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Citation: 2003TCC704
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Date: 20031003
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Docket: 2003-142(EI)
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BETWEEN:
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CHRIS LIEFFERTZ,
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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
Rowe, D.J.
[1] The appellant appeals from a
decision of the Minister of National Revenue (the
"Minister") dated October 17, 2002, wherein the
Minister decided the employment of the appellant - Lieffertz -
with G Q Enterprises Ltd. (payor or Enterprises) from May 14,
2001 to October 11, 2001 and from October 29, 2001 to May 3,
2002, was not insurable employment pursuant to the relevant
provisions of the Employment Insurance Act (the
"Act") because the appellant and the
payor were related and the Minister was not satisfied the
contract of employment would have been substantially similar if
the payor and the appellant had been dealing with each other at
arm's length.
[2] Chris Lieffertz testified he
resides in Duncan, British Columbia and is employed as a public
accountant. He has a Bachelor of Commerce degree and carried on
his own accounting practice between 1987 and 1996 at which point
he became heavily involved in some real estate development and
decided to transfer the accounting business to Enterprises, a
corporation owned by his son Paul Lieffertz - with 61% of
the shares - and Dan Graca - an unrelated person - holding the
balance of 39%. The appellant stated he had intended that his son
would assume the business and carry on servicing the clients of
that accounting practice. The appellant stated the real estate
venture encountered numerous difficulties and - later - led to
his assignment into personal bankruptcy on January 29, 1998,
culminating in a discharge on October 29, 1998. In 1997, the
appellant began working as an accountant - for Enterprises -
using approximately 400 square feet of office space in a building
that he owned in Duncan. He worked from 9:00 a.m. to 5:00 p.m.,
Monday through Friday, and was paid $750 per week, a sum based on
an hourly rate of $18.75. He was paid semi-monthly by
cheques issued by Enterprises and signed by Paul Lieffertz. The
appellant did not have signing authority on the Enterprises
credit union account. Lieffertz stated Enterprises was in the
fruit business and also sold retail oil and gasoline products but
did not operate a restaurant as assumed by the Minister. The
appellant stated his son - Paul Lieffertz - had done some
bookkeeping work in the past but "was not all that keen
about it". Apart from some filing cabinets and office
supplies, the equipment used in the accounting practice consisted
of a computer - with printer - which had been purchased by
Enterprises on February 12, 1996 for the sum of $500 (See invoice
filed as Exhibit A-1). Lieffertz stated the shareholders of
Enterprises did not participate in any aspect of the
bookkeeping/accounting services provided by himself to clients of
the business who were - for the most part - his own former
clients for whom he had done work during the 9 years he had
carried on his own public accounting practice. However, the
appellant stated the current practice provides service to only 8
former major clients from the 1996 client base and most of the
current work is done for new persons and/or entities. Throughout
the relevant period and today, the accounting business is carried
on - by Enterprises - under the name Cowichan
Accounting, as approved by the Directors in a resolution -
Exhibit A-2 - dated February 1, 1996. Lieffertz stated he set the
rates - ranging from $25 to $50 per hour - billed to clients
depending on the nature of the work performed. He prepared
invoices and submitted them to clients and otherwise managed the
entire accounting business including collection of accounts
receivable. Turning to the Reply to the Notice of Appeal (Reply),
the appellant agreed the assumptions contained in subparagraphs
5(a) to 5(e), inclusive were correct. As mentioned earlier, he
considered the nature of the client base was somewhat different
than that assumed by the Minister at subparagraph 5(f) but
accepted the subsequent assumptions set forth in subparagraphs
5(g) to 5(j), inclusive. At sub-paragraph 5(k), the Minister
assumed the appellant's son - Paul Lieffertz - had operated
a restaurant through G Q Enterprises. The appellant filed - as
Exhibit A-3 - a Statement of Business
Activities for a business operated by Paul Lieffertz -
personally - under the name Café Rusticana. The appellant
agreed he set his own hours of work which were standard and
conformed with the local business community. He set priorities
within the accounting practice and utilized the method of
"first in, first out" when serving clients with the
exception that payroll services took precedence over other work.
Lieffertz disagreed with the assumption of the Minister - at
subparagraph 5(o) of the Reply - that the clients of Cowichan
Accounting were his own clients. In his view, they were always
clients of Enterprises although he performed the work. All
equipment necessary to carry out the work was the property of
Enterprises except for a desk and chairs owned by the appellant.
Lieffertz stated he was not entitled to any bonuses or profits
through any sharing arrangement and denies that he was merely
operating his own accounting business under the auspices of
Enterprises. The Record of Employment (ROE) - Exhibit A-4 - dated
May 6, 2002 - pertaining to the period from October 29, 2001
to May 3, 2002 - was signed by Paul Lieffertz on behalf of
Enterprises and certified the appellant had worked 1,080
insurable hours with total insurable earnings in the sum of
$20,250. The ROE - Exhibit A-5 - covered the earlier period from
May 14, 2001 to October 11, 2001, during which the appellant had
worked only 121 insurable hours and earned the sum of $2,268.25.
During the May 14, 2001 to October 11, 2001 period, Lieffertz
stated he continued to handle some payroll work and the office
had an answering machine to record messages from callers. The
appellant stated he worked about 4 hours per week during the slow
period but - on occasion - had to perform work which occupied
additional time. He stated he had not been laid off between
October 11, 2001 and October 29, 2002 but had worked straight
through until May 3, 2002. Between 1997 and 2000, the appellant
received employment insurance (EI) benefits as follows:
May 18/97 to
November 22/97
May 24/98 to
November 21/98
May 16/99 to
October 27/99
May 14/00 to
October 21/00
[3] The appellant stated that receipt
of EI benefits had been delayed on one occasion for nearly 4
months while an auditor from Canada Customs and Revenue Agency
(CCRA) examined details of the employer-employee relationship
existing between Enterprises and himself. In 2001 and 2002, his
application for EI benefits was rejected by the Minister and the
appellant stated he is unable to determine the existence of any
difference between the circumstances of his working relationship
during those years and the previous ones which had entitled him
to receive EI benefits during periods of unemployment. On August
9, 2002, he wrote a letter - Exhibit A-6 - to Mr. S.
Ball - at CCRA - setting out his position with respect to his
employment with Enterprises. He also obtained the Report on an
appeal - Exhibit A-7 - containing the
recommendation therein by B. Smith, Appeals Officer, in respect
of his employment. The appellant filed - as Exhibit A-8 - a
Benefit Statement issued by Human Resources Development Canada
(HRDC) on September 27, 2000. The appellant stated he completed a
Questionnaire - Exhibit A-9 - and Paul Lieffertz
completed the Questionnaire - Exhibit A-10 - on behalf of
Enterprises. The appellant stated there were no intertwined loans
or common economic interest between himself and Enterprises even
though the revenue earned by Cowichan Accounting - solely through
his personal efforts - constituted the entire source of
Enterprises corporate income during the relevant period.
Lieffertz stated he did not regard this as being particularly
unusual since his son operated the coffee shop business mainly by
relying on employees. Referring to the Report on Appeal - Exhibit
A -7 - Lieffertz stated he agreed with the conclusion drawn by
the Appeals Officer under the separate headings of
"Remuneration" and "Duration" - as set forth
on page 10 of said report - wherein the Minister accepted the
rate of pay was negotiated and paid on time at regular intervals
as proven by an examination of cancelled cheques. With respect to
the duration of the employment, it was accepted that the services
of the appellant were determined by the needs of clients within
the business community and it was reasonable to conclude that due
to the nature of the services - mainly preparation of income tax
returns to be filed at or near the end of April in each year -
the employment was seasonal in nature. With respect to the
category within the report - labelled "Terms and
Conditions" - the appellant agreed he had no signing
authority but disagreed with the conclusion of B. Smith that he
had "total control" of everything within the scope of
the operation of the accounting business in that he could not
receive pay without having provided any services nor could he
hire other employees or file corporate documents without
instructions from the Directors of Enterprises. He disagreed with
the observation by the Appeals Officer that "[H]is autonomy
was extended to the point of deciding whether or not she should
be laid off". Lieffertz agreed he kept his son advised of
the state of business and reported to him when work had slowed
down to the point where his full-time services were no longer
required. In addition, the state of the Cowichan Accounting bank
account was known to his son and to Graca. He agreed neither Paul
nor Graca could control his work since they were not qualified in
the field of accounting nor tax preparation. The appellant
conceded that the profits flowing from Cowichan Accounting to
Enterprises were - at best - minimal but pointed out that in 2002
the business could have produced a profit of $13,000 except it
was offset by a reserve for bad debts. In 2001, gross revenue of
Cowichan Accounting was $36,000 but that sum increased to more
than $50,000 in 2002 and the appellant stated profits were
expected to accrue to the benefit of Enterprises at the
conclusion of the 2003 business year. Even after the end of tax
season in April, 2003, the appellant has worked steadily
throughout May and June - with the exception of a two-week period
- but expects he will be laid off by the end of July as the work
is dwindling to the point where his services will not be required
until the beginning of October. A record of hours worked -
Exhibit A-11 - was maintained and he was remunerated fully for
his efforts. The appellant filed - as Exhibit A-12 - a document
described as Arm's Length Screening Guidelines in which
affirmative responses had been checked off - by someone, probably
at CCRA or HRDC - in a box next to certain questions concerning
the working relationship. The appellant pointed out that in each
instance, the response supported his position that his employment
with Enterprises had truly been at arm's length. Through his
request for documents relative to his EI claim, the appellant
obtained a memorandum - Exhibit A-13 - concerning the
number of insurable hours required in his region before a worker
could apply for benefits. The appellant referred to a letter
- Exhibit A-14 - dated October 11, 2002 - from
Paul Lieffertz to an official at CCRA - in which reference was
made to Directors Fees - in the sum of $2,000 - having been paid
to him in 1998, 1999, and 2000 as disclosed by copies of
cancelled cheques.
[4] In cross-examination, the
appellant stated that prior to January 31, 1996, he had operated
Cowichan Accounting through a corporation - Champion Games
Inc. - that had been created in order to market games.
Lieffertz stated he had been involved in a real estate
development business and became so busy that he transferred the
accounting business to Enterprises with the intent that his son
- Paul - would continue to operate it and provide
service to existing clients. However, this plan did not work out
and the appellant agreed he continued - without any
hiatus - to perform the necessary accounting work in the face of
an obvious lack of interest on the part of his son despite
efforts by the appellant to offer instruction in matters such as
data entry and preparing a trial balance. Following the transfer
of the accounting business to Enterprises, the appellant remained
the only worker and continued to be the person with whom clients
had contact. Lieffertz stated he was not in financial trouble on
January 31, 1996, in that the 50-acre residential development was
proceeding as planned and he also had an interest - through a
corporation - in a 14-acre parcel of land in Duncan. Later,
delays in obtaining planning approval and the resultant cost of
servicing interim financing proved to be disastrous, eventually
leading to his assignment in personal bankruptcy in January,
1998.
[5] The appellant submitted the
Minister failed to take into account significant, relevant facts
and relied on some irrelevant material in arriving at the
conclusion that he was not engaged in insurable employment with
Enterprises. The appellant referred to those earlier
determinations made by departmental officials - under identical
circumstances - which had resulted in approval of his EI benefits
during each layoff period between 1997 and 2000, inclusive.
[6] Counsel for the respondent
submitted the Minister had made the correct decision and the
Report on Appeal - Exhibit A-7 - disclosed the Minister had
considered all the appropriate circumstances and had weighed
relevant facts prior to deciding the employment of the appellant
was not insurable.
[7] The relevant provision of the
Act is paragraph 5(3)(b) which reads as
follows:
(3) For the purpose 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.
[8] In the case of Adolfo Elia
v.Canada (Minister of National Revenue - M.N.R.), [1998]
F.C.J. No. 316 - a decision of the Federal Court of Appeal dated
March 3, 1998, at page 2 of the certified translation
Pratte, J.A. stated:
Contrary to what the judge thought, it is not necessary, in
order for the judge to be able to exercise that power, for it to
be established that the Minister's decision was unreasonable
or made in bad faith having regard to the evidence before the
Minister. What is necessary is that the evidence presented to the
judge establish that the Minister acted in bad faith, or
capriciously or unlawfully, or based his decision on irrelevant
facts or did not have regard to relevant facts. The judge may
then substitute his decision for that of the Minister.
[9] In Légaré v.
Canada (Minister of National Revenue - M.N.R.), [1999] F.C.J.
No. 878 - another decision of the Federal Court of Appeal -
Marceau, J.A. speaking for the Court stated at page 2 of the
judgment:
In this
matter, the Court has before it two applications for
judicial review against two judgments by a judge of the Tax Court
of Canada in related cases heard on the basis of common evidence
which raise yet again the problems of interpretation and
application of the saving provision, subparagraph
3(2)(c)(ii). I say yet again because since its passage in
1990, several decisions of the Tax Court of Canada and several
judgments of this Court have already considered what workable
meaning could be given to subparagraph 3(2)(c)(ii).
In reading the text, the problems it poses beyond its deficient
wording are immediately obvious, problems which essentially
involve the nature of the role conferred on the Minister, the
scope of the Minister's determination and, by extension, the
extent of the Tax Court of Canada's general power of review
in the context of an appeal under section 70 et seq. of the
Act.
While the applicable principles for resolving these problems have
frequently been discussed, judging by the number of disputes
raised and opinions expressed, the statement of these principles
has apparently not always been completely understood. For the
purposes of the applications before us, we wish to restate the
guidelines which can be drawn from this long line of authority,
in terms which may perhaps make our findings more meaningful.
The Act requires the Minister to make a determination based on
his own conviction drawn from a review of the file. The wording
used introduces a form of subjective element, and while this has
been called a discretionary power of the Minister, this
characterization should not obscure the fact that the exercise of
this power must clearly be completely and exclusively based on an
objective appreciation of known or inferred facts. And the
Minister's determination is subject to review. In fact, 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.
[10] A perusal of the Appeals Officer's
report - Exhibit A-7 - reveals the Officer accepted that the
remuneration paid to the appellant was reasonable and that the
duration of employment was consistent with the nature of the
business activity within the particular community. However, the
Appeals Officer concluded the appellant had total control of the
business - except for signing authority - to the point where the
Directors of Enterprises accepted his decision as to when his
layoff would commence. Further, the Appeals Officer considered it
unusual that an employer would exhibit such an absence of
interest in the operations of a business. The Appeals Officer
also noted - when considering the nature and importance of the
work performed - that Enterprises was not an existing corporation
carrying on other business but had been created specifically for
the purpose of permitting the appellant to continue to carry on
his own accounting practice even to the point of using the same
name, Cowichan Accounting. In this regard, the conclusion of the
Appeals Officer was that the employer and the appellant were not
dealing with each other at arm's length .
[11] Some of the assumptions of fact relied
on by the Minister as set forth at paragraph 5 of the Reply are
as follows:
e) the
Appellant is an accountant and has been providing services for G
Q since 1996;
f) many
of G Q's clients were from the Appellant's previous
accounting business;
g) all G Q
business was conducted from either Paul's home office or the
Appellant's home office;
h) the
Appellant provided full accounting services and handled the
day-to-day operations of G Q;
i) Paul
is not involved in the accounting services provided by G Q;
j) Paul
is not an accountant;
k) Paul
operates a restaurant through G Q;
l) the
Appellant set the rates charged for accounting services;
m) the Appellant
sets his own hours and days of work;
n) the
Appellant determined his own priorities;
o) the
Appellant solicits his own clients requiring accounting
services;
p) the
Appellant supplied the majority of the tools and equipment;
q) the
Appellant was operating his own accounting business under
G Q's name;
[12] The only assumption which was rebutted
by the appellant was 5(k) in that Paul Lieffertz did not operate
a restaurant - or coffee shop - through the corporation,
Enterprises.
[13] Certainly, there are many businesses
that employ related workers, as they are entitled to do, provided
the circumstances of the employment satisfies the test imposed by
paragraph 5(3)(b) of the Act. The language utilized
in that provision recognizes that while persons may not be at
arm's length, they are able to deal with each other in the
course of their contract of employment as though they had been
persons at arm's length. The match does not have to be perfect
because the words, "substantially similar" are used to
modify the nature of the contract of employment under analysis.
One analytical device is to consider whether it is reasonable to
conclude that strangers would have entered into a similar
arrangement as the one - in the within appeal -
between the appellant and his son, the majority shareholder in
the payor corporation. The appellant is an experienced public
accountant and had carried on his own practice under the name
Cowichan Accounting for many years and had developed a solid
client base. Paul Lieffertz - the appellant's son - had no
aptitude or ability to handle the accounting/bookkeeping work nor
did the minority shareholder, Graca. Enterprises had no other
business and the appellant continued - seamlessly - to
operate his previous accounting business without interruption and
maintained contact with his clients, although he now purported
that they were truly clients of Enterprises. His corporation -
Champion Games Inc. - sold the existing working computer to
Enterprises and he also had some of his own office equipment in
the office space in a building that he owned. All decisions
necessary to carry out the work and the entire conduct of the
business were under the sole control of the appellant at all
times. When the work ran out, he informed his son who then signed
a completed ROE which the appellant required to apply for EI
benefits. The accounting work was seasonal in nature and that was
accepted by the Minister when weighing various relevant factors.
The appellant presented a letter - Exhibit A-14 - that had been
provided to an official at CCRA together with copies of cancelled
cheques purporting to demonstrate that his son had received a
benefit - albeit indirectly in the form of Director's Fees -
through his participation in Enterprises, the owner of the
accounting business. I do not find that to be conclusive of
anything other than some funds were paid from the Enterprises
credit union account to Paul Lieffertz without any proof as to
the origin of the funds, particularly since the appellant
testified that Cowichan Accounting - as a business
entity - had not provided any profit to Enterprises since January
31, 1996, the date of the transfer of said business, although a
profit was expected to be available to the corporation at the end
of 2003.
[14] The circumstances of the employment
under examination in the within appeal are not similar to those
in the case of Agnes Quinn-Hiscott v. M.N.R.
- Docket 97-907(UI) - a decision of Judge
Mogan, Tax Court of Canada, relied on by the appellant. In that
case, the worker had been employed in a family business that
supplied aluminum products mainly for domestic residences.
Earlier, the company had also been in the installation business
and the worker went to work for the company as an office
administrator because her mother-in-law was ill and unable to
handle the necessary office work. The nature of the business was
seasonal and her employment ended when a previous bookkeeper
returned to work. During the period relevant to that appeal, the
payor employed 4 workers but at an earlier stage it had employed
10 workers including two installation crews. In the
Quinn-Hiscott case, Judge Mogan held that the
employment of the worker was genuine and in accordance with
normal standards applicable to a contract of employment between
non-related parties.
[15] Returning to the within appeal, the
question remains: Would a stranger - in return for no reasonable
prospect of financial gain (even on a limited investment) and
without possessing specialized skills necessary for the conduct
of said business - enter into an arrangement whereby the former
owner - now transformed into an employee - could - except for
signing cheques - continue to exercise total control over the
ongoing operations of that same business as though he were still
the owner except that now he was entitled to a bi-monthly pay
cheque? The ready answer in my opinion is: No.
[16] In arriving at the above response, I
assume there are no regulations or restrictions in place
preventing a person or corporation from purchasing and operating
such a public accounting business. However, the nature of the
actual operation of Cowichan Accounting and the context in which
Enterprises acquired that business is significant when comparing
the employment circumstances to other scenarios not involving
related parties.
[17] One must regard all the relevant
circumstances and in my view the Minister did not go off the
rails and consider any erroneous material. The factors considered
were weighed and credit was given to the appellant's position
with respect to two of the indicia set forth in the relevant
legislation. On balance, the decision of the Minister was that
the employment of the appellant with Enterprises was not
insurable. The fact that the appellant received his EI benefits
on previous occasions with respect to the same circumstances of
employment with the payor is of no legal consequence in terms of
the validity of the decision of the Minister issued in the within
appeal. There is nothing in the evidence that would justify me
intervening in that exercise of discretion because the conclusion
of the Minister is reasonable and the decision is confirmed.
[18] As a consequence of the above findings,
the appeal is hereby dismissed.
Signed at Sidney, British Columbia, this 3rd day of October
2003.
Rowe, D.J.
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