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Citation: 2003TCC780
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Date: 20031116
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Docket: 2002-4947(EI)
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BETWEEN:
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WIFFEN FINANCIAL SERVICES 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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REASONS FOR JUDGMENT
Bonner, J.
[1] This is an appeal from a decision
of the Minister of National Revenue
(the "Minister") dated September 23, 2002 made on
appeal from a ruling under s. 91 of the Employment
Insurance Act (the "Act"). That decision was
that Jay Brecknell (Brecknell) was employed by the Appellant
in insurable employment during the period January 1 to June 14,
2002.
[2] The central finding or assumption
upon which the decision rested was that, at the relevant time,
Brecknell was dealing with the Appellant at arm's length. The
issue arises because, under s. 5(2)(i) of the Act
insurable employment does not include "... employment if the
employer and employee are not dealing with each other at
arm's length".
[3] Section 5(3) of the Act
states:
"(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."
[4] It was common ground that
Brecknell and the Appellant were not related persons under s.
251(2) of the Income Tax Act.
[5] The issue in this appeal is
whether, during the period, Brecknell and the Appellant were
dealing with each other at arm's length in point of fact. The
Appellant contended that by reason of the relationship between it
on the one hand and its the shareholders on the other and the
relationship among its shareholders, one of whom was Brecknell, a
non-arm's length relationship existed.
[6] At all material times the
Appellant carried on the business of a financial planner. It sold
insurance and mutual funds and furnished financial advice to its
clients.
[7] Prior to January 1, 2002
Jordan Gagner and Vince McKay each owned 50% of the shares of the
Appellant. Brecknell, a friend of Gagner and McKay, operated a
financial planning business as a sole proprietor. In carrying on
that business Brecknell processed some of his financial
transactions through the Appellant.
[8] Late in 2001, Gagner and McKay
approached Brecknell and suggested that he consider becoming a
"third partner" of the Appellant. Brecknell agreed and
the arrangement was implemented, save for share transfer, on
January 1, 2002. Brecknell then became sales manager of the
Appellant and assumed responsibility for training other agents
who placed business through the Appellant. Effective
February 12, 2002 Brecknell purchased one third of the
outstanding shares of the Appellant.
[9] At the hearing of the appeal
evidence was given by Gagner and Brecknell. They were credible
witnesses.
[10] The arrangement proposed by Gagner and
accepted by Brecknell was that Brecknell would transfer his
client base to the Appellant and pay $34,000 to Gagner and McKay
for their shares. A compensation agreement was negotiated which
laid down rules for the division between each shareholder and the
Appellant of the revenues earned by the shareholder. The process
of arriving at the compensation agreement was described by Gagner
as follows:
"... Jays compensation agreement was -- was really the
three of us owners getting together and discussing what's
best for the firm. Jay doesn't have a compensation agreement
that's any different than Vince or myself. We as managers got
together and said, okay, how -- how do we -- how do we pay
ourselves, but let's make sure that the lights and the rent
and everything get paid first. ..."
[11] Upon joining forces with the Appellant
Brecknell became sales manager and assumed responsibility for
training sales agents who placed their business through the
Appellant.
[12] In arriving at his decision the
Minister made the following findings of fact (among others):
(i) Brecknell
was required to report to the Appellant daily and weekly;
(j) Brecknell
was subject to the direction and control of the Appellant;
(k) Brecknell's
remuneration was established by the Appellant;
Although it was common ground that Brecknell was employed by
the Appellant, the testimony which addressed the three quoted
assumptions revealed that the Minister's grasp of the facts
was weak. Brecknell was not obliged to report on a periodic basis
or otherwise. In practice he was not subject to control or
supervision. His remuneration was established by agreement among
himself, McKay and Gagner and the results of that agreement were
imposed on the Appellant. In evaluating the nature of the
relationship between Brecknell and the Appellant, the spirit of
cooperation which informed the actions of the
three individuals is significant. It is clear that they
regarded themselves as partners and that they conducted
themselves in accordance with an oral agreement which called for
decisions to be made by consensus and not by majority rule.
[13] Three criteria or tests are commonly
used to determine whether the parties to a transaction are
dealing at arm's length.[1] 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.
[14] 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.[2] 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."
[15] The decision of Cattanach, J. in
M.N.R. v. T R Merritt Estate[3] 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."
[16] 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.[4] 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."
[17] 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 DTC 5106.
[18] The submission of counsel for the
Respondent was that it is essential for purposes of s.
5(2)(i) of the Act to determine whether the
arm's length relationship is present in dealings between
Brecknell as employee and the Appellant. A distinction is to be
drawn between such dealings and dealings between the two in which
Brecknell is acting in a different capacity such as director or
shareholder. Counsel submitted that Brecknell did not dictate the
terms of his employment on behalf of both parties in his dealings
with the Appellant. He said that Brecknell as employee obviously
decided what was satisfactory to him in that capacity but
Brecknell as shareholder and director of the Appellant was one
voice out of three. He could not dictate to the other
two directors and shareholders.
[19] The language of s. 5(2) is clear. It
addresses the relationship between an employer and an employee.
If they are not dealing with each other at arm's length the
employment is not insurable. The provision applies to except the
employment from insurable status whether the terms of the
employment contract have been affected by the non-arm's
length relationship or not. In this case two individuals who
owned a small private company decided to admit a
third individual to a structure which they regarded as a
"partnership". That structure took the form of a
corporation which employed all three and which was controlled and
operated by them on a consensual basis. In my view it is
impossible to say that Brecknell dealt with the Appellant at
arm's length.
[20] The argument advanced by counsel for
the Respondent must fail because the individuals acted in concert
in accordance with the agreement among them. In so doing they did
not stop to determine whether any decision made by them was made
qua shareholder, qua director or qua employee. They viewed
themselves as partners and did not concern themselves with the
legal niceties of the capacity in which they acted from time to
time. They simply decided what to do and, where involvement of
the Appellant was required, they caused it to carry out their
decision. No consideration appears to have been given to the
"independent interests" of the Appellant. It would be
unrealistic to suggest that the terms of the employment
relationship between Brecknell and the Appellant resulted from
bargaining in which the two sought to protect their respective
interests. The appeal will be allowed and the decision under
appeal will be vacated.
Signed at Toronto, Ontario, this 16th day of November
2003.
Bonner, J.
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