Citation: 2008TCC157
Date: 20080325
Dockets: 2006-2838(EI),
2006-2840(EI)
BETWEEN:
GROUPE J.L. LECLERC INC.,
J.L. LECLERC ET FILS INC.,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
Issues
[1]
The two cases were heard
on common evidence.
[2]
The issue is whether
the work of Gilles, Michel and Jean Leclerc (the "three brothers")
was excluded from insurable employment because of the non-arm's length
relationship between the Appellants (the "business").
[3]
The Appellants claim
that the Minister did not correctly exercise his discretionary power under
paragraph 5(3)(b) of the Employment Insurance Act, in that it was
not reasonable to find that the workers and the business would have entered
into a similar contract of employment, had they been dealing at arm's length.
The periods in question are: from January 1 to August 28, 2004, in the case of
J.L. Leclerc et fils inc. and from August 29, 2004, to August 30, 2005, in
the case of Groupe J.L. Leclerc inc.
[4]
The existence of a non-arm's
length relationship is not being challenged.
[5]
The Appellants
submitted an alternative argument that it was not a contract of employment
between the three brothers and the Appellants, but rather a contract for
services.
The facts
[6]
This is a family business
that holds certain buildings, and develops and makes products for markets in
the energy and transportation sectors. It had between 100 and 115 employees and
sales of close to $12 million for the year ending August 31, 2004, and
close to $16 million for the year ending August 31, 2005.
[7]
Each of the three
brothers received compensation of $950 per week from January 1 to August
31, 2004. From September 1 to December 31, 2004, each brother received a set
compensation of $950 per week plus a bonus payment of $43,550. This bonus
was for the year ending August 31, 2004. From January 1 to August 30, 2005,
each brother received compensation of $1,925 per week, but there was no bonus.
[8]
The three brothers were
shareholders in the company starting in 1988.
The board of directors, during the period in question, was made up of the three
brothers and an external administrator, Serge Olivier.
[9]
The three brothers
worked for the business full time.
[10]
During the period in
question, Michel Leclerc was the director general; he managed the human
resources and was responsible for the business's administration and finances.
Gilles Leclerc was the director of operations; he managed operations and
inventory, and supervised the foremen and team leaders. Jean Leclerc was the sales
director; he worked mainly on the road maintaining good relations with clients
and seeking out new clients.
[11]
There was a council of
governors made up of the three brothers, prior to September 2004. In September
2004, they added four members to the council of governors. They were Julie
Leclerc (Michel Leclerc's daughter), Pierre Laroche, François Matte, and Jérôme
Leclerc (Michel Leclerc's son) (the "four others").
[12]
Jérôme Leclerc earned
$720 per week in 2004 and was 24 years old; he was the director of
finances and marketing. Julie Leclerc earned $675 per week in 2004 and was
27 years old; she was director of continuous improvement. Pierre Laroche joined
the company in 1997 as director of production, industrial products division;
prior to this, he worked at AMT Marine and Bombardier. François Matte earned
$1,035 per week as director of research and development. He was an
engineer with 10 years' experience with the research service at the "Jet
Boat" division of Bombardier.
[13]
The three brothers had
more than 25 years' experience leading the business.
[14]
Michel Leclerc
testified that the seven members of the council of governors were somewhat
interchangeable and that, hypothetically, one of the members could have
replaced another for a fixed period of time.
[15]
Michel Leclerc also
said that the position of one of the brothers could have been filled by someone
else after a period
of adjustment.
[16]
The three brothers
worked 50 to 60 hours a week, whereas the four other members of the council of
governors worked 40 hours a week.
[17]
Michel Leclerc
testified that if the three brothers had only worked 40 hours a week, they may
have been required to add one or two members to the council of governors.
[18]
The council of
governors held meetings once a month.
[19]
The Respondent filed an
organizational chart of the business as it was before September 1, 2005
(Exhibit I-2, tab M, page 1). On the organizational chart, the three brothers
are above the four others, which usually implies that their positions are
higher within the business. However, in his testimony, Michel Leclerc explained
that it was not a "conventional" organizational chart.
[20]
Michel Leclerc also
testified that he was a "coach" to Jérôme Leclerc, whose duties were
under his responsibility. Similarly, Gilles Leclerc was responsible for Pierre
Laroche and François Matte; he was also responsible for continuing improvement
(Julie Leclerc).
[21]
Gilles Leclerc
testified that aside from the three brothers, only Jérôme Leclerc had access to
the business's offices outside business hours.
[22]
The Appellants
presented certain advantages the three brothers had that the four others did
not, in particular:
(a) The three brothers were
paid better than the other members of the council of governors (see below).
(b) The three brothers had a
pension plan, which the four others did not. This plan was set up in 2004, when
the business paid between $60,000 and $65,000 for the "buyback of past
service" of each of the brothers.
(c) The three brothers had
dental insurance, which the four others and other employees did not.
(d) The three brothers had
$300,000 life insurance whereas the four others and the other employees only
had the amount of their salary in life insurance.
(e) The business provided a
car to the three brothers, but not to the other employees.
(f) The three brothers had
more vacation time than all the other employees.
[23]
Michel Leclerc also
testified on the compensation of executive managers.
[24]
Gilles Leclerc
testified that the three brothers had "partnership" life insurance of
$2 million paid by the business. The four others did not have this insurance.
[25]
Gilles Leclerc's
testimony did not explain the nature of this "partnership" life
insurance. He did not testify as to who would be the beneficiary.
[26]
There is a shareholder
agreement (Exhibit I-2, tab I) dated July 21, 2004, that provides for certain
obligations between shareholders in case of death (clause 7(b) of the
agreement). The agreement also provides for the obligations to take out and
maintain life insurance on the other shareholders in order to finance the
obligations set out at clause 7(b) (clauses 9 to 11 of the agreement).
[27]
Gilles Leclerc's
testimony does not clarify whether the "partnership" insurance he
spoke of is the same insurance set out in the shareholder agreement. On this, I
find that the Appellants did now show that the three brothers were the
beneficiaries of $2 million in life insurance as employees.
Analysis
[28]
The Appellants claim
that the employment conditions of the three brothers were very different from
those that would have existed if there had been an arm's length relationship
between the three workers and the business.
[29]
To support this, the
Appellants compared the employment conditions of the three brothers (much
higher salary and benefits) with those of the four other members of the council
of governors.
[30]
I agree that the three
brothers' employment conditions were very different from those of the four
others. However, to decide whether the employment conditions of the four others
are a valid basis of comparison, the following question must be examined: were
the positions and duties of the three brothers comparable to those of the four
others?
[31]
The Appellants'
position was that if one of the three brothers left for a period of six months
to a year, any of the four others on the council of governors would have been
able to take his place for a temporary period only.
[32]
The evidence does not
support this claim. It is possible for one of the other members of the council
of governors to replace one of the three brothers for a short period—for
example, during a vacation. However, the different degrees of experience,
differences in fields of expertise and different training among the seven
members are such that it would not be easy to replace any of the three brothers
by any of the other members of the council of governors.
[33]
Even if this claim had
been proved, the fact that a person is able to take over the position does not
mean the person's old position is comparable to the new position. For example,
a vice president's promotion to president does not show that the position of
vice president is comparable in terms of duties and responsibilities.
[34]
Therefore the duties
and responsibilities of the three brothers and the four others must be
compared.
[35]
Although the three
brothers and the four others are all members of the council of governors and
they all have the title of director, an overall review of the evidence leads me
to find that the positions are not comparable and the three brothers have
positions of a different nature. This is clear, in particular, by the fact that
the three brothers work longer hours, that it would be necessary to hire one or
two additional people if they only worked 40 hours a week, that they are the
only ones—aside from Jérôme Leclerc—with access to the offices outside business
hours, and they are—aside from Jean Leclerc—responsible for some of the other
members of the council of governors.
[36]
Not only are the
positions not comparable, but they are also positions with more responsibility
and that require more work than those of the four others. It is therefore
completely normal for them to be paid better.
[37]
The Appellants seem to
raise a second comparison,
according to which the three brothers could easily have earned more money had
they worked for another business.
[38]
The way to make such a
comparison is described by Archambault J. in Lacroix v. M.N.R., 2007 TCC
81, at paragraphs 40 to 43:
40 Does
the decision rendered by the Minister via the appeals officer still seem
reasonable after hearing the Workers’ evidence? Before answering this question,
it is important to again analyze the wording of paragraph 5(3)(b) of the Act.
What the Minister had to determine was: could it appear reasonable to him that
the Workers would have entered into a substantially similar agreement with the
Payor if they had been dealing with the Payor at arm’s length? It is not a
matter of determining whether the work conditions necessarily reflect normal
market conditions, although that can generally be a relevant circumstance to be
taken into account.
41 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.[8] 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?
42 It is
known in law that workers who are both employees and owners (as shareholders)
of the employer behave differently from those who are just employees. Indeed,
the remuneration of an employee-shareholder may take into consideration the
fact that unpaid wages will become non-distributed profits that may, for
example, be declared as dividends at a later date. Moreover, employees often
prefer to receive dividends rather than a salary when they are shareholders of
their employer because that is often more advantageous for taxation purposes.
However, to be entitled to contribute to a registered retirement savings plan,
it is necessary (in general) that these employee-shareholders receive a salary.
That is the context in which employees work who are also shareholders of their
business and the context which the Court must take into account. In this case,
it is not surprising to note that the income that the Workers receive from a
job may vary from one year to the next. As shareholders, the Workers may
consider the financial needs of their company, in particular whether it must
face a difficult economic situation.
43 Does
the Minister’s decision still seem reasonable? Was it reasonable for the
Minister to conclude that the worker-shareholders would have entered into a
substantially similar contract of employment had they been at arm’s length with
the Payor? In my opinion, the Workers did not succeed in demonstrating that the
Minister’s decision seems unreasonable, given the circumstances of this matter.
This is not a case where the Court should intervene to substitute its opinion
for that or the Minister. If the three Workers had been hired as mere labourers
without holding any interests in the Payor, whether as granite workers or
machinery maintenance workers, whose work is normally paid by the hour, they
would not have accepted, I admit, to work overtime without being paid. However,
these are people in positions where the work is not paid by the hour, but
rather yearly or at least weekly. It is perfectly normal for workers in such
positions to be paid as the Workers were in this case and for them to have a
great deal of independence in deciding when to perform their duties. Moreover,
due to their involvement as executives of the Payor and as its indirect
shareholders, they worked during normal vacation periods. This is perfectly
normal behaviour for executives, even when dealing at arm’s length with the Payor.
However, if one of the Workers had only worked three hours per week throughout
the year while receiving the same salary as the others who were working 65, the
situation could have been very different. Remuneration determined based on the
needs of the employees (supposing this was indeed the case) is also not unusual
for workers who are also owners of the Payor. Furthermore, it is perfectly
common for an executive to use a credit card (even without a credit limit) for
the benefit of his or her employer.
[39]
At paragraph 41
Archambault J. phrases the issue to be determined by the Minister 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?"
[40]
In the present case,
the facts are slightly different, but the principle is the same; a comparison
must be made between the contract of each worker (each brother) who is a
shareholder
and who is related to the payor and the contract of employment that would have
been entered into in a similar situation, including being a shareholder, by a
worker who is not related to the payor.
[41]
On this issue, the
evidence that was presented is very general and does not lead to the conclusion
that persons with an arm's length relationship to the payor would have entered
into a similar contract.
[42]
As a result, the
Appellants have not shown that the Minister's decision is unreasonable.
Alternative argument
[43]
The Appellants
presented an alternative argument that it was not a contract of employment and,
as a result, the three brothers were not insurable.
[44]
Although the nature of
the three brothers' duties means they undoubtedly have great independence, all
their work is dedicated to the business, they are fully integrated into the
business, hold high positions and work at the business's offices (except for
Jean Leclerc, who is sales director).
The three brothers are part of a pension plan set up by the company. There is a
contract of employment within the meaning of the Civil Code of Québec
between the company and each of the brothers.
Conclusion
[45]
For all these reasons,
the appeal is dismissed.
Signed at Ottawa, Canada, this
25th day of March 2008.
"Gaston Jorré"
on this 8th day of
May 2008.
Elizabeth Tan,
Translator
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