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Citation: 2004TCC481
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Date: 20040716
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Docket: 2003-2588(EI)
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BETWEEN:
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CLUB DE GOLF MONTCALM INC.,
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Appellant,
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and
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THE MINISTER OF NATIONAL REVENUE,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Savoie, D.J.
[1] This appeal was heard at
Montréal, Quebec, on March 25, 2004.
[2] The Appellant is appealing from
the decision of the Minister of National Revenue (the
"Minister"), whereby the employment of Mr. Robert-André
Gaudet, the worker, was not insurable.
[3] On June 5, 2003, the Minister
informed the Appellant of his decision in which this employment
was not insurable owing to the existence of a non-arm's length
relationship between the Appellant and the worker during the
period at issue, specifically, beginning January 23, 2002, and
ended January 4, 2003.
[4] In rendering his decision, the
Minister relied on the following assumptions of fact as set out
in paragraph 5 of the Reply to the Notice of Appeal:
(a) the Appellant
operates a golf course which includes a restaurant and a
reception hall; (admitted)
(b) the Appellant
started up his operations in 1977; (admitted)
(c) the business
operates from April to November; (admitted)
(d) the Appellant's
sales figures are approximately $2.8 million per year;
(admitted)
(e) Mr. Raymond
Gaudet is the Chairman of the Board of Directors and the
principal shareholder of the Appellant, with 98% of the shares;
(admitted)
(f) the other
shareholders of the Appellant are the worker, Sylvain, Claude,
and Ève Gaudet, and Ms. Évangeline Richard;
(admitted)
(g) Ms.
Évangeline Richard is the spouse of
Mr. Raymond Gaudet; (admitted)
(h) the worker,
Sylvain, Claude, and Ève Gaudet are the children of Mr.
Raymond Gaudet and Ms. Évangeline Richard; (admitted)
(i) Ms.
Évangeline Richard administers the Appellant's activities;
(admitted)
(j) Mr.
Sylvain Gaudet handles mainly the pro-shop; (admitted)
(k) Mr. Claude
Gaudet is the Appellant's superintendent and handles the golf
course maintenance; (admitted)
(l) the
Appellant has approximately 95 employees; (admitted)
(m) during the period at
issue, the worker's duties consisted of maintaining the
machinery, maintaining the greens, and performing various work in
the restaurant; (denied)
(n) the worker's
remuneration was $680 per week for 40 hours of work; (denied)
(o) the worker also
received vacation pay equal to 6% of his yearly wages;
(admitted)
(p) the worker works
for the Appellant from April to January every year;
(admitted)
(q) the worker and
the other members of his family received bonuses of $5,000 in
2001 and $25,000 in 2002; (admitted)
(r) no other
employee of the Appellant received a bonus in 2001 and 2002.
(admitted)
[5] The Appellant admitted all of the
Minister's assumptions of fact, except for those set out in
paragraphs (m) and (n), which he denied.
[6] Some minor details were filed in
evidence with respect to paragraphs (m) and (n). The worker
was assigned the additional duty of getting the machinery
running. During the period at issue, his wages were $680
per week for 40 hours of work. His wages are now $720 per
week.
[7] It is the opinion of the Appeals
Officer (Exhibit I-3) that the worker's employment involved
nothing unusual, except with respect to wages, and, more
specifically, the payment of a $25,000 bonus in 2002 by the
Appellant.
[8] In other words, the Minister did
not question the insurability of this employment, except to claim
its exclusion under paragraph 5(2)(i) of the Employment
Insurance Act (the "Act"), because of the non-arm's length
relationship.
[9] In her arguments, counsel for the
Minister stated that the Minister was not putting into issue the
legitimacy of the worker's lay-off during a certain period of the
year. Thus, the Minister did not put into issue the
duration, nature, and importance of the worker's work within the
context of paragraph 5(3)(b) of the Act.
[10] In short, the Minister challenged
solely the criterion of the "remuneration paid" as specified in
paragraph 5(3)(b) of the Act.
[11] In his appeal report (Exhibit I-3), the
Appeals Officer pointed out that:
1. No one else in
the industry who was dealing at arm's length received this
bonus;
2. Even the Chairman
of the Appellant did not receive a bonus;
3. The bonus paid to
the worker in 2002 represents 85% of his wages;
[12] However, at the appeal hearing, the
Appeals Officer was unable to answer the question as to whether
the worker was a key employee of the business. Moreover, he
was unable to answer the question as to whether the worker was
included in the group of people who ran the business or who
played a management role, and compare the employees of the
business who had the same responsibilities and differentiate them
from the others.
[13] The evidence shows that the Minister
compared the worker's salary, namely, his bonus, with that of the
Appellant's other employees, without taking into account the work
they did for the company.
[14] The Minister placed a great deal of
importance on the fact that only the worker and the other members
of his family had received a bonus.
[15] The Appellant argues that the Minister
is comparing apples to oranges, because the worker is a manager
who has been working for the company since his youth, and he is
paid according to the importance of his duties within the
company. Furthermore, the Appellant considers him to be
irreplaceable. A number of years ago, at the Appellant's
request, the worker invested $10,000 in the company to effect an
estate freeze. The Appellant argues that the worker
received this bonus in recognition of the voluntary work he
performed when he was a student and as a gift to celebrate the
25th anniversary of the business.
[16] It seems odd to compare the worker's
salary with that of the company President, Mr. Gaudet, given
that, even though he owns 85% of the shares in the Appellant, Mr.
Gaudet does not work in the business, since he operates his own
dental practice.
[17] The evidence showed that the other
shareholders in the company are: Évangeline Richard,
Sylvain, Claude, Ève, and Robert-André Gaudet, the
worker. Évangeline Richard is trained as a chartered
accountant and is primarily responsible for the administration of
the golf club. She is paid $30.00 per hour, based on a
40-hour work week.
[18] The company hires nearly 95 employees
every year and pays them according to their respective skills and
qualifications. The Appellant paid for the training of the
worker and the other employees at the I.T.A. in Saint-Hyacinthe
(crop production).
[19] The worker and the other family
members, namely, Évangeline Richard, Sylvain, Claude, and
Ève Gaudet received a $5,000 bonus in 2001 and a $25,000
bonus in 2002. The Appellant explained that the bonuses
were given in celebration of the company's 25th
anniversary, to bring salaries in line with those paid at other
golf clubs, and to encourage his children to stay with the
company rather than work for another company that might offer
higher wages. It was established that the worker was
supervised by his uncle, Roger Gaudet, and that he worked for the
company as did his brother Claude and the company's
mechanic. It was also established that the worker attended
the company's monthly meetings.
[20] In his appeal report (Exhibit I-3), the
Appeals Officer described the terms and conditions of employment
for the company's other salaried employees as follows:
•
Josée Gaudet (at arm's length)
-
40-hour work week
-
minimum wage plus tips ($13,565 in 2001 and $13,363 in 2002)
-
duties: server
-
period of employment: April to November
-
no bonus
• Danielle
Desrochers (at arm's length)
-
40-hour work week
-
wages: $13.00 per hour ($14,513 in 2001 and $20,146 in
2002)
-
duties: preparing payroll
-
period of employment: April to November
-
no bonus
• Nathalie
Beaudoin (at arm's length)
-
40-hour work week
- wages: $15.00
per hour ($19,529 in 2001 and $22,152 in 2002)
- duties: office
work
- period of
employment: April to December
- no bonus
[21] The Appeals Officer also made the
following comment in his report:
COMMENT:
Robert-André Gaudet earned wage income of $33,909 in 2001
and $54,584 in 2002 (including bonuses).
Sylvain Gaudet earned wage income of $34,139 in 2001 and
$56,015 in 2002 (including bonuses).
Claude Gaudet earned income of $35,438 in 2001 and $56,413 in
2002.
Évangeline Richard earned wage income of $35,151 in
2001 and $60,398 in 2002 (including bonuses).
[22] Counsel for the Appellant criticized
the Minister for comparing the worker's remuneration to that of
other employees in the company who did not have the same job and
pointed out that the Minister failed to make comparisons between
the worker's remuneration and that of workers at other golf
clubs, or in the industry, who perform similar tasks. The
Appellant did so, and, in paying the bonuses, he wanted to bring
his managers' salaries in line with the prevailing wages in the
industry for similar employment.
[23] The Appellant is asking this Court to
reverse the decision of the Minister.
[24] In making his decision, the Minister
relied on paragraphs 5(1)(a) and 5(2)(i) and
subsections 5(3) and 93(3) of the Act.
[25] Subsection 5(1) of the Act reads in
part as follows:
5. (1) Subject to subsection (2), insurable employment
is
(a) employment in Canada by one or more employers,
under any express or implied contract of service or
apprenticeship, written or oral, whether the earnings of the
employed person are received from the employer or some other
person and whether the earnings are calculated by time or by the
piece, or partly by time and partly by the piece, or
otherwise;
[...]
[26] Subsections 5(2) and (3) of the Act are
worded as follows:
(2) Insurable employment does not include:
[...]
(i) employment if the employer and employee are not
dealing with each other at arm's length.
[...]
(3) For the purposes
of paragraph (2)(i),
(a) the question of whether persons are not dealing
with each other at arm's length shall be determined in
accordance with the Income Tax Act; and
(b) if the employer is, within the meaning of that Act,
related to the employee, they are deemed to deal with each other
at arm's length if the Minister of National Revenue is
satisfied that, having regard to all the circumstances of the
employment, including the remuneration paid, the terms and
conditions, the duration and the nature and importance of the
work performed, it is reasonable to conclude that they would have
entered into a substantially similar contract of employment if
they had been dealing with each other at arm's length.
[27] The Minister maintains that the
worker's employment was not insurable during the period at issue,
because a non-arm's length relationship existed between himself
and the Appellant, pursuant to paragraph 5(2)(i) of the
Act and sections 251 and 252 of the Income Tax Act.
[28] The Minister maintains that he
exercised the discretionary powers conferred upon him under
subsection 5(3) of the Act appropriately, and that the worker's
terms and conditions of employment would not have been similar
had a non-arm's length relationship existed between the Appellant
and the worker.
[29] The Federal Court of Appeal has set out
the principles of application to resolve the issue presented to
this Court in Légaré v. Canada
(Minister of National Revenue-M.N.R.), [1999] F.C.J. No.
878. The following is an excerpt:
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.
[30] In the case at bar, the evidence showed
that the Appellant paid this bonus to the worker in celebration
of the business's 25th anniversary, to match the wages
paid to employees who perform the same duties in other
businesses, and to keep the worker working for his
business. It offered the same salary terms to the other
employees in the worker's family who worked in management
positions and who had more responsibilities than the other
employees.
[31] It was determined that, during his
investigation, the Minister did not search for data that would
enable him to make a comparison with employees in the same class,
with the same level of skills, experience, and importance within
similar businesses elsewhere.
[32] He simply relied on a comparison of the
worker's remuneration with that of the other employees, who had
different responsibilities, in the same business.
[33] In this context, counsel for the
Appellant asked this Court to take note of the principle set out
by Desjardins J. of the Federal Court of Appeal in Landry v.
Canada (Minister of National Revenue - M.N.R.), [2001] F.C.J.
No. 148, who wrote the following:
[...] He [the judge] never asked himself whether there
was a connection between the plaintiff's terms of employment
and his non-arm's-length relationship with the payer.
If he had taken the right approach the judge would have found
that in the case at bar the evidence showed that so far as
working conditions were concerned the plaintiff was treated in
the same way as the payer's other employees. The conditions
were admittedly unusual, but we are dealing here with seasonal
employment in remote areas which can easily fall outside the
ordinary rules.
What s. 3(2)(c) of the Unemployment Insurance Act
(later the Employment Insurance Act) seeks to prevent is
not the existence of unusual working conditions as such: it is
the existence of working conditions which can only be explained
by a non-arm's-length relationship between the claimant and
the payer.
[34] The Appellant provided evidence that
the bonus received by the worker was part of his wages for the
purpose of matching the remuneration that prevails in the
industry for comparable work. Not only did the Minister not
disprove this evidence, but also, at the hearing, the Appeals
Officer admitted that no attempt had been made to find data
within the industry that could have been used in support of his
conclusion.
[35] In Légaré, supra,
a similar case, Marceau J. of the Federal Court of Appeal wrote
the following:
But what then were the facts that made such a negative impression
on the Minister? He listed five of them: 1- the
applicants' salary was $10.00 per hour while the other
employees only made the minimum wage of $6.00; 2- the
applicants' salary was even higher than that of the
shareholders themselves; 3- in 1994 and 1995, the applicants'
salary was not paid to them regularly each week as had previously
been and was subsequently the case, but was paid in two
instalments at the end of the year; 4- in 1996, when the
employees' salary was increased to $7.00, the minimum wage,
the plaintiffs' salary remained at $10.00; and 5- the three
young children of one of the applicants, who lived next to the
greenhouses, would sometimes be in the greenhouses or the land
around them..
I have just said that in our view, these facts by themselves do
little to explain and support the response of the Minister or his
representative. Under the Unemployment Insurance Act,
excepted employment between related persons is clearly based on
the idea that it is difficult to rely on the statements of
interested parties and that the possibility that jobs may be
invented or established with unreal conditions of employment is
too great between people who can so easily act
together. And the purpose of the 1990 exception was
simply to reduce the impact of the presumption of fact by
permitting an exception from the penalty (which is only just) in
cases in which the fear of abuse is no longer
justified. From this perspective, after identifying
the true nature of the employment, the importance of the duties
and the reasonableness of the compensation, it is difficult in
our view to attach the importance the Minister did to the facts
he relied on to exclude the application of the
exception. It is the essential elements of the
employment contract that must be examined to confirm that the
fact the contracting parties were not dealing with each other at
arm's length did not have undue influence on the
determination of the terms and conditions of
employment. From this standpoint, the relevance of the
facts relied on, even without further detail, seems very
questionable. And there is no need to go any
further. While the facts relied on might legitimately
leave sufficient doubt with respect to an objective basis for the
conditions of the applicants' employment contract, placing
these facts in the context of the evidence adduced before the Tax
Court of Canada - evidence which was almost completely accepted
by the Tax Court judge - only serves to highlight the
unreasonableness of the Minister's initial
conclusion. It was in fact clearly explained and
established that the applicants' salary was higher than the
minimum wage the other employees received because of the
responsibility involved in the duties they performed and that
that was the prevailing salary in the industry for similar jobs;
it was clearly explained and established that the shareholders
had decided to reduce the salary normally due to them to provide
for the financial support and development of the business; it was
clearly explained and proven that a tornado had destroyed a large
number of the buildings of the business in 1994, which led to a
period of confusion, and then reconstruction and financial
difficulties; last, it was explained and proven that the presence
of the children of one of the applicants on the land around the
greenhouses was very unlikely to affect the performance of her
duties and the provision of the services she agreed to
provide..
[36] The preceding excerpt sheds some light
on the case before this Court. Marceau J.'s reasoning in
Légaré, supra, is useful in the case at bar
and the application of the principle he set out is justified in
this case.
[37] After reviewing the evidence and
hearing the arguments presented at the hearing, considering the
applicable legislation and case law cited, it is the opinion of
this Court that the Minister did not make a proper assessment of
the facts in carrying out the exercise provided for at paragraph
5(3)(b) of the Act, and, consequently, his conclusion no
longer appears to be reasonable.
[38] Therefore, the worker's employment was
insurable, because it was not subject to paragraph 5(2)(i)
of the Act. The worker and the Appellant are deemed to have
a non-arm's length relationship between them with respect to this
employment, because this Court is satisfied that it is reasonable
to conclude, given all of the circumstances, that they would have
concluded a similar contract of employment between them had there
been an arm's length relationship between them.
[39] The appeal is allowed and the decision
rendered by the Minister is vacated.
Signed at Grand-Barachois, New Brunswick, this 16th
day of July 2004.
Savoie D.J.
Translation certified true
on this 5th day of January 2005.
Colette Dupuis-Beaulne, Translator
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