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Citation: 2003TCC417
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Date: 20030625
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Docket: 2002-4614(EI)
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BETWEEN:
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DANY GÉLINAS,
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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
Somers, D.J.T.C.C.
[1] This appeal was
heard at Montréal, Quebec, on April 4, 2003.
[2] The appellant
institutes an appeal from the decision of the Minister of National Revenue (the
"Minister") according to which the employment held with Maçonnerie
Grand-Mère Inc., the payer, during the periods in issue, from January 12
to December 4, 1998, from January 11 to December 17, 1999, from
February 7 to December 15, 2000, and from January 22 to
December 21, 2001, is excluded from insurable employment within the meaning
of the Employment Insurance Act (the "Act") on the
ground that he and the payer were not dealing with each other at arm's length.
[3] 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;
[...]
[4] Subsections 5(2) and (3) of the Employment
Insurance Act read 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.
[5] Section
251 of the Income Tax Act reads in part as follows:
Section 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; and
[...]
(2) Relationship
defined.
For the purpose of this Act, "related persons", or persons related to
each other, are
(a) individuals
connected by blood relationship, marriage or adoption;
[...]
[6] The burden of
proof is on the appellant. He has to show on a preponderance of proof that the
Minister's decision is ill-founded in fact and in law. Each case stands on its
own merits.
[7] In making his
decision, the Minister relied on the following assumptions of fact stated in
paragraph 5 of the Reply to the Notice of Appeal, which were admitted or
denied by the appellant:
[TRANSLATION]
(a) The
payer, which was incorporated on April 23, 1996, specializes in masonry
and heritage restoration. (admitted)
(b) During
the periods in issue, the payer's capital stock was allocated as follows:
Josée Jeansonne,
the appellant's de facto spouse, with 70 percent of the shares;
The
appellant with 30 percent of the shares. (admitted)
(c) The
payer's place of business was located in the couple's residence, which belongs
solely to the appellant. (admitted)
(d) The
payer occupies an office and the garage of the residence without paying the
appellant any rent. (admitted)
(e) The
payer's lines of credit, totalling $85,000, are guaranteed by the two
shareholders, and more particularly by a mortgage guarantee on the appellant's
residence. (admitted)
(f) Josée Jeansonne
has taken a business start‑up course and obtained her competency cards as
a specialized masonry worker. (admitted)
(g) Josée Jeansonne
provided the $10,000 surety required as a financial guarantee to qualify the
payer with the Régie du bâtiment. (admitted)
(h) The
appellant is a master mason and holds his competency cards as a journeyman
mason. (admitted)
(i) When
the payer bids on a contract, it is generally the appellant who goes to evaluate
the work to be done and to determine the number of scaffolds required. (denied)
(j) On
September 23, 1999, the appellant took out a personal loan of $29,986 to
pay for the purchase of a truck (six wheels) for the payer and to
consolidate a loan which the payer had taken out in 1995. (admitted)
(k) The
appellant borrowed the amount himself because the payer was unable to assume
responsibility for the loan. (denied)
(l) From
October 1999 to June 2002, the payer repaid the appellant $250 a month to cover
a portion of the cost of that loan amounting to $499.77 a month. (admitted)
(m) The
appellant was generally remunerated in accordance with the rates established by
the CCQ, except when work was not subject to the Construction Decree.
(admitted)
(n) When
the payer experienced financial difficulties, it did not record the appellant's
hours of work. (denied)
(o) From
1998 to 2001, the appellant took part in the payer's bidding work on a
volunteer basis. (denied)
(p) The
appellant did not appear on the payer's payroll when other workers were on it.
(denied)
(q) The
appellant was involved in all the day-to-day activities of the payer, and the
latter could dismiss him without jeopardizing its survival. (denied)
[8] The payer, which
was incorporated on April 23, 1996, specializes in masonry work and
heritage restoration. During the periods in issue, the capital stock of the
payer was allocated as follows: Josée Jeansonne, the appellant's de facto
spouse, with 70 percent of the shares, and the appellant with 30 percent
of the shares.
[9] The payer's place
of business is located in the couple's family home, which belongs solely to the
appellant. The payer uses the garage and a room in the family home as an office
without paying the appellant any rent.
[10] The appellant
testified that he had been doing masonry work since 1978, that he has held
competency cards as a journeyman mason since 1998 and that he has been an
employee of the payer since 1996.
[11] The appellant's
duties were to act as site foreman and to prepare bids: the technical side is
his area. His spouse prepared the bids for the subcontracts offered by the
general contractor as well as the price lists.
[12] The appellant
admitted that he had taken out a personal loan to purchase a truck for the payer.
He said that the truck had been bought suddenly in order to get it at a good
price. He believed that the transaction would be conducted more quickly if he
took out a personal loan instead of obtaining a loan by the payer. According to
his explanation, for economic reasons, that was more advantageous in view of
the urgent nature of the purchase.
[13] The document
entitled "Loan Contract" (Exhibit I‑1) shows that the
appellant borrowed the total amount of $29,986.20, consisting of the amount of
the loan, that is $20,000, plus the balance of a previous loan, interest and
insurance premiums. The monthly payment terms were $499.77 over 59 months.
The appellant stated that he had used one portion of the loan to purchase the
said truck and the other portion to repay one or more previous loans taken out
by the payer. The appellant also admitted that the payer might have been late
with certain payments.
[14] The appellant's
remuneration was established on the basis of an hourly rate of $25, in
accordance with the Decree of the Commission de la construction du Québec, for
work performed for the commercial sector. For residential restoration work, the
wage was set at $20 since that work was not subject to the Construction Decree.
[15] In
cross-examination, the appellant stated that he belongs to the fourth
generation of a family of masons and therefore handles the technical side of
the business. He said that his spouse decided on the sites where he was to
work. When he was on the job sites with clients and they preferred to do
business with him rather than his spouse, he noted the clients' personal
information and handed it over to his spouse. The appellant's spouse,
Josée Jeansonne, decided on the quantities of materials and the prices.
The appellant said that he had signed order forms while on the job sites.
[16] Josée Jeansonne,
the appellant's spouse, testified that she had been a mother before 1996, the
year in which the payer was incorporated. She stated that she had taken
business start‑up courses and had learned to prepare a business plan in
order to form a masonry company. She took courses six hours a week over a
number of weeks until the end of March 1996 and, at the end of her courses,
obtained her competency cards as a skilled masonry worker in September 1996.
[17] She declared that
it was she who had formed the company and that she had registered with the
Régie des bâtiments before 1996. She added that she had worked for a masonry
company for three years. She also said that she had invested $10,000 in the
company, in addition to another amount of $25,000, which had come from her
mother.
[18] Josée Jeansonne
did the administration and sought out contracts. She also hired apprentices and
"journeymen" workers; the "journeymen" supervised the
apprentices. The appellant became a "journeyman" in the trade in
1998.
[19] When there were
bids to prepare, Josée Jeansonne went to the job sites. She said that
certain clients, particularly in the residential sector, preferred to talk with
a man rather than a woman, and that is why the appellant prepared certain bids,
but it was she who set the prices. Josée Jeansonne corroborated the
appellant's testimony on the purpose of the loan taken out: the personal loan
taken out by her spouse was urgently required to take advantage of a low
purchase price.
[20] She explained that
the appellant paid the Caisse Populaire $250 a month for his portion of the
loan and that the payer repaid the other $250 for the purchase of the truck,
but admitted that her spouse sometimes paid the payer's portion when the payer
was short of cash.
[21] She stated in her
testimony that the hours worked were always entered in the pay records, except
on a few occasions when the business had just started up. She added that she
had always attended to the pay records, payment of accounts, and collection and
that she did the cleaning herself when the work on the job sites was finished.
[22] A document
entitled "Advertising, Exhibit __" (Exhibit I‑2)
states, inter alia:
[TRANSLATION]
Maçonnerie Grand‑Mère Inc., established in central Mauricie
five years ago, operates in various lines of activity and has solid
experience in residential, commercial and industrial work and high-end masonry.
The business, which is
operated by Josée Jeansonne and Dany Gélinas, a master mason from a
family of master masons from father to son for four generations, has
distinguished itself by its vitality and technical knowledge and has projects
worth more than $1.2 million to its credit.
[23] According to the
financial reports filed as Exhibit I‑3, the directors made advances
to the payer, without interest or repayment terms: $66 in 1999, $23,989 in
2000, $22,784 in 2001 and $20,514 in 2002. Josée Jeansonne was unable to
explain the amounts. She said that they were the accountant's responsibility,
but added that three-quarters of those amounts were owed to her.
[24] Josée Jeansonne
stated that the appellant had been paid in accordance with the Degree of the
Commission de la construction du Québec since 80 percent of the work
performed had been in the commercial or industrial sectors. She added that she
reduced the appellant's wages when the payer had financial difficulties. She
also admitted that the appellant had taken out a mortgage on his house to
guarantee the payer's $25,000 line of credit.
[25] The appellant
admitted subparagraph 5(e) of the Reply to the Notice of Appeal, which
states that the payer's lines of credit totalling $85,000 were guaranteed by
the two shareholders and, more particularly, by a mortgage guarantee on the
appellant's residence.
[26] According to
Josée Jeansonne, when the payer submitted a bid on a contract, it was she
who went to the job sites most of the time to examine the premises and set
prices. She stated that the appellant or Jacques Lessard, another
journeyman, occasionally went to examine the job sites. She added that she did
not remember whether the appellant had been in a period of unemployment when he
made certain bids.
[27] Louise Dessureault,
an appeals officer with the Canada Customs and Revenue Agency, stated in her
testimony that she had examined the payer's books and noted that there was no
resolution of the board of directors to make the loans.
[28] According to a
document entitled "Tables of Monthly Income, Number of Employees and
Number of Bids for 1998, 1999, 2000 and 2001" (Exhibit I‑4),
order forms and bids were signed by the appellant while he was in periods of
unemployment.
[29] According to
Louise Dessureault, the appellant was required on a number of occasions to
cover personally the portion of the loan that the payer had to pay each month.
She admitted, however, that, according to the payer's books, the appellant had
received sporadic repayments and that, except for an amount of $250, had been
repaid in full.
[30] In
cross-examination, Louise Dessureault stated that the bids had been made
by the appellant or his spouse; in the case of complicated jobs or when certain
clients preferred to deal with a man rather than a woman, it was the appellant
who took charge of discussions with clients.
[31] According to this
witness, Josée Jeansonne admitted to her that the bids were made by her
and by the appellant. The tables filed in evidence (Exhibit I‑4)
show that the appellant took part in the bids, since his signature or his
calculations appear on a number of them. Louise Dessureault therefore
concluded that the appellant and his spouse had taken part, year-round, in the
preparation of a number of bids a week.
[32] The appeals
officer sent a letter to the payer requesting an explanation of the amounts
owed to the shareholders, the directors' advances to the payer, without
interest or repayment terms, as indicated in the financial statements filed as
Exhibit I‑3, but received no reply. It should be noted that, at the
hearing of the appeal, the appellant's spouse was unable to provide any
explanation on this point.
[33] In her testimony,
Denise Prévost, an investigation and control officer with Human Resources
Development Canada, said that she had met Josée Jeansonne and had received
the documents that she had asked her to forward to her, including the pay
records and accounts receivable.
[34] This
witness also stated that, in her meeting with the appellant, the latter had
acknowledged his signature or his writing on approximately 85 percent of
the bids made by the payer. She filed bids in evidence (Exhibit I‑6):
the red tabs indicate the bids which the appellant signed during the periods
when he received employment insurance benefits and the blue tabs prove the
appellant's involvement, by either his signature or his writing, while he was
in a period of unemployment. The appellant admitted that he had gone to
clients' premises to make bids and acknowledged his writing and that of his
spouse on some of those bids.
[35] The appellant
admitted that he had taken out loans for the payer, including a mortgage loan
on the house of which he was the sole owner. The appellant brought no rebuttal
evidence.
[36] In Ferme Émile
Richard et Fils Inc. v. M.N.R., [1994] F.C.J. No. 1859, the Federal
Court of Appeal held that, in applying subparagraph 3(2)(c)(ii) of
the Unemployment Insurance Act, now subsection 5(3) of the Employment
Insurance Act, the Court must consider whether the Minister's decision
"resulted from the proper exercise of his discretionary authority".
The Court must first require "the applicant to present evidence of wilful
or arbitrary conduct by the Minister".
[37] In Canada
(Attorney General) v. Jencan Ltd., [1997] F.C.J. 876, the Federal Court of
Appeal reiterated our Court's role in cases similar to the case at bar and
wrote as follows at paragraphs 31 and 32 of its decision:
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 inquiry 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.
Desjardins J.A., speaking for this Court in Tignish, supra, described the Tax
Court’s circumscribed jurisdiction at the first stage of the inquiry as
follows:
Subsection 71(1) of the Act provides that the Tax Court has authority to
decide questions of fact and law. The applicant, who is the party appealing the
determination of the Minister, has the burden of proving its case and is
entitled to bring new evidence to contradict the facts relied on by the Minister.
The respondent submits, however, that since the present determination is a
discretionary one, the jurisdiction of the Tax Court is strictly circumscribed.
The Minister is the only one who can satisfy himself, having regard to all the
circumstances of the employment, including the remuneration paid, the terms and
conditions and importance of the work performed, that the applicant and its
employee are to be deemed to deal with each other at arm’s length. Under the
authority of Minister of National Revenue v. Wrights’ Canadian Ropes Ltd.,
contends the respondent, unless the Minister has not had regard to all the
circumstances of the employment (as required by subparagraph 3(2)(c)(ii) of the
Act), has considered irrelevant factors, or has acted in contravention of some
principle of law, the court may not interfere. Moreover, the court is entitled
to examine the facts which are shown by evidence to have been before the
Minister when he reached his conclusion so as to determine if these facts are
proven. But if there is sufficient material to support the Minister’s
conclusion, the court is not at liberty to overrule it merely because it would
have come to a different conclusion. If, however, those facts are, in the
opinion of the court, insufficient in law to support the conclusion arrived at
by the Minister, his determination cannot stand and the court is justified in
intervening.
In my view, the respondent’s position is correct in law...
In
Ferme Émile Richard et Fils Inc. v. Minister of National Revenue et al. (1994),
178 N.R. 361 (F.C.A.), this Court confirmed its position. In obiter dictum,
Décary J.A., stated the following at pp. 362‑363:
As this court
recently noted in Tignish Auto Parts Inc. v. Minister of National Revenue,
(...), an appeal to the Tax Court of Canada in a case involving the application
of s. 3(2)(c)(ii) is not an appeal in the strict sense of the word and
more closely resembles an application for judicial review. In other words, the
court does not have to consider whether the Minister’s decision was correct:
what it must consider is whether the Minister’s decision resulted from the
proper exercise of his discretionary authority. It is only where the court
concludes that the Minister made an improper use of his discretion that the discussion
before it is transformed into an appeal de novo and the court is empowered to
decide whether, taking all the circumstances into account, such a contract of
employment would have been concluded between the employer and employee if they
had been dealing at arm’s length.
[38] In Bérard v.
Canada (Minister of National Revenue ‑ M.N.R.), [1997] F.C.J.
No. 88, the Federal Court of Appeal held as follows:
...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.
[39] The payer is a
family business whose two shareholders were the appellant and his spouse. Under
the Act, a shareholder may be an employee of a company, if the terms and
conditions would have been substantially similar had the parties been dealing
with each other at arm's length. There is no doubt that the appellant and the
payer were not dealing with each other at arm's length.
[40] The appellant's
spouse testified at the hearing of this appeal with a certain degree of
assurance. She stated that she had taken courses for the purpose of forming and
managing a business.
[41] The appellant
testified that he had worked in the masonry field since 1978. When the payer's
business was formed in 1996, he was a bricklayer's/mason's apprentice. He did
not become a "journeyman mason" until 1998.
[42] According to the
document entitled "Advertising, Exhibit __" (Exhibit I‑2),
the appellant and his spouse presented themselves as the officers of the payer;
furthermore, the appellant is referred to in that document as "a master
mason from a family of master masons from father to son for four generations".
The appellant was thus closely related to the business; he was an employee in
it.
[43] In view of the
non-arm's length dealing, it must therefore be determined whether the
appellant's employment was insurable.
[44] The payer's place
of business was located in the family residence of the appellant and his
spouse. The payer paid the appellant no rent for the use of the office and
garage.
[45] According to the
financial reports for the periods in issue, the payer's annual turnover varied
between $270,000 and $415,238. The traffic at the family home must therefore
had been impressive. It is not normal for an employee of a business to lend his
residence to such commercial activities without compensation.
[46] The financial
reports prepared by an accountant show that the directors made advances to the
payer without interest or repayment terms. The appellant and his spouse were
unable to explain those advances to the appeals officer or the Court. It is not
normal for an employee who is dealing at arm's length to advance money to a
business without interest or repayment terms.
[47] The appellant took
out a personal loan at the Caisse Populaire (Exhibit I‑1) in order
to purchase a truck, which was the property of the payer. It is true that the
contract consolidated a previous personal loan of the appellant and the
purchase price of the truck. To repay the loan, the appellant and the payer
each paid $250 a month. The appellant occasionally paid the portion
attributable to the payer when the latter was short of cash; however, the
witnesses at the hearing stated that the payer had repaid the appellant in
full. In signing the "Loan Contract", the appellant personally
undertook to repay the loan: an employee dealing at arm's length would not
personally undertake to repay a loan taken out for the employer.
[48] The appellant also
took out a mortgage loan on his residence to guarantee the payer's lines of
credit. It is not normal for an employee to make a financial undertaking for
his employer's benefit.
[49] The appellant was
paid at the hourly rate of $25, the rate provided for by the Decree of the
Commission de la construction du Québec for work performed in the commercial
sector. For work performed in the residential sector, which is not covered by
the Decree, the appellant received remuneration of $20 an hour. This wage
differential cannot in itself affect his employment's insurability. The
appellant prepared and signed bids, approximately 85 percent of the total
number, while receiving employment insurance benefits. The appellant went to
the clients' premises or to visit the job sites and make the calculations in
preparing the bids. It is not normal for an employee dealing at arm's length to
be so generous with his time for his employer's benefit.
[50] The Court examined
the cases referred to it by the parties concerning non-arm's length dealing.
[51] The Court
concludes that the conditions of employment would not have been the same if the
appellant and the payer had been dealing with each other at arm's length. The
appellant did not show on a preponderance of proof that the Minister's conduct
was wilful or arbitrary.
[52] Accordingly, the
employment held by the appellant was not insurable during the periods in issue
since he and the payer were not dealing with each other at arm's length as
contemplated by paragraphs 5(2)(i) and 5(3)(b) of the Act.
[53] The appeal is
dismissed and the Minister’s decision is confirmed.
Signed at Ottawa, Canada, this 25th day
of June 2003.
D.J.T.C.C.
Translation certified true
on this 3rd day of February 2004.
John March,
Translator
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