Citation: 2005TCC272
Date: 20050502
Docket: 2004-3329(EI)
BETWEEN:
DANIEL LAMOTHE,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
PHILIPPE LAMOTHE INC.
Intervener,
AND
Docket: 2004-2997(EI)
PHILIPPE LAMOTHE INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1] The Appellants are appealing from the decision of the Minister of National Revenue (the "Minister") according to which the employment held by Daniel Lamothe (the "employee") during the period at issue, that is, from June 1 to November 21, 2003, while in the service of Philippe Lamothe inc. (the "Payor") is excluded from insurable employment within the meaning of the Employment Insurance Act (the "Act") on the grounds that the Payor and the employee were related.
[2] Subsection 5(1) of the Act reads in part as follows:
5.(1) Subject to subsection (2), insurable employment is:
(a) employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise;
[3] Subsections 5(2) and 5(3) of the Act read in part as follows:
(2) Insurable employment does not include:
[...]
(i) employment if the employer and employee are not dealing with each other at arm's length.
(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.
[4] Section 251 of the Income Tax Act reads in part as follows:
(1) For the purposes of this Act,
(a) related persons shall be deemed not to deal with each other at arm's length;
[...]
(2) For the purpose of this Act, "related persons", or persons related to each other, are
(a) individuals connected by blood relationship, marriage or common-law partnership or adoption;
(b) a corporation and
(i) a person who controls the corporation, if it is controlled by one person,
(ii) a person who is a member of a related group that controls the corporation; or
(iii) any person related to a person described in sub-paragraph (i) or (ii);
[...]
(3) Where two corporations are related to the same corporation within the meaning of subsection (2), they shall, for the purposes of subsections (1) and (2), be deemed to be related to each other.
[...]
(6) For the purposes of this Act, persons are connected by
(a) blood relationship if one is the child or other descendant of the other or one is the brother or sister of the other;
(b) marriage if one is married to the other or to a person who is so connected by blood relationship to the other;
(b.1) common-law partnership if one is in a common-law partnership with the other or with a person who is connected by blood relationship to the other; and
(c) adoption if one has been adopted, either legally or in fact, as the child of the other or as the child of a person who is so connected by blood relationship (otherwise than as a brother or sister) to the other.
[5] The Minister maintained that the Payor and the employee are related within the meaning of the Income Tax Act since:
5.(a) the sole shareholder of the Payor was 2173-5659 Québec inc.;
(b) the shareholders of 2173-5659 Québec inc. were:
- 2173-5816 Québec inc., with 58% of the shares;
- Jocelyne Lamothe, with 14% of the shares;
- Linda Lamothe, with 14% of the shares;
- the Appellant, with 14% of the shares;
(c) Philippe Lamothe was the sole shareholder of 2173-5816 Québec inc.;
(d) the Appellant, Jocelyne and Linda Lamothe are the children of Philippe Lamothe;
(e) the Appellant is related to Philippe Lamothe, who controlled the Payor.
[6] The Minister also based his finding on the following assumptions of fact set out at paragraph 6 of the Reply to Notice of Appeal:
(a) the Payor operates a quarry;
(b) the business is seasonal;
(c) the business employed five people, three of whom worked at the quarry;
(d) during the period at issue, the Appellant provided services to the Payor, primarily as a heavy machinery operator;
(e) in addition, he performed mechanical maintenance and operated a mechanical saw;
(f) he worked 40 hours a week;
(g) the Payor paid the Appellant a gross salary of $374.40 a week;
(h) on September 4, 2003, the Payor paid to the Appellant, in addition to his weekly salary, a bonus of $10,000;
(i) during the period at issue, the Payor paid the Appellant total remuneration of $19,360, namely 25 weeks at $374.40 plus $10,000;
(j) the salary paid to the Appellant was unreasonable in view of the duties performed;
(k) on November 24, 2003, the Payor issued a Record of Employment in the name of the Appellant showing June 1, 2003 as the first day of work, November 21, 2003 as the last day paid and 1,000 insurable hours, namely 25 x 40 hour weeks;
(l) the Appellant needed 910 hours of insurable employment to qualify for Employment Insurance benefits;
(m) the Appellant was listed on the Payor's payroll until November 21, 2003, whereas the Payor had laid off the foreman of the quarry on or about September 21, 2003;
(n) during the last quarter of the year (September, October and November) the Payor declared only $170 in gross income;
(o) the period of employment of the Appellant does not correspond to the period of activities of the Payor.
Analysis
[7] First, I am of the opinion that the Payor and the employee are related within the meaning of section 251 of the Income Tax Act and are thus deemed not to be dealing at arm's length.
[8] The Federal Court of Appeal has on several occasions defined the role conferred by the Act on a judge of the Tax Court of Canada. This role does not allow the Court to substitute its assessment for that of the Minister, but it includes the obligation to "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, [...] must decide whether the conclusion with which the Minister was "satisfied" was still objectively reasonable."[1]
[9] In other words, before deciding whether the conclusion with which the Minister was satisfied still seems reasonable to me, I must, in light of the evidence before me, verify whether the Minister's assumptions of fact are, in spite of everything, well founded in whole or in part, in light of the factors set out at paragraph 5(3)(b) of the Act.
[10] One must wonder whether, had they not been related, the Payor and the employee would have concluded such a contract of work. In other words, were the conditions of employment more advantageous due to the fact that the Payor and the employee were related?
[11] The evidence revealed that:
(i) the Payor was the owner of some heavy machinery (pneumatic loader, truck, etc.) and equipment (crusher) normally used in the operations of a quarry. The Payor was also the owner of a garage;
(ii) the principal activity of the Payor consisted of renting the equipment and heavy machinery (the "equipment") and providing the personnel required to operate the equipment to Construction Frontenac inc., a corporation controlled by the brother of the employee, which operated a quarry that it owned;
(iii) the Payor had paid the employee a gross salary of $374.40 per week, during the 25 weeks of the period at issue;
(iv) on September 4, 2003, the Payor paid the employee, in addition to his weekly salary, a bonus of $10,000. On July 31, 2003, the directors declared by way of a resolution (Exhibit I-3) the following bonuses in return for services rendered during the year:
(a) $10,000 to the employee;
(b) $600 to Jean-Denis Vachon, the foreman who supervised the employee;
(v) during the period at issue, the Payor had thus paid the employee total remuneration of $19,360, namely $374.40 per week for 25 weeks, plus a bonus of $10,000;
(vi) the salary of the Payor's other employees varied between $10 and $14 an hour (Exhibit A-6);
(vii) the operating income of the Payor for the period from June 30 to September 30, 2003 was $30,772, and for the period from September 30 to December 31, 2003, it was $170. In addition, the Payor incurred a pre-tax loss of $50,515 during his fiscal year ending November 30, 2003.
Testimony of the employee
[12] The employee testified that, during the period from June 1 to September 21, 2003, he had performed services for the Payor, primarily as an equipment operator. He stated that he had worked 40 hours a week during this period. The employee's testimony in this regard was corroborated by the testimony of Denis Vachon, the immediate supervisor of the employee. He stated that the employee had worked under his supervision during this period for 40 hours per week. He added that he had noted the employee's hours of work during that period.
[13] For the period from September 21 to November 21, 2003, the employee testified that he had worked 40 hours a week. His activities had consisted essentially of doing maintenance at the Payor's garage, sorting and storing replacement parts for the equipment in the Payor's parts storage area and insulating the garage. To support his testimony in respect of the insulation of the garage, the employee produced in evidence invoices and accounts to prove that he had indeed purchased the materials required to insulate the garage.
[14] Lastly, the employee testified that the $10,000 bonus that he had received was used to reimburse a debt due to the Payor by a corporation that he controlled.
[15] The Appellant convinced me that he had indeed worked 40 hours a week for the Payor during the period from June 1 to September 21, 2003. The testimony of the employee was, moreover, corroborated in this regard by the credible testimony of Mr. Vachon. Nonetheless, I seriously doubt that the employee worked 40 hours a week during the period from September 21 to November 21, 2003. First, we should remember that the employee testified that he had insulated the Payor's garage during this period, and that he had filed in evidence invoices and statements of account in support of his testimony. A review of these invoices and statements of account showed that the materials had been purchased by Construction Frontenac inc. and not by the Payor in December 2003, thus after the relevant period, which gives rise to serious doubts about the actual amount of work done during this period. How can I subsequently give credence to the testimony of the employee when it is not supported by independent, credible testimony or by serious, objective proof? Furthermore, the testimony of the employee regarding his activities during this period was not supported by any independent, credible testimony, except for that of Mr. Vachon, who stated that he had on occasion seen the employee cutting trees in the quarry to expand the quarry's area of operation and doing chores in the garage. I must emphasize that nowhere in his testimony did the employee mention the cutting of the trees before Mr. Vachon did so in his testimony. I accordingly conclude therefrom that the employee has not satisfied the burden of proof that was upon him to demonstrate, based on a preponderance of probabilities, that work was actually performed, throughout this entire period. Producing as evidence exhibits that run counter to his own testimony is certainly not a way of discharging the burden of proof that was upon him.
[16] I am further of the opinion that the remuneration that the employee received for the services he allegedly rendered is quite unreasonable. We should recall that the employee had received from the Payor during the period at issue total remuneration of $19,360 for 1,000 hours of work, which represents an hourly pay rate of $19. I am of the opinion that the Payor, had he been dealing at arm's length with the employee, would not have paid him this amount of remuneration. We must remember first of all that the evidence revealed that the hourly remuneration of the Payor's other employees varied between $10 and $14. Furthermore, did the father of the employee, who controlled the Payor, not testify that the Payor had paid the person who replaced the employee, Serge Caron, an hourly rate of $11? The employee claimed that his hourly pay was eminently reasonable because it had been around $9. He maintained that I should not take into account the bonus of $10,000, because this bonus had been used to repay a loan that the corporation which he controlled owed to the Payor. I take the view that the bonus that the employee received formed part of his remuneration during the period at issue. I am also of the opinion that the use which the employee made of the bonus is absolutely irrelevant to the case at bar.
[17] In light of the evidence before me, after examining the factors set out at paragraph 5(3)(b) of the Act and after reviewing the Minister's assumptions of fact, the conclusion of which the Minister was convinced appears to me to be eminently reasonable.
[18] For these reasons, the appeal is dismissed and the decision of the Minister is confirmed.
Signed at Ottawa, Canada, this 2nd day of May, 2005.
"Paul Bédard"
Translation certified true
on this 1st day of March, 2006.
Garth McLeod, Translator
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