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Citation: 2006TCC329
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Date: 20060630
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Docket: 2005-859(EI)
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BETWEEN:
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MICHEL DESMARAIS,
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Appellant,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent,
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AND
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Docket: 2005-860(EI)
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PIERRE DESMARAIS,
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Appellant,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent.
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[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Deputy Judge Savoie
[1] These appeals were heard on common
evidence at Québec, Quebec, on March 28, 2006.
[2] These
are appeals against the decisions of the Minister of National Revenue
(the “Minister”) dated November 25, 2004. The Appellants’ period at
issue spans from January 1, 2003 to August 16, 2004. At the heart of the issue
is the work performed by the brothers Michel and Pierre Desmarais for the
corporation Quincaillerie Hors Série Inc., the Payer, of which they were also
shareholders and directors.
[3] The
Minister determined that the Appellants were employed by the Payer under a
contract of service, relying on the following presumed facts:
5.(a) The Payer,
incorporated on July 28, 1987, operates a family hardware store;
(b) The Payer
operates its business year round and specializes in the sale of decorative and
architectural hardware (locks, doorknobs, etc.);
(c) The Appellant
[Pierre Desmarais] has been providing services to the Payer since 1987; the Appellant [Michel Desmarais] since 1988;
(d) As well as
employing the Appellant and his brother (shareholder), the Payer also employs a
reception clerk and a casual worker;
(e) The main
duties of the Appellant [Pierre Desmarais] can be summarized as
follows:
- serve
clients, both on the telephone and in the store,
- look after
purchasing, promotion and advertising,
- attend
exhibitions, etc.
The main
duties of the Appellant [Michel Desmarais] can be summarized as
follows:
- serve
clients, both on the telephone and in the store,
- look after
purchasing and inventory,
- find new
products
- meet with
suppliers
- prepare
deposits, etc.
(f) The
Appellant had a variable work schedule depending on the needs of the Payer, who
did not record his hours;
(g) He generally
worked from Monday to Wednesday, from 8:30 a.m. to 5:30 p.m., Thursdays and
Fridays from 8:30 a.m. to 9:00 p.m. and, alternating with his brother,
Saturdays from 9:00 a.m. to 5:00 p.m.;
(h) Despite a
varying schedule, the Appellant worked 48 hours per week on average;
(i) One of the
shareholders, the Appellant or his brother, always had to be present at the
store; the Appellant had to notify his brother when he had to leave the store;
(j) To
accomplish these tasks, the Appellant used all the Payer’s supplies and
equipment;
(k) When he had
to use his car for work, he used the Payer’s credit card;
(l) The
Appellant received $900 every two weeks and an annual bonus, leaving him with
a total of $40,000;
(m) He was paid by
cheques, cashed regularly.
[4] The
Appellants and the Payer are related persons under the meaning of the Income
Tax Act because:
6.(a) The voting
shareholders of the Payer were
-the
Appellant, Michel Desmarais, with 35% of the shares;
-The
Appellant, Pierre Desmarais, with 40% of the shares,
-Claude
Dupéré, spouse of the Appellant, Pierre Desmarais, with 25% of the shares;
(b) The
Appellants are members of a related group that controls the Payer.
[5] The Minister determined that the Appellant and
the Payer were deemed to be at arm’s length in the context of this employment
because he was satisfied that it was reasonable to conclude that the Appellant and the Payer would have entered into a substantially similar contract of
employment if they had been dealing with each other at arm’s length, given the following circumstances, which are the same in both cases:
7.(a) The Appellant
received compensation of $450 per week plus an annual bonus, for a
reasonable total of $40,000 per year;
(b) The Appellant
worked year-round for the Payer;
(c) The Appellant
worked roughly 48 hours per week, used the Payer’s equipment and supplies and
did not, as employee of the Payer assume any risk of loss;
(d) The Appellant’s
duties and responsibilities were necessary for the proper operation of the
Payer’s business.
[6] The
Appellants have admitted the Minister’s presumed facts except for those stated
in subparagraphs 5(d), (e) and ( g) to (k) and subparagraph 7(c).
[7] It
has been established that the Payer also hired two students as sales
representatives during the summer season.
[8] Besides
the Appellants’ duties recognized by the Minister, the Appellants also
mentioned others at the hearing, such as the marketing of some 3,000 products
that they carefully selected to protect their particular niche since they
cannot compete with the large players in this industry, such as Rona, for
example. With this objective in mind, they rent spaces at different home shows
where they advertise their various products.
[9] The
two Appellants did not count their work hours. At the store, they were present
and on duty approximately 55 to 60 hours per week. In addition, they often
worked evenings, weekends and holidays. The Appellants received no compensation
for overtime hours worked. They used the Payer’s credit card when using their
car to meet clients or to take part in exhibitions.
[10] They were both solidarily liable for the Payer’s loans and its
$20,000.00 line of credit. The Appellants met at the Payer’s annual
meeting, along with their accountant. Yet they discussed the Payer’s business
every day.
[11] The Appellants, as the Payer’s shareholders, voted on their bonus,
which was not automatic, but rather depended on the profitability of the
business.
[12] It remains to be determined if the Appellants’ employment is excluded
from insurable employment.
[13] Since the Appellants were related to a group that controlled the
Payer, the Minister determined that these people were not at arm’s length, as
prescribed by the Income Tax Act, in subparagraph 251(2)(b)(iii)
reproduced below:
251(2) Definition of “related persons”. For the purpose of this Act,
"related persons", or persons related to each other, are:
. . .
(b) a corporation and:
. . .
(iii) any person
related to a person described in subparagraph 251(2)(b)(i) or 251(2)(b)(ii);
. . .
[14] In accordance with the preceding, the Minister maintains that the
Appellants’ employment is excluded under paragraph 5(2)(i) of the Employment
Insurance Act, (the “Act”), reproduced below:
(2) Insurable employment
does not include:
. . .
(i) employment if the
employer and employee are not dealing with each other at arm’s length.
[15] Thus the Minister has
the discretion to determine in accordance with the mandate conferred by the
legislation under paragraph 5(3)(b) whether non-related persons would
have entered into a substantially similar contract if they were dealing with
each other at arms length. This paragraph is reproduced below:
(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.
[16] The Minister therefore proceeded to analyze the Appellants’ employment
according to paragraph 5(3)(b) of the Act.
REMUNERATION
[17] Exhibit I-2, filed at the hearing, was prepared by the Minister of
Human Resources and Skills Development Canada. This document establishes that
the salary paid to the Appellants, including their bonus, is within the average
of those paid in this type of business for similar work.
[18] The Appellants received a fixed salary of $900.00 gross every two
weeks, or $450.00 per week for a work week sometimes reaching 60 weeks or more.
They received a bonus that was awarded depending on the Payer’s financial
condition.
[19] Tardif J. of this Court addressed a similar case in the judgment Industries J.S.P. Inc. v. Canada
(Minister of National Revenue – M.N.R.), [1999] T.C.J. No. 423, and stated after his analysis:
Contributing to and
being a partner in the management, administration or development of a business,
particularly a small business, means that a person's job description is
strongly marked by responsibilities characteristic of those often fulfilled by
actual business owners or persons holding more than 40 per cent of the voting
shares in the company employing them. In other words, in assessing
remuneration, at this level of responsibility, caution must be exercised when a
comparison is made with the salaries of third parties; often there are
advantages that offset the lower salaries.
This led him to conclude that the employment of these members of the same
family, therefore not at arm’s length, was not excluded from insurable
employment.
DURATION OF EMPLOYMENT
[20] The Appellants worked year round and full-time for the Payer, one since
1987 and the other since 1988.
TERMS AND CONDITIONS OF EMPLOYMENT
[21] Let us not forget that the Appellants acted not only as workers for
the Payer, but also as shareholders and directors. The evidence has
demonstrated that they put all their energy into the business, by not counting
their hours, but also by accepting their respective status of minority
shareholders, subject to the Payer’s power, exercised by the voice of the board
of directors, of which they were members and held the majority of shares.
[22] The Appellants, in their duties, their work and their administrative
responsibilities, had the latitude to act as shareholders and could make the
decisions necessary to ensure the proper operation of the business
individually, in the other Appellant’s absence, but they regularly communicated
and consulted with one another on the Payer’s affairs, like something of an
informal board of directors. Nearly all the necessary equipment was supplied by
the Payer, except for their car. They were both solidarily liable for the
Payer’s line of credit of $20,000.00.
[23] It has not been proven that other shareholders, at arm’s length, would
not have entered into a substantially similar contract with the Payer,
occupying a similar position.
NATURE AND IMPORTANCE OF THE WORK
[24] It has been determined that the Appellants’ work was essential for the
proper operation of the business. Indeed, without them, the business would not
exist.
[25] This Court analyzed the facts, in the instant
case, in light of the legislation cited above. This Court also examined how the
Minister carried out his mandate under the legislation. The Federal Court of
Appeal has described the mandate of the Minister and this Court in Légaré v.
Canada (Minister of National Revenue – M.N.R.) [1999] F.C.J. No. 878, reviewing the Minister's decision, in which
Marceau J.A. held the following at paragraph 4:
The Act requires the Minister to
make a determination based on his own conviction drawn from a review of the
file. The wording used introduces a form of subjective element, and
while this has been called a discretionary power of the Minister, this
characterization should not obscure the fact that the exercise of this power
must clearly be completely and exclusively based on an objective appreciation
of known or inferred facts. And the Minister's determination is
subject to review. In fact, the Act confers the power of review on
the Tax Court of Canada on the basis of what is discovered in an inquiry
carried out in the presence of all interested parties. The Court is
not mandated to make the same kind of determination as the Minister and thus
cannot purely and simply substitute its assessment for that of the Minister:
that falls under the Minister's so-called discretionary power. However,
the Court must verify whether the facts inferred or relied on by the Minister
are real and were correctly assessed having regard to the context in which they
occurred, and after doing so, it must decide whether the conclusion with which
the Minister was "satisfied" still seems reasonable.
[26] Having studied this case, this Court must
conclude that the Minister carried out his mandate as prescribed by the
legislation and the case law.
[27] Moreover, I must find that the facts inferred
or relied on by the Minister are real and were correctly assessed having regard
to the context in which they occurred. In my opinion, the conclusion with which
the Minister was "satisfied" still seems reasonable to me.
[28] Consequently, the appeals are
dismissed and the Minister's decisions are confirmed.
Signed at
Grand-Barachois (New Brunswick), this 30th day of June 2006.
Savoie
D.J.
on this 11th day of December 2006.
Gibson Boyd,
Translator
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