Crawford & Co. Ltd. v. M.N.R., docket 98-407-UI

Date: 19991208

Dockets: 98-407-UI; 98-537-UI; 98-538-UI

BETWEEN:

CRAWFORD AND COMPANY LTD.,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

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

[1] These appeals were heard at Edmonton, Alberta on April 22, 1999 on common evidence with the consent of the parties.

[2] The Appellant has appealed the decisions of the Minister of National Revenue (the "Minister") made on April 22, 1998 wherein he decided that the employment of Leslie Anderson, Brian Sharp and Kevin Sharp, who at all material times were the sole Directors of and controlled the shareholdings of the Corporation, from January 1^st to October 24, 1997, was insurable employment under the Employment Insurance Act (hereinafter called the “EI Act”).

[3] In point of fact, it was decisions which related to their employment with the Corporation from January 1^st, 1987 to October 24, 1997 and the date “1997” appears to have been included in error. By agreement between the parties it was decided that the appeal was properly heard in relation to the period of time commencing on January 1^st, 1987. This necessarily involves the provisions of the former Unemployment Insurance Act (UI Act) and a number of amendments which occurred over the time and in particular the amendments in 1990 with respect to related persons.

[4] Although the facts in each case are virtually the same, the issues with respect to Brian Sharp and Kevin Sharp, who are brothers (collectively referred to as “the Sharp brothers”), on the one hand are different to the issues relating to Leslie Anderson on the other hand. The Sharp brothers were ‘related persons’ to the Corporation under the EI Act whereas Leslie Anderson was not a ‘related person’. Although it is convenient to deal with all matters in the same judgment, I will deal with the issues separately.

[5] The decision with respect to Leslie Anderson was said to be based on the following reasons:

“Leslie Anderson was employed under a contract of service and, therefore, he was your employee. Furthermore, Leslie Anderson was dealing at arm’s length with Crawford & Company Ltd. so he was not excluded from insurable employment.”

[6] The decision was said to be issued pursuant to section 93 of the EI Act and was based on paragraph 5(1)(a) of the EI Act.

[7] The decisions with respect to the Sharp brothers were said to be based on the following reasons:

“You were employed under a contract of service and, therefore, you were an employee. Your employment was not excluded from insurable employment as the Minister is satisfied that a substantially similar contract of employment would have been entered into if you had been dealing with each other at arm’s length” (same in each case)

[8] These decisions were said to be issued pursuant to section 93 of the EI Act and were based on paragraph 5(1)(a) of the EI Act. Surprisingly enough, no reference was made to paragraph 5(3)(b) of the EI Act.

[9] It is not in issue that the workers in question were working under contracts of service as opposed to contracts for services. They were clearly employees of the Corporation and not independent contractors.

[10] The established facts revealed that at all material times the Appellant operated a John Deere farm equipment dealership in Camrose, Alberta. Prior to January 1^st, 1987, the dealership had been operated by Wesley Sharp, the father of the Sharp brothers. On that date Brian Sharp and Kevin Sharp, along with Leslie Anderson, became equal shareholders in 294613 Alberta Ltd., a numbered corporation, registered in Alberta, which in turn owned all the shares in the Appellant Corporation. They also became and have remained the three Directors of the Corporation. Leslie Anderson took on the role of General Manager, Brian that of Agricultural Sales Manager, and Kevin that of Consumer Products Sales Manager.

[11] The issue before the Court with respect to Leslie Anderson is relatively straightforward, to be decided by the Court de novo on this appeal; it is whether or not he and the Corporation were dealing with each other at arm’s length. If they were not, and the onus is on the Appellant to show that they were not, then he was not in insurable employment. The decision to be made is a mixed question of fact and law.

[12] The issue, with respect to the two Sharp brothers, is somewhat different in that the matter involves the exercise by the Minister of his discretion under paragraph 5(3)(b) of the EI Act, and its predecessor subparagraph 3(2)(c)(ii) of the UI Act which are, for all intents and purposes, the same.

[13] In 1990, the situation with respect to related persons was changed, by amendment to the UI Act whereby pursuant to subsection 3(2) (and the provisions of the Income Tax Act, employment of related people was excluded) but, the Minister was given the authority to decide whether their employment was substantially similar to an arrangement that would have been made between persons who were dealing with each other at arm’s length. If it was, the employment then became “insurable employment”. That provision has now been carried forward into the EI Act.

[14] In this case the Minister, by exercising his discretion under this section, has included the employment of the Sharp brothers into the fold of “insurable employment” under the EI Act. The first issue then, is whether that decision was lawfully made. If not, and only if not, the second issue is whether taking into account all the circumstances including all those matters set out in the statute, the Court is satisfied that the employment arrangement entered into by the Sharp brothers was substantially similar to one into which persons who were dealing with each other at arm’s length would have entered. If the Court is not so satisfied the employment remains excluded.

[15] Whilst traditionally this provision under paragraph 5(3)(b) of the EI Act has been used by the Minister to alleviate hardship and where appropriate to open the gates to ‘related persons’ to receive benefits in employment situations, where they would otherwise be excluded from the provisions of the employment insurance scheme, in this case, he has exercised his discretion to include the Sharp brothers, when they have no wish to be included. It would seem that in the vast majority of cases which come before this Court, appeals are launched by Appellants in whose favour the Minister has declined to exercise his discretion and who seek to be included in the scheme. That is to say that generally speaking the section is viewed as an exception to an exclusionary provision. This exception was introduced by Parliament in order to alleviate hardship and unfairness in the system. In somewhat of a role reversal, the Minister has sought in this case to use the provision to include persons who in the normal course of events, by operation of law, are excluded from the scheme and furthermore who have no wish to be included. Thus he has turned what would appear to have been an exception to an exclusion under the general rule, that ‘related persons’ are not included in the scheme, into an inclusionary process. The fact that in the cases at hand, the workers, who are substantial businessmen, are most unlikely to ever claim benefits and that the majority of appeals to this Court on this subject, involve the unfavourable exercise of the discretion by the Minister in cases of people in more menial occupations, who are claiming benefits, is not entirely relevant but perhaps nonetheless worthy of observation. There should be no double standard here. Normally the Court is looking down the other end of the telescope to see whether the Minister has properly exercised his discretion by excluding related claimants from the scheme. In the cases at hand it must consider whether the Minister has properly exercised his discretion in bringing them into the scope of the scheme rather then leaving them excluded, where the basic law would otherwise have left them without the proactive exercise by the Minister of his discretion. In such circumstances it is perhaps not inappropriate to so look through the other end of that telescope and consider whether, if the Minister was being asked to let them into the scheme in order to claim benefits, he would have exercised his discretion in a similar fashion.

[16] That being said, I am bound by the decisions of the Federal Court of Appeal, to which I refer below, to give due deference to the decision of the Minister and it is only in certain circumstances that I might interfere with his decision. I must proceed on that basis.

[17] I would, however, add as general comment that this is a difficult legal concept for an unrepresented Appellant to grasp. It was perhaps unfortunate that the Appellant was not represented by properly instructed counsel. The difficulty it faces is that it proceeded on the basis of the general law as it is set out, that is to say that related people are excluded from the scheme. Then ex post facto the Minister stepped in and exercised his discretion, and the past situation which was perfectly in accordance with the law, was changed. At the very least one would say that it would be somewhat unfair to impose any penalties or interest in such a situation.

[18] Over and above this however, I would be remiss if I did not mention that there is a basic unfairness in the approach taken by the Minister. Leslie Anderson has the right to have his appeal decided on a de novo basis. That is, the Court may come to its own conclusion on the merits of the case based on the evidence before it. However, in the case of the Sharp brothers, they do not have the same right of appeal. In their case, the Court must go through the two stage process, to which I refer below, whereby the Court must first review whether the Minister exercised his discretion in a proper manner, giving deference to the decision he made, even if on the same evidence the Court would have arrived at a different conclusion. It is only if the Minister arrived at his decision in an unlawful manner that the Court might go on to the second stage and review the evidence de novo. This is something of a role reversal as generally it is harder for related people to establish an entitlement to participate in the scheme than it is for unrelated people. In the cases at bar, it is harder for the related workers to establish that they should not be included than it is for the unrelated person.

[19] In the normal course of events a person might be let into the fold of the scheme and thus be able to obtain employment insurance benefits, as a result of a favourable exercise of the discretion. However, if exercised in an unfavourable manner they are not called upon to pay (except to repay benefits already improperly obtained). In the cases at hand however, the unfavourable (usually favourable) exercise of the discretion, that is the Minister being satisfied that the arrangement is substantially similar to one which would have been made between persons dealing with each other at arm’s length, leads to a liability to pay premiums and at the same time deprives the Appellant of his normal rights of appeal, all ex post facto. Thus, there is an inherent unfairness in how this statute is now being applied by the Minister. The rights of appeal of the Sharp brothers are considerably curtailed in comparison to Leslie Anderson, who is a non related person.

[20] I make reference to a similar situation which arises in my decision of even date under the name of Hoobanoff Logging Ltd. v. M.N.R. (98-1019(UI) and 98-1018(UI)) and I adopt what I said in that case as another example of the Minister purportedly exercising his discretion to include employment into the fold of the scheme, where the law would in the normal course of events have excluded it.

[21] I propose to deal first with the issue involving Leslie Anderson and thereafter with the discretionary decision of the Minister as it relates to the Sharp brothers. Then, if appropriate, I will proceed to the second stage, to review the evidence as it relates to their situation.

The Law relating to Arm’s Length

[22] 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.

[23] Subsections 5(2) of the Employment Insurance Act read in part as follows:

"5(2) Excluded employment

...

(i) employment if the employer and employee are not dealing with each other at arm's length.

(3) For the purposes of paragraph (2)(i),

(a) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the Income Tax Act; and

(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."

[24] 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)

[25] 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 at page 310:

"It is true that a determination whether persons are at arm’s length requires that a court makes findings of fact, but whether, on the facts, there is in law an arm’s length relationship is necessarily a question of law.[...] All that paragraph 251(1)(b) means is that in determining whether, as a matter of law, unrelated persons are at arm’s length, the factual underpinning of their relationship must be ascertained. The meaning of "arm's length" within the Income Tax Act is obviously a question of law."

[26] 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 at page 1113:

"The expression is one which is usually employed in cases in which transactions between trustees and cestuis que trust, guardians and wards, principals and agents or solicitors and clients are called into question. The reasons why transactions between persons standing in these relations to each other may be impeached are pointed out in the judgments of the Lord Chancellor and of Lord Blackburn in McPherson v. Watts, 1877, 3 A.C. 254. These considerations have no application in considering the meaning to be assigned to the expression in s. 20(2)."

[27] 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.), where Laskin, J.(as he then was) said at 6473 in conclusion:

"....the payer and payee must not be persons who, effectively, are dealing exclusively with each other through a fund provided by the payee for the benefit of the payee. A sound reason for this that the enactment itself suggests is the assurance that the interest rate will reflect ordinary commercial dealing between parties acting in their separate interests. A lender-borrower relationship which does not offer this assurance because there are, in effect, no separate interests must be held to be outside of the exception that exempts a non-resident from taxation on Canadian interest payments. The fact that the interest actually authorized or paid is consistent with arm's length dealing is not enough in itself to avoid this conclusion."

[28] 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".

[29] 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.

[30] 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 common mind test emerges from two cases. The Supreme Court of Canada dealt first with the matter in M.N.R. v. Sheldon's Engineering Ltd. (above) at pages 1113-14, Locke, J., speaking for the Court, said the following:

Where corporations are controlled directly or indirectly by the same person, whether that person be an individual or a corporation, they are not by virtue of that section deemed to be dealing with each other at arm's length. Apart altogether from the provisions of that section, it could not, in my opinion, be fairly contended that, where depreciable assets were sold by a taxpayer to an entity wholly controlled by him or by a corporation controlled by the taxpayer to another corporation controlled by him, the taxpayer as the controlling shareholder dictating the terms of the bargain, the parties were dealing with each other at arm's length and that s. 20(2) was inapplicable.

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.

The acting in concert test illustrates the importance of bargaining between separate parties, each seeking to protect his own independent interest. It is described in the decision of the Exchequer Court in Swiss Bank Corporation v. M.N.R. At page 5241, Thurlow J. (as he then was) said:

To this I would add that where several parties - whether natural persons or corporations or a combination of the two - act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the "mind" that directs may be that of the combination as a whole acting in concert or that of any of them in carrying out particular parts or functions of what the common object involves. Moreover as I see it no distinction is to be made for this purpose between persons who act for themselves in exercising control over another and those who, however numerous, act through a representative. On the other hand if one of several parties involved in a transaction acts in or represents a different interest from the others the fact that the common purpose may be to so direct the acts of another as to achieve a particular result will not by itself serve to disqualify the transaction as one between parties dealing at arm's lenght. The Sheldon's Engineering case [supra], as I see it, is an instance of this.

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."

[31] 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. Many factors are relevant in the determination of the issue, such as ownership and control of a corporation. However, share control (or absence of it) is not necessarily conclusive; it is only a factor to be considered in determining the question of arm's length (Robson Leather Co. v. M.N.R., [1974] C.T.C. 872; 74 D.T.C. 6666, Collier, J. affd [1977] C.T.C. 132; 77 D.T.C. 5106 (F.C.A.)).

In Interpretation Bulletin IT-419 Revenue Canada suggested the following factors will determine whether or not dealings are at arm's length:

(a) the existence of a common mind which directs the bargaining for both parties to a transaction,

(b) parties to a transaction acting in concert without separate interests, and

(c) de facto control.

The criteria enunciated in IT-419 have also been the criteria consistently considered by the courts. In this case, it appears the factor that will illuminate the situation is determining the controlling mind of these two corporations. If the "mind" acting for one party is the same "mind" directing the second party, then they cannot really be said to be dealing at arm's length (Oryx Realty Corp. and Shofar Investment Corp. v. M.N.R., [1972] F.C. 33; [1972] C.T.C. 35; 72 D.T.C. 6018; affd [1974] 2 F.C. 44; [1974] C.T.C. 430; 74 D.T.C. 6352 (F.C.A.))."

[32] 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. The distinction was pointed out by Davies J in connection with similar words used in s.26AAA(4) of the Act in Barnsdall v. Federal Commissioner of Taxation (1988) 88 ATC 4565 at 4568, in a passage, which with respect, I agree:

"However, sec.26AAA(4) used the expression 'not dealing with each other at arm's length'. That term should not be read as if the words 'dealing with' were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the person to whom the taxpayer transferred, but also of the fact that they were not dealing with each other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative unless it leads to the ultimate conclusion."

What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining." [emphasis added]

[33] The same wording was also discussed in the Australian case of Granby PTY Ltd. v. The Commissioner of Taxation, 95 ATC 4240. Lee, J. of the Federal Court of Australia, General Divison, discussed the meaning of the phrase and the recent authorities in the following words:

"The expression 'dealing with each other at arm's length' involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length the inference may be drawn that they did not deal with each other at arm's length."

[34] Again like words were discussed by Davies J. in Barnsdall v. F.C. of T., 88 ATC 4565 at 4568; reproduced above in the quote from the Furse Estate case.

[35] 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."

[36] Whilst it is not law, the Revenue Canada Interpretation Bulletin IT-419R (August 24th, 1995) appears to recognize the need to also refer to the nature of the transaction itself:

"19. Failure to carry out a transaction at fair market value may be indicative of a non-arm's length transaction. However, such failure is not conclusive and, conversely, a transaction between unrelated persons at fair market value does not necessarily indicate an arm's length situation. The key factor is whether there are separate economic interests which reflect ordinary commercial dealing between parties acting in their separate interests."

[37] 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".

[38] 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."

[39] 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.

[40] 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.

[41] Parliament itself has recognized this in the Act. The Income Tax Act deems related persons, as defined in that Act, to not be dealing with each other at arm's length. This focuses on the relationship, i.e. persons who are related. The Unemployment Insurance Act was then amended to allow these persons through the gate so to speak provided they could demonstrate to the satisfaction of the Minister that the dealing in question, that is the contract of employment, is substantially similar to one that would have been made between persons dealing with each other at arm's length. This then refocuses on the transaction, the dealing. Surely persons, who are not 'related persons', are not to be dealt with any differently and in effect more harshly. It cannot be said that Parliament would carve out a certain group of people to be treated more firmly than those from whom they were taken, and then grant that group an exception which would have the effect of placing them in a better position than those from whom they were originally taken. That would make no sense, for in deeming related persons to not be dealing with each other at arm's length, Parliament clearly recognized that this was a group with a propensity to not deal with each other at arm's length and thus singled them out to be dealt with more arbitrarily, subject to the exception if they could bring themselves within the normal fold, all the time focussing on the dealing or transaction itself. Persons who are 'not related' but who can be said to be otherwise in a de facto non arm's length relationship surely are not to be treated in any different manner with strict focus on the relationship as opposed to the nature of their dealing or transaction. If that was to be the case Parliament could have said so very simply, e.g. "persons in a non arm's length relationship", and that would have settled it. Then there would have been no need to distinguish between related and non related persons. However Parliament did not say that and in both the Income Tax Act and the Unemployment Insurance Act it uses the words "dealing with each other" as opposed to referring to the relationship. In the Income Tax Act it went one step further in the case of non related persons by using the additional words "at a particular time". These words, if they are to be given any meaning at all, surely bring the focus onto what was taking place at a particular time rather than on the relationship as a whole.

[42] 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."

[43] 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 relating to the Situation of Leslie Anderson

[44] The facts upon which the Minister was said to rely in coming to his decision are set out in the Reply to the Notice of Appeal signed by counsel on behalf of the Deputy Attorney General of Canada. They are as follows:

"(a) the Appellant operates a John Deere dealership located in Camrose, Alberta;

(b) the voting shares of the Appellant are owned one-third each by Brian Sharp, Kevin Sharp and Leslie Anderson;

(c) Brian Sharp, Kevin Sharp and Leslie Anderson are directors of the Appellant;

(d) Kevin Sharp and Brian Sharp are brothers;

(e) Kevin Sharp and Brian are not related to Leslie Anderson;

(f) Leslie Anderson has provided services to the Appellant since January 1, 1987;

(g) Leslie Anderson is the general manager of the Appellant and his duties were to develop and maintain a profitable organization through good management;

(h) the Appellant employed about 22 people in the 1997 year;

(i) Leslie Anderson set his own salary and also set the salary for Brian Sharp and Kevin Sharp;

(j) Leslie Anderson stated that he set his salary based on what he thought was fair for the responsibility of the position;

(k) Leslie Anderson was paid $5,000.00 per month plus a bonus that depended on the Appellant's profits;

(l) Leslie Anderson was paid monthly by the Appellant;

(m) Brian Sharp, as well as Kevin Sharp and Leslie Anderson were paid a bonus of $89,666.00 in June 1997 and the bonus was based on the taxable income of the Appellant;

(n) Leslie Anderson's hours were not monitored or recorded, but he stated he generally worked from 8:00 a.m. to 5:00 p.m., 5 days a week and anywhere from 30 to 50 hours per week;

(o) Leslie Anderson did not need anyone's authorization to take time off work;

(p) Leslie Anderson was not paid any amount for overtime;

(q) the Appellant's service technicians were paid by the hour, the sales staff were paid by commissions and all other workers were paid by the month;

(r) Leslie Anderson decided how much vacation time he took;

(s) when Leslie Anderson was away from work, his duties were performed by the other two shareholders;

(t) Leslie Anderson's work was not supervised and his work was not inspected;

(u) any expenses incurred by Leslie Anderson relating to his duties of employment were reimbursed by the Appellant;

(v) the Appellant provided all of the tools and equipment required for Leslie Anderson to perform his duties;

(w) Brian Sharp, Kevin Sharp and Leslie Anderson have signed personal guarantees with John Deere;

(x) Leslie Anderson dealt with the Appellant at arm's length."

[45] The Appellant agrees with the majority of the facts. In particular he accepts items (a), (c), (d), (e), (f), (g), (h), (i) subject to further comments, (j) subject to further comments, (k), (l), (m), (o), (p), (q), (r), (s), (t), (u), (v), (w), but not (x), which is a conclusion of arm’s length.

[46] With respect to item (b), the evidence revealed that Brian Sharp, Kevin Sharp and Leslie Anderson all in fact owned one third of the shares of a numbered company 294613 Alberta Ltd., which in turn owned the voting shares of the Appellant Corporation.

[47] Dealing with items (i), (j), and (k), it is clear that Leslie Anderson set his own salary. I do not doubt for a moment that the Sharp brothers were consulted if only in an informal way. Nonetheless, he set his own salary, which is not a hallmark of economic separation. Furthermore, his evidence was that at $60,000.00 per annum, his salary was considerably below what he might expect to receive on the open market in a completely unrelated corporation, with whom he was dealing at arm’s length. He did some research and found that with his qualifications he could expect a salary of $87,000.00. He indicated that he would not work for his lower salary in a company for which he was not a part owner. No doubt the working conditions and opportunities for unusual bonuses had a great deal to do with that statement.

[48] The bonuses he and the Sharp brothers paid themselves, depended partly on profits as alleged by the Minister and further, quite significantly, upon arranging the Company profits in a manner to bring its income below the Small Business Tax threshold, even if that meant loaning money to the Company so that these bonuses could be paid. In 1997, his evidence was that they each loaned $20,000.00 to the Company. That again is a mark of economic interdependence, which one would not expect to find existing between parties who were at arm’s length.

[49] A great deal was made, by counsel, of these bonuses being more to do with their capacity as shareholders rather than employees. Shareholders, however, are paid dividends not bonuses and the tax treatment and consequences for the Corporation, with respect to each type of payment, are considerably different. The payments under discussion here were bonuses paid to the employees who were also ‘owners’ in the colloquial sense and they were not paid to other regular employees. The latter had a system of incentive bonuses in which Leslie Anderson and the Sharp brothers did not participate. Those latter bonuses were much more consistent with the type of bonus that would be paid to employees dealing with a corporation at arm’s length, than the bonuses paid to Leslie Anderson and the Sharp brothers, funded, as they were at times, by loans from them to the Corporation. It is noteworthy that the bonuses were sometimes more than their annual salaries.

[50] Leslie Anderson agreed with the remainder of the facts upon which the Minister was said to have relied, but he did go on to amplify them in his evidence as well as to offer other insights into his employment situation.

[51] He dealt with the guarantees referred to in item (w). He pointed out that he and the Sharp brothers personally guaranteed to the John Deere Corporation up to $2,000,000.00 of credit extended to the Corporation. He indicated that he would never do that except in a company in which he had ownership. Again, counsel for the Minister submitted that they signed these guarantees as officers and shareholders of the Corporation and not in their capacity as employees. However, Mr. Anderson made it clear, and I accept his evidence on this point, that John Deere required the people with the hands on management of the Corporation to sign these guarantees, and their exercise of these management functions was clearly done as employees of the Corporation. It is doubtful in my view that employees dealing with the Corporation at arm’s length would sign guarantees of this magnitude, or quite frankly any guarantees at all.

[52] Leslie Anderson explained his time off. He took three weeks every Spring to work on his farm and three weeks every Fall for similar reasons. He went golfing whenever he wanted to, which was frequently, which he stressed was not business related. He often left the workplace early and went to hockey games with his wife, or to dinner theatre in Edmonton. He never asked anyone for permission, as stated by the Minister. On the other side of the ledger he often worked after hours updating the computers. The point that he made was that he came and went freely as he chose without any supervision and in a manner that no other employees except the Sharp brothers, could or did. His work habits were certainly not of the type that one would expect in an arm’s length situation where certain policies would normally be established and followed. Clearly from his evidence his relationship with the Company was sufficiently close that he could come and go as he chose. The same comments applied to his lunch breaks which he said were not governed by the Company policy of one half hour for all regular employees. In his case he frequently took one-hour breaks.

[53] It was apparent from his evidence that he and each of the Sharp brothers had full access to all the accounts of the Company on an individual basis at any time, something not normally experienced by persons working at arm’s length for a corporation. True, he was the General Manager and responsible for the overall management of the Company, but in addition each of them had individual signing authority on the corporate bank account and had the right to withdraw whatever funds they needed at any time. This is a far cry from persons operating at arm’s length.

[54] He dealt with the question of the use of company equipment. He said that regular employees had to have permission from one of the three of them, in order to use Company equipment for personal use. However, each of them could take whatever equipment they wished at any time without consulting the others.

[55] With regard to the health and sickness benefit plans, all regular employees were required to be part of the Corporate plans. Mr. Anderson said that the three of them had the choice as to whether they wished to participate or not and if they did, that they paid their own premiums personally.

[56] Finally, the last matter that I thought to be of significance in his evidence, was that the three of them were not paid overtime by the Corporation because it was tax advantageous not to receive it. The Corporation paid tax at a lower rate than their personal rates of tax. I cannot see any employee who was dealing with his employer at arm’s length, arranging such a state of affairs.

[57] When I look at the evidence as it relates to Leslie Anderson, there clearly does not exist the type of adverse economic interest between him and the Appellant Corporation that would lead me to the conclusion that they were dealing at arm’s length. There was an economic interdependence between him (and his ‘partners’ the Sharp brothers) and the Corporation. If I return to the example of the traders in the market place, I cannot say that there is the kind of independence of thought and purpose, the kind of adverse economic interest and the same kind of bona fide negotiating permeating this relationship, as one might expect to find in that situation of the traders in the marketplace. On the whole of the evidence it is clear that there was such a close interdependence, from many different aspects, between Leslie Anderson and the Appellant Corporation that it could not be said that they were dealing with each other at arm’s length.

The Law relating to a review of the Decision of

the Minister with respect to Kevin Sharp and Brian Sharp

[58] In the scheme established under the EI Act, Parliament has made provision for certain employment to be insurable, leading to the payment of benefits upon termination, and other employment which is “not included” 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 not included. Brothers and corporations controlled by them are deemed not to be dealing with each other at arm’s length pursuant to subsection 251(1) of the Income Tax Act, which governs the situation. Quite clearly the original purpose of this legislation was to safeguard the system from having to pay out a multitude of benefits based on artificial or fictitious employment arrangements, see the comments of the Federal Court of Appeal in Paul v. The Minister of National Revenue, (A-223-86) unreported, where Hugessen J. said

"We are all prepared to assume, as invited by appellant's counsel, that paragraph 3(2)(c) of the Unemployment Insurance Act, 1971, and subsection 14(a) of the Unemployment Insurance Regulations have for at least one of their purposes the prevention of abuse of the Unemployment Insurance Fund through the creation of so-called "employer-employee" relationships between persons whose relationship is, in fact, quite different. That purpose finds obvious relevance and rational justification in the case of spouses who are living together in a marital relationship. But even if, as appellant would have us do, we must look only at spouses who are legally separated and may be dealing at arm's length with one another, the nature of their relationship as spouses is such as, in our view, to justify excluding from the scheme of the Act the employemt of one by the other.

...

We do not exclude the possibility that the provisions may have other purposes, such as a social policy decision to remove all employment within the family unit from the operation of the Unemployment Insurance Act, 1971, as was suggested by respondent's counsel." (emphasis mine)

[59] The harshness of this situation has however been tempered by paragraph 5(3)(b) of the EI Act, which provides for such employment between related persons to be deemed to be at arm’s length and thus in turn to be treated as insurable employment, if it meets all the other provisions, where the Minister is satisfied having regard to all the circumstances of the employment, including the remuneration paid, theterms and conditions, the duration and the nature and importance of the work performed, that it is reasonable to conclude that they would have entered into a substantially similar contract if they had (in fact) been dealing with each other at arm’s length.

[60] It may be helpful to reframe my understanding of this section. For people related to each other the gate is closed by the statute to any claim for insurance benefits unless the Minister can be satisfied that in effect the employment arrangement is the same as that which unrelated persons, that is persons who are clearly at arm’s length, would have made. If it is a substantially similar contract of employment, Parliament has deemed it to be only fair that it should be included in the scheme. However, the Minister is the gatekeeper. Unless he is so satisfied the gate remains closed, the employment remains excepted and the employee is not eligible for benefits.

[61] Subsection 93(3) of the EI Act deals with appeals to and the determination of questions by the Minister. It requires that “the Minister shall decide the appeal within a reasonable time after receiving it and shall notify the affected persons of the decision”.

[62] Thus, the Minister has no discretion whether or not to decide the question. He is required by law to do so. If he is not satisfied, the gate remains closed and the employee is not eligible. If however he is satisfied, without more ado or any action on the part of the Minister (other than notification of the decision) the employee becomes eligible for benefits, provided he is otherwise qualified. It is not a discretionary power in the sense that if the Minister is satisfied he may then deem the employment to be insurable. He must “determine the question” and depending on that determination the law deems the employment to be either at arm’s length or not at arm’s length. In this sense the Minister has no discretion to exercise in the true sense of the word, for in making his decision he must act quasi-judicially and is not free to chose as he pleases. The various decisions of the Federal Court of Appeal on this issue reveal that the same test applies as to a myriad of other officials making quasi-judicial decisions in many different fields. See Tignish Auto Parts Inc. v. M.N.R., 185 N.R. 73, Ferme Émile Richard et Fils Inc. v. M.N.R., 178 N.R. 361, Attorney General of Canada and Jencan Ltd., (1997) 215 N.R. 352 and Her Majesty the Queen and Bayside Drive-in Ltd., (1997) 218 N.R. 150.

[63] The function of this Court then, upon appeal, is to review the decision of the Minister and decide whether it was arrived at lawfully that is in accordance with the EI Act and with the principles of natural justice. In the case Her Majesty the Queen v. Bayside et al. (supra) the Federal Court of Appeal laid out certain matters which should be considered by this Court when hearing these appeals. These were:

"...(i) the Minister acted in bad faith or for an improper purpose or motive, (ii) the Minister failed to take into account all of the relevant circumstances, as expressly required by s. 3(2)(c)(ii); or (iii) the Minister took into account an irrelevant factor."

[64] The Court went on to say:

"It is only if the Minister made one or more of these reviewable errors that it can be said that his discretion was exercised in a manner contrary to law, and ... the Tax Court judge would be justified in conducting his own assessment of the balance of probabilities as to whether the respondents would have entered into substantially similar contracts of service if they had been at arm’s length”

[65] I remind myself, when reviewing this case, that it is not for this Court to substitute its opinion of the evidence for that of the Minister. However, if his or her manner of arriving at the decision was unlawful in the context of the judgments set out above, those affected parts of the stated facts may be disregarded and I must then consider whether that which is left affords justifiable grounds for the decision. If those grounds, standing alone, are sufficient for the Minister to form a decision, albeit that the Court may not agree with it, the decision must stand. If on the other hand there is no basis left upon which the Minister might lawfully make such a decision, from an objective and reasonable point of view, then such decision may be struck down and the Court can consider the evidence before it on appeal and make its own decision.

[66] In summary then, if there are sufficient facts before the Minister for his decision, it is his or her determination to make and if he or she is “not satisfied” it is not for this Court to substitute its view of those facts and say he or she should have been satisfied. Similarly, if he or she was satisfied it is not for this Court to substitute its view that he or she should not have been satisfied (an unlikely scenario in any event). Only if the decision is reached in an improper manner and it is unreasonable, from an objective point of view, on the basis of the facts which were properly before the Minister, may the Court interfere.

[67] I am fortified in this approach by a number of decisions of various Courts of Appeal across the country and the Supreme Court of Canada in related decisions concerning the issue of various processes under the Criminal Code, which subsequently came to be reviewed by the Courts and are in my view analogous to the present situation. The standard of review of the validity of a search warrant was set out by Cory, J.A. (as he then was) in Times Square Book Store, Re (1985) 21 C.C.C. (3d) 503 (C.A.), where he said that it was not the role of the reviewing judge to look at or consider the authorization of a search warrant de novo and it was not open to the reviewing judge to substitute his or her own opinion for that of the issuing judge. Rather, on review, the first issue to be decided was whether or not there was evidence upon which a justice of the peace, acting judicially, could determine that a search warrant should be issued.

[68] The Ontario Court of Appeal reiterated and expanded upon this point of view in R. v. Church of Scientology of Toronto and Zaharia (1987) 31 C.C.C. (3d) 449 C.A. leave to appeal refused. In suggesting that the reviewing Court look at the “totality of the circumstances” the Court said at 492:

“Obviously if there is not such evidence to provide a basis for such a belief (that a criminal offence had been committed) it cannot be said that in those circumstances the justice should be satisfied. There will, however, be cases where such evidence (showing reasonable grounds) does exist and the justice could be satisfied but where he or she is not satisfied and does not exercise his or her discretion in favour of issuing a search warrant. In these circumstances, the reviewing judge must not say that the justice should have been satisfied and should have issued the warrant. Similarly, if the justice in such circumstances says that he or she is satisfied and issues the warrant, the reviewing judge must not say that the justice should not have been so satisfied”.

[69] The Supreme Court of Canada endorsed this approach in R. v. Garofoli (1990) 2 S.C.R. 1421. The late Mr. Justice Sopinka, when dealing with the review of the issue of an authorization to wiretap, then said:

“..While a judge exercising this relatively new power need not comply with the Wilson criteria, he should not review the authorization de novo. The correct approach is set out in the reasons of Martin J.A. in this appeal. He states...

If the trial judge concludes that, on the material before the authorizing judge, there was no basis upon which he could be satisfied that the pre-conditions for the granting of the authorisation exist, then, it seems to me that the trial judge is required to find that the search or seizure contravened s. 8 of the Charter.

The reviewing judge does not substitute his or her view for that of the authorizing judge. If, based on the record which was before the authorizing judge as amplified on the review, the reviewing judge concludes that the authorizing judge could have granted the authorization, then he or she should not interfere. In this process, the existence of fraud, non-disclosure, misleading evidence and new evidence are all relevant, but, rather than being a prerequisite to review, their sole impact is to determine whether there continues to be any basis for the decision of the authorizing judge."

[70] This approach appears to have been adopted by almost every appellate court in the country. (See R. v. Jackson (1983) 9 C.C.C. (3d) 125 (B.C. C.A.); R. v. Conrad et al. (1989) 99 A.R. 197; 79 Alta. L.R.; (2d) 307; 51 C.C.C. (3d) 311 (C.A.); Hudon v. R. (1989) 74 Sask. R. 204 (C.A.); and R. v. Turcotte (1988) 60 Sask. R. 289; 39 C.C.C. (3d) 193 (C.A.); R. v. Borowski (1990) 66 Man. R. (2d) 49; 57 C.C.C. (3d) 87 (C.A.); Bâtiments Fafard Inc. et autres c. Canada et autres (1991) 41 Q.A.C. 254 (C.A.); Société Radio-Canada v. Nouveau-Brunswick (Procureur général) et autres (1991) 104 N.B.R. (2d) 1; 261 A.P.R. 1; 55 C.C.C. (3d) 133 (C.A.); R. v. Carroll and Barker (1989) 88 N.S.R. (2d) 165; 225 A.P.R. 165; 47 C.C.C. (3d) 263 (C.A.); R. v. MacFarlane (K.R.) (1993) 100 Nfld. & P.E.I.R. 302; 318 A.P.R. 302; 76 C.C.C. (3d) 54 (P.E.I. C.A.). It seems to me most relevant to a review of the Minister’s determination, which is itself a quasi judicial decision.

Part 1 -Analysis of the Minister’s decision as it relates

to Kevin Sharp and Brian Sharp

[71] As can be seen the Sharp brothers have a significantly higher hurdle to overcome than Leslie Anderson in order for the Appellant Corporation to be successful in its appeals, however fair or unfair that may be, and this despite the comments of André Plourde, MP speaking in the House of Commons on behalf of the government of the day, at the time the amendments to the UI Act were introduced. He said that Bill C-21 had provisions to eliminate unfair restrictions on eligibility of benefits and:

“all the changes proposed in Bill C-21 have essentially been designed to make the system more efficient and equitable and to meet the needs of workers” (see Hansard June 7^th House of Commons Debates page 2722)

[72] It is clear that, whatever might have been the intention of Parliament, the law is not ambiguous and a strict interpretation of the section in question allows the Minister to exercise his discretion so as to include employees for assessment purposes (revenue collecting) as well as for the purpose of relieving the severity of the exclusionary provisions of the statute as they apply to related persons. It is clear that the Court must apply the law as it is written and not as it thinks Parliament intended.

[73] With that stricture, I must look at the evidence considered by the Minister. That evidence is set out in the Replies to the Notices of appeal and is very similar in each case so I have condensed the assumptions of fact relied upon by the Minister into one. As they relate to Brian Sharp they are as follows:

"(a) the Appellant operates a John Deere dealership located in Camrose, Alberta;

(b) the voting shares of the Appellant are owned one-third each by Brian Sharp, Kevin Sharp and Leslie Anderson;

(c) Brian Sharp, Kevin Sharp and Leslie Anderson are directors of the Appellant;

(d) Kevin Sharp and Brian Sharp are brothers;

(e) Kevin Sharp and Brian Sharp are not related to Leslie Anderson;

(f) Brian Sharp is related to the Appellant within the meaning of the Income Tax Act;

(g) Brian Sharp has provided services to the Appellant since January 1, 1987;

(h) Brian Sharp is the sales manager of agricultural products and his duties included:

(i) coordinating sales staff of 5 to market new and used agricultural products;

(ii) keeping abreast of market conditions and farming practice changes to be aware of values of new and traded in implements;

(iii) coordinating with suppliers to ensure a good working relationship with them;

(iv) communicating with customers to learn from them how to improve customer focus;

(v) supervising and hiring sales staff;

(vi) deciding the amount of used inventory to maintain;

(vii) deciding the dollar amount to make on specific items;

(viii) deciding trade in values on equipment taken in on trade;

(i) the Appellant employs about 22 people;

(j) Leslie Anderson set the wages of the staff and also set the salary for Brian Sharp and Kevin sharp;

(k) Brian Sharp and Kevin Sharp's salary was based on what Leslie Anderson thought was fair for the responsibility of each person;

(l) Brian Sharp was paid $4,900.00 per month plus a bonus that depended on the Appellant's profits;

(m) Brian Sharp, as well as Kevin Sharp and Leslie Anderson were paid a bonus of $89,666.00 in June 1997 and the bonus was based on the taxable income of the Appellant;

(n) Brian Sharp's hours were not monitored or recorded, but he stated he generally worked from 8:00 a.m. to 5:00 p.m., 5 days a week and anywhere from 30 to 50 hours per week;

(o) Brian Sharp did not need anyone's authorization to take time off work;

(p) Brian Sharp was not paid any overtime;

(q) the Appellant's service technicians were paid by the hour, the sales staff were paid by commissions and all other workers were paid by the month;

(r) Brian Sharp decided how much vacation time he took;

(s) when Brian Sharp was away from work, his duties were performed by his sales staff or by the other two shareholders;

(t) Brian Sharp's work was not supervised and his work was not inspected;

(u) any expenses incurred by Brian Sharp relating to his duties of employment were reimbursed by the Appellant;

(v) the Appellant provided all of the tools and equipment required for Brian Sharp to perform his duties;

(w) Brian Sharp, Kevin Sharp and Leslie Anderson have signed personal guarantees with John Deere;

(x) Brian Sharp stated that he cannot take an advance on his pay or take drawings from the Appellant as he wishes; ... "

In addition as they relate to Kevin Sharp they are as follows:

"(k) Brian Sharp and Kevin Sharp's salary was based on what Leslie Anderson thought was fair for the responsibility of each person;

(l) Kevin Sharp was paid $54,000 per year plus a bonus that depended on the Appellant's profits;

(m) Kevin Sharp was paid monthly by the Appellant;"

[74] Neither of the Sharp brothers gave evidence themselves, relying entirely on the evidence of Leslie Anderson. Counsel for the Minister called an official from Revenue Canada who collected the information and prepared the report upon which the decision of the Minister was based.

[75] Much of the evidence of Leslie Anderson to which I have referred above applies to the situation of the Sharp brothers. There were a number of additional relevant facts which were not taken into consideration by the Minister and some of the facts upon which the Minister was said to rely were wrong or needed amplification.

[76] A matter of importance, which was not considered by the Minister, was how the Sharp brothers were catapulted into Sales Management positions in 1987 when they had neither sales experience nor managerial experience; something that would not be likely to happen if they had been dealing at arm’s length with the Corporation at that time. That was the evidence of Leslie Anderson and there is no reason to doubt it. It does demonstrate that the relationship between the brothers and this Corporation was different from an arm’s length relationship right from the start.

[77] The Minister was said to have relied on the fact that the two brothers also signed guarantees with the John Deere Corporation. Apparently, it was unknown to the Minister that these were in the amount of $2,000,000.00, or no doubt he would have mentioned it. That is hardly the burden that the average employee dealing at arm’s length with his employer would take on. Again, much was made by counsel for the Minister of the fact that this was in their capacity as shareholders. However, the uncontradicted evidence of Leslie Anderson was that these were required by John Deere Corporation from those who were significantly dealing with the management of the Corporation. It is clear that it was in their capacity as employees managers that they signed these guarantees. If the Minister was of a different view he was clearly mistaken.

[78] Evidence was given that Brian Sharp had been convicted of impaired driving and had lost his drivers licence for one year. Leslie Anderson said that another employee in such circumstances might well have faced dismissal or at least been transferred to a different job. Brian Sharp however, was driven around by another employee, so that he could attend to his duties, something that would not have occurred if he had been dealing with the Company at arm’s length. That seems to be a significant fact concerning the circumstances of his employment, which was not considered by the Minister.

[79] The question of bonuses was considered by the Minister, in a superficial way, but not the circumstances of how they were calculated or how the two brothers would make loans to the Corporation to enable it to pay those bonuses. Again, the reason for the payment of the bonuses often had more to do with bringing the taxable income of the corporation below the Small Business tax threshold than with any merit or profitability of the Company. The economic interdependence of these arrangements was not considered by the Minister.

[80] Although one of the assumptions of fact relied upon by the Minister was to the effect that the two brothers could not raise their salaries without the approval of the other shareholders, which was correct, he did not take into account the fact that each had full and singular signing authority on the Company bank accounts, access to all the financial information of the Company and the right to take funds whenever they wanted. Item 5(y) (above), of the Reply of the Minister was incorrect in this respect.

[81] The evidence was clear that the Sharp brothers could come and go as they pleased and were not subject to all the corporate policies which bound the regular employees, thus putting themselves well out and beyond the working conditions of employees who were dealing with the Corporation at arm’s length. There was evidence of clear consequences for these employees if they failed to follow corporate policy.

[82] The matter of use of Company equipment by the two brothers for their own personal use was not considered by the Minister. Other employees needed permission, which I understood was not necessarily given, but each of the brothers could take and use whatever equipment they chose at any time.

[83] The Corporate Sickness and Health Benefit Plan was not considered by the Minister and the fact that these brothers had a choice whether to sign up on the plan or not and that they paid their own premiums, whereas for the regular employees it was obligatory to be part of the plan.

[84] The loans made by the brothers ($20,000.00 in 1997) amounted in total, together with Leslie Anderson, to $280,000.00.

[85] Kelly Storrier gave evidence on behalf of the Minister. She was the Revenue Canada employee who prepared the initial report for the Minister. She said she took into account the terms and conditions of the employment of the Sharp brothers and in particular the supervision or lack of it, the hours of work, technically 8:00 a.m. to 5:00 p.m., (the evidence revealed that they were far more flexible than that), the flexibility, which they enjoyed, the time off, vacations and sick benefits. She was of the view that Managers would normally expect these privileges and benefits albeit they were not owners of a Company for whom they worked. She agreed, however, that she had not compared the salaries to any other managerial salaries in the open market, did not know if other managers in comparable employment received bonuses which far exceeded their base salaries, nor did she know that the Sharp brothers paid their own premiums for their health care and sickness benefits or that they had a choice to be in or out of the corporate plan. These are all relevant matters that the Minister might have been expected to take into consideration in coming to his decision, but were obviously not put before him.

[86] All in all I am of the view that there were a considerable number of relevant facts that the Minister did not consider, there were matters about which he was mistaken and there were many factors which he appeared to consider superficially but did not have the full relevant details before him. Whilst many of these factors are significant, the most significant is that the brothers in their capacity of managers, employees, participated in the decision over the size of their own bonuses which, as I say often, had more to do with the tax bracket into which the Corporation was going to fit, than any value they had contributed to the Corporation or to the profits or sales. This total economic interdependence between these employees and the Corporation was not a factor taken into account by the Minister.

[87] When I consider all the significant and relevant factors that have come from the evidence and the irrelevant, incorrect or incomplete factors that the Minister took into account, I have absolutely no hesitation in saying that, if the Minister had considered those factors which should have been before him and ignored those that should not have been taken into account as being incorrect or irrelevant, he could not from a reasonable and objective point of view have lawfully arrived at the decision which he did. It is thus not sustainable in law and I must now advance to the second stage of the appeal process and decide whether, on all the evidence, the parties, had they been at arm's length, would have entered into a substantially similar contract of employment, taking into account all of the circumstances including those specifically set out in paragraph 5(3)(b) of the EI Act.

Part 2 – Review of the Evidence as it relates to Kevin Sharp and Brian Sharp

[88] I do not propose to review all of the evidence a further time. It has already been amply canvassed. It is clear from the evidence that there was a total economic interdependence between the two Sharp brothers and Leslie Anderson on the one hand and the Corporation on the other hand. Their economic interests were totally intertwined, from the point of view of loans to the Corporation, bonuses paid by the corporation and guarantees signed by the employees. This type of situation is precisely that which the Minister usually cites in these appeals as the reason for refusing to exercise his discretion, under the section, to allow related people into the scheme. I would not go so far as to say that these employees operated this company as their alter ego, as if it was entirely their own business, but they were not far short of that situation. They clearly were together the operating mind of the Corporation. I gleaned that Leslie Anderson was in a sense a guiding father figure to the two brothers, installed long ago by their own father, to help them run the business, which he was turning over to them. None of the circumstances of their employment was the type of arrangement that one would expect to be made between employees and employers dealing with each other at arm’s length.

[89] Leslie Anderson talked of being ‘owners’ and about his ‘partners’. I have no doubt that is how they operated the Corporation, as their own personal business. That is not to say that they might not still be held to be dealing with each other at arm’s length, but clearly in this case there was not that spirit of adverse economic interest permeating their arrangements. I cannot help but think that if the Minister was viewing the situation from the other side of the fence, in the event that any of these three workers was attempting to claim employment insurance benefits, he would quickly be excluded. The appeals before this Court are rife with situations far less clear than this, where benefits have been declined on the basis that the parties were not dealing with each other at arm’s length.

[90] I have absolutely no hesitation in coming to the conclusion in this case that none of these three employees were dealing with the Appellant Corporation at arm’s length. Employees dealing with their employers at arm’s length, even when they are part of management, would not be arranging their employee bonuses to suit the tax needs of the Corporation, nor signing guarantees in the millions of dollars, nor making loans to the employer in the tens of thousands of dollars, nor be catapulted into management roles with no experience, nor be chauffeured around by other employees upon losing their driver’s license, nor have access not only to the financial records of the corporation but also have unrestricted access to the corporate bank account, nor enjoy the degree of flexibility in how they went about their work, in the manner that these three were able to do.

[91] On a final note it seems to me, in general terms, that quite clearly the scheme set up by Parliament excludes from insurable employment, those situations where people are in business for themselves, or have substantial control of the corporations for whom they work, either with persons to whom they are related or with whom they are not dealing at arm’s length. If in those situations the working relationship is substantially the same as that which exists between unrelated people dealing with each other at arm's length, then clearly Parliament has tempered the severity of depriving such people of the opportunity to participate, by giving the Minister a discretion to let them into the scheme. It seems clear that this process was not designed by Parliament to draw into the net of the employment insurance scheme, employment arrangements, where people are virtually operating their corporate businesses as their own business; where they are economically intertwined with their corporations to such an extent that there is really no adverse economic interest between them; where in essence they are entrepreneurs not workers engaged in employment.

[92] Whilst it is clear that there are many who make contributions to the scheme, who might never expect to claim from it, which is not the point, it is equally clear that the scheme is designed to be for the benefit of and to be supported by contributions from genuine employees and not from those, who somewhat go out on a limb to pursue their own entrepreneurial interests. Those who do that, take their own risks and are expected by Parliament to look after themselves in the event of bad times. The scheme has been very much set up for the benefit of those in regular employment situations and not for those in business for themselves. Clearly in the appeals at hand the three workers in question were effectively in business for themselves.

Conclusion

[93] I am of the view that there did not exist between each of the workers in these appeals and the Appellant Corporation, the degree of adverse economic interest such that one could say that there were separate interests. Their economic interests were clearly linked so closely with those of the Corporation, that the latter could not be said to be acting with a separate mind. The same kind of bona fide negotiating that would take place between those traders, strangers in the marketplace, to which I referred above, was not present in these arrangements. There was not the kind of independence of thought or purpose between the Corporation and the three individuals that one could say that they were dealing with each other at arm’s length. Accordingly, I hold that none of them were employed in insurable employment.

[94] In the result, the appeals are allowed and the decisions of the Minister are vacated.

Signed Calgary, Alberta, this 8th day of December 1999.

"Michael H. Porter"

D.J.T.C.C.