Citation: 2008TCC266
Date: 20080430
Docket: 2007-4163(EI)
BETWEEN:
AGRIMÉTAL INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
The Appellant is
appealing from a decision of the Minister of National Revenue
("the Minister") concerning the insurability of the employments
of François Houle, Mario Houle and Pascal Houle ("the Workers")
with Agrimétal Inc. ("the Payor") from January 1, 2006, to February 5, 2007 ("the period in issue"). The Minister
determined that all the Workers held insurable employment for the purposes of
the Employment Insurance Act ("the Act"). The Appellant
had submitted that the Workers did not hold insurable employment because their
employment is excluded from the concept of insurable employment owing to the
non-arm's-length dealings between the Workers and the Payor. In addition, the
Appellant submits that the Minister improperly exercised his discretion under
paragraph 5(3)(b) of the Act because it is not reasonable to
conclude that the Workers and the Payor would have entered into a substantially
similar contract of employment if they had been dealing with each other at
arm's length.
[2]
In making his decision,
the Minister relied on the following assumptions of fact, set out in
paragraphs 5, 6 and 7 of the Reply to the Notice of Appeal:
[TRANSLATION]
5. The Minister
determined that the Workers were employed by the Appellant in insurable
employment under a contract of service, based on the following assumptions of
fact:
(a) The Appellant was incorporated in 1989. (admitted)
(b) The Appellant operates a business that
manufactures municipal park and golf course maintenance equipment and
machinery. (admitted)
(c) The Appellant operates a business
throughout the year and its busiest period is from March to December each year.
(admitted)
(d) The Appellant's place of business is in Wickham.
(admitted)
(e) During the period in issue, the Appellant
had roughly 30 employees. (admitted)
(f) The Workers are brothers, directors and,
through their management company, shareholders of the Appellant. (admitted)
(g) Each shareholder is responsible for a
particular sector of the operations, and together they make all decisions
regarding major and day-to-day operations of the Appellant. (denied with
respect to the day-to-day operations)
(h) François Houle primarily looks after
purchasing, and, in this capacity, he makes purchase forecasts, finds parts and
equipment, fills out purchase orders, negotiates prices, meets with suppliers,
etc. (admitted)
(i) Pascal Houle is responsible for the sales
department as well as interpersonal relations within the business, and, in this
capacity, solicits potential customers, does product demonstrations, looks
after exhibits, is responsible for the collective agreement, and mediates
problems between employees. (admitted)
(j) In addition to being the president of the
business, Mario Houle is actively in charge of the research and development
component, with a view to improving existing products and creating new ones. (admitted)
(k) Mario works with Pascal on customer
requests, criticism, and improvements to be made to products, and works with
François to obtain the prices of components that finalize products. (admitted)
(l) All the Workers consider themselves
employees of the business who render services to it in that capacity. (denied
because they all consider themselves owners)
(m) The Workers have a
great deal of flexibility in the performance of their respective tasks, and
this is directly related to their responsibilities as directors and shareholders
of the Appellant. (denied because Pascal has more responsibilities)
(n) Despite this considerable flexibility, the
Appellant has a right to control them, and exercises that right in that, among
other things, two signatures are required in order to issue the
Appellant's cheques, and the three Workers have to consult each other with
regard to every important decision involving the Appellant.(denied because
there is no right to control)
(o) The Workers' hours are not recorded by the
Appellant, but they generally work during the opening hours of the business,
that is to say, roughly 40 hours a week. (denied because on an annual
basis they work much less than 40 hours a week)
(p) By reason of his duties, Pascal Houle sometimes
has to travel, and sometimes works more than 40 hours per week. (admitted)
(q) The Workers have disability and life
insurance paid for by the Appellant, which offers group insurance to all its employees,
including the Workers. (admitted)
(r) During the period in issue, the Workers
received fixed weekly pay of $1,746 by direct deposit each week. (admitted)
(s) The Worker's remuneration takes into
account the fact that each of them has a management position and each is a worker-shareholder
with the Appellant. (denied)
6. The Workers and the Appellant are related
persons within the meaning of the Income Tax Act because
(a) during the period in issue, the
Appellant's equal voting shareholders were
- Gestion Mario Houle Inc.,
- Gestion François Houle Inc. and
- Gestion Pascal Houle Inc.; (admitted)
(b) Mario, François and Pascal are each the
sole shareholder of their respective management company; and (admitted)
(c) each of the Workers is part of a group
that controls the Appellant. (admitted)
7. The Minister also
deemed that the Workers and the Appellant were dealing with each other at arm's
length in the context of the employments in question because he was satisfied
that it was reasonable to believe that they would have entered into a
substantially similar contract of employment if they had been dealing with each
other at arm's length, having regard to the following circumstances:
(a) Despite having a
great deal of flexibility in the performance of their work, the Workers remain
under the Appellant's control in the performance of their respective duties and
their decision-making regarding the operation of the Appellant's business. (denied)
(b) The duties and tasks
carried out by the Workers are essential to the operation of the Appellant's
business. (admitted)
(c) the Appellant
operates its business throughout the year, and the duration of the Workers'
employment is consistent with the Appellant's true needs in this regard. (denied)
(d) The Workers'
remuneration is reasonable having regard to the fact that each of them has a
management position and is a worker‑shareholder with the Appellant. (denied)
[3]
In his assessment of
the file, the Minister also took into account the other relevant facts set out
in paragraphs 8, 9 and 10 of the Reply to the Notice of Appeal:
[TRANSLATION]
8. On July 12, 2002, the insurability
department, at the Appellant's request, determined that the three Workers' jobs
were insurable despite the non-arm's-length dealings, for the period from January 1, 1999, to July 11, 2002.
9. On March 20, 2003, the appeals branch of the
Canada Revenue Agency (CRA) confirmed the insurability decisions and the
Appellant did not appeal these decisions to the Tax Court of Canada.
10. In the instant case, Mario Houle, a
shareholder with the Appellant who also represented his brothers Pascal and
François, specified a few times that the terms and conditions of his job and
that of his brothers did not significantly change during the period in issue.
[4]
Only Pascal Houle
testified at the hearing. He began by providing information about the origins
of the business, its development, and the selloff of the agricultural division
in 2000 when the business was making roughly $13 million in sales. Following
the selloff, that figure declined to $5 million, and is now roughly $3.5 million. For the fiscal
year ended March 31, 2007, the Appellant incurred a net loss of
$64,195, and for the fiscal year ended March 31, 2006, the Appellant incurred a
loss of $70,590.
[5]
Mr. Houle also
explained that the Appellant's employees' workload decreased significantly
after the agricultural division was sold off, but that the employees continued
to be paid at the same rate. They simply worked fewer hours and were paid based
on the number of hours worked. That was not the Workers' case: they kept the
same salary, namely $90,800 per year, despite the reduction of their
workload.
[6]
In addition, Mr. Houle explained
the restructuring of the Appellant's operations in October 2003. In order to
protect the Appellant's assets from the risk of litigation, each brother incorporated
a management company to hold his shares in the Appellant, and another
corporation, Les Immeubles MFP Inc., was created to hold the buildings and
machinery. After transferring the ownership of the buildings and machinery to
Les Immeubles MFP Inc., the Appellant entered into a lease agreement with that
company for the occupancy of the buildings and the use of the machinery.
[7]
Lastly, Mr. Houle clearly
stated that if he were replaced by a new employee, the employee would earn no
more than $40,000 a year, and would not be entitled to the 13 weeks of vacation
that each of the Workers can take.
[8]
The Canada Revenue
Agency appeals officer did not testify, but her appeal report was tendered in
evidence.
Part VI of the report, entitled [TRANSLATION] "Summary", aptly
summarizes the appeals officer's analysis, and it is worth reproducing it:
[TRANSLATION]
This summary applies, without restriction, to the cases
involving the Workers François Houle (1008085), Mario Houle (1008093) and
Pascal Houle (1008101).
The Payor, Agrimétal Inc., was incorporated in 1989 and
the shareholders were Mario Houle, François Houle and Pascal Houle. The three
shareholders are brothers, and each held 33⅓% of the
voting shares.
The Payor's activity consists in manufacturing machines used for
lawn maintenance (golf courses, municipal parks). The Payor's place of business
is in Wickham, and it has roughly 30 employees.
Effective October 1, 2003, the shareholders of Agrimétal Inc. are Gestion Mario Houle
Inc., Gestion Franjo Houle Inc. and Gestion Pascal Houle Inc., each of which holds
33⅓% of the voting shares. Mario, François and Pascal Houle each own
100% of the shares of their management company.
The three shareholders work for the Payor, and each is responsible
for a department. Mario Houle is in charge of research and development.
François is responsible for purchasing and computer systems. Pascal Houle is
responsible for sales, customers and production.
The Payor argues that the Workers' jobs were excluded from insurable
employment because of non-arm's-length dealings during the period in issue,
which is from January 1, 2006 to February 5, 2007.
Since all the shareholders belong to the same family, each worker is
part of a related group that controls more than 50% of the voting shares of the
company. The Workers were also related persons as defined by paragraph 251(2)(a)
and subparagraph 251(2)(b)(ii) of the Income Tax Act. Under
paragraph 251(1)(a) of the Act, related persons are deemed not to be dealing
with each other at arm's length.
The issue in these files was whether there was a true contract of
service between the Workers and the Payor, and whether it was reasonable to
believe that an outsider could have been employed under substantially similar
terms and conditions.
In determining whether employment in Quebec is insurable for the purposes of the
Employment Insurance Act, one must refer to the provisions of the Civil Code
of Québec, which dictates the rules governing a contract of employment and
the rules governing a contract of enterprise or for services.
Contract of employment
The facts analysed above show that the contract of employment
between the parties was not in dispute. There was indeed a contract of
employment based on the criteria set out in the Civil Code of Québec, namely,
a prestation of work, remuneration of the Workers, and subordination that
existed and was exercised by the Payor.
Non-arm's-length dealings
The terms and conditions of the employment and its
nature and importance
Mario, François and Pascal Houle each hold management positions
within the company.
Mario Houle's duties, in his capacity as the person in charge of
research and development, are to develop prototypes, test them and adjust them,
and find solutions when machines are broken.
Pascal Houle's duties, in his capacity as the person in charge of
sales, customers and production, are to visit the distributors, do
demonstrations, and set up exhibits.
The Payor's official hours of business are Monday to Thursday from
7:30 a.m. to 5 p.m. Closing
time on Fridays is noon. The three shareholders do not really have a work
schedule to comply with, but they work roughly 40 hours a week
on average. However, Pascal Houle sometimes works up to 80 hours a week
when he has to travel for presentations or trade shows.
Unlike the unrelated employees, the three shareholders do not fill
out time sheets. In our opinion, given the fact that the Workers hold
management positions, this is not unusual. It is normal for their work
schedules to coincide mainly with the Payor's hours of business and for them to
work more on some weeks and less on others.
It is true that Mario, François and Pascal Houle have a great deal
of flexibility in the performance of their duties. However, the Payor has a
right to control them, and that control is exercised in that, among other
things, two signatures are required in order to issue the Payor's cheques.
Moreover, although each shareholder manages his own department and ensures that
the department is running soundly, they jointly discuss and weigh important
decisions involving the Payor, such as investments.
The financial statements as at March 31, 2006, refer to a $473,000 advance
payable to related persons. This amount is the balance of a dividend payable to
the three shareholders' management companies and stems from their creation. It is
common for amounts to be owed to a company's shareholders, but this has no
bearing on the terms and conditions of their work as employees.
As a shareholder, Mario Houle made a $12,690 personal loan to the Payor
on January 1, 2006; the loan was repaid to him in April 2006.
The three shareholders have 13 weeks of vacation, whereas the
unrelated employees get six weeks off. Mario, François and Pascal Houle have
disability insurance and life insurance and the premiums for these are paid by
the Payor. The Payor offers group insurance for everyone, that is to say,
shareholders and unrelated employees.
The Workers' duties are essential to the business. In our opinion, it
is possible for outsiders in similar positions with the Payor to be essential
to the business as well.
Duration
The Payor operates year-round, but its peak period is March to
December. Mario, François and Pascal Houle work for the Payor all year.
In our opinion, the duration of the jobs is consistent with the Payor's
needs and it is possible for outsiders to be in the same situation.
Remuneration
François, Mario and Pascal Houle are each paid a fixed salary of $1,746
per week. Unlike the unrelated workers, the shareholders are not paid
based on an hourly rate. The remuneration of all the Payor's workers,
including the shareholders, is paid by direct deposit each week.
The shareholders' remuneration might initially seem high, but one
must bear in mind that each of them holds a management position and is a
worker-shareholder.
The following excerpt from the Honourable Justice Tardif's decision
in 9022‑0377 Québec Inc. aptly summarizes the situation:
When
shareholders in an arm's length or non‑arm's length relationship decide
to have a salary policy for the shareholders‑workers, be it stingy or
generous, very permissive or very restrictive, it has nothing to do with the
other employees' conditions of employment.
In our opinion, a person unrelated to the Payor, who is also a
shareholder and performs the same duties as the Workers, could have been paid
the same salary.
Other consideration
On July 12, 2002, the insurability department determined that the
jobs held by François Houle, Mario Houle and Pascal Houle when they were
working for Agrimétal Inc. were insurable under paragraph 5(1)(a) of the
Employment Insurance Act. The period in issue was January 1, 1999, to
July 11, 2002, and a right of appeal was available for the period
from January 1, 2001,
to July 11, 2002, and was exercised by Agrimétal Inc. On March 20, 2003, the CPP/EI Appeals Division
confirmed the decisions of July 12, 2002. This determination was not
brought before the Tax Court of Canada.
Based on the facts obtained in these files, the terms and conditions
of the three shareholders' jobs have not significantly changed since they were
first considered. The only change that we noted was the creation of the
management companies solely held by each of the three brothers. In our opinion,
this change in the share ownership does not interfere with the terms and
conditions of the three shareholders' jobs, and therefore does not interfere
with the insurability of those jobs either.
Conclusion
The analysis of the non-arm's-length dealings has also
shown us that the parties would have entered into a substantially similar
contract. Thus, the Minister is satisfied that it is reasonable to conclude
that the elements analysed and referred to in paragraph 5(3)(b) of the Employment
Insurance Act cause the jobs to be re‑included in insurable
employment.
Since Mario Houle, François Houle and Pascal Houle's jobs during the
period in issue were in Canada, remunerated, and under a contract of service,
the requirements of paragraph 5(1)(a) of the Employment
Insurance Act have been met, and the jobs are therefore insurable within
the meaning of the Act.
[The author made minor corrections to the text.]
The Appellant's position
[9]
In his oral argument,
counsel for the Appellant submitted that there was no contract of employment
within the meaning of the Civil Code of Québec between the Workers and
the Appellant. He argued that, owing to the degree of autonomy that they each
enjoyed, their contract with the Appellant was a contract of enterprise.
[10]
In addition, counsel
for the Appellant submitted that the Minister improperly exercised his
discretion because, in the opinion of counsel, it was unreasonable to conclude
that the terms and conditions of employment would have been substantially
similar if the Workers and the Appellant had been dealing with each other at
arm's length. In particular, counsel for the Appellant submitted that the
employees who were at arm's length could not have continued to be paid the same
compensation after the selloff of the agricultural division because their
workload had decreased by roughly 30%. Employees at arm's length would not have
been paid annual remuneration of $90,800 because the Appellant incurred net
operating losses for the 2006 and 2007 fiscal years. They would not have been
able to take 13 weeks of
vacation per year and to take their vacations when they wished, outside usual
vacation periods, without advance notice. They would not have gotten phone
calls at home during the evening, nor would they have been able to use the
truck supplied by the Appellant for personal reasons on weekends.
[11]
Counsel for the
Appellant also submitted that the appeals officer incorrectly applied the
provisions of the Act because her decision did not take into account the
decline in the Appellant's sales following the selloff of the agricultural
division.
Analysis
[12]
The provisions relevant
to the instant dispute are paragraphs 5(1)(a), 5(2)(i) and 5(3)(b)
of the Act, which read as follows:
Types of insurable employment
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;
. . .
Excluded employment
(2) Insurable employment does not include
. . .
(i) employment if the employer and employee are
not dealing with each other at arm’s length.
Arm's length dealing
(3) For the purposes of paragraph (2)(i),
…
(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 definition of
"contract of employment" is set out in article 2085 of the Civil Code
of Québec and the definition of "contract of enterprise" is set
out in articles 2098 and 2099 of the same Code. The provisions read:
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.
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 and 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.
[14]
The evidence discloses
that the Workers provided services to the Appellant and were remunerated. As
for the relationship of subordination, in assessing it, one should not
look at whether the employer actually exercised control over its employees,
but, rather, whether the employer had the power to control the manner in which
they carried out their duties.
Some of the indicia of direction or control worth noting are mandatory presence
at a workplace, a requirement to comply with a work schedule, a requirement
to do the work personally and on an exclusive basis, the nature of the
work to be performed, and the degree of integration into the Appellant's
activities.
[15]
Upon applying these
criteria to the facts of the instant appeal, it is clear that the contract in
issue was a contract of employment, not a contract of enterprise. Although the
Workers enjoyed a great deal of autonomy in the performance of their work, this
autonomy was entirely justified having regard to the nature of their respective
duties; each of them was responsible for an important activity sector in the
Appellant's business. The fact that the Workers held senior positions in
the company's hierarchy and that most of their duties were carried out at the
Appellant's place of business (except in the case of Pascal Houle) constitute
indicia of a high degree of integration into the Appellant's business, and, thus,
of the existence of a relationship of subordination between the Workers and the
Appellant.
[16]
As the person
responsible for sales, customers and production, Pascal Houle was frequently
called away from the Appellant's office in order to visit distributors,
demonstrate equipment and participate in trade shows that were often outside Canada. His hours of work were less regular than his
brothers' and he sometimes worked many more hours than them as part of his
marketing activities. Despite this disparity between the Workers' outputs, all
of their salaries were quite similar, ranging from $90,000 to $109,000.
[17]
Although the Workers
noted that they did not have to report to anyone and that they acted as owners,
not employees, the fact is that the Appellant exercised its power of direction
and control in order to ensure that the work entrusted to the Workers was done
adequately. I am convinced that this is what happened when Mario Houle went
through his divorce in 2006 and had to stay away from work for three months due
to depression.
[18]
In light of the
foregoing, I find that there is indeed a relationship of subordination between
the Appellant and the Workers, and that, consequently, the relations between
the Appellant and each of the Workers are governed by an employment contract.
Exclusion by reason of non-arm's-length dealings
[19]
Under the provisions of
the Income Tax Act, the three Workers constitute a group of related
persons who together control the Appellant through their respective management
companies. Consequently, it is clear that the Workers are related to the
Appellant and are not at arm's length from it.
[20]
In accordance with
paragraph 5(3)(b) of the Act, the Minister must determine if he is
satisfied that it is reasonable to believe, having regard to all the
circumstances, including the remuneration paid, the terms and conditions of
employment, and the duration, nature and importance of the work, that they
would have entered into a substantially similar contract of employment if they
had been dealing with each other at arm's length.
[21]
In her appeal report,
the appeals officer exercised the discretion conferred on the Minister by
stating as follows:
[TRANSLATION]
The analysis of the non-arm's-length dealings has also
shown us that the parties would have entered into a substantially similar
contract. Thus, the Minister is satisfied that it is reasonable to conclude
that the elements analysed and referred to in paragraph 5(3)(b) of the Employment
Insurance Act cause the jobs to be re‑included in insurable
employment.
[22]
The role conferred on
this Court where the Minister has exercised his discretion has been the subject
of considerable case law, including the decision of the Federal Court of Appeal
in Canada (Attorney General) v. Jencan Ltd. (C.A.), [1997] F.C.J. No. 876
(QL), [1998] 1 F.C. 187. The following excerpts from Jencan aptly
summarize the role conferred on this Court:
. . . Because it is a decision made pursuant to a
discretionary power, as opposed to a quasi-judicial decision, it follows that
the Tax Court must show judicial deference to the Minister's determination when
he exercises that power.
. . .
. . .
. . . On the basis of the foregoing, the Deputy Tax Court
Judge was justified in interfering with the Minister's determination under
subparagraph 3(2)(c)(ii) only if it was established that the Minister
exercised his discretion in a manner that was contrary to law. . . . The Tax
Court is justified in interfering with the Minister's determination under
subparagraph 3(2)(c)(ii)"by proceeding to review the merits of the
Minister's determination "where it is established that the Minister: (i)
acted in bad faith or for an improper purpose or motive; (ii) failed to take
into account all of the relevant circumstances, as expressly required by
paragraph 3(2)(c)(ii); or (iii) took into account an irrelevant factor.
[23]
The important question
to be asked in the case at bar is whether the Minister considered all the
relevant circumstances required by paragraph 5(3)(b) of the Act. In his
oral argument, counsel for the Appellant cited the fact that the appeals
officer did not take the selloff of the agricultural division, or the resulting
drop in sales, into account in her decision. It is true that the appeals
officer did not specifically refer to these things in her report, but it has
not been proven that she did not know about them and did not take them into
account. In my opinion, when she examined the Appellant's financial statements
for the years 2005, 2006 and 2007 and the monthly GST remittances for the same
periods, she undoubtedly noticed that the business's sales dropped following
the selloff of the agricultural division and the rise of the Canadian dollar against
the U.S. dollar (80% of the Appellant's sales are to the United States).
[24]
Counsel for the
Appellant also cited the fact that the Appellant incurred net operating losses
in 2006 and 2007, with a view to showing that the compensation paid to the Workers
was not reasonable having regard to the circumstances. Counsel for the
Respondent rebutted this argument, alleging that the compensation paid to the
Workers was reasonable having regard to the management positions held by the
Workers and their seniority (25-27 years). She also noted that the Workers
received no bonuses and were not paid for their overtime.
[25]
In assessing whether
the Workers' contracts of employment would have been substantially similar if
the parties have been dealing with each other at arm's length, one must have
regard to the special circumstances of the Workers, each of whom held one
third of the Appellant's shares though their respective
management companies. Workers who are both salaried employees and owners
of their employer often behave differently from those who are mere employees. This case
is an illustration. The Workers receive fixed compensation that does not depend
on the number of hours worked or the employer's sales or operating revenues. Rather, it
appears to me that the Workers' remuneration is based on their personal needs.
The argument that the Workers' remuneration is too high having regard to
the net operating losses incurred by the Appellant is entirely unacceptable in
my view, because the Appellant is not a "profit centre". The profits
made by the Appellant are extracted to pay the rent payable to the affiliate
Immeubles MFP Inc. and the $473,056 advance owed to the management
companies as at March 31, 2006, which advance represents the balance of
the $2,400,000 dividend declared on October 1, 2003, upon the creation of the three
management companies. Such conduct is not unusual for people who are Workers
but who indirectly own their employer as well. Pascal Houle himself stated
that the management companies and the real estate company were put in place to shelter
the assets of the business (buildings, machinery and liquid assets) from
potential legal claims.
[26]
I find that the Workers
and the Appellant have not succeeded in reversing the burden of proof by
showing that the Minister's decision was unreasonable having regard to the
circumstances. In my opinion, the instant case is one in which the Court must
not intervene to substitute its opinion for that of the Minister.
[27]
For these reasons, the
Appellant's appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of April 2008.
"Réal Favreau"
Translation certified
true
on this 30th day
of May 2008.
Brian McCordick,
Translator
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