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Citation: 2003TCC548
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Date: 20030911
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Docket: 2002-3804(EI)
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BETWEEN:
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CAROLINE ÉMOND,
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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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JONATHAN FOSTER,
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Intervener.
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REASONS FOR JUDGMENT
Somers,
D.J.T.C.C.
[1] This
appeal was heard at Jonquière, Quebec, on June 18, 2003.
[2] The
Appellant appeals from the decision of the Minister of National Revenue (the "Minister") that the employment with the Payor,
Jonathan Foster, during the period at issue, from March 5, 2001, to
March 8, 2002, is excluded from insurable
employment within the meaning of the Employment Insurance Act because
there was not an arm’s-length relationship between the Payor and the
Appellant.
[3] Subsection 5(1) of
the Employment Insurance Act (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 5(3) of the Unemployment 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
relationship
(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;
. . .
[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] In making his decision, the Minister relied on the following
assumptions of fact outlined in paragraph 7 of the Reply to the Notice of Appeal, which were
admitted or denied:
[translation]
(a) the
Payor registered a business on January 16, 1997, as a sole
proprietor; (admitted)
(b) the
Payor was an electrician; (admitted)
(c) the
Payor conducted business under the corporate name "Entreprise Jonathan Foster Enr."; (admitted)
(d) the
Appellant is the spouse of Jonathan Foster; (admitted)
(e) the
Appellant had been hired as an accounting secretary by the Payor; (admitted)
(f) the
Appellant had worked for the Payor since the beginning of the business;
(denied)
(g) the
Appellant’s duties included answering the phone, taking care of bank
reconciliations and payroll, preparing invoices, typing bids and filling out
reports for government organizations; (denied)
(h) the
Appellant was recorded in the Payor’s payroll register with remuneration of $16 per
hour in 2001 and $20 per hour in 2002; (admitted)
(i) on
May 8, 2002, the Appellant told a representative of the Respondent
that her salary had been established to meet the family’s needs; (denied)
(j) on
July 18, 2002, the Payor stated to a representative of the Respondent
that he was looking for a replacement to perform the Appellant’s duties with a
salary of $10 or $12 per hour subsidized by HRDC; (admitted)
(k) the
Appellant’s salary was unreasonable in light of her duties; (denied)
(l) the
Appellant’s salary was not fully paid; (denied)
(m) in
2001, of the 41 weeks worked, the Appellant and the Payor have proof of pay for
only 19 weeks; (denied)
(n) in
2002, of the 10 weeks worked, the Appellant and the Payor have no proof of pay;
(denied)
(o) on
March 14, 2002, the Payor gave the Appellant a record of employment
for the period beginning March 5, 2001 and ending on March 8, 2002, that
indicated 1,080 insurable hours and total insurable earnings of $19,040.00;
(admitted)
(p) after
she was laid off, the Appellant continued to provide services to the Payor
without pay; (denied)
[8] The Payor
registered a business on January 16, 1997, as a sole proprietor. The
Payor was an electrician doing business under the corporate name of
"Entreprise Jonathan Foster Enr."
[9] The Appellant is
the Payor’s spouse. She had been hired as an accounting secretary by the Payor.
[10] The Appellant told
the Court that she had worked as an office clerk for the school board until
1999, and that she has not worked anywhere else since then.
[11] She stated that she
worked for the Payor between 2000 and 2002. Her duties included answering the
phone, taking care of the bank reconciliations and payroll, preparing invoices,
typing bids and filling out reports for government organizations. In addition,
she allocated tasks to the Payor’s employees and spread salt on icy surfaces in
the winter.
[12] The Appellant was
entered in the payroll register with remuneration of $16 per hour in 2001
and $20/hour in 2002.
[13] She admitted have
spoken to a representative of Human Resources Development Canada
(HRDC) on July 18, 2002, saying that she was working for good of the
family.
[14] On
July 15, 2002, the Payor told a representative of the Minister that
he was looking for a replacement to perform the Appellant’s duties at a salary
of $10 or $12 per hour, subsidized by HRDC.
[15] The Appellant
testified that her salary of $16 per hour was always paid weekly, either
by cheque or in cash, for a total of $461.66 per week. In January 2002,
she received $20 per hour for approximately $580.
[16] The Appellant stated
that she worked for 41 weeks in 2001 and received 32 paycheques.
[17] She admitted that in
2002 she worked for the Payor for 10 weeks and she was paid in cash since the
Payor had enough liquidity to do so. According to her, she did not work for the
Payor after March 2002.
[18] On
March 14, 2002, the Payor issued a record of employment, Exhibit I‑4,
to the Appellant, for the period beginning on March 5, 2001, and
ending on March 8, 2002, indicating 1,080 insurable hours and total
insurable earnings of $19,040.00.
[19] The Appellant told
the Court that she did not work for the Payor after March 2002.
[20] In
cross-examination, she stated that at the very start of business operations in
1997, when the business office was in the family home, she helped her spouse
prepare invoices and set up an accounting system.
[21] Between 1999 and
2000, she went to the business office to perform certain duties without pay; at
that time, the business office was located in a building owned by her spouse,
located approximately 3 to 4 km from her home.
[22] She admitted having
spoken to Lynne Laberge, insurance agent for HRDC, and thinks she told her that
she was working for the Payor to meet the family’s needs.
[23] She admitted there
is no payroll register for her salary for 2002 and that her spouse asked her to
delay payment of her salary, to which she replied, "You pay me when you
can." However, she stated that she received her full salary for 2002 in
cash.
[24] She admitted having
signed a statutory declaration on April 17, 2002, (Exhibit I‑1),
which reads in part as follows:
[translation]
. . .My spouse Jonathan Foster has been the
sole proprietor of a business "Entrepreneur Électrique" since
1997. I have worked with him since that date, but I never worked for pay before
March 2001. At the beginning, we had set up the offices in our home and we
paid ourselves a salary by making withdrawals from the company profits. We thought
that we had no right to a salary because we were "owners". The first
year, the profits were around $30,000 and increased from year to year. Last
year, it was up to $808,000. In April 2000, my spouse bought a building in
Forestville, since the business was expanding and it had become too cramped at
home (materials, traffic, etc.) . . .
[25] Upon reading her
statutory declaration, she admitted that she had not been paid during this
period although she performed the same duties for which she had been paid
previously. Only since 2000 had she been on the payroll register.
[26] The Appellant
recognized the paycheques she received in 2000 and 2001.
[27] She admitted having
received a letter from the
Canada Customs and Revenue Agency dated
July 22, 2002, (Exhibit I-3), asking for documents such as the
payroll register and proof of wages paid.
[28] The Appellant
submitted as evidence photocopies of her paycheques (Exhibit A-1) for 2001
and recognized that approximately 11 were missing.
[29] She stated that she
signed her own paycheques and deposited them in the joint account she held with
her spouse, the Payor.
[30] According to the
Appellant, the secretary who replaced her was paid $10 per hour
during 2002. The latter worked from July 2002 until January 2003
and this job was subsidized by HRDC.
[31] She admitted that
her hourly rate was increased to $20 per hour in 2002, since the
Payor had a large contract. She stated that her salary was not paid regularly
and that she went to the office outside the period at issue to show her spouse
the tasks that needed to be done.
[32] She stated that the
following passage in her statutory declaration was false:
[translation]
. . . When the paperwork
accumulated, I went to the office for a few hours to do it and I took care to declare
my hours and the pay I received.
[33] Jonathan Foster,
the Payor, testified that he had employed an average of eight to 10 people in
2001 and four to five in 2002.
[34] His business office
was set up in his home from 1997 to 1998. Since his business had
grown, he bought a building in 2000, where his office is now located.
[35] He admitted that the
Appellant had worked for him for several weeks in 2000 and she only received a
salary in 2001. He also admitted that she did not receive her salary regularly
because his business did not have enough liquidity.
[36] In the fall of 2001,
he decided to give the Appellant a raise to $20 per hour, starting in
2002.
[37] He stated that he
did not have any employees between March and June 2002. He also admitted that
his business had a loss of $54,143 in 2001 and a profit of approximately
$63,000 in 2002.
[38] Anny DeBlois, Client
Service Officer and Appeals Officer at HRDC during the period at issue, stated
that she had telephone conversations with the Payor and the Appellant: with the
Payor on July 18, 2002, and with the Appellant on July 18,
August 5 and August 12, 2002.
[39] The information
obtained from the Payor and the Appellant confirms that the Appellant worked
for the Payor without pay from 1997 to 1999 and that her salary was
not paid on a regular basis in 2000.
[40] This witness
submitted a table, labelled Exhibit I-7, that shows the names of the
Payor’s employees as well as their working hours.
[41] According to her
report on a call (Exhibit I-6), the Appellant was entered on the payroll
register for 2000 and 2001 whereas according to the payroll register and the
proof of pay provided by the Payor, several paycheques had not been cashed by
the worker in 2000, 2001 and 2002:
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YEARS
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Weeks Worked
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Entry in payroll register
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PROOF OF PAY
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2000
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52
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10*
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3*
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2001
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52
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41
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19
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2002
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10
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8
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0
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*in 2000, the salary was
paid every two weeks.
[42] However, the
Appellant presented evidence that there were 31 salary payments made
in 2001, whereas she worked 42 weeks; however, no proof of pay was
presented for 2002.
[43] The Appellant did
not receive vacation pay or 4% pay in lieu of vacation.
[44] The Appellant
received a salary increase of $4 per hour, bringing her hourly rate to
$20, whereas the Payor did not have the ability to pay.
[45] After
March 2002, the Appellant went to the office four or five times per week
without being paid.
[46] The
Federal Court of Appeal, in Ferme Émile Richard et Fils Inc.
v. Canada (Department of National Revenue), [1994] F.C.J. No. 1859, indicated that
when applying subparagraph 3(2)(c)(ii) of the Unemployment Insurance Act,
now paragraph 5(3)(b) of the Employment Insurance Act,
the Court must ask whether the Minister’s decision "resulted from the
proper exercise of his discretionary authority." The Court must first
require that the Appellant "present evidence of wilful or arbitrary
conduct by the Minister."
[47] In Bérard v. Canada
(Minister of National Revenue – M.N.R.), [1997]
F.C.J. No. 88, Hugessen J. of the
Federal Court of Appeal said the following at paragraph 3:
. . . 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.
[48] In Légaré v. Canada
(Minister of National Revenue – M.N.R.), [1999]
F.C.J. No. 878, Marceau J. of the
Federal Court of Appeal said the following at paragraph 4:
. . .the Act
confers the power of review on the Tax Court of Canada on the basis of what is
discovered in an inquiry carried out in the presence of all interested
parties. The Court is not mandated to make the same kind of
determination as the Minister and thus cannot purely and simply substitute its
assessment for that of the Minister: that falls under the Minister's so-called
discretionary power. However, the Court must verify whether the
facts inferred or relied on by the Minister are real and were correctly
assessed having regard to the context in which they occurred, and after doing
so, it must decide whether the conclusion with which the Minister was
"satisfied" still seems reasonable.
[49] The Court verified
the facts relied on by the Minister and concluded that they were correctly
assessed having regard to the context in which they occurred.
[50] The Appellant
provided services to the Payor from 1997 to 1999 without pay. During 2000, 2001
and 2002, the Appellant was not paid regularly.
[51] The Appellant did
not receive paid vacation during the period at issue, nor did she receive 4% of
her salary in lieu.
[52] The Appellant worked
at the Payor’s office after the period on question without being paid.
[53] According to the
Appellant, she was paid by cheque or in cash; but no evidence was presented to
this effect.
[54] The Appellant
received a salary increase, whereas the Payor’s financial ability had
decreased. This increase was not reasonable.
[55] Given the
remuneration paid, the terms and conditions, the duration, nature and
importance of the work performed it is reasonable to conclude that the Payor
and the Appellant would not have entered into a substantially similar contract
if they had been dealing with one another at arm’s length.
[56] The Appellant has
failed to establish, on a balance of evidence, that the Minister acted wilfully
or arbitrarily.
[57] As a result, the
Court concludes that the Appellant’s employment during the period at issue is
excluded from insurable employment under paragraph 5(2)(i) and subsection 5(3)
of the Employment Insurance Act.
[58] The appeal is
dismissed.
Signed at Ottawa, Canada, this 11th day of September 2003.
Deputy Judge Somers
on this 17th
day of March 2004.
Shulamit Day-Savage, Translator
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