Citation: 2007TCC664
Date: 20071108
Docket: 2007-2479(EI)
BETWEEN:
BRENDA REGULAR,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
REGULAR ENTERPRISES LIMITED,
Intervener.
REASONS FOR JUDGMENT
Webb J.
[1] The issue in this
appeal is whether the decision of the Respondent that the employment of Brenda
Regular by Regular Enterprises Limited (“Company”) during the period from June 19, 2006 to September 22, 2006 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 the
shares of the Company were held by Robert Regular (who held a
controlling interest) and two of his brothers, Terry Regular and Allister
Regular. The Appellant is married to Terry Regular. The Appellant and the
Company were therefore related for the purpose of the Income Tax Act as
a result of the provisions of paragraph 251(2)(b) of that Act and
are deemed to not be dealing with each other at arm’s length under
paragraph 251(1)(a) of the Income Tax Act. As a result, the issue
in this case is whether the decision of the Minister of National Revenue that
Brenda Regular and the Company would not have entered into a substantially
similar contract of employment during the period 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 the Tax 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] The Company carried
on a logging and trucking operation in rural Newfoundland in or near Hampden, Newfoundland and Labrador. The
logging operations for the Company would generally start around the first of June
and continue until the first or middle of October. The starting and ending
dates for this operation were dependant upon the weather. The Company had only
one customer for its logs and that was the pulp mill in Corner Brook.
[7] The Company also
owned two trucks. The trucking operation would generally start around the last
of March and run until December of each year. There were two truck drivers. The
busy time of the year for the Company was when both operations were being carried
on with the logging operation requiring more of the Appellant’s time.
[8] The Appellant was
the office manager responsible for the office administration. She would answer
telephones and respond to e-mails or any other correspondence the Company had received.
She was also responsible for looking after the accounts payable, accounts
receivable, payroll, HST returns and other bookkeeping activities. She would
use the accounting software “Simply Accounting” to prepare financial
statements from time to time. The year‑end financial statements and
income tax returns were prepared by an external accountant.
[9] The one customer
for the logging operation would automatically send payment to the Company based
on the logs that were delivered to the mill in Corner Brook. The Company had 12
loggers that were working in the woods.
[10] The Appellant would
work 40 hours per week during the busy season and she was paid $466 per week.
No issue was raised with respect to the amount that was paid to the Appellant
for the time that she was on the payroll.
[11] The Appellant did
have some flexibility with respect to when she would work. Sometimes she would
work in the evenings or on weekends but in general it was 40 hours per week.
[12] The office for the
Company was in the home of the Appellant. No direct compensation was paid to
the Appellant for the use of the office in her home. The Appellant did testify
that she felt that she was being indirectly compensated for the use of the home
as the Company was paying for the insurance on her vehicle.
[13] The Respondent
relied upon three main factors in determining that the Appellant and the
Company would not have entered into substantially similar terms of employment
if they would have been dealing with each other at arm’s length. These factors
are as follows:
1. the
work that was performed by the Appellant for the Company during the period
while she was not on the payroll and hence was not being paid by the Company;
2. the
lack of compensation for the use of the office in the home;
3. the
circumstances related to the termination of the employment of the Appellant
(including the fact that she was terminated after working the minimum number of
weeks to qualify for the maximum employment insurance benefits based on her
rate of pay).
[14] The evidence related
to the work that Brenda Regular did following the termination of her
employment (which she did in each year after she was laid off) was that these
were minimal bookkeeping activities that were done mainly to ensure that the
Company complied with its statutory obligations in relation to payroll and HST
remittances. The Appellant indicated that these activities would take
approximately one hour per week. Since she was paid $466 per week when she was
on the payroll, this would mean that her hourly rate of pay would be $11.65.
Therefore for the one hour that she did some work for the Company following the
termination of her employment she would only be entitled to $11.65. Assuming
that she worked this one hour per week for each of the other 38 weeks in
the year following her employment for 14 weeks, she would only have been entitled
to receive $442.70, if she would have been paid separately for this. Since she
was paid $6,524 for the 14 weeks that she was on the payroll, this extra amount
would be less than seven percent of that total.
[15] In interpreting the
phrase “all or substantially all” for the purposes of the Income Tax Act,
the Canada Revenue Agency (“CRA”) has consistently maintained the position that
this phrase means 90% or more. This is reflected in several Technical
Interpretations of the CRA and in paragraphs 18 and 24 of Interpretation
Bulletin IT-151R5 and paragraph 1 of Interpretation Bulletin IT-507R. When the
Minister is evaluating whether the terms and conditions of an employment
arrangement are “substantially similar” to those that would have been entered
into if the parties had been dealing at arm’s length, it seems to me that the
Minister should not adopt a more restrictive meaning of “substantially” than the
CRA has adopted in interpreting “all or substantially all”.
[16] The other important
circumstances in this case are, in my opinion, the nature of the operation of
the Company and the location of the operation of the Company. This is a small
family-owned business operating in rural Newfoundland and Labrador. There
would not be a lot of other job opportunities for the Appellant in or near
Hampden nor presumably would there be a lot of opportunities for the Company to
find someone else to do these activities for it. To do activities that would
only take one hour per week, does not seem so unreasonable that an arm’s length
person would not also do the same for an arm’s length employer in an area where
employment opportunities are very limited.
[17] In the case of Samson
v. Minister of National Revenue, 2005 TCC 383, Little J. dealt with a
situation in which an individual performed services while they were not on the
payroll and determined that this was a significant factor in determining
whether or not the individual was engaged in insurable employment. In
particular Little J. made the following comments in paragraph 22:
22 When
I apply the approach outlined above to the facts before me I am convinced that
the primary evidence that justifies the position adopted by the Minister is the
extensive work carried out by the Appellant for the Payor while she was not on
the Payor's payroll. As is noted above during those days when the Appellant was
not on the Payor's payroll she made a total of 135 separate bank deposits in
1996, 1997 and 1998. In addition the Appellant prepared and signed a total of
623 cheques for the Payor in 1996, 1997 and 1998 while she was not on the
Payor's payroll. Finally, the Appellant signed a number of invoices for the
Payor while she was not on the Payor's payroll. The extensive activities
performed by the Appellant for the Payor while she was not on the payroll are
clear evidence that a person who was at arm's length with the Payor would not
have performed activities of this magnitude and nature. I have therefore
concluded that the Minister was correct when he made his decision.
[18] The activities in
the Samson case were much more substantial than in the present case. As
noted, the activities performed by the Appellant in the present case while she
was not on the payroll would only take about one hour per week. Assuming this
continued for the entire period when she was not on the payroll and assuming it
was 38 weeks before she was put back on the payroll, this would only be 38
hours worth of work spread out over a 38 week period in a rural area where
employment opportunities are limited and there would be limited opportunities
for the Company to find someone else to do the small amount of work that had to
be done. If she would have been paid at the same hourly rate for the few
additional tasks that she performed while she was not on the payroll, she would
have only been entitled to additional pay of less than seven percent of her
total pay while she was on the payroll. Based on CRA’s interpretation of “all
or substantially all”, this additional entitlement of the Appellant for the
extra work performed when she was not on the payroll would not affect a
determination of whether she had received all or substantially all of the
amount to which she was entitled for the year; and therefore, is not
significant in determining whether the terms of her employment, in relation to
the amount that she was paid for the work that she performed throughout the
entire year were substantially similar to those that would have been agreed
upon if she were dealing at arm’s length with the Company.
[19] With respect to the
issue of the compensation for the use of the office in the home, it seems to me
that there now may be many situations, with modern means of communication, where
arm’s length employees may choose to work from their own home without receiving
compensation from their employer for the use of their home. Since the Company
only had one customer in relation to the logging operation there was no indication
that the office in the home was used to meet any customers or for any activity
other than the bookkeeping activities. It does not seem unreasonable that the
Appellant could work from her home without being directly compensated whether
she was dealing at arm’s length or non-arm’s length with her employer.
[20] The termination of
the Appellant after 14 weeks of work was also a significant factor for the
Respondent in finding that the terms and conditions were not the same as would
have been reached in an arm’s length relationship. In particular the Respondent
assumed that the Appellant was laid off before the end of the busy season while
the other person who was hired as a bookkeeper (a spouse of one of the
other shareholders) was kept on as an employee. However both the Appellant and
Robert Regular testified that the Company was having a difficult time in 2006.
The Company was experiencing a lot of problems with its equipment and Robert
Regular testified that he had to inject further funds into the Company. It
therefore appears that the termination of the Appellant was based on financial
needs.
[21] The appeals officer
testified that she based her information on the review of the HST returns that
had been filed for the Company. However the HST returns can only identify the
sales and do not accurately disclose the expenses of the Company. Therefore it
is not possible to tell from an HST return whether the Company is making a
profit or losing money. In particular it should be noted that wages are not
subject to HST and therefore no input tax credit would arise in relation to
wages that have been paid. Therefore analyzing the input tax credits would not
give an accurate indication of all of the expenses that the Company was
incurring. As well, the HST returns were filed quarterly and therefore the
total revenue would cover a period of three months. Again, it cannot be
determined based on HST returns whether the revenue was all earned in the first
month, second month, or third month or equally in all three months, or
otherwise.
[22] As well, the
Appellant testified that in other years she would have worked for longer
periods of time when things were going better for the Company.
[23] Counsel for the
Respondent also noted that the Company had employed two individuals who were
identified as bookkeepers. However the evidence indicated that their duties did
not exactly overlap and bookkeepers may not have been the correct terminology.
In particular Mae Regular, the other “bookkeeper” would help to deliver parts
and run errands for the Company.
[24] As a result I am
unable to conclude that the Minister’s decision still seems reasonable in light
of the evidence that was presented and therefore the appeal under the Act
is allowed and the matter is
referred back to the Minister of National Revenue for reconsideration and
reassessment on the basis that the employment of the Appellant during this
period was insurable employment under section 5 of the Act.
Signed at Ottawa,
Ontario, this 8th day of November 2007.
"Wyman W. Webb"
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