Citation: 2005TCC474
Date: 20050906
Docket: 2004‑3731(EI)
BETWEEN:
9022‑0377 QUÉBEC INC., (ÉVASION SPORTS D.R.),
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
ROGER GAGNON,
DENIS GAGNON,
Interveners.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif, J.
[1] This is an appeal
in which the question at issue is to determine whether or not the employment
held between September 1st and November 17, 2003, in
the Denis Gagnon case, and between January 1st and
November 17, 2003, in his brother Roger's case, both Interveners,
should be excluded from insurable employment under paragraph 5(2)(i)
of the Employment Insurance Act ("Act").
[2] The jobs in
question were performed for the Appellant, 9022‑0377 Québec Inc.
Brothers Denis and Roger Gagnon held 30% and 25% of voting shares
respectively, and the remaining 45% were the property of Denis Coiffier.
[3] To explain and
justify the ruling, the Respondent listed the assumed facts. Several facts
reported in paragraph 7 of the Reply to the Notice of Appeal (the
"Reply") were admitted and others denied, as follows:
[TRANSLATION]
(a) the
Appellant, incorporated on June 15, 1995, runs a business that sells,
rents and repairs recreational vehicles (snowmobiles, motorcycles, all‑terrain
vehicles (ATVs)) under the name, "Évasion Sport D.R."; (admitted)
(b) the Appellant
operates its business year‑round: during the winter season it is open six
to seven days a week; in the summer, it is open five and a half to
six days a week; (admitted)
(c) Roger Gagnon
is the sales director: he is in charge of orders, finances, large vehicle
sales, rentals and bids; (admitted)
(d) Denis Gagnon
is in charge of parts and repair services as well as the supervision of
administrative staff; he also does sales and rentals; (admitted)
(e) each worker is
responsible for his work area, hiring staff, work schedules and supervising
employees; (admitted)
(f) Denis Coiffier,
the Payor's third shareholder, is not involved in the Appellant's daily
activities but the workers do consult him when major investments or changes
have to be made; (denied)
(g) the workers
generally worked on the business' premises using the Appellant's equipment; (admitted)
(h) the workers
worked from Monday to Friday and took turns working at the business on Saturdays;
(denied)
(i) the workers'
work schedule accommodated the Appellant's needs; they estimated working
approximately 60 hours a week; (denied)
(j) the workers
received a set annual income of $50,000, i.e. $1,912 every
two weeks; (admitted)
(k) when required
to travel for the Appellant, all travel‑related costs were reimbursed by
the Appellant. (denied)
[4] Paragraph 8 of
the Reply was also admitted. It reads as follows:
[TRANSLATION]
8. Each worker is
related to the Appellant within the meaning of the Income Tax Act because:
(a) Voting shareholders of the Appellant
were:
- Denis Gagnon with 30% of the
shares;
- Roger Gagnon with 25% of the
shares; and
- Denis Coiffier with 45% of the
shares.
(b) Denis and Roger Gagnon are
brothers.
(c) The workers formed a related group
that controlled the Payor.
(admitted)
[5] Paragraph 9 of
the Reply was denied as well as subparagraphs 9(a) and 9(b).
Subparagraphs 9(c) and 9(d) were admitted. They all read as follows:
[TRANSLATION]
9. The Minister
also ruled that the workers were considered to be working at arm's length with
the Appellant as part of their employment because he was convinced that it was
reasonable to conclude that each worker would have entered into a substantially
similar contract of employment with the Appellant if they had been dealing with
each other at arm's length having regard to the following circumstances: (denied)
(a) The remuneration paid
to each worker was reasonable given that they each worked 60 hours a week
and given their administrative responsibilities; (denied)
(b) the work schedule of
each of the workers, as that of the Appellant's other employees, was based on
the Appellant's requirements; (denied)
(c) the workers' work
period met the Appellant's actual requirements; (admitted)
(d) each of the workers
rendered services to the Appellant, in his own respective area of activity that
was essential to the Appellant's activities. (admitted)
[6] Denis Gagnon
and Roger Gagnon testified for the Appellant.
[7] The third shareholder,
Denis Coiffier, residing in France, periodically visited the Saguenay region to take care of
his financial interests and indulge in his passion: snowmobiling.
[8] Described as a
passive investor, Denis Coiffier acquired 50% of the shares after the
periods at issue. At that time, Denis Gagnon became the shareholder with
the other 50% of shares, since Roger Gagnon had chosen to sell his shares:
at the time of the hearing, Denis Gagnon and Denis Coiffier were the
only shareholders, each holding 50%.
[9] The Appellant's
evidence relied primarily on the testimony of the Gagnon brothers.
Denis Gagnon looked after the rental and after‑sales services while
his brother Roger looked after the sales department. The rental component was a
very significant part of the business and required considerable availability in
order to respond to service calls during breakdowns that could occur far away
from the company's place of business, particularly with the numerous vehicles
that the business rented on weekends.
[10] Though Denis joined
the business after his brother, Roger, he quickly became his equal with regard
to conditions of employment, including salary level.
[11] The Gagnon brothers
also enjoyed a high degree of autonomy in their respective responsibilities.
They were, in some ways, in charge of managing their respective departments.
They respected, trusted and supported one another. They had a harmonious
relationship and generally made all decisions together with regard to the
routine management and administration of the business.
[12] Admittedly, there
may have been a few things that they disagreed on; however, the overall climate
was calm, productive and dynamic.
[13] Furthermore, the
business experienced a growth that demonstrated exceptional dynamism. Sales
grew as follows: (Exhibit I‑2)
|
Fiscal Year ending on
|
Sales
|
Net Profit
|
|
May 31, 2003
May 31, 2002
May 31, 2001
May 31, 2000
|
$3,903,037
$3,161,415
$2,046,405
$1,832,073
|
$47,052
$71,797
$ 7,419
$24,847
|
[14] Not only did sales
increase, but profits as well. During the same period, profits were as follows:
(Exhibit I‑2)
|
Year
|
Denis Gagnon’s
Income
|
Roger Gagnon’s
Income
|
|
2003
2002
2001
2000
|
$47,883
$ 7,467
|
$47,890
$42,345
$38,748
$38,579
|
[15] In deciding the appeal, the Court must first
determine whether or not the employment of the Interveners was performed under
a true contract of service during the periods in question, pursuant to
paragraph 5(1)(a) of the Act.
[16] Then, if the jobs in
question proved to be performed as part of a contract of employment, the Court
must verify if this employment should be excluded from insurable employment
because of a non‑arm's length relationship between the shareholders,
whose percentage of shares resulted in them controlling the company; the
exclusion is set forth in paragraph 5(2)(i) of the Act.
[17] This second step must reflect the quality of the
analytical work performed by those in charge of the case. Therefore, if the
investigative and analytical work performed under the discretionary power
granted by Parliament in paragraph 5(3)(b) of the Act was
judiciously carried out with adequate consideration of all the relevant facts,
the Court cannot intervene.
[18] Conversely, that is,
if certain elements were overlooked, ignored, underestimated or overestimated,
the Court must ask the following question: is the determination reasonable with
regard to the new elements of proof, shortcomings, omissions or errors? If so,
there will be no intervention: however, if not, the Court must proceed with a
new analysis to confirm or vacate the determination under appeal.
[19] Two statutes that
must be taken into consideration in this analysis deal with the contract of
employment or contract of service. They are the Civil Code and the
Act.
[20] Article 2085 of
the Civil Code defines the contract of employment as follows:
2085. A contract of employment is a contract by which a
person, the employee, undertakes for a limited period to do work for
remuneration, according to the instructions and under the direction or control of
another person, the employer.
[21] Paragraph 5(1)(a)
of the Act sets forth the following:
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;
[22] A contract of
employment must meet three conditions: performance of work, remuneration,
and a relationship of subordination. The first two conditions are clearly
present in this case; the facts should be analyzed for the purpose of
determining if there was power of control. Was there a relationship of
subordination? Did 9022‑0377 Québec Inc. have the power of
control, the power to intervene in the work performed by the Gagnon brothers?
[23] Evidence shows
that Denis Coiffier was present essentially on a random basis. Was he
that disinterested? Did he do all that was required to ensure that his
investment was profitable and that the business ran according to his
expectations?
[24] Evidence showed that
the shareholders had entered into an agreement, in effect during the periods at
issue; it was signed by the three shareholders on August 18, 1998.
This agreement stipulated the following in particular:
[TRANSLATION]
RESTRICTIONS TO The authority of the Directors:
5. Any company
by-law or resolution having as its purpose or effect, direct or indirect, one
of the following points, will not be exercisable by the directors, whose
authority in these matters is hereby restricted, but by the shareholders
themselves, and shall be wholly adopted by them in order to be valid:
(a) the issuance of company shares and
other securities;
(b) the approval or registration of
transfer of shares of the company's capital stock not in compliance with these
provisions;
(c) the declaration of dividends and
distribution of assets or money to the company's shareholders;
(d) the identification and payment of
any salary, bonus, gratuity or other form of remuneration to one or more
shareholders, their relatives or partners (if such payment results in the
direct or indirect payment of an income higher than what the shareholder is
entitled to under article 6 below);
(e) the appointment of company officers;
(f) the adoption, amendment or repeal
of any by-law;
(g) the designation of authorized
signatories of cheques and negotiable instruments of the company;
(h) any decision other than an
administrative decision made during the usual course of company business.
INCOME
SPLITTING:
6. The shareholders
agree that incomes for each that are drawn from the company, in any form, will
be proportionate to the number of ordinary shares held, except for the interest
set forth in article 2 above, as well as remuneration that may be
allocated by the board of directors for set functions or as a salaried employee
of the company.
[25] The contents of these
clauses clearly show that shareholder Denis Coiffier had an interest in
the activities of the company in which he held 45% of the shares. With respect
to the burden of proof, which as I recall, fell on the Appellant, there is no
doubt that shareholder Denis Coiffier stubbornly held to his shareholder
rights.
[26] To claim the
contrary simply defies the most basic logic and is an insult to the
intelligence of a businessperson who, in addition to the distance, had to deal
with a lack of knowledge of a field in which he had invested, knowing that his
co‑shareholders were two brothers who had the required knowledge and
together controlled more than 51% of the voting shares. Is it reasonable and
likely to think or believe that an intelligent person, under these
circumstances, would give up his shareholder rights? The response is an
unequivocal no.
[27] A businessperson's
primary concern is to maximize the return on his investment. In some
situations, an investor can be motivated by a need, a passion or pastime, in
which case his or her decisions may not always be rational. In this case, there
is no evidence to this effect.
[28] Denis Coiffier
did not testify. However, I find it reasonable to assert that the latter was
without a doubt very satisfied with the economic performance of the business in
which he had decided to invest. Both sales and profits were enough to satisfy
any investor.
[29] With these results,
it is no surprise that shareholder Denis Coiffier was unobtrusive.
[30] The fact that he may
have been passive does not in any way mean that he had waived his shareholder
rights. Results were very good and business was going very well, so
Mr. Coiffier did not need to intervene.
[31] Had things
deteriorated, had results been disappointing, had tensions arisen in relations
between the investors, had one of the Gagnon brothers mismanaged or misused
expenses, the business would certainly have exercised its power of control to
correct the situation arising from the facts and acts committed by one of the Gagnon
brothers in the performance of his work.
[32] To determine whether
or not 9022‑0377 Québec Inc. had a power of control, I
reiterate that it is important to determine the status of shareholder
Denis Coiffier.
[33] He is described as a
passive investor; can we conclude that Denis Coiffier was disinterested or
indifferent such that he would have waived his shareholder rights? Evidence
does not point to this being a symbolic or philanthropic investment. This was,
rather, a business relationship.
[34] Moreover,
Denis Coiffier acquired other shares when Denis Gagnon decided to
part with his, holding 50% of the capital stock from that point onward. This
increase in Mr. Coiffier’s capital stock, however, is not relevant because
it occurred after the period at issue.
[35] For all of these
reasons, I conclude that, initially, there was indeed a true contract of
service between the stakeholders and 9022‑0377 Québec Inc.
during the periods in question.
[36] The quality of work
performed out by the Appeals Officer should be assessed at the second stage.
[37] Ms. Jacynthe Bélanger
performed the case investigation and analysis. The relevant documents, elements
and facts were all available and taken into consideration.
[38] In preparation for a
conference call with the Gagnon brothers and their representative,
Alain Savoie, Ms. Bélanger had this questionnaire prepared prior to
the meetings in order to cover the elements and facts she thought relevant.
During the investigation via conference call, the latter had the right to
submit all information deemed relevant and useful to support the merits of
their arguments.
[39] If
Ms. Bélanger's questions were incomplete or vague, the Appellant,
represented at the telephone conference call by someone whom it had mandated (in
this case, Alain Savoie), had the time to report it.
[40] The only possible
criticism of Ms. Bélanger with regard to the case is that she did not
communicate with Denis Coiffier, which she acknowledged herself. Did
the Appellant raise this element during the conference call through its
representative? The evidence did not provide an answer to this question.
[41] Did the Appellant
suggest or offer Denis Coiffier's involvement during the conference call?
If it were important, why did the Appellant not ensure that he come and
testify? Need I issue a reminder that the burden of proof was on the Appellant?
[42] Did the Respondent
correctly apply paragraphs 5(3)(a) and (b) of the Act?
This provision reads as follows:
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.
[43] Under this
provision, the Respondent had the duty to verify all of the relevant facts and
consider them in a just and balanced manner, in which case the Court does not
need to intervene. If the Respondent found shortcomings, the Court must verify
if the conclusion is still reasonable and consistent, having regard to the
evidence from the new facts.
[44] In her analysis of
the facts, Jacynthe Bélanger requested and obtained the shareholders'
agreement. The contents of that agreement confirmed her assessment as to the
presence of the power of control refuting the argument that Denis Coiffier
was a passive, disinterested shareholder, in no way concerned with the
company's affairs.
[45] This is particularly
clear from the excerpt of the agreement reproduced above. For ease of
reference, here is, once again that text:
[TRANSLATION]
RESTRICTIONS TO The authority of the directors:
5. Any company
by-law or resolution having as its purpose or effect, direct or indirect, one
of the following points, will not be exercisable by the directors, whose
authority in these matters is hereby restricted, but by the shareholders
themselves, and shall be wholly adopted by them in order to be valid:
(a) the issuance of company shares and
other securities;
(b) the approval or registration of
transfer of shares of the company's capital stock not in compliance with these
provisions;
(c) the declaration of dividends and
distribution of assets or money to the company's shareholders;
(d) the identification and payment of
any salary, bonus, gratuity or any other form of remuneration to one or more
shareholders, their relatives or partners (if such payment results in the
direct or indirect payment of an income higher than what the shareholder is
entitled to under article 6 below);
(e) the appointment of company officers;
(f) the adoption, amendment or repeal
of any by-law;
(g) the designation of authorized
signatories of cheques and negotiable instruments of the company;
(h) any decision other than an
administrative decision made during the usual course of company business.
INCOME
SPLITTING:
6. The
shareholders agree that incomes for each that are drawn from the company, in
any form, will be proportionate to the number of ordinary shares held, except
for the interest set forth in article 2 above, as well as the remuneration
that may be allocated by the board of directors for set functions or as a
salaried employee of the company.
[46] With respect to the
facts considered, she based her analysis on the following elements:
·
the
size of salaries with relation to competency and scope of responsibilities;
·
the
quality of administration and results obtained;
·
the
contents of the agreement entered into by the shareholders; and
·
the
nature and importance of the responsibilities assumed.
[47] Ms. Bélanger's
involvement in the case was on the initiative of the Appellant, which had
initiated the appeal process following the Minister's (the
"Minister") initial decision with which it evidently disagreed.
[48] Having regard to the
importance of the involvement by the person charged with reviewing the file,
the Appellant and Interveners could have and should have submitted all relevant
documentation and information demonstrating the merits of their arguments.
[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.
[60] The argument that
the Gagnon brothers acquired the de facto control of shares held by
the passive investor, Denis Coiffier, is totally unfounded. Firstly,
nothing in the evidence leads to such a conclusion; secondly, the person
concerned was not heard; and thirdly, what appears to me to be most
determinative, how could we reconcile such an argument with sections 5 and
6 of the shareholders' agreement?
[61] Appeals Officer Jacynthe Bélanger
considered all of the relevant facts in her analysis. She retained the
comparison submitted by the Appellant as relevant. However, she concluded that
the comparison did not support the arguments of the Appellant and Interveners.
[62] Even though she did
not communicate with shareholder Denis Coiffier, and even if she assumed
that the work of Roger Gagnon was comparable to the work of
Pierre Deschênes, it did not lead to an unreasonable conclusion. On the
contrary, the conclusion reached is still reasonable.
[63] For all of these
reasons, I dismiss the appeal and confirm the merits of the Minister's
decision.
Signed at Ottawa,
Canada, this 6th day of September 2005.
"Alain Tardif"
Translation certified true
on this 9th day of January 2006.
Email this Content