Date:19980323
Dockets: 96-1435-UI; 96-1437-UI; 96-1912-UI; 96-1915-UI;
96-2118-UI; 96-2119-UI
BETWEEN:
ANNA INSALACO, GIUSEPPE INSALACO, RINA GENOVA, JOSEPH GENOVA,
ANTONIO INSALACO, SILVANA INSALACO,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Cuddihy, D.J.T.C.C.
[1] These appeals were heard on common evidence in Toronto,
Ontario, on December 2, 1997 and February 17, 1998.
I- The appeals
[2] These are appeals from six determinations by the Minister
of National Revenue (the "Minister") of May 9 and
September 11, 1996, where it was determined that the employment
of Anna Insalaco from May 30 to
November 12, 1993 and from May 30 to October 29,
1994, the employment of Giuseppe Insalaco from
May 30 to November 12, 1993, the employment of
Rina Genova from May 30 to October 29, 1993
and from May 30 to November 12, 1994, the employment of
Joseph Genova from May 30 to November 1,
1993, the employment of Antonio Insalaco from
May 30 to November 1, 1993, and the employment of
Silvana Insalaco from May 30 to
November 12, 1993 and from May 30 to November 12,
1994, while employed by Goreway Construction and Paving Limited
(the "Payor") were excepted within the meaning of
paragraph 3(2)(c) of the Unemployment Insurance Act
(the "Act") because the Appellants and the Payor
were not dealing with each other at arm’s length.
II- The facts
[3] In rendering his decisions the Minister relied on the
facts and reasons outlined in paragraph 5 of his six Replies to
the Notices of Appeal which form part of this decision as if
recited at length herein.
[4] The Appellant, Anna Insalaco, through her
representative A. Natale, in appeal no :
96-1435(UI) as to paragraph 5 of the Reply to the Notice
of Appeal, admitted the allegations in subparagraphs (a) to (p),
(x) and (ad). The allegations in subparagraphs (q) to (w), (y) to
(ac), (ae) and (af) were denied.
[5] The Appellant, Giuseppe Insalaco, through his
representative A. Natale, in appeal no :
96-1437(UI) as to paragraph 5 of the Reply to the Notice
of Appeal, admitted the allegations in subparagraphs (a) to (p),
(r), (s), (u), (v), (ab) and (ac). The allegation in subparagraph
(q) was admitted with explanations to be given at the hearing.
The allegations in subparagraphs (t), (w), (x) to (aa), (ad) and
(ae) were denied.
[6] The Appellant, Rina Genova, through her
representative A. Natale, in appeal no :
96-1912(UI) as to paragraph 5 of the Reply to the Notice
of Appeal, admitted the allegations in subparagraphs (a) to (f)
and (j) to (m). The allegations in subparagraphs (g) and (n) to
(p) were admitted with explanations to be given at the hearing.
The allegations in subparagraphs (h), (i) and (q) to (x) were
denied.
[7] The Appellant, Joseph Genova, through his
representative A. Natale in appeal no :
96-1915(UI) as to paragraph 5 of the Reply to the Notice
of Appeal, admitted the allegations in subparagraphs (a) to (f),
(j) to (n), (p), (q), (s) and (t). The allegations in
subparagraphs (g), (o) and (r) were admitted with explanations to
be given at the hearing. The allegations in subparagraphs (h),
(i), (u) and (v) were denied.
[8] The Appellant, Antonio Insalaco,
through his representative A. Natale in appeal
no : 96-2118(UI) as to paragraph 5 of the Reply to
the Notice of Appeal, admitted the allegations in subparagraphs
(a) to (j), (l), (m), (q) to (v), (x), (y), (aa) and (bb). The
allegation in subparagraphs (k), (n) to (p), (w), (z), (cc) and
(dd) were denied.
[9] The Appellant, Silvano Insalaco, through his
representative A. Natale in appeal no :
96-2119(UI) as to paragraph 5 of the Reply to the Notice
of Appeal, admitted the allegations in subparagraphs (a) to (e),
(h) to (k), (p) to (s), (z), (bb) and (dd). The allegations in
subparagraphs (f), (g), (n), (o), (t), (u) and (y) were admitted
with explanations to be given at the hearing. The allegations in
subparagraphs (l), (m), (v) to (x), (aa), (cc), (ee) and (ff)
were denied.
III- The Law and Analysis
[10] i) Definitions from the Unemployment Insurance
Act
"employment" means the act of employing or
the state of being employed;
"Insurable employment"
[11] Subsection 3(1) reads as follows:
"3. (1) Insurable employment is employment that is not
included in excepted employment and 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;
..."
"Excepted employment"
[12] Subsection 3(2) reads in part as follows:
"(2) Excepted employment is
...
(c) subject to paragraph (d), employment where
the employer and employee are not dealing with each other at
arm's length and, for the purposes of this paragraph,
(i) the question of whether persons are not dealing with each
other at arm's length shall be determined in accordance with
the provisions of the Income Tax Act, and
(ii) where the employer is, within the meaning of that Act,
related to the employee, they shall be deemed to deal with each
other at arm's length if the Minister of National Revenue is
satisfied that, having regard to all the circumstances of the
employment, including the remuneration paid, the terms and
conditions, the duration and the nature and importance of the
work performed, it is reasonable to conclude that they would have
entered into a substantially similar contract of employment if
they had been dealing with each other at arm's length
..."
(d) the employment of a person by a corporation if the
person controls more than forty per cent of the voting shares of
that corporation;"
[13] ii) 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) ..."
[14] The Appellants have the burden of proving their cases.
Each appeal however must be decided on the facts particularly
established and on its own merits.
[15] It is the determinations of the Minister that are
appealed. In the case of Sylvie Desroches v. M.N.R.
(A-1470-92), at page 3 of the Reasons for Judgement, Desjardins,
J.A. of the Federal Court of Appeal says:
"...However, in the final analysis, as this Court held in
Attorney-General of Canada v. Jacques Doucet, it is the
Minister's determination which is at issue, namely that the
employment was not insurable because the applicant and the payer
were not bound by a contract of service. The function of the Tax
Court of Canada judge extended to considering the record and the
evidence in its entirety. Accordingly Marceau J.A., speaking for
the Court, said the following in Doucet:
The judge had the power and duty to consider any point of fact
or law that had to be decided in order for him to rule on the
validity of that determination. This is assumed by s. 70(2) of
the Act and s. 71(1) of the Act so provides
immediately afterwards...
The trial judge could go as far as deciding that there was no
contract between the parties..."
[16] If there is a doubt in the interpretation, it must favour
the claimant and there is nothing that prevents a taxpayer from
benefitting from a social program if the requirements of the law
are respected. This is what Judge Hugessen, F.C.A., described in
Attorney General of Canada v. Rousselle et al., decision
of October 31, 1990 (124 N.R. 339):
"I do not think it is an exaggeration to say, in light of
these facts, that if the respondents did hold employment this was
clearly "convenience" employment, the sole purpose of
which was to enable them to qualify for unemployment insurance
benefits. These circumstances certainly do not necessarily
prevent the employment from being insurable, but they imposed on
the Tax Court of Canada a duty to look at the contracts in
question with particular care; it is apparent that the motivation
of the respondents was the desire to take advantage of the
provisions of social legislation rather than to participate in
the ordinary operation of the economic forces of the market
place."
[17] The Court therefore has a duty to scrutinize with care
the conditions of the relations between a worker and a payor in
every case.
[18] Furthermore, subsections 70(2) and 71(1) of the
Unemployment Insurance Act grant to the Tax Court broad
remedial powers that would permit the Court to resolve any
dispute of a factual nature and to reverse, affirm or vary the
Minister's determinations.[1]
[19] All the Appellants were heard in support of the appeals.
Exhibits R-1 to R-22 were filed in the Court
record.
[20] Antonio Insalaco is married to
Silvana Insalaco. Giuseppe Insalaco is married to
Anna Insalaco. Antonio and Giuseppe Insalaco are
brothers.
[21] Joe Genova is married to Rina Genova. They are
not related to the Insalaco appellants.
[22] The Payor was incorporated on February 28, 1991.
From February 28, 1991 to September 27, 1993, all of
the Payor’s outstanding voting shares were owned by the
Insalaco family. Each of the four members owning 1/4 of the
shares.
[23] On September 28, 1993, two thirds of the
Payor’s outstanding voting shares were owned by the
Insalaco family of four, each member owning 1/6 of the shares.
The other third of the outstanding voting shares were owned by
the Genova family of two, each member owning 1/6 of the
shares.
[24] The Payor is in the construction business and specializes
in paving, concrete curbs, etc. The business is seasonal and
generally operates from May/June to October/November.
Working contract of Anna, Giuseppe, Antonio and
Silvana Insalaco
[25] These Appellants were related to the Payor within the
meaning of the Income Tax Act. Their work periods
under review all began on May 30, 1993. It was admitted that
Silvana and Anna Insalaco were put on the Payor’s
payroll each season to work in the office at a weekly salary of
$600. It was admitted that Giuseppe and Antonio Insalaco
were also on the payroll each season to work outside in the field
at a weekly salary of $700. It was admitted that at all material
times, the Payor engaged in the services of a full-time
bookkeeper. The bookkeeper, Suzan DiMichele would go in the
office once a week and also took care of the invoicing of the
Payor at its office after the office workers were laid off
work.
[26] The Minister, according to the evidence, took into
consideration the working arrangements and conditions of these
Appellants. He analyzed the payroll, the work carried out by the
Appellants, the seasonal type of business, the duties of the
Appellants, the fact that two other shareholders, sometime in
1993, invested into the Payor, and the fact that the Insalaco
members still owned two thirds of the Payor’s
shares.
[27] The Minister also took into consideration the wages that
always remained the same for each respective Appellant before and
after the arrival of the two new minority shareholders. He
especially took note and analyzed the duration, the nature and
the importance of the work performed and all the circumstances
surrounding the employment of these Appellants. Furthermore, the
Minister noted that the business activity of the Payor continued
substantially after the Appellants were no longer on the payroll
and it was admitted by Antonio Insalaco, in the Reply, that
he, Giuseppe Insalaco and Joe Genova all worked without
pay, outside the periods during which they were on the
Payor’s payroll. In fact, no real records were kept of the
hours worked.
[28] Did the Minister except the employments of the Insalaco
family members within the meaning of subparagraph
3(2)(c)(ii) of the Act?
[29] The Federal Court of Appeal in Attorney General of
Canada and Jencan Limited [2] has outlined the principles which must guide the
Tax Court when dealing with an appeal under
3(2)(c)(ii) of the 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 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...[3]
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.[4]
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 emphasize 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.[5]
Lord Macmillan’s comments were quoted with approval by
Abbott J. of the Supreme Court in Boulis v. Minister of
Manpower and Immigration.[6] See also Friends of the Oldman River Society
v. Canada (Minister of Transport)[7] and Canada v. Purcell.[8]
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.”
[30] The Tax Court in dealing with an appeal under
subparagraph 3(2)(c)(ii) of the Act must undertake
a two-stage inquiry.
[31] The Tax Court is justified in interfering with the
Minister’s determination 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 determination under subparagraph
3(2)(c)(ii) 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 paragraph 3(2)(c)(ii); or (iii) took
into account an irrelevant fact".
[32] In other words, the Court does not have to consider
whether the Minister's decision was correct. What the Court
must consider is whether the Minister's decision resulted
from the proper exercise of his discretionary authority.
[33] 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 the employee, if they had been dealing
with each other at arm's length.
[34] No other documents were provided to the Court except
those filed by the Respondent. No documentation was filed by any
of the Appellants that would have been different from that
examined by the Minister.
[35] The evidence before me did not show that the Minister
acted in bad faith or for an improper purpose or motive. The
Minister took into account all of the relevant circumstances as
expressly required by subparagraph 3(2)(c)(ii) of the
Act. No evidence before me showed that the Minister took
into account an irrelevant or any other important fact that could
have persuaded the Court to intervene.
Working contract of Joseph &
Rina Genova
[36] Joseph Genova is married to Rina Genova. They
are not related to the Insalaco Appellants.
[37] These Appellants had the burden of establishing on a
balance of probabilities that an arm’s length relationship
existed between them and the Payor.
[38] Rina Genova stated that she and her husband invested
$25,000 each in the Payor in January of 1993, and that when they
entered the partnership with the Payor, she would become an
employee. She worked as a receptionist, 40 hours a week at
the same salary as the other office workers. She described her
duties. The evidence did not establish who she replaced, when she
started work. She admitted that being a shareholder it was her
concern what the other office workers were being paid. She stated
"we all had a meeting and it was decided $600 for all the
ladies". I understood from the evidence that Anna and
Silvana Insalaco and Rina Genova were paid the same
wages, that they all worked in the same office, that their hours
were never recorded, that their duties appeared to be similar and
that they received their pay cheques late, according to the cash
flow available. Rina Genova also said "we would receive
a percentage of profits according to the percentage of shares we
had". She could not remember whether any profits were
made.
[39] Giuseppe (Joseph) Genova testified that he
became a partner in the Payor in 1993 and that he was approached
by Giuseppe Insalaco. He was asked to become a partner. He
confirmed that he and his wife both invested $25,000 each in the
Payor. The agreement was that he would overlook the Payor’s
affairs. He was paid $700 per week. His expenses were paid by the
Payor. He was the general manager and said "I overlooked the
whole company. I report to myself. I report to no one. I make the
decision of any move that has to be made. The men take my orders
as far as the job is concerned. The ladies earned $600. I
established the salary based on their experience. I hired the
wives because of their experience. If I were to hire someone
else, I would pay them the same, more or less. They put in 50
hours a week. If they stay late, it is up to them. They are not
paid extra hours. Some pay cheques were issued four or five at
one time". He further said that Anna and
Silvana Insalaco took care of all the books, one did the
accounts payable and the other the accounts receivable and that
Susan DiMichele, the accountant, attends the office of the
Payor once a week to go over the accounts, does the trial
balancing, prepares the records of employment and also does the
invoicing, "after the other employees left work". When
asked by the Court why the office employees did not stay on the
job to do this work instead of being laid off, he replied
"it was because it wasn’t that much". He also
admitted that he directed the bookkeeper while he was laid off
work and receiving unemployment benefits, that the bookkeeper was
paid by the hour and that the rent of the office was paid by the
month at a rate of $500.
[40] Under cross-examination, he was asked to file a draft
agreement (Exhibit R-16) entered into by the Payor and
all the Appellants, dated September 20, 1993, after Joseph
and Rina Genova began working for the Payor and after they
invested their money. The witness was also shown GST reports
(Exhibit R-21). He stated that the Court could rely
upon these reports which show sales of the Payor for the periods
ending April 30, 1993 at $56,085, July 31, 1993 at
$716,172 and October 31, 1993 at $728,354 and January 30,
1994 at $418,261.
[41] No other documents were filed by the Appellants Giuseppe
or Rina Genova that would demonstrate new facts that were
not before the Minister.
[42] The Minister decided that Joseph (Giuseppe) and
Rina Genova were in fact not dealing with the Payor
at arm’s length. Was he correct? Have these
two Appellants shown on a balance of probabilities that they
were in an arm’s length relationship?
[43] The case law provides guidelines as to what determines
that unrelated persons are or are not dealing at arm's
length.
[44] In Noranda Mines Limited and The Minister of National
Revenue, (1987) 2 C.T.C. at p. 2093, Bonner J. of the
Tax Court of Canada stated as follows:
"The process just described, especially step (d), is not
typical of what one might expect of parties dealing with each
other at arm's length.
The question of the presence or absence in fact of an
arm's length relationship has been explored by the courts in
many cases. The Supreme Court of Canada dealt first with the
matter in M.N.R. v. Sheldon's Engineering, Ltd.,
[1955] C.T.C. 174; 55 D.T.C. 1110. At page 180 (D.T.C. 1113)
Locke, J., speaking for the Court, said the following:
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 arm's 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 arm's length and that Section 20(2) was
inapplicable.
The decision of Cattanach, J. in M.N.R. v. T.R. Merritt
Estate, [1969] C.T.C. 207; 69 D.T.C. 5159, is also helpful.
At page 217 (D.T.C. 5165) he said:
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 were 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.
A few years later the importance of bargaining between
separate parties, each seeking to protect his own independent
interest, was again emphasized in the decision of the Exchequer
Court in Swiss Bank v. M.N.R., [1971] C.T.C. 427; 71
D.T.C. 5235. At page 437 (D.T.C. 5241) Thurlow, J. (as he then
was) said:
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 of them in carrying out particular parts
or functions of what the common object involves. Moreover as I
see it no distinction is to made for this purpose between persons
who act for themselves in exercising control over another and
those who, 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. The Sheldon's Engineering case
(Supra), as I see it, is an instance of this.
Finally, it may be noted that the existence of an arm's
length relationship is excluded when one of the parties to the
transaction under review is in a position in which he has de
facto control of both parties. In this regard reference may
be made to the decision of the Federal Court of Appeal in
Robson Leather Compagny Ltd. v. M.N.R., [1977] C.T.C. 132;
77 D.T.C. 5106.
" The issue in this appeal is essentially one of fact.
The onus rests on the appellant to establish on the balance of
probabilities that Noranda and Orchan did in fact deal with each
other at arm's length. That onus has not been
discharged."...
And further at p. 2095
"...A finding that the same mind directed the actions of
both parties to the transaction does not, in my view, involve a
finding that the mind was not, as regards both corporations,
acting honestly, in good faith and with the best interests of
both corporations in view.
On behalf of the appellant stress was also laid on the
admitted fact that the consideration flowing from Orchan
represented fair market value. The arm's length test looks
to the presence or absence of the power to influence or
control. An unusual result may well be indicative of the
absence of an arm's length relationship, but the fact
that a result is typical of what might be expected between
parties who do deal at arm's length does not negative the
existence of a non-arm's length relationship."
(underlining by undersigned)
[45] In 1991 in the Case of Peter Cundill & Associates
Ltd. v. Her Majesty the Queen [1991] l C.T.C., Culen, J. at
page 203 stated as follows:
"Whether the parties in this case were dealing at
arm's length is a question to be examined on its own
particular facts. Many factors are relevant in the determination
of the issue, such as ownership and control of a corporation.
However, share control (or absence of it) is not necessarily
conclusive; it is only a factor to be considered in determining
the question of arm's length (Robson Leather Co. v.
M.N.R., [1974] C.T.C. 872; 74 D.T.C. 6666, Collier, J. affd
[1977] C.T.C. 132; 77 D.T.C. 5106 (F.C.A.)).
In Interpretation Bulletin IT-419 Revenue Canada suggested the
following factors will determine whether or not dealings are at
arm's length;
(a) the existence of a common mind which directs the
bargaining for both parties to a transaction,
(b) parties to a transaction acting in concert without
separate interests, and
(c) de facto control.
The criteria enunciated in IT-419 have also been the criteria
consistently considered by the courts. In this case, it appears
the factor that will illuminate the situation is determining the
controlling mind of these two corporations. If the
"mind" acting for one party is the same
"mind" directing the second party, then they cannot
really be said to be dealing at arm's length (Oryx Realty
Corp. and Shofar Investment Corp. v. M.N.R., [1972] F.C. 33;
[1972] C.T.C. 35; 72 D.T.C. 6018; affd [1974] C.T.C. 430; 74
D.T.C. 6352 (F.C.A.)."
[46] In Penner et al. v. The Queen; 1994 C.C.H.
Canadian Limited, p. 6568, Teitelbaum, J. of the Federal Court
said:
"I agree with the Plaintiff's submission that the
facts of this case do not support a conclusion that a common mind
existed which directed the bargaining for both parties to the
transaction. Further, the above, in my view, is consistent
with the object and spirit of the SRTC provisions of the Act,
which were enacted to permit research companies to effectively
renounce their tax benefits in favour of investors who purchased
qualifying securities.
Further, I am not persuaded by the evidence that either party
to this transaction did, or had the power to exert, de
facto control over the other." (underlining by the
undersigned)
[47] From these cases parties are not dealing at arm's
length when the predominant consideration or the overall interest
or the method used amount to a process that is not typical of
what might be expected of parties that are dealing with each
other at arm's length.
[48] Parties will not be dealing with each other at arm's
length if there is the existence of a common mind which directs
the bargaining for both parties to a transaction or that the
parties to a transaction are acting in concert without separate
interests or that either party to a transaction did or had the
power to influence or exert control over the other. The dealings
of the parties are not consistent with the object and spirit of
the provisions of the law and they do not demonstrate a
fair participation in the ordinary operation of the economic
forces of the market place[9].
[49] Therefore, the existence of a combination of one or
several of these initiatives that would be inconsistent or
interfere with the negotiating between employer and employee and
with the object and intent of the legislation, will not survive
the arm's length test.
[50] The Court is also bound to ensure in analyzing all the
circumstances and the accepted evidence that the parties are not
defeating the purpose of the legislation[10].
[51] The members of the Insalaco family detained the majority
of the voting shares of the Payor. The Payor was in a difficult
financial state. The two members of the Genova family
invested in the Payor and Joseph Genova became the
General manager. According to the Insalacos', he took
over the control of the Payor. However, Giuseppe and
Antonio Insalaco and Joe Genova as of
September 20, 1993 had signing authority for the Payor. The
monies were or appear to have been invested in the Payor as of
January 1993. Who ran the Payor then? What was the arrangement?
None of the Appellants was working in January of 1993. The pay
period for each of the Appellants begins on May 30, 1993.
What were the real arrangements between the Payor represented by
the Insalaco members of the corporation Payor and the future
Genova members of the corporation Payor at the beginning of the
pay periods on May 30, 1993.
[52] Furthermore, the questionnaire (Exhibit R-5) which
was sent to Anna Insalaco, certified by Joseph Genova
(General manager) on March 21, 1996, indicates that the
Payor had no shareholders and that none of the workers were
related to any of the shareholders because there are no
shareholders. This is in direct contradiction with the evidence
and with the list of shareholders (Exhibit R-19). The
same questionnaire approved by Joseph Genova, reveals no
duties or secondary duties of the worker. No other questionnaire
was shown to the Court.
[53] The Minister also noted, as the evidence shows, that the
periods of employment of Joseph and Rina Genova began on
May 30, 1993 and that they would have invested in the Payor
in January 1993, a period previous to the draft agreement dated
September 20, 1993. Was Joseph Genova running the
company before the agreement? What were the real business
relations between the Payor and the Appellants, Joseph and
Rina Genova? It is difficult to say. The evidence of the
witnesses heard must be analyzed with caution.
[54] The Minister saw much more documented evidence than that
shown to the Court. The Minister’s allegations of fact
indicate that the Genova Appellants were not in an arm’s
length relationship, even though they were not related to the
Payor.
[55] From the evidence I heard and saw of the witnesses, it
did appear that the Payor was not in a position of necessary
independence that would create a real situation of subordination
between the Payor and the Appellants Joseph and Rina Genova.
I would go as far as to say that there did not appear to the
Court the existence of a real genuine contract of service between
Joseph and Rina Genova and the Payor. No other records or
minute books or other documentation was put forward to dispel
such a conclusion. It also appeared on the whole of these
relationships that all the Appellants were in some sort of a
joint venture. Such a situation would be sufficient in my view to
conclude that in fact there could not be an arm’s length
relationship and the Minister did well to adopt the position he
took.
IV- Decision
[56] The appeals are dismissed and the determinations of the
Minister are confirmed.
Dorval, Quebec, this 23rd day of March 1998.
"S. Cuddihy"
D.J.T.C.C.
Email this Content