Roxboro Excavation Inc. v. M.N.R., docket 97-1467-UI

Date: 19990115

Docket: 97-1467-UI

BETWEEN:

ROXBORO EXCAVATION INC.,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

DANIEL THÉORÊT, MICHEL THÉORÊT, RAYNALD THÉORÊT, ROGER THÉORÊT, YVON THÉORÊT,

Interveners.

Appeal heard on July 2, 1998, at Montréal, Quebec, by the Honourable Judge Alain Tardif

Reasons for judgment

Tardif, J.T.C.C.

[1] This is an appeal from a decision dated May 7, 1997. In that decision, the respondent informed the appellant and the interveners, Michel Théorêt, Daniel Théorêt, Raynald Théorêt, Roger Théorêt and Yvon Théorêt, that the interveners had held insurable employment in 1996 while they were being paid by the appellant, which carried on business under the firm name “Roxboro Excavation Inc.” (hereinafter referred to as “Roxboro”).

[2] The only intervener who testified in support of the appeal was Yvon Théorêt. According to counsel for the company, he was the best qualified of all the interveners to describe the facts related to the work that he and his brothers performed.

[3] Denis Couture, in his capacity as the company’s controller, also testified in support of the appeal.

[4] The evidence showed that Roxboro had two main lines of business: industrial and commercial excavation and snow removal during the winter.

[5] The company, which was established in April 1972 by the Théorêt brothers’ father, had gradually transferred its capital stock to the Théorêt brothers until each of them owned 20 percent.

[6] At the end of 1996, major changes occurred with the Théorêt brothers’ decision to reorganize the family’s corporate structure.

[7] The evidence showed, however, that Roxboro remained the principal corporate entity at the centre of a group of several other companies headed by 9045-1410 Québec Inc., which was incorporated on December 23, 1996. Moreover, Roxboro generated a very large majority of the economic activities of the group of companies and thus most of the income.

[8] It was shown that each of the Théorêt brothers had specific, defined responsibilities within Roxboro. Each of them devoted most of his available time to that company, although they were each also marginally involved in ensuring the efficient operation of the other companies.

[9] In exercising their respective responsibilities, the Théorêt brothers had a fair degree of independence and managed their own areas of activity quite freely. They did not have to ask for permission when deciding when to take vacations; they could be absent without having to give anyone an explanation. They each received more or less the same salary, part of which was paid through consecutive weekly cheques for the same amount; the other part of their remuneration was paid in the form of a bonus whose amount varied based on the financial performance of Roxboro and/or the other companies.

[10] During peak periods, the company had up to 110 employees, depending on the season and its economic activities. The five Théorêt brothers ran the company with the help of a superintendent, a controller and a number of foremen.

[11] In 1996, the controller was paid $770 gross a week, which represented an annual salary in excess of $40,000. The superintendent was paid $1,100 gross a week, or nearly $60,000 a year. According to the controller, some of the employees were able to earn between $50,000 and $60,000, depending on how much overtime they put in.

[12] Yvon Théorêt explained that each of the brothers had had to stand surety at the bank for up to $30,000, but not jointly and severally. He also said that the insurance company which provided the bonds required for the performance of certain contracts over $4 million had changed its requirements as a result of the Marché central contract. Thereafter, the personal guarantee of the five brothers was required starting with the first dollar, and this is still the case today, which considerably increased the risks for the Théorêts as signatories.

[13] The difficult and painful consequences of the Marché central contract, with respect to which the company had had to bear the cost of more than $2 million worth of work that had been done but not paid for, were set forth. Marché central was a megaproject that gave rise to several lawsuits. The bonuses were substantially lower that year and, according to the controller, two of the brothers had to wait a few months before receiving their weekly pay.

[14] That salary decrease is clearly shown in the tables prepared by the company’s controller (see Exhibit A-4, attached).

Analysis

[15] The Minister of National Revenue (“the Minister”) argued that the Théorêt brothers performed their work and exercised their respective responsibilities for and on behalf of Roxboro pursuant to a contract of service. To support the soundness of his determination, the respondent referred to the various tests set out in the case law, inter alia in Montreal v. Montreal Locomotive Works Ltd. et al., [1947] 1 D.L.R. 161, at pp. 169-70, and Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553.

[16] The respondent argued that the Théorêt brothers were not running their own business and were therefore employees of the company that paid them their salaries.

[17] The evidence clearly showed that the Théorêt brothers performed genuine work for the appellant company and were genuinely paid for that work; these two important facts are moreover not in dispute.

[18] The key issue in this case is basically whether there was in 1996 a relationship of subordination between the company paying the remuneration and the interveners. In other words, did the company have the power to control and influence the work done by the Théorêt brothers?

[19] In this regard, I consider it important to point out that the courts have often said that it is not mandatory or necessary that the power to control actually be exercised; in other words, the fact that an employer does not exercise its right to control does not mean that it loses that power, which is absolutely essential to the existence of a contract of service.

[20] The power to control or the right to influence the performance of work is the main component of the relationship of subordination that lies behind a genuine contract of service.

[21] Assessing whether or not a relationship of subordination exists is difficult when the individuals who hold authority by virtue of their status as shareholders and/or directors are the same individuals who are subject to a power to control or to the exercise of authority in respect of specific work. Put differently, it is difficult to draw a clear line when a person is an employee and in part an employer all at the same time.

[22] In such cases, it is essential to draw a very clear distinction between what is done as a shareholder and/or director and what is done as a worker or non-management employee. In the case at bar, that distinction is especially important.

[23] Although the courts have identified four tests to help in characterizing a contract of employment, the test relating to the power to control is the most important; indeed, it is essential.

[24] There can be no contract of service without such a power to control the person who performs the work for which he or she is being paid. This implies, of course, that this work is genuine.

[25] The power to control the performance of work is what lies behind the relationship of subordination that is absolutely fundamental to the existence of a contract of service within the meaning of the Unemployment Insurance Act.

[26] In the case at bar, did Roxboro have the power to control the work that the interveners did for it? Did the weight of the evidence show that such a power to control existed? Could that power be exercised?

[27] The evidence showed that each of the Théorêt brothers had authority and independence and even had carte blanche in performing the work for which he was responsible. The evidence also showed that decisions were made informally, collegially and by consensus.

[28] Was there a relationship of subordination between the interveners and the company in and as regards the performance of the work they did within the scope of their respective roles? I believe that the company, which oversaw the work done by the Théorêt brothers, had the full right and power to influence that work. The fact that the company did not exercise that power to control and that those who performed the work did not think they were subject to such a power or feel they were subordinate in performing their work does not have the effect of eliminating, reducing or limiting the power to influence their work.

[29] Admittedly, certain rather vague facts, such as the delay in paying the two young Théorêt brothers their salaries, suggest that there was special treatment because of the family situation. However, I do not consider this sufficient to disqualify the persons in question. They were being generously co-operative because of their interest as shareholders.

[30] I do not think that it is objectively reasonable to require a total, absolute separation between the responsibilities that result from shareholder status and those that result from worker status. The wearing of both hats normally—and this is perfectly legitimate—creates greater tolerance and flexibility in the relations arising out of the two roles. However, combining the two roles produces effects that are often contrary to the requirements of a genuine contract of service.

[31] In the case at bar, the fact that authority did not seem to be exercisable against the Théorêt brothers and that decisions concerning the company were made by consensus and collegially does not mean that the company was deprived of its authority over the work done by the interveners. The evidence did not show that the company had waived its power to influence their work or that its right to do so was reduced, limited or revoked.

[32] Moreover, the example given by Yvon Théorêt is quite meaningful: he indicated that one of the brothers was forced to take a vacation to think things over and that he ultimately came back and accepted the majority’s approach. The concept of authority was also evident from his statement that one of the brothers took time off work to engage in his favourite sport, which created some tension among those who were more assiduous in carrying out their respective roles.

[33] Counsel for the appellant also argued that the interveners’ employment should be excepted from insurable employment on the basis of the exceptions set out in paragraph 3(2)(c), which reads as follows:

(2) Excepted employment is

. . .

(c) subject to paragraph (d), 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, and

(ii) where the employer is, within the meaning of that Act, related to the employee, they shall be 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.

[34] I do not accept that argument, since the exception provides for the exercise of a discretion that requires an analysis of the terms and conditions of the performance of the work at issue. The non-arm’s-length relationship is deemed not to exist 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 the employer and employee would have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length.

[35] In the case at bar, all the circumstances of the employment and the terms and conditions suggest that there was a genuine contract of service that was in no way affected by the non-arm’s-length relationship; in other words, the company did not confer any advantage or benefit that it would not have conferred on shareholders who were at arm’s length. Conversely, the Théorêt brothers were not penalized because of their family status.

[36] The weight of the evidence is that the Théorêt brothers’ concern was the company’s interests; they stood together and were determined to do everything they could to maintain the company’s financial health. How did the fact that they were brothers change their relationship with the company? There was no evidence adduced on this point.

[37] Admittedly, they were major contributors; they had to bear an enormous financial burden because of the guarantee provided by each of them and they were not shielded from the consequences of certain difficult contracts; however, I do not think—and if this was the case, the evidence did not show it—that the family connection was the reason for those disadvantages and, in other circumstances, for benefits received. Rather, their status as shareholders explains certain differences, which are moreover not so significant as to vitiate those elements that are fundamental and essential to the existence of a genuine contract of service.

[38] Furthermore, it is fairly common to see co-shareholders who, because of their status, discipline themselves in the interest of the company in which they are shareholders.

[39] It is not easy to draw a clear line with respect to everything that is done in cases where a person has a dual status within a company. Each case is sui generis, and it is a matter of assessing and analyzing whether the encroachments of the powers resulting from shareholder status significantly altered the elements essential to the formation of a contract of service.

[40] In the instant case, I do not think that the family connection so influenced or shaped the terms and conditions under which the Théorêt brothers performed their work as to justify disregarding the elements indicative of a contract of service. The Théorêt brothers performed work. They received fair and reasonable compensation for the work they performed, and that work was subject to the company’s genuine power to control.

[41] For these reasons, I am dismissing the appeal, since the work performed in 1996 for the appellant by the interveners, Daniel Théorêt, Michel Théorêt, Raynald Théorêt, Roger Théorêt and Yvon Théorêt, was so performed under a contract of service within the meaning of the Unemployment Insurance Act.

Signed at Ottawa, Canada, this 15th day of January 1999.

“Alain Tardif”

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 16th day of September 1999.

Erich Klein, Revisor

Exhibit A-4

[Omitted]