Citation: 2007TCC406
Date: 20070711
Docket: 2006-333(EI)
BETWEEN:
NATIONAL INSTALLATIONS LTD.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Sarchuk D.J.
[1] By Notice of
Assessment dated August 24, 2004, the Minister of National Revenue assessed the
Appellant, National Installations Ltd., with respect to employment insurance
premiums in the amount of $5,896.80, plus applicable penalty and interest for
the 2003 taxation year. The basis for the assessment is that the premiums were
payable by the Appellant under the Employment Insurance Act (the “Act”), in
connection with services performed by Michael Vesterback, Ronald A.
Jassmann and Rick Musil (the “Workers”), in respect of whose remuneration
the Appellant failed to make required remittances to the Receiver General for
Canada.
Background
[2] Helmut Musil was
the owner of National Hydronics Ltd. (Hydronics), a holding company which owned
the Appellant. In June 2002, Musil contemplated retirement and looked for
someone to take over the business. The Workers approached him and negotiated a
purchase of Hydronics. For that purpose, they formed 649902 BC Ltd., in which
each acquired a one-third interest, and that company acquired 100% of the
shares of Hydronics, which in turn owned 100% of the shares of the Appellant.
[3] The issue before
the Court is whether the employment arrangements between the Appellant and
Vesterback, Jassman and Musil were such that the Workers were engaged in
insurable employment pursuant to the Act.
Appellant’s submission
[4] The Appellant contends
that the three employees of National Installations Ltd. were not related to
each other, nor did they form a related group as defined by the Income Tax
Act. More specifically, the Appellant’s representative noted that the three
individuals did not deal at arm’s length in respect of their employment
arrangement with the company. Specific reference was made to paragraph 5(2)(i)
of the Employment Insurance Act (EI Act), which provides that:
5(2) Insurable employment does not
include
(a) …
(i) employment
if the employer and employee are not dealing with each other at arm's length.
And paragraph 251(1)(c) of the Income Tax Act (IT
Act) defines “arm’s length” as follows:
251(1) For the purposes of this Act,
(a) …
(c) … it is a
question of fact whether persons not related to each other are at a particular
time dealing with each other at arm’s length.
[5] Pursuing this line, the Appellant’s representative
submitted that the key factors in a determination of this issue “boil down to
whether there exists a common mind directing the transaction from both sides –
on both sides of the transaction”.
[6] Reference was made to Jassman’s testimony which,
according to the representative, affirmed the distinction between the Workers
and the Appellant’s other employees. Specific reference was made to the following:
(a) Both he
and the other two Workers own all the shares of the numbered company, which
owns the holding company, National Hydronics, and therefore control the Appellant.
The three make all decisions for it regarding wages, the choosing of projects,
hiring and firing of other employees, etc. Their performance is not monitored
and they do not report to anyone else.
(b) At all
times, the Workers dictated the terms of their employment agreements.
(c) No other
employees of the Appellant have contracts that are substantially similar to the
Workers’
contracts.
(d) They have
unrestricted access to the Appellant’s equipment and any one of them could
utilize a company motor vehicle if they needed to do so for personal use.
(e) They
derive their bonuses directly from income earned for the Appellant and bear the
risk for any financial difficulties. They are expected to defer salaries should
the company require additional working capital and also, they have provided
personal guarantees and risked their personal securities and properties in
order to achieve the bonding covenant and any bank loans required for the
business.
[7] It was submitted
that the Workers and the directors of the Appellant are “factually the same
people” and therefore,
“as employees they share a common
interest, by virtue of the shareholder’s agreement. As directors, they share a
common interest. There is a lack of an adversarial arrangement here. They all
have the same interest. …”
By way of example, referral was
made to the method by which the bonuses were calculated and the representative noted
that they
“Don’t look at performance. They don’t
look as if anybody messed up a job or if, you know, so-and-so took two weeks in
Italy. They look at the taxable income of the corporation and the taxable
income of the parent, and the associated group’s business limit, and then they
look at the individual taxable incomes of the corporation - - or of the
individuals and the tax rates, and whether or not as a dividend, if they paid a
dividend, how much would they have in their pocket? If they paid a bonus, how
much would they have in their pocket? It’s the same pocket.”
[8] Furthermore, the
shareholder’s agreement requires unanimous consent of the Workers for most
business decisions. This agreement, the representative noted, binds the Workers
and creates the common mind and de facto control for non‑arm’s
length dealings.
Accordingly, the Workers are, in effect, indistinguishable from the Appellant.
[9] The Appellant’s
representative noted the comments of Porter D.J. in Crawford & Co. Ltd.
v. M.N.R., (in
which reference was made to Swiss Bank Corporation v. M.N.R.) and submitted
that:
“At paragraph 29, Crawford also
indicates that the case law has concluded that even people who are ordinarily
arm’s length in their relationship can deal not at arm’s length in certain
circumstances.”
And that:
“The facts here support the conclusion that
the three Workers, as a consequence of their shareholder’s agreement and the
requirement to achieve unanimity with the relationships with the subsidiary - -
or, sorry, with their employer, cause a common objective and common mind, and
that test is fulfilled such that no meaningful bargaining exists between the
two in respect of their employment.”
Respondent’s submission
[10] The Respondent’s
position is that the facts before the Court establish that the Workers were
dealing at arm’s length with the Appellant.
[11] Counsel submitted
that what is most relevant in this appeal is the multiplicity of legal entities
and roles that the Workers held. Jassman’s testimony is that of a shareholder
of 649902 BC Ltd. which owned 100% of Hydronics, which in turn, owned the Appellant.
He was also a director and an employee and, in effect, wore three different
hats in relation to the Appellant. Furthermore, the Appellant is a completely
distinct legal entity owned and controlled by the directors of which Jassman is
only one and, counsel noted, it is necessary to keep in mind the roles that the
Workers held and the different rights and responsibilities associated with them.
[12] Reference was made
to the manner in which the Workers were paid by the Appellant, and bonuses were
granted to them. Jassman testified that his salary in 2003 was approximately
$74,000 and was reported on a T4 slip at the end of the year. On the other
hand, the bonuses of $100,000 paid to each of the Workers were not treated as
dividends or employment income, but were reported as business income.
Furthermore the evidence was that the bonus amounts were paid not only from the
profits of the Appellant, but also those of National Hydronics and 649902 BC
Ltd.
[13] Counsel submitted that
the manner in which the Workers’ salaries were determined was substantially
different than the manner in which the $100,000 bonuses were granted to each of
the three shareholders in their capacity as directors. By way of example, the testimony
established that Musil was not in favour of bonuses, however, since unanimity
was required Musil subordinated his interest to that of the corporate entity in
order that Vesterback and Jassman could receive bonuses. Counsel noted that in this context,
Musil “could not exercise his will” and this clearly establishes the nature of
the triple role of Worker as employee, shareholder and director held by the
three.
[14] With respect to the Appellant’s
reliance on the decision of Porter D.J. in Crawford, counsel noted that
in that case, the trial judge made a point of the fact that the three owners,
directors and employees had full access to all the accounts of the company on
an individual basis at any time, and thus, there is a substantial distinction
between Crawford and the matter before this Court. Specifically, no
shareholders’ agreement existed to protect the company from any one of the
three employees in that case. Thus, the three had access to the employer’s accounts
and to company funds at any time individually, without the consent of the
others.
[15] The facts in the
present appeal are substantially different in that the shareholder’s agreement
with 649902 BC Ltd. lists items in respect of which a decision of the directors
had to be unanimous. The agreement itself is fatal to the Appellant’s case
because, counsel submitted, the shareholder’s agreement essentially sets out
that a Worker cannot exert individual control over this company as an employee.
Conclusion
[16] The Appellant’s position
is premised on the assumption that the existence of a requirement where the
three Workers were obliged to act as one, coupled with their personal financial
stakes and the interdependence created by virtue of the shareholder’s agreement
established that what is in the best interest of the individual worker is
identical to what would be in the best interest of the company and thus, it
cannot be said that the parties were dealing at arm’s length.
[17] Reference was made
by both parties to Peter Cundill and Associates and the three-factor
test set out therein, i.e. the existence of a common mind which directs the
bargaining for both parties to the transaction; parties to a transaction acting
in concert without separate interests, and de facto control, has been
adopted and has been appropriately utilized in a number of cases. The foregoing
was approved by Miller J. in Terra Remote Sensing Inc. v. The Queen in which he
stated:
“What is important to note is that these
factors are to be addressed to the individual Appellants and the corporate Appellant’s
dealings in the context of their employment relationship, not their shareholder
relationship.”
[18] The testimony of
Jassman established that the Appellant was a general contractor providing:
“the full spectrum of the – a high-rise
building, for example. We would do the plumbing, the mechanical, HVAC systems,
sprinkler systems. So we are actually the mechanical contractors for that
project.”
And that his responsibilities as
employee were:
“looking after the day to day
operations, the manpower, out in the field, and many times I’m going from job
to job making sure that things are in place, materials are there, orders are
met. I also look after the service end of the company which requires going to
different service contractors that we deal with and satisfying their needs.”
[19] He further testified
that before the Workers acquired the Appellant, he and Musil:
“were members of the Union and were paid
an hourly rate specific to what we did on each job site. For Mike Vesterback,
who is one of the estimators, the same applied for him. He was an hourly
employee, working in the office, doing estimating, project coordination and
purchasing and his salary was determined by the previous owner, and was
comparable to our rate as well since he was not a pensionable employee of the Union.”
[20] Following their
acquisition of the Appellant, Jassman said they could have paid themselves
whatever they deemed fit as employees, however, they deliberately decided to
maintain their salaries at the Union rate with the intention of remaining
within the Union structure to retain access to its pension plan, which, their
representative noted, was “probably pretty good”. Jassman also noted that
Vesterback was not a Union member and therefore, they, in their corporate role
agreed to pay him an extra $4.00 per hour to compensate him for the lack of a
Union pension.
[21] He further observed
that the Union rate was also necessary because both before and after the
acquisition, the Workers tracked their hours including overtime, as was the
case with the Appellant’s other Union employees. This was necessary because the
Workers’ hours were billed to each specific contract to permit the keeping of a
“weekly job cost breakdown” for their employer.
[22] Given the foregoing,
it is necessary to distinguish between the Workers roles as shareholders and
directors from their performance of their duties as employees of the Appellant.
It is trite law that working for a company in which the employee is also a
shareholder does not by itself preclude a finding that a shareholder/employee
was in insurable employment since the company and its shareholders each have
distinct legal personalities. As was noted in Doyle v. Canada, the appropriate question is what was the
nature of the relationship that existed between the Appellant and the Workers.
[23] In this context,
serious consideration must be given to the testimony of Jassman and, more
particularly, with respect to the nature of the two roles he held. He said that
in his employee function as daily operations manager, he was responsible for
the supervision of the manner in which the project was being carried out for
the contractors, as well as the work performed by the foreman and other
employees. Furthermore if in an individual project that he was supervising, it
became necessary to obtain additional material, he, as daily operations
manager, was able to make decisions regarding the purchase and provision of such
supplies. However, in that case he also noted that he was limited to $1,000 and
if any major acquisition was necessary, he was required to conform with the
shareholder’s agreement. Although
the foregoing described his daily tasks, he noted that:
“When it comes to the major decisions
like whether or not we’re going to accept a bid from Centreville Projects or
Concord Pacific, then that’s a group decision. We sit down and we say, Are we
going to make this - - are we going to make that leap?”
This, as counsel for the Respondent
noted, creates a substantial distinction between Jassman, in his “Worker” capacity
as project supervisor, and his role as one of three directors and shareholders,
who on major decisions were required to be unanimous.
[24] The Appellant failed
to recognize that there is no common mind between Jassman, as an employee, and
the controlling mind of the unanimous decision of the three, as the employer. Furthermore,
the Appellant’s submission confused the second element of the test, “acting in
concert”, with the requirement for unanimous consent, and failed to correctly
delineate the parties in their appropriate roles in the transactions. I note as
well that the particular duties and powers of an individual Worker in his role
as employee do not equate with de facto control. This is particularly
evident from the testimony of Jassman who indicated that no major decision
could be made by any individual employee. In my view, the Appellant failed to
understand the distinct personality a corporation has apart from shareholders
at law, and has also failed to recognize that the Workers are to be evaluated
as individuals and not as a unit when considered in their separate legal roles
as employees.
[25] The evidence is
clear that the shareholder’s agreement did precisely what it was designed to
do, which was to insulate the Appellant from having a non-arm’s length
relationship with any one of the three individual Workers on their own. In the
present case, it is most evident that there was a contract of service between
the Appellant and the three Workers, making the latter subject to the control
of the company and thus, employees of the Appellant.
[26] The expression
dealing with each other at arm’s length involves an analysis of the manner in
which the parties to a transaction conducted themselves in forming that
transaction. What is asked is whether the parties behaved in the manner in
which parties at arm’s length would be expected to behave in conducting their
affairs. That is the test. I am satisfied that the Minister was correct in
looking at the Appellant as payor and the three individuals as Workers, and not
accepting the three collectively as directors, as shareholders, but the three
individually, as workers.
[27] The appeal is
dismissed and the decision of the Minister is confirmed.
Signed at Ottawa, Canada, this 11th
day of July, 2007.
“A.A. Sarchuk”
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