[OFFICIAL ENGLISH TRANSLATION
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Citation: 2003TCCI871
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Date: 20031209
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Docket: 2003-986(EI)
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BETWEEN:
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JACQUES HOVINGTON,
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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: 2003-1252(EI)
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YANNICK HOVINGTON,
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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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JACQUES HOVINGTON,
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Intervener.
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REASONS FOR
JUDGMENT
Deputy Judge Savoie
[1] These
appeals were heard on common evidence at Chicoutimi, Quebec on August 18, 2003.
[2] These are
appeals regarding the insurability of the employment held by the Appellant,
Jacques Hovington, with Yannick Hovington, the "Payer", during
the period from April 15 to November 10, 2002, the "period at issue".
[3] On February
24, 2003, the Minister of National Revenue (the "Minister") notified
the Appellant of his decision that, after having examined the terms and
conditions of employment, this employment was not insurable for the period at
issue, because a substantially similar contract of employment would not have
been entered into if he and the Payer had been dealing at arm’s length.
[4] The
Minister based his decision on the following presumptions of fact:
a) the Appellant was
operating a security guard business; (admitted)
b) on August 22, 1996, the
Appellant signed a contract of service with Boisaco Inc. (hereinafter called
Boisaco) for the surveillance of his Sacré-Cœur plant; (admitted)
c) the contract established
the following surveillance schedule: from 3 pm Friday to 7 pm Sunday, and
on weekdays from 5 pm to 7 am if required; (admitted)
d) the contract established
that the Appellant or one of his employees would make a security round hourly
on the Boisaco property; (admitted)
e) under the terms of this
agreement, the Appellant received remuneration of $14.47 an hour for security
guard services and $9.00 for transportation for each round made; (admitted with
clarifications)
f) under the terms of the
agreement, the Appellant was to provide a vehicle to make the security rounds;
(admitted)
g) under the terms of the
agreement, the Appellant was to have $500,000 worth of liability insurance;
(admitted)
h) the contract of service
was renewed by tacit agreement from year to year; (admitted)
i) for 4 years, the
Appellant hired the Payer at an hourly rate of $8.00 an hour as a security
guard; (admitted)
j) the Payer is the son of
the Appellant; (admitted)
k) in April 2002, the
Appellant transferred the Boisaco security guard contract to the Payer,
receiving nothing in return; (admitted)
l) following this
transfer, no new contract was signed between Boisaco and the Payer; (admitted)
m) on April 15, 2002, the
Payer hired the Appellant as a security guard; (admitted)
n) the Appellant looked
after security of the premises, training and personnel selection for the Payer;
(admitted)
o) during the period at
issue, the Payer hired, in addition to the Appellant, Franco Dufour, Pierre‑Luc
Savard, Jonathan Morin and Carl Lévesque as security guards in succession
and Marie‑Anna Deschênes to keep the accounting books; (admitted)
p) during the period at
issue, the Payer remunerated the Appellant at an hourly rate of $14.00 for 45
hours per week; (admitted)
q) during the period at issue,
the Payer remunerated the other security guards at an hourly rate of $8.00;
(admitted)
r) during the period at
issue, the Appellant supplied the Payer with a motor vehicle; (admitted)
s) during the period at
issue, the Appellant personally guaranteed the Payer's credit line; (admitted)
t) on November 14, 2002,
the Payer issued a Record of Employment to the Appellant, showing April 15,
2002, as the first day of work and November 10, 2002, as the last day of work,
1,350 hours as the number of insurable hours and $19,656.00 as total insurable
earnings for the last 27 weeks of the period; (admitted)
u) the Appellant claims
that he was laid off on November 10, 2002, as the Payer was no longer able to
make ends meet financially, whereas following his layoff, the Appellant
continued to provide services to the Payer, without reporting any remuneration;
(admitted)
v) on February 18, 2003,
the Payer stated to a representative of the Respondent that the worker was
continuing to work on a voluntary basis for the Payer and was doing him a great
service; (admitted with clarifications)
w) the Appellant's record of
employment is not consistent with the hours and the period actually worked by
the Appellant; (denied)
x) the period claimed to
have been worked by the Appellant does not correspond to the period actually
worked. (denied)
[5] Subsection
5(1) of the Employment Insurance Act (the "Act") reads
in part as follows:
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;
[...]
[6] Subsections
5(2) and (3) of the Act are worded in part 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.
[7] Section 251
of the Income Tax Act reads in part as follows:
251. Arm's length.
(1) For the purposes of this Act,
a) related persons shall be deemed not to deal with each other
at arm's length;
[...]
(2) Definition of "related
persons". For the purposes 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;
[...]
[8] In order to
help out his son Yannick, the Payer, the Appellant Jacques Hovington, the
worker in question, transferred to him the contract of service that he had with
Boisaco Inc., for which he received nothing in return. His son is young and he
had just bought a vehicle on behalf of his father; he was having financial
problems. In order to give him a chance, the Payer transferred the contract to
him in writing effective April 11, 2002.
[9] The week
following the transfer of the contract, the Payer obtained full-time employment
in the autobody field in Quebec City. This is why the Appellant was hired by
the Payer beginning on April 15, 2002. Pursuant to paragraph 251(2)(a)
of the Income Tax Act, the Appellant Jacques Hovington is related
to the Payer Yannick Hovington. According to the Act, they do not deal
with each other at arm's length.
[10] We shall
thus analyze this arm's-length relationship in light of the established
criteria.
[11] According
to the Appellant, Boisaco Inc. paid the Payer $15.81 an hour for the hours of
guard duty from 3:30 pm on Friday until 7 pm on Sunday. The Payer stated that
he thought it was $17.60. In addition to the remuneration paid to the Appellant
and to the other employee, the Payer was supposed to pay for the cost of
gasoline and oil, which amounted to between $325 and $628 a month. However, the
Payer paid the Appellant $14 an hour for 45 hours a week, and paid the other
employee $8 an hour for 16 hours. According to the Appellant, his hourly rate
was justified by the fact that it had been set on the basis that he looked
after everything and that he had heavy responsibilities.
[12] According
to the Appellant, the Payer laid him off in November as he was unable to make
ends meet financially. He hired employees at $8 an hour. Since the Payer
continued to work in Quebec City and was not available, the Appellant continued
to work from 3:30 pm on Friday until 7 pm albeit without receiving remuneration
from the Payer. He did it to help him out and is still doing it.
[13] In his
determination, the Minister took into account the fact that, when Jacques Hovington
was fulfilling the contract himself, he had hired his son, the Payer, for more
than four years at a rate of $8 an hour.
[14] In light of
the foregoing, the Minister concluded that a stranger would not have been paid
at that rate and would not have continued to work without remuneration.
[15] The
Appellant was familiar with the work that he was called upon to do, since he
himself had performed these duties under the contract with Boisaco Inc. from
1996 until the contract was transferred to the Payer.
[16] The
Appellant estimates that he was working 8.5 hours on Fridays, 14 hours on
Saturdays, 13 hours on Sundays, and between 3 to 10 hours cleaning one day a
week.
[17] During the
period at issue, the Payer was working in Quebec City as an autobody man for
$9.75 an hour.
[18] It is true
that, if the Appellant had not been employed by the Payer, the latter would
have been obliged to hire someone else, but the individual hired would not have
done the same job. In fact, after he was laid off, the Appellant continued to
perform certain duties that could not be done by the Payer's young employees.
This work was done on a voluntary basis.
[19] The
evidence revealed that the Appellant was hired from April 15 to November 10,
2002. He thus, to some extent, continued the work that he was doing before
while the contract was in his own name.
[20] The
Appellant stated that the Payer had worked on contract during the two-week
holiday season at the end of December.
[21] It has been
established that the Appellant also provided the Payer with services, albeit on
an unpaid basis, after the holiday season, namely 3.5 hours every Friday
evening. The Payer was, moreover, not able to be present from 3:30 to 7 pm on
Fridays. In addition, the Appellant answered calls from the Payer's employees
when the latter did not return from Quebec City on weekends.
[22] The
Minister's analysis of these circumstances persuaded him that a stranger would
have received remuneration for all the time he worked.
[23] During the
period at issue, the Appellant's vehicle remained on the site of Boisaco Inc.
to do the security guard rounds. It was used by the Appellant and by the
Payer's other employee. However, the Appellant received no compensation for the
use of this vehicle.
[24] It is important
to emphasize that the Appellant personally stood surety for the Payer's $3,000
line of credit.
[25] It goes
without saying that such conditions would not have existed, if the parties had
been dealing with each other at arm's length.
[26] It must be
noted that the Appellant has admitted virtually all the Minister's
presumptions. The few clarifications he added do not in any way change the
general scope of the Minister's presumptions.
[27] The
Appellant is asking this Court to set aside the Minister's decision in this
case.
[28] It is
appropriate to mention that the authority of this Court, its scope and its
limitations, was reviewed by the Federal Court of Appeal of Canada in Canada
(Attorney General) v. Jencan Ltd., [1998] 1 F.C. 187 (C.A.). It is appropriate
to reproduce these relevant excerpts by Isaac C.J., who put it in the following
terms:
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. As will be more fully developed
below, it is by restricting the threshold enquiry that the Minister is granted
judicial deference by the Tax Court when his discretionary determinations under
subparagraph 3(2)c)(ii) are reviewed on appeal. [...]
[...]
[...] Because it is a decision made pursuant to a
discretionary power, as opposed to a quasi-judicial decision, it follows that
the Tax Court must show judicial deference to the Minister's determination when
he exercises that power. Thus, when Décary J.A. stated in Ferme Émile, supra
[..] that such an appeal to the Tax Court "more closely resembles an
application for judicial review", he merely intended, in my respectful
view, to emphasize that judicial deference must be accorded to a determination
by the Minister under this provision unless and until the Tax Court finds that
the Minister has exercised his discretion in a manner contrary to law.
[...]
Thus, by limiting the first stage of the Tax Court's
enquiry to a review of the legality of Ministerial determinations under
subparagraph 3(2)c)(ii), this Court has merely applied accepted judicial
principles in order to strike the proper balance between the claimant's
statutory right to have a determination by the Minister reviewed and the need
for judicial deference in recognition of the fact that Parliament has entrusted
a discretionary authority under this provision to the Minister.
On the basis of the foregoing, the Deputy Tax Court
Judge was justified in interfering with the Minister's determination under
subparagraph 3(2)c)(ii) only if it was established that the Minister exercised
his discretion in a manner that was contrary to law. And, as I already said,
there are specific grounds for interference implied by the requirement to
exercise a discretion judicially. 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); (iii) took into
account an irrelevant factor.
[29] The Federal
Court of Appeal considered a similar situation in Rockwood v. Canada
(Minister of National Revenue – M.N.R.), [2001] F.C.J. No. 948, where
Sexton J.A. wrote as follows:
The Tax Court Judge held that the onus was on the
Applicant to establish that the Minister acted capriciously or arbitrarily and
that the Applicant had failed to discharge this onus. He relied on decisions of
the Court being Tignish Auto Parts Inc. v. Minister of National Revenue
(1994), 185 N.R. 73 (F.C.A.) and Ferme Émile Richard et Fils
v. Minister of National Revenue (1994), 178 N.R. 361 (F.C.A.).
[...]
In the absence of the record before the Tax Court, we
are unable to disagree with the conclusion of the Tax Court Judge. He could
only substitute his decision for that of the Minister where it is established
that the Minister acted in bad faith or for an improper purpose or failed to
take into account all of the relevant circumstances: Canada (Attorney
General) v. Jencan, [1998] 1 F.C. 187 (C.A.). None of these were established
in this case.
[30] The
relevance of the legislation and the case law in respect of employment
contracts between related persons was commented on by Hugessen J. in Bérard
v. Canada (Minister of National Revenue – M.N.R.), [1997] F.C.J. No. 88,
who wrote, inter alia:
[...] The clear purpose of the legislation is to
except contracts of employment between related persons that
are not similar in nature to a normal contract between persons dealing with
each other at arm's length. It is in our view clear that this abnormality can just as well take the
form of conditions unfavourable to the employee as of favourable conditions. In
either case, the employer-employee relationship is abnormal and can be
suspected of having been influenced by factors other than economic forces in
the labour market.
[31] In summary,
therefore, it must be said that this Court is justified in interfering with the
Minister’s determination, by proceeding to review the merits of the Minister’s
determination, where it is established that the Minister acted in bad faith or
for an improper purpose or failed to take into account all of the relevant
circumstances or took into account an irrelevant factor.
[32] The onus
was on the Appellant to prove that the Minister's presumptions were incorrect
and that he had not acted in accordance with the principles established in Jencan,
supra. This he did not do.
[33] Since the
Appellant has admitted virtually all the Minister’s presumptions, we must bear
in mind the Federal Court of Appeal decision in Elia v. Canada (Minister of
National Revenue – M.N.R.), [1998] F.C.J. No. 316, where the Court held
that the Minister’s presumptions must be taken to be admitted unless they have
been specifically disproved by the Appellant.
[34] The
Appellant failed to discharge that duty.
[35] In
consequence, the employment held by the Appellant, during the period at issue,
was not insurable since he and the Payer were not dealing at arm's length in
accordance with the provisions of 5(2)(i) the Employment Insurance
Act and sections 251 and 252 of the Income Tax Act.
[36] Furthermore,
the conditions of employment would not have been similar if the Appellant and
the Payer had been dealing with each other at arm's length.
[37] In light of
the foregoing, the appeals are dismissed and the Minister's decision is
affirmed.
Signed at Grand-Barachois,
New Brunswick, this 9th day of December, 2003.
D.J.T.C.C.
Certified
true translation
Colette
Beaulne
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