Date: 20020807
Dockets: 2002-787(EI)
2002-788(EI)
2002-789(EI)
BETWEEN:
RON THOMPSON,
ROBERT BOOSE,
MICHAEL YOUNG,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Little, J.
FACTS
[1] The appeals of Ron Thompson v. The
Queen, Robert Boose v. The Queen and Michael Young v. The Queen
were heard together on common evidence.
[2] Okanagan Truck Centres Inc.
("Okanagan") is a company incorporated under the
British Columbia Company Act. In the relevant period the
shares of Okanagan were owned as follows:
Mactom Investments Ltd.
("Mactom")
1/3
Runciman Enterprises Ltd.
("Runciman")
1/3
KMA Ventures Ltd.
("KMA")
1/3
[3] The shares of Mactom were owned as
follows:
Ron
Thompson
51%
His
spouse
49%
[4] The shares of Runciman were owned
as follows:
Robert
Boose
51%
His
spouse
49%
[5] The shares of KMA were owned as
follows:
Michael Young
51%
His spouse
49%
[6] Okanagan is a holding company
which owns all of the issued shares of Kamloops Freightliner Ltd.
and Kelowna Freightliner Ltd. Kamloops Freightliner Ltd. and
Kelowna Freightliner Ltd. distribute trucks manufactured by
Freightliner Inc.
[7] Mr. Thompson was the manager of
finance for Okanagan.
[8] Mr. Boose was the manager of
service for Okanagan.
[9] Mr. Young was the manager of sales
for Okanagan.
[10] Each of the Appellants requested a
ruling from the Canada Customs and Revenue Agency
("CCRA"). In this ruling request, the Appellants
maintained that the amounts paid to them by Okanagan were not
insurable earnings within the meaning of paragraph 5(1)(a)
of the Employment Insurance Act
("Act").
[11] By letter dated the 16th day of
November 2001, an official of the CCRA stated that the employment
is insurable under the Act.
[12] Each of the Appellants disagreed with
the decision of the CCRA and filed an appeal to the Tax
Court.
ISSUE
[13] The issue is whether each of the
Appellants were employed by Okanagan in insurable employment in
1999 and 2000. If the Appellant and Messrs. Boose and Young are
exempted from the employment insurance premiums, they wish to
have all of the premiums that they paid under the Act in
1999 and 2000 reimbursed to them and they wish to have the
relevant employment insurance premiums paid by Okanagan in 1999
and 2000 reimbursed.
ANALYSIS
[14] Paragraph 5(1)(a) of the
Act reads as follows:
5. (1) Types of insurable employment - Subject to subsection
(2), insurable employment 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.
[15] Subsections 5(2) and (3) of the
Act read in part as follows:
5. (2) Excluded employment - Insurable
employment does not include
(i) employment
if the employer and employee are not dealing with each other at
arm's length;
(3) For the purposes
of paragraph (2)(i)
(a) the question
of whether persons are not dealing with each other at arm's
length shall be determined in accordance with the Income Tax
Act.
[16] Paragraph 5(3)(b) of the
Act deals with related parties. This paragraph does not
apply in this appeal since Messrs. Thompson, Boose and Young
were not related parties as defined.
[17] Paragraph 251(1)(b) of the
Income Tax Act reads as follows:
... 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.
[18] In essence, the Act appears to
be structured in this manner so that the Minister must be
satisfied that the individual is dealing with the employer
similar to the way an outside employee or arm's length
employee would deal.
[19] In considering the meaning of
"arm's length" in section 251 of the Income
Tax Act I have considered the comments of His Honour Judge
Bonner in William J. McNichol et al. v. Her Majesty the
Queen, 97 DTC 1111. In that case Bonner J. said at page
117:
Three criteria or tests are commonly used to determine whether
the parties to a transaction are dealing at arm's length.
They are:
(a) the existence of
a common mind which directs the bargaining for both parties to
the transaction;
(b) parties to a
transaction acting in concert without separate interests, and
(c) "de
facto control".
[20] After examining the testimony of Mr.
Thompson I have concluded that Messrs. Thompson, Boose and
Young had a "common mind" in their business dealings
with Okanagan. I have also concluded that the evidence provided
by Mr. Thompson indicates that he and his associates were
dealing "in concert without separate interests" in
their business dealings with Okanagan. It is also apparent that
Messrs. Thompson, Boose and Young had "de facto
control" of Okanagan.
[21] I have also compared the relevant facts
in this appeal with the relevant facts in the Tax Court decision
in Crawford and Co. v. Canada (Minister of National
Revenue), [1999] T.C.J. No. 85. I have noted the following
similar facts:
(a) Level of salaries
In Crawford, the Court looked at the level of salaries
that the principals received as well as the relationship of those
salaries to what would be paid in the marketplace and to other
employees.
Mr.
Thompson testified that he and Messrs. Boose and Young set their
own salaries. His Honour Judge Porter referred to the setting of
salaries by employees in Crawford and said: "This is
not a hallmark of economic separation."
(b) Comparison of the salaries paid to
the
employees to salaries paid in the marketplace
Mr. Thompson testified that the salaries which he and
Messrs. Boose and Young were paid by Okanagan were well
below what might be expected to be paid to a person employed by a
similar truck dealership.
In
Crawford, Porter J. referred to the fact that the
employees received lower salaries than similar employees in the
marketplace and said that this is another test of the
non-arm's length status between the employees and the
employer.
(c) Entrepreneurial desires
Mr.
Thompson testified that he and Messrs. Boose and Young worked for
Okanagan for the salaries that they received because they had the
opportunity to run their own business.
Mr.
Thompson said in his evidence:
We wanted to guide our own ship. We wanted to be the ones who
had control. (Transcript, p. 24, lines 12-13.)
In
Crawford, Porter J. said that entrepreneurial desires were
an indication that the relationship between the employer and
employees was not at arm's length.
(d) The salaries depended on
business profitability
Mr.
Thompson testified that when he and his associates set their
salary they took into consideration the profitability of
Okanagan.
In
Crawford, Porter J. referred to the situation where the
employee's salary depended on the profitability of the
employer and said that this factor points to a non-arm's
length arrangement between the employer and the employees.
(d) Vacation time
Mr.
Thompson testified that he and Messrs. Boose and Young were able
to arrange vacations as they wished but they were too busy to
take a vacation. Mr. Thompson said that the other employees
of Okanagan took their vacation on a regular basis.
Mr.
Thompson testified that in the year 2000 he went to work for
Okanagan on 339 days and in the 1999 year he worked a similar
number of days for Okanagan. (Transcript, p. 35, lines 6-11.)
Porter
J. noted in Crawford that the employees' work habits
were not of the type that one would expect in an arm's length
situation. I believe that a similar finding could be made with
respect to the work habits of Messrs. Thompson, Boose and
Young.
(e) Signing authority
In the
present situation Messrs. Thompson, Boose and Young each had
signing authority over the various bank accounts of Okanagan and
could withdraw whatever funds they wanted at any time.
In
Crawford, Porter J. referred to the fact that the
employees had signing authority for the employer and said that
persons operating at arm's length are generally unable to do
this.
(f) Guarantees
Mr.
Thompson testified that he and Messrs. Boose and Young had
provided personal guarantees for any financial transactions with
Freightliner. Mr. Thompson also testified that in 1999 the
extent of the guarantees would be between three to five million
dollars.
In
Crawford, Porter J. referred to guarantees provided by the
employees and said at paragraph 51:
It is doubtful in my view that employees dealing with the
Corporation at arm's length would sign guarantees of this
magnitude, or quite frankly, any guarantees at all.
At
paragraph 57 of the Crawford judgment, Judge Porter
said:
When I look at the evidence as it relates to Leslie Anderson,
there clearly does not exist the type of adverse economic
interest between him and the Appellant Corporation that would
lead me to the conclusion that they were dealing at arm's
length. There was an economic interdependence between him (and
his partners, the Sharp brothers) and the Corporation.
...
In
Crawford, Porter J. concluded his decision with the
following words:
I am of the view that there did not exist between each of the
workers in these appeals and the Appellant Corporation, the
degree of adverse economic interest such that one could say that
they were separate interests. Their economic interests were
clearly linked so closely with those of the Corporation, that the
latter could not be said to be acting with a separate mind. The
same kind of bona fide negotiating that would take
place between those traders, strangers in the marketplace, to
which I referred above, was not present in these arrangements.
There was not the kind of independence of thought or purpose
between the Corporation and the three individuals that one could
say that they were dealing with each other at arm's length.
Accordingly, I hold that none of them were employed in insurable
employment.
[22] In my opinion the facts in the
Crawford case and the facts in the present appeal are
virtually identical.
[23] I have carefully considered the sworn
testimony of Mr. Thompson and the relevant documents. In my
opinion it is clear that there was such a close interdependence
between the Appellants and Okanagan that it cannot be said that
they were dealing with each other on an arm's length basis in
the years 1999 and 2000. It therefore follows that in 1999 and
2000 (the years subject to the ruling) the arrangement between
the Appellants and Okanagan was not insurable employment within
the meaning of subsection 5(1)(a) of the
Employment Insurance Act because they were exempt by
virtue of the wording contained in paragraph 5(2)(i)
of the Act.
[24] The appeals are allowed and the
decision of the Minister with respect to Ron Thompson,
Robert Boose and Michael Young is vacated.
Signed at Vancouver, British Columbia, this 7th day of August
2002.
J.T.C.C.
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