Citation: 2012 TCC 170
Date: 20120529
Dockets: 2010-2064(EI)
2010-3124(EI)
BETWEEN:
MICHEL CYR,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
J.M. CYR SPORTS INC.,
Intervener,
AND:
Docket: 2010-3125(EI)
JEAN CYR,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
J.M. CYR SPORTS INC.,
Intervener.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
These appeals concern the issue of
insurability. The appellants and the respondent agreed to proceed on common
evidence.
[2]
The appellants admitted almost all
of the relevant facts. The facts admitted in the arguments presented by the
appellants in the Reply read as follows:
[Translation]
i.
The company J.M. Cyr Sports Inc. (hereinafter J.M. Cyr) was founded on
April 9, 1987, and is involved in the retail sale and repair of sporting goods.
ii.
J.M. Cyr operates year round.
iii.
When J.M. Cyr was incorporated, the company shareholders were Michel
Cyr, Jean Cyr, Fernand Cyr and Marie-Marthe Leblanc.
iv.
Each shareholder held 25% of the company's voting shares.
v.
Fernand Cyr is Marie-Marthe Leblanc's husband. They are the parents of
Michel and Jean Cyr.
vi.
On October 24, 2007, J.M. Cyr mandated a team of accountants, tax
experts and lawyers to proceed with a corporate reorganization to ensure the
survival of the family business.
vii.
On that date, the company's share capital was changed in the following
manner:
|
J.M.
Cyr Sports Inc.
|
|
Holder
|
Class A
1 Vote/Share
|
Class D Non-voting
|
Class F
Non-voting
|
Percentage of Voting Rights
|
|
Michel Cyr
|
100
|
30,000
|
|
50%
|
|
Jean Cyr
|
100
|
30,000
|
|
50%
|
|
Fernand Cyr
|
|
30,000
|
31,598
|
0%
|
|
Marie-Marthe Leblanc
|
|
30,000
|
|
0%
|
|
Total:
|
200
|
120,000
|
31,598
|
100%
|
viii.
As part of this reorganization, Michel and Jean Cyr each received 50% of
the Class A voting shares.
ix.
Fernand Cyr and Marie-Marthe Leblanc did not receive any voting shares
during the corporate reorganization of October 24, 2007. However, they received
preferred shares.
…
13. On
December 23, 2008, and December 24, 2009, Jean Cyr filed employment insurance
applications for the periods from January 7, 2008, to December 20, 2008, and
from December 29, 2008, to December 19, 2009.
14.
On or around November 13, 2008, Michel Cyr filed applications for
employment insurance for the periods from November 5, 2007, to November 1, 2008,
and from November 10, 2008, to October 31, 2009.
15.
In accordance with the procedure set out in the Employment Insurance
Act, requests for a ruling concerning the insurability of the appellants
were reviewed by authorized CRA officers.
16.
It was ruled that under paragraphs 5(1)(a) and 5(2)(b) of
the Employment Insurance Act (hereinafter the Act), the appellants did
not hold insurable employment as they each held over 40% of their employer's
voting shares.
17.
The following rulings were made by the Canada Revenue Agency and are in
dispute in this case:
-
Concerning Michel Cyr:
. On December
15, 2009, a ruling for the period from November 5, 2007, to November 1, 2008;
. On March 10,
2010, a ruling for the periods from November 10, 2008, to October 31, 2009;
-
Concerning Jean Cyr:
. On March 10,
2010, a ruling for the periods from January 7, 2008, to December 20, 2008, and
December 29, 2008, to December 19, 2009.
18.
The appellants’ representatives discussed the matter with the authorized
CRA officers to understand why employment insurance benefits were denied to
Jean and Michel Cyr for the aforementioned periods.
19.
The appellants’ representatives realized at that moment that the
reorganization of J.M. Cyr on October 24, 2007 prevented the applicants from
benefiting from employment insurance benefits.
20.
After the periods at issue, the company J.M. Cyr then mandated its
lawyers to proceed with a second corporate reorganization so that Michel Cyr
and Jean Cyr would hold less than 40% of the voting shares of J.M. Cyr in order
to be eligible for employment insurance benefits.
21.
Thus, on March 9, 2010, the share capital was modified in the following
manner:
|
Name
of Shareholder
|
Percentage
of Votes
|
Ownership
Percentage
|
Class
of Shares Held
|
Number of Shares
Held
|
|
Fernand Cyr
|
10%
0%
0%
|
10%
0%
0%
|
A
D
F
|
20
30,000
31,598
|
|
Jean Cyr
|
40%
0%
|
40%
0%
|
A
D
|
80
30,000
|
|
Michel Cyr
|
40%
0%
|
40%
0%
|
A
D
|
80
30,000
|
|
Marie-Marthe Leblanc
|
10%
0%
|
10%
0%
|
A
D
|
20
30,000
|
22.
On February 8, 2010, Jean and Michel Cyr appealed the decisions of the
Minister of National Revenue (the Minister) and requested that the J.M. Cyr
share capital modification be recognized retroactively in order for their
employment to be recognized as "insurable" for the periods at issue.
23.
On April 14, 2010, following analysis of the appeals, the Minister
upheld its non-insurability decision concerning the appellants.
24.
On June 28, 2010, Jean and Michel Cyr appealed the Minister's decisions
to the Tax Court of Canada.
25.
On September 5, 2011, the Tax Court of Canada heard the evidence in the
employment insurance cases of Michel and Jean Cyr. It then postponed the
hearing until the outcome of the motion to vary pronouncement before the Québec
Superior Court.
26.
On February 23, 2012, the appellants abandoned their motion to vary
pronouncement before the Quebec Superior Court.
[3]
The evidence submitted by the
appellants established that the father of the appellants Fernand Cyr had strong
moral authority over the actions of his two sons, Michel and Jean Cyr. The
evidence also showed that the business was run in a very special way; in fact
only one of the sons worked for the company while the other collected
employment insurance benefits; after a while, the son collecting employment
insurance benefits would return to work and the other son would begin
collecting employment insurance benefits.
[4]
In other words, brothers Michel
and Jean Cyr, both appellants, did not work together but rather replaced each
other. The father, Fernand Cyr, stated that the company's viability hinged on
this shared work formula and therefore employment insurance was important if
not essential to the very survival of the business.
[5]
However, this dimension or aspect
of the evidence is not relevant to resolving this dispute but it will probably
be relevant in another potential dispute where the key determinants will be
different than those in the case at bar.
[6]
In fact, in the case at bar, the issue
essentially is to determine whether the respondent correctly evaluated and
analyzed the situation by assuming that the two appellants Jean and Michel Cyr
each held 50% of the voting shares or whether it should have instead assumed
they held 40% each under the amended structure with the residual 20% being
shared equally, namely 10% each, by their father and mother.
[7]
As admitted by the appellants, the
first structure and or plan resulted from a mandate entrusted to professionals
and or experts in the field. The appellants and their father, the funder, read
and formally accepted the proposed plan, knowing the importance of employment
insurability as mentioned in paragraphs 3 and 4.
[8]
Claiming they had not been
informed and did not know that this new structure deprived them of the right to
employment insurance, they again mandated experts to modify the corporate
structure so that appellants Jean and Michel Cyr would hold 40% instead of 50%
of the voting shares.
[9]
Claiming that an error was
committed during the initial plan is highly questionable particularly since the
people mandated to prepare the plan were professionals in the field. As an
aside, I would ask whether the State is responsible or should bear
responsibility for errors generally covered by insurers of the professionals
concerned; therein lies a highly speculative hypothesis since it is always
easier to assign blame for a situation to someone else.
[10]
Once the requested corrections
were made, did the jobs automatically become insurable? Must the court base its
analysis and conclusion on the corrected reorganization to determine
insurability or must it instead draw its conclusions based on the first
structure where the appellants each held 50% of the voting shares?
[11]
Assuming that following the
analysis, the work of the appellants is deemed to be insurable, should the same
work not be excluded from insurable employment for another reason, i.e. the
arm's length relationship between the parties, but that is another debate.
[12]
The case law has established that
determining the control of voting shares is a mixed question of law and fact,
which is separate from corporate control.
[13]
In Sexton v. M.N.R., [1991]
F.C.A. No. 417, 132 N.R. 71, Justice Hugeson of the Federal Court of Appeal
suggests a two-step analysis to answer the control of voting shares issue: to
begin with, it must be determined who holds the voting shares; then whether
there are circumstances interfering with the holder's free and independent
exercise of this voting right and, if applicable, who may legally exercise that
right in the holder's place:
10 Determining the control of voting shares in a company is a mixed
question of law and fact. To begin with, it must be determined who is the
holder of the shares; then, the question is whether there are circumstances
interfering with the holder's free and independent exercise of his voting right
and if applicable, who may legally exercise that right in the holder's place.
11 A person who has administrative or operational control of a company
does not necessarily control its shares; in fact, it often happens in the
modern business world that those responsible for managing a company have few of
its shares or none at all.
12 In the case at bar, the Tax Court of Canada judge concluded that the
applicants, who each held 17 per cent of the company's voting shares, actually
controlled it. While this conclusion may be correct, it in no way determines
the control of voting rights to the 33 per cent of the shares held by each of
the applicants' children. As the judge himself said, Michel and Charlène Sexton
"were owners and held the de jure power to control the new company,"
and there is no basis in the evidence for concluding that they ever gave up
their voting rights to the shares owned by them or in any way interfered with
the free exercise of that right.
[14]
With respect to a shareholder's
lack of control of voting rights, Justice Hugeson gives the example of when
shares are held in trust, which temporarily suspends a shareholder's voting
rights.
[15]
In the case at bar, the evidence
shows that during the period in question, from 2007 to 2010, all the voting
shares issued by the employer, J.M. Cyr Sports Inc., were held equally by both
appellants. Therefore, legally, each appellant had 50% control of the voting
shares.
[16]
According to the testimony of the
appellants and Fernand Cyr, the latter was the ultimate corporate
decision-maker. While the appellants never voted against their father's wishes,
the fact remains that there were no voting right restrictions on the
appellants' shares.
[17]
In addition, the fact that Fernand
Cyr controlled the operations and finances of the company does not preclude the
fact that the appellants each controlled 50% of the voting shares during the
period in question: in fact, it is possible and indeed commonplace that those responsible
for managing a company do not have control of its voting shares.
[18]
The involvement of the two
brothers in the company in terms of purchasing goods, hiring personnel and
signing cheques on behalf of the company indicates they were capable of managing
the company on their own without having to seek their father's opinion.
[19]
The appellants, as well as Fernand
Cyr, testified that they never intended to make the appellants ineligible for
employment insurance despite their desire to reorganize the company's share
capital to protect Fernand Cyr's investment and facilitate the smooth operation
of the business in the event of an "accident."
[20]
It is a well-established principle
that the manner in which a taxpayer structures his economic activities will
determine the tax impact. The Supreme Court of Canada has already ruled on this
matter in Shell Canada Ltd. v. Canada, 99 D.T.C. 5682, [1999]
3 S.C.R. 622:
39 This Court has repeatedly held that
courts must be sensitive to the economic realities of a particular transaction,
rather than being bound to what first appears to be its legal form: Bronfman Trust, supra,
at pp. 52-53, per Dickson
C.J.; Tennant, supra,
at para. 26,
per Iacobucci J. But
there are at least two caveats to
this rule. First, this Court has never held that the economic realities of a
situation can be used to recharacterize a taxpayer’s bona
fide legal
relationships. To the contrary, we have held that, absent a specific
provision of the Act to the contrary or a finding that they are a sham, the
taxpayer’s legal relationships must be respected in tax cases.
Recharacterization is only permissible if the label attached by the taxpayer to
the particular transaction does not properly reflect its actual legal effect: Continental
Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, at para. 21, per Bastarache
J.
[Emphasis added.]
This principle, pursuant to which "the taxpayer’s legal relationships must be respected
in tax cases," also applies to the Employment Insurance Act. This principle cannot be applied
retroactively. In other words, the taxpayer cannot make retroactive corrections
based on the result of an audit except for the purpose of correcting an error.
[21]
This is a reasonable and
understandable principle given that if it were otherwise, any interested person
could amend or modify any situation resulting in unexpected or undesirable tax
consequences.
[22]
However, such a limitation does
not eliminate the possibility of correcting errors without consequence in
situations where the error is essentially clerical and obvious. It is also
possible to make corrections or amendments when the parties agree. Such
modifications, corrections or amendments cannot, however, have an impact on a
third party, hence, in this case on the respondent, which, at the time of its
analysis, must take the parties' legal situation into account.
[23]
The case at bar does not involve
this type of error because the percentage of voting shares is a fundamental
aspect of a company's organization. Moreover, I would point out that the company's
planning and organization were handled by qualified people. With regards to the
corrections or new distribution of voting shares, this involves a structure
that cannot be enforced against the respondent.
[24]
In the area of insurability; the
parties to an agreement, accord or other arrangement can agree to make a change
retroactive. However, such changes are not enforceable against third parties,
hence, clearly not against the respondent.
[25]
For these reasons, I confirm the
merits of the determination that was subject to appeals and conclude that the
respondent, in making its analysis, rightfully took into account the reality
that prevailed when the appellants each held 50% of the voting shares. Since
the appellants each held 50% of the voting shares, their work during the
periods at issue cannot be deemed insurable employment; hence the appeals are
dismissed.
Signed at Ottawa, Canada, this 29th day of May 2012.
"Alain Tardif"
Translation certified true
on this 28th day
of August 2012.
Daniela Guglietta,
Reviser
Email this Content