Borsellino v. M.N.R., docket 97-1758-UI

Date: 19990114

Docket: 97-1758-UI

BETWEEN:

GIUSEPPINA BORSELLINO,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

FORMONT INC.,

Intervenor.

Appeal heard on August 6 and 7 1998 at Montreal, Quebec, by the Honourable Deputy Judge M.H. Porter

Reasons for judgment

Porter, D.J.T.C.C.

[1] This appeal was heard on August 6 and 7, 1998 at Montreal in the Province of Quebec.

[2] The appeal was heard officially in the English language at the request of the Appellant although it was agreed between counsel that they would plead their respective cases in the French language, when addressing the Court.

[3] The Appellant, supported by the corporation Formont Inc., the Company, which intervened in the case, has appealed the decision of the Minister of National Revenue (the "Minister") dated September 23, 1997 that her employment with the Company from January 6 to January 31, 1997 was not insurable employment under the Employment Insurance Act (the "Act"). The reason given was:

"there existed a non arm’s length relationship in fact, between yourself and Formont Inc."

the decision was said to be issued pursuant to subsection 93(3) of the Act and was based on paragraph 5(2)(i) thereof.

[4] In the Reply to the Notice of Appeal, counsel for the Minister raised an additional submission that if the Court concluded that the employment was not "excepted employment", it was still not insurable employment because there was no real contract of service between the Appellant and the Company. This of course is a new reason and not the one expressed by the Minister, from which the Appellant has appealed.

[5] There is some history at the root of this appeal to which I feel it is necessary to refer. When the original decision was made at the Human Resources level, there was imposed upon the Company a penalty of $12,000.00 for having knowingly made a false declaration on the Record of Employment issued by the Company with respect to this employment. This seems to have been based on the view of the officials, at that time, that this employment was simply a fabrication and never took place. That is not the view of the Minister now and the witness called on his behalf, who reviewed the file, specifically stated as such. At the hearing of the appeal, before the Board of Referees with respect to the fine, the Board unanimously allowed the appeal and held that no such false statement had been knowingly made by the officials of the Company. This is not directly relevant to the issue before this Court, but it does put this appeal into some perspective.

[6] It is clear now that the Minister no longer takes that position and that the issue before the Court is simply one of whether or not the working arrangement was made at arm’s length.

The Law

[7] 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.

[8] 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;...”

[9] 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)

[10] 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.

[11] 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.

[12] 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.).

[13] 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".

[14] 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.

[15] 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."

[16] 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."

[17] 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]

[18] 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."

[19] 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".

[20] 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."

[21] 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.

[22] 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.

[23] 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.

[24] 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."

[25] 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.

The Facts

[26] Evidence was given by a number of people including the Appellant. Of particular note in my mind was the evidence of Monravio Menni the owner of the Company and Daniel Menni his son, the person who hired the Appellant. I was extremely impressed by the evidence and demeanour of these two witnesses. I found them to be honest and straightforward and not in any way the type of persons who would perjure themselves. I have no hesitation in accepting their evidence in its entirety. The fact that the Board of Referees found that their evidence was credible in their hearing, comes as no surprise. They were impressive witnesses and not in my view at all likely to involve themselves in some petty manipulative scheme with Employment Insurance.

[27] Daniel Menni said that in January of 1997 he was extremely busy. Theirs is a large concrete supply business, mostly for commercial buildings. That business had slowed down in the way of major contracts. However his father had become ill, with heart problems and his two brothers had gone to the United States to look for business. He was thus carrying the administrative load back home. He was also trying to get a number of bids and tenders out to potential customers. The regular staff in the office was generally laid off every January. The witness said that he was reluctant to favour one over the other and bring one back. The third employee in the office who did stay on through the winter was away sick.

[28] He said that he had known the Appellant, as she lived on his street, but they had not socialised together. She had previously asked him for work and at this time asked him again. He needed someone to do two things for him in his work for the Company. The first was to verify the figures in the present tenders upon which he was working. The second was to go through the figures on the contracts for the previous four years, verify them and get them into some kind of form whereby they could be entered into the Company’s computer to assist in planning for the future.

[29] The Appellant had sufficient work experience to carry out this type of work. He told her that she could do the work either at the office or at her home, as it did not matter to him. She agreed to work forty hours per week at her home. It was unclear to the parties how long the work would last. In fact it lasted four weeks. She was paid $450.00 per week. That is slightly more than the long term employees were paid but then again short term contracts often cost more than long term regular ones. It was certainly within the range of what she had been earning prior to that.

[30] Daniel ran the arrangement by his father who approved it. The evidence of the father substantially corroborated that of the son.

[31] It was argued on behalf of the Minister that the work was unnecessary. I do not think that is for the Minister to say. If a company executive decides that he needs work done to better enable the Company to carry on its business, that is a business decision and provided it is not some kind of sham and the work is to do with the business, it is not for the Minister to second guess that decision. If the work had nothing to do with the business of the Company that would be a different thing. However in this case it was clearly related. The Appellant had sufficient experience to carry out this work. It was convenient for it to be done close to Daniel Menni’s home, where he could drop off and pick up files quite easily.

[32] The number of weeks coincided exactly with the number of weeks the Appellant had been notified that she needed to qualify for employment insurance benefits. It was argued on behalf of the Minister that somehow this made the arrangement suspect. I agree that it is coincidental that the exact number of weeks were worked. However the Appellant was entitled to go out and seek work for the number of weeks she needed. If this had been full-time employment she would not have needed to claim employment insurance benefits. However, it was a short-term contract and simply because it was for only four weeks does not in my view detract from its genuine nature.

[33] Similarly, the Minister claims that the remuneration paid was not reasonable. However, it was certainly in the ball park of the salaries that the Appellant had earned elsewhere and close to what the Payor was paying his office staff already.

[34] Again, the Minister asserts that the nature and importance of the work performed was not reasonable. I do not know what he meant by this statement. If the Company in the mind of one of its executives felt it was necessary or useful it is not for the Minister to say it was not, unless there is some direct evidence to the contrary. No such evidence exists in this case.

[35] Much was made of the mistake made in the initial Record of Employment and the application signed by the Appellant for employment insurance benefits, and in particular that her occupation was stated to be "comptable" that is accountant. In fact she was an accounting clerk. I have no hesitation in concluding that this was a genuine error committed quite innocently and not in any way designed to confuse or deceive.

Conclusion

[36] I do not have the slightest hesitation in holding the employment, throughout the time in question, to be insurable employment. I am perfectly satisfied that the arrangement was a genuine one. I am further satisfied that it was made at arm’s length. Although known to each other, there was nothing between the parties that would have caused them to enter into any arrangement other than the type of one that strangers in the market place would have done. The Company had need of some work to be done, the price was fair and the Appellant was in need of work. It was a good arrangement for both of them.

[37] To the extent that it is suggested that this was not a contract of service but rather a contract for services, I again point out that this was not the position of the Minister in the formulation of his decision. In any event a measure of control was exercised by the Company, in that Daniel Menni dropped off work each day and picked-up the work at the end of the day. He decided which work he wanted done and when. Even though the Appellant was free to work in her own home, as I note many employees in today’s workforce are, she was under the direction of Daniel Menni and was expected to work a set eight hours per day. She used her own tools but had no expectation of any additional profit nor would she have encountered any losses. Quite frankly she was not in business for herself and the work was entirely related to and integrated into that of the Company. I am satisfied on balance that this was a contract of service and not a contract for services.

[38] In the result I find that the work for the period in question was insurable employment. The appeal is allowed and the decision of the Minister vacated.

Signed at Calgary, Alberta, this 14th day of January 1999.

"M.H. Porter"

D.J.T.C.C.