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Citation: 2004TCC108
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Date: 20040218
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Docket: 2002-2759(EI)
2002-2760(EI)
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BETWEEN:
SIMON DUBÉ,
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PATRICK DUBÉ,
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Appellants,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent.
[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Angers J.
[1] These are two appeals, heard on
common evidence, from decisions rendered by the Minister of
National Revenue ("the Minister") on
June 26, 2002. In the matter of Simon Dubé,
the Minister decided, after examining the terms and conditions of
the employment with Excavation Dubé 2002 Inc. (the payor),
that the employment during the period of May 14 to
September 14, 2001, was not insurable, because a
substantially similar contract of employment would not have been
entered into if Simon Dubé and the payor had been
dealing with each other at arm's length within the meaning of
paragraph 5(2)(i) and subsection 5(3) of the
Employment Insurance Act.
[2] In the matter of
Patrick Dubé, the Minister informed
Mr. Dubé that he did not hold insurable employment
with the payor during the period of July 16 to
October 12, 2001, because he controlled,
de facto, more than 40% of the payor's voting
shares.
[3] In rendering his decision with
regard to Simon Dubé, the Minister relied on the
following factual presumptions, which were admitted or denied as
indicated below:
[TRANSLATION]
(a) the payor was
incorporated on November 3, 2000, under the corporate
name 9097-3313 Québec Inc.; [admitted]
(b) on May 12, 2001,
the payor obtained from the Inspecteur général des
institutions financières a change of name from
9097-3314 Québec Inc. to Excavation Dubé 2000
Inc.; [admitted]
(c) the payor's
activities consisted of excavation and forest management work;
[admitted]
(d) the payor owned
a backhoe worth $185,000, a bulldozer worth $30,000, a trailer
and tools worth $20,000 and a truck; [admitted]
(e) according to the
share register, the payor's shareholders were purportedly
Steeve
Dubé
100 voting shares
Jacqueline
Dubé
100 voting shares
Patrick
Dubé
100 voting shares [denied]
(f) the
appellant is Jacqueline Dubé's husband and is the
father of Steeve and Patrick Dubé; [admitted]
(g) the appellant,
together with his son Steeve, managed the payor; [denied]
(h) the appellant
went personally bankrupt on May 16, 2001, and could not
be a director; [denied]
(i) the
appellant's tasks consisted of seeking contracts for the
payor, maintaining the machinery and managing the work sites;
[denied]
(j) On
September 17, 2001, the payor issued a record of employment (ROE)
to the appellant for the period commencing
May 14, 2001, and ending September 14, 2001, and
the ROE recorded 623 insurable hours and $9,178 in total
insurable earnings; [admitted]
(k) the ROE is not a
true account of what actually happened during this period;
[denied]
(l) both
before and after the period in issue, the appellant rendered
services for the payor without declared remuneration; [denied]
and
(m) the period during
which the appellant purports to have worked is not the period
during which the appellant actually worked. [denied]
[4] The factual presumptions on which
the Minister based his decision in the matter of
Patrick Dubé are reproduced below, with the exception
of paragraphs (a) through (e), which are identical to those
in the matter of Simon Dubé. The presumptions
were admitted or denied, as indicated:
[TRANSLATION]
(f) Jacqueline
Dubé is the mother of the appellant and
Steeve Dubé; [admitted]
(g) the appellant
and Steeve Dubé each lent $4,000 to the payor after
obtaining a government subsidy; [denied]
(h) the appellant
and Steeve Dubé had non-voting preferred shares
worth $7,500 each; [admitted]
(i) the
appellant and Steeve Dubé gave personal sureties for
various loans of the payor; [admitted]
(j) on
December 10, 2001, Jacqueline Dubé declared to a
representative of the respondent that she paid nothing for her
shares and invested nothing in the payor; [denied]
(k) Jacqueline
Dubé did not participate in the payor's
decision-making; [denied]
(l) the
distribution of the payor's shares is a sham; [denied]
and
(m) the appellant and
Patrick Dubé were the payor's only true shareholders.
[denied]
[5] The appellant
Simon Dubé is 50 years of age. Before going to
work for the payor, he owned and operated a specialized
excavation business. His company ceased operations in 1996 after
losing the right to erect high-voltage towers.
Simon Dubé declared personal bankruptcy in
May 2001. After trying to sell the corporation's
equipment, including a crawler tractor, the Caisse Populaire,
which had provided the financing, took possession of it.
[6] In the fall of 2000,
Simon Dubé was working as an employee for third
parties when his two sons, Steeve and
Patrick Dubé, spoke with him about incorporating an
excavation company. They invited Simon Dubé to join
them, but he was not interested in participating in or managing
such a business. The two sons preferred to work in this
field than in a factory. In November 2000, they incorporated
the payor company for the purpose of carrying out excavation work
and forest management.
[7] The payor's share capital was
divided into three equal parts between
Simon Dubé's two sons Steeve and Patrick and
his wife Jacqueline. However, Jacqueline paid no money for her
part of the share capital. She provided bookkeeping services and
did unpaid office work in exchange for her shares.
[8] Thus, the payor company took on a
financial structure that would enable it to carry out its
activities. Shareholders Steeve and Patrick Dubé were
granted $4,000 each because they were less than 35 years of
age. They invested the money in the business. They were also
eligible for the Youth Strategy program offered by the CFDC in
their area. In addition, the payor company obtained financing of
a more conventional nature. Here is a brief description of that
financing:
- A $2,000 loan, obtained from
Caisse Populaire Desjardins de la Pocatière on
November 16, 2000, which the payor applied toward the
rental of a pick-up truck. Steeve and
Patrick Dubé signed the contract as representatives
of the payor and the three shareholders guaranteed the loan.
The resolution authorizing the loan is signed by
Steeve Dubé.
- An $11,500 loan obtained from
the Caisse Populaire Desjardins de la Pocatière on
February 9, 2001, to purchase a crawler tractor. Steeve
and Patrick Dubé signed the contract as
representatives of the payor and the three shareholders
guaranteed up to $2,875 of the loan. The resolution authorizing
the loan is signed by Jacqueline Dubé.
- A $26,500 loan obtained from
Caisse Populaire Desjardins de Rivière Ouelle on
March 23, 2001, for the purchase of a crawler tractor
and a hydraulic thumb for a power shovel. Steeve and
Patrick Dubé signed the contract and guaranteed the
loan as representatives of the payor. Jacqueline Dubé
signed the resolution authorizing the loan and she was not needed
as a guarantor.
- A $5,000 line of credit and a
$11,000 term loan from Caisse Populaire Desjardins de la
Pocatière dated February 9, 2001. The purpose of
the term loan was to give the payor working capital. Steeve,
Patrick and Jacqueline Dubé guaranteed repayment of
up to $2,500 of the margin loan. Appellant Simon Dubé
gave $2,500 of his savings as security. Michel Chamard
guaranteed the term loan contract to a maximum of $7,000, and
Steeve, Patrick, Jacqueline and Simon Dubé guaranteed
the full amount. Jacqueline Dubé signed the
resolutions authorizing the two loans.
- Another $5,000 line of credit
obtained from Caisse Populaire Desjardins de
Rivière Ouelle on March 23, 2001. The
variable credit contract is signed and guaranteed by Steeve and
Patrick Dubé. The movable hypothec contract is signed
by Steeve and Patrick Dubé.
[9] A shareholders' agreement was
signed on April 26, 2001. Despite the terms of the
agreement, the shareholders did not determine the value of the
shares.
[10] Steeve Dubé is the payor's
president. He operates the machinery and seeks contracts. He uses
the Internet to consult various calls for tender and verifies the
contracts with a view to offering services as a subcontractor.
The payor commenced operations on July 15, 2001.
[11] Appellant Simon Dubé was
hired on May 14, 2001. His work consisted of fixing and preparing
the machinery. His experience was a significant advantage for the
payor. With the assistance of his son Steeve, he put the crawler
tractor, which the company bought from the Caisse Populaire and
which had belonged to Simon Dubé, in working
condition. They replaced the tractor track. The other appellant,
Patrick Dubé, had a job elsewhere and only began
working for the payor on July 16, 2001.
[12] Simon Dubé worked 25 hours
a week for the payor at a rate of $15.00 per hour. The
payor's operations under its first contract began on
July 15, 2001. The contract required the payor to
groom ski trails at
Petite-Rivière-St-François.
Simon, Patrick and Steeve Dubé worked for the payor
in connection with this contract. In view of his experience,
Simon Dubé was responsible for allocating the tasks
at the beginning of the work day based on an agreement between
the payor and the
Petite-Rivière-St-François
representative.
[13] The contract ended on October 12,
2001, but Simon Dubé stopped working on
September 14, 2001, because there was not enough work for
the machine that he drove. The payor company then obtained other
contracts in the Baie-Comeau area from December 2001
to late April 2002, and employed three workers.
[14] Steeve Dubé was the one who
sought out contracts. He consulted his brother Patrick as well as
his parents. Steeve Dubé consults
Simon Dubé in order to draw on his experience,
especially his knowledge of the companies with which the payor
does business, and, in particular, the solvency of those
companies and the prices to offer them in association with a bid.
Steeve Dubé devotes roughly 20 hours a week to
the seeking of contracts online. Simon Dubé was
involved very little in this prospecting work.
[15] Jacqueline Dubé testified that
Steeve and Patrick incorporated the company. She was interested
in being involved, and offered her services in exchange for
one-third of the share capital. In addition to doing the
payor's office work, she held a
25-hour-per-week job as a cook for the Sisters
of Charity. Just like Steeve, Ms. Dubé denies that
the payor took on the $15,000 line of credit from
Simon Dubé's old company. When questioned in 2001
on the subject, she stated that she knew nothing about it and
added that Simon Dubé had worked from May to
July 2001 because his son Steeve needed his services.
[16] The payor's financial statements
show losses in the first two years of operations, including
a $60,000 loss in the first ten months. However, the
payor's revenues increased considerably in the second and
third years of operations.
[17] Appellant Simon Dubé
acknowledged during his testimony that the payor paid debts owed
to certain creditors of his former company. These payments were
made to gain the trust of suppliers common to the former company
and the payor.
[18] Alain Landry, an employment insurance
rulings officer, testified that he had a telephone conversation
with Jacqueline Dubé in which she told him that the
payor had taken responsibility (in her words) for a $15,000 loan
taken out by her husband's former company because that
company was having financial trouble. Report CPT110, tendered in
evidence, sets out the results of the investigation conducted by
appeals officer Denis Hamel and the facts that formed the
basis of the Minister's recommendations in both cases at
bar.
[19] In the matter of
Simon Dubé, the burden was on him to establish, on a
balance of probabilities, that the Minister exercised his
discretion inappropriately in deciding, having regard to all the
circumstances, that the payor and the appellant would not have
entered into a substantially similar contract if they had been
dealing with each other at arm's length. According to the
Federal Court of Appeal in Canada (Attorney General) v.
Jencan Ltd. [1997] F.C.J. No. 876,
[1998] 1 F.C. 187, the appellant must show either
that the Minister acted in bad faith or for an improper purpose
of motive, or failed to take account of all the relevant
circumstances, as expressly required by
paragraph 5(3)(b) of the Act, or that he took an
irrelevant factor into account.
[20] The Minister's role, and the role
that the Court must exercise, were reviewed by the Federal Court
of Appeal in Légaré v.
Canada(Minister of National Revenue), [1999]
F.C.A. No. 878 (QL). Marceau J.A. summarized both
roles in the following words at paragraph 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.
[21] In fact, the Federal Court of Appeal
reiterated its position in Pérusse v.
Canada(Minister of National Revenue), [2000]
F.C.A. No. 310 (QL). Marceau J.A., referring to
the passage from Légaré cited above, added
the following at paragraph 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.
[22] In the instant matter, I believe it is
important to reproduce the factual analysis that enabled the
Minister to exercise his discretion and to conclude, after
examining the terms and conditions of employment, that the terms
and conditions of the appellant Simon Dubé's
employment would have been different at arm's length.
[23] Report CPT110, signed by appeals
officer Denis Hamel, reads as follows:
[TRANSLATION]
Analysis of the non-arm's length dealings
involving Simon Dubé's employment
Terms and conditions of employment
He helps seek out and negotiate contracts, mostly in
conjunction with his son Steeve, based on the facts in the file.
His work on seeking out contracts is unpaid.
His period of employment, which involved machine repair and
maintenance, began in mid-May 2001. None of the
shareholders were salaried employees until
mid-July 2001 when there was a contract to perform at
Petite-Rivière-St-François.
Thus, Simon Dubé was the corporation's only
employee for two months when he maintained the machinery.
The insurance rulings officer had doubts about whether a
two-month period of employment could be associated with
this task and we share his view.
We do not doubt that he did such maintenance work, but it is
curious that it lasted two months. His son Steeve helped him
during this period, but was not paid for this repair and
maintenance work.
In the past, Simon Dubé operated a company that
worked in the same field. Following a personal bankruptcy, he
could not be a shareholder in the current corporation.
He directed much of the work from mid-July to
mid-October 2001 when the contract was being performed
at Petite-Rivière-St-François,
and his two sons Steeve and Patrick worked there as
well.
Curiously, his employment ended on September 14, 2001,
roughly one month before his two sons' employment
ended.
The current company reimbursed certain debts of
Simon Dubé's former corporation. While
Simon Dubé is not the directing mind of Excavation
Dubé 2000 Inc. in the strict sense, he has expertise in
the company's field of endeavour and directs the work on
contracts.
Thus, it is difficult to invoke the concept of control in
relation to his work and to claim that his two sons dictate
how he must carry out his tasks.
Duration of employment
The duration of Simon Dubé's employment bears
little relation to the company's operations. First of all, he
is the only one to be paid for maintaining machinery during
two months prior to the period of employment of his sons
Steeve and Patrick.
Later, when the contract was being performed at
Petite-Rivière-St-François, he
finished his employment one month before his sons even
though he was responsible in large measure for ensuring that the
work is carried out properly.
Remuneration paid
Simon Dubé's rate of pay was $15
per hour. However, he provided contract prospecting
services, unrelated to the performance of contracts, free of
charge.
He was the only employee who has been paid for maintaining
machinery during almost two months.
The accounting journals show low maintenance and repair costs
during the period when he worked on maintaining machinery.
Moreover, the company posted a loss of nearly $60,000 for the
period ending August 31, 2001. One wonders whether an
arm's-length stranger would have been paid a salary for
maintaining machinery while the company was generating no
revenue.
Nature and importance of work
Simon Dubé's work was indispensable to the
proper functioning of the corporation. However, his pay periods
were not representative of his work outputs.
[24] The evidence discloses that
Simon Dubé was employed by other companies prior to
the period of employment in issue. His former company had been
experiencing problems since 1996, and, in my opinion, he was
sincere when he said that he was not interested in managing a
company and even less interested in embarking on a new business.
His role in prospecting for contracts was minimal. As his son
testified, he was more of a resource person. In fact, during the
period in issue, the payor lost a contract and was only able to
obtain the one at
Petite-Rivière-St-François. There
is no evidence that Simon Dubé negotiated contracts
for the payor.
[25] Under the heading "terms and
conditions of employment", the appeals officer does not
question the assertion that Simon Dubé did machinery
repair and maintenance work. Rather, he questions whether
two months were devoted to the work. However, he does not
explain the basis for his doubt. The payor purchased used
equipment, and, in order for the business to start up properly,
it was important that it be in good working condition. The
evidence did not disclose the magnitude of the maintenance and
repair work, but Simon Dubé worked only 25 hours
per week on it.
[26] In carrying out his duties at
Petite-Rivière-St-François,
Simon Dubé did not direct most of the work from
mid-July to mid-October. The evidence showed that, by
reason of his experience, and with the approval of the
Petite-Rivière-St-François
representative, he was responsible for allocating the work in the
morning. The evidence shows that he stopped providing this
service when his employment ended on September 14, one week
before the work ended. It is therefore incorrect to say that
he directed the work for the entire duration of the contract. As
a matter of fact, he stopped working because the equipment he
drove was no longer needed.
[27] The payor did pay certain debts of
Simon Dubé's former company. In my opinion, this
was done to restore the family's reputation and to gain the
trust of suppliers because the payor had to do business with
those suppliers as well. This was a business issue related
to the payor's reputation, not to the terms of
Simon Dubé's employment. In my opinion, the payor
would probably have done the same thing if Simon Dubé
had not been hired.
[28] I find that the duration of
Simon Dubé's employment is consistent with the
contracts that the payor had. The readying of the equipment, and
the first contract, coincided with his period of employment. His
hourly rate of pay was similar to that of the payor's
management. At the time that Simon Dubé performed the
maintenance services, the payor had obtained the necessary
financing and was able to pay someone to prepare equipment that
was indispensable to the performance of the contracts that it was
seeking to obtain during this period. In my opinion, even if the
payor ran a $60,000 deficit in its first ten months of
operations, the expenses paid to repair and ready the equipment
were necessary for the business to function properly, and the
payor would undoubtedly have called on someone of
Simon Dubé's experience to get such work done.
The payor's first fiscal year ended on August 31, 2001.
During this period, its only source of income was a contract with
Petite-Rivière-St-François, which
began on July 15, 2001. The deficit that the payor
ran during the first fiscal year is not a factor to consider, and
neither is the fact that the payor generated no income. As I have
stated, the payor had the necessary financing and the equipment
needed to be readied.
[29] After analysing all the facts in
Simon Dubé's file, I find that the Minister did
not correctly assess the facts in this matter, and that his
conclusion does not seem reasonable. I am therefore permitted to
intervene. I do not intend to repeat my analysis of the evidence.
Thus, and for the reasons set out above, I find that the terms of
the employment, its duration, the remuneration paid and the
nature and importance of the work would have been similar even if
the parties had been dealing with each other at arm's length.
Simon Dubé's limited participation in the
management of the payor, and the few pieces of advice that he
dispensed, do not alter the terms and conditions of his
employment. Consequently, Simon Dubé's appeal is
allowed.
[30] The issue in the matter of appellant
Patrick Dubé is a different one: whether the
appellant had de facto control of more than 40% of
the payor's voting shares.
[31] Simon Dubé testified that
his two sons had decided to start up a business rather than
working at a factory. In his view, they are the ones who
incorporated the payor company. His wife confirmed this. The
facts also show that the two sons made efforts to obtain the
financing needed to start up the business and that they were
eligible for grants under the Youth Strategy program, which was
offered by the CFDC in their area.
[32] As for Jacqueline Dubé, her
participation in the payor company consisted of contributing time
in exchange for a third of the payor's share capital.
However, the evidence did not disclose any mechanism to determine
the value of her contribution. How many hours of free services
did she need to provide to the payor in exchange for those
shares? Why did she not have any preferred shares on the same
basis that her two sons held them?
[33] Ms. Dubé's participation in
the company's decision-making was minimal. Her
explanations did not convince me that she participated in the
company on the same basis as her two sons or that she had
enough influence to change anything at all. With regard to
the guarantees required by the two credit unions, the Court
was told that one of these credit unions required the signature
of three shareholders as guarantors and did not require the
signature of the other shareholder. Would equal participation not
require equal commitment and equal responsibility?
[34] The evidence as a whole favours the
respondent's position in the instant case. The distribution
of the share capital is sham and the two sons, including the
appellant Patrick Dubé, are the true shareholders of
the payor company and are in de facto control of its
affairs. The same is true of the shareholders' agreement.
The sons decided to start the business and are its directing
minds. I therefore find that the appellant has de facto
control of more than 40% of the voting shares of the payor
company and, for the above reasons, that his employment is not
insurable under paragraph 5(2)(b) of the Act.
[35] The appeal of Patrick Dubé is
therefore dismissed.
Signed at Ottawa, Canada, this 18th day of February 2004.
Angers J.
Translation certified true
on this 10th day of February 2005
Jacques Deschênes, Translator
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