Docket: 2010-3970(EI)
BETWEEN:
PERRY FLAMAN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
____________________________________________________________________
Appeal
heard on April 28, 2011, at Vancouver, British Columbia
Before: The Honourable
Justice G. A. Sheridan
Appearances:
|
For the Appellant:
|
The
Appellant himself
|
|
Counsel for the Respondent:
|
Amandeep K. Sandhu
|
____________________________________________________________________
JUDGMENT
In accordance with the following reasons, the appeal of the decision of
the Minister of National Revenue under the Employment Insurance Act is
allowed and the decision vacated on the basis that during the Period, the
Appellant had control of more than 40% of the shares of the employer corporation,
MSA Moving & Storage Ltd., and his employment was therefore excluded under
paragraph 5(2)(b) of the Act.
Signed at Ottawa, Canada,
this 3rd day of May 2011.
“G.A. Sheridan”
Citation: 2011TCC234
Date: 20110503
Docket: 2010-3970(EI)
BETWEEN:
PERRY FLAMAN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Sheridan J.
[1]
The Appellant, Perry Flaman, is
appealing the decision of the Minister of National Revenue that he was engaged
in insurable employment for the period January 1, 2007 to September 10, 2009
(the “Period”).
[2]
Applying the two-step test
established by the Federal Court of Appeal in Sexton v. Minister of National
Revenue (1992), 132 N.R. 71, the Minister’s position is firstly, that the
Appellant’s work was insurable employment under paragraph 5(1)(a) of the
Employment Insurance Act because he was engaged under a contract of
service with the payor, MSA Moving & Storage Ltd.; and that his employment
by MSA Moving & Storage Ltd. was not excluded employment under paragraph
5(2)(b) of the Act because the Appellant did not control more
than 40% of the voting shares of that company.
[3]
In making this determination, the Minister relied on the assumptions of
fact set out in paragraph 6 of the Reply to the Notice of Appeal:
a)
the Payor was in the business of household and
commercial moving;
b)
the Payor was incorporated on September 25,
2006;
c)
the Payor’s shares were owned by Ashay Ventures
Ltd. (“Ashay”) (55%) and JPACT Enterprises Ltd (“JPACT”) (45%);
d)
during the Period, the Appellant did not have
control over the voting shares of JPACT.
e)
Ashay’s shares were owned equally by Graham
Baggaley (“Graham”) and Lesley Baggaley (“Lesley”);
f)
the Appellant and his wife Joan Flaman (“Joan”)
each own 50% of the voting shares in JPACT;
g)
…
h)
both the Appellant and the Payor intended for
the Appellant to be employed pursuant to a contract of service;
i)
during the Period, the Appellant was an employee
of the Payor and was issued a T4 in each year;
j)
the Appellant held the position of
Vice-President and Operations Manager of the Payor;
k)
on October 1, 2006, Joan assigned a company
resolution as director to enter into a Share Purchase Agreement for the shares
of the Payor;
l)
on October 1, 2006, Joan, as director of the
company, signed a Promissory Note in the amount of $240,000.00 respecting the
purchase of shares in the Payor from Baggaley Enterprises Inc.;
m)
during the Period, no infringement existed which
would restrict Joan’s free and independent legal voting rights in JPACT;
n)
the Appellant did not control more than 40% of
the voting shares of the Payor during the Period; and
o) during the Period, the Appellant was not
related to a person who is a member of a related group that control the
Payor Corporation.
[4]
Turning first to the Appellant’s
status as an employee or independent contractor, I am satisfied that the
Appellant, in his capacity as operations manager, was an employee of MSA Moving
& Storage Ltd. The company issued him T-4’s during the period, expensed his
salary, paid him a fixed salary, and paid for benefits such as medical
insurance, sick days and vacation pay.
[5]
The real question is with the
second prong of the Sexton test concerning the Appellant’s control of
the voting shares of MSA Moving & Storage Ltd. and his challenge of the
assumed facts in paragraphs 6(n) and (o) of the Reply. Briefly summarized, it
is not disputed that during the Period, the Appellant and his spouse each owned
50% of the voting shares of their holding company, JPACT Enterprises Ltd.,
which in turn held 45% of the voting shares in MSA Moving & Storage Ltd.
The other 55% of MSA Moving & Storage Ltd. was held by Ashay Ventures Ltd.,
the holding company of the Appellant’s business partner and his wife, Graham
and Leslie Baggaley. While acknowledging that his spouse was the legal owner of
50% of the voting shares in JPACT Enterprises Ltd., the Appellant testified
that, in fact, they had an understanding that she would vote her shares as he
did, the effect of which was to give him de facto control of her shares.
As a result, he had control of 100% of the voting shares of JPACT Enterprises
Ltd. and thereby, control of 45% of the voting shares of MSA Moving &
Storage Ltd., a percentage sufficient to bring his employment within the
exclusion under paragraph 5(2)(b) of the Act.
[6]
The Appellant was the only witness
to testify in this Informal Procedure appeal. I found him credible and do not
doubt for a moment his testimony that his spouse was no more involved in the
activities of MSA Moving & Storage Ltd. after JPACT Enterprises Ltd.’s
acquisition of its 45% interest in that company than she had been when the
Appellant was merely employed as its operations manager. I accept his testimony
that his spouse’s involvement was limited to doing only what was necessary to
permit him to convert his role from operations manager as an employee of MSA
Moving & Storage Ltd. to operations manager employee and part-owner of the
business. For JPACT Enterprises Ltd. to purchase the MSA Moving & Storage
Ltd. shares, the Appellant had to borrow $300,000. Because their matrimonial
home served as collateral, the Appellant’s spouse was required to co-sign the
loan and to be a party to the various agreements underpinning the corporate
structure of the business.
[7]
Counsel for the Respondent argued
that such documents established that the Appellant’s spouse owned half of JPACT
Enterprises Ltd.’s shares, limiting the Appellant’s control of that company to
22.5%, well below the threshold for subsection 5(2)(b) to apply. Citing Sexton,
counsel contended that because there were no written agreements restraining the
Appellant’s spouse from exercising her voting rights in JPACT Enterprises Ltd.,
the Appellant could not be said to have had control of more than 40% of the
voting shares in MSA Moving & Storage Ltd. The first difficulty I have with
this analysis is that it overlooks the reality of the relationship between the
Appellant and his wife of many years. Further, Sexton is distinguishable
on the facts in that the Federal Court of Appeal upheld the trial judge’s
finding that there was an “absence of any evidence that [the
shareholders with de jure control of the company] did not have free
exercise of the voting right to the shares held by them”. [Emphasis added.]
[8]
The same cannot be said
in the present case. In this regard, it is
more on point factually with another case referred to by counsel for the
Respondent in her thorough review of the jurisprudence, St-Onge v. Minister
of National Revenue 2004 TCC 399. There, the trial judge looked beyond the
documentation establishing the legal ownership of the shares to determine who,
in fact, controlled the shares of the employer corporation. Based on the
evidence of the witnesses before him, he held that the employee shareholders
had structured the company to ensure that none would have more than 40% of the
voting shares merely to shield their otherwise insurable employment from
exclusion under paragraph 5(2)(b) of the Act.
[9]
No such motives were at play in
the present matter; my point is simply that in reaching its conclusion as to
the applicability of paragraph 5(2)(b), the Court must satisfy itself on
the evidence before it whether, in the words of Sexton, “there are
circumstances interfering with the holder’s free and independent exercise of
his voting right”.
In the present matter, there is sufficient evidence of such circumstances to
persuade me on a balance of probabilities that the Appellant had de facto control
of his spouse’s voting shares in JPACT Enterprises Ltd. Accordingly, during the
Period, he had control of more than 40% of the shares of MSA Moving &
Storage Ltd. and his employment was excluded under paragraph 5(2)(b) of
the Act. The appeal is allowed and the determination of the Minister is
vacated.
Signed at Ottawa, Canada, this 3rd day of May 2011.
“G.A. Sheridan”
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