Citation: 2009TCC633
Date: 20091221
Docket: 2009-289(EI)
BETWEEN:
CHERISE STEVENS,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The issue in this appeal
is whether the decision of the Respondent that the employment of Cherise
Stevens by her husband, Bradley Stevens, during the periods from August 9, 2006 to April 7, 2007 and
from July 27, 2007 to April 5, 2008 (the “periods under appeal”) was not insurable
employment for purposes of the Employment Insurance Act ("Act")
was reasonable.
[2] Subsection 5(2) of
the Act provides in part that:
Insurable employment does not include
...
(i) employment if the employer and employee
are not dealing with each other at arm's length.
[3] Subsection 5(3) of
the Act provides that:
(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; and
(b) if the employer
is, within the meaning of that Act, related to the employee, they are deemed to
deal with each other at arm's length if the Minister of National Revenue is
satisfied that, having regard to all the circumstances of the employment,
including the remuneration paid, the terms and conditions, the duration and the
nature and importance of the work performed, it is reasonable to conclude that
they would have entered into a substantially similar contract of employment if
they had been dealing with each other at arm's length.
[4] In this case,
Bradley Stevens was carrying on a video rental business as a sole proprietor
and hired the Appellant as his employee for the periods under appeal. Since the
Appellant was (and still is) related to her employer for the purposes of the Income
Tax Act, the issue in this case is whether the decision of the Minister of
National Revenue that Cherise Stevens and Bradley Stevens would not have
entered into a substantially similar contract of employment during the periods
in question if they would have been dealing with each other at arm's length, is
reasonable.
[5] In the case of Porter
v. M.N.R., 2005 TCC 364, Justice Campbell of this Court
reviewed the decisions of this Court and the Federal Court of Appeal in
relation to the role of this Court in appeals of this nature. In paragraph 13
of this decision Justice Campbell stated as follows:
In summary, the function of this Court is
to verify the existence and accuracy of the facts relied upon by the Minister,
consider all of the facts in evidence before the Court, including any new
facts, and to then assess whether the Minister's decision still seems
"reasonable" in light of findings of fact by this Court. This
assessment should accord a certain measure of deference to the Minister.
[6] Bradley Stevens was
an electrician. When companies required an electrician for a certain period of
time or for a particular job, they would contact the union hall and the person
responsible for assigning work would contact an electrician who belonged to the
union. In 2004 Bradley Stevens had some issues with his union and he was not
being assigned electrical work. He and his wife have a daughter who would have
been three years old in 2004. Since Bradley Stevens had accumulated approximately
1,000 videos and he always wanted to open a video store, he opened the video
store in his house in L'Ardoise in 2004. L'Ardoise is a small fishing community
in Cape Breton. Bradley Stevens
stated that the population of L'Ardoise was approximately 3,000 people.
[7] Bradley Steven’s
plan was that he would be the only person working at the business since he was
unable to obtain electrical work. After he started the video store business,
the business agent, who was in charge at the union hall, was replaced and Bradley
Stevens started receiving electrical work assignments. Bradley Stevens would
work at the business when he was not working as an electrician. When he was
working on electrical jobs the Appellant was hired to look after the video
store.
[8] In September 2005,
while Bradley Stevens was working as an electrician on a job site, he came in
contact with toxins in bird droppings, became ill and spent some time in the
hospital. His heart is enlarged. It has affected every muscle in his body. His
vision has been affected and is now threatened. He is no longer able to work.
He has had approximately 100 medical appointments with doctors, including
approximately twenty different specialists in Sydney and Halifax since
September 2005, to apparently no avail. He is no longer able to work as an
electrician or in the video store. He can do 3 five minute walks each week. He
cannot climb stairs or walk up hills or lift anything over 30 pounds. His only
source of income, other than the video business, is temporary workers
compensation benefits. He has received cash from fund raisers held in the
community and in Ontario and a lump sum payment from his Group Retirement Plan as a result of his
shortened life expectancy.
[9] As a result of Bradley
Stevens’ illness the Appellant became the only person working in the video
store. The Appellant was paid minimum wage and her hours were set by Bradley
Stevens. Bradley Stevens also determined the Appellant’s duties while she was
employed.
[10] Paragraph 7 of the Reply
states as follows:
7. In making his
decision, the Respondent relied on the following assumptions of fact:
a) the Appellant’s spouse was
Edison Bradley Stevens;
b) the Payor was a
sole-proprietorship owned and operated by Edison Bradley Stevens;
c) the Payor’s
business activity was the operation of a video rental store, which also offered
snack foods and a DVD and CD repair service;
d) the Appellant’s
duties including renting movies, selling movies and snacks, attaching rating
stickers to movies, and using a machine to repair DVDs (the “Duties”);
e) the business
was attached to the personal residence of the Appellant and the Payor (the
“Residence”);
f) there was a
sensor in the store that buzzed inside the Residence when someone entered the
store (the “Sensor”);
g) the Appellant
often stayed in the Residence until the Sensor notified her that there was a
customer in the store;
h) when the
Appellant received paycheques from the Payor, they were deposited into the
Payor’s business bank account;
i) when the
Appellant was purportedly paid cash, the Payor did not generate enough revenue
to pay the Appellant;
j) prior to the
periods under appeal, the Payor performed the duties himself;
k) the Payor has never had
employees other than the Appellant;
l) the Appellant worked some
hours that were not recorded;
m) the Appellant was sometimes
paid for days that she did not work;
n) the Duties were
not sufficient to occupy the hours that the Appellant purportedly worked; and
o) there was no
fluctuation in the Payor’s business activity to correspond with the changes in
the Appellant’s work hours.
[11] The Reply does not
identify which assumptions were relevant in making the determination that the
terms and conditions of employment would not have been substantially the same
if they would have been dealing with each other at arm’s length. The Appeals
Officer for the Canada Revenue Agency (the “CRA”) testified during the hearing.
She stated during the hearing as follows:
Q. Now
when making a report on this particular matter do you need to take any specific
factors into consideration?
A. I
look at the evidence that I have in front of me. I look at whether or not the
information that was provided at each stage is the same. I do my best to figure
out which way is -- which is the most accurate.
Q. So
what kind of -- what was the conclusion that you came to after assessing all
this information?
A. I
concluded -- I was in agreement with the Rulings Officer that the parties were
not dealing at arms' length.
Q. Can
you expand just a little bit more on how you came to that conclusion that they
weren't dealing at arms' length?
A. Sure.
Just one thing too in 2005 when the ruling was done I do go back in the history
to take a look at what might have been different then. And if you look at the
letter they dealt with contract of service compared to arms' length.
So
I had to -- I had nothing really to go by or compare anything from '05
concerning arms' length. In '06/'07; '07/'08 the topic was more about arms'
length dealings. So if you go through that, I looked at the remuneration and
what I have to compare to is whether or not a person who's not related to the
payer would have been treated the same.
So
when I look at remuneration I see that cheques were deposited back in to the
business bank account with no subsequent withdrawals to actually take money
home to Cherise so I don't see how that would happen for an arms' length
person.
A
person who's not related would also not be paid for hours that they did not
work. An arms' length person would also -- the store would not change its
hours based on that person's schedule.
I
don't see how a person or a business would remain open and go in the -- in a
deficit, that significant of a deficit if they hired an arms' length person. I
believe that if an arms' length person was hired that she'd be -- that the
person would actually be working less hours all year long and not a significant
increase in hours during certain periods and then off on EI for a period.
I
believe that there actually would have been revenue all year long just maybe at
14 hours a week all year long. I couldn't quite understand why they did it the
way they did it other than she -- it's because she's related to Mr. Stevens.
Q. So
that was for remuneration. Is there another factor ---
A. A
couple.
Q. ---
that you consider when dealing with arms' length cases?
A. Actually
it was probably a couple in there. Remuneration, terms and conditions. I also
look at nature and importance and duration. And the duration, when I look at
duration I look at how many hours she needs to qualify for EI.
When
her EI began and when it ended and how her hours change when it begins and
ends. And I noticed that as soon as her claim ended her hours increased
significantly in order to earn more for the next year.
Q. Any
other factor you'd like to ---
A. As
far as nature and importance we look at the need for the worker. And I believe
there was a need. Not to the extent that during the weeks where she was
working 58 hours a week I don't believe she was needed to that extent.
I
do believe she was needed -- he did need someone for the store and I don't deny
that for sure. One of the items that we look at under that is the fact that if
he's operating at a loss that much it's hard to consider that an arms' length
person would still be kept on the payroll to that extent.
Q. And
so what conclusion did this ultimately lead you to?
A. I
had no choice but to determine she was not at arms' length.
[12] The factors
identified by the Appeals Officer for the CRA justifying her conclusion that
the Appellant and Bradley Stevens would not have entered into a substantially
similar contract of employment if they would have been dealing with each other
at arm’s length can be summarized as follows:
(a)
the
Appellant’s cheques for her pay were deposited back into the bank account for
the business;
(b)
the
Appellant was paid for hours she did not work;
(c)
the
store changed its hours to suit her schedule; and
(d)
the
business was losing money and if they would have been dealing with each other
at arm’s length, the Appellant would not have worked the same number of hours
for the same periods of time (the duration of the work and the hours of
employment appeared to coincide with the Appellant’s entitlement to
EI benefits and appear to have been set to increase her benefits).
[13] The earlier ruling,
to which the Appeals Officer referred, was to a ruling in 2005 that the
Appellant’s employment was insurable employment for the purposes of the Employment
Insurance Act. The focus of that ruling was whether the Appellant was an
employee or an independent contractor.
[14] Since the reasons as
stated by the Appeals Officer for her finding do not reflect all of the
assumptions made in the Reply, it seems to me not all of the assumptions (as
set out in the Reply) reflect facts that affected the decision of the Appeals
Officer. It seems to me that the facts upon which the Appeals Officer relied
would be those facts as summarized above and which she stated as the basis for
her conclusion.
[15] The finding that was
made by the Appeals Officer that the cheques for the Appellant had been deposited
back into the account for the business was based on a bank statement from the Credit
Union showing a deposit on January 5, 2007 (which was during one of the periods
under appeal). The total amount of this deposit was $1,108.56 ($256 in cash and
$852.56 in cheques). Copies of the cheques that were deposited were attached
and these included cheques that were payable to the Appellant and that were
dated November 17, 2006 (for $179.93), November 30, 2006 (for $179.73),
December 4, 2006 (for $179.73), December 23, 2006 (for $179.73) and December
31, 2006 (for $109.84). It seems obvious from the documents that these were the
Appellant’s paycheques. There were also two other bank statements introduced
into evidence (one for a deposit made on February 27, 2006 and the other for a
deposit made on April 24, 2006). Neither one of these deposits occurred during
the periods under appeal nor were there any deposit slips for these deposits.
Both of these deposits also appear to include the Appellant’s paycheques.
[16] The Appellant was
adamant during her testimony that she always received cash for her paycheques.
If Bradley Stevens was going to the Credit Union she would give him her paycheques
to cash them for her. She was adamant that he would always give her the cash for
the cheques and she would then deposit the money into her own bank account. In
2007, she was only paid in cash.
[17] I accept the
testimony of the Appellant that Bradley Stevens cashed her cheques for her and
that he delivered the cash for the cheques to her. If Bradley Stevens had
sufficient cash to cover the cheques that he was cashing for his wife so that
he could give her the cash from other sources, it seems to me that he could then
deposit the cheques into the bank account for the business without also
withdrawing cash to cover the cheques. These transactions occurred almost 3
years ago and given Bradley Stevens’ medical problems over the past four
years he may well have had other matters on his mind that may have been more
important than recalling how particular cheques for his wife were cashed on a
particular day. Since there was only the one incidence of the Appellant’s
payroll cheques being deposited into the business bank account during the
periods of appeal and since the Appellant was adamant that she always received
cash for her cheques, it does not seem to me that this deposit record
establishes that the Appellant’s pay went back into the business as the cash
for her cheques could have been covered by other cash that Bradley Stevens had
on hand, including other cash from the business.
[18] The finding by the Appeals
Officer that the Appellant was paid for days that she did not work was based on
the hand written schedule provided by the Appellant of the days that she had worked
and comparing this to the days for which she was paid. However the copy of the
hand written schedule that was made for the Appeals Officer was not correct.
During the hearing it was discovered that the two days identified by the Appeals
Officer (Sunday July 29, 2007 and Sunday August 26, 2007) as days for which the
Appellant was paid but did not work were actually included as days that the
Appellant had worked in her hand written schedule but when this hand written
schedule was copied, the page on which these two days appeared was not copied
correctly and these days (which appeared at the bottom of a page) did not
appear on the photocopied page. Once this error was discovered the Respondent
acknowledged that this fact was not correct and therefore should not have been
a factor that should have been taken into account to determine whether or not
the Appellant and Bradley Stevens would have entered into a substantially
similar contract of employment if they would have been dealing with each other
at arm’s length. The Respondent also withdrew the assumption made in paragraph
7 m) of the Reply. It is clear that this fact was relied upon by the Appeals
Officer in making her determination and that this fact was not correct.
[19] The other reasons
relate to the hours that the Appellant worked. The Appeals Officer had made a
comment with respect to the hours being changed to suit the Appellant. However
there was no evidence that the hours of the video store were set to accommodate
the schedule of the Appellant. The Appeals Officer also testified that she was
concerned that the number of hours increased significantly in February 2007. As
well she expressed concerns that the video store was not open for business
throughout the entire year and whether the hours reflected the duties that were
assigned to the Appellant. She also stated that she would have expected the
video store to be open year-round for fewer hours each week.
[20] Bradley Stevens
stated that his business had encountered some problems. He was operating the
business in a very small community. The chief sources of income in the
community were lobster fishing, crab fishing and construction. During the
lobster fishing season, the individuals involved in this fishery would go out
every day to set or check their traps. He noticed that there was a significant
decrease in his business during the lobster season which was from May to July.
The crab fishing season was from July to September and during the crab fishing
season those individuals involved in this fishery would go out every second day.
As a result the Appellant was laid off (and the store was closed) from April to
July and the stored reopened for a couple of days per week during the crab
fishing season. Following the fishing season, those involved in the fishery
would fix up their boats and traps from September to December and their off
season was from January to April, which one would also expect to be a busier
time for a movie rental business since this is during the winter – early
spring.
[21] As well, because of
his problems with this illness, Bradley Stevens had encountered resentment in
the community and this affected his business. Bradley Stevens’ supervisor,
his foreman and their families lived in the area. Because of his illness (which
arose while he was on a job site) he made complaints to the Department of
Labour and the Union
which would not make him popular in the community. There were also rumours
circulating around the community that his illness was contagious and this would
have a negative impact on his business.
[22] It does not seem to
me that the hours of the video store were set to accommodate the Appellant but
rather were set to take into account the demand for videos in the community.
When any business is operated in a very small community the business owner must
take into account the characteristics of that community that could affect his
or her business. If a significant portion of the population is involved in an
activity that because of its nature would reduce the amount of time that those
individuals would have to watch movies for a particular period of time each
year (and hence the demand for movies would be reduced during such periods of
time), it seems reasonable to conclude that the video business could be closed
for those periods of time. The hours that the video store would operate in L’Ardoise
would not be the same as the hours that a video store would operate in a large
metropolitan area.
[23] The Respondent also
expressed concern about the increase in the hours per day in February 2007 from
4 hours per day to 10 hours per day. The Appellant and Bradley Stevens
indicated that was in part due to the movie classification system imposed by
the Province of Nova Scotia. Each
year the provincial government would issue a catalogue of movie titles with the
appropriate classification for each movie that was to be displayed on the movie
case. Bradley Stevens had started with 1,000 movies and now has
approximately 3,000 movies. This catalogue would be received early in the new
year. There is no doubt that it would take additional time to classify the
movies. Presumably once a movie was classified with a certain rating, that
rating would not change but there was no evidence presented with respect to how
the provincial government classifies movies and whether as a result of changes
in societal values a rating for a particular movie could be changed.
[24] The Appellant was
being paid minimum wage which Bradley Stevens indicated was $6 - $7 per hour.
An increase in her hours from 4 to 10 hours would only cost him $36 - $42 per
day. If a video rental business is to increase its sales, it seems to me that
it would have to be open longer hours and since, as noted above, February would
appear to be a prime month for this business (since it is during the winter and
during the off season in the lobster fishery) it does not seem unreasonable
that a video rental business would be open for business for 10 hours per day in
February.
[25] Another factor that
the Appeals Officer took into account was the fact that the business was losing
money. However it seems to me that there are many examples in the business
community where businesses that are losing money still retain arm's length
employees in the hopes that the situation will improve. The financial statements
for the business were not introduced into evidence. It is not at all clear what
part of the loss was attributable to non-cash items such as capital cost
allowance. Bradley Stevens also did have other sources of cash available to
him. There was no reconciliation of the amount of the losses and the amount of
cash that Bradley Stevens had available to him.
[26] The Appeals Officer
also stated that she was not satisfied that the duties that were assigned to
the Appellant were sufficient to justify the hours that she was employed. It
seems to me that the hours of operation for a retail operation would be set for
the convenience of the customers of the retail operation. There may be periods
of time in any retail operation when there are few, if any, customers and
therefore little, if anything, for the employees to do. However if the retail
store is not open then the customers cannot shop at that location. I do not
think that in an arm’s length relationship employees who work in retail stores will
always have duties to occupy 100% of their time (other than the requirement to
be there if a customer should arrive). It seems to me that Bradley Stevens was
trying to operate his video store as efficiently as possible, bearing in mind
his small market and the fact that he would have to be open a certain number of
hours if he wanted to have any customers.
[27] With respect to the
timing of the work in relation to the entitlement for employment insurance
benefits, it appears that the Appellant worked a significant number of hours in
excess of the minimum number of hours required to qualify for employment
insurance benefits and that the duration of her employment was dictated more by
the demands of the community. The minimum number of hours that the Appellant
needed to qualify was 420 hours and she worked more than twice that number of
hours. After Bradley Stevens became ill, when the Appellant was not working at
the store, the store was closed. It does not seem to me that the duration of her
employment was set only to obtain employment insurance benefits but rather to
try to keep the store and to reduce costs by closing the store during the
lobster fishing season. As Bradley Stevens noted, as a result of his illness he
has lost many things and his business is the last potential income earning
activity that he has been able to retain. It seems to me that he was trying to
keep the business going because he always wanted to operate a video store,
because he had lost all other means of earning a livelihood and because it gave
him something else to think about, other than his illness. Since he could not
work, if the store was to be kept open, either his wife or another employee
would have to be hired.
[28] The Appeals Officer
had also referred to purchases being made for supplies and movies when the
store was closed in May. The amounts spent on snacks were small ($15 - $30).
The Respondent was trying to suggest that the video store was actually open for
business during May and June and that the Appellant was working during these
months without being paid. The only evidence to support this was the purchase
of snacks during these months which could have been purchased in preparation
for the opening of the video store in July / August. I find that on a balance
of probabilities that the Appellant did not work in May and June. In any event,
even if the Appellant did work in May and June this work would have been
performed outside the periods of employment that are under review. In Théberge
v. The Minister of National Revenue, 2002
FCA 123, Justice Décary, writing on behalf of the majority of the Court of
Appeal, stated that:
19 What
a claimant does outside the period during which he or she is employed in what
the Minister considers to be insurable employment can be relevant, for example,
to verify that the claimant is unemployed, to determine the amount of his or
her benefits, or to establish his or her period of unemployment. However, for
the purposes of the exception provided in paragraph 3(2)(c) of the Act, what a
claimant does outside of his or her period of employment will be of little relevance
when, as in this case, it is not alleged that the salary paid during the period
of employment took into account the work performed outside of that period, that
the applicant had included, in the hours spent on his or her insurable
employment, hours worked outside of the period, or that work performed outside
of his or her period of employment had been included in the work performed
during his or her period of employment. It seems to me to be self-evident, and
this is confirmed by the evidence, that in the case of family businesses
engaged in seasonal work, the minimal amount of work that remains to be done
outside the active season is usually performed by family members, without pay.
Excepting seasonal employment, in a family farm business, on the ground that
cows are milked year-round amounts, for all practical purposes, to depriving
family members who qualify by working during the active season of unemployment
insurance and to overlooking the two main characteristics of such a business:
that it is a family business and a seasonal business.
20 A
claimant is not required to remain completely inactive while he or she is
receiving benefits. Under section 10 of the Act, benefits are payable for each
"week of unemployment" included in the benefit period and a
"week of unemployment" is a week during which the claimant does not
work a full working week. Under subsection 15(2) of the Act, a claimant may
have earnings in respect of any time that falls in a week of unemployment and
those earnings will be deducted only if they are in excess of an amount equal
to twenty-five per cent of the claimant's weekly benefit. It is moreover
settled law that work that is truly unpaid does not affect a claimant's status
as unemployed (Bérubé v. Canada (Employment and Immigration),
(1990) 124 N.R. 354 (F.C.A.)). I also note that under subsection 43(3) of the
Unemployment Insurance Regulations, a claimant who is employed in farming is
not regarded as working a full working week at any time during the period from
October 1 to March 31 if the claimant proves that the work he or she performed
was so minor in extent that it would not have prevented him or her from
accepting full-time employment. I realize that those provisions do not apply,
strictly speaking, in insurability cases, but they are nonetheless part of the
backdrop.
21 Getting
back to this particular case, the fact that the applicant worked without pay
for ten to fifteen hours each week outside the active season and while he was
receiving benefits may indicate that he would not have performed that unpaid
work if he had not been his employer's son. However, that is not the work we
are concerned with, and the judge erred by taking it into account in the absence
of any indication that the insurable employment at issue was subject to special
terms and conditions that were attributable services being rendered outside the
period of employment.
[29] Because the business
was adversely affected by the lobster fishing season, the video rental business
in L’Ardoise was a seasonal business. There was no indication in this case that
the Respondent was alleging that the Appellant’s salary was based on any hours
worked during May or June or that the Appellant included any hours worked
during May or June in her claim for EI benefits. Therefore it seems to me that
even if she did work without being paid during May and June that this should
not lead to a conclusion that the terms and conditions of her employment during
the periods under appeal would have been substantially different if the
Appellant and Bradley Stevens would have been dealing with each other at arm’s
length.
[30] While the buzzer
installed on the door was referred to in the Reply, the Appeals Officer did not
refer to it when discussing the reasons for her decision in her testimony. In
any event, there are undoubtedly many retail operations that have a buzzer or
some other means to notify employees when a customer has entered a store,
especially a small store with one employee. In such a situation, that employee
may have a back room available to him or her where he or she can relax until a
customer enters the premises. The presence of the buzzer in this case should
not affect a determination of whether the terms and conditions of the
Appellant’s employment were substantially similar to those that would have been
reached if the Appellant and Bradley Stevens would have been dealing with each
other at arm’s length.
[31] As a result I am
unable to conclude that the decision of the Minister still seems reasonable in
light of the evidence that was presented at the hearing. The appeal is therefore
allowed.
Signed at Halifax, Nova Scotia, this 21st day of December, 2009.
“Wyman W. Webb”
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