Grieves v. M.N.R., docket 96-2272-UI

Date: 19980226

Docket: 96-2272-UI

BETWEEN:

TONI GRIEVES,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

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

[1] This appeal was heard at Toronto, Ontario on January 19, 1998. The Appellant appeals the determination of the Minister of National Revenue (the "Minister"), dated September 17, 1996, that her employment with 1033563 Ontario Inc., operating as Paws & Claws ( the Company), from September 6, 1994 to April 14, 1995, was not insurable employment under the Unemployment Insurance Act (hereinafter referred to as the "Act"). The reason given for the determination was that:

"...You were not dealing at arm’s length nor were you deemed to be dealing at arm’s length with 1033563 Ontario Inc. o/a Paws & Claws."

[2] The established facts reveal that the Appellant is the wife of Richard Grieves who, at the material times, owned all of the outstanding shares of the Company. Thus, pursuant to section 3 of the Act and subsection 251(1) of the Income Tax Act, as related persons they are in law deemed not to deal with each other at arm’s length. It follows that, subject to the exception contained in subparagraph 3(2)(c)(ii) of the Act, the employment in question is categorized as "excepted employment", that is to say it is not employment which triggers the payment of unemployment insurance benefits upon its termination. The Minister has determined that the employment does not fall within the exception and the Appellant has challenged that decision.

[3] The Appellant did not appear in person, for health reasons, and was represented at the hearing of the appeal by her husband.

The Law

[4] In the scheme established under the Act, Parliament has made provision for certain employment to be insurable, leading to the payment of benefits upon termination, and other employment to be "excepted" and thus carrying no benefits upon termination. Employment arrangements made between persons, who are not dealing with each other at arm’s length, are categorized as "excepted employment". Spouses are deemed not to be dealing with each other at arm’s length pursuant to subsection 251(1) of the Income Tax Act, which governs the situation. Quite clearly the purpose of this legislation is to safeguard the system from having to pay out a multitude of benefits based on artificial or fictitious employment arrangements.

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

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

“The Minister shall with all due despatch determine the question raised in the application....”

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

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

[9]The Court went on to say:

"It is only if the Minister made one or more of these reviewable errors that it can be said that his discretion was exercised in a manner contrary to law, and ... the Tax Court Judge would be justified in conducting his own assessment 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.”

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

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

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

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

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

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

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

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

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

Stage 1 - Analysis of the Minister’s decision

[15] I turn now to consider in detail how the Appellant through her husband and agent challenges the decision of the Minister. It was apparent from the evidence that the facts upon which the Minister relied to form his determination, were assembled from a short telephone conversation between the Appellant and an unnamed government official. Neither the Appellant nor her husband saw fit to complete the standard questionnaire sent out to them by the Appeals Division at Revenue Canada despite repeated requests to do so. The contents of the telephone conversation were not put before the Court.

[16] The stated facts upon which the Minister relied are set out in the Reply to the Notice of Appeal. They are as follows:

"(a) the facts admitted and hereinbefore stated;

(b) the Payor was incorporated on June 14, 1993, and carried on business as a pet food store;

(c) during the period in question, the sole shareholder of the Payor/Corporation was Richard T. Grieves, the Appellant's spouse;

(d) at all material times, the sole shareholder of the Payor/Corporation had a permanent full-time job with Pet Science Ltd.;

(e) all business decisions, financial or administrative, including the determination of the terms and conditions of the Appellant's engagement with the Payor, were made by the Appellant and her husband together;

(f) the Appellant and her husband together controlled the day-to-day operation of the Payor's business;

(g) during the period in question, the Payor's business was in fact operated as a partnership or joint venture of the Appellant and her husband;

(h) during the period in question, the Appellant's responsibilities were to run and manage the business and her duties included, but not limited to, the following:

(i) scheduling of employees and all work to be done,

(ii) ordering all goods and wares sold by the Payor,

(iii) hiring and firing the Payor's employees,

(iv) supervising and directing the Payor's other employees,

(v) dealing with the Payor's clients,

(vi) advertising and promotion,

(vii) making bank deposits;

(i) during the period under review, there were three unrelated individuals reported to have worked for the Payor;

(j) any arrangements between the Payor and the Appellant were verbal and the Payor did not have a written contract with the Appellant;

(k) during the 34 weeks that the Appellant's services were engaged by the Payor, she received a weekly salary of $416 for the first 21 weeks and a weekly salary of $815 for the last 13 weeks;

(l) there was no material difference between the duties of the Appellant during her first 34 [sic] weeks of work and the last 13 weeks as there was no probation period and, therefore, the ensuing pay increase was excessive;

(m) the Appellant's salary during her last 13 weeks of work corresponds exactly with the weekly maximum insurable earnings for the period in question;

(n) during the period in question, the other unrelated workers received hourly wages which ranged between $7 and $8;

(o) unlike the Payor's unrelated workers who had work schedules set by the Payor, the Appellant had variable hours of work which she was free to determine herself;

(p) unlike the Payor's unrelated workers, the Appellant was not remunerated for any overtime hours she may have put in;

(q) unlike the Payor's unrelated workers, the Appellant was neither supervised by the Payor with respect to the day-to-day performance of her duties nor was she controlled by the Payor with respect to the manner in which she worked;

(r) during the period in question, the Appellant was not required to report to the Payor;

(s) the Appellant had full control with respect to the terms and conditions of her employment with the Payor;

(t) the Appellant, even when she was not on the Payor's payroll and was not paid to do so, performed her services for the Payor before and after the period in question;

(u) the Appellant worked a total of 34 weeks for the Payor and was let go on April 14, 1995 as she was expecting a child who was born April 20, 1995;

(v) the Appellant is related to the Payor/Corporation's sole shareholder and is accordingly related to the Payor within the meaning of the Income Tax Act;

(w) the Appellant is not dealing with the Payor at arm's length;

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

[17] The Appellant’s husband gave evidence on her behalf.

[18] The Appellant takes no issue with items 10a) to d), f), h), j), k), m), n), p), u) or v). She does take issue with items 10e), g), i), l), o), n), q) to t), w) and x).

[19] I do make the general comment that the manner in which the stated facts were assembled and put before the Minister is somewhat strange. The Appellant was given no opportunity to challenge them before the decision was made and indeed the first time that she became aware of them was after she filed her appeal and received a reply to that appeal from the Deputy Attorney General of Canada. Who assembled the original set of facts and the form in which they were put before the Minister remains a mystery. What is clear is that the Appellant had no opportunity to challenge or comment upon them before the decision of the Minister was taken. Even though the Appellant failed to respond to the questionnaire this would hardly seem to accord with the rules of natural justice. In any event that is how it was done. As it turns out, however, the evidence before me clearly revealed that most but not all of the stated facts are correct. They, on the whole, accord with the evidence. I will deal with those that do not, each in turn:

- Item e): The husband says she was given directions to follow and had to check with him if she wanted to do anything different.

- Item g): The husband says this is incorrect. He was the sole operator of the company and she had no stake in it.

- Item i): There were only two unrelated employees.

- Item l): The husband says that during the last 13 weeks of employment she had finished her probationary period and took on more responsibility. Thus he maintained that the pay raise was not excessive.

- Item o): The husband says that her hours were only flexible to the extent that she had to put in a minimum of forty hours per week. As a manager she had some flexibility how she put those in.

- Item q): The husband says that this is false as she had a number of set duties to perform each and every day.

- Item r): The husband says that she was required to report verbally.

- Item s): The husband says that this is not true.

- Item t): The husband says that this is not true.

- Items w) and x) are opinions of the assembler of facts and not facts per se.

[20] What then is the effect of all this. Certainly the evidence of the husband revealed that he started this pet store business and hired his wife to run it. There was clearly a contract of employment and she was chosen as the best of a number of candidates after a formal interview process in which the husband’s sponsor participated. Equally clearly the business did not do very well and by September 1995 it was closed out by action of the landlord. This was in part due to the location on a street which became closed. It is not clear how much of all this, if any, was before the Minister, or at least before the assembler of facts, as the Appellant did not complete the questionnaire sent to her.

[21] More troubling is the submission of counsel for the Minister. She submitted that the theory of the Minister was that the couple knew the wife was pregnant at the outset of the employment and planned together that she manage the store to enable her to obtain unemployment insurance benefits. This aspect makes absolutely no sense whatsoever, and is not a conclusion that the Minister could reasonably or objectively have arrived at. It was of course denied vociferously by the husband who said they had no idea she was pregnant at the time she started to manage the business. Indeed had she known it would only have made sense for her to have continued in her existing employment where her benefits would have been assured. This submission by counsel is not laid out in the statement of facts and it is hard to know from whence it came. The Minister however is obviously bound by it as it is said by counsel to be his theory. That theory is erroneous and completely unsupportable. I am led to the unequivocal opinion that the Minister has incorrectly taken into account a factor that has no basis and that has improperly distorted his view of the statement of facts. The facts are somewhat equivocal. The Appellant did not help her case by failing to respond to the questionnaire. Nonetheless there is not a significant difference between the facts as stated and as they were presented in evidence. Without this substantial error I would feel compelled to leave the Minister’s decision stand. However clearly he has taken into account something which is completely wrong and laid it at the heart of his decision. The decision in such circumstances is not sustainable in law and I must now advance to the second stage of the appeal process and decide 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) of the Act.

Stage 2 - Review of the evidence.

[22] After listening to the sworn evidence of the husband of the Appellant I was well satisfied on the balance of probabilities that the contract of employment, when it was initially established, was genuine. Steps were taken to interview a number of applicants for the job of manager of this new pet food store. The interviews were conducted not just by the husband but also by Corey Samuel who was the franchiser, supplier and some sort of sponsor of the new business. He was certainly an advisor and in his letter which was placed before the Court as exhibit A-5 he maintained that the contract was fair and reasonable. The Appellant underwent her training with the same person. Throughout the first 21 weeks there is no doubt in my mind that the contract of employment between the Company and the Appellant was substantially the same as if they had been at arm’s length. The remuneration paid throughout this period was consistent with the norm in the trade. That is supported by the various letters filed as exhibits and the evidence of the husband. She took a cut in salary but no doubt felt that if the business was successful she would be able to increase that as time went along. That would surely be the normal expectation of any employee in a management position. I am completely satisfied that when she was engaged there was no knowledge that she was pregnant and that she anticipated this being a long-term position. Otherwise she would not have left her established employment. She had the responsibility for the daily running of the store, subject to directions given to her by her husband and Corey Samuel. In all of these circumstances I can only and do come to the conclusion that throughout this first period of time, the Company and the Appellant would have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length. However all that seems to have changed at the end of the 21 weeks. By this time the business was not doing very well, due in substantial part to a road closure, the husband and wife clearly knew that she was pregnant with the baby due in April and that maternity benefits would be sought at that time. I am not of the view that if they had been dealing with each other at arm’s length the Company would have doubled her salary in those circumstances. In short order the Company was unable to pay its rent. The new salary was considerably above the norm in the trade. The pay increase was excessive and took the employment out of the arm’s length category.

[23] I have to be a little careful here because as counsel for the Minister points out in her able written submission it is not for this Court to determine the way in which the qualifying period for benefits is calculated. I do not seek to do that. In my view 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 more than reasonable to conclude the contract of employment during the first 21 weeks was substantially similar to one into which they would have entered if they had been at arm’s length. That changed at the end of 21 weeks and the new contract was not one into which they would have entered if they had been at arm’s length.

[24] The appeal is accordingly allowed and the decision by the Minister is varied to the extent that it applies to the first 21 weeks of the employment. The effect of this decision on the calculation of any benefits is entirely a matter for the Minister.

Signed at Toronto, Ontario, this 26th day of February 1998.

"Michael H. Porter"

D.J.T.C.C.