Citation: 2008 TCC 502
Date: 20080917
Docket: 2007-4470(EI)
BETWEEN:
MONUMENTS B.M. INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
These are
two appeals from a decision by the Minister of National Revenue ("the
Minister") finding that the employment of Guy Martin,
Daniel Martin and Richard Martin ("the Workers") with the
Appellant Monuments B.M. Inc. ("BM") from January 1, 2004,
to December 31, 2006, and with Gestion G.D.R.R. Inc. ("GDRR")
from January 1 to December 31, 2003, was insurable employment within
the meaning of paragraphs 5(1)(a) and 5(2)(b) of the Employment
Insurance Act ("the Act"). The appeals were heard on common
evidence.
[2]
When the hearing began,
the Appellants admitted that the three Workers were employed by them under
a contract of service and that they and the Workers were related persons within
the meaning of the Income Tax Act.
[3]
The Appellants argued
that the employment was excluded from insurable employment because of this non‑arm's
length relationship and that the Minister had improperly exercised his discretion
under paragraph 5(3)(b) of the Act, since it was not reasonable for
him to conclude that the Workers and the Appellants would have entered into a
substantially similar contract of employment if they had been dealing with one
another at arm's length. This conclusion by the Minister created a presumption
that the Appellants were dealing with the Workers at arm's length in the
context of their employment.
[4]
For the purposes of
this case, and although there is no longer any issue as to the non‑arm's
length relationship and the existence of a contract of service, I will
reproduce the presumptions of fact on which the Minister relied and state
whether the Appellants admitted or denied them.
Monuments B.M. Inc.
[TRANSLATION]
(a)
The Appellant was incorporated on
January 14, 1970. [admitted]
(b)
The Appellant made funerary monuments.
[admitted]
(c)
Business at the Appellant's monument shop was
seasonal from April to November; the Appellant could not deliver monuments in
the winter. [admitted]
(d)
The Appellant's administrative office was open
year‑round. [admitted]
(e)
The Appellant had sales of about
$1.5 million a year.
(f)
In addition to the 3 shareholders, the
Appellant employed 15 seasonal workers and about 70 sales
representatives.
(g)
Guy Martin had worked for the Appellant
since 1976, and Richard Martin and Daniel Martin had worked for the
Appellant since 1980.
(h)
Guy Martin was the Appellant's general
manager. [denied as written]
(i)
Guy Martin's work involved financial
management, bookkeeping, accounting and supervising a secretary. [denied as
written]
(j)
Daniel Martin was responsible for customer
service and for engraving the monuments in cemeteries. [admitted]
(k)
Daniel Martin's work involved managing the
salespersons' activities, customer relations and lettering. [admitted]
(l)
Richard Martin was the production manager.
[admitted]
(m) Richard Martin's work involved supervising the production of
deliveries of monuments. [admitted]
(n)
Richard Martin supervised about
10 employees in the monument shop. [admitted]
(o)
The Workers had no fixed work schedule. [admitted]
(p)
The Workers worked 50 to 70 hours a week
for the Appellant during the busy season and 25 to 30 hours a week during
the winter months. [denied]
(q)
The Workers' remuneration was determined by the
Appellant in accordance with the shareholders' unanimous agreement. [denied]
(r)
Guy Martin's annual remuneration was
$120,780 in 2004, $110,828 in 2005 and $112,938 in 2006. [admitted]
(s)
Daniel Martin's annual remuneration was
$74,545 in 2004, $74,743 in 2005 and $75,923 in 2006. [admitted]
(t)
Richard Martin's annual remuneration was
$66,214 in 2004, $66,246 in 2005 and $67,256 in 2006. [admitted]
(u)
The Workers were paid their salary regularly
every week by direct deposit. [admitted]
(v)
The Appellant had an active corporate life.
[denied]
(w) Important decisions for the Appellant were made by the directors or
by the shareholders in accordance with the unanimous shareholder agreements
limiting the directors' powers, which were dated January 27, 1986.
[denied]
(x)
there was a relationship of subordination
between the Appellant and the Workers. [denied]
(y)
the Appellant had a right of control over the Workers,
and that control was exercised. [denied]
The Appellant and the Workers are related persons within the meaning
of the Income Tax Act because:
(a)
The Appellant's shareholders with voting shares
were:
Guy Martin 33 ⅓ percent of the shares;
Daniel Martin 33 ⅓ percent of the shares;
Richard Martin 33 ⅓ percent of the shares.
(b)
Guy Martin, Daniel Martin and
Richard Martin are brothers.
(c)
The Workers are related by blood to a group of
persons who control the Appellant.
The Minister also determined that the Appellant was deemed to deal
with the Workers at arm's length in the context of their employment because the
Minister was satisfied that it was reasonable to conclude that they would have entered
into a substantially similar contract of employment if they had been dealing
with one another at arm’s length, having regard to the following circumstances:
(a)
The Workers' salaries and bonuses had been
determined by agreement among the Appellant's shareholders. [admitted]
(b)
Each Worker was responsible for his own area of
activity. [denied]
(c)
The Workers held managerial positions and their
earnings were reasonable given their duties and responsibilities with the
Appellant. [denied]
(d)
The Workers had worked for the Appellant year‑round
for more than 25 years. [admitted]
(e)
The duration of the Workers' work was reasonable.
[denied]
(f)
The Workers' work was essential and important to
the smooth operation of the Appellant's business. [admitted]
(g)
The Workers were never absent for an extended
period of time. [admitted]
(h)
The nature and importance of the Workers' work
were reasonable. [denied]
(i)
The terms and conditions of employment reflected
the demands of the Workers' managerial positions. [denied]
(j)
The Workers' terms and conditions of employment
were reasonable. [denied]
Gestion G.D.R.R. Inc.
[TRANSLATION]
(a)
The Appellant was incorporated on May 16,
1986. [admitted]
(b)
During the year in issue, the Appellant paid the
Workers even though they worked for their true employer. [admitted]
. . .
(r)
Guy Martin's annual remuneration was
$101,677 in 2003. [admitted]
(s)
Daniel Martin's annual remuneration was $72,471
in 2003. [admitted]
(t)
Richard Martin's annual remuneration was
$64,301 in 2003. [admitted]
. . .
(w) Important decisions for the Appellant were made
by the directors or by the shareholders in accordance with the unanimous
shareholder agreements limiting the directors' powers, which were dated
June 5, 1987. [denied]
[5]
Only Guy Martin
testified at the hearing. He is BM's general manager. Obviously, BM is a family
business. His testimony served largely to confirm the assumptions relied on by
the Minister in determining the question at issue and admitted by the
Appellants. However, he corrected one of those admissions, namely that he and
his two brothers are equal shareholders in BM. In fact, all of BM's voting
shares are owned by GDRR. The three brothers are equal owners of GDRR's
voting shares, although Guy Martin's management company has owned his
shares since 2006. The witness also admitted that, during the period of
January 1 to December 31, 2003, the Workers were paid by GDRR but
their true employer was BM.
[6]
Guy Martin also
clarified some things about BM's operation and especially his own
responsibilities and duties in BM. In addition to being the general manager,
Mr. Martin works as a commission salesperson one day a week in a defined
territory. This explains the difference between his income and that of his
two brothers. As well, the Workers' salaries as shown in the Reply to the
Notice of Appeal include an amount paid as a bonus. The workers received
dividends from the Appellant GDRR during the four periods in question, but
those amounts were not included in their respective total earnings. Two of the
three brothers therefore had about the same salary, within $10,000 of each
other, while Guy Martin received an average of $40,000 more a year in
commissions for the years in question. It must be recalled that BM has about
70 travelling salespersons who are all self‑employed and do the same
work as Guy Martin.
[7]
The brothers' salaries
were determined by the shareholders in accordance with an agreement they had
reached limiting the powers of the directors of BM and GDRR over such things as
declaring and setting the rate of a dividend and determining and paying any
salary, bonus, premium or other type of remuneration.
[8]
The duties of each Worker
as described in the Reply to the Notice of Appeal indicate that each of them
held a key position in the business. The hours they spent performing their
respective duties were similar, except in the case of Guy Martin, who
worked as a self‑employed salesperson one day a week. He therefore
devoted slightly fewer hours to his managerial position than the other
two Workers, but, based on the description, his work as general manager
seems to have been more demanding during the evenings and on the weekends.
There was thus no set schedule, since each Worker preferred to adapt to the
situation in order to meet the company's needs.
[9]
BM paid each Worker a
disability insurance premium, but the benefits were not payable until
six months after the event causing the disability. BM therefore undertook
to continue paying the three Workers' salaries during that initial six‑month
period following the occurrence of the risk. Each Worker was entitled to
six weeks of vacation a year, and it was agreed that they had to take
their vacation during the least busy time of the year and that there could be
no overlap in their vacation time.
[10]
According to
Guy Martin, his departure as general manager would lead to the creation of
a new management structure and would require BM to hire a comptroller and an
accountant to replace him. BM would also have to hire a sales representative to
cover his territory. Relationships of trust would also have to be re‑established
to ensure the smooth operation of the business, and it might be difficult to
demand the same devotion and trust from a stranger.
[11]
The relevant
legislative provisions are in paragraphs 5(2)(i) and 5(3)(b).
Paragraph 5(2)(i) reads as follows:
5(2) Excluded
employment — Insurable employment does not include
. . .
(i) employment if
the employer and employee are not dealing with each other at arm’s length.
[12]
Based on this
paragraph, the employment of the three Workers in the case at bar is, prima facie,
excluded from insurable employment. However, if the employer is, within the
meaning of the Income Tax Act, related to the employee, the Minister has
a discretion under paragraph 5(3)(b) which may be exercised in
accordance with the following criteria:
5(3) Arm's
length dealing — For the purposes of paragraph (2)(i),
(a) .
. .
(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.
[13]
The question that must
be answered is whether the Minister's decision in this case still seems
reasonable in light of the evidence heard. In other words, it must be asked
whether the three Workers/shareholders would have entered into a
substantially similar contract of employment if they had been dealing with BM
at arm's length.
[14]
This Court has already
rendered several decisions concerning this type of situation involving workers
who are both shareholders and employees, including Lacroix v. Canada,
[2007] T.C.J. No. 81, in which Archambault J. summarized this type of
situation as follows at paragraph 41 of his decision:
I emphasize this nuance because we are dealing with
three workers who, at the same time, through their respective holding
companies, each own one third of the Payor. They are in a way the indirect
owners of the Payor and its business. When paragraph 5(3)(b) of the
Act requires that it must be determined whether the contract of employment
would have been substantially similar in an arm's length relationship, I
believe it must be taken into account that these are three workers who are
at the same time the indirect owners of the Payor. Individually, none of the
three control the Payor and, therefore, had they not been related, none of the
Workers would have been a person related to the Payor within the meaning of the
Tax Act and they would then be at arm's length. Indeed, paragraph 5(3)(b)
of the Act does not indicate that the financial interests that the workers hold
in the company must be ignored. Therefore, it is possible to imagine
three workers with no family relation between them, each holding
one third of the capital stock of the Payor and remaining at arm's length
with the Payor.6 The issue to be determined by the Minister could
therefore be expressed as follows: if each of the Workers had held
one third of the Payor’s shares while remaining at arm's length with the
Payor, would they have entered into a substantially similar agreement?
___________________________________________
6 It is important to stress the fact that because a person is a
shareholder of his or her employer does not necessarily mean that they are not
dealing with each other at arm's length. An employer's shares could be held by
five or ten employees of that employer. Assuming the shares are
distributed equally, none of the shareholders would be able to dictate the
Payor's course of action and therefore none of them would be able to control
it. In this case, unless there are special circumstances, it could not be
concluded either that there is a factual non‑arm's length relationship.
For a discussion of the existence of a factual non‑arm's length
relationship between shareholders at arm's length with the company, see Gestion
Yvan Drouin Inc. v. The Queen, 2001 DTC 72; [2001] 2 C.T.C. 2315,
at paras. 73 et seq. and in particular paras. 80 et seq.
In this case, I do not believe that there are any indicators that could
demonstrate the existence of a factual non‑arm's length relationship
between the Workers and the Payor.
[15]
In my opinion, this is
exactly the question that arises here. Among the criteria the Minister must
consider, namely the terms and conditions, the importance of the work
performed, the remuneration paid and the duration of the employment, is there
something that makes their contract of employment different because of the non‑arm's
length relationship between them and BM?
[16]
Nothing in the evidence
I heard could lead me to conclude that the Minister's decision is not
reasonable. Each Worker held a managerial position in which his activities were
essential to BM's smooth operation. The terms and conditions they accepted were
consistent with their status as shareholders (owners) and managers. The same
was true of their hours of work, vacations and benefits, such as the payment of
their salaries for six months before they became eligible for benefits
under the wage loss insurance provided by BM. These were all terms and
conditions that the three partners or shareholders who were employees
would have agreed to abide by even if they had been dealing with the employer
at arm's length.
[17]
With regard to the
Appellants' argument that the Workers continued working during the off‑season
between November and April, in my view, this made up for the long hours they
worked the rest of the year, and the evidence shows that this was not wasted
time, since there was work to be done.
[18]
Their financial stake
in the smooth operation of the business is really what accounts for their
devotion and for the fact that, if they left the business, two employees
might have to be hired to perform the same duties, and this would probably be
the case for any shareholder who is an employee. This has nothing to do with
the existence of a non‑arm's length relationship.
[19]
It seems to me that the
non‑arm's length relationship may have played a role when Guy Martin
was authorized to spend one day a week working for himself, namely the day
he worked as a salesperson who was self‑employed like BM's 70 other
salespersons. This had the effect of reducing his working hours compared with
the other two Workers and thus enabling him to earn additional income.
Indeed, the Appellants argued that the Minister had not considered this factor
in exercising his discretion.
[20]
However, the evidence
shows that Guy Martin, as the general manager, had to be more available to
BM than the other two Workers, especially evenings and weekends, and that
this appears to be how he made up for the time he devoted to being a
salesperson. The amount of the commissions paid to Guy Martin may seem
high, but the return derived by BM directly and by its shareholders in the form
of income was very satisfactory.
[21]
Having regard to the
circumstances and the evidence, the Appellants have failed to show that the
Minister's decision seems unreasonable. The appeals are dismissed.
Signed at Edmundston, New Brunswick, this
17th day of September 2008.
"François Angers"
Translation
certified true
on this 14th day
of November 2008.
Brian McCordick,
Translator
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