Citation: 2010 TCC 625
Date: 20101203
Docket: 2009-2681(EI)
BETWEEN:
MICHAEL D. HUNTLEY,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Pizzitelli J.
Motions
[1]
On a
motion by the Respondent and on consent of the Appellant, the Reply to the
Notice of Appeal was amended to delete the last two sentences of paragraph 10.
[2]
On a
motion by the Respondent all witnesses other than the Appellant and the
Respondent’s representative, the CRA appeals officer, were asked to leave the
courtroom during the testimony of other witnesses.
[3]
This
appeal was heard over three days, commencing on January 26, 2010 for one day
and then adjourned to enable the exchange of documentation as had been
requested by the Respondent and continued on November 22 and 23, 2010. Prior to
resuming this trial on November 22, 2010, the Appellant brought a motion to
exclude any materials and references to the decision of the Minister of
National Revenue (the “Minister”) in the matter of Edward Huntley, his acknowledged
half-brother, chiefly on the grounds that that decision of the Minister was not
appealed to the Tax Court of Canada and in effect should not be subject to
attack here. I dismissed this motion on the basis that the subject matter of
this appeal is not the decision of the Minister in the case of Edward Huntley
but the appeal of the Minister’s decision in connection with this Appellant
only and that any evidence dealing with his half-brother relevant to this
decision would be given such weight as this Court deems just. Moreover, as the
Appellant himself was the one who introduced a plethora of documents dealing
with Edward Huntley’s decision during his examination-in-chief, it is a
bit too late to suggest we should be cancelling his testimony.
Issues
[4]
The
sole issues to be decided in this case are whether the Appellant and his
employer are related and hence excluded from being in insurable employment
within the meaning of paragraph 5(2)(i) of the Employment Insurance Act
(the “Act”), and if so, whether the Minister erred in his decision
that the Appellant and the Payer were not deemed to deal with each other at arm’s
length within the meaning of paragraph 5(3)(b) of the Act during
the period June 2, 2008 to November 7, 2008 (the “Period”).
Background
[5]
There
is no dispute that the Appellant was employed as an Amusement Device Mechanic
and Operations Manager by his half-brother, Edward Huntley, who operated
Gateway Children's Village Castle in proprietorship (the “Payer”); which was in the business of
operating a seasonal inflatable rides amusement business since 2003. There is
also no dispute the Appellant and Edward Huntley have the same mother but different
fathers and hence are half–brothers. Although the Appellant acknowledged he had
referred to Edward as a step-brother in past correspondence with Canada Revenue
Agency (“CRA”), he admitted he did not understand the legal significance
between the terms and in fact admitted he was raised with Edward as a normal
brother, never distinguishing or denying his relationship as being other than
as true brothers in the full sense of the word, and in any event, acknowledged
they had the same mother and hence were related by blood. There is also no
dispute between the parties that the Appellant, having regard to his duties,
was in a contract of service or was an employee of the business as opposed to
an independent contractor.
[6]
The
business is seasonal operating generally from June to October or November in
any year, usually completing its outdoor operations involving inflatable
children’s amusement devices and some 12-volt non-regulated motorcycle and car rides
in the fall depending on the weather, with some of the maintenance and winter
storage preparation requirements done in shop at the end of the outside
operating season prior to storage of the devices and accessories for the
winter, necessitating longer season operations as necessary. The Appellant was a
qualified Amusement Devices Mechanic (“ADM”) for the Payer, having all the statutory
licences needed to run the amusement devices and drive the truck to transport
them, which were a requirement of the position and hence qualified him to be
the designated Operations Manager for the Payer as required under the Technical
Standards and Safety Act of
Ontario (“TSSA”). He admitted that when the Technical Standards and Safety
Authority (“TSSA Authority”), which oversees the TSSA, commenced regulation of
inflatable rides in about 2003, both he and his brother were grandfathered as
provisional licencees for the one year but after that he took the course to
obtain his new licence since grandfathered licences ceased being accepted on
May 31, 2004. The Appellant received $500 per week each week based on a
40-hour work week during the Period and the Appellant was always paid by cash
although no receipts for payment were ever obtained. The responsibility of the
Appellant was the erecting and dismantling of the rides as well as the general
supervision of the rides and all repairs. The Appellant was also responsible
for keeping a daily log as well as the daily inspection of the rides before
opening them up to the public, both as required pursuant to TSSA regulations.
There may have been volunteer help or part-time labour provided by the business
where there was more than one ride in operation or the nature of the ride or
TSSA rules governing its operations required more than one person in
attendance. There is a dispute as to whether an ADM was required to actually
operate the ride or supervise the operation of the rides, which the Appellant
insisted must be the case since how else could he keep a daily log or be there
to inspect the rides or repair them while the TSSA Authority director suggested
the ADM did not have to actually operate the ride. However, the issue is not
really pertinent here as the evidence of the Appellant and the assumptions of
the Respondent confirm that the Appellant’s duties included staying on duty
from opening to closing during event operations.
[7]
The
inflatable rides business consisted of renting the equipment to organizers of
public events who either paid a rental fee or allowed Gateway Children’s
Village to be paid by retaining all ticket sales at the event other than 10-20%
which were remitted to the event organizer or committee, often a not-for-profit
or charitable organization. If it was raining, during which times the rides
were required to stop operating for safety reasons but remain erected either to
wait out the rain or act as visual advertisements for the event unless
cancelled by the event organizer, the business could in fact lose money. The
business of the Payer had small profits from 2004 to 2006 and losses in the
2007 and 2008 years, with a business loss of over $10,000 in 2008 due,
according to the undisputed evidence of the Payer, to the loss of the Payer’s
food concession contract for Western Fair in London, Ontario, which was his
other business activity prior to that year .
[8]
The
Appellant admitted he collected Employment Insurance Benefits after his work
ended with Gateway Children’s Village each season from 2003 to 2008. The
Minister reviewed the insurability of the Appellant’s employment in 2005 and
found him to be insurable in the end, however reviewed the insurability of his
employment for the Period due to new facts which had come to its attention in
the course of review of the insurability of Edward Huntley’s employment as
well.
[9]
From
May 21, 2006 to 2008, the Appellant was also the sole shareholder of Huntley
Foods Ltd. (“Huntley Foods”), a corporation incorporated since 1977, which was
in the business of providing food services including the sale of candy
confection at amusement events until about 2001 after which the business
consisted only of providing labour services to the Appellant’s proprietorships which
operated at the Brooklin Fair or the Western Fair in London, Ontario, or at other
events. Each of these proprietorships, identified as Parades, Patio Café,
Brooklin Fair, and Gateway (not the same as Gateway Children’s Village) later
called Western Fair more or less operated up to 2007 or 2008 and the Appellant
filed with his T1 Tax returns a Statement of Business Activities for these
proprietorships showing income earned as well as expenses including direct wages
and storage fees for the off-season. The wages for provision of the services of
Edward Huntley and a part-time worker known as Roland Richer to the Appellant’s
proprietorships were paid to Huntley Foods for the provision of labour which
itself included the amounts as income and claimed wages and salary expenses as
deductions.
[10]
The
proprietorships also paid storage fees to the Co‑tenancy consisting of
the Appellant and his half-brother Edward who owned a warehouse located at 103 Main Street in Highgate, Ontario, since 1989 where each
of the businesses stored their equipment or rides during the off-season and
conducted their repairs and maintenance work. The evidence shows that between
2003 and 2008 Huntley Foods also barely broke even or had small losses.
[11]
The
Appellant had acquired two-thirds of the shares of Huntley Foods on May 21, 2006,
as a result of the death of his mother, Ann Huntley, having already owned the
other one-third of the shares. The Appellant testified he did not work for his
own Corporation throughout the above period of years but instead continued to
employ Edward Huntley his half-brother and employer at Gateway Children’s
Village as Operations Manager for Huntley Foods Ltd. as well as employed the
services of a part-time employee named Roland Richer and a few other volunteers
or temporary workers who sought work at the fairs. In 2001 Huntley Foods
ceased to be active in the food business, and, according to the evidence of the
Appellant, disposed of all of its equipment, which was old, and instead became
a labour services business which supplied the services of the same Edward
Huntley and Roland Richer to the Appellant’s proprietorships as above
mentioned.
[12]
It
should be noted that Edward Huntley had been the Operations Manager for Huntley
Foods since at least 1995, most of those years during which the corporation was
controlled by the late Mrs. Huntley. Huntley Foods paid Edward Huntley
a salary very similar to the salaries the Appellant received from Edward
Huntley from 2004 to 2008 and in fact for 2005, 2006 and 2007 both were paid
the identical aggregate salaries although for 2008 the aggregate salaries
differed by $1,150 only in favour of Edward. Edward Huntley held the necessary
Propane Certificate and food handling certificate to qualify as Operations
Manager for Huntley Foods pursuant to the TSSA requirements. However, the Appellant
also testified he used to have a propane certificate when he and the Payer
operated at the Western Canada fairs earlier, and that a propane certificate
from TSSA Authority would not be required where the propane tanks did not
exceed 30 pounds in volume.
[13]
As
earlier referred to, it should also be noted that a recent ruling in May 2009
by the Minister confirmed Edward Huntley was deemed at arm’s length to Huntley
Foods during the Period which was not appealed by the Minister.
Position of the Parties
[14]
The
crux of the Appellant’s position is that since the evidence is that any person
who wished to occupy the position of Operations Manager for the Payer under the
TSSA requirements would have been required to hold an Amusement Devices
Mechanic’s certificate under that legislation enabling such person to set up,
run, supervise and dismantle the inflatable rides and train an apprentice, as
well as be required to have a valid Class D driver’s licence to transport the
rides by transport to the amusement events, then as the Appellant met all of
the Payer’s list of qualifications necessary for any party to be considered for
that position, he must be at arm’s length. The Appellant also argued the
businesses of his half-brother were separate from his businesses and that his
salary increases in 2005 and 2006 were the result in the greater workload
created due to the business having more inflatable rides as well as him
obtaining TSSA certification as an Amusement Device Mechanic for 2005. Similar
reasons were given for the similar increases in pay the Payer received from the
Appellant’s business during the same period by the Appellant but the
Appellant’s brother, Edward Huntley testified these were for cost of living
increases, making no mention of higher pay due to the TSSA qualifications.
[15]
The
crux of the Respondent’s position is that this was a cross employment scheme to
allow both the Appellant and Edward Huntley, his half-brother, to both receive
EI benefits every year which they both have since 2004. More specifically,
the Respondent’s position is that after considering all the circumstances of
employment the Appellant and Payer would not have entered into a substantially
similar contract of employment if they had been dealing with each other at arm’s
length during the Period, having specific regard to the facts pleaded in the
Minister’s assumptions which include that he received salary of $500 whether he
worked 40 hours per week or not, did in fact not work 40 hours per week if at
all, received his salary in cash, worked without pay during the off season, and
in fact paid his half-brother the same or substantially similar amount he
received from him suggesting cross employment was a condition of employment due
to the circular flow of money as well as other factors all of which will be
discussed in more detail.
[16]
It
should be noted that a great many of the Respondent’s assumptions in paragraph
19 of its Reply to the Notice of Appeal, particularly those found in paragraphs
(e), (g), (h), (i), (l), (n), (o) and (r) appear to deal with the provision of
tools, management, supervision, duties and other factors which are pertinent in
establishing whether the relationship was one of employment or independent contractor,
which the Respondent’s Rulings Officer advised was a necessary first step to
establish but frankly, since both sides agree the relationship was one of
employment, i.e., a contract of service, many of such assumptions become
somewhat irrelevant, particularly since most of them are not in dispute.
[17]
As
to the issue of whether the Appellant is related to his employer, Edward Huntley,
operating in sole proprietorship as Gateway Children’s Village, the fact the
two men have the same mother makes them related by blood within the definition
of paragraph 251(2)(a) of the Income Tax Act (“ITA”). As
blood relatives, they are deemed not at arm’s length within the definition
of paragraph 251(1)(a) of the ITA. As mentioned earlier,
there is really no dispute as to this issue.
[18]
Accordingly,
the only issue to be decided is whether the Minister erred in ruling they do
not deal with each other at arm’s length within the meaning of paragraph 5(3)(b)
of the Act.
[19]
The
question to be answered is in fact whether an unrelated person would have been
hired for the position on substantially the same terms and conditions as the
Appellant, having regard to the factors set out in that provision.
[20]
Although
a great deal of evidence was submitted by both the Minister and the Appellant
on the employment relationship of Edward Huntley to Huntley Foods, a
corporation controlled by the Appellant during the Period, I wish to make
clear at this point that notwithstanding the fact the Minister has determined
that such employment relationship is at arm’s length, I can draw no conclusive
inference from such arrangement to the case at hand. The issue here is whether
the arrangement between the Appellant and his employer, Gateway Children’s
Village, can reasonably be considered to be an arm’s length one only. In this
regard, I do not agree with the Appellant’s suggestion that the fact Edward was
already found to be at arm’s length by the Minister means that he as Appellant
in this case must by inference be at arm’s length to Edward operating at
Gateway Children’s Village. They may well have different terms of employment
that would lead to a different conclusion, which is what must be determined by
the evidence here in relationship to the factors that must be considered under
the law.
[21]
I
also do not accept the Appellant’s suggestion that the fact an arm’s length and
non-arm’s length person both would have to have the same qualifications to do
the job means they must both be treated as arm’s length. While such
qualifications are certainly factors to consider, they are by no means
determinative of the issue to be decided.
The Law
[22]
The
relevant provisions of the Act in this matter are paragraph 5(2)(i)
which excludes from insurable employment any employment where the employer and
employee are not dealing with each other at arm’s length and paragraph 5(3)(a)
which provides that for the purposes of paragraph 5(2)(i) above, the
question of whether persons are dealing with each other at arm’s length shall
be determined in accordance with the Income Tax Act. As I mentioned
above, it is not in dispute the Appellant is related to the Payer and
hence under the Income Tax Act is not at arm’s length to him.
Paragraph 5(3)(b) however provides that if the employer is related to
the employee, they are deemed to be dealing with each other at arm’s length if
the Minister of National Revenue is satisfied that, having regard to all the
circumstances, 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.
[23]
Before
analyzing all the relevant factors contemplated by paragraph 5(3)(b) of
the Act, it is important to summarize the law in relation to disturbing
a Minister’s discretion under the said paragraph.
[24]
The
Federal Court of Appeal decided in Canada (Attorney General) v. Jencan Ltd., [1998] 1 F.C. 187
(F.C.A.), in paragraph 37 thereof, that the Tax Court would only be
justified in interfering with the Minister’s determination where it is
established that the Minister:
i)
acted
in bad faith or for an improper purpose or motive;
ii)
failed
to take into account all of the relevant circumstances, as expressly
required in the circumstances; or
iii)
took
into account an irrelevant factor.
[25]
I
should note at the outset that there is no evidence here that the Minister
acted in bad faith or for an improper purpose or motive or that the Minister
took into account an irrelevant factor, but only that the Minister failed to
take into account all of the relevant circumstances as expressly required by
the Act.
[26]
The
position of the Respondent is obviously that the Appellant has failed to
demonstrate any of the above necessary to allow this Court to interfere since
it argues the Minister’s decision is still reasonable.
[27]
The
Respondent relies on the Federal Court of Appeal’s decision in Perusse v.
Canada (Minister of National Revenue), [2000] F.C.J. No. 310 (QL), leave to
appeal of which was denied by the Supreme Court of Canada, where Marceau J.A.
adopted his statements in Légaré v. M.N.R., 1999 CarswellNat 1458 where
Marceau J.A. noted in paragraph 14 thereof that:
… The Court is not mandated to make the
same kind of determination as the Minister and thus cannot purely and simply
substitute its assessment for that of the Minister: that falls under the
Minister’s so-called discretionary power. However, the Court must verify
whether the facts inferred or relied on by the Minister are real and were
correctly assessed having regard to the context in which they occurred, and
after doing so, it must decide whether the conclusion with which the Minister
was “satisfied” still seems reasonable.
[28]
In
paragraph 15 of the Perusse case, Marceau J.A also stated:
15 … The judge’s function is to
investigate all the facts with the parties and witnesses called to testify
under oath for the first time and to consider whether the Minister’s
conclusion, in this new light, still seems “reasonable” (the word used by
Parliament). The Act requires the judge to show some deference towards
the Minister’s initial assessment and, as I was saying, directs him not simply
to substitute his own opinion for that of the Minister when there are no new
facts and there is nothing to indicate that the known facts were misunderstood.
…
[29]
The
rationale of the legislative structure which creates a presumption of a
non-arm’s length relationship between related persons subject to the Minister’s
deeming them to be at arm’s length where the Minister is so satisfied with the
circumstances referred to in paragraph 5(3)(b) of the Act was
clearly explained in the Federal Court of Appeal’s decision in Dumais v. Canada
(Minister of National Revenue – M.N.R.), 2008 FCA 301, [2008] F.C.J. No.
1630 (QL) by Létourneau J.A. at paragraph 24:
24 … The Act assumes that “persons … related by
blood, marriage or adoption are more likely to be able, and to want, to abuse
the … Act” …
[30]
Létourneau
J.A. went on to say in paragraph 25 of that decision, in further explanation of
the statutory structure:
25 One of the undeniable and
undoubtedly laudable objectives of the provision is thus to provide the
employment insurance system with protection against claims for benefits based
on artifice, fictitious employment contracts or real employment contracts
containing fictitious or farfetched conditions: …
[31]
In
light of these observations as to the current state of the law, I now turn to
the facts of the case and the assumptions of the Minister relevant to them,
following the categories of arguments used by the Respondent.
Remuneration
[32]
The
Minister’s assumptions dealing with the Appellant’s terms of remuneration are
found in paragraphs 19(u), (x), (y) and (z) which are not disputed by the Appellant.
In summary, the Minister therein assumed that the Appellant was paid $500 per
week each week during the Period, with payment on a cash basis, and made
regularly during the Period without disruption or delay. In addition, the
Minister’s assumptions in paragraphs 19(kk) and (ll), which are not disputed by
the Appellant was that for the years 2004 to 2008 the Appellant and the Payer
paid, according to issued T4 slips, each other substantially the same aggregate
salaries, with identical aggregate salaries for the 2005, 2006 and 2007 calendar
years, which was based on $500 per week, but that in 2008 the Appellant’s
businesses, through Huntley Foods, paid the Payer $550 per week while the Payer
paid the Appellant $500 per week. There is no dispute either that salaries
started at $300 per week in 2004 for both the Appellant and Payer, then jumped
to $500 in 2005. The Minister also assumed in paragraph 19(oo) that the
Appellant performed services for the Payer without remuneration. The Minister’s
position is that these are not normal remuneration terms in an arm’s length
relationship for several reasons.
[33]
Firstly,
the Respondent points out that the Appellant led absolutely no evidence that
payment was even made. No receipts for payment were obtained and no accounting
records were submitted into evidence suggesting a payroll ledger was even
maintained. The only evidence is that of the Appellant and the Payer who
testified such payments were made weekly in cash and that there was no record
of their deposit into their bank accounts because neither of them deposited the
sums into their bank accounts except as necessary to cover any preauthorized
payments coming from their accounts, although no evidence was submitted to
substantiate this claim either. When the Respondent’s counsel asked the Payer
whether money actually changed hands or whether the parties set off as against
each other, his answer was vague, giving rise to some serious concerns I have
about the credibility of the Payer’s evidence, which will also be referred to later.
Since the evidence was also that each of the businesses was a cash business
where cash sales were obtained and placed in an apron, at least in the case of
the Appellant’s food cart businesses of selling donuts and candy floss, one
would at least have expected a simple daily sales journal or sheets to have
been kept evidencing that sufficient sales were made to allow payment in cash
or the withdrawal from the Payer’s bank accounts of sufficient cash to do so.
No such evidence was tendered either.
[34]
Secondly,
the Appellant admitted no statutorily required vacation pay was paid by either
of the businesses to the Appellant or Payer, which the Respondent pointed out is
hardly a term of employment at arm’s length.
[35]
Thirdly,
there is in fact evidence that for at least one of the years, 2006, no salary
could have been paid by the Payer to the Appellant, since the director for the
TSSA Authority testified that Gateway Children’s Village did not have a licence
to operate amusement devices for that year. The Appellant did not counter with
any evidence to dispute this evidence, no evidence of contracts obtained for
that year or even a schedule of events for that year. Based on this evidence
alone, I have serious doubts as to the credibility of the Appellant in this
case.
[36]
Fourthly,
the Respondent effectively argued there was no rationale for the substantially
same level of salaries paid by the Payer and Appellant to each other. The
Respondent pointed out that the evidence strongly suggests that the role and
duties of the Appellant for the Payer’s business involved that of a mechanic
with duties involved repairing and maintaining generators, air pumps and other
machinery with significant statutory responsibilities such as following
technical dossier instructions approved by the TSSA Authority for the erection
and dismantling of the devices, keeping daily logs and arranging for
inspections each day before the commencement of operations. The Payer on the
other hand testified he cooked donuts and made cotton candy during the week for
sale from two carts at events and held a propane certificate from the TSSA Authority
to enable him to do the cooking. On the face of it at least it would appear a
reasonable conclusion to presume that of the two, the Appellant was the more qualified
and entitled to a higher salary in the workplace yet as noted above, the two
half-brothers received identical salaries via each other for 2005, 2006 and
2007. In fact, the Appellant received $50 per week less than he paid the Payer
in 2008 without explanation, other than his Huntley Foods held back $50 from
Edward’s salary per week for remittances. As a result, an identical $500 in
cash was paid and received between the two. The Appellant, however, led no
evidence to substantiate the level of salary paid to him as being competitive
with what a non-arm’s length person would receive let alone any evidence as to
why the salary paid to Edward was reasonable to challenge the Respondent’s
position that the salaries were simply consistent as part of a scheme to pay
oneself. The Appellant simply stated that at the beginning of each year
they negotiated a salary, albeit in fact, an identical one.
[37]
Fifthly,
the Respondent argued, the evidence shows that both the Appellant and the
Payer’s business made little profit and/or suffered losses, usually minor
during the comparative years of 2004 to 2008 based on the evidence submitted
from the tax returns of the Payer and the Appellant as well as of Huntley Foods
and the largest expense which accounted for the majority of the expenses
claimed by the businesses were the direct salaries paid to each other. As the
Respondent pointed out, in Lelièvre v. Canada (Minister of National
Revenue – M.N.R.), 2003 TCC 55, [2003] T.C.J. No. 125 (QL), the fact a
business operates at a loss in the context of hiring non-arm’s length
employees, is a significant factor evidencing a non-arm’s length employment
relationship.
[38]
Finally,
the Respondent argues, there is evidence that the Appellant worked during the
winter months, during which he was not paid in lining up the amusement
contracts for the next season. The evidence of the Rulings Officer for CRA was
that in a telephone conversation she had with Edward Huntley, he advised her
that it was Michael’s responsibility to renew or deal with contracts for
Gateway Children’s Village and that he did this over the winter months. Edward
Huntley himself denied this in testimony, instead testifying it was his
responsibility and that he would sign up the customer at the end of each year
for the following years, since customers had a hard time getting amusement
devices booked and were eager to do so. I found the testimony of the Rulings Officer
straightforward and credible while I had some difficulty with that of
Edward Huntley who testified that while Gateway Children’s Village and the
Appellant’s food businesses attended many of the same events, they did not
attend all of them together, which of course suggests that he could not have
met with the event organizers who required amusement devices if he was not
always present. Secondly and more importantly, it would have been a simple
matter to produce the event contracts evidencing his signature to back his
claim yet nothing was produced into evidence.
[39]
The
Appellant has in no way rebutted the assumptions of the Minister in this regard.
In the case of Gray v. Canada (Minister of National Revenue – M.N.R.), 2002
FCA 40, [2002] F.C.J. No. 158 (QL), the Federal Court of Appeal confirmed that
it was appropriate to compare the remuneration in other years to that of the
year in question and further that whether the employee worked for the employer
outside his remuneration period were factors the Tax Court could consider
as part of considering “all the circumstances” as referred to in paragraph 5(3)(b)
of the Act, as I have above. In my view, the consideration of all the
circumstances quite rightfully requires the consideration of any remuneration
paid to the party in respect of whom the issue of non-arm’s length arises as
well, i.e., remuneration paid by the Appellant to the Payer in this matter, notwithstanding
the Appellant’s earlier objection that matters and evidence dealing with Edward
Huntley’s earlier decision be struck.
[40]
In the
case of Academy Drywall Ltd. v. Canada (Minister of National
Revenue - M.N.R.), 2002 T.C.J. No. 15 (QL), Porter D.T.C.J undertook an
examination of the law on the meaning of “arm’s length”, and correctly
summarized in my view, the following result flowing from same at paragraph 28:
28 In effect what these cases say
is that if a person moves money from one of his pockets to the other, even if
he does so consistently with a regular commercial transaction, he is still
dealing with himself, and the nature of the transaction remains “non-arm’s
length.”
[41]
In
my view, the evidence of almost identical cash salaries, whether actually
exchanged or not, but claimed to have been paid, is indicative of a circular
flow of cash resulting in the payment to oneself, subject of course to the
presentation of proof to the contrary, none of which has been given to my
satisfaction here.
[42]
As
the Respondent also pointed out, the Academy Drywall case above also
stood for the tenant that the Court will look to the presence or absence of a bona fide
negotiation between the employee and payer as a factor in determining whether
they are acting at arm’s length. Clearly here, there was no sound evidence
suggesting the Appellant and Payer conducted any bona fide negotiation
concerning the issue of remuneration.
[43]
In
my view, a review of the terms of remuneration above, if any was even actually
paid, strongly support the Minister’s decision. The Appellant has in no way rebutted
the assumptions of the Minister in this regard.
Hours /Duration of Work
[44]
The
assumptions of the Minister relevant to the Appellant’s duration of employment
and hours of work are found in paragraphs 19(d), (t), (v), and (w) of the Reply
to the Notice of Appeal wherein the Minister assumed the Payer’s business was
seasonal and operated between June and November, that the Appellant’s rate of
pay was based on a 40-hour work week, that the Appellant did not work 40 hours
per week and that the Appellant’s hours of work were not recorded. The
Appellant agrees with all these assumptions save and except that he argues he
did work 40 hours per week. The Appellant has quite rightfully stated that it
is within his right to accept employment that is based on a weekly salary as
opposed to an hourly one and testified that the 40 hours consisted of five
eight-hour days which included not only setting up, operating and dismantling
the amusement devices at events, with actual operating time being about five
hours per day, but also attending to the maintenance, repair, cleaning and
waxing of the inflatable rides themselves as well as the generators, air pumps
and other equipment necessary to operate the business which were conducted at
the Highgate shop before and after events. The Appellant and the Payer agreed
that the majority of events occurred during weekend days and the maintenance, cleaning
and repair described above during the week at the shop. Although technical
dossiers filed with the TSSA Authority for two of the inflatable devices, the
Obstacle Course and Giant Slide, set out the list of maintenance and operating
requirements to be attended to, there is no indication thereon as to the time
it would take to accomplish such requirements. The Appellant submitted no
specific examples of the time needed to maintain, clean and repair any such
equipment nor of the frequency of the maintenance and repairs nor even any
maintenance schedule adhered to. This Court is really being asked to speculate
as to such time.
[45]
The
Respondent has argued that even if the Appellant was remunerated at all, it was
not for working a 40-hour week for several reasons as well.
[46]
Firstly,
as stated above, the Appellant nor the Payer have provided any proof or
documentation of same, for the Court’s consideration.
[47]
Secondly,
there is evidence suggesting the Appellant may not have even worked in 2008,
let alone in 2006, due to the fact a Schedule of Events required to be filed
with the TSSA Authority, and traditionally filed by the Appellant in past years
by telefax addressed to a specific member of TSSA Authority was not filed with
TSSA Authority for the 2008 year as confirmed by the testimony of the Director
of Technical Services for the TSSA Authority. It should be noted that such
director did also admit permits were issued for the operation of four rides for
that year notwithstanding no compliance with the filing of the initial Schedule
of Events. The Respondent entered into evidence a Schedule of Events purporting
to be for 2008 as supplied by the Appellant to the Respondent on request which
the Respondent suggests was not only not sent to the TSSA Authority as above
but is a fabrication due to the fact the form supplied is a photocopy of the
2007/2008 form which was not the correct form to use for the 2008/2009
June 1 to May 31 year to which the forms apply and would not have
been accepted for filing by the TSSA Authority if sent, as per the above Director’s
testimony as well. In addition, the questionable form is not even an accurate
photocopy since the form identification number found on the bottom left corner
of the form is absent, suggesting it is a photocopy of a doctored form. The
form also suggests it is a revision of a previously filed form instead of an
initial filing, which according to the evidence of the said Director would have
been the first time a revised schedule was ever filed by the Payer. Moreover,
the questionable schedule refers to 17 events having taken place over 30
days during the Period, which the Respondent has demonstrated would indicate
that for 2008 the Payer operated events during a number of days equal to twice
the average for other years in which a schedule was actually filed, which
averaged about 12 to 13 events over 15 days for the 2007, 2009 and 2010 seasons.
Considering the Appellant and the Payer testified that each year most of the
events’ organizers sign on for the following year, it would stand to reason that
there should be roughly the same number of events each year and the Appellant
submitted no event contracts or other evidence to support such schedule. The
evidence regarding this questionable form certainly indicates the form was not
a true representation of the events, if any, attended by the Payer in 2008. It
should be noted that the Appellant, having the opportunity to reply to these
arguments, which seriously question the credibility of the Appellant and the
Payer and suggest fraud, declined to reply. I can only draw the inference the
Appellant had no evidence to rebut the allegations.
[48]
Thirdly,
the Respondent argued that even if the Court accepts that the questionable
Schedule of Events is an accurate representation of the events of the Payer for
2008, then operating for 30 days means that during the Period, shop time to
conduct such maintenance and repairs must have accounted for about three days
of each week which seems highly incredible. If in fact the Court were to accept
that the number of events were more consistent with the average of other years,
then shop time must have accounted for a week and one half out of every two
weeks which is even more incredible. Even more so, suggests the Respondent,
when one considers that the technical dossier for the Giant Slide is very brief
in its operating and maintenance requirements, when compared to the technical
dossier for the Obstacle Course earlier mentioned.
[49]
In
all, the Appellant’s lack of evidence as to the hours worked coupled with the
evidence of the Respondent clearly leads me to conclude the Appellant has not
rebutted the assumptions of the Minister in this regard and in fact on balance
clearly supports the Minister’s decision.
Other Circumstances
[50]
The
other relevant circumstances to be considered in this matter pursuant to the
criteria set out in paragraph 5(3)(b) of the Act all generally
deal with whether the interests between the Appellant and Payer are different
enough to support reversing the Minister’s decision. In the Academy Drywall
case above, the Court, Porter D.T.C.J, as I indicated earlier, undertook an
analyses of the meaning of “arm’s length” and considered the relevant criteria
in paragraph 30, adopting the statements of Bonner T.C.J. in William J.
McNichol et al. v. The Queen, 97 D.T.C. 111:
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.
[51]
In
paragraph 38 of such judgment, Porter D.T.C.J . went on to say:
38 If the relationship itself … is
such that one party is in a substantial position of control, influence or power
with respect to the other or they are in a relationship whereby they live or
they conduct their business very closely, for instance if they were friends,
relatives or business associates, without clear evidence to the contrary, the
Court might well draw the inference they were not dealing with each other at arm’s
length. That is not to say, however, that the parties may not rebut that
inference. …
[52]
And,
in paragraph 40, summarized:
40 … The question that should be
asked is whether the same kind of independence of thought and purpose, the same
kind of adverse economic interest and the same kind of bona fide negotiating
has permeated the dealings in question, as might be expected to be found in
that marketplace situation. If on the whole of the evidence that is the type of
dealing or transaction that has taken place then the Court can conclude that
the dealing was at arm’s length. If any of that was missing then the converse
would apply.
[53]
In
the Academy Drywall case above, the Court found that two brothers who
were the top officers of the corporation where a third uninvolved brother owned
100% of the shares were not at arm’s length to the corporation.
[54]
In
the case at hand, the Respondent argues that the commingling of the business
and personal interests of the Appellant and Payer together with the cross
employment of each other by their businesses support its position that the two
are not at arm’s length and that in fact the Appellant is the controlling mind
of the Payer’s business for whom he works and that the arrangement between the
two is but a scheme to allow the Appellant to obtain Employment Insurance
Benefits.
[55]
The
Appellant of course takes the position that the two businesses are separately
run by each of them, that they are different businesses and that the
requirements of the businesses and the qualifications that each of the Payer and
himself must have to work for the other are sufficiently different to support a
finding of arm’s length employment.
[56]
The
evidence is that prior to and in 2005 the Appellant, by his own admission,
owned and operated two small inflatable rides, which he referred to as a side
business. The Payer in 2005 to 2007, as confirmed in his tax returns, also
operated a food vendor business. In fact, both the Appellant and Payer operated
at one time or another a business known as Western Fair which were described as
food concessions at the annual London, Ontario fair. The Appellant, in fact, initially named his business
activity at the fair “Gateway”, which changed to Western Fair that he agreed he
still operated even in 2008. The Payer on the other hand indicated his higher
losses in 2008 were the result of the loss of his Western Fair contract for
that year. In addition, the evidence is that both the Appellant and the Payer
were equal shareholders of a corporation named 759776 Ontario Ltd. which, by
the Appellant’s testimony, operated fast food services at fairs in Western
Canada, including in Calgary, Saskatoon and Edmonton, which was dissolved in about 2001.
[57]
The
evidence also shows that, notwithstanding the Payer’s denial in testimony, both
the Payer and Appellant were grandfathered by the TSSA as amusement device
mechanics in 2003 up to May 31, 2004. Both the Appellant and Payer were listed
as having amusement device mechanics certificate numbers and the Technical Director
of TSSA Authority testified that those persons who had a certain level of prior
experience in operating inflatable rides were grandfathered until the higher
standards took over in 2004 requiring a course to be taken for continued
certification. Likewise, the Appellant also testified he, like the Payer,
operated propane devices at the fairs in Western Canada prior to 2001
suggesting he also had experience as a propane handler like the Payer.
[58]
The
evidence also shows that for 2008, based on the schedule of events supplied for
both businesses, both businesses attended more or less the same events with few
exceptions. The CRA Rulings Officer testified that in her conversation with the
Payer, the Payer admitted that during the week he and the Appellant cooked the
donuts and made the cotton candy for sale in the Appellant’s food cart
businesses on the weekend and that they both worked the amusement device
business on the weekend, which was denied by the Appellant and Payer in oral
evidence. As I mentioned earlier, I have some concerns regarding the
credibility of the Payer who also testified he was not grandfathered as an
amusement device mechanic before 2004 when the evidence of his own businesses’
application for licence to the TSSA Authority, signed by him, includes him
being listed as a qualified mechanic. I might add I also have some serious
concerns about the credibility of the Appellant as well, as earlier mentioned,
since he testified that Huntley Foods sold off its food business equipment in
2001 and became a labour services business, of which the Payer was the
Operations Manager, and ceased to operate that business under Huntley Foods,
while his tax returns clearly show he had significant machinery, furniture and
fixtures which he was depreciating right up to his 2008 tax return, which
showed an undepreciated balance of $55,631.
[59]
Clearly,
the evidence is that both the Appellant and Payer at one time or another
operated similar businesses either together or separately at the same time and
had the experience and qualifications to do so. They work for each other and
pay each other in fact the same salary and pay out most of their businesses
revenue to each other, with each showing only minor profits or losses each year
from the 2003 to the 2008 year.
[60]
The
Respondent also asks the Court to consider that further evidence of their
interconnectivity is that the Appellant and the Payer are equal owners of a
property described as the Highgate Warehouse, having purchased it in 1989 and
by admission, each of the Appellant and Payer store their devices or food carts
and equipment during the winter, with each, according to the tax returns
submitted into evidence, contributing payment to the co-tenancy for such
storage and deducting such storage expenses. The Respondent also argued that it
is not normal to pay oneself for the use of your own building. I am not sure
what the relevance of that argument is and in fact it makes perfect sense to
ensure that the businesses using the warehouse would pay for its use in an ordinary
arm’s length transaction. In this case, however, the jointly-owned warehouse
supporting what appears to be only their interconnected businesses or dealings
certainly suggests a greater degree of interconnectivity. No evidence was led
suggesting the warehouse was leased to other parties.
[61]
The
Respondent also argued that the Appellant and Payer live together in the
residence owned by the Payer, being further evidence of their non-arm’s length
relationship. The fact that an employee lives free of charge in property owned
by the Employer was found to be a factor evidencing a non-arm’s length employment
relationship in the Lelièvre case. Both the Appellant and the Payer, his
half-brother, are single men and clearly close to each other and I would not
consider that the fact relatives live together to be indicative of some
sinister motive to be used as evidence they are acting in concert as regards to
their employment relationship or businesses. The difficulty I have with that
factor however is that the Appellant vehemently denied he was living with his
half‑brother during the years 2003 to 2008 other than during the Period
January 2008 to sometime in June 2008 because the furnace in his recreational
vehicle that he normally lived in while it was parked at the Highgate shop had
broken down. He testified he had to take up the floors of the vehicle to repair
it and thus had to wait for better weather to do so as the reason he lived with
Edward until June of that year. The Respondent, however, demonstrated that tax
returns filed by the Appellant for 2007 and 2008 show his address as
15349 Muirkirk Line, Muirkirk, Ontario, the Payer’s address. In fact, the 2008 tax return for
Huntley Foods with respect to its November 30, 2008 fiscal year‑end
filed in 2009 also shows the same address. Likewise, the Appellant’s Amusement
Device Mechanics Certificate, ADM1 issued April 17, 2008, and expiring May 31, 2010,
also show the Muirkirk address instead of the Highgate address, which is 103 Main Street, Box
165,
Highgate, Ontario, and the Appellant
filed no notice of address change with the TSSA Authority within 30 days as
required by TSSA regulations. In fairness to the Appellant, he did admit into
evidence his 2008 T4 which showed his address as the Highgate one and
correspondence from the CRA in 2010 addressed to his Highgate address.
The explanation given for the discrepancy is that both the Appellant and
Payer use the same accountant and that the shop does not always receive mail in
winter months due to poor accessibility, hence the reason mail might be sent to
the other address. Of course, such explanation seems odd in that if the mail
cannot get through, how does the Appellant. The Respondent also showed that tax
returns of the Appellant for 2003 and 2005 show his address as 80 Chiddington
Gate, London, Ontario, being the same address shown on the Payer’s tax returns
for 2005 and for Huntley Foods for 2003, being the Payer’s residence at the
time as well, suggesting they lived together at least since 2003. It seems to
me a simple matter for the Appellant to have led other evidence by way of his
personal identification documents and other witnesses to substantiate his claim
he did not live free of charge with his brother but he failed to do so. At the
very least, the Minister’s assumption in paragraph 19(pp) of the Reply to the
Notice of Appeal that the Appellant and the Payer has the same mailing address
is unrebutted and I find that the preponderance of evidence supports the
Respondent’s argument that the two lived together as being at least reasonable.
[62]
However,
I do not agree with the Respondent’s position that the Appellant is the
controlling mind of the Payer however and hence had de facto control.
The Appellant’s own assumption found in paragraph 19(e) that the Payer made
the major decisions for the business as well as the other assumptions
suggesting the Payer had control and supervision over the employee clearly
themselves contradict the Respondent’s above position on de facto
control.
[63]
In
all, however, the evidence above reasonably supports the Respondent’s position
that the Appellant and the Payer during the Period and both before and after,
lived and conducted their businesses closely, demonstrating the same purpose
and economic interests that are criteria of a non-arm’s length relationship
described in the Academy Drywall case above, so as to support the
Minister’s decision.
Summary
[64]
Having
regard to my findings regarding the Appellant’s Remuneration, Hours Worked and
Other Circumstances of his employment with the Payer, I must conclude that
the Minister’s decision was not only reasonable and should be deferred to, but
that the evidence overwhelmingly supports the Minister’s conclusion that the
Appellant and Payer would not have entered into such contract of employment had
they been at arm’s length. Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 3rd day of December 2010.
“F.J. Pizzitelli”
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