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Citation: 2004TCC477
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Date:20040629
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Docket: 2003-1617(EI)
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BETWEEN:
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C&B WOODCRAFT LTD.,
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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 BETWEEN:
Docket: 2003-1615(EI)
DARIO VIRGA
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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
Woods J.
[1] These are appeals by Dario Virga and C&B
Woodcraft Ltd. ("C&B") from a ruling of the Minister of National
Revenue that Mr. Virga was engaged in insurable employment for purposes of the Employment
Insurance Act during the period January 1, 2001 to June 3, 2002. The
appeals were heard together on common evidence.
[2] Mr. Virga's parents, Carlo and Yolanda
Virga, own all the shares of C&B, a corporation that operates a cabinet
making business. Dario Virga is 28 years of age and has worked with his father
in C&B since he was a young age. During the relevant period he was employed
full time as a cabinet maker.
[3] For purposes of determining whether a
person is engaged in insurable employment under the Employment Insurance Act,
the employment of a person who is related to the employer, as Dario Virga was,
is excluded unless the Minister is satisfied that the terms of employment are
substantially similar to arm's length terms.
[4] This appeal arose as a result of an
application for a refund of employment insurance premiums by Mr. Virga and
C&B. The Minister concluded that the terms and conditions of the employment
were substantially arm's length and ruled that the employment was insurable.
[5] This case was the first of four similar
appeals that I heard in Edmonton, Alberta over a one week period. The
individual appellants in all four cases were employed by corporations owned by
their parents and all appeals arose as a result of refund applications. Mr.
Deryk Coward of the law firm D'Arcy & Deacon was counsel for all the
appellants and he informed me that he had hundreds of similar cases pending.
Statutory provisions
[6] The relevant statutory provisions are
contained in paragraphs 5(2)(i) and 5(3)(b) of the Employment
Insurance Act which read:
(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),
…
(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.
(emphasis added)
Scope of Paragraph 5(3)(b)
[7] The
statutory scheme for determining whether a person related to the employer is
engaged in insurable employment is not easy to decipher. One question that has
arisen is whether the Minister's decision making power under these sections is
final and what role the Tax Court has in reviewing these decisions. Another question
that has received less attention is how the legislation applies to a person who
does not wish to be within the employment insurance scheme. I would make a few
comments about this question before considering the facts of this particular
case.
[8] If paragraphs 5(2)(i) and (3)(b) are read
literally, a person who is related to the employer is deemed not to be
insurable, the employee and employer are not required to pay premiums and the
employee is not entitled to benefits - unless the Minister is satisfied that
the employment terms are arm's length. Typically the Minister makes this
determination when a person makes an application for employment insurance
benefits. However, in this case, the Minister made the determination in the context
of the requirement to pay premiums. Does paragraph 5(3)(b) contemplate that
the Minister would make this kind of determination?
[9] To date this court has accepted, albeit
reluctantly, that the Minister has the power to make a determination under paragraph
5(3)(b) to require premiums. The statute been considered to be broad enough as
a matter of strict construction to give the Minister this power: see Hoobanoff
Logging Ltd. v. M.N.R., [1999] T.C.J. 856 (T.C.C.). The following is
from Deputy Judge Porter's decision:
I am of the view that the law enables him
to do that in the appropriate circumstances, but that such is hardly consistent
with the intent of the amendments made to the Unemployment Insurance Act in
1990 when this discretion was first introduced. …
Nonetheless, as a matter of strict
interpretation of the law, I am satisfied that the legal capacity for the
Minister to do this exists.
(paragraphs 11 and 12)
[10] The legislative history suggests that
paragraph 5(3)(b) was enacted as a relieving measure so that persons would not
be denied employment insurance benefits unless the denial could be justified on
a basis other than the relationship between the parties. Prior to the enactment
of paragraph 5(3)(b) in 1990, a person who was employed by a spouse was simply
excluded from the employment insurance scheme. In the case of Canada v.
Druken, [1989] 2 F.C. 24 (F.C.A.), this exclusion was held to be
discriminatory and contrary to the Human Rights Act. As a result, the provision
was struck down and held to be unenforceable. The Druken decision led to
an amendment to the legislation shortly thereafter. The new provision, now in
paragraph 5(3)(b), ensures that a person will not be denied employment
insurance benefits if the employment terms are essentially arm's length terms.
[11] When one looks at the legislative history
and the statutory provisions together, I would have thought that the scheme was
that persons related to their employer would not be eligible for employment insurance
unless they could satisfy the Minister that they should qualify based on the
arm's length test that is provided in paragraph 5(3)(b). If this is the
statutory scheme, then under the so-called modern approach to statutory
construction, paragraphs 5(2)(i) and 5(3)(b) should not be interpreted in a
manner that Parliament did not intend. As a result I have some doubt that
paragraph 5(3)(b) gives the Minister the power to mandate that someone who is
related to the employer should pay employment insurance premiums.
[12] Not only is this Ministerial power not
clear on the words of the statute, but the fact that the power is partly
discretionary makes it quite unfair in a self-assessing system. Persons must
decide whether to pay premiums and risk that the Minister will refuse benefits.
On the other hand, if they do not pay premiums, the Minister can require
premiums on a retroactive basis.
[13] For
these reasons, it is not clear to me that Parliament intended the Minister to have the type of power that
was exercised in this case. It is not necessary that I make a finding on this,
however, because of the conclusion that I have reached on the particular facts
of this case.
The Minister's determination
[14] The Minister concluded that Dario Virga was engaged in insurable employment because the terms and
conditions of his employment were substantially similar to arm’s length terms.
The facts upon which the Minister relied are set out as assumptions of fact in
the pleadings and are attached
as an appendix to these reasons.
The employment relationship that the Minister assumed in making his
determination was typical of an arm’s length relationship – an hourly wage was
paid for a regular work week and the employer provided the tools needed for the
job and reimbursement for fuel expended in the course of employment.
A more fulsome picture of the employment, however, emerged at the
hearing.
[15] Dario Virga was the only person to testify.
He stated that he decided not to have his father testify because of his father’s age and poor English. This was troublesome
because the son’s testimony was somewhat inconsistent with answers contained in
an audit questionnaire signed by both he and his father. I have, therefore,
approached Mr. Virga's testimony with some caution. Nevertheless it is not
surprising to me that there would be some inconsistencies. One does not have a
very clear picture of a relationship by looking at short answers in a
questionnaire.
[16] Even approaching Mr. Virga's testimony with
caution, I conclude that the
Minister did not take into account several facts that should
have had a bearing on his decision. Some of these are:
-
The Minister assumed
that Mr. Virga apprenticed with C&B. This is accurate but the Minister did
not consider that Mr. Virga only recently undertook this training;
-
The Minister assumed
that C&B had arm’s length employees and that they received annual bonuses,
like Mr. Virga. However, the Minister did not appreciate that Mr. Virga’s
bonuses were much greater than those paid to the arm’s length employees. Mr.
Virga received a few thousand dollars whereby the arm’s length employees received only about $100.
-
The Minister assumed
that Mr. Virga completed timesheets but he failed to recognize that
Mr. Virga usually only recorded hours worked during the regular shop hours and
that he was generally not paid
for overtime.
-
The Minister assumed
that C&B reimbursed Mr. Virga for his fuel expenses but he did not
appreciate that not all employment related expenses were reimbursed. There was
no compensation for Mr. Virga's use of his own tools, cell phone and car
expenses other than fuel.
-
The Minister did not
take into account that Mr. Virga did some entertaining of clients at dinner
parties. I have given this factor very little weight because there was no
evidence to show whether this entertaining was primarily business or personal.
[17] These factors together paint a rather
different picture from what
the Minister had assumed. For
this reason, I have concluded that the Minister’s decision is not supportable.
Are employment terms arm’s length?
[18] The arm’s length test in paragraph 5(3)(b)
requires a comparison of the actual terms and conditions of employment to what
they might be if Mr. Virga and C&B were dealing at arm’s length. The employment terms of the arm’s length employees are perhaps the most
relevant evidence but this is of limited assistance here because there is no
evidence that the arm's length employees were employed in a similar capacity to
Mr. Virga. Mr. Virga was a responsible and trusted employee, capable of dealing
with customers, providing estimates and potentially being the successor to his
father.
[19] Another arm's length comparison that was
made at the hearing was whether Mr. Virga would work under similar terms and
conditions if he were working for The Home Depot. This comparison similarly is
of little assistance because the working conditions at a large retail chain
such as The Home Depot are
bound to be much different
than the conditions at a small family run business. The essential question is whether Mr. Virga would have
similar employment terms if he and C&B were dealing at arm's length, not if
Mr. Virga was employed by a hypothetical employer.
[20] There is therefore little evidence to
assist with the arm’s length comparison and the comparison must largely be
determined based on common sense. The appellants argue that Mr. Virga was given
more responsibility than an arm’s length employee. I think that it is a
reasonable assumption that in a small business a father would have more trust
in a son and give him more responsibility in dealing with the business affairs,
especially financial matters such as estimating, than an arm’s length employee.
The appellants also argue that Mr. Virga would not have worked overtime without
pay and used his own tools and cell phone without reimbursement. I also think
that this is a fair argument. Mr. Virga was paid as if he worked regular hours
whereas in fact there was considerable work to be done outside those hours for
which Mr. Virga was not paid. If he had been dealing at arm’s length with
C&B, he would not have been as willing to contribute to the business as he
did without sufficient compensation.
[21] For these reasons, I conclude that Mr.
Virga’s terms and conditions of employment are not substantially similar to
what they would be if he had been dealing at arm’s length with his employer.
Conclusion
[22] The appeals are allowed and the decision of
the Minister that Dario Virga was engaged in insurable employment is vacated.
Signed at Ottawa, Canada, this 29th day of June, 2004.
J.M. Woods J.
APPENDIX
Assumptions of Fact
In so deciding as he did, the
Minister relied on the following assumptions of fact:
(a) the Appellant is in the cabinet
making business;
(b) Carlo Virga
(hereinafter "the Shareholder") was the major shareholder of the
Appellant during the period under review (the Period);
(c) the Worker is the son of the
Shareholder;
(d) the Worker and the
Appellant are related to each other within the meaning of the Income Tax Act,
R.S.C. 1985 (5th Supp.) c. 1, as amended (the "Act");
(e) the Worker [Dario
Virga] was hired as a cabinet maker and did his apprenticeship with the
Appellant;
(f) the Worker has
worked for the Appellant for over 7 years;
(g) the Worker also
installed cabinets and did not estimating;
(h) the Worker earned a set hourly
wage;
(i) the Worker earned $10.00 per hour;
(j) the Worker was paid bi-weekly by
cheque;
(k) the Worker also received a yearly
bonus;
(l) arm's length employees
of the Appellant were paid by the hour and received yearly bonuses;
(m) the Worker's wage was
comparable with the Appellant's arm's length employees;
(n) the Appellant issued
the following T4 amounts to the Worker:
2001 $22,535
2000 $21,804
1999 $21,794
1998 $16,903
1997 $16,086
(o) deduction for Canada
Pension Plan contributions, employment insurance premiums and Income Tax were
withheld from the Worker's wages;
(p) the Worker normally
worked during the Appellant's business hours;
(q) the Worker normally
worked 40 hours per week and some occasional overtime;
(r) the Worker kept
track of his hours and completed timesheets;
(s) the Appellant had
the right to control and supervise the Worker;
(t) the Shareholder
made all of the major decisions;
(u) the Shareholder
assigned work to the Worker;
(v) the Worker notified
the Appellant of any leave required;
(w) the Shareholder
normally did the estimating and any estimates completed by the Worker were
reviewed by the Shareholder;
(x) the Appellant
provided all of the tools and equipment required including saws, staple guns,
woodworking equipment and the work location;
(y) the Worker did not
have financial investment in the Appellant during the Period;
(z) the Appellant
reimbursed the Worker for fuel expenses incurred while travelling to do
estimates;
(aa) the Shareholder
stated that an arm's length worker would not have any authority, would require
instruction and would not do estimating;
(bb) the Minister
considered all of the relevant facts that were made available to the Minister,
including the remuneration paid, the terms and conditions, the duration and the
nature and importance of the work performed, and
(cc) the Minister was
satisfied that it was reasonable to conclude that the Worker and the Appellant
would have entered into a substantially similar contract of employment if they
had been dealing with each other at arm's length.
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