Green v. M.N.R., docket 97-204-UI

Date: 19980520

Docket: 97-204-UI

BETWEEN:

LORNA GREEN,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

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

[1] This appeal was heard at Toronto, Ontario on February 26, 1998.

[2] The Appellant appeals the determination of the Minister of National Revenue (the "Minister") dated December 12, 1996 that her employment with 150307 Canada Ltd., from March 28 to July 29, 1994 was not insurable employment under the Unemployment Insurance Act (hereinafter referred to as the "Act”). The reason given for the determination was that:

“Having regard to all the circumstances of the employment including the remuneration and the duties, the Minister has concluded that the parties would not have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length.”

The decision was said to be based on paragraph 3(2)(c) of the Act.

[3] The established facts reveal that the Company operated a business of wilderness camps and home study programs for students in a remote area of Nova Scotia. At the material time the shareholding in the company was follows:-

Lorna Green (the Appellant): 13%

David Knight ( Husband of the Appellant) 21%

Mother of Appellant 45%

Others 21%

[4] Thus, pursuant to section 3 of the Act and subsection 251(1) of the Income Tax Act, as related persons the Appellant and the Company are in law deemed not to deal with each other at arm’s length. Accordingly the employment in question is, subject to the exception contained in subparagraph 3(2)(c)(ii) of the Act, categorized as “excepted employment”, that is to say it is not employment which triggers the payment of unemployment insurance benefits upon its termination. The Minister has determined that the employment does not fall within the exception and the Appellant has appealed that decision.

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”. Spouses as well as 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, which governs the situation. 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 harshness of this situation has however been tempered by subparagraph 3(2)(c)(ii) of the Act, which provides for such employment between related persons to be deemed to be at arm’s length and thus in turn to be treated as insurable employment, if it meets all the other provisions, where the Minister is satisfied having regard to all the circumstances (including those items that are set out) that it is reasonable to conclude that they would have entered into a substantially similar contract if they had (in fact) been dealing with each other at arm’s length. It may be helpful to reframe my understanding of this section. For people related to each other the gate is closed by the Act to any claim for insurance benefits unless the Minister can be satisfied that in effect the employment arrangement is the same as that which unrelated persons, that is persons who are clearly at arm’s length, would have made. If it is a substantially similar contract of employment, Parliament has deemed it to be only fair that it should be included in the scheme. However the Minister is the gatekeeper. Unless he is so satisfied the gate remains closed and the employment remains excepted and the employee is not eligible for benefits.

[7] Section 61 of the Act deals with appeals to and determination of questions by the Minister. Subsection 61(6) requires that

“...the Minister shall, with all due despatch, determine the question raised by the application ....”

[8] Thus the Minister has no discretion whether or not to decide the question. He is required by law to do so. If he is not satisfied, the gate remains closed and the employee is not eligible. If however he is satisfied, without more ado or any action on the part of the Minister (other than notification of the decision) the employee becomes eligible for benefits, provided he is otherwise qualified. It is not a discretionary power in the sense that if the Minister is satisfied he may then deem the employment to be insurable. He must “determine the question” and depending on that determination the law deems the employment to be either at arm’s length or not at arm’s length. In this sense the Minister has no discretion to exercise in the true sense of the word, for in making his decision he must act quasi-judicially and is not free to chose as he pleases. The various decisions of the Federal Court of Appeal on this issue reveal that the same test applies as to a myriad of other officials making quasi-judicial decisions in many different fields. See Tignish Auto Parts Inc. v. M.N.R., 185 N.R. 73, Ferme Émile Richard et Fils Inc. v. M.N.R., 178 N.R. 361, Attorney General of Canada and Jencan Ltd., (1997) 215 N.R. 352 and Her Majesty the Queen and Bayside Drive-in Ltd., (1997) 218 N.R. 150.

[9] The function of this Court then, upon appeal, is to review the decision of the Minister and decide whether it was arrived at lawfully that is in accordance with the Act and with the principles of natural justice. In the case Her Majesty the Queen v Bayside et al., supra, the Federal Court of Appeal laid out certain matters which should be considered by this Court when hearing these appeals. These were: (i) whether the Minister acted in bad faith or for an improper purpose or motive, (ii) whether the Minister failed to take into account all of the relevant circumstances as especially required by subparagraph 3(2)(c)(ii) or (iii) whether the Minister took into account an irrelevant factor.

[10] The Court went on to say:

"It is only if the Minister made one or more of these reviewable errors that it can be said that his discretion was exercised in a manner contrary to law, and ... the Tax Court Judge would be justified in conducting his own assessment on the balance of probabilities as to whether the respondents would have entered into substantially similar contracts of service if they had been at arm’s length.”

[11] It has been submitted by the Appellant that the stated facts upon which the Minister relied in the Reply to the Notice of Appeal were in many cases wrong or misapprehended. Again I remind myself, when reviewing these submissions, that it is not for this Court to substitute its opinion of the evidence for that of the Minister. However, if his or her manner of arriving at the decision was unlawful in the context of the judgments set out above, those affected parts of the stated facts may be disregarded and I must then consider whether that which is left affords justifiable grounds for the decision. If those grounds, standing alone, are sufficient for the Minister to form a decision, albeit that the Court may not agree with it, the decision must stand. If on the other hand there is no basis left upon which the Minister might lawfully make such a decision, from an objective and reasonable point of view, then such decision may be struck down and the Court can consider the evidence before it on appeal and make its own decision. In summary then, if there are sufficient facts before the Minister for his decision, it is his or her determination to make and if he or she is “not satisfied” it is not for this Court to substitute its view of those facts and say he or she should have been satisfied. Similarly, if he or she was satisfied it is not for this Court to substitute its view that he or she should not have been satisfied (an unlikely scenario in any event). Only if the decision is reached in an improper manner and it is unreasonable, from an objective point of view, on the basis of the facts which were properly before the Minister, may the Court interfere.

[12] I am fortified in this approach by a number of decisions of various Courts of Appeal across the country and the Supreme Court of Canada in related decisions concerning the issue of various processes under the Criminal Code, which subsequently came to be reviewed by the Courts and are in my view analogous to the present situation. The standard of review of the validity of a search warrant was set out by Cory, J.A. (as he then was) in Times Square Book Store, Re (1985) 21 C.C.C. (3d) 503 (C.A.), where he said that it was not the role of the reviewing judge to look at or consider the authorization of a search warrant de novo and it was not open to the reviewing judge to substitute his or her own opinion for that of the issuing judge. Rather, on review, the first issue to be decided was whether or not there was evidence upon which a justice of the peace, acting judicially, could determine that a search warrant should be issued.

[13] The Ontario Court of Appeal reiterated and expanded upon this point of view in R. v. Church of Scientology of Toronto and Zaharia (1987) 31 C.C.C. (3d) 449 C.A. leave to appeal refused. In suggesting that the reviewing Court look at the “totality of the circumstances” the Court said at 492:

"Obviously if there is not such evidence to provide a basis for such a belief (that a criminal offence had been committed) it cannot be said that in those circumstances the justice should be satisfied. There will, however, be cases where such evidence (showing reasonable grounds) does exist and the justice could be satisfied but where he or she is not satisfied and does not exercise his or her discretion in favor of issuing a search warrant. In these circumstances, the reviewing judge must not say that the justice should have been satisfied and should have issued the warrant. Similarly, if the justice in such circumstances says that he or she is satisfied and issues the warrant, the reviewing judge must not say that the justice should not have been so satisfied.”

[14] The Supreme Court of Canada endorsed this approach in R. v. Garofoli (1990) 2 S.C.R. 1421. The late Mr. Justice Sopinka, when dealing with the review of the issue of an authorization to wiretap, then said:

“..While a judge exercising this relatively new power need not comply with the Wilson criteria, he should not review the authorization de novo. The correct approach is set out in the reasons of Martin J.A. in this appeal. He states...

If the trial judge concludes that, on the material before the authorizing judge, there was no basis upon which he could be satisfied that the pre-conditions for the granting of the authorisation exist, then, it seems to me that the trial judge is required to find that the search or seizure contravened s. 8 of the Charter.

The reviewing judge does not substitute his or her view for that of the authorizing judge. If, based on the record which was before the authorizing judge as amplified on the review, the reviewing judge concludes that the authorizing judge could have granted the authorization, then he or she should not interfere. In this process, the existence of fraud, non-disclosure, misleading evidence and new evidence are all relevant, but, rather than being a prerequisite to review, their sole impact is to determine whether there continues to be any basis for the decision of the authorizing judge."

[15] This approach appears to have been adopted by almost every appellate court in the country. (See R. v. Jackson (1983) 9 C.C.C. (3d) 125 (B.C. C.A.); R. v. Conrad et al. (1989) 99 A.R. 197; 79 Alta. L.R.; (2d) 307; 51 C.C.C. (3d) 311 (C.A.); Hudon v. R. (1989) 74 Sask. R. 204 (C.A.); and R. v. Turcotte (1988) 60 Sask. R. 289; 39 C.C.C. (3d) 193 (C.A.); R. v. Borowski (1990) 66 Man. R. (2d) 49; 57 C.C.C. (3d) 87 (C.A.); Bâtiments Fafard Inc. et autres c. Canada et autres (1991) 41 Q.A.C. 254 (C.A.); Société Radio-Canada v. Nouveau-Brunswick (Procureur général) et autres (1991) 104 N.B.R. (2d) 1; 261 A.P.R. 1; 55 C.C.C. (3d) 133 (C.A.); R. v. Carroll and Barker (1989) 88 N.S.R. (2d) 165; 225 A.P.R. 165; 47 C.C.C. (3d) 263 (C.A.); R. v. MacFarlane (K.R.) (1993) 100 Nfld. & P.E.I.R. 302; 318 A.P.R. 302; 76 C.C.C. (3d) 54 (P.E.I. C.A.). It seems to me most relevant to a review of the Minister’s determination, which is itself a quasi-judicial decision.

Stage 1 - Analysis of the Minister’s decision

[16] The stated facts upon which the Minister relied are set out in the Reply to the Notice of Appeal and the Appellant takes issue with a number of them. However before dealing with those issues it is perhaps worthwhile to make a number of general observations and put this matter into context. This case, if nothing else, has a number of strange features to it.

[17] The Appellant gave evidence on her own behalf. She also called as a witness a certain Dr. Elliott, whose two sons attended one year of schooling with the Company and also a number of summer camps. Her last witness was Graham Hitchins, who to the best of his ability prepared some accounts for the Company covering the period in question. Donald Knight was not called as he had gone missing in September 1994 and has not been seen or heard from since. It is apparent that the original decision made in this case from which the Appellant appealed to the Minister, was that of W.A. Fulton, Director of the Sydney, Nova Scotia, Tax Services Office, Revenue Canada on June 24, 1996. That decision was as follows:-

“Your work in Canada, with 150307 Canada Limited for the period under review cannot be considered as insurable employment as you were not an employee performing services under a contract of service.”

[18] This was followed in the letter with various reasons for the decision and a comment that the books of the Company were not available as Donald Knight was not available to be interviewed and thus they could not verify whether or not she was employed under a contract of service.

[19] The decision appears to be somewhat based upon an internal memo, produced to the Appellant pursuant to the Privacy Act and filed with the Court as Exhibit A-1. The conclusion in this memo was that:

“...a contract of service was considered not to be in existence as detailed above and that the objective of the case was to qualify the worker for U.I. In other words it appears to be a Sham.”

Many of the facts upon which the Minister was said to rely are in the same vein, accompanied as they are by words such as “reportedly” (4(a) and 4(b)) “allegedly” (4(b)) and “the purported engagement of the Appellant" (4(m)). At the conclusion of the Appellant's evidence, counsel for the Minister abandoned that position and I am of the view that she was correct in doing so. It was an untenable position in face of the evidence.

[20] As a further preliminary matter, with which I feel I must deal, there was put before me a decision of my late colleague the Honourable Judge Dubienski, who heard a similar appeal from the Appellant on the March 13, 1996 relating to previous years of operation of the Company. After remarking on the general lack of concise information regarding the finances of the Company the learned judge dismissed the appeal. With respect, I do not feel bound to necessarily follow that decision as it related to a different year of operations and considerably more evidence about the Company, its operation and its finances has been put before me than was before him in the previous appeal.

[21] In the present appeal the Appellant dealt with the stated facts as follows:

Item 4(a) "The payor operated a business in a remote part of Nova Scotia which reportedly held summer camps for students in arts, crafts and folklore and organized various trips.”

[22] The Appellant says this is correct as far as it goes. She is uncomfortable with the word "reportedly". The business also provided academic home study for a number of students throughout the whole school year. Dr. Elliott’s evidence clearly bears out that it was legitimate education.

Item 4(b) "The Appellant was reportedly hired by the Payor to do script writing and lead educational trips for teenagers.”

[23] The Appellant says this is incorrect. In 1994 there was nothing to do with script writing. Further she went on no educational trips in this year. Her work, as corroborated by her written contract, entered as Exhibit A-4, consisted of tutoring Earthways, French, Natural Sciences and some creative writing in the home schooling programme from March 28 to June 10, 1994. She did twenty hours per week at $10.00 per hour. From June 13 to July 22, 1994 she worked full time preparing and setting up for the summer camp at $650.00 per week. From July 25, to July 29, 1994 she worked part time at $10.00 per hour for twenty hours. She produced a number of her pay cheques. Others were missing, apparently lost in the confusion of her husband’s disappearance. Thus the extent of her duties was lost on the Minister, as her work, what it involved and the hours worked, was not correctly put before him.

[24] Items 4(c) and 4(d) dealing with the shareholding and the spousal relationship are correct.

[25] Item 4(e):

"Records indicate the Appellant was the President of the Payor."

The Appellant says this is incorrect, as she was not the President in 1994.

[26] Item 4(f):

"the Appellant was experienced and was not controlled or supervised by the Payor."

The Appellant gave considerable evidence about how she carried out her duties and how they were set and supervised by her husband. In view of the fact that the Minister had the wrong work before him for consideration, clearly he was unable to give proper consideration to how her duties were controlled and supervised. To some extent also this item seems aimed at supporting the contention that she was not employed, a position now abandoned by the Minister.

[27] Item 4(g):

"in 1994 the Respondent's records show only two T4's were issued to employees of the Payor, one to the Appellant and one to her spouse."

The Appellant says she has no knowledge of what T4's were issued.

[28] The Appellant agrees with item 4(h) which relates to her spouse going missing in September 1994

[29] Item 4(i) refers to the decision of Dubienski, J., with which I have already dealt.

[30] Items 4(j) and (k) read:

"(j) Corporate tax returns filed by the Payor with the Respondent indicates the following gross income and net profits (Loss):

Year ended Gross Income Net Profit (Loss)

Aug. 31/94 $41,000.00 ($1,000.00)

Aug. 31/93 $29,000.00 ($12,000.00)

Aug. 31/92 $26,000.00 ($11,000.00)

(k) the Payor did not have the necessary gross sales or net profits to hire both the Appellant and the spouse;"

[31] The 1994 return was prepared by the witness Hitchins, to the best of his ability, with what he had to go on. The Appellant says that these figures show that slowly the business was becoming viable. It had done better each year and certainly had sufficient funds to pay the salaries, which it did.

[32] Item 4(l) "allegedly records were kept by the Payor including a minute book, ledgers, payroll journals but no records were provided to the Respondent by the Payor or the Appellant". The Appellant agrees that many of the records went missing in the confusion following her husband going missing. She also said that whilst she was away her house was broken into and vandalised.

[33] Item 4(m) reads:

"(m) the purported engagement of the Appellant by the Payor during the relevant period allowed the Appellant to qualify for unemployment insurance benefits, rather than being based on any business consideration or need;"

I have already dealt with the words “purported engagement”. The Minister has conceded this point and the rest of the paragraph is simply an opinion not fact.

[34] Item 4(n) is correct in stating the Appellant and the Company are related persons.

[35] Items 4(o) and 4(p) are not facts but rather opinions of the person assembling the facts which really usurped the decision that the Minister was himself required to make.

[36] What is the effect of all this. It is clear that the Minister was on the wrong track taking into account the whole question of a sham. The evidence was clear that such a point of view was wrong and was not sustainable. All the facts before the Minister were tainted by this approach. The wrong work was before him, the evidence of the supervision and control was not before him as it should have been, the results of the previous appeal were not put in their proper context and it is clear that there were funds to pay the salaries when the Minister was informed that there were not. I am of the opinion that the Minister was presented with a completely distorted picture of the Appellant's employment. This is not a question of weighing the evidence. The stated facts put before the Minister were clearly wrong. Take out the distortion and the incorrect facts and there is nothing left upon which the Minister could reasonably and objectively come to the conclusion that he did. Clearly the Minister was misled as to the true situation. He took into account incorrect facts and did not take into account relevant correct facts. In these circumstances I am of the opinion that his decision was not properly or lawfully made. It is not sustainable in law and I must now advance to the second stage of the appeal process and decide whether, on all the evidence the parties, had they been at arm's length, would have entered into a substantially similar contract of employment, taking into account all of the circumstances including those specifically set out in paragraph 3(2)(c) of the Act.

Stage 2 - Review of the evidence.

[37] It is clear from the evidence that this summer camp and home schooling business was a legitimate operation. Dr. Elliott attended Court specifically to say how well his two sons had fared there. He was an impressive witness.

[38] The Appellant also was an impressive witness and she left me with the clear impression that the work she did during the time in question was genuine. The issue is whether or not, if she had been at arm’s length from the company a substantially similar contract of employment would have been entered into. Of course the fact that the work was done in and around her home does complicate the issue. However there was a set schedule for both herself and the students. Anyone else brought in from the outside would have had to work the same hours. The pay was modest but it was all the company could afford. No doubt the type of person who would undertake that type of work in that type of setting would also undertake it for that kind of remuneration. The summer camps had to be set up. Again it was a bit of a shoestring operation but she had expertise in getting everything under way, including arranging for volunteer counsellors, getting in food supplies etc., as well as teaching ceremonies and spiritual exercises. There are no doubt many people who would be glad to take on that kind of work and be paid $650.00 per week. It was a good arrangement for her to earn money and a good arrangement for the company to take advantage of her expertise. At the end of July, Donald Knight left on a cycling trip with summer students. Her work terminated because there was nothing more for her to do. She did not see him again.

Conclusion

[39] After considering all of the evidence, both oral and written and the exhibits entered before me, I am well satisfied on the balance of probabilities that indeed the arrangement was genuine, that it was a contract of services and one which, 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 they would have entered into had they been at arm’s length, or at least a substantially similar one.

[40] The appeal is accordingly allowed and the decision of the Minister is vacated.

Signed at Calgary, Alberta, this 20th day of May 1998.

"Michael H. Porter"

D.J.T.C.C.