Citation: 2008 TCC 563
Date: 20081006
Docket: 2006-2688(EI) and 2007-2939(EI)
2006-2689(EI) and 2007-3712(EI)
BETWEEN:
EAGLE CANYON ADVENTURES INC.
and CINDY HAMEL,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Mogan J.
[1] The appeals of
Eagle Canyon Adventures Inc. v. The Minister of National Revenue (Court Files
2006-2688(EI) and 2007-2939(EI)) and Cindy Hamel v. The Minister of National
Revenue (Court Files 2006-2689(EI) and 2007‑3712(EI)) were heard together
on common evidence. In each of the years 2004, 2005 and 2006, Cindy Hamel
(“Cindy”) was employed for approximately six months by Eagle Canyon Adventures
Inc. (“ECA”) . When she was laid off at the end of December 2005, Cindy applied
for employment insurance (“EI”) benefits under the Employment Insurance Act
(the “Act”). She was refused such benefits because she and ECA were not
dealing with each other at arm’s length.
[2] The same thing
happened when Cindy was laid off at the end of December 2006. Again, she
was refused EI benefits for the same reason. The Minister of National Revenue
(the “Minister”) determined that she was not entitled to EI benefits for
employment in 2005 and 2006 because her contract of employment with ECA in the
relevant periods would have been different if she had been at arm’s length with
her employer. She has appealed from those determinations by the Minister. ECA
has also appealed from those determinations by the Minister; and ECA seeks an
order that its employment of Cindy be regarded as insurable employment within
subsection 5(1) of the Act. The relevant periods of employment are
July 11 to December 31, 2005 and July 3 to December 29, 2006.
[3] The relevant provisions
of the Act are 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;
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.
5(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 these appeals,
the Appellants admit that, at all relevant times, Cindy and ECA were not
dealing with each other at arm’s length. The Appellants claim, however, that
having regard to all the circumstances of the employment, it is reasonable to
conclude that Cindy and ECA would have entered into a substantially similar
contract of employment if they had been dealing at arm’s length. In particular,
the Appellants rely on the four tests set out in paragraph 5(3)(b)
of the Act:
— the remuneration paid;
—
the terms and conditions
of employment;
—
the duration of the
work performed; and
—
the nature and
importance of the work performed.
[5] Considering
paragraph 5(3)(b) of the Act, if the Minister determines that,
having regard to all the circumstances of employment, it is not reasonable to
conclude that the parties would have entered into a substantially similar
contract of employment if they had been at arm’s length, an appeal to this
Court from such determination by the Minister is like an application for
judicial review. Over the past 15 years, the Federal Court of Appeal has
decided a number of cases interpreting and applying paragraph 5(3)(b) of
the Act and its preceding provision (subparagraph 3(2)(c)(ii)).
For example, see Tignish Auto Parts Inc. v. M.N.R. (1994), 185 N.R. 73, Ferme Emile Richard & Fils Inc.
v. M.N.R. (1994), 178 N.R.
361, and M.N.R.
v. Jencan Ltd., [1998] 1 F.C. 187. Those cases recognized
an element of ministerial discretion in the Minister’s determination.
[6] According to the three
cases just cited, an appeal to this Court from the Minister’s determination
under paragraph 5(3)(b) involved a two-stage process. If this Court should
decide that the Minister properly exercised his discretion, there would be no
further inquiry, and the appeal would be dismissed. If, however, this Court
should decide that the Minister did not properly exercise his discretion, then
the hearing would become a trial de novo to decide whether the
particular contract of employment would have been entered into if the employer
and employee had been at arm’s length. Frequently, the evidence which permitted
this Court to conclude that the Minister did not properly exercise his
discretion was the same evidence which justified reversing the Minister’s
determination and allowing an appeal.
[7] In two subsequent
cases, the Federal Court of Appeal seems to have modified its position on
paragraph 5(3)(b). In Légaré v. M.N.R., 1999 CanLII 8105, Marceau
J. speaking for the Court stated in paragraph 4:
4 The
Act requires the Minister to make a determination based on his own
conviction drawn from a review of the file. The wording used introduces a form
of subjective element, and while this has been called a discretionary power of
the Minister, this characterization should not obscure the fact that the
exercise of this power must clearly be completely and exclusively based on an
objective appreciation of known or inferred facts. And the Minister’s
determination is subject to review. In fact, the Act confers the
power of review on the Tax Court of Canada on the basis of what is discovered
in an inquiry carried out in the presence of all interested parties. 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.
(emphasis added)
And further in paragraph 12:
12 … Under the Unemployment Insurance
Act, excepted employment between related persons is clearly based on the
idea that it is difficult to rely on the statements of interested parties and
that the possibility that jobs may be invented or established with unreal
conditions of employment is too great between people who can so easily act
together. And the purpose of the 1990 exception was simply to reduce the impact
of the presumption of fact by permitting an exception from the penalty (which
is only just) in cases in which the fear of abuse is no longer justified. … It
is the essential elements of the employment contract that must be examined to
confirm that the fact the contracting parties were not dealing with each other
at arm’s length did not have undue influence on the determination of the terms
and conditions of employment. …
[8] In Pérusse v.
M.N.R., 2000 CanLII 15136, Marceau J. was again one of the three judges
hearing the appeal. In paragraph 13 of his reasons, he described how the trial
judge had viewed the issue before him as to whether the Minister had exercised
properly the discretion conferred on him by the Act. Marceau J. in
paragraph 14 of his reasons stated:
14 In fact, the judge was acting in the manner apparently
prescribed by several previous decisions. However, in a recent judgment this
Court undertook to reject that approach, and I take the liberty of citing what
I then wrote in this connection in the reasons submitted for the Court …
At that point, Marceau J. quoted
paragraph 4 from his reasons in Légaré which is already set out above. I
am encouraged by that statement in paragraph 14 of Pérusse that the
Court in Légaré rejected the earlier approach to ministerial discretion
in paragraph 5(3)(b). I conclude that there is a new approach to the
application of paragraph 5(3)(b) in this Court. My conclusion is
reinforced by what Marceau J. said in paragraph 15 of Pérusse:
15 The
function of an appellate judge is thus not simply to consider whether the
Minister was right in concluding as he did based on the factual information
which Commission inspectors were able to obtain and the interpretation he or
his officers may have given to it. 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. However, simply
referring to the Minister's discretion is misleading.
(emphasis added)
Décary J. concurred with Marceau J.
in Pérusse. Desjardins J. dissented on an issue concerning the so-called
Charter of Rights and Freedoms.
[9] My conclusion that
there is a new approach to the application of paragraph 5(3)(b) is
further reinforced by the decision of my colleague Bowie J. in Birkland v.
M.N.R., [2005] T.C.J. No. 195. See paragraph 4 of the reasons in Birkland.
As I understand the new approach, the trial judge is required to decide, by the
evidence, whether the Minister’s conclusion would be reasonable if the Minister
had had the benefit of all the evidence which came before the Court.
[10] Guided by the
decisions in Légaré and Pérusse, I will review the evidence
presented in these appeals. Cindy claims that she was employed by ECA from July
11 to December 31, 2005 and from July 3 to December 29, 2006. Both Cindy and
ECA admit that they are not at arm’s length. The Respondent admits that Cindy was
in fact employed by ECA during the periods in question. Therefore, the only
question to be decided is whether Cindy’s employment by ECA in 2005 and
2006 was “excluded employment” as a result of the Minister’s determination
under paragraph 5(3)(b) of the Act.
[11] Eagle Canyon Adventures is a tourist
attraction and campground in northwest Ontario located about 70 kms. east of Thunder Bay on the Trans Canada Highway and about six kms.
north of that highway. As a seasonal business, it was started by Harvey Hamel,
a long-time resident of northern Ontario. Mr. Hamel was born in 1939. By 1980, he was in the
logging business. In 1985, he incorporated his logging business and retained
Terrence Jewett, a public accountant, to organize his financial records and
bookkeeping. Mr. Hamel has been a client of Mr. Jewett’s accounting practice
for 25 years.
[12] Around 1980, Mr.
Hamel purchased as a wood lot the land on which Eagle Canyon Adventurers is now
located. He harvested the logs off that land but continued to own the land
because he recognized it as a spectacular canyon site. Mr. Hamel continued his
logging business until 2000 when he sold it because the cost of wood lots was
too high. Also, he wanted to devote his time to the development of a tourist
attraction at Eagle
Canyon. In 2001, he built a suspension footbridge (300 feet long) across the
canyon and, in 2004, he built a second suspension footbridge (600 feet long)
across a wider part of the canyon. The longer bridge is 155 vertical feet above
the lake below, and is the longest suspension footbridge in Canada.
[13] Eagle Canyon
Adventures Inc. (“ECA”) was incorporated on October 24, 2002 and the tourist
attraction opened for business in 2003. ECA operates a convenience store on the
site; maintains over five kms. of gravel wilderness trails; and has 30 fully
serviced R.V. sites. It also has tent sites and a full restroom with hot
showers and laundry facilities. Exhibit A-11 is a brochure with colour
photographs describing the ECA operation. It is apparent from the brochure that
the two suspension footbridges are a feature of the tourist attraction. The
brochure describes the resort as “open year-round 9 a.m. – 9 p.m. daily”
but it is not open in winter except for some ice climbing.
[14] Mr. Hamel testified
at length when these appeals were heard. He stated that, in any particular
year, the dates when the ECA resort would open and close for business are
determined mainly by the weather. In favourable conditions, the resort could be
open from mid-March to mid-November. When these appeals were heard at Thunder Bay on May 1, 2008, the
resort had yet opened for 2008 because of the long winter and late arrival of
spring. Mr. Hamel described one year when several warm days in March permitted
the resort to open by March 15th. The two busiest months for the ECA business
are July and August when families can travel together.
[15] When the ECA
business opened for the first year in 2003, Mr. Hamel did not have any employed
bookkeeper but prepared the payroll himself and maintained his own financial
records. His most important employee was his son, Jimmy Hamel. Actually, Jimmy
Hamel is a nephew of Harvey Hamel, the founder of ECA. Harvey has never married but he adopted
his nephew Jimmy when Jimmy was a teenager. Since that time, Harvey and Jimmy
have had a real father/son relationship.
[16] In 2001 and 2002,
Jimmy worked (without pay) for Harvey preparing the campgrounds for the opening of the ECA
business. In order to complete the project, Harvey borrowed $160,000 in 2002 from the
Business Development Bank. Also, Jimmy inherited $40,000 from his grandfather
in 2002 which he loaned to Harvey to help with the ECA project. Because Jimmy worked without
pay in 2001 and 2002, Harvey figures that he owes Jimmy $50,000 ($25,000 for each year)
in back wages. Harvey stated that, in his mind, the ECA business owes Jimmy $90,000
representing Jimmy’s loan of $40,000.00 plus his unpaid wages of $50,000.
[17] When ECA was
incorporated in 2002, the shares were allocated 85% to Harvey and 15% to Jimmy who was then 28
years of age. Jimmy had worked for Harvey in his logging business before 2000. Harvey and
Jimmy are the only directors of ECA and each has signing authority at the bank.
In the general distribution of labour, Harvey does the outside yard work while
Jimmy works at reception greeting customers and describing the facilities.
There is, however, no fixed allocation of labour. Harvey does the payroll and pays most of
the bills while Jimmy will work inside or outside depending upon where he is
needed.
[18] In 2001, Harvey and
Jimmy went to Smooth Rock Falls, Ontario, to visit Harvey’s brother. While they were at Smooth Rock Falls, Jimmy met Cindy
Miller. They dated and fell in love. Jimmy and Cindy started living together in
August 2001. They have a son who was born in December 2002. Because Harvey and
Jimmy were moving to Dorion (a small town close to Eagle Canyon) in the fall of 2001, Jimmy wanted
Cindy to move there to be with him. Harvey was uneasy with what was then a new relationship
between Jimmy and Cindy, and so he (Harvey) insisted that they enter into a
domestic contract before Cindy moved into the house at Dorion.
[19] Exhibit A-3 is a
domestic contract between Jimmy Hamel and Cindy Miller dated November 16, 2001
but signed on December 18, 2001. Jimmy and Cindy later married on August 24,
2005. Exhibit A-4 is a photocopy of the marriage certificate. Harvey stated that he has
always had a good father/son relationship with Jimmy – better than some
“natural” fathers – but his relationship with Cindy was a little cool at first
because he had insisted on the domestic contract.
[20] At the end of this
paragraph, there is a table showing the revenues, expenses and profit/(loss) of
ECA in its first five years of operations from 2003 to 2007. In 2003, ECA
showed a loss of $49,000 on revenues of $89,000. In 2004, ECA showed a similar
loss of $47,000 on revenues of $195,000. When the business started, Harvey kept all the financial records:
he made up the payroll; he recorded all the revenues and paid all the expenses.
He would issue cheques based on invoices and bills collected in a box. When
revenues and expenses doubled in the second year of operations, it was no
longer practical for Harvey to do or supervise the outside work and also do the
bookkeeping.
Eagle Canyon Adventures Inc.
|
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
Revenue
|
89,874
|
195,164
|
235,677
|
265,607
|
292,151
|
|
Expenses
|
139,710
|
242,612
|
216,795
|
227,641
|
238,959
|
|
Profit/(Loss)
before depreciation
|
(49,836)
|
(47,448)
|
18,882
|
37,966
|
53,192
|
[21] After the first
year, Mr. Jewett advised Harvey that issuing cheques based on a bunch of documents in a
box was not an adequate way to record the expenses of a business grossing more
than $100,000 per year. The business needed a person with bookkeeping
experience. Cindy Hamel had that kind of experience. Exhibit A-5 is her resume
as of 2001, and Exhibit A-6 is her resume as of 2006. In 1992, she graduated
from Kapuskasing High School with an
Ontario Secondary School Diploma including Grade 13 credits in accounting,
calculus and finite mathematics. In 1995, she graduated from Northern College
of Applied Arts and Technology (Timmins, Ontario) having earned a three-year bilingual diploma with honours
in Business Administration and Accounting.
[22] From May 1995 to June
2000, Cindy was employed by a corporation in Timmins doing accounts payable,
accounts receivable, collections, banking, computer bookkeeping and month end
reports. This was hands on, in-house accounting and bookkeeping experience.
From April to August 2001, she worked for the Ontario Correction Services
earning $18.36 per hour for the last three months. After she moved to Dorion in
December 2001 to live with Jimmy, she obtained employment at Thunder Bay from April to November
2002 working as a general office assistant at the rate of $20.81 per hour. Her
first child was born in December 2002.
[23] After Cindy’s son was
one year old, she dropped off her resumes at some offices in Thunder Bay in 2003 where she might
have found employment. She left one of her resumes at the office of Mr. Jewett
whom she had met as Harvey’s accountant. When ECA started its second season in the spring of 2004,
Mr. Jewett recommended that Harvey hire Cindy as a bookkeeper because there was so much catching
up to do with the scattered financial records from 2003. Harvey accepted Mr. Jewett’s
recommendation and hired Cindy as an employee of ECA in March 2004.
[24] When Cindy started
to work for ECA, Mr. Jewett advised Harvey to pay her $18.00 per hour plus 75¢ for vacation
pay. That is how her rate was set at $18.75 per hour. Mr. Jewett testified at
the hearing of these appeals and stated that Cindy’s bookkeeping skills were
valuable to the ECA business. Other persons with her skills are scarce in the
location and vicinity of the ECA business. He further stated that if Cindy were
to leave the employment of ECA, he would recommend that Harvey find and hire some
other person with Cindy’s bookkeeping skills.
[25] Mr. Jewett worked
with Cindy in the spring of 2004 to establish a basic set of financial books
and records for the ECA business. Her first challenge was to put together
adequate documents from 2003 so that financial statements and tax returns could
be filed in 2004. That is why she started in March 2004 even though the
seasonal business for 2004 had not yet commenced. Mr. Jewett came to the ECA
office and worked with Cindy to set up the computer system for coding and
recording all business transactions. After the new system was set up and
running, Cindy would meet Harvey many times each day.
[26] The busiest time in
ECA’s seasonal business is the school holiday (July and August) when families
can travel together. In 2004, Cindy was employed only from March 1 to
mid-September because she was needed to set up the new accounting system;
record all of the 2003 transactions in the new system; prepare the 2003 income
tax returns for Harvey and Jimmy; and do the bookkeeping for the two busiest
months in 2004. Also, the ECA business could not afford her services for a full
year. She was paid every second week.
[27] In 2005 and 2006,
Cindy was employed from early July to the end of December. She explained that
the ECA business was not heavy prior to July 1st; and she could easily in July
and August record all transactions prior to July 1st as well as all
transactions during those two busy months. She was closely cross‑examined
as to why she would work to the end of December when the ECA business season
usually ended on October 31. Specifically, it was suggested that she was
building up hours of “insurable employment” so that she could claim maximum EI
benefits when she was laid off.
[28] Cindy described her
services in November and December. She would receive invoices for good and
services delivered to ECA in September and October; and arrange for Harvey to pay those invoices.
She would prepare monthly statements for September, October, and November and
reconcile the ECA books with the monthly banking statements. She would prepare a
budget for the following year based on the recorded transactions for the year
then ending. She would meet with Harvey to review advertising opportunities for the next year, and
deal with suppliers who would seek orders for the next year.
[29] The Replies to the
Notices of Appeal disclose the facts on which the Minister relied. Counsel for
the Appellants addressed many of those facts when he examined in-chief his
three witnesses: Harvey, Cindy and Mr. Jewett. I found that all three witnesses
were credible without any qualification. A number of facts relied on by the
Minister were proved to be not true or misleading when the witnesses described
surrounding circumstances.
[30] The Minister assumed
that Cindy was hired “to perform office work” and that her duties included:
·
accounting work (deposits, bank reconciliation,
remittances)
·
ordering supplies, pricing merchandise
·
correspondence
·
scheduling staff
When testifying, Cindy explained
that she was not hired as an office clerk or secretary to do correspondence and
take deposits to the bank. She was hired because of her experience and skills
at accounting and bookkeeping. Her primary duties required the skills of a
trained bookkeeper. Her evidence on this point was corroborated by Harvey, Mr.
Jewett and her own resumes (Exhibits A-5 and A‑6). She was emphatic that
she did not do any scheduling of staff.
[31] The Minister relied
on the fact that Cindy’s “period of employment did not coincide with” ECA’s
busy period. Both Harvey and Cindy stated that this was not true. Although
Harvey and Jimmy tried to get the ECA business going as soon as weather
permitted in the spring, the really busy period did not commence until the first
week of July. When Cindy started her employment in early July (July 11, 2005
and July 3, 2006), the busy period was just commencing and she could easily
pick up and record all of the relevant transactions from the active business
period prior to July 1st.
[32] The Minister also
relied on the fact that when Cindy came on the ECA payroll, “her husband
(Jimmy) stopped receiving any earnings, even if he were still working” for ECA.
This is not true. Jimmy as shareholder and part owner of the business was not
paid on a regular basis but was paid as cash became available. There was no
intended link between Cindy’s regular salary cheques every two weeks and
Jimmy’s irregular pay which depended upon ECA’s available cash.
[33] I come back to the
four tests set out in paragraph 5(3)(b) of the Act. First, the
remuneration paid to Cindy ($18.75 per hour) was recommended by Mr. Jewett
and accepted by Harvey. It was consistent with what Cindy had earned in 2001 and 2002 from two
arm’s length employers. See Exhibits A-5 and A-6. There was no evidence that it
was artificially high in relation to any other employee or with respect to
Cindy’s skills. In fact, Mr. Jewett stated that a person with her bookkeeping
skills was scarce in the vicinity of the ECA business.
[34] Second, the terms
and conditions of Cindy’s employment were set by Harvey and Cindy consistent
with the needs of the ECA business. Although she had started working for ECA in
March 2004, that was because there was so much catching up to do from 2003 (the
first year of ECA’s business). In 2005 and 2006, she was able to start in early
July because the bookkeeping system was in place and she could easily pick up
and record all relevant transitions from the beginning of the season. It was a
relatively light period.
[35] Third, the duration
of the work performed and, fourth, the nature and importance of the work are
the last two tests in paragraph 5(3)(b). There is no doubt that, by 2005
and 2006, the ECA business required a person with Cindy’s skills. The
independent evidence of Mr. Jewett confirmed that fact. Also, the summary of
financial results (Exhibit A-10) proved that from the revenue in 2003
($89,000), the revenues in 2005 and 2006 were up by more than 150%. See the
table in paragraph 20 above. A business that size cannot be effectively run by
collecting invoices in a box and recording expenses by the cheques issued. The
ECA seasonal business could not afford a fulltime bookkeeper and probably did
not need one. The duration of Cindy’s work (July to December) was the maximum
time ECA needed to accurately record the financial results of operating in any
particular season.
[36] As stated above in
these reasons, I was favourably impressed with the unqualified credibility of
the three witnesses: Harvey Hamel, Cindy Hamel and Terrence Jewett. I accept
their collective testimony. In my opinion, if the Minister had had the benefit
of the evidence which came before me, he could not reasonably have reached the conclusion
that he did reach. On the evidence, I find that it is reasonable to conclude
that Cindy Hamel and ECA would have entered into a substantially similar
contract of employment if they had been dealing with each other at arm’s
length. All four of the appeals are allowed.
Signed at Ottawa, Canada, this 6th day of October, 2008.
“M.A. Mogan”
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