MacKinnon v. M.N.R., docket 96-1561-UI

Date: 19981016

Docket: 96-1561-UI

BETWEEN:

THELMA P. MACKINNON,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Cuddihy, D.J.T.C.C.

[1] This appeal was heard in Sydney, Nova Scotia, on September 16 and 17, 1998.

I- The appeal

[2] This is an appeal from a decision by the Minister of National Revenue (the "Minister") of May 17, 1996, where it was determined that the employment of Thelma P. MacKinnon (the "Worker" ) with John A. MacKinnon (the "Payor") from July 15 to September 14, 1995, was not insurable within the meaning of the Unemployment Insurance Act (the "old Act") now known as the Employment Insurance Act (the "new Act ") because the Worker was not engaged under a contract of service as required by paragraph 3(1)(a) of the old Act now paragraph 5(1)(a) of the new Act.

[3] The Minister also decided that the employment was excepted because the Worker and the Payor were not dealing with each other at arm’s length within the meaning of subparagraph 3(2)(c)(ii) of the old Act and paragraph 5(2)(i) and subsection 5(3) of the new Act.

II- The facts

[4] In rendering his decision the Minister relied on the facts and reasons outlined in his Reply to the Notice of Appeal and particularly in paragraph 8 as follows:

"(a) the Payor is the Appellant's father;

(b) the Payor engaged in fishing snow crab during the period in question;

(c) the Payor sold his crab catch to Pleasant Bay Fish Co. Ltd. (the "Buyer") during the period in question;

(d) the Payor required a crew of 5 persons including himself as captain, in order to fish for crab;

(e) the Payor instructed the Buyer to issue wage and share payments for 9 to 13 crew members during the period in question and the Payor's wage expenses exceeded the value of his catch on 7 of the 10 weeks as follows:

Week Ending Crew Total Wages Catch Value

July 15 10 $ 8,238.88 $ 7,327.50

July 22 13 18,360.96 45,603.75

July 29 13 18,970.38 50,201.25

Aug. 5 13 11,748.13 10,698.75

Aug. 12 13 9,863.46 7,500.00

Aug. 19 12 8,264.08 6,506.25

Aug. 26 10 7,287.83 5,700.00

Sept. 2 10 7,308.83 5,805.00

Sept. 9 9 6,364.09 5,156.25

Sept. 16 9 6,362.59 5,148.75

(f) the Payor made false declarations to the Buyer during the period in question;

(g) the Appellant was on the Buyer's records as a crew person aboard the Payor's boat, the "Perry & Sisters";

(h) the Appellant was not a self-employed fisherperson during the period in question;

(i) the Appellant did not own either the boat or the gear used in the catch;

(j) The Payor controlled the hours worked and the duties performed by the Appellant;

(k) the Appellant did not have a risk of loss nor did she have a chance to share in profits;

(l) during the period in question the Appellant received a gross weekly pay of $815.00 by cheque issued by the Buyer;

(m) the maximum weekly insurable earnings for Unemployment Insurance benefits in 1995 was $815.00;

(n) the Appellant's services were not required for the duration that she was in the Payor's employ;

(o) the Appellant's employment was an artificial arrangement designed to enable the Appellant to qualify for Unemployment Insurance benefits at the maximum rate;

(p) the Appellant was related to the Payor within the meaning of the Income Tax Act;

(q) the Appellant was not dealing with the Payor at arm's length;

(r) 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 Payor would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length."

[5] The Appellant, through counsel, admitted the allegations in subparagraphs (g) and (m). The allegations in subparagraphs (b), (c), (h) to (j), (l), (p) and (q) were admitted with explanations to be given at the hearing. The allegations in subparagraphs (a), (d) to (f), (k), (n), (o) and (r) were denied.

III- The Law and Analysis

[6] i) Definitions from the Employment Insurance Act

"employment" means the act of employing or the state of being employed;

"Insurable employment" has the meaning assigned by section 5;

Paragraph 5(1)(a) of the new Act reads as follows:

"5. (1) Subject to subsection (2), insurable employment is

(a) employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise;

..."

"Excluded employment"

Paragraph 5(2)(i) and subsection 5(3) of the new Act read as follows:

"(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."

[8] ii) Unemployment Insurance Regulations

"Section 76"

"76.(1) For all purposes of the Act and any regulation made thereunder, the employer of a fisherman shall be the person determined as such in accordance with this section.

(2) Where a catch is delivered in Canada to a buyer or to a buyer’s agent by a member of the crew that made the catch and, in a declaration made pursuant to section 82, the members of that crew are declared to share in the returns from the sale of the catch, the buyer shall be regarded as the employer of all fishermen who are members of that crew and who share in such returns.

(3) Subject to subsection (5), where a catch is delivered by a member of the crew that made the catch to a person who is not the employer within the meaning of subsection (2),

(a) the head fisherman of the crew, or

(b) where there is no head fisherman, the agent for selling the catch of the crew

shall, if the gross returns of the catch are paid to him, be regarded as the employer of all the fishermen other than himself who are members of the crew.

...

(5) Where it is established to the satisfaction of an officer of the Department of National Revenue, Taxation, that any person required to make a declaration under subsection 82(1) failed to make the declaration or made it falsely, that person shall be deemed to be the employer of all fishermen other than himself who are members of the crew."

"Section 82(1)"

"82.(1) the person who delivers a catch in the manner specified in subsection 76(2) shall, at the time of delivery, declare to the buyer or agent the following particulars:

(a) that he is a member of the crew that made the catch;

(b) the names, addresses and social insurance numbers of all fishermen who are members of the crew who share in the returns of the catch and the share arrangement including bonuses or other extra monies;

(c) the portion of the delivered catch, if any, that was not caught by the crew;

...

(e) the names, addresses and social insurance numbers of all persons, if any, employed under a contract of service and the amount of their wages or other remuneration that has been or will be paid in respect of the catch that is being delivered; and

... "

[9] iii) Definitions from the Income Tax Act

Arm's length and Related persons

Section 251 of the Income Tax Act reads in part as follows:

"Section 251. Arm's length.

(1) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm's length; and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.

(2) Definition of "related persons". For the purpose of this Act, "related persons", or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption;

(b) a corporation and

(i) a person who controls the corporation, if it is controlled by one person,

(ii) a person who is a member of a related group that controls the corporation, or

(iii) any person related to a person described in subparagraph (i) or (ii) ..."

[10] The Appellant had the burden of proving her case. Each appeal however must be decided on the facts particularly established and on its own merits.

[11] The Court therefore has a duty to scrutinize with care the conditions of the relations between a worker and a payor in every case.

Section 15 of the Charter

[12] The Appellant argued that subsection 3(2)(c)(ii) was unconstitutional since it discriminates towards families and their members.

[13] With respect to section 15 of the Charter, judge Archambault of this Court in Thivierge v. Minister of National Revenue (1994), T.C.J. No. 876 found that the revised subparagraph 3(2)(c)(ii) of the old Act now known as paragraph 5(2)(ii) and subsection 5(3) of the new Act as reproduced at the beginning of this decision did not contravene with section 15 of the Canadian Charter of Rights and Freedoms, and was not discriminatory. I cite in part two passages:

" A reading of paragraph 3(2)(c) of the Act as a whole leads me to conclude that the exception of employment is not made on the basis of a personal characteristic, whether it be sex, marital status or family status, but rather on the basis of the very terms and conditions of the contract of employment. If the terms and conditions of the contract of employment are those that persons dealing at arm’s length would have accepted, the employment constitutes insurable employment, whether the employee be female or the wife of the person who controls the employer. It is the terms and conditions of the contract of employment that determine whether there is insurable employment. Since there is no inequality based on personal characteristics, subsection 15(1) of the Charter cannot be argued in respect of paragraph 3(2)(c) of the Act.

...

Even if one concludes in the first stage that there was deemed non-arm’s length dealing between an employer and an employee under the Income Tax Act, that does not mean that the employee’s employment was definitively excepted from insurable employment. In the second stage, it is possible that persons thus deemed not to deal with each other at arm’s length for the purposes of the Income Tax Act may be deemed to deal with each other at arm’s length for the purposes of the Act. In other words, the irrebuttable presumption for the purposes of the Income Tax Act may be overturned for the purposes of the Act.

Certain conditions must be met. The Minister must be convinced that the related persons would have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length. The Minister must take into account all the circumstances, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed. Thus, if the contract of employment is one which strangers would have entered into, that employment will constitute insurable employment even if the employee is the wife of the employer or of the person who controls the employer. It is thus the terms and conditions of a given employment which determine the eligibility of an employment, not the personal characteristics of the employee. The Federal Court of Appeal recently concluded that the difference in treatment granted by the Income Tax Act with respect to income or sources of income did not constitute an inequality based on a personal characteristic. Consequently, section 15 of the Charter did not apply."

[14] I agree with that finding and no evidence was put before this Court to determine otherwise.

Brief summary of documentary and testimonial evidence and analysis

[15] The Appellant, her father, John Allister MacKinnon and Doug MacKinnon, were heard in support of the appeal. Deborah Fraser was heard on behalf of the Respondent. Exhibits A-1, R-1 to R-3 were filed in the Court record. The Court felt it valuable and necessary to have heard J. Sutherland the Appeals Officer. A copy of his report was shown and given to the Court and to the parties as well. This report was not filed as an exhibit but I did consider it to be part of the record and have marked it J-1 for that purpose.

[16] The Payor is the Appellant’s father. He engaged in fishing. He owned his own snow crab vessel called the "Perry & Sisters". He sold his crab catch to Pleasant Bay Fish Co. Ltd. (the "Buyer") during the period under review.

[17] The declaration made pursuant to subsection 76(2) of the Unemployment Insurance Regulations (the "Regulations") was filed as Exhibit R-2. This declaration was made up by the mother of the Appellant and was given to the buyer sometime around July 15, 1995 before the crab season. The declaration indicates the name of the captain, the names of three persons followed by a percentage figure, under the heading "crew shares" and the names of eight persons, one of which was the Appellant, under the heading "crew for higher stamp". The names of two other persons were added to the declaration (Exhibit R-2) by someone in the office of the buyer at an unspecified date. The areas highlighted in yellow on the declaration (Exhibit R-2) were carried out at the hearing to indicate what had been added to the document by the buyer.

[18] According to the evidence this declaration (Exhibit R-2) which contains the names of a total of 13 people was the only declaration made according to the applicable Regulations.

[19] This single declaration (Exhibit R-2) would have been furnished to the buyer before any fish was caught or delivered.

[20] Section 76 of the applicable Regulations stipulates under what conditions the buyer of a catch shall be regarded as the employer of a fisherman. Section 82 of the same Regulations stipulates what, the person who delivers a catch, shall declare to the buyer at the time of delivery.

[21] The declaration (Exhibit R-2) therefore was not made at the time of delivery of a catch. No subsequent declaration was made for any other catch in that season at least none others were shown to the Court.

[22] Therefore, the declaration (Exhibit R-2) not having been made at the time of delivery and being the only document given to the buyer before any of the catches is not what the Regulations indicated or required. The buyer then could not be considered as the employer of the Appellant.

[23] Under such circumstances the Minister was correct in considering that John Allister MacKinnon would then be the Payor for the purpose of his investigation in attempting to determine the insurability of the Appellant.

[24] After speaking to the Payor and the Appellant, he then analysed the information he obtained from the buyer. The conflicting evidence led him to consider that the buyer could not be considered as the employer. He was correct on that issue as I have indicated.

[25] He then considered the relationship between the Payor and the Appellant. He spoke to these two people over the telephone and considered that because of the conflicting evidence there was some questions as to the necessity for the Payor to have so many people working on his boat. "Who was doing what?" He considered that there was the possibility of a sham based on the total inconsistencies. He considered that the duties were reasonable. He considered that the salary of the Appellant was in line with what is paid in the industry.

[26] The work of the Appeals Officer is not easy. He must rely on what he is told by the parties. When the matter is at the hearing stage as in this case, close to three years have elapsed since the events took place.

[27] The Appeals Officer viewed both aspects of the Appellant’s work: the contract of service and the arm’s length aspect. He mentioned however that he basically looked at the arm’s length issue and concluded that the Appellant and the Payor were not dealing at arm’s length.

[28] What were the intentions of the parties in 1995, when the Payor and the Appellant worked at fishing crab on the Perry & Sisters?

[29] The evidence of the witnesses and the documents filed indicate that the Appellant worked as a crew member on the Perry & Sisters for a salary of $815.00 a week, which was the maximum weekly insurable earnings for unemployment insurance benefits in 1995. This is confirmed in the declaration (Exhibit R-2) where the Appellant’s name appears under the heading "Crew for higher stamp".

[30] The Appellant confirmed that she was not paid on a share basis and was paid by the buyer. She received from the buyer her record of employment. She was not aware of what information the buyer was given by her father. She did appear to know however the difference between a member of the crew being paid on a share basis and another being paid on salary. She also said that she worked two weeks prior and two weeks after the crab season. She said that her father (the Payor), told her that those weeks would be included in her pay.

[31] The Respondent alleged that there was no contract of service. At the hearing, it appeared that this element was not pursued very strongly. Therefore, did the Minister except the Appellant’s employment within the meaning of subparagraph 3(2)(c)(ii) of the old Act and paragraph 5(2)(i) and subsection 5(3) of the new Act?

[32] The Federal Court of appeal in Attorney General of Canada and Jencan Limited [1] has outlined the principles which must guide the Tax Court when dealing with an appeal under 3(2)(c)(ii) of the old Act as follows:

“The decision of this Court in Tignish, supra, requires that the Tax Court undertake a two-stage inquiry when hearing an appeal from a determination by the Minister under subparagraph 3(2)(c)(ii). At the first stage, the Tax Court must confine the analysis to a determination of the legality of the Minister’s decision. If, and only if, the Tax Court finds that one of the grounds for interference are established can it then consider the merits of the Minister’s decision. As will be more fully developed below, it is by restricting the threshold inquiry that the Minister is granted judicial deference by the Tax Court when his discretionary determinations under subparagraph 3(2)(c)(ii) are reviewed on appeal. Desjardins J.A., speaking for this Court in Tignish, supra, described the Tax Court’s circumscribed jurisdiction at the first stage of the inquiry as follows:

Subsection 71(1) of the Act provides that the Tax Court has authority to decide questions of fact and law. The applicant, who is the party appealing the determination of the Minister, has the burden of proving its case and is entitled to bring new evidence to contradict the facts relied on by the Minister. The respondent submits, however, that since the present determination is a discretionary one, the jurisdiction of the Tax Court is strictly circumscribed. The Minister is the only one who can satisfy himself, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions and importance of the work performed, that the applicant and its employee are to be deemed to deal with each other at arm's length. Under the authority of Minister of National Revenue v. Wrights' Canadian Ropes Ltd., contends the respondent, unless the Minister had not had regard to all the circumstances of the employment (as required by subparagraph 3(2)(c)(ii) of the Act), has considered irrelevant factors, or has acted in contravention of some principle of law, the court may not interfere. Moreover, the court is entitled to examine the facts which are shown by evidence to have been before the Minister when he reached his conclusion so as to determine if these facts are proven. But if there is sufficient material to support the Minister’s conclusion, the court is not at liberty to overrule it merely because it would have come to a different conclusion. If, however, those facts are, in the opinion of the court, insufficient in law to support the conclusion arrived at by the Minister, his determination cannot stand and the court is justified in intervening.

In my view, the respondent's position is correct in law...[2]

In Ferme Émile Richard v. M.N.R., this Court confirmed its position. In obiter dictum, Décary J.A. stated the following:

As this Court recently noted in Tignish Auto Parts Inc. v. Minister of National Revenue, July 25, 1994, A-555-93, F.C.A., ... 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.[3]

Section 70 provides a statutory right of appeal to the Tax Court from any determination made by the Minister under section 61, including a determination made under subparagraph 3(2)(c)(ii). The jurisdiction of the Tax Court to review a determination by the Minister under subparagraph 3(2)(c)(ii) is circumscribed because Parliament, by the language of this provision, clearly intended to confer upon the Minister a discretionary power to make these determinations. The words "if the Minister of National Revenue is satisfied" contained in subparagraph 3(2)(c)(ii) confer upon the Minister the authority to exercise an administrative discretion to make the type of decision contemplated by the subparagraph. Because it is a decision made pursuant to a discretionary power, as opposed to a quasi-judicial decision, it follows that the Tax Court must show judicial deference to the Minister’s determination when he exercises that power. Thus, when Décary J.A. stated in Ferme Émile, supra, that such an appeal to the Tax Court "more closely resembles an application for judicial review", he merely intended, in my respectful view, to emphasise that judicial deference must be accorded to a determination by the Minister under this provision unless and until the Tax Court finds that the Minister has exercised his discretion in a manner contrary to law.

If the Minister’s power to deem “related persons” to be at arm’s length for the purposes of the UI Act is discretionary, why, one might ask, does the right of appeal to the Tax Court under section 70 apply to subparagraph 3(2)(c)(ii) at all? The answer is that even discretionary powers are subject to review to ensure that they are exercised in a judicial manner or, in other words, in a manner consistent with the law. It is a necessary incident of the rule of law that all powers granted by Parliament are of an inherently limited nature. In D.R. Fraser and Co. Ltd. v. Minister of National Revenue, Lord Macmillan summarized the legal principles which ought to govern such review. He stated:

The criteria by which the exercise of a statutory discretion must be judged have been defined in many authoritative cases, and it is well settled that if the discretion has been exercised bona fide, uninfluenced by irrelevant considerations and not arbitrarily or illegally, no court is entitled to interfere even if the court, had the discretion been theirs, might have exercised it otherwise.[4]

Lord Macmillan’s comments were quoted with approval by Abbott J. of the Supreme Court in Boulis v. Minister of Manpower and Immigration.[5] See also Friends of the Oldman River Society v. Canada (Minister of Transport)[6] and Canada v. Purcell.[7]

Thus, by limiting the first stage of the Tax Court’s inquiry to a review of the legality of ministerial determinations under subparagraph 3(2)(c)(ii), this Court has merely applied accepted judicial principles in order to strike the proper balance between the claimant’s statutory right to have a determination by the Minister reviewed and the need for judicial deference in recognition of the fact that Parliament has entrusted a discretionary authority under this provision to the Minister.

On the basis of the foregoing, the Deputy Tax Court Judge was justified in interfering with the Minister’s determination under subparagraph 3(2)(c)(ii) only if it was established that the Minister exercised his discretion in a manner that was contrary to law. And, as I already said, there are specific grounds for interference implied by the requirement to exercise a discretion judicially. The Tax Court is justified in interfering with the Minister’s determination under subparagraph 3(2)(c)(ii) - by proceeding to review the merits of the Minister’s determination - where it is established that the Minister: (i) acted in bad faith or for an improper purpose or motive; (ii) failed to take into account all of the relevant circumstances, as expressly required by paragraph 3(2)(c)(ii); or (iii) took into account an irrelevant factor.”

[33] The Tax Court in dealing with an appeal under subparagraph 3(2)(c)(ii) or paragraph 5(2)(i) and subsection 5(3) of the Act must undertake a two-stage inquiry.

[34] The Tax Court is justified in interfering with the Minister’s decision only if it is established that the Minister exercised his discretion in a manner that was contrary to law. The Tax Court is justified in interfering with the Minister’s decision under subparagraph 3(2)(c)(ii) or paragraph 5(2)(i) and subsection 5(3) by proceeding to review the merits of the determination where it is established "that the Minister: (i) acted in bad faith or for an improper purpose or motive; (ii) failed to take into account all of the relevant circumstances as expressly required by subparagraph 3(2)(c)(ii) or paragraph 5(2)(i) and subsection 5(3); or (iii) took into account an irrelevant fact".

[35] The main allegations of the Minister, without enumerating the others, were that the Payor did not require from 9 to 13 people on his boat, the Payor’s wage expenses exceeded the value of his catch on 7 of the 10 weeks of fishing, the Payor made false declarations to the buyer, the Appellant’s services were not required for the duration that she was in the Payor’s employ, and that the Appellant’s employment was an artificial arrangement for her to qualify for benefits. It also appeared to me that the Appeals Officer questioned whether the Appellant worked on the boat.

[36] The number of persons on the Payor’s boat was a concern. The evidence indicated that the Payor had some difficulty with the hauling equipment on his boat and needed more people to help pull in his cages. If we were to rely on the number of people required for a crew under normal circumstances, the evidence seemed to indicate that from five to seven crew members would be sufficient. One could wonder what five or six extra people would actually be doing however, if there were too many people, who were they? This fact alone could not exclude the Appellant as the evidence clearly indicated that she did work on the boat and an unrebutted explanation was given to explain the presence of the number of persons on the Payor’s boat.

[37] As to the false declarations to the buyer, the evidence in my view demonstrated that John Allister MacKinnon made no valid declarations to the buyer as required by the Regulations and this was the reason why he was considered as the employer of all the members of his crew including the Appellant. Her duties were accepted. Her salary was what was paid in the industry. However the evidence did show that the Appellant also worked two weeks before and after the crab season without pay, which according to the evidence would be 14 weeks. This could lead to conclude that the Appellant was hired by her father before the crab season and was paid later as it must sometimes happen in the work place.

[38] As a result, the allegations that led to the conclusion that the employment of the Appellant was an artificial arrangement, were not proven. The witnesses for the Appellant were not impeached and their evidence must be accepted.

[39] It is my view, that if the Minister had heard the evidence put forward at the hearing, he would have come to a different conclusion. However, the time allocated to the Minister to carry out each investigation is not comparable to the time available to the Court and one must appreciate the difficult task of the Appeals Officer in carrying out his interview over the telephone as was done and accepted by both parties in this case.

[40] Under all the circumstances that I have heard, I do not consider that the Minister could legally have concluded as he did and it is preferable that this Court intervene.

[41] The evidence did demonstrate the existence of a contract of service between the Appellant and the Payor, outside the ambit of the Regulations. The evidence demonstrated that the Appellant worked for a period of 14 weeks and not only the 10 weeks of the crab season. Under those circumstances the salary that was paid to the Appellant by the Payor should have included all her weeks of work (14) and not only those decided on, between the Payor and the buyer of the fish, who were or should have been aware of the Regulations. I thus conclude, that the Appellant would have been at arm’s length for that 14 week period only because this is the only period of work that may be considered by this Court.

[42] I do not consider this decision to be a precedent for any other past or future periods of employment of the Appellant with the Payor or anyone else. The Minister maintaining the right to investigate any other periods of employment for insurance purposes.

IV- Decision

[43] The appeal is allowed and the decision of the Minister is reversed. The period of employment of the Appellant is extended from July 1 to September 30, 1995 to conform to the evidence.

Signed at Dorval, Quebec, this 16th day of October 1998.

"S. Cuddihy"

D.J.T.C.C.

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