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Citation: 2005TCC62
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Date: 20050127
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Docket: 2004-484(EI)
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BETWEEN:
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THE MCDONNELL CONSULTING CORPORATION,
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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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REASONS FOR JUDGMENT
MacLatchy, D.J.
[1] The Appellant appealed a ruling to
the Minister of National Revenue (the "Minister") for the
determination of the question of whether or not
Michelle A. Lewin (the "Worker") was employed
in insurable employment while engaged by the Appellant during the
period of January 6 to June 30, 2003 within the meaning of the
Employment Insurance Act (the "Act").
[2] By letter dated November 19, 2003,
the Minister informed the Worker and the Appellant that it had
been determined that the Worker was not employed in insurable
employment, for the period referred to herein, for the reason
that the Worker and the Appellant were not dealing with each
other at arm's length, pursuant to paragraph 5(2)(i)
of the Act.
[3] The Minister relied on the
following assumptions of fact to reach his decision:
(a) the
Appellant's business is to provide consulting services such
as writing and editing of materials for publication and provide
advice concerning the start-up and operation of small
businesses;
(b) the
Appellant's sole shareholder is Thomas E. McDonnell;
(c) the Worker is
related to the Appellant's shareholder as being his
daughter;
(d) the Worker was
hired to develop new business for the Appellant, under a verbal
agreement;
(e) the Worker's
position did not exist before the period in question;
(f) the Worker
was the only worker for the Appellant during the period in
question;
(g) the Worker was
not replaced during her maternity leave;
(h) the Worker
performed most of her duties at the Appellant's clients place
of business;
(i) the Worker
was paid $3,333.33 monthly, by cheque from the Appellant;
(j) the Worker
was required to work 35 hours per week;
(k) the Worker's
hours of work were not recorded by the Worker neither the
Appellant;
(l) all the
equipment and the materials were provided by the Appellant's
clients;
(m) the Worker is related
to the Appellant's shareholder within the meaning of the
Income Tax Act;
(n) the Worker is
not dealing with the Appellant at arm's length.
[4] The Appellant agrees that these
assumptions of fact were correct.
[5] The Minister exercised his
discretion under paragraph 5(2)(i) of the Act and
decided that the contract of employment would not be deemed to be
at arm's length.
[6] The issue before this Court was
clearly stated in Légaré v.
Canada(Minister of National Revenue - M.N.R.),
[1999] F.C.J. No. 878 (F.C.A.) by Marceau, J. in these terms:
[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.
[7] The matter was further commented
on by the Federal Court of Appeal in Pérusse v.
Canada(Minister of National Revenue), [2000] F.C.J.
No. 310, where Marceau, J. expressed himself in the following
terms:
[15] The function of an
appellate judge is thus not simply to consider whether the
Minister was right in concluding as he did based on the factual
information which Commission inspectors were able to obtain and
the interpretation he or his officers may have given to it. The
judge's function is to investigate all the facts with the parties
and witnesses called to testify under oath for the first time and
to consider whether the Minister's conclusion, in this new light,
still seems "reasonable" (the word used by Parliament). The Act
requires the judge to show some deference towards the Minister's
initial assessment and, as I was saying, directs him not simply
to substitute his own opinion for that of the Minister when there
are no new facts and there is nothing to indicate that the known
facts were misunderstood. However, simply referring to the
Minister's discretion is misleading.
[8] The jurisdiction of the Tax Court
of Canada relative to such an inquiry is ably and extensively
covered by Porter, D.J.T.C.C. in the case of Crawford and
Company Ltd. and M.N.R., reported, [1999] T.C.J. No. 850 (QL)
and referred to in Docherty v. Canada(Minister
of National Revenue - M.N.R.), [2000] T.C.J. No. 690 by
Rowe, D.J.T.C.C. and is well repeated:
[58] In the scheme established
under the EI Act, Parliament has made provision for certain
employment to be insurable, leading to the payment of benefits
upon termination, and other employment which is "not
included" and thus carrying no benefits upon termination.
Employment arrangements made between persons, who are not dealing
with each other at arm's length, are categorized as not
included. Brothers and corporations controlled by them are deemed
not to be dealing with each other at arm's length pursuant to
subsection 251(1) of the Income Tax Act, which governs the
situation. Quite clearly the original purpose of this legislation
was to safeguard the system from having to pay out a multitude of
benefits based on artificial or fictitious employment
arrangements, see the comments of the Federal Court of Appeal in
Paul v. The Minister of National Revenue, [1996] F.C.J. No. 682,
(A-223-86), where Hugessen J. said:
We are all prepared to assume, as invited by appellant's
counsel, that paragraph 3(2)(c) of the Unemployment Insurance
Act, 1971, and subsection 14(a) of the Unemployment Insurance
Regulations have for at least one of their purposes the
prevention of abuse of the Unemployment Insurance Fund through
the creation of so-called "employer-employee"
relationships between persons whose relationship is, in fact,
quite different. That purpose finds obvious relevance and
rational justification in the case of spouses who are living
together in a marital relationship. But even if, as appellant
would have us do, we must look only at spouses who are legally
separated and may be dealing at arm's length with one
another, the nature of their relationship as spouses is such as,
in our view, to justify excluding from the scheme of the Act the
employment of one by the other.
...
We do not exclude the possibility that the provisions may have
other purposes, such as a social policy decision to remove all
employment within the family unit from the operation of the
Unemployment Insurance Act, 1971, as was suggested by
respondent's counsel.
[59] The harshness of this
situation has however been tempered by paragraph 5(3)(b) of the
EI Act, which provides for such employment between related
persons to be deemed to be at arm's length and thus in turn
to be treated as insurable employment, if it meets all the other
provisions, where the Minister is satisfied 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, that it is reasonable to
conclude that they would have entered into a substantially
similar contract if they had (in fact) been dealing with each
other at arm's length.
[9] The Federal Court of Appeal has
clarified the present understanding of the various sections in
issue in Légaré, supra, where Marceau, J.A.
stated as follows:
In this matter, the Court has before it two applications for
judicial review against two judgments by a judge of the Tax Court
of Canada in related cases heard on the basis of common evidence
which raise yet again the problems of interpretation and
application of the saving provision, subparagraph 3(2)(c)(ii). I
say yet again because since its passage in 1990, several
decisions of the Tax Court of Canada and several judgments of
this Court have already considered what workable meaning could be
given to subparagraph 3(2)(c)(ii). In reading the text, the
problems it poses beyond its deficient wording are immediately
obvious, problems which essentially involve the nature of the
role conferred on the Minister, the scope of the Minister's
determination and, by extension, the extent of the Tax Court of
Canada's general power of review in the context of an appeal
under section 70 et seq. of the Act.
While the applicable principles for resolving these problems
have frequently been discussed, judging by the number of disputes
raised and opinions expressed, the statement of these principles
has apparently not always been completely understood. For the
purposes of the applications before us, we wish to restate the
guidelines which can be drawn from this long line of authority,
in terms which may perhaps make our findings more meaningful.
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.
[10] In the case of Adolfo Elia v.
M.N.R., [1997] F.C.J. No. 316 (QL), a decision of the Federal
Court of Appeal, the comments of Pratte, J.A. are worth
repeating:
Contrary to what the judge thought, it is not necessary, in
order for the judge to be able to exercise that power, for it to
be established that the Minister's decision was unreasonable
or made in bad faith having regard to the evidence before the
Minister. What is necessary is that the evidence presented to the
judge establish that the Minister acted in bad faith, or
capriciously or unlawfully, or based his decision on irrelevant
facts or did not have regard to relevant facts. The judge may
then substitute his decision for that of the Minister.
[11] The evidence produced before this Court
was complete and fairly given and well articulated by the two
witnesses for the Appellant, Michelle Ann Lewin and Thomas
McDonnell. Their evidence was open and without avoidance or
subterfuge. It was a pleasure to have witnesses whose evidence
was honest and reliable. However, I could not reach the same
conclusion as the Appellant did in argument, on the same
evidence.
[12] It was agreed that the Minister did not
act capriciously or in bad faith but the Appellant believes the
decision was made without a complete examination of the true
nature of the employment of the Worker by the Appellant. It was
accepted that the Worker was and would be considered to be
related to the Appellant for purposes of paragraph 5(2)(i)
of the Act and thus not included in insurable employment
but for the saving provisions in paragraph 5(3)(b). The
Appellant argued that the Minister acted on irrelevant
assumptions and was unaware of the totality of the employment
arrangement with the Worker.
[13] Ms. Lewin, the Worker, is well educated
and knowledgeable in her chosen field of fine art and appeared to
be well connected to a segment of the art community in Toronto.
She worked for certain art galleries until mid-2002 when she was
forced to quit such employment due to unreasonable working hours
expected from her by her then employer. She remained unemployed
till the beginning of the year 2003 when she became employed by
the Appellant company, owned by her father, Thomas McDonnell. She
attempted to be employed in her chosen profession but was
unsuccessful as she stated that the art community is a small
tight circle with very few openings for someone with her
training, education and talents.
[14] The Appellant company, it was agreed,
has been used by Thomas McDonnell for consulting purposes
with clients requiring small business advice in the field of tax,
succession and general operation of a family business. The
evidence of Thomas McDonnell was that the Appellant was kept
involved with a few select clients who had become not only
clients but friends who appeared to rely on Mr. McDonnell for
business advice and would turn to him outside his practice of tax
law at a Toronto law firm specializing in tax matters. The
Appellant's company was also used by Mr. McDonnell for
editing material and commentary for publication of newsletter for
professionals and the co-authoring of a book dealing with
the tax benefits of scientific research and development
grants.
[15] Apparently both Mr. McDonnell and his
daughter discussed her situation as it existed at the end of 2002
and they reached an agreement that she would work for the
Appellant company in her art field with a view to that employment
increasing the range of services that the company could provide.
The Worker was pregnant at the time, which was known by Mr.
McDonnell. She worked, as arranged, for 6 months and left on
maternity leave at the end of June 2003. She intended to remain
on leave for one year but returned on a part-time basis in
9 months instead.
[16] The income to be paid to the Worker was
negotiated between the parties and reflected her abilities and
expertise in the art field and the fact she would only work 35
hours a week from Monday to Friday. The remuneration agreed to
was less than she had earned when she was employed elsewhere but
what was felt to be commensurate with her education and training.
On her return from maternity leave, she then resided in
Peterborough and could only work from time to time depending on
her child's schedule. She was able to work from her residence
with the use of e-mail and could commute to clients in Toronto
when required.
[17] During her 6-months tenure before
having her child, she had a modicum of success reconnecting with
3 clients in the art field and produced business about equal to
2/3 of the income she received during that period. The Appellant
was satisfied with this progress but did not itself connect to
these clients. There was no contact with those clients during the
Worker's maternity leave and there was no intention to make any
contact with them.
[18] Mr. McDonnell indicated to this Court
that he did not intend to hire anyone or connect to the art
community before engaging his daughter to work for the Appellant.
He had no particular interest in enlarging the Appellant company
and knew little about the business his daughter might bring to
the Appellant. His daughter made a presentation to him which he
thought might produce something for the Appellant. Further, he
was aware that his daughter was expecting a child and could only
work for 6 months and then fully expected to take a year away
from work. No one was hired during his daughter's absence from
employment to service the business newly acquired for its
maintenance, if for no other purpose.
[19] No written contract was entered into by
the Appellant and the Worker. Mr. McDonnell said it did not
cross his mind but I find this unusual as he is a tax expert and
would expect him to be aware of the exclusionary provisions from
insurable employment that the Worker would find herself in and to
that end he would be well advised to be scrupulously careful to
document the employment agreement and see that all "i" were
dotted and the "t" crossed.
[20] Although the Minister had not heard the
evidence of these two witnesses, he appeared to be well aware of
the circumstances of the employment that was entered into between
the two and was aware of the remuneration agreed to, the terms
and conditions and the nature and importance of the work
performed. All of this information was openly provided by the
Appellant and the assumptions on which the Minister based his
decision reflected this knowledge.
[21] Although I believe there was no overt
attempt by either the Appellant or the witnesses to create a
position for the Worker, it was not surprising that the Minister
would look at these circumstances surrounding the employment and
based on the agreed facts reach the conclusion that the parties
would not have entered into a substantially similar contract of
employment had they been dealing with each other at arm's length.
The Appellant had no intention of creating the type of employment
that was offered to the Worker. No one replaced her when she left
her position indicating that it was not an essential or needed
position to be filled by her absence. No vacancy was created and
whatever business was acquired would not need to be serviced in
order to maintain contact or expand any relationship created.
[22] Further, Mr. McDonnell indicated openly
that had someone else came to him with a similar proposal as that
of his daughter, he probably would not have considered it. He
indicated he has an entrepreneurial spirit and would consider any
serious proposal if it could be made to appear to be viable but
has never done so other than in his chosen field.
[23] The facts relied on by the Minister are
real and relevant and the conclusion reached, after assessing
those assumptions in the context in which they occurred, was
reasonable. The evidence presented supports this conclusion and
the Appellant has not satisfied this Court, on the balance of
probabilities, otherwise.
[24] The final paragraph of the judgment of
Bowie, T.C.J. in Glacier Raft Co. v.
Canada(Minister of National Revenue), [2003] T.C.J.
No. 450, 2003 TCC 559, bears reading as follows:
I should make it clear that although I am bound to dismiss the
appeals, I was impressed with all the witnesses, and in
particular with Anne Duquette, as she now is, Elizabeth Murphy,
and James Murphy. I have no doubt that Anne and Elizabeth worked
as hard as, and probably harder than, the other guides. Nor do I
doubt that Mr. Murphy relied heavily on their experience, not
only when he bought the company in 1995, but thereafter as well.
This is certainly not a case of employment of convenience being
created for the benefit of members of the family so that they
could take unfair advantage of the employment insurance system.
Nevertheless, the terms of the Act are reasonably clear, and when
related parties enter into employment contracts they must be
scrupulous to see that the terms do not differ from those on
which the employer employs other workers, or on which the workers
could find work with other employers, if they wish the employment
to be insurable under the Act.
[25] The appeal is dismissed and the
decision of the Minister is hereby confirmed.
Signed at Toronto, Ontario, this 27th day of January 2005.
MacLatchy, D.J.
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