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Citation: 2004TCCI234
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Date: 20040413
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Docket: 2003-1308(EI)
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BETWEEN:
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GILLES DESCHÊNES,
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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
Savoie D.J.
[1] This appeal was heard at Québec, Quebec, on November 28, 2003.
[2] It must be determined whether the Appellant's employment for the periods from September 23, 1997 to September 4, 1998, from May 8 to September 4, 1999, from September 13, 1999 to September 8, 2000, from May 1 to 10, 2001, and from May 1 to September 1, 2002, when in the service of Claudette Lévesque, operating the Café L'Essentiel enr., the "Payor," was insurable within the meaning of the Employment Insurance Act (the "Act").
[3] On January 7, 2003, the Minister of National Revenue (the "Minister") informed the Appellant of his decision that this employment, for the periods at issue, was not insurable because he and the Payor would not have entered into a similar contract of employment if they had been dealing with each other at arm's length.
[4] At the hearing, Counsel for the Minister presented the Court with a notice of motion for permission to submit an Amended Reply to the Notice of Appeal, pursuant to subsection 18.16(1) of the Tax Court of Canada Act, and to subsection 27(4) of the Tax Court of Canada Rules.
[5] The Minister's request was granted by the Court.
[6] In addition, the Minister informed the Appellant that this employment was not insurable because it did not meet the requirements of a contract of service and that there was not an employer-employee relationship between him and the Payor.
[7] In making his decision, the Minister relied on the following assumptions of fact, which were either admitted or denied by the Appellant:
[translation]
(a) On August 17, 1994, Claudette Lévesque registered the company name "Café L'Essentiel enr."; (admitted)
(b) Claudette Lévesque is the sole owner of the business; (admitted)
(c) Claudette Lévesque is the Appellant's spouse; (admitted)
(d) The Payor was operating a vegetarian restaurant in Trois-Pistoles that could accommodate up to 50 people in two rooms; (admitted)
(e) The Payor operated the business from May 1 to September 1 each year; (admitted)
(f) The restaurant's business hours were 8 a.m. to 10 p.m., seven days per week; (subject to amplification)
(g) The Appellant had been manager-server since 1995; (subject to amplification)
(h) According to the Appellant, his duties involved keeping the Payor's accounts books, preparing cheques and making deposits, placing orders, preparing the employee schedules and taking care of repairs and maintenance for the Payor's premises; (subject to amplification)
(i) The Appellant allegedly received remuneration of $10/hour in addition to his tips; (subject to amplification)
(j) On October 7, 2002, in a sworn statement to Human Resources Development Canada, the Appellant stated that "I did not receive all my paycheques in 2000 because the working capital of the business did not permit it"; (denied)
(k) In 2000, the Payor owed an amount of $1,489.17 to the Appellant, which was allegedly unpaid remuneration that still had not been paid as of November 2002; (denied)
(l) In 2001, the Payor issued three alleged paycheques to the Appellant although he was not working; (denied)
(m) The Appellant did not always cash his paycheques as they were issued by the Payor; (denied)
(n) The Appellant was not always paid for his services; (denied)
(o) The Appellant provided services to the Payor outside of the periods at issue, without being entered in the Payor's payroll; (denied)
(p) By doing this, he received full employment insurance benefits to which he would not normally have been entitled; (denied)
(q) On October 7, 2002, in a sworn statement to Human Resources Development Canada, the Appellant stated: "As manager, I am autonomous, but we made decisions together."; (denied)
(r) The Payor did not supervise the Appellant's work; (denied)
(s) The Appellant and the Payor made business decisions together; (denied)
(t) The Appellant was the sole owner of the building that housed the restaurant and four apartments; (admitted)
(u) The Appellant did not charge the Payor rent for the eight months between September and April, when the restaurant was not actively in operation; (denied)
(v) In 2001, the Payor did not pay rent to the Appellant; (denied)
(w) In 2001, the Appellant personally paid for the expansion of the Payor's kitchen; (denied)
(x) The Appellant used his personal line of credit to finance the Payor; (denied)
(y) The Appellant oversaw the administration of the restaurant and he personally ensured that the necessary funds were available for business operations; (denied)
(z) The Appellant had a risk of financial loss in the Payor's business; (denied)
(aa) The Appellant operated the business jointly with the Payor. (denied)
[8] The Appellant asked this Court to reverse the decision of the Minister to the effect that his employment with the Payor was not insurable since he and the Payor did not have an arm's-length relationship, but also because there was no contract of service.
[9] It is therefore appropriate to examine the main points of the oral and documentary evidence provided at the hearing to first determine how the Respondent arrived at the decision with respect to the arm's-length relationship.
[10] The relevant text of the Act, which will be used as a guide by the Minister and the Court to determine insurability, is reproduced below:
5.(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.
[11] It is therefore appropriate to review the circumstances around the Appellant's employment in light of the tests outlined in paragraph 5(3)(b) of the Act, in other words, the remuneration paid, the terms and conditions of employment, as well as the duration, nature and importance of the work performed.
Remuneration paid
[12] From 1998 to 2001, the Appellant was paid $10/hr in addition to tips. In 2000, after May 28, he cashed his paycheques a month or more after they were issued. From August 13, 2000 to September 10, 2000, five paycheques totalling $1,506.20 net were not put through the Payor's bank account and the Appellant confirmed that the Payor still owed him the sum of $1,489.17.
[13] In 2001, the Appellant worked from May 1 to 10. During this period, two paycheques were issued for each of the weeks, one for renovation work and the other for work as a server in the evenings. According to the payroll log, the Appellant added tips to his salary for the daytime work, when he was making repairs to the restaurant, and for his evening work. Moreover, during the second week of May 2001, the Appellant went to Ottawa and was therefore out of the area for two to three days. However, in the payroll log, the Appellant added tips to both his day and evening salary.
[14] After his workplace accident on May 11, 2001, three paycheques were issued to the Appellant, and according to the payroll log, $100 in tips was added to his weekly pay of $400, although he was not working. These three cheques, issued in May 2001, were cashed by the Appellant beginning on July 23, 2001, even though his benefits from the Commission de la santé et de la sécurité du travail (CSST), totalling $1,965.59, were deposited into the Payor's bank account on July 25, 2001. This amount also included other amounts that the restaurant had advanced to him but that he had not entered into the Payor's payroll log.
[15] In 2002, the Appellant's paycheques were cashed and deposited regularly into credit line #18956. The couple used them to pay the mortgage on their residence, which they had acquired in July 2002. However, the paycheque of $256.88 for the period of August 11, 2002, had not yet been cashed as of October 9, 2002.
[16] In addition, vacation pay adjustment, as required by the Commission des normes du travail in 2002, was paid to employees at the beginning of May 2002. The cheque of $460.09 was issued on May 17, 2002, but the Appellant did not cash it until November 12, 2002.
[17] These circumstances led the Minister to say that:
1. An arm's-length worker would cash cheques as they were issued by the employer;
2. An arm's-length worker would not agree to go without being paid for five weeks without informing the Commission des normes du travail; and
3. An arm's-length employer would not pay client tips to employees for work involving renovation of the work premises, nor for travel time.
Terms and conditions of employment
[18] From 1995 to 1999, the Appellant worked as manager-server and cook's helper, while since 2000, he has worked only as a manager-server.
[19] As a manager, the Appellant was responsible for keeping the restaurant's books: the general ledger (the income and expenses record has been computerized since 2001); the payroll log (for the three kitchen employees and three servers including himself); monthly government remittances of payroll source deductions, GST and QST; he prepared the cheques to pay the bills, made the restaurant deposits, placed orders and was responsible for salaries of the other two servers. He was also responsible for administering and reconciling the restaurant bank account #17400 and various lines of credit, which he held jointly with his spouse, Claudette Lévesque.
[20] These lines of credit were used to finance the restaurant start-up each year, and to make up for the restaurant's lack of liquidity. These are credit line #18956, used from 1998 to 2002, and #370704 from Orsainville, used in 2002 to advance the funds required to begin restaurant operations.
[21] From the time the restaurant opened, the two spouses always operated this way, using their joint personal lines of credit to advance funds to the restaurant. The Appellant took the various steps to advance the funds from their personal lines of credit to the restaurant bank account and when the restaurant had sufficient liquidity, he reimbursed the various lines of credit.
[22] In 2002, and to date, the line of credit #370704 had not been fully paid by the restaurant, and to date, since the Commission des normes du travail required the Payor to rectify employee holiday pay other words, 6% instead of 4%. The Payor therefore owes $2,500 to this line of credit, according to the bankbooks.
[23] As a server, from 1998 to 2000, the Appellant's schedule was 4 p.m. to midnight, five nights per week, totalling the 40 hours reported in the payroll log. In 2002 his schedule was 8 p.m. to midnight, four nights per week, totalling 16 hours in the payroll log, and his last three weeks were from 5 p.m. to midnight and two hours at lunchtime, totalling the 30 hours in the payroll log.
[24] The restaurant closed its doors at 11 p.m. and the Appellant did the cleaning after closing, balanced the cash and prepared the deposits. He did the restaurant accounting and managed the various bank accounts at his home. These duties required a minimum of five hours per week and were not reflected in the payroll log. The Appellant justified this by accumulating hours. If, for example, the accounting work required more time, he could accumulate 10 hours and take it back in time not worked at the restaurant.
[25] In 2001, the Appellant experienced a workplace accident on May 11 and did not return to work after this accident. Claudette Lévesque took care of all the restaurant accounting and managed the various accounts and lines of credit, duties which had been taught to her by the Appellant in 2001. Since the Payor's accounting had been computerized since 2001, the computer had been set up either before the Appellant's employment began, or after the Appellant's workplace accident, involving work hours for the Appellant that were not reported in the Payor's payroll log. From May 1 to 10, 2001, the Appellant performed repairs at the restaurant, such as stripping the floors and refinishing the fridge interiors and grills, painting, etc. He did this work during the day and at night he fulfilled his responsibilities as a server. In addition, during the second week of May 2001, he went to his sister's in Ottawa, a two- to three-day trip, since she had things to give him for the restaurant. He calculated his travel time, there and back, as well as his time in Ottawa, as time worked.
[26] However, during these two weeks, the Appellant paid himself two salaries at the restaurant, one for the repair work in the restaurant during the day (totalling 40 hours of work) and at night as a server, totalling 40 hours of work. Yet he was away in Ottawa for two to three days. He therefore could not have worked as a server at night.
[27] It is important to note that since 1996, the Appellant had been the owner of the building in which the restaurant is located. The restaurant occupies the first floor and storage space in the basement. There are two apartments on the second floor and two more occupy a portion of the basement. Tenants in these units pay monthly rent, year round, according to the size of the unit. Since 1996, the Appellant had not collected any monthly rent from the Payor, except for the months during which the restaurant was operating, which were May, June, July and August.
[28] Given these observations:
1. Would an arm's-length worker have used his personal line of credit to finance the start-up of his employer's operations, and would he have been paid, at all times, in accordance with his time and effort;
2. Would an arm's-length owner have collected monthly rent year round for the area in his building occupied by the restaurant year round?
Duration of employment
[29] The Appellant revealed that he did not work before the restaurant opened, nor after it closed. From 1998 to 2001, expansion work was done on the restaurant before its annual opening. Although the Appellant affirmed that he only helped by ordering the materials, this time was not entered into the payroll log.
[30] In addition, the entries in the general ledger for 2000, and transactions in the restaurant bank account and the couple's lines of credit show activity in March and April, before the restaurant opened in May, as well as in September and October, after the restaurant closed, implying unpaid services rendered by the Appellant.
Nature and importance of the work
[31] The Appellant affirmed that, as the restaurant manager, he was not supervised by Claudette Lévesque, and this fact was confirmed by the remainder of the evidence. The Appellant affirmed that he was autonomous, but that he and his spouse made decisions together. Claudette Lévesque, the restaurant owner, did not know why she did not have a line of credit exclusively for the restaurant. In addition, she could not explain why she had not made her spouse an official associate in the business, given his personal and financial involvement.
[32] This leads to the conclusion that:
1. An arm's-length worker would not have had all the latitude of the Appellant to manage the bank account used by the restaurant; and
2. When the Appellant's personal and financial involvement in the business is considered, we conclude that it was a business operated in partnership rather than by an employer and her employee.
[33] The circumstances around the Appellant's employment, analyzed in light of these various tests, lead to the inevitable conclusion that a substantially similar contract of employment would not have been entered into by him and his employer if they had been at arm's length. The Minister also analyzed the circumstances of the Appellant's employment under paragraph 5(1)(a) of the Act. In his analysis, he examined the Appellant's employment under the tests established in Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553, in order to determine whether there was a contract of service between the Appellant and the Payor. The tests are as follows:
1. The degree of control exercised by the Payor over the worker's work;
2. Ownership of tools;
3. Chance of profit and risk of loss; and
4. Integration of the employee's work into the Payor's business.
Control
[34] The Appellant oversees the administration of the restaurant, ensures the availability of the funds required for its operation and participates in the decision-making. So, by virtue of this fact, for all practical purposes, the Payor cannot dismiss him without risking the business' very survival.
[35] It had been established that the accounting duties related to the management of the various bank accounts used for the restaurant were carried out by the Appellant at his residence and were not reflected in the Payor's payroll log. He thus accumulated time that he took back in time not worked at the restaurant. In fact, the Appellant's time and effort were not controlled by the Payor. The relationship of subordination is obstructed and the Payor's power of control is non-existent.
Ownership of tools
[36] The tools and equipment used by the Appellant for his work were provided by the Payor. However, it should be noted that the Appellant provided the place of business, the building where the Payor's business was located, and agreed that no rent would be paid by the Payor during the eight months in which the restaurant was closed.
Chance of profit and risk of loss
[37] In 1996, the Appellant bought the apartment building, which already housed the restaurant, for $100,000. He is the building's sole owner. To make this purchase, the Appellant borrowed $25,000 from his brother and he personally contracted a commercial mortgage loan of $75,000, which he is repaying in monthly payments of $776.59.
[38] For 14 years, Gilles Deschênes and Claudette Lévesque have owned another rental building located in Orsainville. Upon the sale of this building in July 2002, an amount of $18,353 was paid back to the Appellant's brother with the amounts that had been deposited, at the time of the sale, into the couple's joint account #18956. In the building located at 332 Jean Rioux Street, in Trois-Pistoles, the restaurant occupies the first floor and storage space in the basement. There are four apartments on the second floor and in a part of the basement. Tenants of the four apartments pay a monthly rent, year round, according to the size of the apartment, totalling monthly income of $1,200, or $14,400 annually. Since 1996, Gilles Deschênes has collected monthly rent from the restaurant only during the months of operation, from May to August.
[39] In 1998 and 1999, the Appellant asked the restaurant for $400 rent for each of its four months of operation, in 2000, $575 per month, in 2001, $775 (this amount was not found in the restaurant's bank account) per month in operation; and in 2002, $805 per month of operation. The restaurant rent increased in 2001 since the restaurant kitchen had been expanded at a cost of $4,000 and the Appellant, as building owner, paid for the renovations.
[40] According to the Appellant, even though rent was collected from the restaurant for only four months, this was equivalent to an annual rent because he could not rent the space occupied by the restaurant to another business. Thus, in 2000, if the rent collected from the restaurant totalled $2,200, this equalled a monthly rent of $185. If the rent required from the restaurant is compared to the rent collected from other tenants, it can only be concluded that the Appellant experienced a rental loss of at least $4,000 per year, in addition to the expenses which he covered during the year, as a result of the restaurant occupying the first floor.
[41] Thus, as owner of the building housing Café L'Essentiel enr., Gilles Deschênes assumed the municipal tax expenditures, the cost of maintenance and repairs, hot water for the entire building including the restaurant, heating for the two basement apartments (which helped heat the restaurant when it was not in operation), and electricity for the first floor when the restaurant was not in operation.
[42] In addition to the risk of loss as an owner, and as a result of the unpaid salary from 2000 (totalling $1,506.20), the use of the couple's joint lines of credit to finance the restaurant start-up demonstrated another significant risk of loss to the Appellant.
[43] Thus, from February 29, 2000 to June 9, 2002, an amount of $2,777.55 was transferred from the couple's line of credit #18956 into the restaurant bank account #17400 and the advances to the restaurant were repaid between May 8, 2000 and August 28, 2000, totalling $2,900.
[44] From March 12, 2001 to April 23, 2001, an amount of $1,350 was transferred from the couple's credit line #18956 to the restaurant bank account #17400 and the advances to the restaurant were repaid between June 26, 2001 and August 13, 2001, totalling $1,900, or $550 more than the amounts advanced by the line of credit.
[45] From April 22, 2002 to May 9, 2002, an amount of $4,000 was transferred from the couple's line of credit #370704 into the restaurant bank account #17400 and the advances to the restaurant were repaid between July 15, 2002 and August 26, 2002, totalling $1,500, or $2,500 less than the amounts advanced by the credit line. This amount has yet to be repaid by the Payor.
[46] It is therefore established that the Appellant accepted a portion of the risk related to the operation of Café L'Essentiel enr.
Integration
[47] Analysis of all the circumstances of the Appellant's employment and his relationship with the Payor lead to the conclusion that the business is a partnership rather than a situation in which an employer plays a role vis à visthe employee, in other words, an employer-employee relationship in which the employee's work is integrated into the Payor's business, which is not the case in this situation.
[48] After analysis, the Minister concluded that the parties, in other words, the Payor and the Appellant, were not bound by a contract of service, and that the worker's employment was not insurable. In the opinion of this Court, the Minister was correct in doing so.
[49] After analysis of the Appellant's employment in accordance with paragraphs 5(1)(a) and 5(3)(b) of the Act, this Court is of the opinion that the Minister's decision was lawful and in accordance with the principles outlined in the rulings of the Federal Court of Appeal, in other words, Canada (Attorney General) v. Jencan Ltd. (C.A.), [1998] 1 F.C. 187, and Légaré v. Canada (Minister of National Revenue - M.N.R.), [1999] F.C.J. No. 878.
[50] This Court concludes that the Appellant's employment was not insurable during the periods at issue, since there was not an arm's-length relationship between the Appellant and the Payor, in compliance with the provisions of paragraph 5(2)(i) of the Act and sections 251 and 252 of the Income Tax Act. In addition, this Court concludes that the Appellant's employment during the periods at issue was not insurable, since, during these periods, his employment did not meet the requirements of a genuine contract of service.
[51] As a result, the appeal is dismissed and the Minister's decision is upheld.
Signed at Grand-Barachois, New Brunswick, this 13th day of April 2004.
Savoie D.J.
Translation certified true
on this 27th day of August 2004.
Shulamit Day, Translator
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