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Citation: 2004TCC748
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Date: 20041109
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Docket: 2003-3005(EI)
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BETWEEN:
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DEREK J. McGEACHIE,
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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
Sarchuk J.
[1] This is an appeal by Derek J.
McGeachie from a ruling by the Minister of National Revenue that
he was not employed in insurable employment for the period
January 31, 2001 to January 15, 2003. The basis for the
ruling is that the Appellant and the Payer, FBI Trade Lithoplate
Corp. (FBI) were not dealing with each other at arm's length
pursuant to paragraph 5(2)(i) of the Employment
Insurance Act (the Act).
[2] In making his decision, the
Minister relied on the following assumptions of fact:
(a) the Payer
operates a business of outputting and imaging (75%), digital
printing (20%) and websites (5%);
(b) the Payer's
shareholders are as follows:
Derek G. McGeachie (Appellant's
father)
40%
Derek J. McGeachie (Appellant)
35%
Shirley
Zerfas
25%
(c) the Appellant is
related to one of the Payer's shareholders as being Derek G.
McGeachie's son;
(d) the Appellant
was hired as Manager;
(e) the Appellant
performed his duties at the Markham and Mississauga
locations;
(f) the
Appellant was paid $6,000 per month plus bonuses;
(g) the Appellant
was paid by cheque, on a bi-weekly basis;
(h) the Appellant
and the Appellant's father had full signing authority on the
Payer's bank account;
(i) the
Appellant was primarily responsible for all the aspects of the
business operations;
(j) the
Payer's shareholder, Derek G. McGeachie, the Appellant's
father, made a financial investment in the Payer's business
but had no involvement in the day-to-day operation of the
business;
(k) based on a
letter signed by the Appellant, dated January 27, 2003, the
Appellant advised the staff that he was leaving the company and
that he was taking the staff from the Mississauga division with
him his new business venture called "M15 Digital
Communications" with his partner, Jez Metcalfe, this
situation is not common in an arm's length transaction;
(l) the
Appellant's ability to sell the company's assets without
a co-signature of the other shareholders is not common in an
arm's length transaction (agreement between the Appellant and
Jez Metcalfe dated December 16, 2002);
(m) the Appellant is
related to the Payer's sole shareholder within the meaning of
the Income Tax Act;
(n) the Appellant is
not dealing with the Payer at arm's length.
[3] Before proceeding with a review of
the evidence before the Court, I feel obliged to note that the
Respondent tendered in evidence two separate questionnaires
completed by the Appellant. The first is dated March 3, 2003 and
was sent in response to a request by a CPP-EI rulings officer.
The second is dated May 12, 2003 and is referred to as a
"certification" of the answers therein. Although both
documents deal with the same issues, the questions are phrased
differently and often approach the same subject in a different
fashion. In my view neither one, standing alone or for that
matter both read together, provide a complete picture of the
relevant events. I also note that there is nothing before the
Court to indicate whether one or the other or both documents were
relied upon by the Minister in making the determination in issue.
Notwithstanding the absence of such information, I propose to
deal with the matter on the basis that both documents are in
play. I concede that, as counsel for the Respondent suggested,
the Appellant could have provided the Minister, as he did in
Court, with a much more complete history of his employment,
including such things as salary arrangements, duties, bonus
payments, etc. as well as a better description of his
responsibilities. But his failure to do so does not preclude this
Court from considering all of the evidence adduced during the
course of this hearing.
[4] The Appellant is the son of Derek
G. McGeachie ("Derek G."), however, the relationship
between father and son was short-lived. Derek G. left his family
when the Appellant was a year and a half old, his mother
remarried and he was raised by her and the stepfather. He
observed that "I really didn't know him until I got into
business with him at a much later date". The Appellant
attended the Ivey Business School and earned an Honours Business
Administration degree in 1995. During that period, he was
employed by Proctor and Gamble in an internship and following
graduation, worked for that company in a fulltime position for
approximately two years. His duties were essentially those of an
"assistant brand manager" with the duty to build and
manage that brand in a marketing and sales sense. As well, in his
second year of university, he and a colleague acquired a small
trading company in Hong Kong which, when sold in early 1996 to
Nestlé Canada, had six fulltime staff and a number of
subcontracted commission-based agents selling products of
Nestlé and Cadbury throughout southeast Asia. The
Appellant was the general manager of that company.
[5] The Appellant returned to Canada
and in January 1997 joined FBI as the general manager in charge
of "production operations". At that time it was owned
50% by Derek G. and 50% by Dave Hills. Over the course of 1997,
1998 and 1999, the Appellant bought shares from both of them and
ultimately acquired 35% of the company at a cost of $165,000.[1] The Appellant's
position as general manager was similar to that previously held
by Hills and included sales, administration, production and
purchasing, etc. However, notwithstanding his title and
responsibilities, Derek G.'s approval was required in most
instances and particularly so with respect to staff hiring and
equipment acquisition. Initially, the Appellant was paid a salary
of $45,000 plus a car and an expense allowance. He testified that
in his first six months, the company performed well and continued
to do so over the next few years and that concurrently his
earnings increased and ultimately reached the $90,000-level plus
bonus. He also observed that in addition to his management
responsibilities, he had also taken on a sales role and in 1999,
was the company's second largest salesman in terms of dollar
volume and commissions earned.
[6] At some point of time while Derek
G. and Hills were still the owners of FBI, a separate company,
Canadian Imaging Associates (CIA) had been incorporated by
them.[2] FBI was
intended to be the manufacturing company and CIA would perform a
brokering function. The evidence is unclear but it appears that
CIA was dormant for some period of time and according to the
Appellant "about a year or two into my employment", the
shareholders of FBI purchased CIA in the same proportions as
their shareholdings in FBI and restarted the operation at the
Mississauga location.[3] As before, CIA was intended to be the sales arm and
FBI retained the manufacturing responsibilities. The Appellant
worked for both companies and indicated that it was a good deal
for him if, in his words, "I was able to make it profitable,
which I did, and I earned a $30,000 bonus in the first
year". The evidence of the Appellant is not entirely clear
regarding the sequence of events which followed this acquisition.
It appears that he was intent on continuing to work for both CIA
and FBI and subsequently, this led to friction between
Derek G. and the Appellant with the result that Derek G.
ordered him to go "fully to Mississauga". A further
disagreement erupted over the manner in which the Appellant's
accounts were being handled in Markham after his departure and,
as a result, he returned to Markham and insisted on splitting his
time between the two operations. His request was not accepted by
Derek G., the situation degenerated and ultimately led to a
refusal by Derek G. to pay any commission cheques for the sales
that the Appellant says he continued to bring into Markham.
[7] The foregoing problems appear to
have been exacerbated during the course of 2002 when FBI
"began to perform very poorly, and effectively it lost quite
a bit of money". According to the Appellant, Derek G.
elected to "consolidate FBI and CIA into the main Markham
operation which was our original one, the purpose being to
essentially reduce costs and increase the manufacturing base of
the main head office which had lost a lot of sales". The
Appellant said he "had no real say in this since I
didn't have control, but I wasn't opposed to it. It made
sense". As a result, all of the operations were combined
and, according to the Appellant, Derek G. put him in charge of
"selling all the assets of the Mississauga operation which
we didn't need, which I did". The Appellant further
testified that he moved his office to Markham in the Fall of 2002
but from October of that year to January 2003, he received no
remuneration or pay.
Conclusion
[8] The determination in issue was
made by the Minister pursuant to the authority given to him by
paragraph 5(2)(i) and subsection 5(3) of the Act
which read as follows:
5(2) Insurable employment does
not include
(a)
...
(i)
employment if the employer and employee are not dealing with each
other at arm's length.
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.
[9] Guidelines with respect to the
nature of the role conferred on the Minister, the scope of the
Minister's determination and the extent of the Tax Court of
Canada's general power of review of that determination were
set out by Marceau J. in Légaré v.
Canada, [1999] F.C.J. No. 878. More specifically, he
stated:
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
Marceau J. went on to say in Pérusse v. Canada,
[2000] F.C.J. No. 310:
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.
[10] With the foregoing principles in mind I
have decided that the Minister's conclusion was not, in light
of certain facts before me, reasonable. I make particular
reference to the following assumptions made by the Minister:
(a) the Appellant
was primarily responsible for all the aspects of the business
operations;
(b) the Payer's
shareholder, Derek G. McGeachie, the Appellant's father, made
a financial investment in the Payer's business but had no
involvement in the day-to-day operation of the business;
The Appellant does not dispute that he was hired as general
manager and that to the best of his abilities, he carried out
that function as well as being heavily involved in sales.
However, there is no evidence before me whatsoever to support the
conclusion that Derek G. had no involvement in the
day-to-day operation of FBI. Quite the contrary, it appears that
he exercised substantial control over all of the activities and
in several instances vetoed the Appellant's proposals.
(c) based on a
letter signed by the Appellant, dated January 27, 2003, the
Appellant advised the staff that he was leaving the company and
that he was taking the staff from the Mississauga division with
him his new business venture called "M15 Digital
Communications" with his partner, Jez Metcalfe, this
situation is not common in an arm's length transaction;
(d) the
Appellant's ability to sell the company's assets without
a co-signature of the other shareholders is not common in
an arm's length transaction (agreement between the Appellant
and Jez Metcalfe dated December 16, 2002);
These assumptions ignore several factors, the primary one
being that the Mississauga plant had been closed down, a portion
of the sales force had transferred to the main office in Markham
as was some of the equipment. According to the Appellant
"Markham needed about half the equipment to make it all work
and the other half was surplus". He maintains that at all
relevant times, he had Derek G.'s instructions to and
"100 percent" approval to sell the equipment and that
"I found a couple of buying options, Jez had the highest
amount that he was willing to pay. The only other option I found
was that equipment reseller who was offering maybe 20,000 for the
whole amount".
[11] The foregoing events must be considered
in light of the fact that there appears to have been considerable
friction between Derek G. and the Appellant which led to the
latter's apparent dismissal from his employment as general
manager. The relationship ended, in the Appellant's words,
with "an argument and a fight, and it wasn't pretty". An
agreement to terminate the relationship led to a mediated
settlement in which, according to the Appellant, "in return for
me agreeing not to sue for severance or anything like that,
keeping in mind I was employed as vice-president for six years. I
agreed to accept $100,000 payment, which I have yet to receive
actually".
[12] This Court is required to verify
whether the facts inferred or relied on by the Minister were real
and were correctly assessed having regard to the context in which
they occurred. The Appellant's training and experience in the
field of marketing provides a sound basis for the conditions of
his employment contract and the evidence as a whole confirms that
although Derek G. and the Appellant were not dealing with each
other at arm's length, this fact did not have undue influence
on the determination of the terms and conditions of his
employment. Accordingly, I have concluded that the Minister erred
in finding that "Considering all the facts, he submits that
it was reasonable for the Respondent to conclude that the
Appellant and the Payer would not have entered into a
substantially similar contract of employment, if they had been
dealing with each other at arm's length".
[13] The appeal is allowed and decision of
the Minister is vacated on the basis that the Appellant was
engaged in insurable employment with FBI during the period
January 31, 2001 to January 15, 2003.
Signed at Ottawa, Canada, this 9th day of November, 2004.
Sarchuk J.
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