Date: 19980128
Dockets: 97-1016-UI; 97-1017-UI
BETWEEN:
BRUCE G. McKICHAN, JOHN ARNOLD,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
__________________________________________________________
For the Appellants: Bruce G. McKichan
Counsel for the Respondent: Nicole Levasseur
__________________________________________________________
Reasons for Judgment
(Delivered orally from the bench at London, Ontario
on November 18, 1997)
Mogan, J.T.C.C.
[1] This is an appeal under the provisions of the
Unemployment Insurance Act, more recently named the
Employment Insurance Act. The Appellants are shareholders
in Brohn Developments Inc. (the company), a small corporation
which is engaged in the business of construction and excavation.
The three shareholders of that company are the two Appellants,
Bruce McKichan and John Arnold, and a third person, Doug
Hodgins. The company is engaged in underground excavation and
construction of sewers and watermains.
[2] The business began in 1989 by the two Appellants and
Norman Hodgins, the father of Doug Hodgins. At that time, they
raised capital and became shareholders in proportion to the
capital they had raised or guaranteed, as follows:
Norman Hodgins - 40%
Bruce McKichan - 35%
John Arnold - 25%
The shareholdings have remained the same except that Norman
Hodgins transferred his 40% ownership to his son, Doug Hodgins.
There is a line of credit at the bank and each shareholder
guarantees the line of credit up to the maximum limit of his
percentage as a shareholder. The third party shareholder is not
an Appellant in these proceedings. Doug Hodgins is not actively
involved in the operation of the company while, in contrast, the
two Appellants are actively involved.
[3] Mr. McKichan is the bookkeeper and job superintendent and
Mr. Arnold is also involved in the actual operations of the
company. They work on a weekly basis as long as there is work
available. In the summer, the company might have as many as 10 to
15 employees. In the winter, and especially in January and
February when work is slack, there could be weeks when the two
Appellants would be the only persons employed by the company. In
those slack times, the Appellants repair equipment and keep
themselves busy making the company ready to perform when there is
adequate work. The name of the company itself is a combination of
the Appellants’ first names, Bruce and John, resulting in
the word “Brohn”.
[4] The Appellants are paid a weekly salary in the range of
$700 to $800. They are both managers and also hard workers in the
company’s endeavours. They are paid at the end of each week
and there are the usual source deductions for income tax and
Canada Pension Plan contributions. They perform services for the
company commensurate with their responsibilities and salaries
paid.
[5] The Respondent takes the position that the two Appellants
are employed in insurable employment because, pursuant to
paragraph 3(1)(a) of the Unemployment Insurance
Act, they are employed under an express or implied contract
of service. In other words, the Minister of National Revenue says
there is a contract of service between the company and each
Appellant. The Appellants render services to the company and
perform work for a fixed and pre-determined remuneration, paid on
a weekly basis. There is much jurisprudence to the effect that an
individual can be employed by a company in which he is a
shareholder and, indeed, an individual can be employed by a
company in which he is the only shareholder.
[6] The Appellants argue that they ought not to be regarded as
employees because they are the owners of the company. They
consider the enterprise as a proprietorship, of which they own
60%, and they are actively involved in the business. Therefore,
they do not consider themselves employees; they do not expect to
receive unemployment insurance benefits; nor do they believe they
should be eligible for them. Also, they do not feel they should
contribute to the unemployment insurance plan. The
Appellants’ argument is a forceful one, but the fact is
that there are Court cases which indicate that there can be a
contract of service with a major shareholder of a company whether
that person owns 20% or 40% of the shares of a closely-held
company with only three or four shareholders.
[7] I am satisfied on the evidence in these appeals that there
is a contract of service. The Appellants described in a very
forthright manner what they did. It is evident that they are paid
like any other employee with a fixed salary on a weekly basis.
They have identifed duties which they perform in the interest of
the company’s business and they are paid for those duties.
Indeed, the contrast is quite interesting between the two
Appellants who are working shareholders and who freely
acknowledged in evidence that they are paid a weekly salary, and
the third shareholder who is a non-operating shareholder. He does
not perform regular services and so he is not paid by the company
on a regular basis. He has no fixed contract with the company and
no pre-determined salary.
[8] The third shareholder is engaged in a farming operation
and owns heavy equipment for that farming operation. According to
the evidence of Mr. McKichan, when the company needs a float
to move heavy equipment or materials, it hires the tractor and
float from Doug Hodgins. Mr. Hodgins is paid for his equipment on
an hourly basis at the prevailing rate in the construction
industry for the hiring of similar equipment and, therefore, he
gets no advantage for being a 40% shareholder. It is interesting
to me, however, that the largest shareholder does not get paid
any amount, weekly or monthly, because he is not engaged in the
operation of the company and providing personal services for it.
The two Appellants who manage the company and provide services
every day of the week are paid on a regular basis.
[9] I find that there is insurable employment in these appeals
and, therefore, unemployment insurance premiums are payable by
both the company as to its employer portion of the premium, and
by the two Appellants as to their employee portions of the
premium.
[10] The Appellants raised the interesting argument that if
they applied for unemployment insurance benefits, they believe
they might be denied on the basis that there is a non-arm’s
length relationship between them and the company. Pursuant to the
provisions of section 251 of the Income Tax Act, I am
inclined to the view that there is an arm’s length
relationship between Mr. McKichan and the company because he owns
only 35% of the shares and he is not related to the other two
shareholders. Similarly, there is an arm’s length
relationship between Mr. Arnold and the company because he
owns only 25% of the shares and he is not related to the other
two shareholders of the company. Therefore, at first blush, under
section 251 of the Income Tax Act, I would say that each
Appellant is at arm’s length with the company. It could
possibly be argued that there is a non-arm’s length
relationship under the terms of paragraph 251(1)(b) which
raises the question of fact whether persons not related to each
other were at a particular time dealing with each other at
arm’s length.
[11] Having listened to the Appellants, I would be very
reluctant to find that as a matter of fact they are not at
arm’s length with the company. I regard the two Appellants
to be very much at arm’s length, admittedly though, they
cooperate in a friendly manner to achieve the successful
operation of the company that employs them. I would like to think
that the doubt raised by the Appellants in argument that they
might be denied benefits under paragraph 3(2)(c) of the
Unemployment Insurance Act would be such a remote
possibility so as to not be a material factor in anyone’s
consideration.
[12] On the basis of what I have heard, I have to dismiss the
appeals and hold that the Appellants were engaged in insurable
employment by Brohn Developments Inc. during the relevant period
from January 1, 1993 to December 6, 1996.
Signed at Ottawa, Canada, this 28th day of January, 1998.
"M.A. Mogan"
J.T.C.C.
Email this Content