Docherty v. M.N.R., docket 2000-1466-EI

Date: 20001006

Docket: 2000-1466-EI

BETWEEN:

BARBARA DOCHERTY,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent

and

DAVID O. GRIFFITHS,

Intervenor.

Reasons for Judgment

Rowe, D.J.T.C.C.

[1]            The appellant appeals from a decision dated March 31, 2000 in which the Minister of National Revenue (the "Minister") held the employment of the appellant with the intervenor - and payor - during the period from September 1, 1998 to September 17, 1999 was not insurable because - as the common-law spouse of David Griffiths - she was in excluded employment and the Minister was not satisfied that a substantially similar contract of employment would have existed if she and the payor had been dealing with each other at arm's length.

[2]            David Griffiths testified he resides in Vancouver and is a practising lawyer. While in Montreal, he met the appellant who had obtained a Master degree in Library Science. They moved to Vancouver and - in 1985 - he established a law practice with two other lawyers on the basis of a space - and cost - sharing arrangement. The appellant began working for the three lawyers and Griffiths would issue her a pay cheque and then obtain reimbursement from the other two practitioners for their share. In 1988, a new arrangement was entered into with other lawyers and the re-structuring resulted in there not being any physical office space in which the appellant could carry out her work. As a consequence, the appellant set up an office in the residence she shared with Griffiths and he paid her a monthly salary and took off the usual deductions from her cheque on the basis she was an employee. In due course, a modem connection was established between the in-home office and the intervenor's law office. At this point, the other lawyers did not share the cost of the appellant's salary. Griffiths paid his share of the office rent, reception and other related costs to the manager of the cost-sharing arrangement. In 1990, another cost-sharing arrangement was established but the appellant continued to perform the para-legal services for Griffiths' practice from the in-home office. Griffiths stated he became involved in the Association of Legal Aid Lawyers and the appellant began to work for the Association and billed her time to the organization at the rate of $15.00 per hour during a period covering approximately one year. As a result of having set that hourly rate for the work done for the Association, Griffiths and the appellant decided it was an appropriate amount upon which to base her monthly salary and the calculation resulted in the amount of $2000.00. In March, 1995, their first child was born and the appellant took maternity leave during which she received the appropriate employment insurance benefits. In 1996, the mortgage on their principal residence was transferred to the same bank - and branch - where Griffiths had his accounts for the purpose of operating his law practice and they established a method whereby the bank deducted - on a weekly basis - the amount of the mortgage payment which was in excess of the appellant's net salary. In 1997, Griffiths moved his law practice to a premise occupied by an existing law firm, Wilson & Buck. Unfortunately, there was no space for any support staff to assist Griffiths with his own practice. He connected to the Internet and obtained a dedicated line for the fax and modem apart from the regular telephone line. The residential telephone line into their home was sufficient for business purposes from the standpoint of the appellant carrying out her work on a daily basis. During the years since 1985, there had been no fundamental change in the business structure of his law practice as it concerned the working relationship between the appellant and Griffiths. After 1988, when she was working out of their home, he expected her to be available to be contacted during the working day and even after their son was born - in 1995 - she still worked during the evenings while he cared for the child. Griffiths explained that much of his law practice was "demand driven" and was not conducive to logging regular hours. The staff assistance at the law office from which he carried on his practice was limited to reception services only and the appellant had always been his total office support in terms of secretarial and para-legal services since he began practising in Vancouver in 1985. In June, 1997, he began to wind down his law practice and took on circuit duties as Legal Aid Counsel requiring him to be out of town one week every two months and, during these periods, the appellant's duties increased. On May 10, 1999, he accepted the position as Managing Lawyer of the Gastown Criminal Aid Clinic (Gastown Clinic) a law practice dedicated to criminal defence work. The appellant and Griffiths worked at winding up the law practice during the summer of 1999 and he had obtained permission from his employer to devote some time to that end. The winding up process involved locating other counsel to take over files of private clients. By September 17, 1999 the phasing out work had mainly been accomplished and the appellant and Griffiths' second child - a son - was born on October 5, 1999. After September 17, 1999, Griffiths no longer had any private practice and worked full time as an employee of the Gastown Clinic. However, he still had to undertake a final audit and report concerning his trust accounts for the Law Society of British Columbia and he performed the work himself without the assistance of the appellant. He prepared and sent out a couple of accounts to clients and had one matrimonial file that he continued to handle for which he did the necessary work from his office at the Clinic. Griffiths explained it is not unusual for criminal lawyers in the Vancouver area to utilize minimal office space at low cost without obtaining any support services - an activity known as "perching" - while the actual legal work is done from an off-site location.

[3]            In cross-examination, Griffiths stated that when the appellant worked for the Legal Aid Association she continued to work for him and accomplished both tasks by putting in more hours. He chose a salaried position with Gastown Clinic in order to have some financial security flowing from a regular income. Once their son had been born in October, 1999, had he chosen to remain in private practice, he would have had to replace the appellant as he had done when she was on maternity leave in 1995. There was no tracking or recording of hours worked by the appellant and none of the usual employment benefits were available to her. The bank had suggested the method of paying the mortgage - at the rate of $450.00 per week - from the account in which funds from his law practice were deposited. As a result, that weekly sum was withdrawn from the account and later attributed to her salary - after calculating her net income - leaving a balance to be considered as having been paid from Griffiths' own funds in the account. In referring to a Deductions Statement - Exhibit R-1 - for January, 1999, Griffiths explained it erroneously included the employer's share of the premiums for employment insurance and pension plan contributions and her net income should have been shown as $1545.94. In 1998, despite working 55-60 hours per week and grossing in excess of $110,000, the appellant's net income - as disclosed in his income tax return - Exhibit R-2 - was less than $22,000.00 while the salary paid to the appellant was in the sum of $25,850.26. Griffiths stated there had been a 100% increase in the volume of Legal Aid work since 1992 but the fees paid to practitioners had declined by 45% during a period of rising operational costs.

[4]            Barbara Docherty testified that throughout the years since 1988 she could not discern any change in the method of operation of the law practice or her working conditions and she did not consider she was ever overpaid. She was responsible for all remittances and wrote cheques on the law office general account. After September 17, 1999, she only performed minor clerical work for Griffiths such as preparing her own T4 slip and the last remittance pertaining to her own salary which was done on a quarterly basis.

[5]            In cross-examination, Docherty stated Griffiths had been her common-law spouse for 14 years and she had worked for him - since 1988 - from an office in the home they shared. In 1999, the child - born in 1995 - went to pre-school on Monday, Wednesday and Friday from 9:00 a.m. to noon and she also shared child care duties with a neighbour who was a lawyer.

[6]            David Griffiths, as intervenor, submitted the evidence established the decision of the Minister was clearly incorrect as the work had been done by the appellant and the salary was reasonable in accordance with a long-standing arrangement between the parties for a period of 14 years which was an ordinary working relationship when viewed in the context of his type of law practice.

[7]            The appellant adopted the submissions of the intervenor.

[8]            Counsel for the respondent submitted the appellant was not paid by means of a pay cheque, per se, and the amount attributable to her salary was based on a gross amount without concern for deductions on a monthly basis and suggested the evidence pointed to a family enterprise rather than a regular employer-employee relationship.

[9]            The decision of the Minister was based on the fact the appellant was living in a common-law relationship with David Griffiths and the Minister was not satisfied - pursuant to paragraph 5(3)(b) of the Employment Insurance Act (the "Act") - that a substantially similar contract of employment would have resulted had the parties been dealing with each other at arm's length.

[10]          The first issue to be determined is whether or not there is any basis - as disclosed by the evidence - for me to intervene in the decision of the Minister.

[11]          In the case of Crawford and Company Ltd. and M.N.R., reported, [1999] T.C.J. No. 850 (QL), a decision of Porter, D.J.T.C.C. issued December 8, 1999, Judge Porter considered the appeals of three employees of the corporation, of whom two were brothers, falling into the category of related persons within the meaning of the Income Tax Act. The remaining appellant was not a related person to the corporation and this required a separate examination of the facts as no discretion had been exercised by the Minister pursuant to paragraph 5(3)(b) of the Employment Insurance Act. The analysis undertaken by Judge Porter, as it pertained to the two brothers is extensive, and is relevant to the requisite analysis undertaken in the within appeal. For that reason, I am quoting extensively from the Crawford judgment because it accords with my understanding of the law and the facts in that case are substantially similar to the within appeal. At page 21, commencing at paragraph 58, Judge Porter stated:

[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 employment 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.

[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 choose 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."

[12]          In the case of Adolfo Elia v. M.N.R., [1997] F.C.J. No. 316 (QL), a decision of the Federal Court of Appeal dated March 3, 1998, at page 2 of the certified translation Pratte, J.A. stated:

"Contrary to what the judge thought, it is not necessary, in order for the judge to be able to exercise that power, for it to be established that the Minister's decision was unreasonable or made in bad faith having regard to the evidence before the Minister. What is necessary is that the evidence presented to the judge establish that the Minister acted in bad faith, or capriciously or unlawfully, or based his decision on irrelevant facts or did not have regard to relevant facts. The judge may then substitute his decision for that of the Minister."

[13]          In Légaré v. Canada (Minister of National Revenue), [1999] F.C.J. No. 878 - another decision of the Federal Court of Appeal – Marceau, J.A. speaking for the Court stated at page 2 of the judgment:

                "In this matter, the Court has before it two applications for judicial review against two judgments by a judge of the Tax Court of Canada in related cases heard on the basis of common evidence which raise yet again the problems of interpretation and application of the saving provision, subparagraph 3(2)(c)(ii). I say yet again because since its passage in 1990, several decisions of the Tax Court of Canada and several judgments of this Court have already considered what workable meaning could be given to subparagraph 3(2)(c)(ii). In reading the text, the problems it poses beyond its deficient wording are immediately obvious, problems which essentially involve the nature of the role conferred on the Minister, the scope of the Minister's determination and, by extension, the extent of the Tax Court of Canada's general power of review in the context of an appeal under section 70 et seq. of the Act.

                While the applicable principles for resolving these problems have frequently been discussed, judging by the number of disputes raised and opinions expressed, the statement of these principles has apparently not always been completely understood. For the purposes of the applications before us, we wish to restate the guidelines which can be drawn from this long line of authority, in terms which may perhaps make our findings more meaningful.

                The Act requires the Minister to make a determination based on his own conviction drawn from a review of the file. The wording used introduces a form of subjective element, and while this has been called a discretionary power of the Minister, this characterization should not obscure the fact that the exercise of this power must clearly be completely and exclusively based on an objective appreciation of known or inferred facts. And the Minister's determination is subject to review. In fact, the Act confers the power of review on the Tax Court of Canada on the basis of what is discovered in an inquiry carried out in the presence of all interested parties. The Court is not mandated to make the same kind of determination as the Minister and thus cannot purely and simply substitute its assessment for that of the Minister: that falls under the Minister's so-called discretionary power. However, the Court must verify whether the facts inferred or relied on by the Minister are real and were correctly assessed having regard to the context in which they occurred, and after doing so, it must decide whether the conclusion with which the Minister was "satisfied" still seems reasonable."

[14]          The assumptions of fact relied on by the Minister are set out in paragraph 5 of the Reply to the Notice of Appeal. The first five assumptions - as reproduced below - are correct.

"a)            during the Period, the Payer had a law practice and was associated with the firm, Wilson & Buck, Barristers and Solicitors;

b)             the Payer's law practice operated from the Wilson & Buck, Barristers & Solicitors premises located at #425, 744 West Hastings Street, Vancouver, British Columbia;

c)              Wilson & Buck, Barristers and Solicitors, provided a receptionist whose salary expense was shared by the lawyers of the firm;

d)             the Appellant is the common-law spouse of David Griffiths;

e)              the Appellant is a legal secretary and has performed administrative duties for the Payer's law practice since he was called to the bar in 1985."

[15]          However, at paragraphs 5(f) and (g) the Minister made the following assumptions of fact:

"(f)           the payer has, since 1995, maintained an office in his home and it was from this home office that the administrative work of his law practice was co-ordinated;

(g)            prior to 1995, the Appellant performed legal secretary duties for the Payer at the Payer's business location and subsequent to the birth of their first child in 1995, the Appellant has worked from the home office."

[16]          Those assumptions are incomplete and incorrect. Griffiths had maintained an office - since 1988 - in the home he shared with the appellant when she was required to perform her work from that location following the formation of a new cost-sharing arrangement which left her without a place to work within the law firm premises. By the time their first child was born in 1995, she had been working from the in-home office for 7 years, whereas one can infer from the Minister's assumptions that she was considered to have worked for Griffiths at an office within the premises of a law firm and then had moved to an auxiliary in-home office - in 1995 - following the birth of their first child. It was not an office. It was the office for the Griffiths law practice.

[17]          Certain other assumptions are basically irrelevant. The monthly salary was $2,000.00 per month and there was no need for anyone to keep track of hours worked and the fact the appellant had signing authority on the business account for the law practice is not unusual. Then, the Minister - at paragraphs 5o), p) and q) - made the following assumptions of fact:

"o)           the Payer commenced winding up his law practice on or about May 1999;

p)             the Payer did not hire anyone to replace the Appellant when the appellant commenced her maternity leave on or about September 1999;

q)             the Appellant continued to perform legal secretarial duties for the Payer while she was on maternity leave, but was not paid for those services ..."

[18]          The evidence is clear, Griffiths did not hire anyone to replace the appellant when she ceased working on September 17, 1999 because there was no need to do so as he was now a salaried employee at the Gastown Clinic - since May - and had obtained special permission from his new employer to do what was necessary in the ensuing months to close out his former law practice. She did not perform legal secretarial duties for him after she had ceased working for him and he undertook the required secretarial, accounting and administrative duties himself except for the minor matters such as the preparation of her own T4 slip and the final remittance to Revenue Canada which was required to be done for the preceding quarter. The due date was probably September 30, 1999. In my view, this was done by her in order to tidy up all remaining details arising out of her employment with her spouse and it was in her best interest to do so.

[19]          While there is no reason to suggest the decision of the Minister was motivated by bad faith or was issued capriciously or unlawfully, it is apparent the Minister relied on irrelevant facts, as noted earlier. In addition, the Minister did not properly consider the relevant fact of the long-standing employment of the appellant with Griffiths and the reasonable explanation for the particular need for the secretarial and administrative services required by his law practice to have been carried out from their mutual family residence. It is apparent from perusing certain assumptions of fact contained in the Reply, that the Minister did not understand the nature of the law practice carried on by Griffiths or the fact there had not been any physical space in which the appellant could perform work for her spouse since 1988, despite moving to another cost-sharing arrangement in 1990. One can infer from the overall context of the assumptions relied on by the Minister that the appellant was considered to have been an auxiliary member of Griffiths' administrative staff and had chosen to work at home. The Minister did not take into account Griffiths had hired an off-site replacement secretary to assist him when the appellant had taken maternity leave in March, 1995 and then - in contrast - relied on the fact he had not replaced her during her so-called maternity leave after September 17, 1999. The Minister obviously regarded that omission as an inconsistency not in accord with the arm's length relationship one would expect between non-related parties. The error is apparent. It was not maternity leave in the sense she was coming back to her employment in a few months. There was no employment to come back to and the correct interpretation is that September 17, 1999 was - simply - her last day of work.

[20]          It is obvious from the whole of the evidence that I am required to intervene in the decision of the Minister. Having done so, I must examine the evidence in order to decide whether or not the appellant was in insurable employment during the relevant period or whether she was in excluded employment. The relevant provision of the Act is paragraph 5(3)(b) which reads:

                "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."

Remuneration:                                      

[21]          The salary paid to the appellant was in the sum of $2,000.00 per month and had been based on a calculation of hours generally worked, multiplied by the rate of $15.00 per hour which had been charged by her to the Legal Aid Association during a one-year period. On that basis - which I find to be reasonable - she was compensated for 133 hours per month or approximately 32 hours per week. The method of paying her salary by attributing the whole amount to the mortgage payment is not particularly relevant as many people have their remuneration deposited - electronically - into an account. Once the funds are there, they can flow wherever required. If she and Griffiths then chose to commingle funds to pay familial obligations that is not of any major concern.

Terms and Conditions:

[22]          The appellant worked for Griffiths in providing off-site secretarial and administrative support for his downtown law practice which offered him only minor reception services and no technical support whatsoever. She worked for him on a full-time basis and had done so since 1985. Until 1988, the appellant had worked for Griffiths and two members of a cost-sharing arrangement but the situation changed and thereafter she worked only for Griffiths but had to move out of her office at those premises. It is reasonable for the work to be done via the Internet or utilizing modems to communicate between the computer at the office in which Griffiths was located and the one in the office at their residence. Tele-commuting is becoming more and more popular as it reduces the cost of expensive downtown space in which to house administrative staff and enables employees to avoid costs of transportation and to have a more flexible work schedule.

Duration :

[23]          The employment was full time and had been for 14 years. It did not depend on seasons or cash flow or the tides. It was a normal open-ended contract of employment one would expect with this kind of important administrative work. It was not work that had been faked or invented for the purpose of permitting the appellant to qualify for employment insurance benefits.

Nature and importance of the work performed:

[24]          The work done by secretaries, para-legals and other administrative assistants is absolutely vital to carrying on any professional practice. The work required in the course of a criminal defence practice - largely based on legal aid - is enormous and demanding while the remuneration is paltry. Add to that mix a matrimonial dispute resolution component, and one can understand the need for a full-time assistant. It is not a useful exercise to compare the salary paid to employees with the bottom line or take-home profit of the practitioner. Anyone who has had to meet expenses of a business operation - including payroll - is acutely aware the proprietor is the last to be paid and there are many places to skimp and save before reducing administrative and secretarial assistance which is always at the core of the operation.

[25]          The template to be utilized in making a comparison with arm's length working relationships does not require a perfect match. That is recognized within the language of the legislation because it refers to a "substantially similar contract of employment". Any time the parties are related to each other within the meaning of the relevant legislation, there will be idiosyncrasies arising from the working relationship, especially if the spouse is the sole employee or perhaps a member of a small staff. However, the object is not to disqualify these people from participating in the national employment insurance scheme provided certain conditions have been met. To do so without valid reasons is inequitable and contrary to the intent of the legislation.

[26]          I have considered the various factors as discussed above and find the appellant and the payor - her common-law spouse - would have entered into a substantially similar contract of employment had they been dealing with each other at arm's length.

[27]          The appeal is allowed and the decision of the Minister is varied to find that:

                Barbara Docherty was employed in insurable employment with David Griffiths during the period from September 1, 1998 to September 17, 1999.

Signed at Sidney, British Columbia, this 6th day of October 2000.

"D.W. Rowe"

D.J.T.C.C.