Citation: 2008TCC138
Date: 20080403
Docket: 2007-3959(EI)
BETWEEN:
LES PORTES ARCO 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 in which the Minister of National Revenue ("the
Minister") concluded that Pierre‑André Binette ("Pierre‑André"),
Patrick Binette ("Patrick") and Chantale Binette
("Chantale") held insurable employment with the Appellant,
Les Portes Arco inc., from January 1 to December 21,
2006.
[2] The Minister
concluded that the Appellant was deemed to be dealing at arm's length with the
workers, Pierre‑André, Patrick and Chantale, in the context of their
employment. The Minister was satisfied that, having regard to all the
circumstances of the employment, it was reasonable to conclude that the Appellant
and those persons would have entered into a substantially similar contract of
employment if they had been dealing with each other at arm's length.
[3] The Minister relied
on the following assumptions of fact in making the decision under appeal:
[TRANSLATION]
5. . . .
(a) the Appellant was incorporated
on June 2, 1977;
(b) the Appellant
operated a door and window manufacturing and distribution business and also ran
a store that sold doors, hardware, handles, moulding and frames;
(c) the Appellant operated year‑round;
(d) the business
was open Monday to Friday from 8:00 a.m. to noon and 1:00 to 5:00 p.m.;
(e) the Appellant had sales of
about $3 million a year;
(f) the Appellant
employed 10 workers, including the three shareholders;
(g) Pierre‑André
Binette had worked for the Appellant since 1977;
(h) Pierre‑André
Binette worked as a travelling sales representative; he met with customers and
gave estimates;
(i) Patrick Binette
had worked for the Appellant since 1999;
(j) Patrick Binette
worked as the production manager; he negotiated prices with suppliers, was
responsible for purchases and supervised the plant personnel;
(k) Chantale Binette
had worked for the Appellant since 1998;
(l) Chantale Binette
worked as an administrative secretary and was responsible for the bookkeeping,
the payroll and the government remittances;
(m) the workers
worked 40 to 45 hours a week for the Appellant;
(n) the workers
were each paid $700 a week;
(o) during the
period in issue, the workers each received a $15,000 bonus decided on by the board
of directors;
(p) the workers
were paid their salaries regularly every week by direct deposit;
(q) the workers and
all the employees had wage loss insurance and a group drug insurance plan;
(r) the workers had
two weeks of vacation in the summer and two weeks in the winter;
(s) decisions that
were important for the Appellant were made by the three directors;
(t) a relationship
of subordination existed between the Appellant and the workers;
(u) the Appellant
had a right of control over the workers, and that control was exercised;
6. .
. .
(a) the Appellant’s
shareholders with voting shares were:
Pierre‑André Binette 33
1/3% of the shares
Patrick Binette 33
1/3% of the shares
Chantale Binette 33
1/3% of the shares
(b) Pierre‑André Binette is the
father of Patrick Binette and Chantale Binette;
(c) the workers are related by blood to a
group of persons that controls the Appellant.
7. .
. .
(a) the workers’
salaries and bonuses had been decided by agreement among the
three directors;
(b) each worker’s
annual remuneration, including bonuses, totalled $52,000;
(c) the workers
were responsible for their respective areas of activity;
(d) the workers'
remuneration was reasonable in light of their duties and responsibilities for
the Appellant;
(e) the workers had
been working for the Appellant for several years;
(f) the workers worked for the Appellant
year‑round;
(g) the duration of the workers'
work was reasonable;
(h) the Appellant
was the beneficiary under a life insurance policy on the
three shareholders and paid the premiums on that policy;
(i) the workers'
work was necessary and important to the smooth operation of the Appellant’s
business;
(j) the terms and
conditions and the nature and importance of the workers' work were reasonable.
[4] First, the
following subparagraphs were admitted: 5(a), (b), (c), (d), (e), (f), (g), (h),
(i), (j), (k), (l), (n), (p) and (q), 6(a), (b) and (c) and 7(a), (c), (e),
(f), (h) and (i). The following subparagraphs were denied: 5(m), (n), (o),
(r), (s), (t) and (u) and 7(b), (g) and (j).
[5] Only
Chantale Binette testified. She explained the work done by her, her father
Pierre‑André and her brother Patrick.
[6] Briefly, Pierre‑André
was a sales representative and was in charge of sales. He was responsible for
everything associated with the construction sites where the windows
manufactured by the company were to be delivered. Patrick Binette was in
charge of production.
[7] Finally, Chantale
was responsible for administrative management, since she looked after accounts
payable, receivables, dealings with bankers, bookkeeping, invoicing, the
payroll and the various reports that had to be prepared in operating the
business.
[8] According to the
witness, although the company operated year‑round, its order book was
fullest from May to October, which was generally the construction period.
[9] With regard to the
number of hours that each of them worked each week, Ms. Binette estimated
that Patrick worked 70 to 80 hours, that Pierre‑André worked
50 to 60 hours and that she worked 35 to 37 hours.
[10] In principle, the
company's working days were Monday to Friday and Saturday until noon. However, Pierre‑André and
Patrick regularly worked after normal working hours, that is, in the evening
and on Saturday.
[11] All three had the
following conditions of employment: a life insurance policy for which the
company paid all the premiums, six weeks of paid vacation and great
freedom in their respective areas of activity.
[12] The plant employees'
conditions of employment were not comparable to those of the Binette family.
For example, they had much less vacation time, since they were paid on the
basis of four percent of their earned income. Their life insurance was
also less generous than that of the Binette family.
[13] The employees were
paid by the hour, while the Binettes received a fixed weekly amount unrelated
to the number of hours they worked. All three of the Binettes received an
annual bonus of $15,000.
[14] Pierre‑André,
the father of Patrick and Chantale, planned to leave the company for good as of
November 2009. The parties reached various agreements under which Patrick
and Chantale were to gradually acquire their father's shares by that time.
[15] Patrick stopped working
for Les Portes Arco inc. after it purchased another company,
Acier inc., in November 2007. He has since devoted himself completely
to the activities of the new company.
[16] After Patrick left,
an existing employee was promoted and took on about 60 percent of Patrick's
work for about $620 a week. Ms. Lacroix testified that she and her father
had divided up the remaining 40 percent.
[17] When asked for
examples to support the position that there was no relationship of
subordination, Ms. Binette explained that, apart from her obligation to
open and close the business, she did her work autonomously, including when
making important decisions. The example she gave to illustrate this was the
purchase of a very large investment from a financial institution.
[18] Finally,
Chantale Binette explained that two women also worked in the sales
department; they were paid $9.75 and $10.50 an hour, plus a commission of
one percent on their sales.
[19] When asked what a
commission of one percent might represent, she stated that, some weeks, it
could represent an annual total of about $4,000. She recalled having filled out
a T4 for over $5,000 for commission alone.
[20] The analysis that
led to the decision under appeal was based on the same facts, except for the
hours worked. It was shown before the Court that the number of hours worked by
each shareholder was very different from the number presented at the time of
the analysis.
[21] This is a case in
which work is excluded from insurable employment because of the non‑arm's
length relationship between the persons concerned and the business that paid
their remuneration.
[22] Work that is
excluded in principle will be considered insurable if it is reasonable to
conclude, having regard to all the facts and circumstances of the employment,
that a substantially similar contract of employment would have been entered
into if the persons concerned and the business had been dealing with each other
at arm's length.
[23] The relevant
provisions, paragraphs 5(2)(i) and 5(3)(a) and (b),
read as follows:
5. (2) Insurable employment does
not include
(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.
[24] In this case, the
Minister concluded that the contract of employment was substantially similar to
a contract entered into by a third party.
[25] The Appellant argued
that the characteristics of the work were such that it was patently
unreasonable to conclude that third parties would have been given substantially
similar conditions of employment.
[26] In this regard, it
stressed that Pierre‑André's replacement was paid roughly the same salary
even though his workload was only about 60 percent of Pierre‑André's.
[27] It also pointed out
that the number of hours worked by the three shareholders varied a great
deal. Chantal worked 35 to 37 hours, Pierre‑André worked
50 to 60 hours and Patrick worked 60 to 70 hours.
[28] Reference was also
made to the fact that the Binettes had a more generous vacation package (in
time and salary) than the other employees and that the company paid the
Binettes' life insurance premiums.
[29] It is clear that
these various facts constitute weighty evidence that certainly establishes on a
balance of probabilities that the three shareholders' conditions of
employment were in no way comparable to those of the other employees, as they
were more advantageous in several respects.
[30] However, the real
question that must be asked in this case is as follows: is it reasonable to
imagine a situation in which three third parties would have been offered
conditions of employment comparable or similar to those referred to in the
instant case? In this regard, I reiterate what I said in 9022‑0377
Québec inc. (Évasion Sports D.R.) v. Minister of National Revenue, 2004‑3731(EI),
2005TCC474, at paragraphs 49‑59 inclusive:
49 The Appellant
made much of the relevance of comparing Roger Gagnon’s status before and
after his departure. After the sale of Roger Gagnon’s shares to the two
other shareholders, i.e. to his brother, Denis and to
Mr. Coiffier—they each now held 50% of the shares—the company had to fill
the void created by Roger’s departure, so it retained the services of
Pierre Deschênes.
50 In
support of its arguments, the Appellant compared the salary, work conditions,
the constraints of absences, vacation, etc. of Roger Gagnon and of
Pierre Deschênes; after the departure of Roger Gagnon,
Mr. Deschênes was given a large part of work performed until that time by
Roger Gagnon.
51 I do not find
the comparison totally relevant because Pierre Deschênes did not have any shares
in the business. What a company demands and requires from its shareholders
holding employment in its commercial activities, after having agreed to the
terms and conditions of employment, has nothing to do with the salary reserved,
offered or agreed to by anyone without any shares in the company.
52 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.
53 If shareholders‑workers
agreed to the conditions, whether the conditions place them at an advantage or
disadvantage vis‑à‑vis other company employees, it has nothing to
with the existence of a non‑arm’s length relationship. The only relevant
question is whether or not there was work, remuneration, power of intervention
and control of the company over one or all of the shareholders‑workers.
If so, a contract of employment exists. In an exclusion as set forth in
paragraph 5(2)(i) of the Act, a comparison of the work must
be made between a shareholder‑worker in an arm’s length relationship, and
not with other employees who have no shares, even if shareholder status and
worker status are fundamentally different.
54 To argue the
contrary would create a serious inconsistency with respect to all SMEs where
shareholders who are dealing with each other at arm’s length decide to have a
particular policy for shareholders‑workers. Without being subject to the
exercise of discretionary power, given the absence of a non‑arm’s length
relationship, their work agreement would be deemed insurable, even if their
conditions of employment were extremely different from those of other workers
in the same company.
55 The
very high level of autonomy shared by the shareholders‑workers in the
performance of their work, the significance of the employment, the
substantially lower or higher salary of the shareholders‑workers with
relation to the other workers, the total absence of vacation or opportunity to
take vacation without greater notice than that of other employees, and so
forth, are all elements that shareholders‑workers dealing with each other
at arm’s length cannot invoke to exclude themselves from the obligation to pay
premiums on the ground that their work agreement is not a true contract of
service.
56 Parliament made
an express stipulation on the issue of work performed by shareholders employed
in their business. It appears in paragraph 5(2)(b) of the Act, which
stipulates that the work performed by a shareholder‑worker or an owner of
more than 40% of voting shares is automatically excluded from insurable
employment.
57 The status of a
shareholder‑worker with less than 40% of voting shares is recognized
under the Act. Consequently, where one or more comparisons are required in a
case where a non‑arm’s length relationship exists, an analysis and
comparisons must be carried out between workers working in the same capacity or
capacities, and the shareholder capacity cannot be concealed from the analysis.
58 When a person
invests in an area in which he or she has no or little knowledge and his or her
co‑shareholders have the skill and expertise, it is completely natural to
leave it to them to ensure sound management of the business.
59 It therefore
becomes essential for that person to have some tools of control or
intervention. In this case, Denis Coiffier, in addition to the rights
conferred upon him through his 40% portion of shares, was probably the
instigator of the shareholder agreement that provided him with an additional
element to ensure the smooth operation of the company and the viability of his
investment.
[31] In the instant case,
the Appellant referred to the conditions of employment of the company's employees.
This comparison is completely inappropriate, since it is obvious that the
differences were important and numerous.
[32] Only similar or
comparable situations can be compared. One need only think of a situation in
which the founder of a company, after a long and prosperous career, decides to
plan his or her retirement and, for this purpose, to come to an agreement with
managerial employees with whom the founder has worked for some time and whom he
or she trusts completely. The transition scenario could be comparable to the
facts disclosed by the evidence.
[33] The analysis on
which the decision under appeal was based took account of all the relevant
facts, and the Minister's conclusion is entirely reasonable, which means that
there are no grounds for intervening.
[34] For these reasons,
the appeal is dismissed.
Signed at Ottawa, Canada,
this 3rd day of April 2008.
"Alain Tardif"
Translation certified true
on this 21st day of May 2008.
Brian McCordick, Translator
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