Citation: 2012 TCC 87
Date: 20120323
Docket: 2010-578(EI)
BETWEEN:
LAVIN ASSOCIÉS INC,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
This is an appeal from
a decision by the Minister of National Revenue (the Minister) dated November
23, 2009, rendered pursuant to the Employment Insurance Act (the Act), according
to which Thomas Lavin, Dominique Lavin and Érica Gosselin held insurable
employment when they worked for Lavin Associés Inc. (the payor) during the
following periods: March 1 to April 30, 2009, for Thomas Lavin and Dominique
Lavin and April 6 to April 30, 2009, for Érica Gosselin.
[2]
In the case of Thomas
Lavin and Dominique Lavin, the Minister determined that they were
employees of the payor during the relevant periods under a contract of service
and that their employment was not excluded as insurable employment because he
was convinced they would have entered into a substantially similar contract had
they been dealing with the payor at arm's length. In the case of Érica
Gosselin, the Minister decided that she was an employee of the payor during the
relevant period under a contract of service and she was dealing with the payor
at arm's length, meaning her employment was not excluded as insurable
employment.
[3]
The respondent's
decision was based on the following facts, stated at paragraphs 18, 19 and 20 of
the Amended Reply to Notice of Appeal:
[translation]
(18) In making
his decision, the Minister determined that the workers held employment under a
contract of service, based on the following presumptions of fact:
(a)
the appellant was incorporated on July 26, 2007;
(admitted)
(b)
the appellant operated a professional business, specifically
a law firm; (admitted)
(c)
the appellant's three main shareholders are the
three workers involved in this case, who hold equal parts of the appellant's
voting shares; (admitted)
(d)
a shareholder agreement exists, but does not
restrict the voting rights of any of the shareholders; (admitted)
(e)
the shareholder agreement also states that all
business conduct decisions must be approved unanimously; (denied)
(f)
prior to the appellant's incorporation, the
three shareholder workers operated a law firm as an informal cost-sharing
company; (admitted)
(g)
at that time, the three workers had the status
of self-employed workers; (admitted)
(h)
the appellant acquired the building and
equipment for its head office in December 2008; (admitted)
(i)
half of the building and the basement are used
by the appellant and the other half has two rented dwellings; (admitted)
(j)
the appellant's facilities provides an office
for each worker and a secretary, and has a reception area; (denied)
(k)
Thomas A. Lavin and Érica Gosselin each have a
secretary; (admitted)
(l)
Érica Gosselin's secretary has a desk at the
reception, Thomas A. Lavin and Dominique Lavin each pay one third of 20% of
this secretary's salary, and the same is true for Thomas A. Lavin's
secretary who spends one day per week on bookkeeping; (admitted)
(m)
the purpose of incorporating was to reduce
paperwork and have only one accounting process; (admitted)
(n)
the facts show there are the so-called common
expenses related to the building and stationery, and the expenses associated
with each lawyer's mandate are accounted for by lawyer; (denied)
(o)
the appellant's business hours are from Monday
to Friday, 8:30 a.m. to 5:00 p.m., but sometimes the lawyers bring work
home with them; (denied)
(p)
generally, Érica Gosselin and Dominique Lavin
work five days, whereas Thomas A. Lavin works four days; (denied)
(q)
the appellant's clients mandate the appellant;
(admitted)
(r)
clients are billed on behalf of the appellant;
(denied)
(s)
the appellant receives all the income, which is
accounted for in the appellant's books under the name of the worker who
generated this income; (admitted)
(t)
the appellant's cheques require the signature of
two or three worker shareholders; (admitted)
(u)
each of the shareholders has the use of a
vehicle provided by the appellant; (admitted)
(v)
the workers try to plan their schedules so the
office is not empty during vacation periods; (admitted)
(w)
from the incorporation date to February 28,
2009, no salary was paid to the shareholder workers because they took advances
according to their respective needs and at the end of the year, the accountant
converted the advances into dividends; (denied)
(x)
in January 2009, the worker shareholders
verbally agreed to pay themselves a salary, starting March 1, 2009; (admitted)
(y)
since March 1, 2009, Thomas A. Lavin and
Dominique Lavin have been receiving a salary; (admitted)
(z)
although the salaries were paid annually, they differed
from worker to worker; Dominique Lavin received an annual salary of $32,000, Thomas
A. Lavin, $10,000 and Érica Gosselin, $42,000; (admitted)
(aa)
the amount of the salaries changed many times and
then settled on an equal salary based on the maximum earnings of the Québec
Pension Plan; (denied)
(bb)
Érica Gosselin was on maternity leave from June
28, 2008, to April 5, 2009; (admitted)
(cc)
she started to receive a salary from the
appellant upon her return, April 6, 2009; (admitted)
(dd)
only one of the three shareholder workers, Érica
Gosselin, chose to buy wage-loss insurance, which she paid for herself; (denied)
(ee)
the appellant is the owner of insurance policies
and pays the fees; (denied)
(19)
The appellant and two of the workers are related
within the meaning of the Income Tax Act because:
(a)
the appellant's shareholders were, in equal
parts, Thomas A. Lavin, Dominique Lavin and Érica Gosselin; (admitted)
(b)
Thomas A. Lavin is Dominique Lavin's father; (admitted)
(c)
there is an arm's length relationship between
Thomas A. Lavin, Dominique Lavin and Érica Gosselin; (denied)
(d)
the appellant admits that the three shareholder
workers form a related group for the purposes of the Income Tax Act. (admitted)
(20)
The minister found that the appellant and the
workers were deemed to have an arm's length relationship in the context of
these jobs because he was convinced it was reasonable to find that the
appellant and the workers would have entered into a substantially similar
contract of employment if they had been dealing with each other at arm's
length, considering the following:
(a)
the three shareholder workers, including
the related workers, carried out the same lawyer's duties; (admitted)
(b)
the working conditions were the same for the
related shareholder workers and for Érica Gosselin; (denied)
(c)
the three workers, including the related shareholder
workers, experienced the same salary fluctuation, the same terms of
remuneration and the same wage determination; (denied)
(d)
the tasks carried out by the shareholder workers
correspond to the needs and expectations of the appellant and are essential to
the appellant; (denied)
[4]
I note that each of the
workers testified in support of the payor's position and only Lyne Courcy, appeals
officer (who reviewed the decision of the insurability officer who had
determined that the workers held insurable employment when working for the payor
during the relevant periods) testified in support of the respondent's decision.
[5]
The workers' testimony,
which I felt was very credible, can be summarized as follows:
(1)
After the payor was
incorporated, each of them continued to manage his or her legal practice in the
same manner as when they were in a nominal partnership. On this, they stated
that:
(i)
the payor did not
supervise their work. They each determined their own work schedule and could
modify these hours as they wished. Each could be absent when they wanted, based
on family and personal needs. Each could determine the dates and length of their
vacations;
(ii)
each had the choice to
accept or refuse a mandate;
(iii)
each received from the payor
(as salary, bonus or dividend, their choice) the net earnings they generated
for the payor, the net earnings being essentially the result obtained by
subtracting from the hours billed the sum of the following two amounts:
(a)
his or her share of the
common expenses (such as those related to the building); and
(b)
inherent expenses of his
or her law practice (such as bailiff fees, court fees, stenographer fees,
expert fees, secretary's wages, expenses related to the rental car the payor made
available to each worker, and his or her disability insurance premiums;
(iv)
each could also require
the payor to lease a vehicle for their use, or that the payor hire a secretary
or a lawyer as an employee available exclusively for that worker, and the
expenses so incurred by the payor would be accounted for as that worker's
expenses in the calculation of the net earnings generated by his or her
practice;
(v)
the workers worked
almost exclusively on the cases of clients they had recruited.
(2)
At the time the payor
was incorporated, the workers had agreed that it would not give them any
instructions and would not supervise their practice in any way. They explained
that they were subject to only two rules: workers must not receive an amount
greater than the net earnings generated by their law practice and workers must
compensate the payor when the fees generated by their law practice are less
than the sum of their share of the common expenses and the expenses related to
each worker's law practice.
(3)
The workers were not bound
to each other or to the payor by any type of non-competition clause. The
workers explained that they had agreed each worker would remain the owner of
the clients they recruited and they could retain them if they decided to
practice law elsewhere than for the payor.
[6]
The evidence also
showed that:
(i)
Thomas A. Lavin and
Dominique Lavin are not related to Érica Gosselin.
(ii)
Dominique Lavin,
Érica Gosselin and Thomas A. Lavin hold 400 class A-1 shares, 400 class
A-2 shares and 400 class A-3 shares, respectively. The three share classes in
question are ordinary types that carry voting rights. These shares in distinct classes
allow the payor to, for example, pay a dividend to the class A-1 shareholder
without being required to pay one to the shareholders in other classes. This is
why, in 2009, the workers received unequal dividends. That year, Érica
Gosselin, Thomas A. Lavin and Dominique Lavin received dividends of $32,000, $10,000 and
$19,000, respectively. It should also be noted that the information slips for
2009, established by the payor indicate employment income of $32,000, $61,964 and
$60,372 for Érica Gosselin, Thomas Lavin and Dominique Lavin, respectively.
(iii)
The payor's board of
directors is composed of two people. During the relevant periods, Dominique Lavin
and Érica Gosselin were the payor's two directors. It should be noted that
under the terms of the shareholders agreement, signed by the workers (Exhibit I‑1,
Tab 6), the workers are required to take the measures required and use the
voting rights attached to their shares to elect a board of directors for the payor
and to keep "at least" Dominique Lavin and Érica Gosselin or
their representatives in place. I also note that under this agreement, any
decision regarding compensation for the workers and the declaration of
dividends must be approved by a unanimous vote of the payor's shareholders. I
also note, however, that the Minister's statement at paragraph 18(e) of the
Reply is inaccurate because only the decisions regarding the subjects described
at paragraph 9.1 of the shareholder agreement were to be approved by a unanimous
shareholder vote.
(iv)
Dominique Lavin and Ms.
Gosselin were guarantors for the payor's $35,000 line of credit.
(v)
The three workers were
guarantors for the hypothecary loan taken out by the payor.
Analysis and conclusion
[7]
The first question to
answer in this case is: Were the workers employed by the payor during the
relevant periods, under contracts for services?
[8]
When
the courts must define concepts from Quebec's private law for the purpose of
applying federal legislation such as the Employment Insurance Act, they
must follow the rule of interpretation at section 8.1 of the Interpretation
Act. To determine the nature of a Quebec employment contract and
distinguish it from a contract for services, at least since June 1, 2001, the
relevant provisions of the Civil Code of Québec (the Civil Code) must be
applied. These rules are not consistent with the rules stated in decisions such
as 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001]
2 S.C.R. 983 and Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C.
553. Unlike in common law provinces, in Quebec the constituent elements of a
contract of employment have been codified and since the coming into force of articles 2085 and 2099 of the Civil Code on January
1, 1994, the courts no longer have the same latitude as the common law courts
to define what constitutes a contract of employment. If it is necessary to rely
on previous court decisions to determine whether there was a contract of
employment, decisions with an approach that conforms to civil law principles
must be used.
[9]
The Civil Code
contains specific chapters governing the "contract of employment" (articles
2085 to 2097) and on the "contract of enterprise or for services" (articles
2098 to 2129).
[10]
Article 2085 states
that the contract of employment:
...is a contract by which a person, the employee, undertakes
for a limited period to do work for remuneration, according to the instructions
and under the control of another person, the employer.
(emphasis added)
[11]
Article 2098 states
that the contract of enterprise:
...is a contract by which a person, the contractor or the provider
of services, as the case may be, undertakes to carry out physical or
intellectual work for another person, the client or to provide a service, for a
price which the client binds himself to pay.
[12]
Article 2099 follows,
and states:
The contractor or the provider of services is free to choose the
means of performing the contract and no relationship of subordination exists
between the contractor or the provider of services and the client in respect of
such performance.
[13]
It
can be said that the fundamental distinction between a contract for services
and a contract of employment is the absence, in the former, of a relationship
of subordination between the service provider and the client, and in the latter,
the presence of the right of the employer to direct and control the employee.
Therefore, in the present case, it must be determined whether there was a
relationship of subordination between the payor and the workers.
[14]
The payor
has the burden of proving, on a balance of probabilities, the facts in issue
that establish its right to have the Minister's decision set aside. It must
prove the contract entered into by the parties and establish their common
intent regarding the nature of this contract. If there is no direct evidence of
this intent, the payor may turn to indicia in accordance with the contract
entered into and the Civil Code provisions that governed it. In this
case, the payor must prove there was no relationship of subordination if it
wishes to show that there was no contract of employment; to do so, it may, if
necessary, use indicia of independence such as those stated in Wiebe Door,
supra, namely the ownership of tools and the risk of loss and
possibility of profit. However, in my opinion, I feel that unlike the common
law approach, once a judge is able to find there is no relationship of
subordination, the analysis ends there when determining whether there is a
contract for services. It is not necessary to consider the relevance of the
ownership of the tools and the risk of loss or possibility of profit because
under the Civil Code, the absence of a relationship of subordination is the
only essential element of a contract for services that distinguishes it from
the contract of employment. Elements such as the ownership of tools and risk of
loss or possibility of profit are not essential elements of a contract for
services. However, the absence of a relationship of subordination is an
essential element. For both types of contract, it must be determined whether
there is a relationship of subordination. Clearly, the fact a worker behaved
like a contractor could be an indication that there was no relationship of
subordination.
[15]
In this case, the
evidence clearly established that the workers carried out their profession with
the payor, as they saw fit. In other words, the evidence clearly established
that the workers did not work under the control or direction of the payor
during the relevant periods.
[16]
Since the evidence
showed that the payor did not, in this case, exercise control over the workers
during the relevant periods, the next question to answer is: did the payor have
the power to control the way the workers did their work? This is what the
Federal Court of Appeal asks us to do in such a situation. In this regard, I
will reproduce the statements by Noël J.A. in Canada (Minister of National
Revenue – M.N.R.) v. Groupe Desmarais Pinsonneault & Avard Inc., 2002 FCA
144, [2002] F.C.J. No. 572, at para. 5:
5 The
question the trial judge should have asked was whether the company had the
power to control the way the workers did their work, not whether the company
actually exercised such control. The fact that the company did not exercise
this control or that the workers did not feel subject to it in doing their work
does not have the effect of removing, reducing or limiting the power the
company had to intervene through its board of directors.
[17]
In my opinion, the
question to ask now is the following: did the payor waive its power of
direction or control, or was this right reduced, limited or even revoked? Under
the Companies Act (see sections 123.91 to 123.93) shareholders
may, if all of them consent and make a written agreement to that
effect, restrict the powers of the directors. In this case, the payor did not
prove that a unanimous shareholder agreement restricting or revoking the power
of its board of directors in regard to the workers work existed during the
relevant periods. Throughout the case, the evidence showed that during the
relevant periods, there was an oral agreement between the workers under which
the payor did not control or direct their work in any way. However, the Supreme
Court of Canada, in Duha Printers (Western) Ltd. v. Canada, [1998] S.C.J.
No. 41, [1998] 1 S.C.R. 795 indicates that such an oral agreement cannot result
in a restriction or revocation of the directors' power over the workers' work. The
workers' credible testimony indicates that they had come to an oral agreement,
not only amongst themselves but with the payor, that the payor, through the
board of directors, would not exercise its right of direction or control over
their work or regarding the practice of their profession. In particular, I note
the testimony of Dominique Lavin (who had suggested the payor be incorporated)
according to which the two other workers had in a sense agreed to work in their
profession with the payor on condition that the complete freedom to exercise
their profession they had enjoyed with the nominal partnership would be
maintained with the payor. I note that Thomas A. Lavin essentially gave similar
testimony (see typed transcript, page 4, paragraphs 15 to 25 and page 5,
paragraphs 1 to 16).
[18]
Since under the terms
of the oral contract between the workers and the payor, the payor agreed (a commitment,
it must be remembered, that was respected) to not direct or control the
workers' work, I must find that the contract is a contract for services within
the meaning of article 2098 of the Civil Code and not a contract of employment
within the meaning of article 2085 of the Civil Code. Again, the
fundamental distinction between a contract for services and a contract of
employment is the absence, in the first case, of a relationship of
subordination between the service provider and the client and the presence, in
the second case, of the right of the employer to direct and control the
employee.
[19]
According to the
provisions of the Civil Code, regarding the contract for services:
(i) the employer's obligations pursuant to
article 2087 of the Civil Code are to: (1) provide work, (2) remunerate the
employee, (3) protect the health, safety and dignity of the employee.
(ii) moreover, pursuant to article 2088,
the employee is bound, among other things, to personally carry out the work
agreed to, as provided by the employer.
[20]
In this case, the
evidence clearly showed that the payor did not provide any work to the workers.
Since the payor did not provide work to the workers, the conclusion must be
that they had no obligation to perform work for the payor and that the workers
were dealing with the payor at arm's length under a contract for employment
pursuant to article 2085 of the Civil Code. In fact, the evidence showed that
the workers did not actually work for the payor. The method of remunerating the
workers very clearly shows that they worked solely for the purpose of ensuring
the success of their own practice.
[21]
Considering my
conclusion that the workers were not the payor's employees during the relevant
periods under a contract of service, it does not seem necessary to review the
other issues that led to the Minister's decision.
[22]
For all these reasons,
the appeal is allowed.
Signed at Montréal, Quebec, this 23rd day
of March 2012.
"Paul Bédard"
Translation
certified true
on this 3rd day of
May 2012.
Elizabeth Tan,
Translator
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