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Citation: 2004TCC291
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Date: 20040423
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Docket: 2003-3946(EI)
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BETWEEN:
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PAULA THOMPSON LASH,
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Appellant,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent,
and
BEACON MARINE SECURITY LIMITED,
Intervener.
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REASONS FOR JUDGMENT
Weisman, D.J.
[1] The Appellant, Paula Thompson
Lash, is talented in the field of marketing and communications.
She acted as Director of Marketing and Communications for Bell
Expressvu, earning a salary of $100,000 per annum. She resigned
that position for a similar one at the Art Vault Limited, an
online retailer of fine art, at a salary of $120,000 per annum,
plus stock options.
[2] Her husband, David Lash, is also
talented. His expertise lies in the field of marine electronics.
He invented a wireless device designed to monitor ships at sea.
To develop and market this product, Beacon Wireless Solutions
Inc. ("Beacon") was incorporated. Beacon wholly owns
and controls the Intervener company (the "payer"). All
the issued and outstanding shares of Beacon are held by the Lash
family.
[3] In October of 2000, the Appellant
was invited to join this new enterprise as Vice-President of
Marketing and Communications. It was thought that her expertise
was absolutely crucial to the proper development of the business.
She was enthusiastic about this new opportunity to play an
integral part in the development of an exciting new high
technology product. She accepted the position at an annual salary
of $75,000 plus 4 % of the equity in Beacon. This level of
remuneration was all the payer could then afford.
[4] Unfortunately, the technology
sector and the company fell upon hard times in the spring of
2001. As a result of cash flow problems, the Appellant received
only $24,519.00 for her services for the first four months of
2001, and nothing thereafter until August of 2002, a period of
some fifteen months. The company received a tax credit in
December of 2002 and paid her a lump sum of $12,000.00. From
January 20 to March 5, 2000 she received $1,500.00
bi-weekly as salary.
[5] In March of 2003, the Appellant
was hospitalized because of an unusually difficult pregnancy
which resulted in a hysterectomy and complete immobilization for
three months. Thereafter she left the payer to stay home and
raise her newborn baby. The company simply carried on as best it
could without her services but has yet to prosper.
[6] The Appellant applied for
disability and maternity benefits, both of which were denied her
because she was not dealing with her employer at arm's length
within the meaning of the Employment Insurance Act (the
"Act").[1]
[7] In this regard the Act
provides as follows:
5(2) Insurable employment does not include
...
(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;
[8] The Income Tax Act[2] provides as
follows:
Section 251. Arm's length.
(1) For the purposes of
this Act,
(a) related
persons shall be deemed not to deal with each other at arm's
length; and
...
(2) Definition
of "related persons". For the purpose of this
Act, "related persons", or persons related to each
other, are
(a) individuals
connected by blood relationship, marriage or adoption;
(b) a
corporation and
...
(ii) a person who is a
member of a related group that controls the corporation, or
...
(c) any two
corporations
(i) if they are
controlled by the same person or group of persons,
...
[9] Since the Appellant was related to
her employer she was deemed not to be dealing with that employer
at arm's length. This presumption is not rebuttable.[3]
[10] In these circumstances she was left to
rely on paragraph 5(3)(b) of the Act which provides
as follows:
(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] The Respondent declined to exercise his
discretion in the Appellant's favour and she now appeals that
determination.
[12] The Act requires me to show some
deference towards the Minister's initial assessment and does
not permit me to simply substitute my 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.[4] The Court must also 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, must decide whether the
conclusion with which the Minister was "satisfied"
still seems objectively reasonable.[5]
[13] The Federal Court of Appeal also
reminds us that excluded employment between related persons is
based on the idea that it is difficult to rely on the statements
of interested parties and that the possibility that jobs may be
invented or established with unreal conditions of employment is
too great between people who can so easily act together.
Paragraph 5(3)(b) of the Act provides an exception
to the penalty in cases in which the fear of abuse is no longer
justified.[6]
[14] In the matter before me there is
clearly no fear of abuse. The Appellant was severely disabled and
her expertise was absolutely crucial to the proper development of
the business.
[15] In Légaré, it was
clearly explained and established that the shareholders had
decided to reduce the salary normally due to them to provide for
the financial support and development of the business. That is
precisely what the Appellant, and indeed the entire Lash family,
did in the matter before me.
[16] Moreover, there is no evidence that the
terms and conditions of the Appellant's employment were in
any way more favourable than would be afforded to those dealing
with the payer at arm's length.[7]
[17] From this standpoint, the adverse
determination of the Minister seems objectively unreasonable. In
the context of the evidence before me, I conclude that the
parties would have entered into a substantially similar contract
of employment if they had been dealing with each other at
arm's length.
[18] In the result, the Appellant having
discharged the burden of proof upon her, the appeal will be
allowed and the determination of the Minister vacated.
Signed at Toronto, Ontario, this 23rd day of April 2004.
Weisman, D.J.
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