Date: 20010704
Docket: 2001-99-EI
BETWEEN:
RANJU VERMA,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasonsfor
Judgment
Hershfield, J.T.C.C.
[1]
This is an appeal under the Employment Insurance Act (the
"Act") from a determination by the Respondent
that the Appellant was not employed in insurable employment by
1262828 Ontario Limited ("Ontario Limited") for the
periods of May 11, 1998 to October 24, 1998 and May 14, 1999 to
October 23, 1999 by virtue of the exclusion from
insurable employment in paragraph 5(2)(i) of the
Act of employment where the employer and employee are not
dealing with each other at arm's length. The question of
whether persons are dealing at arm's length is, pursuant to
paragraph 5(3)(a) of the Act, determined in
accordance with the Income Tax Act.
[2]
There is no dispute that the Appellant and Ontario Limited were
not dealing with each other at arm's length during the
subject periods as determined in accordance with the Income
Tax Act. As such, there is no need to set out the
shareholdings of the company. However, for the record, I note
that the Appellant owned 18% of the shares of the employer
company as did her husband and that she was related to a
controlling group of shareholders which consisted of herself, her
husband and her husband's brother and sister. Within the
meaning of the Income Tax Act, the Appellant was during
the subject periods thereby related to her employer, Ontario
Limited and thereby was not dealing at arm's length with her
employer during the subject periods. I also note that the
Appellant was neither an officer nor a director of the company
and was not involved in its management. Her husband, Naresh, was
the president of Ontario Limited and his sister, Santosh, was the
secretary of the company.
[3]
Given that the Appellant and Ontario Limited were not dealing
with each other at arm's length during the subject periods,
the Appellant's employment was not insurable subject to the
application of paragraph 5(3)(b) of the Act which
provides as follows:
5. (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.
[4]
The Reply to the Notice of Appeal states that the Respondent
exercised his discretion under the Act and decided that
the Appellant's employment would not be deemed to be
insurable employment. The issue in this appeal is whether the
Minister properly exercised his discretion under the foregoing
paragraph of the Act. That there was a contract of service
during the subject periods has been admitted to by the
Respondent.
[5]
In making his decision, the Respondent relied on the following
assumptions of fact (facts relating to the Appellant's
related status are omitted):
(a)
the Payer operates a 47-unit motel in Niagara Falls;
(b)
during the period in question, the Payer operated under the name
of "Cataract Motel";
(c)
the Payer's business is seasonal from May to October;
(d)
the Payer's business operates 24 hours a day, 7 days a week
during the peak season;
(g)
the Appellant's duties were as follows:
- checking customers in and out at the front desk
- taking reservations by phone or internet
- handling customer complaints
- ensuring rooms are suitable for guests
- marketing, dealing with travel agents and taking group
reservations
- housekeeping supplies management;
(h)
the Appellant performed her duties at the Payer's place of
business;
(i)
during the peak period, the Appellant worked 7 days a week for a
total of between 50 to 60 hours per week;
(j)
during the low period, the Appellant worked on an
"as-required basis" for a minimum of 40 hours a
week;
(k)
the Appellant's hours of work were determined by the
Payer;
(l)
the Appellant's hours of work were not recorded;
(m) the
Appellant was not provided with any employee benefits;
(n)
the Appellant was paid $550.00 per week regardless the amount of
hours worked;
(o)
the Appellant was paid by cheque on a bi-weekly basis;
(p)
the Appellant's rate of pay was determined by the Payer;
(q)
the Appellant was supervised by his (sic) spouse,
Naresh Verma, and the other shareholders;
(r)
the Appellant and one other person were on the Payer's
payroll during the period in question;
(s)
all the equipment was provided by the Payer at no cost to the
Appellant;
(t)
the Appellant and her spouse reside at the motel;
(u)
while on lay off, the Appellant performed services for the Payer
without remuneration;
(x)
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 not have entered into a
substantially similar contract of employment if they had been
dealing with each other at arm's length.
[6]
The Appellant gave evidence, as did her husband. The
Appellant's husband was excluded from the Court when the
Appellant testified. Their testimonies confirmed the assumed
facts set out above but with elaboration, particularly as to the
nature and extent of the services referred to in assumption (u)
above. A summary of their evidence is as follows.
[7]
The 47-unit motel was operated throughout the year, primarily by
the Appellant's husband, Naresh. The motel had three business
cycles each year. The winter cycle was the off-season and ran
from the end of October to early May.[1] During this time the motel had little
business. Only five to six rooms, or less, were occupied each
week. Two to three single night drop-ins per week and a similar
number of weekly tenants, who were given no services, comprised
the motel's business during the off-season. That is, during
the off-season there was little work to do and Naresh was there
seven days a week to attend to what little business there was. In
May, traffic began to pick up and in September it began to slow
down again. Peak business was July and August. During such peak
season the motel was virtually full every night. The tourist
season coincides with the motel's peak business cycle. During
this peak period the Appellant worked 50 to 60 hours per week as
stated in paragraph (i) of the assumptions. In May and most of
June, September and October, which were slow periods, she worked
approximately 40 hours per week as stated in paragraph (j) of the
assumptions. She was not employed to perform services during the
off-season.
[8]
As set out in paragraph (g) of the assumptions, the
Appellant's duties as an employee of Ontario Limited were
largely guest service related. During the subject periods the
motel was not linked to a reservation network and, accordingly,
most business was comprised of road traffic and there was much
less in the way of group reservations. Indeed, managing bookings
was largely a manual job. What could be done on computer was
being done. The Appellant had taken computer business courses and
was comfortable operating e-mail, Wordperfect, Lotus and other
programs. In her prior employment she worked in a shipping office
of a computer sales business and worked on a computer, checking
shipments. At that job, which she had for seven years in Toronto
before the family acquired the motel in January 1998, she was
earning $12.00 per hour at the time she left that employment.
[9]
While the Appellant did the office work relating to guest
services, Naresh did everything else from banking to
housekeeping.[2] In
the peak season Naresh's brother came in from the United
States to help with the housekeeping demands although he was not
on the payroll. The Appellant occasionally helped with
housekeeping and occasionally chambermaids were hired but for the
most part the motel was operated by the three family members
during the peak season, and by Naresh alone in the off-season
when he did maintenance and repairs as well as handle the
infrequent guests. Before the family acquired the motel, while
living in Toronto, Naresh ran his own renovation business and his
van carried the logo from that business (with the Toronto area
code) even after the business was abandoned and he moved to
Niagara to operate the motel.
[10] Since the
Appellant was not employed during the off-season, she was able to
claim employment insurance benefits during that time provided her
employment was insurable. To deny such benefits the Minister
refused to exercise the discretion given him in paragraph
5(3)(b) of the Act. That is, having regard to this
arrangement, the Minister determined that it was not one that
would have been engaged in by an arm's length person.
[11] The
critical assumption in so exercising his discretion is the
assumption set out in paragraph (u) above. Respondent's
counsel acknowledged that but for that assumption there would be
no basis for the Respondent's exercise of discretion. That
is, he agreed that an arm's length person would have entered
into a substantially similar contract of employment during the
subject periods as that entered into by the Appellant. However,
that the Appellant provided further services outside of those
periods without compensation is argued to have tainted this
otherwise arm's length engagement.
[12] Although
her wages were fixed on a weekly basis, the Appellant was earning
roughly $12.00 per an hour over the six months of her engagement.
The Appellant and her husband testified that such rate, or more
particularly her weekly wage over such period, was standard in
the industry in the area and in all respects the terms of
engagement were as they would be if the person engaged were an
arm's length person. Respondent's counsel did not dispute
this but argued that the assumption referred to in paragraph (u)
was relevant and that it distinguished the Appellant's
engagement by incorporating into that engagement the off-season
contribution that the Appellant made to the employer's
business. Before examining the relevance of this distinction I
will consider more of the evidence that bears to the
off-season.
[13] The
Appellant testified that during the off-season she did not
provide assistance other than occasionally answering the motel
phone or attending to a guest when her husband was not there.
Their residence was attached to the motel office. There were two
telephone lines, one for the motel and one for the residence. The
motel telephone line did not have an extension in the residence
but the motel phone was cordless and could be left in the
residence to receive motel business calls in the residence. The
Appellant acknowledged that if her husband was not around during
the day in the off-season, the motel phone would be left in the
residence and would be answered by her when she was at home. She
testified that this only happened rarely. She testified that the
residence had a separate entrance of its own as well as an
entrance through the motel office. Regardless of the residence
being attached to the motel she testified that she did not spend
time in the motel office during the off-season simply because
there was little business to attend to and what business there
was, was being handled by her husband. While the office was
generally closed when he was not around, the Appellant confirmed
that there was a bell outside the motel office that rang in the
residence and that she would attend to a guest during the
off-season when her husband was not there. She testified that
this only happened two or three times during a season. I am
satisfied that this was not a question of what her
responsibilities were. There was simply little traffic to attend
to given the season and her husband's regular attendance to
what little business there was. Her services, or that of any
prospective arm's length worker, were not required. Business
during the off-season did not justify the employment of a second
person to serve what little business might have been gained.
[14] The
Appellant's husband testified that he carried out all duties
during the off-season. He locked the office door when he was not
in the office and when he was on the premises, but not in the
office, he carried the portable phone with him but there was
little business to attend to during the off-season. The tourist
business was dead at this time. He testified that he did
maintenance and repairs around the motel during this time and
that he was generally there to attend to what little business
came by.
[15] The
Respondent relied on the testimony of an investigator who gave
evidence at the hearing. The investigator, from Human Resources
Canada in Brampton, Ontario, testified that on January 28, 2000
at 12:55 p.m. he called the motel and that a female person
answered and gave him the motel's fax number and the name
"Ranju" as the person to whose attention a fax could be
sent. That is the Appellant's name. On February 4, 2000
he attended the motel and she was at the office attending to the
registration of a guest. Brochures in the office pictured her
behind the registration desk. On February 24, 2000 he again
visited the motel and Naresh was there putting in a new front
desk. The investigator asked for Ranju and was told she was not
there. The investigator, noting during this visit that there was
a van advertising Verma Renovation Services parked outside the
office, asked Naresh if he had another business that he operated.
Naresh told him that he only did repairs around the motel.[3] The investigator
acknowledged that the decal on the van had a 416 area code. The
Minister wants to rely on this evidence to support its position
that Naresh was not always around the motel in the off-season to
attend to occasional business and that the Appellant was employed
during the off-season, without pay, to provide her services in
his absence. Taking all testimony into account, I am satisfied
that Naresh was generally available at the motel during the
off-season to attend to what little business there was during
that time and that he did not operate a second business that
would have detracted from that general availability. It is also
clear that Naresh would not have been around the motel to attend
to it at all times and that the Appellant, living at a residence
forming part of the motel, would have been available to provide
assistance on an occasional basis. This is not inconsistent with
the Appellant's testimony and that of her husband although
both the Appellant and her husband might well have downplayed the
extent of the occasional assistance that the Appellant
provided.
[16] On
March 4, 2000 the investigator interviewed Ranju in
St. Catharines. He confirmed that she received employment
insurance benefits each year during the winter because business
was very slow and because her husband ran the motel at that time.
She told the investigator her role during the subject periods was
to serve customers. Presumably the inference was that there was
no job for her in the off-season since there were so few
customers to serve at that time. While a signed statement made no
mention of it, the investigator testified at the hearing that the
Appellant acknowledged, at the interview, that she did help a
little in the winter by answering the phone when her husband was
not there and that she did not get paid for providing occasional
assistance.
[17] Counsel
for the Respondent argued that the Minister can reasonably draw
the inference that the Appellant works year round as evidenced
that on two of three random contacts, the investigator found the
Appellant attending to office business during the off-season.
Assuming such an inference is not unreasonable or that this Court
does not have jurisdiction to make a finding on the merits as to
whether it would come to the same conclusion as the Minister,
there is then only one question to be decided. Namely, whether
the Appellant's providing occasional services in the
off-season, without pay, is a relevant factor in the
Minister's exercise of discretion under paragraph
5(3)(b). If it is, the appeal must fail as the following
analysis of the law demonstrates. On the other hand, if such
factor is not relevant and it is the only factor relied upon by
the Minister as admitted by the Minister's counsel, then the
appeal must be allowed.
Analysis
[18] The role
of this Court in appeals of the exercise of the Minister's
discretion under paragraph 5(3)(b) is well established.
Counsel for the Respondent and counsel for the Appellant provided
a number of cases on this point. The most succinct statement of
the law regarding such role is found in Légaré
v. Canada.[4]
The judgment of the Federal Court of Appeal was delivered
in that case by Marceau J. Referring to this Court's
role he observed as follows:
... 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.
[19] Lest this
seems like an over-simplification of the law on the point,
consideration should also be given to the Federal Court of
Appeal's findings in Canada v. Jencan Ltd. and in
Bayside Drive-In Ltd. v. Canada.[5]
[20] These
cases, drawing from the Federal Court of Appeal decision in
Tignish Auto Parts Inc. v. M.N.R.,[6] confirm that the Tax Court of Canada
is required to undertake a two-stage inquiry when hearing an
appeal on a determination by the Minister under paragraph
5(3)(b). The first stage, in deference to the
Minister's discretionary power, is to determine if his
discretion was exercised in a judicial manner or, in other words,
in a manner consistent with the law. A Tax Court judge is
justified in interfering with the Minister's determination
only if it is established that the Minister exercised his
discretion in a manner that was contrary to law. The Tax Court
can only go on to the second stage of the inquiry - to
review the merits of the Minister's determination -
where it is established that the Minister exercised his
discretion in a manner that was contrary to law which is to say
where it is established that the Minister:
(i)
acted in bad faith or for an improper purpose or motive;
(ii)
failed to take into account all of the relevant circumstances, as
expressly required by paragraph 3(2)(ii); or
(iii)
took into account an irrelevant factor.
[21] Based on
the foregoing, this Court has no jurisdiction to review the
merits of the Minister's determination in this case unless he
took into account an irrelevant factor. That is to say, in the
case at hand, there is no reason to suggest that the Minister
acted in bad faith or for an improper purpose and, further, I am
satisfied that the Minister had all relevant circumstances
available to take into account when the decision was made.
Counsel for the Respondent has acknowledged one and only one
pivotal factor, so the question comes down to whether or not that
pivotal factor is relevant.
[22] I fail to
see how a circumstance that relates only to a period outside the
employment period under appeal can be relevant as a circumstance
of that employment during that period where every
indicator is that the terms of that employment for that period
are arm's length terms. If the contract were not reflective
of an arm's length arrangement, it might be explained by
reference to work related activities outside of the stipulated
contract period. For example if the pay rate was too high for a
specified period, work done for that employer outside of that
period at lower than an arm's length rate would be relevant
in assessing whether the terms of the contract for the specified
period are arm's length or whether the specified term and
rates were genuine. Another example would be where the seasonal
aspect of a contract of employment was suspect on the basis that
that particular employment would not typically be contracted for
on a seasonal basis. In such case, work performed outside of the
seasonal employment period would be relevant in assessing whether
the terms of the contract for the specified period are arm's
length or whether the specified term of the contract is genuine.
In the case at bar, the seasonal nature of the work is admitted.
The need for the Appellant's services and her ability to
perform them during the approximate six month term of the
employment each year are not questioned. The terms of the
engagement during the employment period such as hours of work and
compensation paid relative to duties performed are not
substantially different than those that would have applied had an
arm's length person been employed. Indeed such terms as
applied to the Appellant's employment were standard in the
area. The Respondent's counsel did not take issue with the
evidence on these points. Further, I have found that the
Appellant's services or those of an arm's length person
were not required in the off-season. The business gained by the
Appellant's occasional assistance did not justify retaining
her or anyone else's services. The employer's business
activity in the off-season would not justify hiring a replacement
worker whether the Appellant helped out occasionally or not and
the Minister knew this[7] . This underlines the irrelevance of the
Minister's assumption in paragraph (u) of the Reply.
[23] Family
members often provide occasional services without compensation to
family businesses. The Appellant should not be punished for not
refusing to answer an office phone or answering the office bell
where doing so is as infrequent as the evidence in this case
suggests. If an arm's length person were seasonally employed
during the peak and slow periods and that person claimed
employment insurance benefits during the off-season, the
irrelevance of the Appellant's assistance during the
off-season would be apparent. That its irrelevance is less
apparent where she is the person employed does not make it more
relevant in my view.
[24] In
exercising his discretion under paragraph 5(3)(b) the
Minister is to satisfy himself that it is reasonable that an
arm's length party would have entered into a similar contract
of employment, as did the Appellant in this case, and he is to
have regard "to all the circumstances of the
employment" (emphasis added). The contract of
employment in this case is from May to October, not from November
through April. In my view, in determining the exercise of his
discretion in this case, the Minister considered as a pivotal
factor a circumstance (the Appellant's occasional
assistance during the off-season) that was not relevant to the
exercise of his discretion. Based on these findings it is open
for me to consider the question on the merits and on that basis I
would allow the appeal. On the merits of this matter, it is
reasonable to conclude that the Appellant and Ontario Limited
would have entered into a substantially similar contract of
employment if they had been dealing at arm's length.
[25] I add
that I take some comfort in this conclusion from the case of
Rita Harvey v. M.N.R.[8] In that case Associate Chief Judge Bowman
considered facts that are similar to the facts of the case at
bar. It was a case of a wife working for her husband on a grain
farm paid at a fixed rate on a bi-weekly basis. There was no
record of hours actually worked and no supervision. Hours worked
were not regular. It was not a 9 to 5 job. The importance of the
work to the employer was the same as if it had been done by an
arm's length worker. There was no suggestion that the hourly
rate was not an arm's length rate. While there was a part
time contract of employment in the year under review, the
appellant wife in that case had done similar work for her husband
in a prior year without any wages. That she had worked free had
no bearing on the assessment of the arm's length nature of
the contract under consideration. The finding in that case was
that the Minister failed to disclose any reasons that would
suggest that they would not have entered into the same
arrangement had they been dealing at arm's length.
Associate Chief Judge Bowman's analysis in that case focuses
on the total lack of relevant factors considered by the Minister
in exercising his discretion. In that case as in the case at bar
the terms of the specific contract were arms length terms. In
such circumstances its arm's length nature should not be
ignored on the premise that outside of the term of that contract
family members can and occasionally do work for one another
without remuneration. Such circumstance in and by itself is not a
relevant factor in determining the nature of the contract under
review.
[26]
Accordingly, the appeal is allowed.
Signed at Ottawa, Canada, this 4th day of July 2001.
"J.E. Hershfield"
J.T.C.C.
COURT FILE
NO.:
2001-99(EI)
STYLE OF
CAUSE:
Ranju Verma and The
Minister of National Revenue
PLACE OF
HEARING:
St. Catharines, Ontario
DATE OF
HEARING:
May 29, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge J.E. Hershfield
DATE OF
JUDGMENT:
July 4, 2001
APPEARANCES:
Counsel for the Appellant: Paul M. Bauerle
Counsel for the
Respondent:
Ernest Wheeler
COUNSEL OF RECORD:
For the
Appellant:
Name:
Paul M. Bauerle
Firm:
Chown, Cairns
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-99(EI)
BETWEEN:
RANJU VERMA,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Appeal heard on May 29, 2001 at St. Catharines,
Ontario, by
the Honourable Judge J.E. Hershfield
Appearances
Counsel for the
Appellant: Paul
M. Bauerle
Counsel for the Respondent: Ernest
Wheeler
JUDGMENT
The
appeal is allowed and the determination by the Minister that the
Appellant was not engaged in insurable employment in the periods
in question is varied in accordance with the attached Reasons for
Judgment.
Signed at Ottawa, Canada, this 4th day of July 2001.
J.T.C.C.
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