Citation: 2008 TCC 612
Date: 20081219
Docket: 2008-1157(EI)
BETWEEN:
J. B. DESCHAMPS INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
This is an appeal from
the determination that the work performed from January 1, 2006, to May 15,
2007, by the Deschamps brothers, Christian, Francis and Jean, for the Appellant
corporation J.B. Deschamps inc., was insurable.
[2]
Where individuals
performing work are related to their employer pursuant to the Income Tax Act,
the Employment Insurance Act (the Act) provides that the work in
question is excluded from insurable employment. However, Parliament provided
one exception: when the work in question is carried out in circumstances and
under conditions similar to those that an employee and an employer dealing with
each other at arm’s length would accept. In determining whether the exception
applies, the Respondent has discretionary power attributed by Parliament that
he must exercise by taking certain criteria into consideration, as follows:
5 (3)(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. (http://www.hrsdc.gc.ca/eng/ei/legislation/ei_act_insuremp.shtml)
[3]
When this discretionary
power is exercised judiciously and unimpeachably, the Tax Court of Canada does
not have the power to change the decision.
[4]
When an individual
institutes an appeal to have a decision set aside and obtain a new evaluation,
he or she must first prove that the analysis was conducted improperly and that
certain facts or elements were not taken into consideration or that undue
importance was attached to insignificant or secondary elements.
[5]
In other words, it is
the duty of the Court to verify the quality of the work carried out by the
Respondent in exercising his discretionary power.
[6]
If all the relevant
facts were taken into consideration and evaluated objectively and the
conclusion reached is reasonable, the Court must simply validate the
reasonableness of the conclusion even if another conclusion could be reached
given the same facts and circumstances.
[7]
To explain and justify
the merits of his determination, the Respondent made the assumptions of fact
stated in the Reply to the Notice of Appeal. Of these assumptions of fact,
counsel for the Appellant admitted or denied the following:
[TRANSLATION]
5. …
a)
the Appellant incorporated December 31, 1979; (admitted)
b)
the Appellant specializes in the commercial
printing of confidential documents, such as birth and death certificates; (admitted)
c)
as part of its professional activities, the
Appellant owns a plant that operates 24 hours a day, 7 days per week and its
office hours are Monday through Friday, 7:30 a.m. to 5:00 p.m.; (admitted)
d)
the Appellant’s sales amount to $25 million per
year and the Appellant employs over 240 employees; (admitted)
e)
the workers were shareholders of the Appellant
and worked year-round for the Appellant’s business; (admitted)
f)
each of the workers was a director of one of the
Appellant’s sectors of activity and all were members of the Appellant’s board
of directors; (admitted)
g)
the workers had worked for the Appellant for
over 20 years and held the following positions: (admitted)
-
Christian was the Appellant’s executive
vice-president;
-
Francis Deschamps was the Appellant’s
vice-president of procurement, research and development;
-
Jean Deschamps was the Appellant’s president;
h)
the workers made all major operating decisions
for the Appellant’s business together; (admitted)
i)
the workers had daily meetings at the office and
attended the Appellant’s annual board meetings; (admitted)
j)
the workers did not guarantee any loan or line
of credit for the Appellant; (admitted)
k)
the workers and their father, Jules Deschamps,
have signing authority for the Appellant’s bank accounts; (admitted)
l)
only one signature is required for the
Appellant’s chequing account whereas two signatures are required for loans and
lines of credit; (admitted)
m)
generally speaking, the workers carried out
their duties in the Appellant’s branch offices located in Québec and Montréal; (admitted)
n)
the workers did not have a fixed work schedule;
they generally worked the following hours during business hours: (denied)
-
Christian worked 35 to 50 hours per week;
-
Francis worked 35 to 55 hours per week;
-
Jean worked 40 to 50 hours per week;
o)
the workers’ actual work hours were not recorded
or accounted for by the Appellant; (admitted)
p)
the workers, like all of the Appellant’s
executive employees, had wage-loss insurance; (admitted)
q)
the workers had a defined-benefits pension plan
whereas the Appellant’s other employees had a defined-contribution pension
plan; (admitted)
r)
each worker had a fixed annual salary determined
during board meetings; (admitted)
s)
the workers’ remuneration was established based
on their respective tasks and responsibilities; (admitted)
t)
the Appellant granted a 2% salary increase to
all its employees and the workers got a $2,000 increase in 2006; (admitted)
u)
in 2006, the workers received the following
earnings: (admitted)
- Christian was paid $117,899 and received $5,128.44
in taxable benefits,
- Francis was paid $109,572 and received $6,362.45
in taxable benefits,
- Jean was paid $146,152 and received
$6,765.14 in taxable benefits,
v)
the Appellant made an automobile available to
the workers and reimbursed all the related expenses; (admitted)
w)
all expenses related to carrying out their tasks
were paid for with a credit card provided by the Appellant; (denied)
x)
the workers were entitled to annual vacations of
indeterminate length; they took 6 or 7 weeks per year; (admitted)
6.
…
a)
the Appellant’s only shareholder was Corporation
Financière J. Deschamps; (admitted)
b)
Corporation Financière J. Deschamps is a holding
company in which the majority shareholder was Jules Deschamps; (admitted)
c)
between January 1, 2004, and the end of the time
at issue, the workers each held between 2.72% and 2.84% of the voting shares in
Corporation Financière J. Deschamps; (admitted)
d)
during this period, Mr. Jules Deschamps held the
remaining voting shares in Corporation Financière J. Deschamps (over 91%); (admitted)
e)
Mr. Jules Deschamps is the workers’ father; (admitted)
f)
the workers were related to a person who
controlled the Appellant. (admitted)
7.
…
a)
the workers did not track their working hours
but were subject to the authority of the Appellant as exercised by the board of
directors of which they were part with their father; (admitted)
b)
even though they did not have a set work
schedule, they usually carried out their tasks during the business hours of the
Appellant’s offices and worked 30-55 hours per week; (admitted)
c)
the workers received reasonable remuneration
having regard to the tasks assigned to them by the Appellant and their
remuneration was decided during the Appellant’s annual board meetings; (denied)
d)
considering the scope of the Appellant’s
business and each worker’s tasks and responsibilities, their remuneration
corresponded to the Appellant’s economic and operational needs; (denied)
e)
each worker was responsible for his sector of
activities and provided services to the Appellant as salaried employees while
consulting each other regularly regarding the business’s general operation;
(denied)
f)
each worker’s work was essential and necessary
to the smooth running of the Appellant’s operations as all three held senior
executive positions; (admitted)
g)
if the workers had special working conditions,
it was not as a result of their non-arm’s length relationship with the
Appellant but as a result of their status as executives of the Appellant; (denied)
[8]
In the case at bar,
Jean and Christian Deschamps testified; the evidence submitted in support of
the appeal relies mainly on their testimony. Firstly, Jean Deschamps provided
the business’s history. He explained that the business had been run by his
family for three generations and was now headed by the three Deschamps
brothers.
[9]
Since it was founded in
1926, the business has gone through several changes. In 1945, the brothers’
father took it over from their grandfather in order to run it with his
brothers, the uncles of Jean, Christian and Francis.
[10]
In 1979, the brothers
ran the business with their father and sister.
[11]
In 1995, following a
major disagreement with respect to the business’s direction, the sister sold
her shares to the other shareholders, who continued to run the business.
[12]
The father held a very
large majority of the shares in “J.B. Deschamps inc.” and over the years, he
gradually withdrew from the corporation’s operations.
[13]
During the period at
issue, Jules Deschamps, then 80 years old, had reduced the time he put into the
corporation.
[14]
His son, Christian,
even said that their father seemed more interested in flowers and flower
arrangements than in the corporation’s daily activities.
[15]
It was also because his
father had confidence that his three sons would manage the corporation as
though it was their own.
[16]
Jean Deschamps provided
several examples of major decisions, such as acquisitions, particularly
equipment and machinery, which cost a few million dollars. He said that, out
of respect, the Deschamps brothers talked to him about it, but usually after
the fact.
[17]
As a general rule, the
father was neither consulted, nor called upon to contribute to corporate
activities, even for strategic activities like the modernization that was
required to remain
competitive.
[18]
New
market niches were added, which effectively made the corporation unrecognizable
in the eyes of Jules Deschamps, the father. It was usually managed through
informal meetings which only the three brothers attended and where they made
current, important or strategic decisions.
[19]
During
the period in issue, the corporation had over 200 employees and had annual
sales of over 25 million dollars. Operating in the highly specialized area of
printing and executing highly sophisticated tasks, the corporation must
regularly acquire cutting-edge equipment to keep up.
[20]
The
fast and substantial evolution of the industry, the many changes, the addition
of new avenues and multiple needs of a growing customer base are factors that,
combined with the advanced age of their father, explain why, for all intents
and purposes, he has completely withdrawn from the management of the
corporation, even though he still has an office and occasionally attends
certain meetings, particularly the annual meeting when the financial statements
are tendered.
[21]
Next,
the Respondent called the Appeals Officer, Johanne Potvin, to testify. She
explained the work that she had done and emphasized the facts she considered in
making her determination.
[22]
During
cross-examination, it was revealed that a Ms. Poirier had recorded the Appeals
Officer’s phone calls without her knowledge. The transcription of the
recording was submitted to counsel for the Appellant, who apparently had used
it for cross-examination. This manner of proceeding is completely
inappropriate, even more so because the recording was clearly made without Ms.
Potvin’s knowledge for the obvious purpose of trapping her.
[23]
Incidentally,
one of the Deschamps brothers explained that some of his answers were
voluntarily incomplete in order to avoid certain fiscal consequences.
[24]
The
burden of proof before the Court lies with the individual who brings the
appeal. On the one hand, it is not easy to discharge this burden; on the other
hand, the Court’s justification is very limited in that it cannot intervene if
the Respondent exercised his discretionary power correctly by taking into
consideration all the relevant facts, by interpreting them in a judicious and
reasonable manner and by proceeding in an honest and transparent manner.
[25]
In some situations
where the Appellant is not represented, the Appeals Officer must make a
concerted effort to ensure that all the relevant facts have been considered
because such an Appellant may very well be unable to recognize the elements
relevant to his or her file. In this case, the Respondent would be looked upon
with disfavour if he alleged that the information obtained was insufficient or
incomplete. This element alone may contribute to discrediting the quality of
the Respondent’s work and cast doubt on the work in terms of exercising that
discretionary power.
[26]
However, if an
individual is competently represented by one or more persons and voluntarily
conceals a relevant element for the purpose of raising it before the Court in
order to discredit the Respondent with respect to the exercise of his
discretionary power and thereby obtain a revision of this determination, this
manner of proceeding must be rejected as it is patently unreasonable.
Accepting this manner of doing something or subscribing to it would bring the
administration of justice into disrepute by rendering the review stage
completely useless.
[27]
In the case at bar, the
only criticisms or grievances raised with respect to how the discretionary
power was exercised stems from a set-up whose sole purpose was to trap the
Appeals Officer by hiding information from her or giving her incomplete or
false information; as a result, I do not accept this evidence nor any of the grievances
and I find that the discretionary power was exercised irreproachably on the
basis of the facts that were admitted to by counsel for the Appellant, and that
it is appropriate to reproduced them below:
[TRANSLATION]
a)
the Appellant incorporated December 31, 1979; (admitted)
b)
the Appellant specializes in the commercial
printing of confidential documents, such as birth and death certificates; (admitted)
c)
as part of its professional activities, the
Appellant owns a plant that operates 24 hours a day, 7 days per week and its
office hours are Monday through Friday, 7:30 a.m. to 5:00 p.m.; (admitted)
d)
the Appellant’s sales amount to $25 million per
year and the Appellant employs over 240 employees; (admitted)
e)
the workers were shareholders of the Appellant
and worked year-round for the Appellant’s business; (admitted)
f)
each of the workers was a director of one of the
Appellant’s sectors of activity and all were members of the Appellant’s board
of directors; (admitted)
g)
the workers had worked for the Appellant for
over 20 years and held the following positions: (admitted)
-
Christian was the Appellant’s executive
vice-president;
-
Francis Deschamps was the Appellant’s
vice-president of procurement, research and development;
- Jean Deschamps was the Appellant’s president;
h)
the workers made all major operating decisions
for the Appellant’s business together; (admitted)
i)
the workers had daily meetings at the office and
attended the Appellant’s annual board meetings; (admitted)
j)
the workers did not guarantee any loan or line
of credit for the Appellant; (admitted)
k)
the workers and their father, Jules Deschamps,
have signing authority for the Appellant’s bank accounts; (admitted)
l)
only one signature is required for the
Appellant’s chequing account whereas two signatures are required for loans and
lines of credit; (admitted)
m)
generally speaking, the workers carried out
their duties in the Appellant’s branch offices located in Québec and Montréal; (admitted)
o)
the workers’ actual work hours were not recorded
or accounted for by the Appellant; (admitted)
p) the workers, like all of the Appellant’s
executive employees, had wage-loss insurance; (admitted)
q) the workers had a defined-benefit pension
plan whereas the Appellant’s other employees had a defined-contribution pension
plan; (admitted)
r) each worker had a fixed annual salary
determined during board meetings; (admitted)
s) the workers’ remuneration was established
based on their respective tasks and responsibilities; (admitted)
t) the Appellant granted a 2% salary
increase to all its employees and the workers got a $2,000 increase in 2006; (admitted)
u) in 2006, the workers received the
following earnings: (admitted)
- Christian was paid $117,899 and
received $5,128.44 in taxable benefits,
- Francis was paid $109,572 and received
$6,362.45 in taxable benefits,
- Jean was paid $146,152 and received $6,765.14 in taxable
benefits,
v) the Appellant gave made an automobile
available to the workers and reimbursed all the related expenses; (admitted)
x) the workers were entitled to annual
vacations of indeterminate length; they took 6 or 7 weeks per year; (admitted)
6. …
a)
the Appellant’s only shareholder was Corporation
Financière J. Deschamps; (admitted)
b)
Corporation Financière J. Deschamps is a holding
company in which the majority shareholder was Jules Deschamps; (admitted)
c)
between January 1, 2004, and the end of the time
at issue, the workers each held between 2.72% and 2.84% of the voting shares in
Corporation Financière J. Deschamps; (admitted)
d)
during this period, Mr. Jules Deschamps held the
remaining voting shares in Corporation Financière J. Deschamps (over 91%); (admitted)
e)
Mr. Jules Deschamps is the workers’ father; (admitted)
f)
the workers were related to a person who
controlled the Appellant. (admitted)
7. …
a)
the workers did not track their working hours
but were subject to the authority of the Appellant as exercised by the board of
directors of which they were part with their father; (admitted)
b)
even though they did not have a set work
schedule, they usually carried out their tasks during the business hours of the
Appellant’s offices and worked 30-55 hours per week; (admitted)
[28]
I would like to add
that even if the Appellant had convinced me that the exercise of power was
tainted by certain defects or serious lapses, I would still have confirmed the
merits of the decision made regarding the subject of the current appeal.
[29]
The Appellant, through
its counsel, admitted that the three bothers, Christian, Francis and Jean,
effectively assumed control of the corporation. On the basis of this
admission, the preponderance of evidence is such that the family ties did not
play a role in establishing the working conditions and salaries. The issue is
about the characterization of the employment contracts and not the details of
the division of shares and associated rights of said shares.
[30]
The
few comparisons submitted, particularly with respect to the possible use of an
asset (in this case, the corporation’s trucks) for personal purposes, the
taking out of wage-loss insurance, the amount of autonomy enjoyed and the use
of an employee’s services for personal purposes are the benefits often enjoyed
by corporate managers who are not related to their employers.
[31]
Moreover,
these are taxable benefits that are often the subject of assessments. This
kind of assessment is not limited to files where individuals are related to
their employers.
[32]
For
all these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 19th day of December
2008.
“Alain Tardif”
Translation
certified true
on this
19th day of February 2009.
Bella Lewkowicz, Translator
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