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Citation: 2003TCC479
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Date: 20030717
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Dockets: 1999-3937(EI)
1999-3939(EI)
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BETWEEN:
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ALAIN MÉTHOT,
EDGAR SÉNÉCHAL,
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Appellants,
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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
Judge Alain Tardif
[1] The parties
agreed to proceed on common evidence in the two cases. The appeals concern the
insurability of the work performed by the appellants when they worked for the
company “Fermes de Toit Jomar Inc.” In the case of the appellant
Alain Méthot (1999‑3937(EI)), the period at issue extends from
January 12 to December 11, 1998; as for the other appellant, Edgar Sénéchal
(1999-3939(EI)), the period at issue is between January 12 and December 18,
1998.
[2] To support and
justify the decisions that are the subject of the appeals, the respondent
assumed the facts set out as follows:
[Translation]
(a) the payer, Les Fermes de Toit Jomar Inc., was incorporated on
July 9, 1990;
(b) the principal activities of the payer are the manufacture of
roof trusses, doors, frames and windows;
(c) the shareholders of the payer are
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Marcel
Sénéchal
Edgar
Sénéchal
Alain
Méthot
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34%
33%
33%
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(d) Alain Méthot is the brother-in-law of Edgar Sénéchal who is the
brother of Marcel Sénéchal;
(e) the appellants primarily handled the following tasks: preparing
estimates, taking orders and making purchases and helping when the parts were
assembled;
(f) the appellants primarily took care of the cutting and assembly
of the parts manufactured by the payer;
(g) the plant where the trusses are manufactured is situated on a
property belonging to Edgar Sénéchal;
(h) the garage where the doors, frames and other material are
stored is the property of Alain Méthot;
(i) the appellants did not collect any rental income from the
payer for the property and the garage that they provided;
(j) the appellants each made their own pickup trucks available to
the payer, without compensation or reimbursement for the expenses incurred on
the payer’s behalf;
(k) the appellants purchased tools, namely a press, a large table
and a saw, from a bankrupt company for the sum of $3,000 to $4,000, and lent
them to the payer, without demanding rent for their use;
(l) a $25,000 line of credit was personally guaranteed by Alain
Méthot and Edgar Sénéchal;
(m) the payer’s cheques were signed by the appellants;
(n) apart from $34, representing the purchase of $34 shares at $1
each, the other shareholder, Marcel Sénéchal, made no investment in the payer’s
business;
(o) on the financial statements ending December 31, 1997, there is
an interest-free loan owed to the directors for $10,720, which does not provide
for any method of payment; only the appellants were responsible for this loan
to the payer;
(p) Marcel Sénéchal is the only one of the three shareholders with
no expertise in the payer’s field of operations;
(q) Marcel Sénéchal claims that he invests more time in the
business now that he has retired after being a high school math teacher; he
says he works from 6 to 8 hours a week;
(r) the appellants now claim that Marcel Sénéchal supervises
them despite the fact that he has no expertise in the field and that the
appellants has operated the business for many years without
Marcel Sénéchal;
(s) only the appellants are remunerated for their work, and
Marcel Sénéchal does not receive a salary or dividends;
(t) Ghislaine Méthot, the wife of Edgar Sénéchal and the sister of
Alain Méthot, handled the accounting with Marcel Sénéchal;
(u) the payer’s actual control was, in fact, effected by the
appellants.
[3] The facts alleged
in subparagraphs 5(a), (c), (d), (e), (f), (l), (o), (q) and (t) were admitted;
the remainder were denied.
[4] The evidence
disclosed that the status of the appellants with respect to their insurability
had already been the subject of a ruling. Evidently disappointed and embittered
by the experience, the appellants had refused to cooperate with the formula
suggested by the person responsible for the file, namely, questions and answers
in the course of a telephone conversation.
[5] The appellants’
attitude and their conduct in refusing to answer questions by telephone was
interpreted adversely by the person responsible for the files who then quickly
wound up his investigation and refused to agree with the appellants’ request to
send them the questionnaire in writing.
[6] The
question-and-answer formula is an acceptable method that may prove to be less
convincing because of the lack of spontaneity in the answers. On the other
hand, nervousness and intimidation can also impair the quality of answers
provided spontaneously in a telephone conversation.
[7] Both methods have
one significant defect, however; that is, the complete absence of body
language, which is often decisive in assessing the value of the relevant facts
in general.
[8] In the case at
bar, the Court was able to assess the testimony from every aspect so that it
could draw conclusions.
[9] The preponderance
of the evidence submitted established that the company, “Fermes de Toit Jomar
Inc. had not been incorporated in order to deceive or to be a bogus legal
personality. The company grew in a normal way, within quite acceptable
parameters considering the shareholders’ education and corporate skills.
[10] The evidence did
not highlight any fact or element that was of a nature to discredit the
corporate reality. I did not note or see any irregularities or serious
misconduct that could give rise to an adverse impact such that the corporate
reality needed to be disregarded.
[11] To be sure, the
respondent argued a certain number of factors in order to discredit the
legitimacy and even the reality of the company. I refer in particular to the
following points:
·
the lack of an indication that rent was paid for the premises where the
financial statements were prepared; and
·
the lack of an investment by one of the shareholders;
[12] As for the
argument concerning the non-payment of rent, this is the respondent’s
interpretation arising from the lack of an indication in the financial
statements to that effect for certain years, confirmed by the absence of any
acknowledgment of such rental income on the recipients’ tax returns. However,
the evidence showed that this was a nominal rent that had been agreed to for a
two-year period, supported by cheques corresponding with the amounts agreed to,
which were issued and endorsed.
[13] As for the lack of
a dollar investment by one of the shareholders, there is nothing in the Act that
condemns such a practice. It is not uncommon, moreover, for individual skills
or expertise to take the place of a contribution at the time a company is
created.
[14] In the case at
bar, the personality and education of Marcel Sénéchal, a retired teacher,
were an asset for the company. Furthermore, his testimony established that he
had a relatively sound acquaintance with the company’s affairs, that he took an
interest in them and participated actively in them.
[15] The findings
highlighted by the respondent do not enable decisive conclusions to be reached.
Certainly, the appellants had a formal obligation to report all income sources,
including any rental income, regardless of how small it was. Concealing such
income could eventually justify notices of reassessment, but is certainly not
sufficient to conclude that the company was a sham.
[16] As for the lack of
investment, the evidence disclosed that the shareholder, Marcel Sénéchal,
did not make a cash investment, and he hastened to add that his investment
corresponded with his experience and primarily his training.
[17] A retired teacher,
Marcel Sénéchal was clearly an articulate person who was well informed and
evidently had ideas about how to organize, administer and supervise the
operations of a corporate entity.
[18] As for the
appellants, they had considerable experience and cutting-edge skills in the
type of work that characterized the company’s output. Formerly employed in that
sector with businesses that had since closed, they were essential to the
operations of the business, whose main income came from the manufacture of roof
trusses for which the appellants were the main contractors.
[19] Did they possess
the qualities, knowledge and experience to perform the work in the context of
the company’s operations? Perhaps, but the presence of the shareholder Marcel
Sénéchal gave them a sense of security and a feeling of comfort since the
latter had greater aptitude for the administrative, clerical and representative
sides of the business.
[20] There is no doubt
that the involvement and participation of the shareholder Marcel Sénéchal was a
very important element, largely making up for the lack of investment.
[21] Concerning the
issue of control, it is important, I feel, to remember the importance of making
clear distinctions concerning corporate status where the dual functions of
workers and shareholders are combined.
[22] To be sure, it may
be difficult to separate or compartmentalize the two functions, but this is a
fully necessary activity, especially when assessing whether the company had a
power of control.
[23] The concept of
power of control does not require that the person or persons who collaborate in
its exercise be as competent or more competent than those who perform the work
that is to be controlled. The authorities have dealt with this issue on a
number of occasions. I refer, inter alia, to excerpts from the following
decisions:
·
In Weibe Door Services Ltd. v. M.N.R., (1986) 3 F.C. 533, the
Honourable Judge MacGuigan stated the following on this subject:
...
A principal inadequacy
is its apparent dependence on the exact terms in which the task in question is contracted
for: where the contract contains detailed specifications and
conditions, which would be the normal expectation in a contract with an
independent contractor, the control may even be greater than where it is to be
exercised by direction on the job, as would be the normal expectation in a
contract with a servant, but a literal application of the test might find the
actual control to be less. In addition, the test has broken down completely in
relation to highly skilled and professional workers, who possess skills far
beyond the ability of their employers to direct.
...
·
In Hennick v. Canada, (1995) F.C.J. No. 294, at paragraph 7,
the Honourable Judge Desjardins states:
...
While it is true that
the element of control is somewhat more difficult to assess in cases of
professionals [See Note 5 below], the trial judge completely ignored that, on
January 15, 1993, the intervener notified the respondent that she had not
fulfilled the minimum teaching requirement as stipulated in the collective
agreement and that she was requested to increase her teaching load.[See Note 6
below] While her contract with the intervener did not specify how she was to
teach, there were parameters she had to meet with regard to time which clearly
constituted control. The trial judge erred in failing to consider this piece of
evidence. Besides, what is relevant is not so much the actual exercise of a
control as the right to exercise a control.
...
·
There are also the comments of the Honourable Judge Sobier in Whistler Mountain
Ski Club v. Canada, (1996) T.C.J. No. 876, at paragraph 22:
...
·
Supervision
or control of how a professional or expert performs his
functions cannot be said to be control since the professional
generally knows more about his functions than his employer. He can however
exercise control over his employee by setting his hours of employment, his
place of employment, whether he can come and go at his own wish.
[24] If this were not
the case, it would mean that the performance of any specialized work could not
be the subject of any kind of control. The only way to have control over the
worker would be if the company employed a natural person to exercise such
control who was even more specialized than the worker.
[25] Any work can be
the subject of control even if the person who assumes or participates in its
exercise has little or no knowledge of the kind of work performed.
[26] It is also
important to remember that a shareholder whose work and expertise contribute to
the revenues of the company may collaborate in the activity to provide a
genuine relationship of subordination between the company that employs him and
of which he is a shareholder and the work as an employee that he performs for
the company.
[27] In the case at
bar, the work performed by the appellants generated the company’s revenues.
Working in a highly specialized field, they manufactured roof trusses. They had
the knowledge and the experience to do this kind of work and they were paid
based on the regulations applying to this occupation.
[28] With knowledge and
extensive experience in the field, they prepared and submitted tenders to
obtain contracts. They were two of the three shareholders, the third being a
retired teacher who had little practical knowledge of the work performed by the
appellants. He did, however, have a general knowledge of mathematics and his
academic training made him more articulate and perhaps better able to represent
the company. He could reassure the appellants whose chief quality was their
mastery of their art to the detriment of any general knowledge in commercial
and corporate relationships needed for the successful operation of any
business.
[29] To be sure, the
appellants, who had formerly worked in similar plants, wanted to keep going in
the only field they really knew, without being penalized, since the work was
mainly seasonal and done in summer.
[30] The chances of
obtaining employment in the same sector of activities were very low and they
decided to incorporate a company, which in itself was completely legitimate.
Did they meet all the requirements?
[31] Generally
speaking, the answer to this question is yes. From a modest background, with an
apparently limited financial capability, they obtained the interest of their
brother and brother-in-law and structured a company according to their
respective assets and limitations.
[32] Did they create a
bogus business? The answer is no. Their knowledge being limited to their
sector, they got Marcel Sénéchal interested so they could enrich the
company with a vision that might ensure its successful operation.
[33] The business was
created, organized and operated in accordance with the available resources and
following the applicable rules.
[34] To be sure, a
business that could afford an accountant, a comptroller, a lawyer and an
analyst might have presented a more polished case, but the presence of such
professionals is by no means mandatory if certain key principles are followed
and the operations are in keeping with the legitimate choices that have been
made.
[35] For all these
reasons, I find that the appellants have discharged the onus on them and have
shown that the work performed during the periods at issue met the requirements
and conditions for a bona fide contract of service.
[36] The appeals are
therefore allowed because the work performed by the appellants for the periods
at issue was insurable.
Signed at Ottawa, Canada, this 17th day of
July 2003.
Judge Tardif
Translation certified
true
on this 30th day of
January 2004.
Leslie
Harrar, Translator
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