 251(2)(b)(i) and (iii) of the ITA.
According to paragraph 251(1)(a), the appellant was
related to Mr. Kazzaz because they were married together. By
virtue of subparagraph 251(2)(b)(i), Rafedain and
Mr. Kazzaz would have been related because he would have
been the person who controlled the company. Finally, applying
subparagraph 251(2)(b)(iii) Rafedain and the appellant
would have been related because she was related to the person who
would have controlled the company.
[35] Now, if one considers that Mr. Waly was the true owner of
the shares and that Mr. Kazzaz acted only as a mandatory or
a “prête-nom” the end result is the same:
Rafedain and the appellant would still have been related. First,
according to paragraph 251(2)(a), individuals are said to
be related to each other when they are connected by blood
relationship, marriage or adoption. According to paragraph
251(6)(a), persons are connected by blood relationship if
one is the brother or sister of the other. Paragraphs
252(2)(a) and (d) as they read in 1991 prescribed
that in the ITA “brother” includes
brother-in-law and “sister” includes sister-in-law.
Mr. Waly being Mr. Kazzaz’ brother-in-law (having
married his sister) would then be considered connected to him by
blood relationship (as a brother would be) according to paragraph
251(6)(a). Then, applying paragraph 251(6)(b) the
appellant and Mr. Waly would be considered connected by
marriage because she was married to a person (Mr. Kazzaz)
connected to the other (Mr. Waly) by a blood relationship. Being
connected to Mr. Waly by marriage the appellant would thus have
been related to him according to paragraph 251(2)(a). As
she would have been related to the person controlling Rafedain
the appellant would finally have been related to Rafedain by
application of subparagraph 251(2)(b)(iii) of the
ITA. As explained before, such persons are conclusively
considered not to deal with each other at arm’s length by
virtue of paragraph 251(1)(a) of the ITA.
[36] Where the employer and the employee are not dealing at
arm’s length the employment is considered excepted
employment and thus not insurable according to paragraph
3(2)(c) and subsection 3(1) of the UIA except
in the circumstances described in
subparagraph 3(2)(c)(ii) of the same act. This
provision reads:
(ii) where the employer is, within the meaning of that Act,
related to the employee, they shall be deemed to deal with each
other at arm’s length if the Minister of National Revenue
is satisfied that, having regard to all the circumstances of the
employment, including the remuneration paid, the terms and
conditions, the duration and the nature and importance of the
work performed, it is reasonable to conclude that they would have
entered into a substantially similar contract of employment if
they had been dealing with each other at arm’s length.
[37] In Ferme Emile Richard (supra), Mr. Justice
Décary of the Federal Court of Appeal stated the following
at pages 362-363:
As this Court recently noted in Tignish Auto Parts Inc. v.
Minister of National Revenue, July 25, 1994, A-555-93,
F.C.A., not reported, an appeal to the Tax Court of Canada in a
case involving the application of s. 3(2)(c)(ii) is not an appeal
in the strict sense of the word and more closely resembles an
application for judicial review. In other words, the court does
not have to consider whether the Minister’s decision was
correct: what it must consider is whether the Minister’s
decision resulted from the proper exercise of his discretionary
authority. It is only where the court concludes that the Minister
made an improper use of his discretion that the discussion before
it is transformed into an appeal de novo and the court is
empowered to decide whether, taking all the circumstances into
account, such a contract of employment would have been concluded
between the employer and employee if they had been dealing at
arm’s length.
[38] In Minister of National Revenue v. Bayside Drive-In
Ltd., (1998) 218 N.R. 150, the Federal Court of
Appeal further explained the role of the Tax Court of Canada when
a 3(2)(c)(ii) determination is in issue in the following
terms at page 156:
[23] The Tax Court’s role when hearing an appeal
pursuant to s. 70(1) is to perform a review function. Because a
determination by the Minister under s. 3(2)(c)(ii) is pursuant to
a discretionary power, accepted judicial principles require
deference to the discretion which the Minister has exercised,
unless it has been shown on a balance of probabilities that he
exercised that discretion in a manner contrary to law. Only
then is the Tax Court entitled to make an independent assessment
of the evidence in order to review the correctness of the
Minister’s determination. At that stage, there is no new
hearing and the parties do not start afresh or anew in the sense
of calling their evidence and presenting their arguments again.
Rather, the Tax Court must proceed with its independent
assessment of the evidence on the basis of the record already
before it. Thus, while the Tax Court’s review of the
evidence at the second stage of the inquiry is de novo, the
appeal itself is not, and cannot be transformed into, a trial de
novo.
(emphasis added)
[39] The condition that the employer and employee be related
to one another is a condition precedent to the exercise of the
ministerial discretion under subparagraph 3(2)(c)(ii) of
the UIA not the subject matter of that discretion. Given
the circumstances of the present case, it is not really essential
to establish with absolute certainty in what manner the appellant
and her employer, Rafedain, were really related because one thing
remains: as a matter of law they were related to each other one
way or another. The condition precedent to the exercise of the
discretion conferred upon the respondent by subparagraph
3(2)(c)(ii) of the UIA has thus been satisfied
whether or not the Minister was right in considering that they
were related because of the appellant’s husband, Mr.
Kazzaz.
[40] With respect to the exercise of that discretion, the
testimony of Mr. Houle, as well as his report[7], indicates that he
conducted his examination on the circumstances of the
appellant’s employment seriously and with the information
he was provided with although he could not meet with or talk to
the appellant herself. In my view, the facts before him and
particularly the level of the appellant’s salary compared
to the minimum wage rate paid in similar shops, were sufficient
to make a determination. Nothing in the evidence presented at
trial convinces me otherwise. In fact, that evidence simply does
not show, on the balance of probabilities, that the respondent
acted in a manner contrary to law or made an improper use of the
discretion conferred by subparagraph 3(2)(c)(ii) of the
UIA. Such a conclusion puts an end to the matter as I am
not, according to the decisions of the Federal Court of Appeal in
Tignish Auto Parts (supra), Ferme Emile
Richard (supra), M.N.R. v. Jencan Ltd., (1997)
215 N.R. 352 (T.C.C.), Bayside Drive-In Ltd.
(supra) authorized to go further and determine whether the
respondent was right or wrong in reaching the conclusion he
did.
[41] The appeal is dismissed and the decision of the Minister
is confirmed.
Signed at Ottawa, Canada, this 23rd day of June 1998.
“P.R. Dussault”
J.T.C.C.
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