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Citation: 2004TCC545
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Date: 20040813
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Docket: 2004-476(EI)
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BETWEEN:
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603709 ALBERTA LIMITED c/o HUMPTY'S
FAMILY RESTAURANT,
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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
Rip, J.
[1] The issue in this appeal by 603709
Alberta Limited, carrying on business as Humpty's Family
Restaurant, is whether during the year 2002,
Christopher Turner ("Christopher"), the son of
Donald and Elena Turner, persons owning 100 per cent of the
voting shares of the corporation and not dealing at arm's
length with the corporation, was engaged in insurable employment
with the corporation within the meaning of paragraph
5(1)(a) of the Employment Insurance Act
("Act"). The parties agree Christopher was an
employee of the corporation.
[2] Christopher's employment is
not insurable employment by virtue of paragraph 5(2)(i) of
the Act since he and the corporation did not deal with
each other at arm's length. However, the respondent, in
exercising his discretion under paragraph 5(3)(b) of the
Act, was satisfied, having regard to all the circumstances
of the employment including remuneration paid, the duration,
nature and importance of the work performed and the terms of the
employment contract that it was reasonable to conclude that
notwithstanding Christopher and the corporation did not deal at
arm's length, the corporation and Christopher would have
entered into a contract of employment substantially similar to
their actual contract of employment in 2002 if they had been
dealing with each other at arm's length. The appellant does
not agree.
[3] The appellant's position is
that Christopher was not considered a regular employee and had
duties that other employees did not have. Christopher was general
manager of a restaurant owned by the corporation. The principal
shareholders of the corporation, Christopher's parents, were
not active in the restaurant in 2002. Donald Turner,
Christopher's father, said he attended at the restaurant in
2002 perhaps a "bit more than one day a month". Donald
Turner testified he works at the restaurant as a
"back-up" when it is "very busy".
[4] Donald Turner declared that
Christopher has full responsibility for the operation of the
restaurant. He "hires and fires" personnel, he orders
and pays for food and other supplies, he maintains the building
in which the restaurant is located, he prepares the menus, etc.
An accountant prepares the payroll but Christopher signs the
payroll cheques. Donald Turner said he was involved in the
business in 2002 only in the "periphery". "We
discuss what he [i.e. Christopher] is doing, ... if he wants to
commit money to ... redecorate the restaurant [for example]
..." then Christopher "needs our O.K.". It is
important for Donald Turner, he declared, that his son
succeed.
[5] The corporation's
year-end is the last day of February. The corporation paid
Christopher a bonus of $25,000 in 2002 and about $38,000 in 2003.
The bonus was determined by the appellant's profits and
Christopher's needs, Donald Turner recalled. If in the
next year the business did well, the bonus would increase. In
addition to this year-end bonus, Christopher, as general
manager, was also entitled to two other monthly bonuses, one
dependent on food sales and the other on labour costs.
Christopher was also paid a monthly salary[1] which, during 2002, the Minister
assumed was $3,700. The corporation also loaned money to
Christopher to purchase a home, according to his mother's
answers to a questionnaire sent to her by the respondent.
[6] The appellant acquired the
restaurant business in 1995. Donald Turner managed the business
during the first two years. Christopher, studying in England at
the time, was fully employed by the corporation in 1998 or 1999.
In 2002, he was 26 years of age.
[7] Donald Turner was replaced as
manager by Paul Cleroux. Mr. Cleroux worked a
forty-hour week as manager. He had the authority to hire
and fire staff, was responsible for restaurant operations
including ordering, purchasing and paying for food, scheduling
staff and formulating records for the accountant. Food was - and
is - paid on a "cash on delivery" basis and Mr. Cleroux
was reimbursed for items for which he paid. Christopher is
reimbursed in the same manner.
[8] Mr. Cleroux was paid a salary of
between $3,000 and $4000 per month and was entitled to monthly
bonuses respecting food sales and labour costs.
Donald Turner was still active in the restaurant when
Mr. Cleroux was manager.
[9] The restaurant is open 24 hours a
day, every day of the year, except for Christmas Day. The
restaurant employs about 40 people at any one time. During the
hours between 11:00 p.m. and 6:00 a.m., there are only three
people working, a cook, a dishwasher and a server; there is no
night manager. During the day there are about eight people
working at any one time, four in the kitchen and four in the
dining room; during peak periods, such as weekends, there is
additional staff. During the day, staff reports to Christopher
or, if he is not available, to an assistant manager who works
five days a week. Christopher is paid bi-weekly for 88
hours of work. However, unlike Mr. Cleroux, Christopher is on
24 hour call in the event of any emergency or other matter
requiring his attention.
[10] Christopher and his sister each own 50
non-voting shares in the corporation. His sister does not
receive any bonus and there is no evidence that she works for the
corporation. The shares were acquired for one dollar each. From
time to time Christopher and his sister have received dividends
from the corporation.
[11] Among the facts assumed by the Minister
in making his decision and agreed to by the appellant's agent
were the following:
5. In so
assessing as the Minister did with respect to the Worker, the
Minister relied on the following assumptions of fact:
...
(c) the two
directors of the Appellant were Donald Turner and Elena
Turner;
...
(f) the Worker
and the Appellant are related to each other as defined in
subsection 251(2) of the Income Tax Act, R.S.C. 1985
(5th Supp.) c.1, as amended (the
"Act");
(g) the Worker's
duties were to manage the restaurant and his duties included
supervising staff, scheduling and hiring and firing staff;
...
(m) the Worker's
remuneration was similar to that of a person who dealt with the
Appellant at arm's length;
(n) the Worker's
remuneration was reasonable;
...
(p) the Worker
worked flexible days and hours;
(q) the Worker's
hours of work were not recorded;
...
(u) there were no
pay periods during 2002 where the Worker did not receive his pay
or when the pay was late;
...
(x) the Worker did
not deposit any part of his wages back to the Appellant's
bank account;
(y) the Worker was
not paid for overtime that he worked;
(z) the Worker's
vacation time was flexible and was usually 2 to 3 weeks per
year;
(aa) the Worker's vacation
time was reasonable;
(bb) in the event of an
emergency the Worker was free to attend to personal errands, but
as a rule work had first priority;
...
(ee) the Worker used his car to
run errands for the Appellant;
(ff) occasionally
the Worker incurred expenses for the Appellant for which he was
not reimbursed;
[12] In Tignish Auto Parts Inc. v.
Minister of National Revenue[2], Ferme Émile Richard
et Fils Inc. v. M.N.R.[3] and Bayside Drive-in Ltd v.
The Queen[4] the Federal Court of Appeal held that the
Tax Court's role when hearing an appeal under the Act
where the Minister has exercised his discretion is to perform a
review function, to examine the facts proven to have been before
the Minister when he reached his conclusion, and in performing
that function the Tax Court judge must defer to the
Minister's discretionary decision unless it was shown on a
balance of probabilities that the Minister had exercised the
discretion in a manner contrary to law. It is not for the Tax
Court judge to weigh the evidence or to speculate as to the
weight placed on the evidence by the Minister during the exercise
of his discretion. Only if the facts relied on by the Minister
are insufficient in law to support his conclusion and therefore
his determination cannot stand, may the Court intervene.
[13] In Légaré v. M.N.R.[5], the
Court of Appeal had occasion to readdress this issue and arrived
at a new test replacing the test described in
Tignish, Ferme Émile Richard and
Bayside Drive-in. In paragraph 4 Marceau J. explained that
in his view:
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 Minster 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 Minster was "satisfied" still
seems reasonable.
[14] The Federal Court of Appeal again
considered the issue in Pérusse v. M.N.R.[6], and at
paragraph 14 Marceau J.A. referred to his comments in
Légaré, supra.
[15] He explained, 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.
[16] In Staltari v. Canada (Attorney
General)[7], Sharlow J.A., speaking for the Court set
aside the decision of this Court and found that as in Valente
v. M.N.R.[8], the Tax Court judge erred in law when he
failed to consider the appellate court's directions in
Légaré and Pérusse, supra.
[17] However, in the case of Quigley
Electric Ltd. v. M.N.R.[9], Linden, Sexton, and Malone J.J.A.
considered an appeal from a decision of this Court which
confirmed the Minister's ruling that the worker was employed
in insurable employment under the deeming provisions of
subsection 5(3) of the Act notwithstanding that she was
related to the appellant. The Court of Appeal considered the
argument an error of law when it was suggested that the trial
judge failed to apply the legal test, a reasonableness test,
outlined in Légaré, and Pérusse,
supra. The panel of the Appeal Court in Quigley
Electric agreed with the panel's approach in
Canada (Attorney General) v. Jencan Ltd.[10], namely,
that the Minister's excercise of discretion under paragraph
5(3)(b) can only be interfered with if she acted in bad faith,
failed to take into account all relevant circumstances or took
into account an irrelevant factor. This appears to be contrary to
the decision in Staltari, supra.However, it should be
noted that Staltari is dated November 25, 2003
and Quigley Electric is dated November 28, 2003. The
Federal Court of Appeal panel in Quigley Electricmay have
been unaware of the decision in Staltari.
[18] Justice Bowie had the opportunity to
consider the reasonableness test in Glacier Raft Co. v. Canada
(M.N.R.).[11] At paragraph 2 he pointed out that
Sharlow J.A., speaking for the Court in Valente,
supra, described the reasonableness test as:
a departure from earlier decisions in defining the role of the
Tax Court in considering appeals from ministerial
determinations under paragraph 5(3)(b) of the ...
Act.
He continued:
It is surprising that the Federal Court of Appeal would
overrule its several earlier decisions [Tignish Auto Parts,
... Jencan Ltd, ... Bayside Drive-In Ltd.]... without
specific reference to them, but that appears to be the
result.
[19] Justice Bowie dismissed the appeal but
concluded, at paragraph 9, that:
this is certainly not the case of employment or convenience
being created for the benefit of members of the family so that
they could take unfair advantage of the employment insurance
system. Nevertheless, the terms of the Act are reasonably
clear, and when related parties enter into employment contracts
they must be scrupulous to see that the terms do not differ from
those on which the employer employs other workers, or on which
the workers could find work with other employers, if they wish
the employment to be insurable under the Act.
[20] In Belanger v. Canada (Ministre de
Revenu national)[12], the Federal Court of Appeal,
Décary, Létourneau and Nadon JJ.A. held that the
Trial Judge had not properly considered the new jurisprudence as
set out in Pérusse, and
Légaré, which were followed in
Valente, andMassignani v. Canada (M.N.R.)[13].
[21] The issue before me is whether, in
determining that the corporation and Christopher are deemed to
deal with each other at arm's length during 2002 pursuant to
paragraph 5(3)(b) of the Act, the Minister properly
exercised his discretion; If the Minister exercised his
discretion in an manner contrary to law I may interfere with the
Minister's determination: Canada v. Jencan Ltd.[14] In
assessing the manner in which the Minister has exercised his
statutory discretion, the Federal Court of Appeal stated that
"I may have regard to the facts that have come to my
attention during the hearing of the appeal". Notwithstanding
that several of the assumptions of fact relied upon by the
Minister may have been disproved at trial, I must consider
whether or not the remaining facts proved at trial were
sufficient in law to support the Minister's determination
that the parties would have entered into a substantially similar
contract of service if they had been "at arm's
length". If the Minister's determination lacks a
reasonable evidentiary foundation I may intervene. Or I may
interfere if the Minister failed to take into account all
relevant circumstances.[15]
[22] The Minister's position in the
appeal is that the circumstances of Christopher's employment
were similar, if not identical, to that of Paul Cleroux.
But, in arriving at this conclusion, the Minister ignored or did
not give sufficient weight to at least two circumstances that are
present in Christopher's employment and not in Paul
Cleroux's. The first is that Christopher received an annual
bonus that was dependent on the corporation's profit for the
year and Christopher's personal needs. The latter, even more
that the former, suggests that the annual bonus, was particular
to Christopher as a child of the principal shareholders of the
corporation.
[23] The second circumstance of
Christopher's employment is that he was on 24 hour call.
Although Christopher was paid on the basis of a 44 hour week, his
work responsibilities included time in excess of the 44 hours for
which he was paid. In effect, the business carried on by the
corporation was a family owned business and Christopher
contributed his share of the work. A person dealing with the
corporation at arm's length would not be interested in the
working conditions undertaken by Christopher and the corporation
would not be inclined to pay an annual bonus to a person with
whom it dealt with at arm's length that was dependent not
only on the business' profits but also, the needs of the
party it was dealing with at arm's length.
[24] Accordingly the appeal is allowed. The
Minister's determination is vacated.
Signed
at Ottawa, Canada, this 13th day of August 2004.
Rip J.
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