Beausoleil v. M.N.R., docket 97-1052-UI

Date: 19980507

Docket: 97-1052-UI

BETWEEN:

HUGUETTE BEAUSOLEIL,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

LAMARRE PROULX J.T.C.C.

[1] The appellant is appealing a determination by the Minister of National Revenue ("the Minister") that the appellant’s employment during the period from January 1, 1994 to May 13, 1995 was not insurable within the meaning of s. 3(2)(c) of the Unemployment Insurance Act and that her employment during the period from May 1, 1996 to November 9, 1996 was also not insurable within the meaning of s. 5(2)(i) of the Employment Insurance Act ("the Act").

[2] At the start of the hearing the appellant and her counsel told the Court that the appellant was not disputing the Minister's decision for the period from January 1, 1994 to May 13, 1995 because, during that period, the appellant was living with the payer's sole shareholder, Claude Cloutier, but that she left him on March 26, 1996.

[3] The facts on which the Minister relied in making his determination are set out in paragraph 8 of the Reply to the Notice of Appeal ("the Reply") and are as follows:

[TRANSLATION]

(a) the payer was incorporated on May 28, 1987;

(b) since the incorporation the payer's sole shareholder has been Claude Cloutier;

(c) the payer operates a grocery store and in December 1995 it began renting video cassettes;

(d) the appellant and the payer's sole shareholder were de facto spouses;

(e) the appellant's working hours were not recorded by the payer;

(f) no record was kept by the payer of the work done by the appellant;

(g) the appellant's duties as described by the appellant and the payer were very vague and did not indicate that at any time the appellant had enough work to keep her busy full time;

(h) the income of the business did not show any significant difference when the appellant was working part time from when she was working full time;

(i) at no time did the appellant work full time;

(j) the appellant was hired to perform the duties of a general clerk, that is arranging merchandise, placing orders, counter sales and other duties;

(k) the appellant performed the same duties during the two periods in question;

(l) it should be noted that when the appellant was hired she did not replace anyone and when she was laid off no one replaced her;

(m) when she was laid off for the first time the appellant waited 11 months before filing her claim for unemployment insurance benefits;

(n) when the appellant received the decision that she was not eligible in April 1996, she went back to work for the same payer in May 1996;

(o) the reason for the layoffs was [TRANSLATION] "shortage of work", but this is not what the sales showed as they were increasing;

(p) no significant increase in sales was shown when the appellant was hired full time and no appreciable decrease was noted when she was laid off and not replaced;

(q) the appellant lived just above the business with the payer's sole shareholder, which made her movements easier as she came and went from the business as she thought fit;

(r) the appellant and the payer are related persons within the meaning of the Income Tax Act;

(s) if it is found that the appellant was not related to the payer at any time then it should be considered whether the appellant and the payer were de facto not dealing with each other at arm's length;

(t) 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 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.

[4] The appellant's grounds of appeal, as set out in her Notice of Appeal, are as follows:

[TRANSLATION]

1. I worked for Épicerie Masham Inc. twice, from January 1, 1994 to May 13, 1995 and from May 15 to November 9, 1996;

2. in my first contract, from January 1, 1994 to May 13, 1995, I worked for Épicerie Masham Inc. part time and I was at that time living with the owner of that business;

3. when I made an application for benefits in May 1995 the reason for denying them was that I had not accumulated the number of weeks necessary for unemployment insurance at that time and so was not entitled to benefits;

4. on March 26, 1996 I ceased living with the owner of Épicerie Masham Inc. and have since that date been living with my sister Lise Beausoleil (see the attached affidavit of Lise Beausoleil);

5. on May 1, 1996 the owner of Épicerie Masham Inc. needed staff and he contacted me to ask me if I could work full time; as I was unemployed at that time and needed a source of income, I agreed to take the job;

6. at the time I filed my unemployment insurance claim on November 15, 1996 I was not living with the owner of Épicerie Masham Inc. and had no relationship, economic or legal, with him since I never married him.

7. in view of the facts set out above, ss. 3(2)(c) of the Unemployment Insurance Act and 5(2)(i) of the Employment Insurance Act cannot be applied since those sections deal with excepted employment when the employer and employee are not dealing with each other at arm's length or when they are related persons: that was absolutely not true in my case after March 1, 1996;

. . .

[5] The affidavit mentioned in paragraph 4 of the Notice of Appeal is as follows:

[TRANSLATION]

DETAILED AFFIDAVIT

I the undersigned, LISE BEAUSOLEIL, residing and domiciled at 366 chemin Kennedy, Masham, Quebec J0X 2W0, do solemnly affirm:

1. I have been renting a room to my sister Huguette Beausoleil since March 26, 1996, the date on which she ceased living with the owner of Épicerie Masham Inc.;

2. Huguette Beausoleil has always lived at this address for over a year now and has no relationship with the owner of Épicerie Masham Inc.

. . .

[6] The appellant and Mr. H. Mousseau, her brother-in-law, testified at the request of the appellant's counsel. Mr. Patras, an appeals officer with the Department of National Revenue, testified at the request of the respondent's counsel.

[7] Mr. Mousseau is the brother-in-law of the appellant and husband of Lise Beausoleil, the appellant's sister, who made the declaration attached to the Notice of Appeal. He explained that on March 25, 1996 he went to pick up the appellant from Mr. Cloutier's premises and that she was in a profound state of depression caused in part by the deterioration of her relationship with her de facto spouse, the owner of Épicerie Masham Inc. He added that from then on the appellant lived with himself and his wife.

[8] Contrary to what was stated in paragraph 5 of the grounds of appeal, the appellant said in her testimony that it was she who asked Mr. Cloutier to give her work, not he who offered it to her. She said she worked at the business but she did not go back to living with the owner of the business. She would sometimes prepare his supper for him, but did not eat with him.

[9] Subparagraphs 8(a) to (c) of the Reply were not contradicted and so I regard them as admitted. The statement in subparagraph 8(d) was valid for the first period but not for the period at issue.

[10] The evidence established that subparagraphs 8(e) and (f) of the Reply were correct. According to the appellant, every employee noted down his or her hours and at the end of the week entered the hours and was paid. According to the appellant, what was filed as Exhibits A-2, I-2 and I-3 was not representative of the work done by the employees. Exhibit A-2 is an extract from the payer's payroll concerning the appellant for 1995 and 1996. Exhibits I-2 and I-3 are records of employment. It can be seen in Exhibit A-2 that the pay is the same every week for 30 hours. The appellant said that she might work two days in some weeks, in others seven days, from 8:00 a.m. to 6:00 p.m., which makes weeks of 70 hours, and that she was paid at the minimum wage in effect. She said what was contained in the payrolls was the payer's accounting, which had nothing to do with the wages actually paid. In the same way, the records of employment were also wrong since they did not represent the actual agreements between the parties.

[11] Mr. Mousseau said that Mr. Cloutier never gave the appellant a "penny", and yet in a record of employment dated May 16, 1995 Mr. Cloutier alleged that he paid the appellant a total of $4,267 for the first period. This suggests that there was at all times parallel accounting which bore little resemblance to the reality of the situation.

[12] Regarding the statements in subparagraphs 8(g) and (i) of the Reply, the appellant said that some days she worked full time and others not.

[13] Subparagraphs 8(j) and (k) of the Reply were admitted.

[14] Regarding the statement in subparagraph 8(l) of the Reply, this was not contradicted by the evidence.

[15] The statement in subparagraph 8(m) of the Reply is correct if we look at the dates on the documents. The appellant made her first application for unemployment insurance benefits on April 1, 1996, that is a few days after abandoning cohabitation with the owner of the business.

[16] The statement in subparagraph 8(n) of the Reply is what the appellant said, yet when she ceased cohabitation on March 26, 1996 she was in a state of exhaustion. Her brother-in-law, Mr. Cloutier, testified to the same effect.

[17] Regarding the statement in subparagraph 8(h) of the Reply, that there was a consistent level of sales, there was no contrary evidence presented by the appellant. In the same way, subparagraph 8(o) of the Reply, which says:

(o) the reason for the layoffs was [TRANSLATION] "shortage of work", but this is not what the sales showed as they were increasing;

was proven by the Minister's representative, who asked for and obtained the payer's sales figures for each month in 1995 and 1996 and testified on that point. The statement in subparagraph 8(p) of the Reply, which is to the same effect, was also not contradicted.

[18] The statement in subparagraph 8(q) of the Reply is no longer relevant, as in the second period the appellant was no longer living with the owner of the business.

Argument and conclusions

[19] Section 5(2)(i) and (3) of the Act reads as follows:

5. (2) Insurable employment does not include

. . .

(i) employment if the employer and employee are not dealing with each other at arm's length.

(3) For the purposes of paragraph (2)(i),

(a) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the Income Tax Act; and

(b) if the employer is, within the meaning of that Act, related to the employee, they are 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.

[20] Counsel for the appellant argued that in the second period the appellant was no longer cohabiting with the payer's sole shareholder, the payer was operating a convenience store, it needed employees and the appellant was treated like the payer's other employees. She accordingly argued that in the second period, the one which is at issue, the appellant and the payer were no longer dealing with each other at arm's length and the appellant's employment was genuine employment and so was insurable employment within the meaning of the Act.

[21] Counsel for the respondent argued that even if in the second period the appellant was not a related person within the meaning of the Income Tax Act, as she was no longer cohabiting with the payer's sole shareholder, he and the appellant were still persons not dealing with each other at arm's length because they did not have separate interests. In this connection counsel for the respondent referred to paragraph 16 of Interpretation Bulletin IT-419R, which reads as follows:

16. The following criteria have generally been used by the courts in determining whether a transaction has occurred at "arm's length":

* was there a common mind which directs the bargaining for both parties to a transaction;

* were the parties to a transaction acting in concert without separate interests; and

* was there "de facto" control.

[22] Counsel for the respondent argued that in the present circumstances it was the second test which applied, as the first test applied mainly when the parties at issue were artificial entities. In the case of natural persons, the second test should be applied.

[23] These tests have been developed by the courts. The first test, whether there was a common directing mind, was laid down by the Supreme Court of Canada in M.N.R. v. Sheldon’s Engineering Limited, [1955] S.C.R. 637, at 644, per Locke J. for the Court:

Where corporations are controlled directly or indirectly by the same person, whether that person be an individual or a corporation, they are not by virtue of that section deemed to be dealing with each other at arms length. Apart altogether from the provisions of that section, it could not, in my opinion, be fairly contended that, where depreciable assets were sold by a taxpayer to an entity wholly controlled by him or by a corporation controlled by the taxpayer to another corporation controlled by him, the taxpayer as the controlling shareholder dictating the terms of the bargain, the parties were dealing with each other at arms length and that s. 20(2) was inapplicable.

[24] In M.N.R. v. Merritt et al., [1969] 2 Ex. C.R. 51, at 62 and 63, Cattanach J. said much the same thing:

In my view, the basic premise on which this analysis is based is that, where the "mind" by which the bargaining is directed on behalf of one party to a contract is the same "mind" that directs the bargaining on behalf of the other party, it cannot be said that the parties are dealing at arm's length. In other words where the evidence reveals that the same person was "dictating" the "terms of the bargain" on behalf of both parties, it cannot be said that the parties were dealing at arm's length.

[25] The second test, whether the parties were acting in concert, is set out in the judgment of the Exchequer Court in Swiss Bank Corp. et al. v. M.N.R., [1971] C.T.C. 427, in which Thurlow J. said at 437 and 438:

To this I would add that where several parties – whether natural persons or corporations or a combination of the two – act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the "mind" that directs may be that of the combination as a whole acting in concert or that of any one of them in carrying out particular parts or functions of what the common object involves. Moreover as I see it no distinction is to be made for this purpose between persons who act for themselves in exercising control over another and those who, however numerous, act through a representative. On the other hand if one of several parties involved in a transaction acts in or represents a different interest from the others the fact that the common purpose may be to so direct the acts of another as to achieve a particular result will not by itself serve to disqualify the transaction as one between parties dealing at arm's length.

[26] The third test is whether there was de facto control. There will be no arm's length relationship if one of the parties to the transaction exercises de facto control over the other. In this connection we may mention the judgment rendered by the Federal Court of Appeal in Robson Leather Co. Ltd. v. M.N.R., 77 DTC 5106.

[27] As was just mentioned in paragraph 25 of these reasons, the action in concert test was developed by Thurlow J. in Swiss Bank Corporation, supra. This test is regarded as an extension of the same directing mind test, which is a test usually applied to artificial persons, while the action in concert test is a test that applies to natural persons. Applying the latter test, as Thurlow J. mentioned, persons may have actions in concert while dealing with each other at arm's length because their interests are separate. It is therefore important to understand the concept of separate interests.

[28] In my opinion, the judgment of the Federal Court of Australia in Furse Estate v. Federal Commissioner of Taxation, 91 ATC 4007 (F.C.A.) clearly explains what is meant by this concept of separate interests. I quote paragraph 37, at p. 28:

What is required in determining whether parties dealt with each other in respect of a particular dealing at arm’s length is an assessment whether in respect of that dealing they dealt with each other as arm’s length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.

[29] In order to determine whether unrelated parties are dealing with each other at arm's length the Court must establish, based on a finding of fact, whether in respect of a given agreement the parties dealt with each other as parties dealing at arm's length would ordinarily do, that is, so that the agreement concluded between them is a matter of real bargaining.

[30] This explains why employment between persons not dealing with each other at arm's length is always excepted under s. 5(2)(i) of the Act, while employment between related persons ceases to be excepted under s. 5(3)(b) of the Act when it is employment which would have existed in the ordinary labour market, or in other words, the terms and conditions of employment are a matter of real bargaining.

[31] In the case of unrelated persons it is the nature of the agreement between the parties, whether or not it is a matter of real bargaining, and not the relationship between the parties, which will determine whether those persons are persons dealing with each other at arm's length. For the purposes of the Income Tax Act, the phrase "related persons" means persons who have a relationship between them quite apart from the legal transaction concluded between them. Consequently, in the latter situation the employment is not conclusively excepted if the contract of employment is a genuine contract of employment.

[32] Counsel for the appellant argued that the appellant was not treated differently from other employees, in particular the owner's son. However, for s. 5(2)(i) of the Act to have any meaning it requires that the comparison be made with an employee who is not related to the employer.

[33] According to the usual standards of the labour market, an employer lets an employee go or hires him or her based on the needs of the business. There is no evidence here to contradict the Minister's allegations that the economic position of the business did not change when the appellant was hired or laid off. It should also be recalled that the appellant allegedly abandoned cohabitation with her supposed employer in a state of complete depression. It is difficult to see how she could have returned to do long hours in premises where the work had put her into a deep state of depression.

[34] It is also usual for an employer dealing at arm's length to be one who keeps a record of the employees' hours and pays them in accordance with the hours worked. The evidence was that the employer did not keep any record of his employees' hours; rather, it was the employees who did so and at the end of the week paid themselves out of the money in the cash register.

[35] It is also very important to remember that the evidence was that neither the amounts of money nor the hours of work shown in the records of employment corresponded to the actual situation. In such circumstances, employment cannot be insurable employment.

[36] I have to conclude that the appellant's employment was not insurable employment within the meaning of s. 5(2)(i) of the Act because the parties were not dealing with each other at arm's length, although they were not related parties within the meaning of the Income Tax Act. The parties were not dealing with each other at arm's length because the terms and conditions of employment were not the result of a negotiation in accordance with the ordinary rules of the labour market. Because it was not genuine employment, this employment was not insurable employment within the meaning of s. 5(1)(a) of the Act.

Signed at Ottawa, Canada, May 7, 1998.

Louise Lamarre Proulx

J.C.C.I.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 16th day of December 1998.

Kathryn Barnard, Revisor