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Citation: 2003TCC541
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Date: 20030812
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Docket: 2002-4356(EI)
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BETWEEN:
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ALAIN TREMBLAY,
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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
Somers, D.J.T.C.C.
[1] This appeal was heard at Jonquière, Québec, on
June 16, 2003.
[2] The Appellant appealed from the decision of the
Minister of National Revenue (the "Minister")
that the employment with the Payor, Gestion Rodrigue Tremblay Ltée., from January 1 to December 31, 2000, is insurable
because this employment met the requirements for a contract of service and
there was an employer-employee relationship between the Payor and Appellant.
[3] Subsection 5(1) of the Employment Insurance 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:
5. (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;
. . .
(2) Definition
of "related persons". For
the purpose 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;
(b) a corporation and
(i) a person who controls the
corporation, if it is controlled by one person,
(ii) a person who is a member of a
related group that controls the corporation, or
(iii) any person related to a
person described in subparagraph 251(2)(b)(i) or 251(2)(b)(ii);
…
[6] The burden of proof is on the Appellant. The
Appellant must show, on a balance of evidence, that the Minister's decision is
unfounded in fact and in law. Each case stands on its own merits.
[7] The
Minister based his decision on the following presumptions of fact outlined in
paragraph 10 of the Reply to the Notice of Appeal, which were admitted or
denied:
[TRANSLATION]
(a) The
Payor has been in operation since 1964; (admitted)
(b) The
Payor operated a shoe sales and foot orthotics manufacturing business;
(admitted)
(c) During
the period at issue, the Payor’s shareholders were: (admitted)
Rodrigue 50.9%
of the shares
Peurl Mercier 49%
of the shares
The
Appellant 0.1% of the shares
(d) Rodrigue Tremblay
is the Appellant’s father and Peurl Mercier is the Appellant’s mother;
(admitted)
(e) The
Appellant was hired as the Payor’s managing director; (admitted)
(f) The
Appellant’s duties involved supervising the employees, purchasing, selling and
manufacturing orthotics and directing daily business operations; (admitted)
(g) Significant
decisions were made by the Payor’s board of directors; (denied)
(h) The
Appellant was paid $41,000 per year by the Payor; (admitted)
(i) The
Appellant usually worked 42 to 43 hours per week; (admitted)
(j) For
three of the months during the period at issue, the Appellant worked 80 to 85
hours per week as the result of the absence of one of the Payor’s employees;
(admitted)
(k) During
these three months, the Appellant received the same pay; (admitted)
(l) The
Appellant was paid by cheque each week; (admitted)
(m) The
Appellant received group insurance that included a wage‑loss indemnity
plan; (admitted)
(n) The
Appellant had three weeks of paid vacation per year; (admitted)
(o) The
Payor reimbursed the costs of the Appellant’s training or conferences;
(admitted)
(p) The
Appellant did not have to cover any expenses as part of his employment;
(admitted)
(q) As
part of his work, the Appellant assumed no risk of loss or chance of profit;
(denied)
(r) All
the tools and equipment used for the Appellant’s work belonged to the Payor;
(admitted)
(s) The
Appellant’s work was an integral part of the Payor’s activities. (admitted)
[8] The Payor has been
in operation since 1964, operating a shoe sales and foot orthotics
manufacturing business.
[9] During the period
at issue, the Payor’s shareholders were Rodrigue Tremblay,
Peurl Mercier and the Appellant, who owned 50.9%, 49% and 0.1% of the
shares, respectively.
[10] Rodrigue Tremblay
and Peurl Mercier are the Appellant’s father and mother; there is
therefore not an arm’s‑length relationship between the Payor and the
Appellant.
[11] The Appellant was
hired as the Payor’s managing director. His responsibilities included the
supervision of approximately eight employees, purchasing, sales and
manufacturing of orthotics, and directing daily business operations.
[12] Major decisions were
made informally by the board of directors, but the Appellant made daily
decisions without consulting the two other shareholders. There was a full
transfer of the management of the business.
[13] The Appellant was
paid $41,000 per year, usually working 42 to 43 hours per week. However,
for three months during the period at issue, the Appellant worked 80 to 85
hours per week as the result of the absence of an employee, without any
increase in salary.
[14] The Appellant was
paid by cheque each week. He received group insurance that included a wage‑loss
indemnity plan. He had three weeks of paid vacation per year.
[15] The Payor reimbursed
expenses related to the Appellant’s training courses or conferences. The
Appellant was not responsible for any expenses as part of his employment.
[16] The tools and
equipment used in the Appellant’s work were the property of the Payor.
[17] Rodrigue Tremblay
testified that he started this business in 1964 with his spouse.
[18] While they were in
school, the children worked for the business. However, the Appellant developed
a particular interest in the business. Starting in 1990, the Appellant worked
full-time.
[19] In 1994, the
Appellant took an eight- or nine-month training course in manufacturing moulded
shoes. Rodrigue Tremblay has complete trust in the Appellant’s abilities.
[20] Two documents
submitted as Exhibits I-1 and I-2 demonstrate that
Rodrigue Tremblay and Peaul Tremblay, his spouse, signed them:
Exhibit I-1 is a loan for $35,000 from the National Bank of Canada to
the Payor and Exhibit I-2 is a line of credit for $75,000.
Rodrigue Tremblay and his spouse were jointly liable to the National Bank
of Canada.
[21] The photocopies of
the cheques made payable to the Appellant, submitted as Exhibit I-3, were
all signed by Peurl Tremblay, the spouse of Rodrigue Tremblay.
[22] Exhibit I-4, [translation] “List of administrators
or notice of change in administrators” indicated the three shareholders’ names
and occupations within the business and the Appellant appears on the list as
the manager.
[23] Rodrigue Tremblay
stated that he worked between 10 and 20 hours per week during the
period at issue and that he received a weekly salary of $527.96.
[24] Since they were on
site, Rodrigue Tremblay and the Appellant consulted one another on
occasion when making major decisions.
[25] According to the
witness, the other employees each received one hour for a meal, with a 15‑minute
break in the morning and the afternoon. The Appellant was not subject to these
working conditions and had the right to one day off each week.
[26] The Appellant
essentially corroborated his father’s testimony. He stated that he never felt
controlled by his parents with respect to managing the business. He stated that
he did not have a fixed schedule and that the meal hour and breaks given to the
other employees did not apply to him.
[27] He added that his
father earned $500 to $600 per week, whereas he earned $800 for a 40‑hour
week. He claimed that his salary should be double what he earned.
[28] In Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553, the Federal Court of
Appeal listed four basic tests for distinguishing between a contract of service
and a contract for services. These tests are:
(a) The
degree of control;
(b) Ownership
of tools;
(c) Chance of profits and risks of
loss;
(d) Integration of
the employee’s work into the Payor’s business.
[29] The evidence
demonstrated that the tools belonged to the Payor. The Appellant received a
regular salary paid by cheque every week. Therefore there was no chance of
profit or risk of loss. The Appellant was an integral part of the Payor
company’s operations, working exclusively for the family business.
[30] From these three
tests, it can be concluded that there was a contract of service between the
Appellant and the Payor.
[31] The degree of
control is an important factor in determining whether there is a contract of
service.
[32] In Groupe
Desmarais Pinsonneault & Avard Inc. v. Canada (Minister of National Revenue
- M.N.R.), [2002] F.C.J. No. 572, Noël J. of the Federal
Court of Appeal said the following:
4 In concluding that
there was no relationship of subordination between the workers and the
defendant, the trial judge does not appear to have taken into account the
well-settled rule that a company has a separate legal personality from that of
its shareholders and that consequently the workers were subject to the
defendant's power of supervision.
5
The question the trial judge should have asked was whether the company had the
power to control the way the workers did their work, not whether the company
actually exercised such control. The fact that the company did not
exercise the control or that the workers did not feel subject to it in doing
their work did not have the effect of removing, reducing or limiting the power
the company had to intervene through its board of directors.
6
We would add that the trial judge could not conclude there was no relationship
of subordination between the defendant and the workers simply because they
performed their daily duties independently and without
supervision. The control exercised by a company over its senior
employees is obviously less than that exercised over its subordinate employees.
[33] In Industries J.S.P. Inc. v. Canada (Minister of National Revenue –
M.N.R.), [1999] T.C.J. No. 423, Tardif J. of this Court
summarized the facts, similar to those of the case under review, in these
terms:
Marie-Claude Perreault testified
and gave a number of examples to describe and explain her interest, enthusiasm
and fervour and that of her brothers with respect to the interests of the
appellant company, which operates in the difficult and highly competitive field
of furniture building.
Sharing major strategic
responsibilities in the company controlled by Jacques Perreault, who holds 1,000
voting but non-participating shares, Marie-Claude Perreault and her brothers
left nothing to chance in ensuring the company's well-being and development.
Each family member was paid more
than a reasonable salary and, at year end, received a bonus that varied
depending on the economic performance of the company and the quality of the
work performed.
Major decisions were made jointly
and by consensus. The family members each devoted at least 60 hours [per week]
to their respective duties for the company.
The balance of evidence,
therefore, was that the Perreault family members dedicated themselves totally
and entirely to the company's business. They invested in it most of their
available time (at least 60 hours [per week]) to ensure that the company could
succeed in a difficult market where competition is stiff.
The family members affected
by the Minister's decision held important, essential positions and were paid
salaries probably lower than those the company should have paid to third
parties for performing similar duties. This fact alone led the agent for the
appellant company to state and conclude that their employment was excluded from
insurable employment under paragraph 3(2)(c) of the Unemployment
Insurance Act ("the Act").
. . .
Contributing to and being a partner in the management,
administration or development of a business, particularly a small business,
means that a person's job description is strongly marked by responsibilities
characteristic of those often fulfilled by actual business owners or persons
holding more than 40 per cent of the voting shares in the company employing
them. In other words, in assessing remuneration, at this level of
responsibility, caution must be exercised when a comparison is made with the
salaries of third parties; often there are advantages that offset the lower
salaries.
and concluded that the employment
of the members of this same family, although not at arm’s‑length, was not
excluded from insurable employment.
[34] The degree of
control is a factor that is very important in assessing the Minister’s
decision.
[35] In this case, the
board of directors had the power to exercise control over the Appellant’s
management of the business. Control over the company’s operations does not mean
that there is control over the company.
[36] Rodrigue Tremblay
and his spouse controlled almost all the company shares and had an interest in
the proper operation of the business operations.
[37] Rodrigue Tremblay
testified that his income came from his dividends and his salary of
approximately $600 per week was his [translation]
“pension fund.”
[38] Informal discussions
were still held with respect to major decisions to be made. The Appellant’s
father and mother signed financial commitments for the company’s benefit.
[39] Despite the full
authority exercised by the Appellant, he consulted his father with respect to
the major decisions to be made, for example, renovations to the business.
Rodrigue Tremblay worked in the business approximately 15 to 20 hours
per week. He effectively had control over the administration of the business,
despite his great trust in the Appellant’s management abilities.
[40] We can identify a
relationship of subordination between the Appellant and the company. After an
analysis of all the factors, the Appellant’s employment meets the requirements
for a contract of service.
[41] The Minister and the
Appellant held that there was not an arm’s‑length relationship between
the Appellant and the Payor; this was, in fact, the case.
[42] The Appellant worked
regular hours, approximately 40 hours per week, except for the three
months of the period at issue due to exceptional circumstances during which he
worked 80 hours per week.
[43] The Appellant had
the right to paid vacation, as did the other employees. His salary, despite his
responsibilities, was not unreasonable. The fact that he did not receive a
one-hour lunch or breaks, as did the other employees, cannot be considered
unreasonable. The Appellant exercised a management position within the company,
therefore his special position had both advantages and disadvantages. The
Appellant had a particular interest because he testified that he would inherit
the company when his parents died.
[44] It is therefore
reasonable to conclude, given the circumstances of the case, the remuneration
paid, the terms and conditions, the duration and the nature and importance of
the work performed, that the Appellant and the Payor would have entered into a
substantially similar contract if they had been dealing with each other at
arm’s length.
[45] Under the
circumstances, during the period at issue, the Appellant’s employment was
insurable within the meaning of the Employment Insurance Act.
[46] The appeal is
dismissed.
Signed at Ottawa, Canada, this 12thth day
of August 2003.
D.J.T.C.C.
on this 15th
day of March 2004.
Shulamit Day-Savage, Translator
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