Larouche v. M.N.R., docket 95-2754-UI

Date: 19971209

Docket: 95-2754-UI

BETWEEN:

BERNARD LAROUCHE,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

TARDIF, J.T.C.C.

[1] This is an appeal from a determination dated September 14, 1995, in which the respondent ruled that the employment held from January 6 to March 27, 1992, with "Construction Econo Plus Inc." was not insurable employment within the meaning of the Unemployment Insurance Act (the "Act").

[2] The respondent based his decision on paragraph 3(2)(d) and subsection 61(3) of the Act, R.S.C. 1985, c. U-1, as applicable during the period in issue.

[3] The facts of the case are set out in paragraph 5 of the Reply to the Notice of Appeal. The appellant made certain admissions, specifically the following:

[TRANSLATION]

5(a) the payer was incorporated on April 18, 1989;

(b) the payer operates a residential construction business;

(c) on June 7, 1991, Gaétan Larouche, the payer's sole shareholder, died as a result of an accident;

(d) Gaétan Larouche's two minor children are his sole heirs;

(e) the appellant is Gaétan Larouche's brother;

(f) on July 23, 1991, as a result of a judgment by the Quebec Superior Court confirming the decisions made by the family council, the appellant was appointed tutor of the minor children's estate;

. . .

(i) from January 6 to March 27, 1992, the appellant received a weekly salary of $500 from the payer for performing his administrative duties.

[4] The appellant denied the other allegations setting out the following facts:

[TRANSLATION]

(g) from that moment, the appellant had full responsibility for managing and administering the affairs of the payer;

(h) among other obligations and responsibilities stated in the said judgment, the appellant had " . . . to attend and vote at all meetings of shareholders . . . (of the payer)" . . . .

[5] Only the appellant testified in support of his appeal. He indicated that his brother Gaétan Larouche had died accidentally in June 1991. As he died intestate, Gaétan Larouche’s two children became his sole heirs.

[6] While alive, Gaétan Larouche had operated a construction business. To prevent the assets of his estate from being reduced to nothing by the debts of the business, it was thus essential to properly value the assets and liabilities before the children accepted the estate.

[7] To protect their interests and ultimately to administer the property of the minor children Pascal and Caroline, a family council was then called so that a tutor could be appointed. The family council consisted mainly of the appellant, his brother Denis, their mother (the children's grandmother) and Gaétan Larouche's former spouse (the mother of the minor children).

[8] As a result of the family council’s deliberations, the appellant was appointed tutor to the minor children. He was granted a general power of attorney conferring full powers of administration on him. The appellant held considerable powers by virtue of this power of attorney.

[9] To illustrate the extent and importance of the powers granted to the appellant, I think it is useful to reproduce the relevant paragraphs of the judgment (Exhibit A-1), which read as follows:

[TRANSLATION]

(a) to continue the business of the deceased known under the style and trade name of "CONSTRUCTIONS ÉCONO PLUS INC." for and on behalf of the minor children and that he accordingly be authorized to carry out the acts of administration necessary to the company's proper operation, in particular, but not limited to, signing cheques, receiving payments, paying accounts, reaching payment agreements with suppliers and, in general, continuing and conducting all commercial transactions, buying and selling any goods, entering into and performing any contract; granting any credit and giving any terms; requesting any advance and obtaining credit from any financial institution and giving any guarantee; claiming any proceeds of insurance policies taken out on the life of Gaétan Larouche of which the company may be the owner and/or beneficiary;

(b) to obtain an offer to purchase the assets of the company, either as a whole or separately, the whole subject to the procedure prescribed by the Code of Civil Procedure;

(c) to continue the business of the deceased known under the style and trade name of "2621-3603 QUÉBEC INC." for and on behalf of the minor children and that he accordingly be authorized to carry out the acts of administration necessary to the company's proper operation such as signing cheques, receiving payments, paying accounts and, in general, continuing and conducting all commercial transactions, buying and selling any goods, entering into and performing any contract; granting any credit and giving any terms; requesting any advance and obtaining credit from any financial institution and giving any guarantee;

(d) to obtain an offer to purchase the shares of the company, the whole subject to the procedure prescribed by the Code of Civil Procedure for the sale by agreement of unlisted shares;

(e) to continue the business of the deceased known under the style and trade name of "LES IMMEUBLES LOGI PRO INC." for and on behalf of the minor children and that he accordingly be authorized to carry out the acts of administration necessary to the company's proper operation such as signing cheques, receiving payments, paying accounts and, in general, continuing and conducting all commercial transactions, buying and selling any goods, entering into and performing any contract; granting any credit and giving any terms; requesting any advance and obtaining credit from any financial institution and giving any guarantee;

(f) to obtain an offer to purchase the shares of the company, the whole subject to the procedure prescribed by the Code of Civil Procedure for the sale by agreement of unlisted shares;

(g) to attend and vote at all meetings of shareholders of the aforementioned companies;

(h) to obtain a minimum extension of time of 60 days from "Ameublement Capri Ltée" for the signing of the notarial deed of sale so as to be able to act on the said offer to purchase the land and the construction in progress, so that "Constructions Écono Plus Inc." can recover the prior investment in the immovable the deceased planned to purchase;

(i) to claim for and on behalf of the minor children any proceeds of insurance policies taken out on the life of Gaétan Larouche . . . .

[10] After making an inventory of the assets and liabilities of "Construction Econo Plus Inc.", it was decided that it was in the children's interests to accept the succession, which was done in December 1991.

[11] To maximize the value of the assets, it was also agreed that work on the existing sites should continue to completion. For this purpose, the appellant tried unsuccessfully to hire a former partner of the deceased named Richard Lépine. As Mr. Lépine was not at all interested because of the many problems involved, including a number of lawsuits, the appellant was then hired to head up the administration of the business of the de cujus for a consideration of $500 a week.

[12] The employment lasted 12 weeks, at the end of which the appellant prepared his own separation certificate (Exhibit I-1). The appellant submitted that he ate at his mother's home every week during his period of employment and consistently met with his brother Denis every other day. As these two individuals were members of the family council, he said that they thus had control over the work he performed.

[13] For example, he noted that he had had to refuse to sell a paint gun. His brother felt that the amount of $1,000 offered was not sufficient, contrary to what he himself had first thought.

[14] According to the appellant, this was a concrete example showing that his work was subject to the right of supervision and control of the members of the family council.

[15] At the time of the insurability investigation, the appellant signed a statutory declaration which read as follows:

[TRANSLATION]

I am the sole owner of DELIBER INC. This business operated in 1993. There is nothing in the books prior to 1993 (no employees). I hold 30 or 33 1/3 percent of the shares in the Énergec company together with Denis Larouche and Myrilla Lapierre Larouche, and he is a shareholder, but does not work in the business. Denis Larouche does site work and project management. I am the person responsible for the company’s bids and estimates. I have the final say in administrative matters.

Construction Écono. Following Gaétan Larouche's death, I worked as tutor to pay the accounts and conduct all the transactions of the business. I had a free rein in settling the estate.

Analysis

[16] The respondent excepted the appellant's employment from insurable employment, relying on paragraph 3(2)(d) of the Act which reads as follows:

(d) the employment of a person by a corporation if the person controls more than forty per cent of the voting shares of that corporation . . . .

[17] In the instant case, the respondent submits that the appellant had de facto control over all the shares. The judgment filed as Exhibit A-1 is very clear on this point. I refer in particular to the following paragraph:

(g) to attend and vote at all meetings of shareholders of the aforementioned companies . . . .

[18] The appellant submitted that his powers were reduced and modified as a result of the acceptance of the succession in December 1991. No convincing evidence of this reduction in powers was adduced since this interpretation was not confirmed by any writings, minutes or testimony. In addition, none of the members of the family council testified in support of the appellant's submissions that his powers were reduced or that the family council exercised control over his remunerated activities.

[19] In insurability cases, the burden of proof is on the appellant. Even if it is proven that the mandate was reduced as a result of the acceptance of the succession, the appellant absolutely had to show that the work performed for and on account of "Construction Econo Plus Inc." was subject to control and that there was a relationship of subordination between him and someone in a position of authority.

[20] The evidence on this point is not really conclusive. Quite to the contrary, I find that the balance of evidence is consistent and in agreement with the description of powers in the deed of tutorship.

[21] All this leads me to the conclusion that the appellant in actual fact had full control over the voting right attaching to the company's shares and consequently controlled more than 40 percent of those shares, as a direct effect of which his employment was excepted from insurable employment.

[22] In support of his submission, the respondent rightly referred to the judgment in Rodrigue Sexton and M.N.R. and Tax Court of Canada, A-723-90, in which Hugessen J.A. wrote as follows:

Determining the control of voting shares in a company is a mixed question of law and fact. To begin with, it must be determined who is the holder of the shares; then, the question is whether there are circumstances interfering with the holder's free and independent exercise of his voting right, and if applicable, who may legally exercise that right in the holder's place.

[23] I also think it useful to refer to the remarks by my colleague the Honourable Judge Pierre Dussault, who wrote the following in Morton Cornblit v. M.N.R., 93-125(UI):

Their intention to transfer more shares to their wives never materialized into valid and legally effective transfers.

[24] The right to organize one's affairs so as to avail oneself of the benefits or advantages of financial assistance legislation or programs has often been acknowledged. This presupposes, however, that the persons concerned meet the various requirements and comply with the rules in effect. It is not enough to claim that that is what was intended and that what actually transpired is not what is described in and proven by very explicit writings.

[25] On this point, Linden J.A. wrote the following in The Queen v. Friedberg, 92 DTC 6031 (F.C.A.):

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil 91 DTC 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.

[26] The Act speaks of control, not ownership, and it is the right to vote that confers control over a company, not ownership of its shares.

[27] The powers described in the power of attorney held by the appellant during the period in issue were so extensive that he had total de facto control of all the voting rights of all the company's shares.

[28] The appellant held all the voting rights attaching to the shares. The power of attorney gave him the right and power to vote as he wished; he was subject to no restrictions. The delegation of powers was complete and unreserved, at least with respect to the use of the voting rights.

[29] Furthermore, the extent and quality of the appellant's powers were unequivocal as regards the discretion he in fact had. He was subject to no control; there was no relationship of subordination between him and the other members of the family council. The only limits and constraints were of course those provided for by the Act with respect to the obligations that tutors must discharge.

[30] It was clearly shown on the balance of evidence that the appellant controlled more than 40 percent of the shares in the company that remunerated him and that the employment he held during the period in issue was not insurable employment pursuant to paragraph 3(2)(d) of the Act.

[31] Furthermore, there was no genuine contract of service since the evidence of a relationship of subordination, which is essential to the formation of such a contract, was entirely insufficient.

[32] For these reasons, the appeal is dismissed and the determination is affirmed.

Signed at Ottawa, Canada, this 9th day of December 1997.

"Alain Tardif"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 31st day of August 1998.

Stephen Balogh, Revisor