Citation: 2008TCC52
Date: 20080207
Docket: 2007-3447(EI)
BETWEEN:
EXPERTS ACOUSTIQUE 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 concerning the insurability of the work done by Patrick
Bernard for Experts Acoustique Inc. from January 1, 2006, to December 19, 2006.
[2] In making his
decision, the Respondent relied on the following assumptions of fact:
[TRANSLATION]
5. The Minister determined that the worker was
employed by the Appellant in insurable employment under a contract of service
based on the following assumptions of fact:
(a) The Appellant was incorporated on
February 7, 1996. (admitted)
(b) The Appellant operated a drywall, acoustic
tile and suspended ceiling installation business. (admitted)
(c) The Appellant held a specialized
contractor licence from the Régie des bâtiments du Québec. (admitted)
(d) The Appellant posted $5,543,325 in sales
in the fiscal year ended January 31, 2006. (admitted)
(e) The Appellant had its business office in Sherbrooke and employed 15 to 75 employees.
(admitted)
(f) The Appellant operated year-round. (admitted)
(g) The Worker had been rendering services to
the Appellant for 10 years. (admitted)
(h) The Worker was the Appellant's Vice-President.
(admitted)
(i) The Worker hired staff and supervised the
four office workers; he looked after purchasing supplies, and negotiated and
signed contracts for the Appellant. (admitted)
(j) The Worker worked at the Appellant's
office. (denied)
(k) The Worker generally worked Monday to
Friday from 6:30 a.m. to 5:00 p.m. (denied)
(l) The Worker was paid weekly by direct
deposit. (admitted)
(m) The Worker's salary was $1,040 per week.
(admitted)
(n) The Worker's pay was decided by the Appellant's
four shareholders. (denied)
(o) The Worker had four weeks of vacation per
year. (denied)
(p) The Appellant paid for a group RRSP and
prescription drug insurance for its employees, including the Worker. (denied)
(q) The Worker had to notify the Appellant in
the event of absence. (denied)
(r) The Appellant had the right to control the
Worker. (denied)
6. The Appellant and the
worker are related persons within the meaning of the Income Tax Act because
(a) the Appellant's
shareholders were
|
Yvan Bernard
|
52% of shares
|
|
Simon Bernard
|
16% of shares
|
|
Rémy Bernard
|
16% of shares
|
|
The Worker
|
16% of shares
|
(admitted),
(b) Yvan Bernard is the Worker's father and
Simon and Rémy are the Worker's brothers, (admitted) and
(c) the Worker is related by blood to a group
of persons who control the Appellant. (admitted)
7. The Minister also deemed that the Appellant was
dealing with the Worker at arm's length in connection with his employment,
because he was satisfied that it was reasonable to conclude that the Appellant
and the Worker 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) In 2006, the Worker's weekly pay was the same
as his brother Simon's, and less than Yvan's ($1,100 per week). (admitted)
(b) The Worker's remuneration was reasonable. (denied)
(c) Depending on the year, the Appellant
either paid or did not pay its shareholders and certain employees a bonus; for
example, in 2004 the Worker did not receive a bonus. (admitted)
(d) In 2006, the Worker received a $65,000
bonus, his brother Simon (who left the business in the fall of 2006) received
$145,000, his brother Rémy received $30,000 and his father Yvan received $45,000.
(admitted)
(e) During the period in issue, Rémy and Simon
Bernard were site forepersons for the Appellant. (denied)
(f) The Worker's bonus reflected the Worker's
position of responsibility with the Appellant. (admitted)
(g) The terms and
conditions of the employment were consistent with those that an unrelated
employee would have, and the work done on the Appellant's premises during the
business's hours of operation, and the responsibilities, were commensurate with
the experience acquired over the years. (denied)
(h) There was a relationship of subordination between
the Payor and the Worker. (denied)
(i) The Worker's terms and conditions of
employment were reasonable. (denied)
(j) The Worker had been working with the
Appellant for roughly 10 years. (admitted)
(k) The Worker worked for the Appellant year-round.
(admitted)
(l) The duration of the Worker's work was
reasonable. (denied)
(m) The work done by the Worker was necessary
and important for the sound operation of the Appellant's business. (admitted)
(n) The Worker's position existed since 1999
and if the Worker were unable to perform his duties, the Appellant would hire
someone else. (denied)
(o) The nature and importance of the Worker's
work were reasonable. (denied)
[3] Patrick Bernard,
the shareholder whose work is at the heart of the dispute, represented the
Appellant company for which the work in question was done. After being
sworn in, he admitted to the contents of subparagraphs 5(a) to (r), 6(a) to
(c) and 7(a) to (o).
[4] He explained that
he held 16% of the company's share capital. The other shareholders were his
father and his brothers. His father held 52% of the share capital.
[5] He said that he had
little formal education and devoted much of his time to the family business
from a young age with the ultimate objective of replacing his father as the
true decision-maker.
[6] He explained that
his father's situation for the last few years has been a sort of
semi-retirement, in which he has spent less and less time at the company and has
taken increasingly lengthy vacations.
[7] One of his brothers
did manual labour as a plasterer under the same conditions as the other
specialized employees, who were paid in accordance with the standards
established by the Commission de la construction du Québec (CCQ).
[8] His other brother
was a site foreperson whose remuneration included a profit-sharing formula
based on the profits on the estimates and contracts for which he was
responsible. However, he left the company to work in Alberta. As for the father, for several
years now he has acted as consultant and advisor, and he is involved mainly in seeking
new contracts.
[9] Patrick Bernard explained
that he alone made all the decisions associated with the company's activities.
He signed all the cheques, and said that he had total autonomy. Thus, he did
not need to obtain anyone's permission to be absent from work. He prepared bids
and signed contracts on his own.
[10] As for his remuneration,
he claimed that, contrary to what the Respondent is claiming, it was not
reasonable, mainly because he worked long hours, including weekends.
[11] He explained that
the company hired employees, that the vast majority of them were paid based on
the CCQ's pay scale, and that the hourly rates varied from $16 to $26 per hour.
[12] Patrick Bernard's
salary was equal to the highest salary paid to an employee of the Appellant's
for a regular week of work, that is to say, 40 hours at $26 per hour, for a
total of $1,040 per week.
[13] Lastly, Mr. Bernard
explained that he received bonuses based on the company's performance, but also
and chiefly based on his contribution to the results. When questioned by the
Court, he admitted that he could be reprimanded and even dismissed because he
was the minority shareholder.
[14] The Respondent, relying
on the assumed facts, determined that Patrick Bernard was employed under
the terms of a contract of service that was consistent with what a person at
arm's length might have entered into in a similar context and under similar
circumstances.
[15] Appeals officer Nathalie
Bédard explained what led her to conclude that the non-arm's-length
relationship had no bearing on the work done by Mr. Bernard. In her view,
it was ordinary work for which reasonable pay was provided. She determined
that the fact that Mr. Bernard notified the secretary of his absences was
an indicia that he had an obligation to account to the Appellant; and based on
this accountability, she concluded that a relationship of subordination existed.
[16] The Minister also
took into account the fact that Patrick Bernard had received employment
insurance benefits a few years earlier. In this regard, Ms. Bédard said
that she asked Mr. Bernard whether his work had since changed. He apparently
answered that his job was essentially the same.
[17] In my view, the
determination that the work was performed under a contract of service seems
appropriate. However, was it an unusual employment contract shaped by the
family ties or the non-arm's-length relationship?
[18] In dealing with this
subject, it is very important to draw certain distinctions, because certain
terms and conditions of employment might stem from a worker's shareholder
status, not his or her employee status. Moreover, it is normal and legitimate
for a shareholder to be more eager, dynamic and interested than a non‑shareholder
would be, without thereby affecting the insurability of his or her employment. This
added value that a shareholder provides to his or her employer's business has
absolutely nothing to do with a non-arm's‑length relationship, though such
a relationship can, in some cases, either enhance or detract from that added value.
[19] Here, the bonus was
not based on the percentage of holdings in the company. It was essentially a
reward for contributing to the success of the business. The fact that the
bonuses were granted in a way that was unrelated to the percentage of shares
held makes it more difficult to determine whether the contract of employment
was shaped by the non-arm's-length relationship.
[20] Did the
non-arm's-length relationship influence the contract of employment to such an
extent that it was a different contract from what a person at arm's length
would have obtained in a similar situation?
[21] First of all, I feel
it is important to note that the analysis in this matter was very superficial.
Worse still, I believe that it was clearly coloured by the fact that Patrick
Bernard received employment insurance benefits a few years earlier.
[22] Indeed, to claim
that the salary was adequate and reasonable is to demonstrate a patent lack of
objectivity, since this was the salary that all employees earned for a regular
week of work, even though Mr. Bernard's work and responsibilities were not
at all comparable to those of the other employees. His work was much more
demanding, not only in terms of hours, but also in terms of responsibilities.
In addition, his work was crucial to the viability of the business.
[23] The issue of the
bonus had nothing to do with the remuneration, for if the results had been
disastrous or negative, there would clearly not have been a bonus.
Consequently, Patrick Bernard could have found himself in a situation where he
received the same salary as many of the other employees, but with a
considerably heavier workload.
[24] Another very
important if not determinative element is the fact that he alone signed the
cheques issued by the company, and he alone signed the bids and resulting
contracts. Even though these facts are very important, they were not raised in
the course of Ms. Bédard's investigation and analysis.
[25] In light of the
evidence, I believe that the determination stems from an incomplete analysis that
was strongly influenced by irrelevant elements (past receipt of employment
insurance benefits) and highly debatable conclusions (relationship of
subordination and reasonable remuneration).
[26] For these reasons, I
set aside the determination and find that the work done by Patrick Bernard was
indeed shaped by the fact that he had a non-arm's-length relationship with the
Appellant. Patrick Bernard had actual control over the company.
[27] Indeed, Patrick Bernard
acquired so much experience and expertise over the years that he became the
Appellant's directing mind during the period in issue. He acquired the independence
of a business owner, and since he took on all the managerial responsibilities,
he became a key person with the Appellant, thereby rendering him unassailable.
[28] This situation was
different from the one widely encountered in this type of business, where the
members of a family share the various responsibilities to such an extent that
one person's departure would not jeopardize the survival of the business. In
that situation, each person has responsibilities associated with the various
components of the company. That interdependence constitutes the basis for the
existence of a relationship of subordination. The situation in the case at bar
was very different, because Patrick Bernard was the true manager of the
business. Among other things, he was the only one who signed the contracts
and cheques.
[29] For all these
reasons, I find that the work done by Patrick Bernard constitutes excluded
employment under paragraph 5(2)(i) of the Act, on the ground that it was
work governed by terms and conditions of performance that were very different
from the terms and conditions that a person at arm's length would have had in a
similar situation.
Signed at Ottawa, Canada, this 7th
day of February 2008.
"Alain Tardif"
Translation
certified true
on this 19th day
of March 2008.
Brian McCordick,
Translator
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