Citation: 2007TCC426
Date: 20070904
Dockets: 2006-2054(EI)
2006-2055(CPP)
BETWEEN:
JEAN-YVES LEVESQUE,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Savoie D.J.
[1] These appeals were
heard on common evidence at Beresford, New
Brunswick, on June 12, 2007.
[2] This is an appeal
from the decision of the Minister of National Revenue (the “Minister”)
dated November 1, 2005. The period at issue begins on January
3, 2005, and ends on September 3, 2005. At the centre of the debate is the
work performed by the Appellant on behalf of 610771 NB Inc. (the “payor”),
considering that the Minister determined that, during the period at issue, the
Appellant was employed in insurable employment in accordance with
subsection 2(1), paragraph 5(1)(a) of the Employment Insurance Act
(the “Act”) and subsection 2(1) of the Insurable Earnings and
Collection of Premiums Regulations (the “Regulations”). The Minister also
determined that the Appellant was engaged in pensionable employment with the
payor within the meaning of subsection 2(1) and paragraph 6(1)(a) of the
Canada Pension Plan (the “CPP”) and subsection 3(1) of the Canada Pension
Plan Regulations.
[3] In rendering his decision, the Minister relied on the
following assumptions of fact:
[TRANSLATION]
(a) the payor was
incorporated on February 4, 2004; (admitted)
(b) the payor has
been operating a business under the name “Grange à tapis / Carpet Ranch”
(the “business”) since September 23, 2004; (admitted)
(c) the business
was open year-round and its business activities consisted of selling floor
covering products and services, interior decorating services as well as
retailing home decorations; (admitted)
(d) the payor’s
shareholders were as follows: the Appellant, Réjean Bernard
(“Mr. Bernard”), Denis LeBlanc (“Mr. LeBlanc”) and
Joey Legacé [sic] (“Mr. Legacé” [sic]) and each
shareholder held 25% of the common voting shares in the payor; (admitted)
(e) the shareholders
were not related persons; (admitted)
(f) each
shareholder invested $15,000 and all the shareholders signed loans for the
payor; (admitted)
(g) there was no
unanimous shareholder agreement; (admitted)
(h) the Appellant,
Mr. Bernard and Mr. LeBlanc (the “trio”) controlled the payor’s daily
activities and made major decisions for the payor; (admitted)
(i) the trio
rendered services to the payor and participated in the payor’s daily business
activities; (admitted)
(j) M. Bernard
was the president and M. Legacé [sic] was the treasurer and
together, they had signing authority on the payor’s bank account; (admitted)
(k) from September
23, 2004, to January 1, 2005 (the “previous period”), each member of the trio
received a gross salary of $600 per week, which gave each member of the trio a
net salary of about $472.93 per week; (admitted)
(l) as of January
3, 2005, and for the remainder of the period at issue, the payor paid each
member of the trio $475 per week, allegedly as taxable dividends (the
“payments”); (admitted)
(m) the Appellant
was laid off on September 3, 2005, and as of that date, the payor stopped
paying him the payments; (denied)
(n) during the
period at issue, the Appellant’s duties included selling merchandise, cleaning
and organizing shelves at the payor’s business premises, ordering merchandise
and all other duties required for the successful operation of the business;
(admitted)
(o) the payor
provided the Appellant with all the tools required for the performance of his
duties; (admitted)
(p) the Appellant
performed his duties at the payor’s business premises; (admitted)
(q) the payor had
the right to monitor the Appellant’s activities; (denied)
(r) the Appellant
did not have the right to hire an assistant or replacement at will; (admitted)
(s) the Appellant
was engaged under a contract of service; (denied)
(t) the
Appellant’s duties did not change between the previous period and the period at
issue; (admitted)
(u) after the
period at issue, Mr. Bernard and Mr. LeBlanc continued to render
services to the payor and to receive payments of $475 per week; (admitted)
(v) during the
period at issue, the fourth shareholder, Mr. Legacé [sic], worked
elsewhere, did not render services to the payor, did not participate in the
payor’s daily business activities, and did not receive either a salary or
payments; (admitted)
(w) during the
period at issue, the only shareholders who received payments were those who
rendered services to the payor; (denied)
(x) the payments
were not paid to the Appellant for his role as shareholder; and (denied)
(y) the payments
were the Appellant’s remuneration, for the services he rendered to the payor,
during the period at issue. (denied)
[4] It is important to
note that the Minister’s assumptions of fact, set out in paragraphs (m), (q)
and (w), although denied by the Appellant, were proven, based on the evidence
adduced at the hearing. All of the other facts assumed by the Minister were
admitted by the Appellant, except for those set out in paragraphs (s), (w), (x)
and (y), but they provide the Minister’s findings in the case on which this
Court has to rule.
[5] The issue also
involves the Minister’s determination that the Appellant received remuneration
from the payor as salary and not as dividends as submitted by the Appellant.
[6] The dividend
payment was not paid to all shareholders, only to those who performed duties
for the company.
[7] The dividend was
paid each week to providers of services as salary.
[8] The Appellant
received his dividend payments until he was laid off on September 3, 2005.
[9] As for the fourth
shareholder, Mr. Lagacé, who was employed elsewhere, he did not receive
any dividend payments even though he held the same common voting shares in the
company as the Appellant and the payor’s other shareholders and employees.
[10] The Minister rightly
submits that the decision to pay a dividend to shareholders is not that of only
one shareholder, but that which must be made at a duly constituted shareholder
meeting where decisions are rendered by the shareholders in a resolution that
is part of the company’s minutes, duly voted on by the board of directors, in
accordance with section 64 of By-law No. 1 of 610771 NB Inc., that
is to say, the payor, which stipulates as follows:
[TRANSLATION]
64. The board of directors may on
occasion declare the payment of dividends to shareholders in accordance with
their respective rights and interests in the Corporation. A dividend payable in
cash shall be paid by cheque drawn on the Corporation’s banks or one of them,
to the order of each registered holder of shares of the class in respect
of which it has been declared. The
cheque is mailed by prepaid
ordinary mail to such registered holder
at his or her latest address as shown on the records of the Corporation. In the case of joint holders, the
cheque shall, unless such joint holders otherwise direct, be made payable to the order of
all of such joint holders, and if more than one address appears on the records of the Corporation in
respect of such joint holding, the cheque is sent to the first of the
addresses. The mailing of such cheques, unless the same is not paid on
due presentation, shall satisfy and
discharge the liability for the dividend to the extent of the sum represented thereby. In the event of
non-receipt of any dividend cheque by the person to whom it is sent, the Corporation shall issue to such
person a replacement cheque for a
like amount on such terms as evidence of non-receipt and satisfactory security.
[11] It was established
at the hearing that no resolution consistent with what is provided for in
section 64, above, has been produced to date by the Appellant.
[12] Occasionally the
compensation of an employee shareholder by way of salary or dividends results
in confusion for some. Some have even argued that the performance of work was
required to justify the payment by the payer corporation of a dividend to the
provider of services. However, in Neuman v. Canada (Minister of
National Revenue – M.N.R.), [1998] S.C.J. No. 37, per Iacobucci J.,
the Supreme Court of Canada clearly rejected that interpretation when he wrote
as follows:
57. . . . a dividend is a payment
which is related by way of entitlement to one’s capital or share interest in
the corporation and not to any other consideration. Thus, the
quantum of one’s contribution to a company, and any dividends received from
that corporation, are mutually independent of one another. La Forest J.
made the same observation in his dissenting reasons in McClurg (at p.
1073):
With respect, this fact is irrelevant to the issue before
us. To relate dividend receipts to the amount of effort expended by
the recipient on behalf of the payor corporation is to misconstrue the nature
of a dividend. As discussed earlier, a dividend is received by virtue of
ownership of the capital stock of a corporation. It is a fundamental
principle of corporate law that a dividend is a return on capital which
attaches to a share, and is in no way dependent on the conduct of a particular
shareholder. [Emphasis added.]
. . .
60. . . . I
am not aware of any principle of corporate law that requires in addition that a
so-called “legitimate contribution” be made by a shareholder to entitle him or
her to dividend income and it is well accepted that tax law embraces corporate
law principles unless such principles are specifically set aside by the taxing
statute.
[13] The words of
Iacobucci J., above, were also quoted by Archambault J. of this Court in Pauzé
v. Canada, [1998] T.C.J. No. 560 where he stated as follows:
10. As my colleague Judge
Dussault said in Gosselin v. R., 1996 CanRepNat 2472 (TaxPartner,
Carswell CD-ROM), at paragraph 16, a company which pays dividends does not
receive any consideration from its shareholders.
. . .
. . . The right to a dividend is a
right to share in a company’s profits. With respect for those who hold the
contrary view, that right arises from only one source: the ownership of shares
that carry the right, and nothing else. The dividend is income from
"property" and is not pay or compensation for services rendered.
The fact that dividends are given favourable tax treatment when they are
received by individuals, under the gross-up and tax credit provisions, is
because they represent the result of this very division of a company’s profits,
profits which have already, in theory at least, been taxed at this initial
stage, and on which the purpose is to limit or reduce the impact of double
taxation when they are received by individuals. This scheme clearly does not
apply to payment for services rendered . . . .
[Emphasis added.]
. . .
12. I would also add that when an
employer pays money in consideration of services rendered by an employee it is
salary. . . .
[14] The evidence
revealed that the Minister determined that the Appellant held insurable
employment in 2004. Those circumstances, according to the evidence, did
not change in 2005.
[15] Moreover, it was
established that the amount of the dividend was paid to the Appellant as
salary. However, not all of the payor’s shareholders received the dividend,
only those who performed duties for the payor.
[16] In
September 2005, the Appellant was laid off. Since then, he has requested
that the status as to the insurability of his employment be assessed. Although
he stopped receiving dividend payments at that point, other employee
shareholders continued to receive them.
[17] At the hearing, the
Appellant stated as follows [translation]: “I was paid as a shareholder.” When
counsel for the Respondent asked him why, in the same circumstances as 2004, he
should not consider his employment as insurable, he replied as follows
[translation]: “In 2004, an error was made, we paid ourselves in salary.”
[18] In his testimony at
the hearing, the accountant Alain Pitre stated that the payor’s shareholders
decided to pay themselves a dividend of $24,700.00 in January 2005,
with the exception, however, of the shareholder Joey Lagacé. He added that
in September 2005 the Appellant decided to stop his dividend payments so
that he could qualify for employment
insurance benefits. The accountant stated that, at the end of 2005, he should have made
corrections to accommodate the Appellant’s situation.
[19] The analysis of
these facts, in light of the foregoing case law, leads to the conclusion
reached by the Minister that the weekly payments of $475.00 were made to
the Appellant in remuneration for the services he performed and not for his
role as shareholder. In other words, the Minister was right to conclude that
the weekly payments of $475.00 made to the Appellant were his salary.
[20] The second part of
the issue to be dealt with is the insurability of the Appellant’s employment.
In other words, the issue here is whether the Appellant was employed in
insurable employment under a contract of service, in accordance with the Act,
or under a contract of employment in accordance with the Civil
Code of Québec.
[21] With respect to the
insurability of the employment in accordance with the Employment Insurance
Act, the relevant provision is set out in paragraph 5(1)(a) of the
Act as follows:
5(1) Subject
to subsection (2), insurable employment is
(a) employment in Canada
by one or more employers, under any express or implied contract of
service or apprenticeship, written or oral, whether the earnings of the
employed person are received from the employer or some other person and whether
the earnings are calculated by time or by the piece, or partly by time and
partly by the piece, or otherwise;
[Emphasis added.]
[22] A contract for services is a civil law concept found in the Civil Code of Québec (the “Civil Code”). Consequently, the nature of the contract must be
determined in accordance with the relevant provisions of that Code.
[23] In a publication entitled, “Contract of Employment:
Why Wiebe Door Services Ltd. Does Not Apply in Quebec and What Should
Replace It,” published by the Association de planification fiscale et
financière (APFF) and the federal Department of Justice in The
Harmonization of Federal Legislation with Quebec Civil Law and Canadian
Bijuralism: Second Collection of Studies in Tax Law, Justice
Pierre Archambault of this Court explains the steps that courts are to
take for any period of employment subsequent to May 30, 2001, since the coming
into force, on June 1, 2001, of section 8.1 of the amended Interpretation
Act, R.S.C. 1985, c. I-21, when faced with a case such as the one
at bar. Here is what Parliament has stated in this provision:
Property
and Civil Rights
8.1 Both the common
law and the civil law are equally authoritative and recognized sources of
the law of property and civil rights in Canada and, unless otherwise
provided by law, if in interpreting an enactment it is necessary to
refer to a province’s rules, principles or concepts forming part of the
law of property and civil rights, reference must be made to the
rules, principles and concepts in force in the province at the time the
enactment is being applied.
[Emphasis added.]
[24] It will be helpful to reproduce the relevant
provisions of the Civil Code, which will serve to determine whether a
contract of employment exists in Quebec and will distinguish such a contract
from a contract of enterprise:
Contract of employment
2085 A contract of employment is a contract by which a person,
the employee, undertakes for a limited period to do work for remuneration, according
to the instructions and under the direction or control of another person,
the employer.
2086 A contract of employment is for a fixed term or an
indeterminate term.
Contract of entreprise or for services
2098 A contract of enterprise or for services is a
contract by which a person, the contractor or the provider of services, as the
case may be, undertakes to carry out physical or intellectual work for another
person, the client or to provide a service, for a price which the
client binds himself to pay.
2099 The contractor or the provider
of services is free to choose the means of performing the contract
and no relationship of subordination exists between the contractor or the
provider of services and the client in respect of such performance.
[Emphasis added.]
[25] The
provisions of the Civil Code reproduced above establish three essential conditions for the existence
of a contract of employment:
(1) the employee’s performance of
work;
(2) remuneration by the employer
for that work; and
(3) a relationship of
subordination. The significant distinction between a contract of service and a
contract of employment is the existence of a relationship of subordination-the
fact that the employer has a power of direction or control over the worker.
[26] This Court
must therefore conclude that the first two elements of the definition set out
in article 2085 were established, the work performed by the Appellant was
proven, while this Court concluded that the weekly amounts paid to the
Appellant were his salary for his performance of work.
[27] As for the relationship of subordination, the third element of
this definition, the following facts are relevant.
[28] It was
established that the “trio” controlled the payor’s daily activities. The trio
was formed by the Appellant, Réjean Bernard and Denis LeBlanc.
Together, the three shareholders held 75 per cent of the common voting shares in the payor. The
Appellant was laid off on September 3, 2005. This undoubtedly supports the
notion of a relationship of subordination.
[29] The evidence
revealed that the payor provided the Appellant with all the tools required for the
performance of his duties, which were carried out at the payor’s business
premises.
[30] The trio,
which in some respects constituted the board of directors with 75 per cent
of the payor’s voting shares, had the right to monitor the Appellant’s activities and the
Appellant did
not have the right to hire an assistant or replacement at will.
[31] It was
established that the trio decided on the work schedule, which, although
flexible, required the Appellant to be present at the payor’s business
premises.
[32] In his
testimony, the Appellant admitted that if he jeopardized the company’s
financial health or rendered poor services to the company, the “others” could
intervene. This situation, described by the Appellant, is a prime example of
how the power to exercise control over the company resided with the board of
directors. Furthermore, it was never shown that the board of directors waived
its power to exercise control over the company. In fact, it is clear that the
Appellant played two roles in the company, some would say that he “wore two
hats,” as he performed specific duties as an employee and held 25 per cent of the
payor’s voting shares. Thus, he held a voting seat on the board of directors.
He was both a director and an employee.
[33] Tardif J. of
this Court had to rule on a similar case in Industries J.S.P. Inc. v.
Canada (Minister of National Revenue – M.N.R.), [1999] T.C.J. No. 423.
He stated as follows:
When a
person occupies a strategic, executive position in a business, it is customary
and normal for the job description to be very difficult to define. A partner or
an individual taking part in the management of a business can hardly hope for a
clearly defined, specific, limited job description.
Contributing
to and being a partner in the management, administration or development of a
business, particularly a small business, means that a person's job description
is strongly marked by responsibilities characteristic of those often fulfilled
by actual business owners or persons holding more than 40 per cent of the
voting shares in the company employing them. In other words, in assessing
remuneration, at this level of responsibility, caution must be exercised when a
comparison is made with the salaries of third parties; often there are
advantages that offset the lower salaries.
In this
case, the work performed by Marie-Claude Perreault and her brothers was in many
respects comparable to the work performed by business owners. That fact alone
is not decisive or sufficient to exclude their work from insurable employment,
particularly since the company employing them never waived its power to
exercise control over their work.
. . .
In this
case, the evidence has established that the appellant company never waived its
power to exercise control over the work performed by the Perreault family
members. . . .
[34] Furthermore,
another decision by Tardif J., Roxboro Excavation Inc. v. Canada
(Minister of National Revenue – M.N.R.), [1999] T.C.J. No. 32, on
appeal, was upheld by the Federal Court of Appeal. The following paragraphs are
particularly relevant in this case:
. . .
The key
issue in this case is basically whether there was in 1996 a relationship of
subordination between the company paying the remuneration and the interveners.
In other words, did the company have the power to control and influence the
work done by the Théorêt brothers?
In this
regard, I consider it important to point out that the courts have often said
that it is not mandatory or necessary that the power to control actually be
exercised; in other words, the fact that an employer does not exercise its
right to control does not mean that it loses that power, which is absolutely
essential to the existence of a contract of service.
The power
to control or the right to influence the performance of work is the main
component of the relationship of subordination that lies behind a genuine
contract of service.
Assessing
whether or not a relationship of subordination exists is difficult when the
individuals who hold authority by virtue of their status as shareholders and/or
directors are the same individuals who are subject to a power to control or to
the exercise of authority in respect of specific work. Put differently, it is
difficult to draw a clear line when a person is an employee and in part an
employer all at the same time.
. . .
The
evidence showed that each of the Théorêt brothers had authority and
independence and even had carte blanche in performing the work for which he was
responsible. The evidence also showed that decisions were made informally,
collegially and by consensus.
. . .
In the
case at bar, the fact that authority did not seem to be exercisable against the
Théorêt brothers and that decisions concerning the company were made by
consensus and collegially does not mean that the company was deprived of its
authority over the work done by the interveners. The evidence did not show that
the company had waived its power to influence their work or that its right to
do so was reduced, limited or revoked.
[35] After
analyzing the facts and in light of the case law, this Court is of the opinion
that the relationship of subordination was
established.
[36] Therefore,
this Court finds that there was a contract of service within the meaning of
paragraph 5(1)(a) of the Act and a contract of employment in accordance
with the Civil Code of Québec.
[37] Furthermore,
this Court determines that the Appellant was employed in insurable employment
with the payor within the meaning of paragraph 5(1)(a)
of the Act as well as a contract of employment in accordance with article 2085
of the Civil Code of Québec.
[38] Moreover,
this Court determines that the payments made to the Appellant by the payor were
not taxable dividends but remuneration paid to him for services rendered to the
payor.
[39] Finally, the
amounts paid by the payor to the Appellant represented his contributory salary and wages within the
meaning of paragraph 2(1) of the CPP and his ordinary remuneration from pensionable employment within the meaning of subsection 3(1) of the Canada
Pension Plan Regulations.
[40] Accordingly,
the appeals are dismissed and the Minister’s decisions are confirmed.
Signed at Grand-Barachois, New Brunswick, this 4th day
of September 2007.
“S.J. Savoie”
Translation certified true
on this 16th day of November 2007.
Daniela Possamai,
Translator
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