Persaud v. M.N.R., docket 96-1933-UI

Date: 19980107

Dockets: 96-1987-UI; 96-1988-UI; 96-1933-UI

BETWEEN:

DONALD PERSAUD, SHEILA PERSAUD, KATHY D. HERRING,

Appellants,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

MISTY’S SEAFOOD & TAKE OUT LTD.,

Intervenor.

Reasons for Judgment

Bowman, J.T.C.C.

[1] These appeals are from determinations that the appellants were not employed in insurable employment. The appeal of Donald Persaud was quashed at the opening of trial on the basis that he did not request the Minister of National Revenue to determine a question pursuant to section 61 of the Unemployment Insurance Act, and that no such determination was made. Counsel for Mr. Persaud did not question that the appeal should be quashed.

[2] The other two appeals are properly before the court. The sole question involves the determination under paragraph 3(2)(c) of the Unemployment Insurance Act (now the Employment Insurance Act). It is not contended that there was no contract of service. There have been numerous cases in this Court and the Federal Court of Appeal dealing with the principles to be applied in an appeal under paragraph 3(2)(c). Essentially it involves a two-step process:

(a) a determination whether the discretion conferred on the Minister was properly exercised; and

(b) if and only if the Court concludes that it was improperly exercised, a determination whether, having regard to the factors set out in paragraph 3(2)(c), it is reasonable to conclude that the related employer and employee “would have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length”.

[3] At the first stage, the court must not substitute its own discretion for that of the Minister. Rather it must determine solely whether the Minister’s discretion was exercised in a manner contrary to law.

[4] In The Queen v. Bayside Drive-In Ltd., [1997] F.C.J. No. 1019 (Q.L.)(C.A.), Chief Justice Isaac set out the principle as follows:

In Attorney General of Canada v. Jencan Ltd.⁶, this Court recently had occasion to reaffirm the principles governing review by the Tax Court of Canada of ministerial determinations under subparagraph 3(2)(c)(ii). I do not propose to repeat in detail the analysis contained in the reasons for judgment in that case. It is sufficient for the purposes of disposing of these applications for judicial review to restate the governing principles first laid down by this Court in Tignish Auto Parts Inc. v. M.N.R.⁷.

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 threshold stage of the inquiry, review by the Tax Court is confined to ensuring that the Minister has exercised his discretion in a lawful manner. If, and only if, the Minister has exercised his discretion in a manner contrary to law can the Tax Court then proceed to a review of the merits of the determination. It is only by limiting the first stage of the inquiry in this manner that the Tax Court exhibits the degree of judicial deference required when faced with an appeal from a discretionary determination.

The specific grounds which justify interfering with the exercise of a statutory discretion, including the discretion given to the Minister by subparagraph 3(2)(c)(ii) of the Act, are well known⁸. The Tax Court Judge was justified in interfering with the determination made by the Minister under subparagraph 3(2)(c)(ii) only if he was satisfied that the Minister made one or more of the following reviewable errors: (i) the Minister acted in bad faith or for an improper purpose or motive; (ii) the Minister failed to take into account all of the relevant circumstances, as expressly required by paragraph 3(2)(c)(ii); or (iii) the Minister took into account an irrelevant factor. 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 hence that the Tax Court Judge would be justified in conducting his own assessment of 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.

In this case, the Tax Court Judge concluded that his interference on appeal was justified because, in his opinion, the Minister had not given “sufficient importance to the work put in by the workers and their contribution to the Payor’s success.” The view that a failure by the Minister to give “sufficient importance” (i.e., weight) to specific facts is a ground for reversible error is not supported by the jurisprudence of this Court and, in my respectful view, is wrong in principle. By questioning not the relevance or truth of the facts relied upon by the Minister but simply the weight to be attached to the various facts otherwise properly considered, the Tax Court Judge, in effect, overruled the Minister’s discretionary determination without first having concluded that the determination had been made in a manner contrary to law. In doing so, he improperly substituted his own independent assessment of the evidence for that of the Minister, thereby usurping the discretionary authority which Parliament clearly and unambiguously entrusted to the Minister.

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⁶(unreported), File No. A-599-96, 24 June 1997 (F.C.A.).

⁷ (1994), 185 N.R. 73 (F.C.A.) [“Tignish”].

⁸ See Lord Macmillan’s comments in D.R. Fraser and Co. Ltd. v. M.N.R., [1949] A.C. 24 at 36 (P.C.), quoted with approval by the Supreme Court of Canada in Boulis v. Minister of Manpower and Immigration, [1974] S.C.R. 875 at 877. See also, Friends of the Oldman River Society v. Canada (Minister of Transport), [1992] 1 S.C.R. 3 at 76-77; and Canada v. Purcell, [1996] 1 F.C. 644 at 653 (C.A.), per Robertson J.A.

[5] The conclusion that I draw from these observations is that although the court is justified in considering whether the Minister took into account all relevant facts, or whether he took into account extraneous facts, it is not justified in determining whether the Minister assigned to the facts as found their proper weight.

[6] The statement that “the view that a failure by the Minister to give ‘sufficient importance’ (i.e., weight) to specific facts is a ground for reversible error is not supported by the jurisprudence of this Court and, in my respectful view, is wrong in principle” invites comparison with the statement in Canada v. Schnurer Estate, [1997] 2 F.C. 545 where Chief Justice Isaac said at p. 557:

In essence, if the Minister has given sufficient weight to all of the relevant factors related to the employment relationship, the Tax Court is not at liberty to overrule the Minister’s decision under subparagraph 3(2)(c)(ii) merely because it would have come to a different conclusion.

(emphasis added)

[7] It is not necessary for the purposes of these appeals that I attempt to reconcile these statements.

[8] The list of factors set out by Isaac C.J. as justifying an interference with the ministerial exercise of discretion is somewhat more restrictive than those that I set out in Caines et al. v. M.N.R., 96-91(UI), September 23, 1997 where I said at p. 4:

The principles to be applied in an appeal from a determination under paragraph 3(2)(c) are reasonably well settled. Since the determination under paragraph 3(2)(c) involves the exercise of a ministerial discretion the initial inquiry must necessarily be a review of the exercise of the discretion and not of the ultimate decision. This requires a consideration of a number of factors such as: was the discretion exercised arbitrarily or capriciously? Was it based upon an erroneous principle of law? Was it exercised in accordance with principles of natural justice, including the affording to the person or persons affected a full opportunity of stating their case? Was the exercise of the discretion based in material way upon extraneous or irrelevant facts? Did the Minister fail to take into account relevant facts or considerations? All of these factors -- and the list is not exhaustive -- must be considered by the court and assigned their proper weight in the context of the particular case.

[9] Obviously, if I went further than I should have in light of what Isaac C.J. said in Bayside, or if there is inconsistency between the two, Bayside must prevail. I do not, however, think that there is any essential difference in what we are saying.

[10] As Isaac C.J. observed later in his reasons on that case, the use of the words “trial de novo” to describe the second stage of the enquiry is clearly inappropriate. It is an independent review of the evidence, not only that which was before the Minister but also such new evidence as may be brought before the court by either party.

[11] Moreover, it is clear from A.G. Canada v. Jolyn Sport Inc., [1997] F.C.J. No. 512 (Q.L.) (C.A.) that at neither stage of the enquiry is this Court bound by findings of fact made by the Minister. The Federal Court of Appeal said:

The applicant submits that this Court’s decision in Tignish Auto Parts Inc. v. Minister of National Revenue², as confirmed by an obiter dictum in Ferme Émile Richard et Fils Inc. c. Le Ministère du revenu national et al³, requires the Tax Court to undertake a two stage inquiry, first into the legality of the Minister’s decision, and subsequently, if grounds for interference by the Court are established, into whether the decision was wrong. To this point the Attorney General has it right; he goes on, however, to submit that in the first stage the Tax Court is bound by the Minister’s findings of fact but that in the second it is not.

This latter submission, in our view, misunderstands what was decided in Tignish. In that case, Desjardins J.A. speaking for the Court said:

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 has 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

...

The underlined words make it clear in our view that the Tax Court is not bound by the Minister’s findings of fact. That is also a necessary inference from the text of section 70 and subsection 71(1):

In every appeal under section 70 the Minister’s findings of fact, or “assumptions”, will be set out in detail in the reply to the Notice of Appeal. If the Tax Court judge, who, unlike the Minister, is in a privileged position to assess the credibility of the witnesses she has seen and heard, comes to the conclusion that some or all of those assumptions of fact were wrong, she will then be required to determine whether the Minister could legally have concluded as he did on the facts that have been proven.

[12] Three further observations should be made. The first is that there need not be two separate parts to the evidentiary aspect of the trial. All of the evidence should be put in initially and the Court can then make the first determination and, if it is decided that the discretion was not exercised on proper principles, the Court may then move on to the second determination. Much of the evidence relating to the first branch will be relevant to the second branch of the enquiry.

[13] This method of proceeding commends itself as a matter both of efficiency and of procedural fairness. Most of the appellants in these proceedings are unrepresented. The burden of meeting the twofold hurdle in an appeal from a determination under paragraph 3(2)(c) is heavy enough. I do not propose to make it even heavier for them. In Caines (supra), the following observation was made at p. 5:

The court’s task is rendered somewhat more difficult in cases under paragraph 3(2)(c) because in the majority of instances the appellant is unrepresented and is unaware of the principles applicable in such cases as enunciated in Wrights’ Canadian Ropes and the several cases decided in recent years by the Federal Court of Appeal¹. Generally, the appellants appear before the court and tell their story. It is for this reason that it is of consummate importance for the respondent to disclose fully to the appellants and to the court the full basis of the exercise of the discretion. This should be set out in the reply to the notice of appeal under what are generally described as “assumptions”, which are in the nature of particulars. They must be complete and accurate. In some cases the officials who made the determination are called as witnesses to explain the basis of the decision. This is extremely helpful. By way of contrast, a case in which these rules were ignored was Clara Rita Harvey v. M.N.R., (95-340(UI)). There the respondent pleaded only that the Minister exercised his discretion against the appellant because she was married to the employer and argued only onus of proof. That was a clear case of an improper exercise of discretion.

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¹ I have in mind such cases as Tignish Auto Parts Inc. v. M.N.R., A-555-93; Ferme Émile Richard et Fils Inc. v. M.N.R., 178 N.R. 361; The Queen v. Bayside Drive-In Ltd., A-626-96; A.G. Canada v. Jencan Ltd., A-599-96 and A.G. Canada v. Jolyn Sport Inc., A-96-96.

[14] The second observation is that the second branch of an appeal from a determination under paragraph 3(2)(c) involves the formation by the Court of an opinion whether the parties would, had they been at arm’s length, have entered into a similar contract of employment having regard to the factors set out in that paragraph. The formation of such a conclusion is simply a part of the judicial function and, unlike the ministerial determination, is not the exercise of a discretion, even though the court is called upon to form an opinion in respect of precisely the same matter as the Minister was supposed to. In other words, the judicial forming of an opinion — which is what judges are supposed to do — is not a discretionary act, whereas the ministerial formulation of an opinion on the same subject manner is. The average unrepresented appellant may have some difficulty in grasping this subtle legal distinction.

[15] In Clara Rita Harvey v. M.N.R., (95-340(UI)) I posed the question “what is the nature of the discretion?” My possibly unsuccessful attempt to answer it was as follows at p. 2:

That the words “if the Minister of National Revenue is satisfied” confer upon him an administrative discretion seems to be settled¹. What is the nature of the discretion? Paragraph 3(2)(c) does not confer on the Minister any discretion to exercise or not to exercise a power once he has reached the requisite state of satisfaction. Once he is satisfied of the existence of the conditions in paragraph 3(2)(c) his discretionary function is at an end. Paragraph 3(2)(c) does essentially two things: it imposes on the Minister an obligation to consider all of the circumstances, including those specifically listed, and to reach a conclusion whether he is “satisfied” that it is reasonable to conclude that the related employer and employee would have entered into substantially the same contract of employment had they been at arm’s length. Once he is satisfied the result is inevitable. Wherein, then, does his discretion lie? Parliament has told him what he must consider. The obligation to consider all of the circumstances of an employment relationship and to reach a conclusion involves the exercise of very little discretion. The determination of the question whether arm’s length persons would have entered into a similar contract of employment is essentially one of fact. Nonetheless the Federal Court of Appeal in Tignish Auto Parts Inc. v. The Minister of National Revenue, A-555-93 (July 25, 1994) and in Ferme Émile Richard et Fils Inc. v. The Minister of National Revenue et al., 178 N.R. 361 has described the Minister’s function under paragraph 3(2)(c) as a discretionary one and an appeal to this court as being in the nature of a judicial review. This court must therefore approach the matter on that basis.

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¹ Re Cook and Cook v. Carter and Harrower [1952] 4 D.L.R. 656. In that case it was held that the words “if the judge is satisfied” referred to a discretion to be exercised judicially. It is true that the discretion under paragraph 3(2)(c) is an administrative, not a judicial discretion, but while that distinction may be relevant for other purposes, it is not relevant in determining whether the words quoted confer a discretion.

[16] To this observation I would simply add that the making of findings of fact is a necessary antecedent to the formulation of an opinion under paragraph 3(2)(c), but it is not of the essence of the exercise of the discretionary power.

[17] The third observation is that it has been held to be an error in law for a judge of this court to fail to set out fully the basis upon which he or she arrives at a conclusion that the Minister’s determination must be affirmed or reversed. A decision that the determination of the Minister is right necessarily either subsumes a conclusion that his determination was based on proper principles or, at least, even if the process by which the Minister arrived at his determination is legally flawed, renders the flaws in the process irrelevant. A trial judge who fails to spell out that he or she has followed the two step procedure is in serious danger of having the matter sent back to another judge who may well arrive at the same conclusion but who, it is hoped, will be sufficiently articulate in setting out his or her thought processes. Ferme Émile Richard et Fils Inc. v. M.N.R., 178 N.R. 361 (F.C.A.); Le Procureur général du Canada v. Thibault, [1997] A.C.F. No. 1499 (Q.L.)(C.A.). This point is emphasized in the recent decision of the Federal Court of Appeal in Corbo v. M.N.R., [1997] F.C.J. No. 1588 (Q.L.)(C.A.).

[18] Bearing these principles in mind and mindful of the myriad of errors that the Federal Court of Appeal appears to believe that the judges of this court are capable of making in appeals under paragraph 3(2)(c) I shall, with some trepidation, embark upon the first branch of the determination.

[19] By way of background, the question upon which the Minister of National Revenue was required to form an opinion was whether Sheila Persaud and Kathy D. Herring, had they been at arm’s length with Misty’s Seafood and Take Out Ltd. (“Misty’s”), would have entered into a substantially similar contract of employment with Misty’s, having regard to all the circumstances of the employment including those specifically mentioned in paragraph 3(2)(c).

[20] The periods in question are in the case of Sheila Persaud June 20, 1993 to October 9, 1993, June 19, 1994 to September 17, 1994 and June 11, 1995 to September 2, 1995, and, in the case of Kathy D. Herring, May 17, 1993 to September 18, 1993 and July 3, 1994 to September 24, 1994.

[21] There is no question that the appellants and Misty’s are related and that they do not deal at arm’s length. The shares of Misty’s are owned 61% by Viola Herring (Kathy D. Herring’s mother-in-law) and 39% by Donald Persaud (Viola Herring’s son-in-law). Sheila Persaud, Viola’s daughter, was married to Donald Persaud.

[22] Misty’s operates a restaurant on a seasonal basis in Murray River, in Kings County, Prince Edward Island. The restaurant was purchased by Donald Persaud and Viola Herring through the company Misty’s. Donald Persaud is a chemical engineer employed by the Province of New Brunswick. The restaurant was originally called “Bernice’s”. Donald Persaud’s association with it started in 1962 when he moved back from Alberta and decided, with Viola Herring, to acquire and expand the restaurant.

[23] During the periods in question, Misty’s hired Sheila Persaud as manager and Kathy D. Herring as chief cook. Other facts will be set out when I come to deal with the assumptions.

[24] The first branch of the enquiry involves a three part analysis, as follows:

(a) One starts with the so-called “assumptions” as pleaded. The pleading and use of assumptions in appeals from decisions or actions of the Minister of National Revenue in tax or unemployment insurance matters is unique in civil litigation. It stems primarily from two leading cases, Johnston v. M.N.R., [1948] S.C.R. 486 and M.N.R. v. Pillsbury Holdings Ltd., 64 DTC 5184. Assumptions as pleaded are in the nature of particulars of the factual basis of the Minister’s action, whether it be an assessment of tax under the Income Tax Act or the Excise Tax Act or a determination under the Employment Insurance Act. In effect, they define the onus that lies upon the appellant. If unchallenged they must be accepted for the purposes of the litigation as factually correct. For this reason it is of consummate importance that the assumptions pleaded be a full, accurate and honest disclosure of the basis of the Minister’s decision and that they include all findings or conclusions made by the Minister which ever party they may favour.

It is strange that the first time that an appellant is told what these so-called assumptions are is when the Attorney-General files the reply to the notice of appeal. They are not, as I understand it, normally communicated to the appellant prior to the determination nor is the appellant (at that stage the applicant) given any opportunity to rebut them or to state why the determination unfavourable to him or her should not be made. At the risk of stating what I should have thought was obvious, it is patent that this failure constitutes a fundamental breach of one of the most essential tenets of natural justice. Since we have it on high authority that the act of being or not being satisfied involves the exercise of a ministerial discretion it is imperative that the principle of audi alterem partem be honoured. Moreover, the failure to give reasons at the time the discretion is exercised is in itself a breach of another cardinal rule of natural justice.

For the reasons that follow, I do not consider it necessary in this case to take these failures to observe elementary principles of natural justice into account in my decision to set aside the determination. The determination is so patently flawed in a multitude of other respects that it is unnecessary to deal with these points, although in themselves the failure to observe rules of natural justice would justify setting aside the alleged exercise of the Minister’s so-called discretion.

The first step in the analysis is to determine whether the assumptions as pleaded, if unchallenged, support the determination. If they do not the determination cannot stand although the Minister would be entitled to plead and assume the onus of proving further facts in support of the determination. If the pleaded assumptions, if unchallenged, and standing alone justify the determination we move to the second step in the analysis.

(b) The second step involves the appellants’ adducing evidence to establish, if possible, either that some or all of the assumptions are wrong or that there are other material facts that the Minister failed to take into account and that he should have considered in exercising his discretion. In this regard, I am referring to the factors set out by Chief Justice Isaac in the passage quoted above from Bayside. Implicit in that passage is a consideration whether the assumptions are factually correct.

(c) The third step is to determine whether what remains after such of the assumptions as the appellant has challenged have been demolished and such further facts have been established as the appellant or the Minister put before the court warrants the ministerial exercise of discretion. Even at this stage, the court is not entitled to substitute its discretion for that of the Minister. If and only if the answer to that question is in the negative is the court entitled to move to the second stage.

[25] I begin then with the assumptions of fact pleaded by the respondent. In the Sheila Persaud case, they are as follows under paragraph 6 of the Reply to the Notice of Appeal:

(a) the Payor was a corporation duly incorporated under the laws of the Province of Prince Edward Island on October 14, 1992;

(b) at all relevant times the Payor’s issued voting shares were owned as follows:

Viola Herring (Appellant’s mother) 61%

Donald Persaud (Appellant’s husband) 39%

(c) the Payor operated a seasonal restaurant with seating inside for 44 persons and a take-out menu;

(d) the Appellant was engaged to perform the duties of a manager, cook and waitress;

(e) the Appellant’s duties were substantially the same in 1993, 1994 and 1995;

(f) the Appellant’s weekly salary was $490.00 for a 48 hour work week in 1993; $495.00 for a 45 hour work week in 1994; and $517.50 for a 45 hour work week in 1995;

(g) the Appellant received pay increases of 7.75% in 1994 and 4.5% in 1995 while the Payor showed losses in 1993, 1994, and 1995;

(h) the Payor’s gross profit, payroll, and annual net losses for the periods in question were as follows:

Gross Profit Wages Net Losses

1993 $32,345 $38,337 $10,790

1994 $26,173 $29,514 $ 9,015

1995 $18,753 $17,366 $ 4,768

(i) the Payor did not have the ability to pay all the wages as stated on the Payor’ financial statements and did not in fact do so;

(j) during the periods in question, when the Payor did not have enough cash on hand to pay all of it’s payroll all other staff was paid in priority to the Appellant and the Appellant was occasionally not paid;

(k) the Appellant was issued Records of Employment for amounts of earnings that had not been fully paid to her and she used these Records of Employment to apply for Unemployment Insurance benefits;

(l) the Appellant used her own vehicle for business purposes without reimbursement;

(m) the Appellant supplied kitchen equipment which was used by her and other workers of the Payor without reimbursement;

(n) the Appellant prepared food items at her residence without compensation;

(o) the Appellant personally owned the building and land where the Payor’s business operated and the Appellant was not compensated by the Payor for the use of this property;

(p) in 1993 the Payor operated for 19 weeks while the Appellant was only on its payroll for 14 weeks during the season and an additional two weeks after the Payor closed the restaurant and laid off all the other workers;

(q) in 1993 the Appellant required 12 insurable weeks in order to qualify for Unemployment Insurance benefits and she received a Record of Employment from the Payor with 16 insurable weeks;

(r) in 1994 the Payor operated for 23 weeks while the Appellant was on the payroll for only 13 weeks;

(s) in 1994 the Appellant required 12 insurable weeks in order to qualify for Unemployment Insurance benefits and she received a Record of Employment from the Payor with 13 insurable weeks;

(t) in 1995 the Payor operated for 18 weeks while the Appellant was only on the payroll for 12 weeks;

(u) in 1995 the Appellant required 12 insurable weeks in order to qualify for Unemployment Insurance benefits and she received a Record of Employment from the Payor with 12 insurable weeks;

(v) the Appellant performed services for the Payor without remuneration outside the periods in question;

(w) the Appellant’s employment with the Payor was an artificial arrangement designed in order to qualify the Appellant for Unemployment Insurance benefits;

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

(y) the Appellant was not dealing with the Payor at arm’s length;

(z) 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 at arm’s length.

[26] In the case of Kathy D. Herring, the assumptions set out in paragraph 9 of the reply to the notice of appeal are as follows:

(a) the Payor was a corporation duly incorporated under the laws of the Province of Prince Edward Island on October 14, 1992;

(b) at all relevant times the Payor’s issued voting shares were owned as follows:

Viola Herring (the Appellant’s mother-in-law) 61%

Donald Persaud (Viola Herring’s son-in-law) 39%

(c) during the periods in question, Viola Herring’s son Garry Herring was married to the Appellant;

(d) Viola Herring’s daughter, Sheila Persaud, managed the business during the periods in question;

(e) Sheila Persaud was Donald Persaud’s spouse;

(f) the Appellant was engaged to perform the duties of an assistant manager, cook and waitress;

(g) the Appellant’s weekly salary was $490.00 in 1993 and $400.00 in 1994;

(h) the Appellant’s rate of pay during the periods in question was excessive;

(i) the Appellant’s duties were substantially the same in both 1993 and 1994 while the Appellant’s weekly salary was decreased by $90.00;

(j) the Appellant’s rate of pay was not related to the duties she was charged with performing;

(k) the Payor’s gross profit, total payroll expenses and annual net losses for the periods in question are as follows:

Gross Profit Wages Net Losses

1993 $32,345 $38,337 $10,790

1994 $26,173 $29,514 $ 9,015

(l) the Payor did not have the ability to pay the wages as stated on the Payor’s financial statements and in fact did not do so;

(m) the Appellant used her own vehicle, her own kitchen equipment and her residence for business purposes without compensation;

(n) during the periods in question the Appellant and her husband operated “Alpha & Omega Motel & Cottages” which was located roughly 3 kilometres from the Payor’s restaurant;

(o) in addition to the motel and cottages, the Appellant’s husband operated a charter service during the periods in question under the name of “Captain Garry’s Deep-Sea Fishing” in 1993 and “Captain Garry’s Seal & Bird Watching Cruises” in 1994;

(p) the Appellant scheduled her work with the Payor around the needs the motel and cottage business;

(q) the motel and cottages required the Appellant to be actively involved in their day to day management;

(r) the Payor was open for business for the 19 weeks from May 17, 1993 to September 25, 1993 while the Appellant was only on the Payor’s payroll for 13 weeks;

(s) in 1993 the Appellant required 20 insurable weeks in order to qualify for Unemployment Insurance benefits;

(t) the Appellant received 7 insurable weeks from another employer between February 8, 1993 and March 26, 1993 and then she obtained a Record of Employment from the Payor for the remaining 13 insurable weeks;

(u) the Payor was open for business for the 23 weeks from April 23, 1994 to September 24, 1994 while the Appellant was only on the Payor’s payroll for 12 weeks;

(v) in 1994 the Appellant required 12 insurable weeks in order to qualify for Unemployment Insurance benefits and she received a Record of Employment from the Payor with 12 insurable weeks;

(w) the Appellant’s employment with the Payor was an artificial arrangement designed to enable the Appellant to qualify for Unemployment Insurance benefits;

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

(y) the Appellant was not dealing with the Payor at arm’s length;

(z) 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 substantially similar contract of employment if they had been dealing with each other at arm’s length.

[27] If the assumptions, as pleaded, had not been successfully challenged they would no doubt have formed an adequate basis for the determination.

[28] I do not think that I have heard an unemployment insurance case in which the material assumptions have been so thoroughly demolished. I accept the credibility of all of the witnesses. They struck me as hardworking and honest people and there is no basis upon which I could, based on the evidence before me and on my observation of their demeanour in the witness stand, reject their testimony or disbelieve them. In the case of Sheila Persaud, assumption (d) is wrong. She was hired as manager and in fact acted in that capacity. She was not hired as a cook and waitress. Assumptions (i), (j) and (k) are wrong. Sheila Persaud testified that she was paid and I believe her. Assumption (k) implies fraud and there is no basis for the suggestion. Assumptions (l), (m) and (n) were vehemently denied by Mrs. Persaud and I believe her. Her testimony was uncontradicted and unchallenged on cross-examination.

[29] Assumptions (p), (q), (r), (s), (t) and (u) are admitted but insofar as they imply that the appellant was employed solely to obtain unemployment insurance benefits, the appellant denies that implication. Mrs. Persaud denies assumption (v).

[30] A fundamental assumption is (w), that the employment of Mrs. Persaud was an artificial arrangement designed in order to qualify the appellant for employment insurance benefits. Mr. and Mrs. Persaud denied this with considerable force and I find that this fundamental assumption was wholly without foundation. Mr. Persaud testified that he needed someone whom he could trust to run the restaurant. He relied upon his wife because he was working in New Brunswick and could not be there. She had experience, was reliable and intelligent — an assessment that was borne out by my observation of her. There is no assumption or suggestion that her salary was excessive.

[31] So far as Kathy D. Herring is concerned, I should preface the examination of the assumptions by observing that she is extremely experienced in the restaurant and food business, having run a canteen and having worked in the restaurant on the Northumberland ferry. She has operated, with her husband, restaurants in the United States.

[32] Assumption (f) is wrong. She was hired as head cook.

[33] Assumption (h), that the rate of pay was excessive, was denied. Mr. Persaud testified that he paid her what he believed to be the going rate on the Island and it is not for me or the Minister to second guess his business acumen in deciding what to pay his sister-in-law (see Gabco Ltd. v. M.N.R., 68 DTC 5210). The salary paid to Mrs. Herring was in the broad range of salaries paid for similar work in the food industry in Prince Edward Island, according to the evidence.

[34] Assumption (i) refers to a reduction in salary in 1994. This had to do with the fact that the restaurant in 1994 was not as profitable as had been hoped. It is entirely consistent with an arm’s length relationship.

[35] I find as a fact that, contrary to assumption (j), her rate of pay was related to her duties. She was an experienced and competent cook.

[36] Assumptions (k) and (l) are denied by Mrs. Herring. She states that she was paid and I find it somewhat farfetched to suggest that anyone would work for his or her brother-in-law without pay. The implication of fraud in assumption (l) is wholly unfounded.

[37] Assumption (m) is wrong, on the evidence, and appears to be a figment of the imagination of the departmental official.

[38] Assumption (o) is admitted, but assumptions (n), (p) and (q) have been wholly demolished on the evidence of Mrs. Herring and that of her husband Mr. Herring, as well as that of Mr. and Mrs. Persaud. Mrs. Herring worked regular hours and took no part in operating or managing the motel and cottage business. In light of the strong denial by all witnesses of these assumptions, I have great difficulty in understanding how the departmental official from Human Resources Development Canada, a Mr. Heinz, could have reached such a conclusion. The respondent called no evidence to contradict the testimony of Mr. and Mrs. Herring and Mr. and Mrs. Persaud. Since Mr. Heinz ostensibly would have obtained most of his information from interviewing the employees, I draw an adverse inference from the failure to call him.

[39] The same comments apply to assumptions (r), (s), (t), (u) and (v) as in the case of Mrs. Persaud.

[40] There is simply no possible basis upon which assumption (w), that the employment was an artificial arrangement designed to enable the appellant to claim unemployment insurance benefits, can be supported. That assumption has been overwhelmingly demolished.

[41] What then is left? Virtually every major and material assumption has been destroyed. From the few scraps that remain there is no conceivable basis upon which the determination could be sustained.

[42] One final point merits comment. Both Mrs. Persaud and Mrs. Herring testified that the investigator from Human Resources Development Canada treated them in a bullying, intimidating and overbearing way, that he accused them of lying and in both cases went so far as to threaten them with criminal prosecution. I believe their testimony. It was not contradicted and not challenged on cross-examination. Mr. Heinz was not called as a witness. In the circumstances, their evidence is, I find, unassailable.

[43] Such conduct by an official of the Government of Canada toward persons in this country is wholly unacceptable. Although the determination is so badly flawed in other respects that it is unnecessary to treat this behaviour by Mr. Heinz as a separate ground for setting aside the determination, I should mention that by itself it could vitiate the exercise of the so-called ministerial discretion because it violates basic rules of natural justice. Counsel for the respondent stated that Mr. Heinz, the investigator, worked for Human Resources Development Canada, whereas the “discretion”, so-called, was exercised by the Director of Appeals in the local office of the Department of National Revenue. This in my view does not insulate the official making the determination from the flawed process whereby the facts upon which the determination was based are gathered. I have been unable to find any specific delegation in the regulations permitting the powers of the Minister under paragraph 3(2)(c) to be delegated to an official in the local office. I do not however propose to base my decision upon this point. Counsel were not asked to deal with the question and the matter may have to be dealt with in another case. If there is indeed no such specific delegation — indeed Part I of the Act contains no regulation making authority comparable to subsection 75(2) under Part III permitting the Minister to delegate his powers — counsel should be given an opportunity of addressing the question whether at common law such a delegation is permissible (see, for example, Carltona, Ltd. v. Commissioners of Works and others, [1943] 2 All E.R. 560) or whether the recent addition to the Interpretation Act of paragraph 24(1)(d) provides adequate authority for doing so.

[44] I turn now to the second branch of the enquiry. Mr. Leslie very fairly conceded that in light of the evidence it was appropriate that I embark on the second branch and determine whether, on all of 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). On this point, I have no hesitation. Clearly they would have and I rely particularly upon the testimony of Mr. Persaud, an impressive and articulate witness. He made a business decision to hire his wife as manager and his sister-in-law as head cook because he thought they were well qualified for the job and he paid them what he believed to be the going rate. He testified that had he been able to get people of that calibre who were at arm’s length with Misty’s he would have done so on the same terms. I find the arrangements between Misty’s and the two appellants perfectly normal. This is in my view a clear case. The conclusion reached by the official purporting to exercise the discretion and on which the determination was based is so perverse and so divorced from reality and from what I find to be the facts that it is seriously open to that question whether the determination was made in good faith. Even if the official in the Department of National Revenue honestly believed the facts that were given to him by the official in Human Resources Development Canada, those facts were so fanciful that I find it hard to believe that the assumptions were ever made. That however is more relevant to the first branch of the enquiry.

[45] On the second branch there can be no doubt. The evidence clearly establishes that had the parties been at arm’s length it is reasonable to conclude that they would have entered into substantially similar contracts of employment.

[46] The appeals are allowed and the determination that the appellants were not employed in insurable employment is reversed.

Signed at Ottawa, Canada, this 7th day of January 1998.

"D.G.H. Bowman"

J.T.C.C.