Date: 19990226
Docket: 97-806-UI
BETWEEN:
SINGH BAKHSHISH,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Porter, D.J.T.C.C.
[1] This appeal was heard at Montreal, Québec on August
7, 1998.
[2] The Appellant appeals the determination of the Minister
of National Revenue (the "Minister") dated April 15,
1997, that the employment of the Appellant with System
Bleaching Inc (the "Company”) from March 27, 1995 to
May 5, 1996, was not insurable employment under the
Unemployment Insurance Act (the
"Act”). The reason given for the
determination was that:
“...this employment was excluded from insurable
employment for the following reason: there existed a
non-arm’s length relationship between yourself and System
Bleaching Inc.”
[3] The established facts reveal that the Appellant at all
material times was the holder of at least one third of all the
outstanding shares of the Company. He may have been the holder
of 37.5% of those shares as set out in the Reply to the Notice
of Appeal. The other two shareholders were Jaswander Puri and
Jagtar Singh, neither of whom were related to him. The Company
was incorporated on April 26, 1994, with the object
of running a clothes cleaning and washing business. It went
into bankruptcy in May 1996. The Appellant had been attending
to the day-to-day operation of the business, that
is to say the production and working of the machines. He had
invested $25,000 into the business at its inception, which
apparently he lost. The Minister decided that the Appellant and
the Company were not, in fact, dealing with each other at
arm’s length. The Appellant has maintained that he was in
a minority situation and that the other partners really
controlled the situation.
The Law
[4] In the scheme established under the Act, Parliament
has made provision for certain employment to be insurable,
leading to the payment of benefits upon termination, and other
employment which is "excepted" and thus carrying no
benefits upon termination. Employment arrangements made between
persons, who are not dealing with each other at arm's length,
are categorized as "excepted employment". Quite clearly
the purpose of this legislation is to safeguard the system from
having to pay out a multitude of benefits based on artificial or
fictitious employment arrangements.
[5] Subsection 3(2) of the Unemployment Insurance Act
reads in part as follows:
"3(2) Excepted employment is
...
c) subject to paragraph (d) [which refers to
persons and related corporations has no applicability in this
case] employment where the employer and employee are not
dealing with each other at arm’s length and, for the
purposes of this paragraph,
(i) the question of whether persons are not dealing with each
other at arm’s length shall be determined in accordance
with the provisions of the Income Tax Act;...”
[6] Paragraph 251(1)(b) of the Income Tax Act
reads as follows:
"it is a question of fact whether persons not related to
each other were at a particular time dealing with
each other at arm’s length." (emphasis added)
[7] Although the Income Tax Act specifies that it is a
question of fact whether persons were at a particular time
dealing with each other at arm’s length, that factual
question must be decided within the cradle of the law and in
reality it is a mixed question of fact and law; see
Bowman, T.C.J. in R.M.M. Canadian Enterprises et al. v.
The Queen, 97 DTC 302.
[8] What is meant by the term "arm's length" has
been the subject of much judicial discussion both here in Canada,
in the United States, the United Kingdom and in other
Commonwealth countries such as Australia where similar wording
appears in their taxing statutes. To the extent that the term has
been used in trust and estate matters, that jurisprudence has
been discounted in Canada when it comes to the interpretation of
taxation statutes; see Locke, J. in M.N.R. v.
Sheldon’s Engineering Ltd., 55 DTC 1110.
[9] In considering the meaning of the term "arm's
length" sight must not be lost of the words in the statute
to which I gave emphasis above, "were at a particular
time dealing with each other at arm's length".
The case law in Canada as Bowman, T.C.J. points out in the
R.M.M. case (above) has tended to dwell upon the nature of
the relationship rather than upon the nature of the transactions.
I am not sure that having regard to the inclusion of these words
in the statute, that this approach is necessarily the only one to
be taken, for to do so is to ignore these somewhat pertinent
words, to which surely some meaning must be given. Perhaps this
development has come about as a result of the factual situations
in a number of the leading cases in Canada. These have tended to
involve one person (either legal or natural) controlling the
minds of both parties to the particular transaction. Thus even
though the transaction might be similar to an ordinary commercial
transaction made at arm's length that itself has not been
enough to take the matter out of the "non arm's
length" category; see for example Swiss Bank Corporation
et al. v M.N.R., 72 D.T.C. 6470 (S.C.C.).
[10] In effect what these cases say is that if a person moves
money from one of his pockets to the other, even if he does so
consistently with a regular commercial transaction, he is still
dealing with himself, and the nature of the transaction remains
"non arm's length".
[11] However, simply because these leading cases involved such
factual situations, does not mean that people who might
ordinarily be in a non arm's length relationship cannot in
fact "deal with each other at a particular time in an
'arm's length' manner", any more than it means
that people who are ordinarily at arm's length might not from
time to time deal with each other in a non
arm's length manner. These cases are quite simply examples of
what is not an arm's length relationship rather than
amounting to a definition in positive terms as to what is an
arm's length transaction. Thus at the end of the day all of
the facts must be considered and all of the relevant criteria or
tests enunciated in the case law must be applied.
[12] The expression "at arm's length" was
considered by Bonner, T.C.J. in William J. McNichol et al. v.
The Queen, 97 D.T.C. 111, where at pages 117 and 118 he
discussed the concept as follows:
"Three criteria or tests are commonly used to determine
whether the parties to a transaction are dealing at arm's
length. They are:
(a) the existence of a common mind which directs the
bargaining for both parties to the transaction,
(b) parties to a transaction acting in concert without
separate interests, and
(c) "de facto" control.
The decision of Cattanach, J. in M.N.R. v. T R Merritt
Estate is also helpful. At pages 5165-66 he said:
"In my view, the basic premise on which this analysis is
based is that, where the "mind" by which the bargaining
is directed on behalf of one party to a contract is the same
"mind" that directs the bargaining on behalf of the
other party, it cannot be said that the parties were dealing at
arm's length. In other words where the evidence reveals that
the same person was "dictating" the "terms
of the bargain" on behalf of both parties, it cannot
be said that the parties were dealing at arm's length.
...
Finally, it may be noted that the existence of an arm's
length relationship is excluded when one of the parties to the
transaction under review has de facto control of the
other. In this regard reference may be made to the decision of
the Federal Court of appeal in Robson Leather Company v
M.N.R., 77 DTC 5106."
[13] This approach was also adopted by Cullen, J. in the case
of Peter Cundill & Associates Ltd. v. The Queen,
[1991] 1 C.T.C. 197, where at page 203 he says this:
"Whether the parties in this case were dealing at
arm's length is a question to be examined on its own
particular facts."
[14] Many of these cases, as I say, are premised on the
relationship existing between the parties which was determined to
be all conclusive. There is little direct guidance there, when
consideration is being given to the nature of the transaction or
dealing itself. This question has, however, been quite succinctly
dealt with by the Federal Court of Australia in the case of
The Trustee for the Estate of the late AW Furse No 5 Will
Trust v. FC of T, 91 ATC 4007/21 ATR 1123. Hill, J. said when
dealing with similar legislation in that country :
"There are two issues, relevant to the present problem,
to be determined under s.102AG(3). The first is whether the
parties to the relevant agreement were dealing with each other at
arm's length in relation to that agreement. The second is
whether the amount of the relevant assessable income is greater
than the amount referred to in the subsection as the
"arm's length amount".
The first of the two issues is not to be decided solely by
asking whether the parties to the relevant agreement were at
arm's length to each other. The emphasis in the subsection is
rather upon whether those parties, in relation to the agreement,
dealt with each other at arm's length. The fact that the
parties are themselves not at arm's length does not mean that
they may not, in respect of a particular dealing, deal with each
other at arm's length. This is not to say that the
relationship between the parties is irrelevant to the issue to be
determined under the subsection..." [emphasis added]
[15] Bowman, T.C.J. alluded to this type of situation in the
R.M.M. case (above) when he said at page 311 :
"I do not think that in every case the mere fact that a
relationship of principal and agent exists between persons means
that they are not dealing at arm's length within the meaning
of the Income Tax Act. Nor do I think that if one retains
the services of someone to perform a particular task, and pays
that person a fee for performing the service, it necessarily
follows that in every case a non-arm's-length relationship is
created. For example, a solicitor who represents a client in a
transaction may well be that person's agent yet I should not
have thought that it automatically followed that there was a
non-arm's-length relationship between them.
The concept of non-arm's length has been
evolving."
[16] In Scotland, in the case of Inland Revenue
Commissioners v. Spencer-Nairn 1991 SLT 594 (ct.
of Sessions) the Scottish Law Lords reviewed a case where the
parties were in a non arm's length situation. They commented
favourably on the approach taken by Whiteman on Capital Gains
Tax (4th ed.), where it was suggested by the author that two
matters that should be taken into account when considering the
words 'arm's length'. These were whether or not there
was separate or other professional representation open to each of
the parties and secondly, perhaps with more relevance to the
situation on hand, whether there was "a presence or absence
of bona fide negotiation".
[17] In the United States the term "arm's
length" was defined in the case of Campana Corporation v.
Harrison (7 Circ; 1940) 114 F2d 400, 25 AFTR 648, as
follows:
"A sale at arm's length connotes a sale between
parties with adverse economic interests."
[18] I dealt with these cases in Campbell and M.N.R.
(96-2467(UI) and (96-2468(UI)) and the principles for which
they stand. I adopt all that I said in that case.
[19] At the end of the day it would seem to me that what is
intended by the words "dealing at arm’s length"
can best be described by way of an example. If one were to
imagine two traders, strangers, in the market place negotiating
with each other, the one for the best price he could get for his
goods or services and the other for the most or best quality
goods or service he could obtain, these persons one would say
would be dealing with each other at arm's length. If however
these same two persons, strangers, acted with an underlying
interest to help one another, or in any manner in which he or she
would not deal with a stranger, or if their interest were to put
a transaction together which had form but not substance in order
to jointly achieve a result, or obtain something from a third
party, which could not otherwise be had in the open marketplace,
then one would say that they were not dealing with each other at
arm's length.
[20] If the relationship itself (and here it must again be
remembered that the Act does not say "where they are
in a non arm's length relationship" it says "where
they are notdealing with each other
at arm's length") is such that one party is in a
substantial position of control, influence or power with respect
to the other or they are in a relationship whereby they live or
they conduct their business very closely, for instance if they
were friends, relatives or business associates, without clear
evidence to the contrary, the Court might well draw the inference
that they were not dealing with each other at arm's length.
That is not to say, however, that the parties may not rebut that
inference. One must however, in my view, distinguish between the
relationship and the dealing. Those who are in what might be
termed a "non arm's length relationship" can surely
deal with each other at arm's length in the appropriate
circumstances just as those who are strangers, may in certain
circumstances, collude the one with the other and thus not deal
with each other at arm's length.
[21] Ultimately if there is any doubt as to the interpretation
to be given to these words I can only rely on the words of Madam
Justice Wilson who in the case of Abrahams v. A/G Canada
[1983] 1 S.C.R. 2, at p. 10 said this:
"Since the overall purpose of the Act is to make benefits
available to the unemployed, I would favour a liberal
interpretation of the re-entitlement provisions. I think any
doubt arising from the difficulties of the language should be
resolved in favour of the claimant."
[22] In the end it comes down to those traders, strangers, in
the marketplace. The question that should be asked is whether the
same kind of independence of thought and purpose, the same kind
of adverse economic interest and same kind of bona fide
negotiating has permeated the dealings in question, as might be
expected to be found in that marketplace situation. If on the
whole of the evidence that is the type of dealing or transaction
that has taken place then the Court can conclude that the dealing
was at arm's length. If any of that was missing then the
converse would apply.
Review of the evidence
[23] The facts upon which the Minister was said to rely were
set out in the Reply to the Notice of Appeal as follows:
"a) the Payer, incorporated on April 26th 1994,
operated a clothes cleaning and washing business for
manufacturers;
b) according to the Payer's 1995 Income Tax Return, its
shareholders were:
the Appellant 37.5%
Jaswander Puri 37.5%
Jagtar Singh 25 %;
c) the Appeals officer could not get any other document to
substantiate the ownership of the shares of the Payer;
d) the three alleged shareholders are not related;
e) the Appellant invested approximately $25,000 at the start
of the Payer's business;
f) the Payer declared bankruptcy in May 1996;
g) Jagtar Singh invested in the Payer but did not work in
its business, nor did he participate in its administration;
h) Jaswander Puri lived in Ontario;
i) Jaswander Puri helped start the Payer's business, and
came to Ville St-Laurent occasionally to verify the activities
of the Payer's business;
j) the Appellant managed the Payer's daily
activities;
k) his work was not controlled by the Payer;
l) during the first year of the operations of the
Payer's business, he worked without any salary;
m) afterwards, he received a $250 a week gross salary;
n) during the last months preceding the Payer's
bankruptcy, his salary was increased to $500 net per week;
o) he signed his own Record of employment;
p) in fact, the Appellant was not dealing with the Payer at
arm's length;"
[24] The Appellant said in evidence that he agreed with
items 5a), b) ( except as to the amount of the shareholding
which he claimed was one third each), c), d), e), f), g), j),
l), m), n) and o).
[25] He disputed items 5h), i) and k). The onus is upon him
to refute the facts upon which the Minister relied and if he
fails to do so, on the balance of probabilities, those facts
must be accepted by the Court.
[26] In evidence the Appellant said that the three men held
equal shares in the Company. He said that Jagtar Singh came to
meetings although he agreed that he did not work in the
business. He disputed, and I accept his evidence on this point,
that Jaswander Puri lived in Ontario. He said that he lived in
Montreal and that he came to the business everyday and handled
all the money and the business affairs. His everyday work was
not controlled by the Company. However all the financial and
business affairs were looked after by Puri and perhaps also
Jagtar Singh.
[27] He agreed that throughout the first year he worked
without salary, and that afterwards he took a modest salary of
$250 per week going up to $500 after six to seven months.
Eventually there was no money left and the business closed
down. He suspected his partners had taken the money. The doors
were closed and he signed his own record of employment so as to
apply for unemployment benefits.
[28] It is of course a rather sad story. That, however, is
not the point. The arrangement he made with the Company to work
for no or very little pay is hardly the type of arrangement
entered into by strangers. I do not doubt that he worked very
hard in the business. The original intention seems to have been
to provide himself with some employment. The fact that he
appears, according to his evidence, to have been taken
advantage of by his partners does not in my view alter that
situation. The nature of the arrangements made, quite simply,
are not those that strangers in the market place would have
made.
[29] I cannot, in these circumstances conclude that the
Minister was in error in making the determination that he did.
The appeal is accordingly dismissed and the decision of the
Minister is confirmed.
Signed at Calgary, Alberta, this 26th day of February
1999.
" Michael H. Porter "
D.J.T.C.C.
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