Citation: 2008TCC140
Date: 20080421
Docket: 2007-3422(EI)
BETWEEN:
LES ÉQUIPEMENTS WOODY INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal
from a decision finding that Jérôme Labbé and Sébastien Labbé
("the workers") held insurable employment with Les Équipements
Woody inc. from January 1, 2005 to February 16, 2006.
[2] In determining that
Sébastien and Jérôme Labbé were employed under a contract of service, the
Minister of National Revenue ("the Minister") relied on the following
assumptions of fact:
[TRANSLATION]
5.
. . .
(a)
the Appellant, which
was incorporated on March 26, 2003, operates an agricultural and forestry
machinery manufacturing business; (admitted)
(b)
the Appellant has
annual sales of between $1,249,587 and $1,500,000; (admitted)
(c)
during the period at
issue, Sébastien Labbé provided services to the payer as the operator of a
digital laser cutting machine (for steel); (denied)
(d)
during the same
period, Jérôme Labbé was the Appellant's general manager; he was
responsible for purchases and sales and for finding new distributors; (denied)
(e)
the workers, who were
shareholders in the Appellant company, made decisions on the Appellant's behalf
jointly with the third shareholder; (denied)
(f)
the security for the
Appellant's loans and line of credit was signed by the Appellant's three
shareholders; (denied)
(g)
the workers provided
their respective services at the Appellant's place of business; (denied)
(h)
they worked under the
Appellant's supervision; (denied)
(i)
the workers did not
record their hours of work and worked between 40 and 60 hours a week; (denied)
(j)
despite their
variable work schedule, the workers received fixed weekly earnings; (denied)
(k)
they were paid by
direct deposit every two weeks. (admitted)
6.
. . .
(a)
during the period at
issue, the Appellant's voting shares were equally divided among the workers
and Ghislain Maheu (1/3 each); (admitted)
(b)
the workers are
brothers; (admitted)
(c)
Mr. Maheu is not
related to the workers; (admitted)
(d)
the workers were
related to a group that controlled the payer. (admitted)
7.
. . .
(a)
although their
earnings during the period at issue varied, going from $300 to $1,000 and $600
a week, the workers had annual earnings of $36,600 in 2005, as did the third,
unrelated shareholder; (denied)
(b)
before leaving the
Appellant, the third, unrelated shareholder had the same earnings as the
workers; (denied)
(c)
although they worked
from 40 to 60 hours a week, it cannot be concluded that this term of
employment was unreasonable given that the workers are shareholders in the
Appellant; (denied)
(d)
the workers provided
services to the Appellant year‑round based on the Appellant's needs; (admitted)
(e)
the services provided
by the workers were essential to the proper functioning of the Appellant
company. (admitted)
[3] The Minister
determined that the Appellant's workers were deemed to deal with each other at
arm's length in the context of this employment because he was satisfied that it
was reasonable to infer that the workers and the Appellant would have entered
into a substantially similar contract of employment if they had been dealing
with each other at arm's length.
[4] Testimony was given
by Sylvie Drouin, the mother of Jérôme and Sébastien Labbé. She
explained that she had made her career in a credit union in the field of
business financing.
[5] She explained that
she had done the Appellant's accounting work for free and that, at the end of
the year, her work had been sent to an accounting firm so the financial
statements could be prepared.
[6] She also explained
that she had been paid for a one‑year period for a very specific reason,
which was described in greater detail by her son Jérôme.
[7] She explained that
she had worked for the company in which her two sons had each initially
owned one third of the capital stock. She explained that Ghislain Maheu
had owned the remaining one third of the shares.
[8] Jérôme Labbé
testified next. He explained that he and his brother had qualifications and
skills in welding and hydraulics. At one point, they decided to start up a
welding business.
[9] To get their
project off the ground faster, they met with Ghislain Maheu, who was
already running a business in that field. Following a discussion, they agreed
to create the Appellant company, Les Équipements Woody inc.
[10] In mid‑March
2005, Jérôme Labbé received a telephone call from Ghislain Maheu
asking him to read a letter dropped off in his mailbox so they could discuss
its content the following Monday.
[11] The letter in
question set out Mr. Maheu's decision to sell his shares because he was
dissatisfied with the way things were working; his main objection was that he
felt excluded from decisions, and his minority shareholder status was troubling
him to the point that he had decided to sell his shares.
[12] With regard to the
price requested for his shares, Mr. Maheu said that he preferred to wait
for the financial statements so he could determine their fair value.
[13] Initially, it had
been agreed that the shareholders would receive a very modest salary to ensure
the company's financial health. For the same reason, Sylvie Drouin had
agreed to work for free. The Labbé brothers and their mother realized that such
a situation would artificially inflate the value of the company, which would be
very detrimental to them.
[14] Indeed, modest
salaries for the Labbé brothers and no salary for their mother would have the
effect of increasing the quality of the balance sheet used to establish the
value of Ghislain Maheu's shares.
[15] They therefore
decided that the company would pay the Labbé brothers an appropriate salary and
give their mother a salary for the work she did. This was to have the effect of
reducing the cash surpluses resulting from the company's activities and thus
affect the balance sheet used to determine the value of Ghislain Maheu's
shares.
[16] The shares were sold
on February 17, 2006. Ghislain Maheu's resignation letter is dated
September 2, 2005. Jérôme Labbé explained that Mr. Maheu had in
fact left the company at the end of March 2005 and started working for
another company at that time, thus ending any employment relationship with the
Appellant as of that date.
[17] The Appellant also
referred to a loan (Exhibit A‑1). Fearing that the loan would
decrease the economic value of his shares, Mr. Maheu informed the
representatives of the financial institution that had granted the loan that he
did not agree with it.
[18] These are, broadly
speaking, the facts revealed by the evidence.
Analysis
[19] Mr. Maheu was a
shareholder in the company until his shares were sold on February 17,
2006. In actual fact, he formally resigned on September 2, 2005 through a
letter. The manual labour he did for the company ended on March 30 after
two weeks' notice. This fact, which was established unequivocally, was
completely overlooked or ignored in the analysis leading to the decision.
[20] The circumstances in
which Ghislain Maheu's relationship with the company ended for good were
glossed over in the analysis that led to the determination. This is, in itself,
a fundamental and even determinative aspect of this case.
[21] The Respondent
submits that Mr. Maheu remained a shareholder until the notarial contract
attesting to the sale of his shares was signed, with the result that the
analysis must be based on the assumption that the Labbé brothers and
Ghislain Maheu each legally owned one third of the shares until that time.
[22] To validate his
argument, the Respondent further submits that the fact that Mr. Maheu
expressed his disagreement to the financial institution that had issued a loan
to the company confirms that he still owned one third of the shares during the
period in question.
[23] Indeed, there is no
doubt that Mr. Maheu was a minority shareholder until the date he
transferred his shares. In actual fact, however, it is obvious that the Labbé
brothers ran the business as if they each owned half of the shares.
[24] This explains
Mr. Maheu's decision to sever his ties with the company. Although formally
he was the registered owner of one third of the shares, he had made a clear
decision to transfer them, and the Labbé brothers had made the clear decision
to acquire them; the transfer was delayed only by the fact that the
consideration or the value of the shares was to be determined on the basis of
the balance sheet. The fact that Mr. Maheu left his job with notice and
started another job is very important in assessing the Labbé brothers' status
as workers. Moreover, such facts clearly illustrate the extent to which
Mr. Maheu had resigned from the day‑to‑day affairs of the
business. Legally, he was still a shareholder, although he knew that he no
longer had the necessary influence or power to change anything, since the other
two shareholders (the two Labbé brothers) were calling the shots. The
evidence in this regard is quite significant; I am referring in particular to
the decision to take out a loan, a decision with which Mr. Maheu
disagreed, but also and above all to the decision to substantially increase the
Labbé brothers' salary and give their mother a salary.
[25] In light of the
evidence, it must be concluded that the Labbé brothers worked under a contract
of service until March 31; after Ghislain Maheu left, they became, de facto,
the persons who ran the Appellant's business on a 50‑50 basis.
[26] In the circumstances,
I conclude that Jérôme and Sébastien Labbé worked under a contract of
service until Mr. Maheu left on March 30, 2005.
[27] After that date,
they became shareholders who in fact controlled more than 40 percent of
the shares, and their work thereby became excluded from insurable employment.
Signed at Ottawa, Canada, this 21st day of April 2008.
"Alain Tardif"
Translation
certified true
on this 19th day
of June 2008.
Stefan Winfield,
Revisor
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