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Citation: 2004TCC75
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Date: 20040309
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Docket: 98-758(UI)
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BETWEEN:
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TIBÉRIO MASSIGNANI,
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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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AND
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Docket: 98-763(UI)
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BETWEEN:
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FRANCINE PROVOST,
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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]
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REASONS FOR JUDGMENT
Archambault J.
[1] Mr. Tibério Massignani
("Tibério") and Ms. Francine Provost are appealing
from the decisions rendered by the Minister of National Revenue
(the "Minister") with respect to the insurability of their
employment with Les Confections Tiva Inc. ("Tiva"). The
periods of employment ("relevant periods") contemplated by the
Minister's decisions are as follows for Tibério:
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(i)
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March 5, 1990, to August 31, 1990;
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(ii)
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November 11, 1991, to July 24, 1992;
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(iii)
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March 7, 1994, to July 29, 1994.
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The relevant periods for Ms. Provost are as follows:
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(i)
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January 12, 1991, to February 20, 1992;
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(ii)
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August 1, 1994, to December 9, 1994;
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(iii)
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July 10, 1995, to July 14, 1995.
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[2] These appeals are being heard for
a second time, further to a decision of the Federal Court of
Appeal in Massignani v. Canada, 2003 FCA 172, [2003]
F.C.J. No. 542 (Q.L.), in which an application for judicial
review was made, and the Court ordered that the appeals be heard
by a different judge. The reasons in support of the
Minister's decision are the same for all of the relevant periods,
namely, the Appellants did not hold genuine employment at Tiva,
and, consequently, it was not an insurable employment.
Furthermore, even if the Appellants held genuine employment, this
employment is excluded from insurable employment, because a
non-arm's length relationship existed between them and
Tiva. Essentially, the Minister concluded that the
Appellants had participated in a scheme to defraud the Government
of Canada (Employment and Immigration Canada and Human Resources
Development Canada ("HRDC")) of a sum exceeding $5,000, thus
committing a criminal offence under section 380 of the
Criminal Code. The scheme allowed employees of Tiva
to work while receiving unemployment insurance benefits.
[3] A warrant for the arrest of
Tibério was signed by a justice of the peace on April 5,
1997, and Tibério pleaded guilty to the above-noted
offence on June 30, 1998. The scheme was carried out during
the period beginning January 1, 1991, and ended July 12,
1996. In the case of a similar action regarding the period
beginning September 9, 1990, and ended March 4, 1995, involving
employment insurance benefits that Tibério received while
working for Tiva, a conditional stay was entered in
Tibério's court record. Even though arrest warrants
had been issued against Ms. Provost, charges were not filed
against her.
Facts
[4] Tiva is a corporation that was
incorporated on January 20, 1982, to acquire a men's and women's
clothing manufacturing business.[1] It operated this business until
March 1996.[2]
During the relevant periods, this business was located on
Richelieu Street in St-Hubert, Quebec. Until the time of
her death in October 1995, Ms. Lina Massignani, Tibério's
mother, held all of the common shares in Tiva. After that
time, Tibério's brother, Vladimiro, became the sole
shareholder of the common shares. Tibério, however,
held some preferred shares in Tiva. According to
Tibério, the funds raised by Tiva through the preferred
shares were used to purchase a building. Ms. Massignani was
originally from Italy, and she spoke very little French or
English. She started working as a forewoman in a
manufacturing business owned by Mr. Marcoux and his spouse. When
the Marcoux couple started to experience financial difficulties,
Ms. Massignani decided to buy the business. According to
Ms. Diane H. ("Diane"), who joined the business shortly after Ms.
Massignani acquired it, Ms. Massignani's sons, Tibério and
Vladimiro, negotiated the purchase.
[5] Firstly, it should be noted that
Tiva is a family business. The two Massignani brothers
negotiated its purchase, and, according to Diane, they also
operated the business from the outset. The two brothers and
their mother were authorized to sign cheques for Tiva; two
signatures were required. Diane, who was employed as a
secretary for Tiva from 1981 to March 1993, was Vladimiro's
spouse until 1987. She remarried in 1988. Vladimiro
became the common-law spouse of one of Tiva's forewomen who was
hired in 1992 or 1993. Ms. Francine Provost has been the
common-law spouse of Tibério since 1986. She started
to work for Tiva doing finishing work, and she was later promoted
to secretary.
Scheme
[6] According to Diane, the scheme had
existed for a number of years, at least since 1985, and it was
still being used when she left Tiva in March 1993.
According to her, Tibério would call each of the
business's employees into his office, and, after explaining about
the financial difficulties the business was experiencing, he
would ask them to claim unemployment insurance benefits while
they continued to work for Tiva. According to the testimony
of Ms. Elizabeth B. ("Elizabeth"), Ms. Provost asked her to
participate in the scheme.[3] According to Diane, most of the employees who
agreed to file a claim for unemployment insurance benefits for
some periods came back to work for Tiva on a full-time basis
during these periods, but for a lower hourly wage.
According to her, Tiva was saving approximately two or three
dollars an hour in wages. However, during these periods,
these employees were treated as self-employed workers, and their
remuneration was paid either by Tiva, where the employee could
provide another name or another social insurance number, or by a
numbered corporation. Diane also stated that the T4A
prepared to report the remuneration paid to the self-employed
workers contained, in many cases, errors in the name, social
insurance number, or address of the worker. The Appeals
Officer corroborated this fact. She noted that 23 of the 60
T4As prepared for 1993 contained errors.
[7] A number of witnesses confirmed
that they participated in this scheme. Diane acknowledged
that she participated in it as a result of the pressure
Tibério placed on her, owing to Tiva's financial
difficulties. She acknowledged that she received
unemployment insurance benefits while she was working and that
she was liable for repaying a sum of $12,300 to HRDC. At
the time of her bankruptcy, she still owed $9,300.
Elizabeth also acknowledged that she had participated in the
scheme and that she received remuneration for her services under
the name of Lise B. She claimed that she repaid the
sum of $12,000 to HRDC. The Appeals Officer confirmed that
the social insurance number appearing on the T4A issued to Lise
B. was not valid. Ms. Ida H. ("Ida") acknowledged that she
received remuneration paid by Tiva in this scheme through a
numbered company and through Herman Sports Wear.
[8] According to Diane, Tibério
also participated in the scheme, and he used an assumed name,
with the first name François, for payment of his
remuneration. The Appeals Officer confirmed that the T4A
issued to Tibério for 1993 contained an invalid social
insurance number. According to Ms. Nicole M. ("Nicole") and
Diane, Vladimiro also participated in the scheme. According
to Diane, the name used by Ms. Provost in the scheme was Nancy,
her daughter's name, or Lussier, her former spouse's name.
During her testimony, Ms. Provost did not deny Diane's
testimony. She even acknowledged that she used her former
spouse's name at times. A T4 was issued in the name of
Prévost for 1994, and the social insurance number entered
was also invalid.
[9] According to Diane, numbered
corporations belonging to Tibério, Vladimiro, and Ms.
Provost were used to make under-the-table payments. In
general, these corporations did not make source deductions and
did not issue T4s. Moreover, they did not file GST or QST
returns. These corporations were used for a period of less
than one year so that they would not draw the attention of the
tax authorities to the fact that these returns had not been
filed. According to the Appeals Officer's verifications,
Vladimiro was the president of three of these numbered companies;
these companies did not file any income tax returns (T2) and they
did not have a number for source deductions ("SD"). Nicole
acknowledged that she received her remuneration through one of
these corporations and that she participated in the scheme from
January to March 1994. The remuneration was paid in her
spouse's name and the social insurance number indicated was not
valid.
[10] During his testimony, Tibério
stated that he did not own any numbered companies from 1990 to
1995 except for Gestion Massie, which he transferred to his
brother. Ms. Provost acknowledged that she had been the owner of
two numbered corporations. The first one, 2733-7278
Québec Inc. ("Company 2733"), was incorporated in January
1990, and it was only used until December 1990. She was the
sole shareholder of this company. She explained that she
had attempted to operate her own business and that Company 2733
had leased 1,200-square-metre premises and equipment from
Tiva. She acknowledged that 75% of the workers she used
were self-employed workers and that she had five or six
employees. Company 2733 had only three or four
clients. Ms. Provost stated that, at that time, she worked
25 hours per week for Company 2733. According to the
Appeals Officer, this corporation did not have a SD number, but
it did file two income tax returns. The other numbered
corporation, 9033-9011 Québec Inc. ("Company 9033"),
was incorporated in April 1996. This company filed an
income tax return in 1997, and it had a SD number; however, it
did not have a corporate identification number.
Tibério's work
[11] Tibério's claim that he started
working for Tiva in 1984 or 1985 was contradicted by Diane, who
claimed that he started working for Tiva from the outset, in
1982. Tibério described his duties for Tiva from
1990 to 1996 as including three important duties. Forty
percent of his time was spent maintaining, repairing, and
preparing the equipment used by Tiva's operators and
seamstresses. Thirty to forty percent of his time was spent
controlling the productivity of these operators and seamstresses.
The balance of his time was spent delivering garments to and
picking up garments from the residences of the self-employed
workers.
[12] This description contains no mention of
managerial duties; the duty that most resembles a managerial task
is controlling productivity. This duty consisted of
determining the amount of time that each of the workers spent
carrying out their duties. It does not, obviously,
correspond with the description provided by Diane and some of the
former workers who testified at the hearing. Diane
described Tibério's responsibilities as those of a
production manager. Vladimiro dealt with the clients and
handled the shipping of assembled pieces. Diane stated that
Tibério was quick-tempered, making his relations with the
business's clients difficult. However, Tibério and
Vladimiro were the ones who met with the accountants and the
bankers. Diane stated that Lina Massignani did not have an office
in the administrative area of Tiva's workshop; she worked with
the other workers as a forewoman. Elizabeth indicated that
Tibério was always in the office. Tibério,
Vladimiro, or Ms. Provost would announce lay-offs owing to work
shortages. It should be noted that the description of
duties given by Diane further corresponds with the titles that
Tibério used to describe himself in his unemployment
insurance benefit claims, in which he describes his position as
that of [TRANSLATION] "manager of 'garment' production,"
or "person responsible for production," or "production
manager."
[13] During Tibério's testimony, in
which he attempted to provide evidence of his relationship of
subordination, he claimed that he received his instructions from
his mother, who was, in his opinion, the person who made all of
the important decisions. Tibério indicated that,
when he was working in the workshop, he received his instructions
from the forewomen.
[14] With respect to the terms and
conditions of Tibério's employment, he did not, according
to him, benefit from preferential treatment as a result of his
familial relationship with his mother. He claimed that she
was strict with him, particularly when he worked in the
workshop. When work shortages arose, Tibério was
laid-off like the other employees. During his examination, he
estimated that his weekly remuneration from 1990 to 1994 ranged
from $550 to $650. During his cross-examination, he gave an
estimation of $650 to $850. He was paid weekly for a
minimum of 40 hours per week; however, the average was 45 hours
per week. His unemployment insurance claims indicate that
his income was in line with his second version of the
facts. In his September 1990 claim, he indicated that his
weekly wages were $744 for 40 to 50 hours of work per week.
In the August 1992 claim, he entered wages of $850 for 55 to 60
hours per week. This same claim for benefits shows that he
worked 50 hours in his last week. Finally, according to his
August 1994 claim, his weekly remuneration was $750 for 40 of
work hours per week.
[15] Tibério indicated that his
hourly wage was $14 to $18 and that this remuneration was
comparable to the wages paid to workers in the field of human
engineering, which ranged from $20 to $24 per hour. He also
indicated that the forewomen earned between $10 and $12 per hour.
He estimated that a mechanic earned between $15 and $20 per
hour. However, there were no witnesses whatsoever to
corroborate this data. A remuneration of $744 for an
average week of 45 hours[4] represents an hourly rate of $16.53. A
remuneration of $850 for an average of 55 hours per week pays an
hourly rate of $15.45, and a remuneration of $750 for an average
of 40 hours per week pays $18.75 per hour. A payroll record
was not filed to corroborate these figures, specifically, the
number of hours of work. It should also be noted that the
only document filed in evidence by the Appellants in support of
their assertions is a medical report relating to Ms.
Provost. An allegation was made that the Royal Canadian
Mounted Police ("RCMP") had seized documents and had not returned
all of them, which explains why no other documents were
filed.
Tibério's periods of unemployment
[16] Tibério claimed that, between
1990 and 1995, his employment with Tiva and his unemployment
insurance benefits were his only sources of income.[5] He did not work
for other employers. His attempts to find another
employment were unsuccessful because, according to him, certain
economic conditions existed at the time. Consequently it
appears that, during the periods that are not at issue in his
appeal, Tibério was unemployed, and he received
unemployment insurance benefits for at least a portion of these
periods of unemployment. The period beginning August 31,
1990, and ended November 11, 1991, represents 14 and a half
months, and the period beginning July 24, 1992, and ended March
7, 1994, represents 19 and a half months ("Tibério's
periods of unemployment").
[17] Tibério claimed that he did not
provide any services to Tiva during these periods of
unemployment, with or without remuneration. He acknowledges
only that he ran short errands for his mother, namely, doing the
bank deposits. During his cross-examination, when he was
asked what measures Tiva took to ensure the maintenance and
repairs of the machines during his periods of unemployment,
Tibério stated that it had hired sub-contractors. It
should be noted that, at that time, Tiva had approximately 25
machines and 35 employees and, according to Elizabeth's
testimony, a machine would break down at least every two
weeks. Tibério indicated that Nicole prepared the
equipment to take into account the requirements of the various
productions, yet during the 1990s, Nicole only worked from August
1993 to March 1994.
[18] Tibério claimed that he had been
laid-off from Tiva owing to a shortage of work. During his
testimony, he gave a lengthy narrative describing the impact of
the Free Trade Agreement on the textile industry. According
to him, the number of workers in this industry fell from 100,000
in the 1980s to 60,000 or 65,000 in the 1990s. Prior to
1990, employees would work on a full-time basis, except for short
periods during the change of seasons; during the 1990s, work
stoppages lasted longer. He emphasized that this occurred
mostly in the fall, but also in the spring. However, it was
never during the same period. He claimed that it depended
on the contracts and that the periods in which there was no work
could range from two weeks to two months. The number of
employees working for Tiva decreased from 40 or 50 in the 1980s
to between 25 and 35 in the 1990s. Ms. Provost acknowledged
that this figure might have been as high as 40 employees during
these years.
[19] Tibério's description was
contradicted by Diane's version of the facts. According to
her, there has always been work, and the lay-offs were part of
the scheme. Most of the laid-off workers continued to
work. According to Diane, Tibério has always
continued to work for Tiva. I recall that Diane was
employed by Tiva until March 1993. Ida, who was also
employed by Tiva until December 11, 1992, confirmed that
Tibério was present and that he was not absent for
extended periods. Elizabeth, who started working for Tiva
in early 1992 and continued until 1996, confirmed that
Tibério was always in the office and that he was rarely in
the workshop. She added that there was not one week during
her time with Tiva in which she did not see him.
[20] Nicole, who worked for a second period
for Tiva between August 1993 and March 1994, confirmed that
Tibério handled administration and repairs, and that he
was present all of the time, except for a one-month period in
August 1993 during which time he travelled to Europe.
Francine Provost's work
[21] Ms. Provost claimed that she has
been working since the age of 16 and that her specialty was
operating "special" finishing machines, namely, machines used to
sew on buttons, pockets, and collars. Her employment with
Tiva began in 1984, and she has always been paid on an hourly
basis. Her hourly wage was $9 in 1990, and $10.50 in 1994
while she was working as a secretary. She was required to
clock in every day, just like all of the other employees at Tiva
(except for the Massignanis), even when she was performing
secretarial duties. She started working in the office
gradually in 1986 or 1987. This period corresponds with the
time at which she began living with Tibério. Her
administrative duties included payroll, accounts payable, and
accounts receivable. She claimed that Tiva purchased a
computer in 1990, which increased productivity in administrative
work greatly. What used to take three days to do could now
be done in three hours. Consequently, the secretaries were
required to work in the workshop also. She claimed that she
performed secretarial work for two and a half days per week and
that the balance of her time was spent in the workshop.
[22] According to Diane, the computer was
purchased in 1986 or 1987. However, because the scheme was
implemented during this period, it was necessary to keep two sets
of books. One set, used to track the under-the-table
payments, was kept manually. As a result, there was enough
work to keep two full-time secretaries busy. She stated
that she spent 90% of her time performing secretarial work during
the 1990s. According to Elizabeth,[6] Ms. Provost was always in the
office. She stated that Ms. Provost would help out on
special machines perhaps twice per month, when there was extra
work. According to Nicole, when she was employed by Tiva,
from August 1993 to March 1994, Ms. Provost was not working in
the administrative section of the workshop; rather, she handled
productivity control.
[23] According to Ms. Provost, Nicole earned
an hourly wage of $10.50 in 1994. Nicole, however, stated
that her wages were only approximately $9 per hour.
According to a decree setting out the terms and conditions for
the remuneration of workers in the textile industry,
specifically, in the field of ladies' clothing, the operator of a
regular machine earned $8.95 per hour in 1990 and $9.63 per hour
in 1993.
Ms. Provost's periods of unemployment
[24] Two periods are not included in the
relevant periods of employment for Ms. Provost; the first,
beginning February 20, 1992, and ended August 1, 1994, represents
29 months, and the other, beginning December 9, 1994, and ended
July 10, 1995, represents a period of seven months.[7] With respect to the
29-month period, Ms. Provost provided the following
explanations. Firstly, she experienced a severe depression
in late February 1992 requiring that she be hospitalized for a
period of two months. During her interview with the Appeals
Officer, she claimed that she was hospitalized for four
months. Her medical file reveals that her hospital stay was
44 days long, beginning on March 4, 1992. Ms. Provost
claimed that she convalesced for one year. However, her
medical records indicate that, as of April 30, 1992, everything
was going very well, and that by May 28, 1992, she was planning
to open a new store. However, she had a relapse in October
1992, which led to a four-day hospital stay. She was
diagnosed with another condition, and the appropriate medication
was prescribed to her. Regular follow-ups took place
throughout the fall.
[25] In her testimony, Ms. Provost stated
that she had returned to work gradually in March 1993 and that
she worked on a full-time basis during July, August, and
September 1993. She stated that she was able to assume all
of her duties for a period of six months, which would have taken
her to September. However, she claimed that she was unsure
whether she had worked after July 1993.
[26] Her medical report shows that, on March
11, 1993, she returned to work. A note dated July 15, 1993,
indicates that she had returned to work on a full-time
basis. In May 1995, according to the medical report, she
again had to start taking the medication that she had stopped
taking in July 1993, which gave rise to a relapse.
Throughout the month of August, everything was going well and she
was scheduled to leave on vacation for five weeks. It is
interesting to note that this trip took place a number of weeks
after she had worked her 20th week-the week she needed
in order to be entitled to unemployment insurance benefits-the
week of July 10, 1995.
[27] In their testimony, Diane, Elizabeth,
and Nicole confirmed that Ms. Provost worked in the workshop at
Tiva during the periods in which they were employed by the
company. Diane and Elizabeth acknowledged that Ms. Provost had
been absent owing to her health. Specifically, Elizabeth
acknowledged that she had been absent for one month. Diane stated
that this absence took place around September or October 1991,
approximately one and a half years before she left. Nicole
started to work at approximately the same time as Ms. Provost was
returning to work on a full-time basis.
[28] To explain her seven-month period of
unemployment beginning December 1994 and ended July 1995, Ms.
Provost stated that Tiva had experienced a work shortage.
It was not, therefore, health-related. She indicated that
she was not eligible to receive unemployment insurance benefits
at that time, because she needed one more week to become
eligible-a week that she worked in July 1995. She stated
that she had not worked during this seven-month period of
unemployment and that she rarely went to Tiva. Therefore, she
rendered no services to Tiva during this period. Elizabeth,
however, indicated that during this period, Ms. Provost was
always at the office. Ms. Provost acknowledged that she had
worked from January 1996 to May 1996,[8] the point at which the RCMP carried
out its search.
[29] In her testimony, the Appeals Officer
indicated that, in addition to the Appellants' files, she had
handled Vladimiro's file for the following periods: May 20, 1990,
to October 19, 1990; September 7, 1992, to February 12, 1993;
and, May 9, 1994, to December 12, 1994. Shortly before the
appeal hearings of Tibério and Ms. Provost, Vladimiro
informed the Court that he was withdrawing his appeal, which was
to be heard at the same time as Tibério's and Ms.
Provost's. The Appeals Officer pointed up the fact that
neither Ms. Provost, nor Tibério, nor Vladimiro had been
employed by Tiva at any time during 1993, except for the month of
January and two weeks in February for Vladimiro. That year, Tiva
posted $637,000 in sales. The sales figures were $1,013,000
for 1992, and $656,000 for 1994. According to the Appeals
Officer, the Appellants' contracts of employment were not genuine
contracts of employment owing to their participation in the
scheme. When I asked her about the extent of her analysis
of the terms and conditions of the Appellants' employment
contracts under paragraph 3(2)(c) of the Employment
Insurance Act (the "Act"), she simply reiterated that there
was no genuine employment contract. She acknowledged that
she had not analyzed these terms and conditions in detail,
although this paragraph is mentioned in the decision itself.
Position of the parties
[30] Counsel for the Appellants maintains
that the independent witnesses heard at the hearing, and the
Appeals Officer in this case, were unduly influenced by the
scheme that was implemented by Tiva. Did these witnesses,
who participated in the scheme, not perform services pursuant to
a contract of service? He could not understand how a
different conclusion could be drawn in the case of the
Appellants. Regarding the terms and conditions of
remuneration for the Appellants, he maintains that they were no
different than those of the other employees or of people working
under similar conditions in other businesses. Consequently,
the terms and conditions of employment would have been the same,
even if an arm's-length relationship had existed between the
Appellants and Tiva. He acknowledged, however, that if I
were to conclude that the Appellants had worked without
remuneration or for a lesser remuneration during their period of
unemployment, the conclusion would have to be that these were not
the reasonable conditions to which a third party would agree.
[31] Counsel maintains that Ms. Provost did
not work without pay for Tiva during her periods of
unemployment. He pointed out that she stopped working at
the end of February 1992 for health reasons. Moreover, he
claims that Ms. Provost worked for her own numbered company
during the other periods, specifically from January 1994 to March
1994, even though Nicole testified that Ms. Provost was present
the entire time that she worked for Tiva.
[32] Counsel for the Respondent maintains
that the employment contracts binding the Appellants to Tiva did
not constitute genuine contracts of employment. She relied
on a number of decisions in case law, specifically, the following
excerpts from the decision of Tardif J. in Thibeault v.
Canada, [1998] T.C.J. No. 690 (Q.L.):
20 To receive
unemployment insurance, now called employment insurance, the work
must be performed within the framework of a genuine contract of
service. The following criteria have been identified in the case
law as elements of a contract of employment: a relationship of
subordination giving the payer a power of control over the work
performed by the employee, the chance of profit and risk of loss,
ownership of the tools and integration.
21 The application
of these criteria to the facts available obviously facilitates
the exercise of characterization. On the other hand, it is just
as important that there be genuine employment, without which the
exercise of applying the criteria is completely useless.
22 Genuine
employment is employment remunerated according to market
conditions, which contributes in a real and positive way to the
advancement and development of the business paying the salary in
consideration of work performed. These are basically economic
factors that leave little, if any, room for generosity or
compassion.
[...]
29 Of course, it is
neither illegal nor reprehensible to organize one's affairs
so as to profit from the social program that is the unemployment
insurance scheme, subject to the express condition that nothing
be misrepresented, disguised or contrived and that the payment of
benefits occur as a result of events over which the beneficiary
has no control. Where the size of the salary bears no relation to
the economic value of the services rendered, where the beginning
and end of word periods coincide with the end and the beginning
of the payment period and where the length of the work period
also coincides with the number of weeks required to requalify,
very serious doubts arise as to the legitimacy of the employment
contract. Where the coincidences are numerous and
improbable, there is a risk of giving rise to an inference that
the parties agreed to an artificial arrangement to enable them to
profit from the benefits.
30 In this case, not
only are the coincidences great and very numerous, the size of
the salary has never been justified in a proper and reasonable
manner.
[33] Counsel noted that this decision had
been confirmed by the Federal Court of Appeal in
Coopérative forestière de Girardville v.
M.N.R., Docket A-587-98, on June 15,
2000. In a two-paragraph decision, Desjardins J. indicated
that the judge had correctly examined the issue of whether a
genuine employment existed between the claimant and the
Coopérative. She concluded that the decision under
judicial review presented nothing unreasonable. Consequently, the
Federal Court of Appeal dismissed the applications for judicial
review.
[34] Finally, counsel for the Respondent
cited the decision of my colleague, Dussault J., in Carpentier
v. Canada, [1995] T.C.J. No. 279 (Q.L.), in which he
referred to the approach taken by our colleague, Lamarre-Proulx
J., in Gauthier v. Canada, [1993] T.C.J. No 109 (Q.L.).[9] I cite
paragraph 9 of Dussault J.'s reasons:
Judge Lamarre Proulx of this Court stated in Gauthier,
"The object of the Act is to insure true
employment." On this point, it is appropriate to examine
all of the circumstances, including the work performed and the
remuneration agreed upon, in order to determine whether there was
a true contract of service between the parties or whether the
contract of employment submitted truly represented the relations
they decided to have between them. I also hasten to point out
that it is clearly established that the onus is on the appellant
to show on a balance of probabilities that such a contract
existed where it is disputed by the respondent.
[Emphasis mine.]
[35] Finally, counsel maintains that one of
the requisites to the validity of a contract of employment was
not present, because there was an unlawful cause or
consideration. She relied specifically on section 984 of
the Civil Code of Lower Canada ("C.C.L.C.").
Moreover, under section 990 of the C.C.L.C., the consideration is
unlawful when it is prohibited by law, or is contrary to good
morals or public order. In the new Civil Code of
Québec ("C.c.Q.") (in effect since January 1,
1994), article 1411 states that a contract whose cause is
prohibited by law or contrary to public order is null.
Article 1417 of the C.c.Q. stipulates that a contract is
absolutely null where the condition of formation sanctioned by
its nullity is necessary for the protection of the general
interest. Under article 1418 of the C.c.Q., "The absolute
nullity of a contract may be invoked by any person having a
present and actual interest in doing so; it is invoked by the
court of its own motion. A contract that is absolutely null may
not be confirmed."
[36] In support of her position, counsel for
the Respondent also relied on my decision of May 23, 1997, in
Isidore v. Canada, [1997] T.C.J. No. 463
(Q.L.). This case involved a contract of employment between
a Canadian business and two citizens of a foreign country.
One of them had been denied refugee status by the Canadian
authorities, and the other was awaiting a decision from
Immigration in his case. I also concluded that, in the
presence of an unlawful cause, these people had not rendered
services pursuant to a valid contract. I concluded that
working in Canada without employment authorization, as required
by section 18 of the Immigration Regulations, 1978, made
pursuant to the Immigration Act, was prohibited by
law and contrary to public order. Consequently, the
contracts at issue were null and void.
[37] Counsel for the Respondent cited the
decision of the Superior Court of Québec in Office de
la construction du Québec v. Corporation municipale de
Paspébiac, [1980] C.S. 70. To understand
the decision, it is important to summarize briefly the most
relevant facts:
[TRANSLATION]
Because the work had been suspended for a lack of funding, the
Arena Committee devised a project whereby the numerous unemployed
local construction workers would work for unemployment insurance
stamps, to enable them to draw benefits at a later date.
This project was not officially sanctioned by the municipal
council, but the mayor, the individual councillors, and the
secretary of the municipality were aware of the arrangement.
A pay list was prepared in accordance with the required
standards, including the regular deductions, except for
provincial and federal taxes. Unemployment insurance stamps were
affixed in the workers' booklets.
A cheque was issued to each of the employees for each week of
work, and each employee would endorse it and give it back to the
municipality.
[38] I will now comment on this
decision. I believe that the Superior Court rightly
concluded that a genuine contract of employment did not exist;
rather, a service had been provided on a volunteer basis.
The Superior Court concluded that the volunteer work was not
subject to the Quebec construction decree. In the
alternative, the Court indicated that, where it was not volunteer
work, the contract was completely null and had no legal
existence. In the opinion of the judge, it was a contract
based on an unlawful consideration contemplated in article 989 of
the C.C.L.C. Under article 13 of the C.C.L.C., no one can,
by private agreement, validly contravene the laws of public order
and good morals. Given the conclusion that there was no
remuneration paid under the agreement entered into by the workers
and the municipality, the arrangement was in violation of the
provisions of the Unemployment Insurance Act. At
page 72, the judge wrote:
[TRANSLATION]
In fact, their employment is not an insurable employment
within the meaning of section 25 of the Unemployment Insurance
Act. A remuneration must be paid by the employer or
another party for an employment to be insurable.
[39] It is my opinion that, in that case,
clearly, the parties had not entered into a contract of
employment. It was not, at any time, a matter of paying a
genuine remuneration. Consequently, the contract that was
concluded was merely a mock document. Because there was no
contract of employment, the decree on the construction industry
in the province of Quebec was not applicable to this contract,
which was not a contract of employment. The sole purpose of
the mock document was to make the workers eligible for
unemployment insurance benefits unlawfully.
Analysis
Existence of a contract of employment
[40] According to well-established case law,
the burden of demonstrating that the Appellants held an insurable
employment during the relevant periods is on the
Appellants. Paragraph 3(1)(a) of the Act stipulates
that an insurable employment is employment under a contract of
service ("contract of employment"). Because the Act does
not define this type of contract, reference must be made to
legislation in Quebec, the province in which the contract between
the Appellants and Tiva was entered into. For the period
beginning 1990 and ended 1993, reference must be made to the
Civil Code of Lower Canada, specifically, paragraph
1665(a), which defines a contract of employment and a
contract for services. We must, therefore, rely on doctrine
and case law to distinguish between these two types of
contracts.
[41] In Droit du Travail,[10] Robert P.
Gagnon puts forward this concept of the contract of
employment:
[TRANSLATION]
A contract of employment is one through which a person (the
employee) agrees to work for a certain period of time for another
person (the employer), under this person's supervision, for
remuneration. There is no prescribed form for this
contract; it can be an oral agreement or an extensive written
document, and it can include a detailed list of the reciprocal
obligations of the parties or simply a signature on a hiring
form.
[42] It is not always easy to
distinguish between a contract of employment and a contract for
services; there are a number of similarities between the
two. In both cases, a person may agree to provide a service
in exchange for remuneration, for an indeterminate period. What
is the fundamental difference between the two contracts?
Rinfret J. of the Supreme Court of Canada provides the answer in
Quebec Asbestos Corp. v. Couture:[11]
[TRANSLATION]
The contract we have to interpret does not reserve to Quebec
Asbestos Corporation the right to give Couture orders and
instructions as to the manner of carrying out the duties
that he accepted. This right is the basis of the
authority and subordination without which no one can really be an
employer.
[Emphasis mine.]
[43] Pigeon J. adopted the same
approach in Hôpital Notre-Dame et Théoret v.
Laurent.[12] In Gallant v. M.N.R.,[13] Pratte J. of
the Federal Court of Appeal agrees, and adds an important
detail:
[...]The distinguishing feature of a contract of service is
not the control actually exercised by the employer over his
employee but the power the employer has to control the way
the employee performs his duties.
[Emphasis mine.]
[44] For the
relevant periods prior to December 31, 1993, reference must be
made to the new Civil Code of Québec, which
establishes the general system of law in matters of employment at
articles 2085 to 2097. Article 2085 of the C.c.Q. provides
the following definition of a contract of employment:
A contract of employment is a contract by which a person, the
employee, undertakes for a limited period to do work for
remuneration, according to the instructions and under the
direction or control of another person, the employer.
[Emphasis mine.]
[45] As we can see,
the conditions necessary to the existence of a contract of
employment are identical to those recognized by doctrine and in
case law, namely: (i) the provision of a service, (ii)
payment of remuneration, and (iii) the existence of a
relationship of subordination.
[46] It is not because the parties
have characterized their agreement as a contract of employment or
because they have made source deductions that it must necessarily
be concluded that this is a contract of employment. The
determination of the true nature of a contractual relationship
between the parties must be based on the facts as a whole.[14]
[47] As is often the case in this type
of appeal, the recipients of unemployment insurance have arranged
their affairs in such a way as to be eligible for the benefits
provided for by the Act. However, as recognized by the
Federal Court of Appeal, this fact does not necessarily prevent
the employments from being insurable; nevertheless, this Court
has a duty to ensure that the conditions set out in the Act have
been met. This is what Hugessen J. says in Canada
(Attorney General) v. Rousselle, [1990] F.C.J. No. 990
(Q.L.), at page 2 of the judgment:
I do not think it is an exaggeration to say, in light of these
facts, that if the respondents did hold employment this was
clearly "convenience" employment, the sole purpose of
which was to enable them to qualify for unemployment insurance
benefits. These circumstances certainly do not
necessarily prevent the employment from being insurable, but
they imposed on the Tax Court of Canada a duty to look at the
contracts in question with particular care; [...]
[Emphasis mine.]
[48] Moreover, in Navennec v.
Canada (M.N.R.), [1992] F.C.J. No. 1005 (Q.L.),
Desjardins J., on behalf of the Federal Court of Appeal, said
that the criteria established by the Supreme Court of Canada in
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R.
536, were applicable in matters involving unemployment
insurance:
It is true that in Stubart the question was whether a
company could, for the avowed purpose of reducing its tax,
conclude an agreement by which its future profits were
transferred to a subsidiary in order to take advantage of the
latter's loss carry-forward; but the rules are still
applicable to the case at bar when it must be determined whether
the applicant has, in short, arranged his affairs so as to be
able to collect unemployment insurance benefits
[...]
[Emphasis mine.]
[49] It should be noted that, in
Stubart, at page 575, the Supreme Court rejected "the
proposition that a transaction may be disregarded for tax
purposes solely on the basis that it was entered into by a
taxpayer without an independent or bona fide business
purpose." Desjardins J. applied the criteria set out in
Stubart to Navennec as follows:
The parties in the case at bar are related; but what matters
is to establish whether by their agreements they did
what they said they intended to do. Did the applicant in fact
intend to make the company a family business or did he retain
control of it? Did his wife and children in fact intend to pay
off their promissory notes by the profits they received from
the business or by other income? - or did they never intend to do
so? Were these legal obligations clear and executory, or was
it a façade?
[50] I note, from these two Federal Court of
Appeal decisions, that an employment that is not a façade
and that meets all of the conditions set out in the Civil Code
of Québec constitutes a genuine contract of employment
for the purposes of the Act, even where the purpose of this
contract was to make a person eligible for unemployment insurance
benefits. However, this Court has a duty to carefully
examine the agreement that exists between the parties-in this
case, the Appellants and Tiva-to ensure that a genuine contract
of employment exists. I add that the impact of the reasons
given by my colleagues, Tardif and Dussault, must be interpreted
in light of these principles.
[51] The first issue to be resolved here is
whether the contract that binds the Appellants and Tiva
constitutes a genuine contract of employment. As mentioned
above, the three conditions essential to the existence of a
contract of employment are: the provision of a service, payment
of remuneration, and the existence of a relationship of
subordination. In this case, there was never any doubt that
the Appellants, while working during the relevant periods,
provided services to Tiva. It was not alleged that the
Appellants were not receiving a remuneration for the services
they provided. A number of witnesses confirmed that
Tibério was the production manager at Tiva and that, in
general, Ms. Provost worked as a secretary and, on occasion,
provided services as a special equipment operator. The Respondent
filed the Records of Employment and the unemployment insurance
benefit claims, showing the amount of remuneration the Appellants
received during the relevant periods. In her testimony, the
Appeals Officer did not indicate that she did not believe that
this remuneration had been paid to the Appellants.
[52] Finally, given the duties performed by
each of the Appellants and the circumstances in which these
duties were performed, I do not hesitate to conclude that a
relationship of subordination existed. I do not believe
that Tibério received instructions from the forewomen for
the work he performed in the workshop, as he claimed he
did. Rather, I believe that Tiva, through Ms. Massignani,
the holder of all of the common shares in Tiva and, in all
likelihood, the director of this company, had the authority to
exercise control over the activities of Tibério,[15] if she had wanted to
do so. Even if it had been determined that Tibério acted
as the president of Tiva and that he was the director, which is
not the case, I would not hesitate to conclude that he could be
both the director and an employee of the company.
(Specifically, see the decision rendered by the House of Lords in
Catherine Lee v. Lee's Air Farming Ltd., [1961]
A.C. 12 (P.C.)). Also with respect to Ms. Provost, I have
no doubt that the services she provided were provided under the
direction and control of Tiva, through either Ms. Massignani or
Tibério in his capacity as production manager.
[53] In this case, the three conditions
necessary to the existence of a contract of employment have been
met: the Appellants provided services to Tiva; the services were
provided under the direction of Tiva; and wages were paid to them
by Tiva for their services.
[54] It must now be determined whether the
essential conditions applicable to all contracts have also been
met, that is, it must be determined specifically whether the
parties were legally capable of contracting, whether consent was
given lawfully, whether the contract had a purpose, and whether a
lawful cause or consideration existed. In this case,
counsel for the Respondent maintains that only the last condition
was not met, because an unlawful cause or consideration existed
with respect to the Appellants' contracts of employment. In
my view, there was no such consideration in these contracts of
employment. Contrary to the belief of counsel for the
Respondent, the cause or consideration of the contracts was not
to unlawfully obtain employment insurance benefits. The
consideration, in this case, was the provision of services for
Tiva, and wages for the Appellants. The goal of the
parties, namely, to operate a business and earn money to support
themselves, was lawful.
[55] To quote my colleague, Tardif J., in
Thibeault, a genuine contract exists in this case because
a contribution was made "in a real and positive way to the
advancement and development of the business." In the case
where wages had been paid to someone who had nothing to do for
the business[16]
or who was asked to perform work that had no benefit for the
business, for the sole purpose of enabling him to receive
unemployment insurance benefits, the conclusion would have to be
that a genuine contract of employment did not exist. The
fact of providing a service that benefits a business, without
remuneration, as was the case in Municipalité de
Paspébiac, prevents the creation of a genuine contract
of employment, because one of the conditions essential to the
existence of such a contract, namely, remuneration, has not been
met. Volunteer work cannot be the subject of a contract of
employment, because, by definition, a contract of employment
requires that a remuneration be paid. In this case, I
repeat, there was never any doubt that Tiva benefited from
services that contributed to the development of its business or
that the Appellants received wages for their services during the
relevant periods.
[56] It is true that Tiva was involved in an
unlawful scheme in which it would be subsidized by unemployment
insurance benefits for a portion of the remuneration it owed to
its employees. As recalled by the Supreme Court of Canada
in Canada (Canada Employment and Immigration Commission) v.
Gagnon, [1988] 2 S.C.R. 29, at page 37, the primary
and essential purpose of the Act is to provide persons who are
involuntarily unemployed with a means of supporting themselves
until they become reintegrated in the labour market.
Consequently, it is clear that the purpose of the Act is not to
provide a subsidy to cover a portion of the wages paid for
services provided.
[57] Tiva's goal was obviously unlawful, but
it was neither the cause nor the consideration of the contract of
employment that it entered into with the Appellants. If
Tiva had robbed a bank to pay its employees, it would not have
changed the fact that they were bound by a contract of
employment. In my view, a court could not deny these
employees the right to recover their wages if the employer had
not paid them. Obviously, the situation would be completely
different if the services provided by these employees had
included their participation in the bank robbery. In this
case, the work of Tiva's employees consisted of manufacturing
clothing, not obtaining unemployment insurance benefits from HRDC
unlawfully. All of the independent witnesses acknowledged
that they had not remitted the funds they received from HRDC to
Tiva. The scheme, therefore, is independent of the
contractual rights of the contract of employment; it is an
arrangement made independently of the contract of
employment. Consequently, the contracts that exist between
the Appellants and Tiva are genuine contracts of employment.
[58] However, even though these are genuine
contracts of employment, the employments are not necessarily
insurable within the meaning of the Act. Subsection 3(2) of
the Act sets out exclusions. Paragraph 3(2)(c)
stipulates the following:
(2) Excepted employment is:
[...]
(c) subject to paragraph (d), employment
where the employer and employee are not dealing with each other
at arm's length and, for the purposes of this
paragraph,
(i) the question of whether persons are not dealing with each
other at arm's length shall be determined in accordance with
the provisions of the Income Tax Act, and
(ii) where the employer is, within the meaning of that
Act, related to the employee, they shall be 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;
[Emphasis mine.]
[59] This is the second reason given by the
Respondent in his Reply to the Notice of Appeal. As set out
in paragraph 3(2)(c) of the Act, reference must be made to
the Income Tax Act to determine whether an arm's length
relationship existed between the Appellants and Tiva.
Subsection 251(1) of the Income Tax Act is the relevant
provision. It reads as follows:
251. (1) Arm's length-For the purposes of
this Act,
(a) related persons shall be deemed not to deal with
each other at arm's length;
[...]
(c) [...] it is a question of fact whether
persons not related to each other are at a particular time
dealing with each other at arm's length;
[Emphasis mine.]
[60] To determine whether they are related
persons, reference must be made to subsection 251(2) of the
Income Tax Act, which reads as follows:
(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 common-law partnership or adoption;
(b) a corporation and
(i) a person who controls the corporation, if it is controlled
by one person
[...]
[Emphasis mine.]
[61] Finally, it should be noted that, under
subsection 252(4) of the Income Tax Act, as it read during
the relevant periods after 1992, a common-law partner is the
equivalent of a spouse. Subsection 252(4) provided as
follows:[17]
252(4) In this Act:
(a) words
referring to a spouse at any time of a taxpayer include
the person of the opposite sex who cohabits at that
time with the taxpayer in a conjugal relationship
and,
(i) has so cohabited with the taxpayer
throughout a 12-month period ending before that time,
or
[...]
(b)
references to marriage shall be read as if a conjugal
relationship between 2 individuals who are, because of paragraph
(a), spouses of each other were a marriage
(c)
provisions that apply to a person who is married apply to a
person who is, because of paragraph (a), a spouse of a
taxpayer; and
(d)
provisions that apply to a person who is unmarried do not apply
to a person who is, because of paragraph (a), a spouse of
a taxpayer.
[Emphasis mine.]
[62] Pursuant to the provisions of the
Income Tax Act cited above, Tibério, the son of the
person who controlled Tiva, was clearly related to Tiva and,
consequently, a non-arm's length relationship existed between him
and this company during his relevant periods. With respect
to Ms. Provost, this conclusion is applicable only beginning on
January 1, 1993, because, although she was Tibério's
common-law spouse from 1986, that is the date on which she became
a related person within the meaning of the Income Tax
Act. For the period subsequent to 1993, she was not a
related person, because she was not related to Tibério by
marriage. With respect to this period, it is necessary to
determine whether a de facto non-arm's length relationship
existed between Ms. Provost and Tiva.
[63] For the purposes of applying paragraph
3(2)(c) of the Act to Ms. Provost, a distinction must be
made between the period prior to 1993 and the period subsequent
to 1992. For the period subsequent to 1992, Ms. Provost was
a person who was related to Tibério and to Ms. Massignani
and, consequently, to Tiva. Like the employment of her
common-law spouse for this period, Ms. Provost's employment is
excluded owing to the non-arm's length relationship that existed
between her and Tiva. In the case of persons who are
related, as are the Appellants and Tiva, subparagraph
3(2)(c)(ii) gave the Minister the authority to deem their
relationship to be at arm's length, where it was reasonable to
conclude that, in consideration of all of the circumstances,
namely, the wages paid, the terms and conditions of employment,
the duration of the work, and the nature and importance of the
work performed, they would have entered into a substantially
similar contract of employment had they been dealing with each
other at arm's length.
[64] Nonetheless, it is the duty of this
Court to ensure that the Minister's decision is the result of an
appropriate exercise of his discretion. The Federal Court
of Appeal has had the opportunity to specify this role on a
number of occasions, namely, in Canada (Attorney General) v.
Jencan Ltd., [1998] 1 F.C. 187, [1997] F.C.J. 876 (Q.L.). At
paragraph 31, Isaac C.J. (as he then was) wrote the
following:
The decision of this Court in Tignish, supra,
requires that the Tax Court undertake a two-stage inquiry
when hearing an appeal from a determination by the Minister under
subparagraph 3(2)(c)(ii). At the first stage, the Tax
Court must confine the analysis to a determination of the
legality of the Minister's decision. If, and only if, the
Tax Court finds that one of the grounds for interference are
established can it then consider the merits of the Minister's
decision.
[Emphasis mine.]
[65] Further in the decision, at paragraph
37, the same judge described the specific reasons that justify
this Court's interference:
[...] The Tax Court is justified in interfering with the
Minister's determination under subparagraph
3(2)(c)(ii)-by proceeding to review the merits of the
Minister's determination where it is established that the
Minister: (i) acted in bad faith or for an improper purpose or
motive; (ii) failed to take into account all of the relevant
circumstances, as expressly required by paragraph
3(2)(c)(ii); or (iii) took into account an irrelevant
factor.
[66] In Légaré v.
Canada (Minister of National Revenue-M.N.R.), [1999]
F.C.J. No. 878 (Q.L.), the Federal Court of Appeal felt that it
was important to restate its thoughts on the approach to be taken
in the application of paragraph 3(2)(c):
3 While
the applicable principles for resolving these problems have
frequently been discussed, judging by the number of disputes
raised and opinions expressed, the statement of these principles
has apparently not always been completely
understood. For the purposes of the applications
before us, we wish to restate the guidelines which can be drawn
from this long line of authority, in terms which may perhaps make
our findings more meaningful.
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.
[Emphasis mine.]
[67] According to the Appeals Officer's
testimony-contrary to what is indicated in the Minister's
decision-it is obvious that the Minister did not exercise the
discretion granted to him by subparagraph 3(2)(c)(ii) of
the Act. He was truly satisfied with the conclusion that a
genuine contract of employment did not exist. Consequently,
because he did not exercise his discretion appropriately, it is
the Court's duty to determine whether the terms and conditions of
employment would have been the same had there been an
arm's-length relationship between the Appellants and Tiva.
[68] It is appropriate, at this point, to
comment on Tibério's and Ms. Provost's terms and
conditions of remuneration. In general, the wages that
Tibério received can be considered to be reasonable,
because it is not unusual to remunerate a manager on a weekly
basis, and an hourly rate of $14 to $18 does not appear
disproportionate in the circumstances. There is no evidence
to contradict the assertion that Tibério worked between 40
and 60 hours per week, when he was working. Even where
Tibério's duties had included only those that he
described, namely, maintaining and repairing the equipment,
delivering materials and fabrics, and controlling productivity, I
would not necessarily be inclined to come to the same
conclusion. Rather, I would be inclined to believe that an
employer would have remunerated these services according to the
number of hours actually worked for the business, on an hourly
basis. An employee with similar duties, dealing with Tiva
at arm's length, would have had to clock in like all of Tiva's
other paid employees. However, having concluded that
Tibério's work consisted essentially of production
management, and that it is normal to remunerate this type of work
on a weekly, monthly, or yearly basis, I conclude that the terms
and conditions of remuneration were reasonable, insofar,
obviously, as during his periods of unemployment, Tibério
did not work without remuneration or for lower remuneration.
[69] As previously noted, his counsel agrees
that, if I were to conclude that Tibério worked during his
periods of unemployment without remuneration or for lower
remuneration, it would have to be concluded that the conditions
set out in subparagraph 3(2)(c)(ii) have not been met.
[70] Before dealing with this issue, I would
like to comment on Ms. Provost's remuneration. The evidence
showed that Ms. Provost was remunerated on an hourly basis and,
unlike her common-law spouse, she was required to substantiate
her hours by clocking in upon arrival and clocking out at the end
of the day, as did all of the other employees of Tiva, except for
the Massignanis. Moreover, the hourly rate that she claimed
she received does not appear to be disproportionate in comparison
with the wages paid by the business to the other workers during
the relevant period. Consequently, insofar as Ms. Provost
did not work for Tiva without pay or for lesser pay during her
periods of unemployment, I would conclude that the terms and
conditions of her remuneration were similar to those of a person
dealing at arm's length with the employer.
[71] Essentially, the issue of the
Appellants' appeals depends on determining whether they
did, in fact, work without remuneration or for lower remuneration
during their periods of unemployment.
Tibério's employment
[72] Firstly, we will address
Tibério's case. In my view, the Respondent's
evidence as a whole clearly contradicts the evidence presented by
Tibério at the hearing. Contrary to his claims that
he did not work during his periods of unemployment, four
independent witnesses confirmed that Tibério was always
present, with no extended periods of absence, during the time
they were employed by Tiva. Nicole acknowledged that
Tibério had been absent for one month in 1993, but she
said that he was there the rest of the time. The testimony
of Diane, Ida, and Elizabeth supports this information.
[73] Counsel for the Appellants tried to
cast doubt on the probative value of Diane's testimony by having
her acknowledge that she had taken part in the scheme and that
she had unlawfully appropriated for herself sums of money that
belonged to the employer for whom she worked after leaving Tiva
in March 1993. However, I find that she responded frankly
to all of the questions this counsel asked her. Moreover,
the fact that a person has stolen from his employer does not
necessarily mean that that person has lied as a witness.
Obviously, the Court must exercise additional prudence in
examining the testimony of such a person.
[74] I have no reason to doubt the
credibility of Diane's testimony about the scheme devised by Tiva
and its senior managers. The existence of this scheme was
confirmed by Tibério, who acknowledged that he pleaded
guilty to participating in it with respect to the remuneration
paid to Tiva's employees. Moreover, Diane's testimony was
corroborated by that of three additional independent
witnesses.
[75] Also in support of my conclusion is the
fact that Tibério was unemployed, according to him, for
very long periods-the first period was 14 and a half months and
the second was 19 and a half months-during which time he was
absent from Tiva's premises, and he did not perform any work for
Tiva. During these periods, Tiva posted respectable sales
figures. It would be very surprising if Tibério, who
convinced the other Tiva employees to participate in the scheme,
did not participate in it himself. Tibério was the
production manager for the business, which, at the time, employed
between 25 and 40 employees. He claims that he was
responsible for repairing the equipment used by the employees;
according to Ida, these machines broke down at least every two
weeks.
[76] Tibério's version does not seem
credible to me. On a number of occasions, it was
contradicted by that of the other witnesses. This is the
case with his claim that, during the '90s, the business
experienced longer periods of work stoppage, especially in the
fall, but also in the spring. How is it that Tibério
was not employed by Tiva for periods of 14 and a half months and
19 and a half months, whereas, according to his own testimony,
the business did not experience such extended work
stoppages? The stoppages it did experience ranged from two
weeks to two months. Regardless, Diane's testimony is clear in
this respect: the employees who participated in the scheme
(including Tibério) came back to work for the business and
were paid under the table by Tiva or through a numbered
company.
[77] Moreover, Tibério's credibility
was further undermined on a number of occasions during his
testimony, specifically, where he described his duties by
minimizing the administrative role he played in managing
production. He presented his role as being limited to
controlling productivity, yet he did much more. He also
claimed that he attended classes at Collège Lasalle and at
CÉGEP. Yet, when he completed his unemployment
insurance claims, he indicated in one case (Exhibit I-4) that his
education was limited to secondary school, and in another,
(Exhibit I-5), that he had no uncompleted college or technical
institute studies. Finally, he gave an unlikely explanation
whereby he received his instructions from the forewomen with
respect to his duties in the workshop!
[78] Neither Tibério nor Vladimiro,
Tiva's two most senior managers, were present during the periods
from October 1990 to November 1991, and from February 1993 to
March 1994. Therefore, I do not hesitate to conclude that,
on the balance of probabilities, Tibério worked during his
periods of unemployment, contrary to his statement, and that he
did not receive any remuneration for his services or his
remuneration was low. For example, in 1993, the year in
which he was unemployed for the entire year and he received no
remuneration, he reported $13,206 in unemployment insurance
benefits, and in all likelihood, income from self-employment of
$5,285, according to the T4A issued by Tiva.
[79] A stranger working under a genuine
contract of employment, who was not involved in any scheme to
defraud the unemployment insurance system, would not have agreed
to work on a volunteer basis (or for low wages) for a clothing
manufacturing business like Tiva's. Consequently, Mr.
Tibério Massignani's employment was excluded from
insurable employment for each of the relevant periods.
Ms. Provost's employment
Employment prior to 1993
[80] Prior to 1993, Ms. Provost was not
related to Tiva and, consequently, there is no legal presumption
of a non-arm's length relationship between her and Tiva, as is
the case after 1992. Thus, it must be determined whether,
in fact, such a non-arm's length relationship
existed. The concept of a non-arm's length relationship has
been addressed a number of times in case law. My colleague
Bonner J. dealt with this concept in McNichol v. Canada,
[1997] T.C.J. No. 5, par. 16 [97 DTC 111, at
pages 117 and 118]:
16 Three criteria or tests are commonly used to determine
whether the parties to a transaction are dealing at arm's
length. They are:
(a) the existence of
a common mind which directs the bargaining for both parties to
the
transaction,
(b) parties to a
transaction acting in concert without separate interests,
and
(c) "de
facto"
control.
The common mind test emerges from two cases. The Supreme Court
of Canada dealt first with the matter in M.N.R. v.
Sheldon's Engineering Ltd. At pages 1113-14 Locke J.,
speaking for the Court, said the following:
Where corporations are controlled directly or indirectly by
the same person, whether that person be an individual or a
corporation, they are not by virtue of that section deemed to be
dealing with each other at arm's length. Apart altogether
from the provisions of that section, it could not, in my opinion,
be fairly contended that, where depreciable assets were sold by a
taxpayer to an entity wholly controlled by him or by a
corporation controlled by the taxpayer to another corporation
controlled by him, the taxpayer as the controlling shareholder
dictating the terms of the bargain, the parties were dealing with
each other at arm's length and that s. 20(2) was
inapplicable.
The decision of Cattanach, J. in M.N.R. v. T R Merritt
Estate is also helpful. At pages 5165-66 he said:
In my view, the basic premise on which this analysis is based
is that, where the "mind" by which the bargaining is
directed on behalf of one party to a contract is the same
"mind" that directs the bargaining on behalf of the
other party, it cannot be said that the parties were dealing at
arm's length. In other words where the evidence reveals that
the same person was "dictating" the "terms of the
bargain" on behalf of both parties, it cannot be said that
the parties were dealing at arm's
length.
The acting in concert test illustrates the importance of
bargaining between separate parties, each seeking to protect his
own independent interest. It is described in the decision of the
Exchequer Court in Swiss Bank Corporation v. M.N.R. At
page 5241 Thurlow J. (as he then was) said:
To this I would add that where several parties -- whether
natural persons or corporations or a combination of the two --
act in concert, and in the same interest, to direct or dictate
the conduct of another, in my opinion the "mind" that
directs may be that of the combination as a whole acting in
concert or that of any of them in carrying out particular parts
or functions of what the common object involves. Moreover as I
see it no distinction is to be made for this purpose between
persons who act for themselves in exercising control over another
and those who, however numerous, act through a representative. On
the other hand if one of several parties involved in a
transaction acts in or represents a different interest from the
others the fact that the common purpose may be to so direct the
acts of another as to achieve a particular result will not by
itself serve to disqualify the transaction as one between parties
dealing at arm's length. The Sheldon's Engineering case
[supra], as I see it, is an instance of
this.
Finally, it may be noted that the existence of an arm's
length relationship is excluded when one of the parties to the
transaction under review has de facto control of the other. In
this regard reference may be made to the decision of the Federal
Court of Appeal in Robson Leather Company Ltd. v. M.N.R.,
77 D.T.C. 5106.
[Emphasis mine.]
[81] To determine whether a non-arm's length
relationship does exist, the courts analyze the facts as a
whole. One indicator that a non-arm's length relationship
exists is the fact that the terms and conditions under which
property is acquired do not correspond with a regular business
operation. In Petro-Canada v. The Queen,
2003 DTC 94, Bowie J. concluded as follows at
paragraph 82:
[...] The evidence leaves me in no doubt that these
transactions did not reflect ordinary commercial dealings between
the vendors and the purchasers acting in their own interests and
so were not at arm's length. [...]
[82] At page 1453 of Freedman Holdings
Inc. v. The Queen, 96 DTC 1447, Rip J. stated
that the guidelines set out in Interpretation Bulletin IT-419R
appeared to him to be a reasonable application of the case
law. Paragraph 19 of these guidelines reads as follows:
19. Failure to carry out a
transaction at fair market value may be indicative of a
non-arm's length transaction. However, such failure is not
conclusive and, conversely, a transaction between unrelated
persons at fair market value does not necessarily indicate an
arm's length situation. The key factor is whether there are
separate economic interests which reflect ordinary commercial
dealing between parties acting in their separate interests.
[83] In my view, this constitutes only one
of the aspects that the courts must take into account to
determine whether a non-arm's length relationship exists in
situations that present indicators of a negotiated transaction,
where in reality, one of the parties exercises influence over the
other in such a way that this party is not free to participate in
this transaction independently. Although Bonner J. (like
many others) sets out three separate criteria to define the
concept of a non-arm's length relationship, there is essentially
one single criterion that can be summarized briefly as follows:
is one party exercising control or influence over the other
party? What the three criteria seek to determine is whether
a relationship exists between individuals who are party to a
transaction in which one of the parties exercises its influence
over the other in such a way that the other party is no longer
free to participate independently.
[84] The factual elements that can be
indicators of a non-arm's length relationship during the period
prior to 1993 are the fact that Ms. Provost was the common-law
spouse of the son of the person who controlled Tiva and the fact
that the terms and conditions of her employment were less
favourable than those a third party would have had for their
services. As mentioned above, most of Ms. Provost's
terms and conditions of remuneration during this period were
substantially the same as those of other employees of the
business. It must be determined whether Ms. Provost worked
during her periods of unemployment for no pay or for an amount
clearly lower than her usual remuneration. The answer to
this question depends largely on the answer to the following
question: did Ms. Provost, like the Massignani brothers and
a number of Tiva's other workers, participate in the scheme
whereby Tiva's workers received unemployment insurance benefits
while working for Tiva for lower wages? In these
circumstances, Ms. Provost would have received lower wages,
something that a third party who was dealing at arm's length and
who was not participating in any scheme would not have accepted
in consideration for his or her services.
[85] In this case, as in Tibério's
case, I have two contradictory versions. Ms. Provost's
case is more difficult to decide than her spouse's, because some
important statements made by Ms. Provost were found to be fair,
namely her explanation (sick leave) for her first period of
unemployment. In fact, Ms. Provost was hospitalized for
depression beginning on March 4, 1992, and not, as Diane
believed, in 1990 or 1991. However, her hospital stay was
not four months long, as she told the auditor, or two months, as
she claimed initially in her testimony at the hearing, but 44
days. Moreover, I am prepared to admit that her recovery
probably lasted nearly one year, even though her medical record
shows that, on May 28, 1992, things were going well, and she was
considering launching a new store.
[86] However, Ms. Provost's credibility is
undermined by her version of the facts for the period beginning
July 1993 and ended August 1994. During
cross-examination, she stated that she did not know whether
she had worked after July 1993. However, on her Record of
Employment dated December 16, 1994, she entered August 1, 1994,
as her first day of work for the 52 weeks preceding the date of
the Record. Therefore, she claims that she did not work for
Tiva between December 16, 1993, and August 1, 1994. Nicole
stated that Ms. Provost worked with her for this company between
August 1993 and March 1994. Counsel for Ms. Provost
tried to provide a plausible explanation to reconcile these two
versions by stating that Ms. Provost had worked for her own
numbered company. However, according to her own testimony,
Ms. Provost operated Company 2733 for one year only, in 1990, and
the other numbered company she owned was only incorporated in
April 1996. Therefore, this explanation is without
merit.
[87] In my view, Nicole's testimony, whereby
Ms. Provost worked between August 1993 and March 1994, is more
credible than Ms. Provost's. In addition to Nicole's
testimony, Elizabeth testified that Ms. Provost was always at the
office, except for a one-month period during which time she was
ill. Elizabeth was employed by Tiva from January 1992 to
1996.
[88] Ms. Provost's version of the events
regarding her work in 1990 for Company 2733 was not
convincing. Even though Ms. Provost maintains that she
worked for this company in order to genuinely operate her own
business, this business did not have a SD number, 75% of its
workers were self-employed workers, and it was operated for 12
months only. This way of doing things is the same as for
the other numbered companies, Tibério's and Vladimiro's
companies, which were used to pay the workers who participated in
the scheme under the table. According to Diane, Ms. Provost
took part in the scheme. She received her pay under the
table in her daughter Nancy's name and in her former married
name, Lussier. Given that Diane indicated that the scheme
had been used since 1985, it is reasonable to believe that Ms.
Provost took part in it in 1990.
[89] Another aspect raises doubt as to Ms.
Provost's version of the facts as they relate to her work for
Company 2733. According to the Appeals Officer, a Tiva
Record of Employment dated September 6, 1990, for Ms. Provost
shows that the reason given for her lay-off was shortage of
work. That information is difficult to reconcile with Ms.
Provost's testimony in which she stated that she worked for
Company 2733 from January 1990 to December 1990.
[90] The following aspects also undermine
Ms. Provost's credibility. Ms. Provost's version of
the facts, in which she spent two and a half days per week
performing secretarial duties and the balance of her time working
in the workshop, was contradicted by Diane, Elizabeth, and
Nicole. Moreover, Diane's explanation that the scheme
required that two sets of books be kept, requiring the services
of two full-time secretaries, seems more plausible to me than Ms.
Provost's version of the facts.
[91] Another indicator that Ms. Provost
participated in the scheme is the fact that her Record of
Employment of December 16, 1994, contains the name "Francine
Provost" in the section provided for the name and address of the
employee, and her former married name, "Ms. Lussier," in the
section provided for the name of the resource person that HRDC
could contact for information. The same is true of the
Record of Employment of July 21, 1995. The name "Francine
Provost" is typed in the section that identifies the employee,
and the name "Ms. Lussier" is entered in the box reserved for the
name of the resource person. Why would Ms. Provost use her
former name, given that she had been divorced since 1983,
particularly as she identified herself as "Francine Provost" in
the section reserved for the name and address of the
employee? Furthermore, she does not provide a first name
with the mention of Lussier. When she completed the Records
of Employment for Tibério, Ms. Provost used her own name,
"Provost" rather than the name of her former spouse, "Lussier"
(see Exhibits I-3 and I-5). Finally, why did she identify
herself if she was no longer an employee of Tiva? This
implies that she continued to work at Tiva's place of
business. The facts on the whole lead me to believe that
the Records of Employment were doctored in order to mislead HRDC
and that they confirm Ms. Provost's participation in the
scheme.
[92] Consequently, I conclude that, on the
balance of probabilities, Ms. Provost worked, as did the other
Tiva employees, during her alleged periods of unemployment,
except during her sick leave in 1992 and 1993, and she did so, at
the very least, for a remuneration that was clearly lower than
what she would normally receive. The terms and conditions
of employment, for the period prior to 1993 and for the periods
after 1992, are not the terms and conditions that a person
dealing at arm's length with the employer would have agreed
to. A de facto non-arm's length relationship
existed for the period prior to 1993, and a legal non-arm's
length relationship existed after 1992; her employment was
excluded during all of the relevant periods.
[93] For these reasons, the appeals of Mr.
Tibério Massignani and Ms. Francine Provost are
dismissed.
Signed at Ottawa, Canada, this 9th day of March
2004.
Archambault J.
Translation certified true
on this 30th day of March 2005.
Colette Dupuis-Beaulne, Translator
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