REASONS FOR JUDGMENT
D’Auray J.
Background
[1]
These are appeals by V.Y.F. Express Inc. (VYF) and
Vipro Inc. (Vipro) from the decisions of the Minister of National Revenue
(the Minister) (finding) that Francine Vincent Allard (Francine) and her brother, Yvon Vincent
(Yvon) held insurable employment with VYF during the period from January 1, 2012,
to February 13, 2013, and that Jasmin Allard (Jasmin) held, according to
the Minister, insurable employment with Vipro during the period from January 1, 2012,
to March 6, 2013.
[2]
The cases of VYF and Vipro were heard on common evidence.
[3]
The Minister submits that there was a contract
of service between VYF and Francine and between VYF and Yvon under paragraph 5(1)(a)
of the Employment Insurance Act (the Act).
[4]
The Minister also submits that there was a
contract of service between Vipro and Jasmin under paragraph 5(1)(a) of
the Act.
[5]
Section 5(1)(a) of the Act reads as
follows:
5. (1) Subject to subsection (2),
insurable employment is
(a) employment in
Canada by one or more employers, under any express or implied contract of
service or apprenticeship, written or oral, whether the earnings of the
employed person are received from the employer or some other person and whether
the earnings are calculated by time or by the piece, or partly by time and
partly by the piece, or otherwise;
[6]
Although the employment of Francine, Yvon and
Jasmin is excluded under subparagraph 5(2)(i) of the Act in light of the
non-arm’s length relationship with VYF and Vipro, the Minister argues that in
these cases subparagraph 5(3)(b) of the Act applies. According to the Minister,
it was reasonable to conclude, having regard to all the circumstances, that
Francine, Yvon and Jasmin would have entered into
substantially similar contracts of employment if they had been dealing with the
employer at arm’s length. Subparagraph s 5(2)(i)
and 5(3)(b) read as follows:
5(2) Insurable employment does not include
(i) employment if the
employer and employee are not dealing with each other at arm’s length.
5(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.
[Emphasis
added.]
[7]
VYF and Vipro submit that the employment of Francine,
Yvon and Jasmin are excluded from insurable employment under paragraph 5(2)(i)
of the Act and that paragraph 5(3)(b) of the Act does not apply. They
argue as follows:
(a) that the
Minister failed to consider relevant facts;
(b) that
the Minister misapprehended certain facts by relying on irrelevant, inaccurate
or ambiguous factors.
[8]
Justice Bowie noted in Birkland v. Canada
(Minister of National Revenue – MRN), 2005 TCC 291, [2005] TCJ No. 195, that
the wording of paragraph 5(3)(b) has led to some difficulty in
interpretation. He described the principles that the Court must apply by
referring to Légaré and Denis of the Federal Court of Appeal. Justice
Bowie wrote as follows:
[4] At this point it is sufficient simply to state my
understanding of the present state of the law, which I derive principally from paragraph
4 of Légaré (reproduced above) and from the following passage from the judgment
of Richard C.J., concurred in by Létourneau and Noël JJ.A., in Denis v.
Canada.
5 The
function of the Tax Court of Canada judge in an appeal from a determination by
the Minister on the exclusion provisions contained in subsections 5(2) and (3)
of the Act is to inquire into all the facts with the parties and the witnesses
called for the first time to testify under oath, and to consider whether the
Minister's conclusion still seems reasonable. However, the judge should not
substitute his or her own opinion for that of the Minister when there are no
new facts and there is no basis for thinking that the facts were misunderstood
(see Pérusse v. Canada (Minister of National Revenue - M.N.R.), [2000]
F.C.J. No. 310, March 10, 2000).
[9]
Upon reviewing all the evidence on file
including the testimonies of Francine, Yvon and Jasmin, I am of the view that
the Minister’s decision is unreasonable in the case at bar. I find that in deciding
as he did, the Minister misapprehended the facts and also failed to take into
account relevant facts. I am also of the opinion that if the Minister had not misapprehended
the facts and omitted relevant facts, he would not have rendered the decision he
did, as that decision is unreasonable, having regard to the circumstances.
Facts
[10]
I will first explain the non-arm’s-length
relationships between the parties involved in the dispute.
(a)
Francine Vincent Allard is Yvon Vincent’s sister,
Ange-Albert Allard’s spouse and Jasmin Allard’s mother.
(b)
Yvon Vincent is Francine’s brother, Ange-Albert
Allard’s brother-in-law and Jasmin’s uncle.
(c)
Jasmin Allard is Francine and Ange-Albert Allard’s
son and Yvon’s nephew.
[11]
Ange-Albert Allard operates Animat, a company
that manufactures and sells interlocking rubber mats made from recycled tires.
[12]
Animat operates primarily in the agricultural
sector. The rubber mats are used to provide comfort to animals, particularly dairy
cows.
[13]
Ange-Albert Allard approached Yvon about starting
up a business as a subcontractor for Animat.
[14]
Not wanting to go into business alone, Yvon asked
his sister, Francine, to join him. Thus, in 1998, Francine and Yvon founded VYF.
They each invested $5,000 .They are the sole directors and each hold 50% of
the capital stock of VYF.
[15]
Francine used part of her principal residence for
the operations of VYF.
[16]
In 2000, more space was required and VYF rented
the half basement of a residence for its operations.
[17]
In the first years of operations of VYF, although
Francine worked many hours, she did not receive a salary from VYF. As she
explained during her testimony, she could afford not to receive income because
the salary of her spouse, Ange-Albert Allard, sufficed to meet their needs. However,
Yvon received $600 per week from VYF. Yvon’s salary was based on his financial
needs and not on the profits of VYF.
[18]
VYF was doing quite well. Thus, in 2002 or 2003,
VYF purchased land and built a building for its operations. Francine and Yvon also
guaranteed the loans that VYF took out with the Caisse populaire Desjardins for
the land purchase and construction of the building.
[19]
It was also at the time of the purchase of the
land and building that VYF ceased to be a subcontractor for Animat and began
selling directly products manufactured by Animat.
[20]
For his part, in the early 2000s, Jasmin founded
Vipro with his father, Ange-Albert Allard, and another partner. Although Ange-Albert
is a shareholder of Vipro, he is not involved in the operations of Vipro.
[21]
Vipro recovers chicken residue to turn it into
fertilizer intended for sale in the agricultural products sector.
[22]
In late 2003, Jasmin’s partner passed away.
Jasmin was now operating Vipro alone. VYF therefore decided to integrate Vipro
into its operations. That said, the two companies continued their operations. The
integration was done through the redistribution of the shares of VYF and Vipro,
namely:
|
|
VYF
|
Vipro
|
|
Francine Vincent
|
16.67 %
|
16.67%
|
|
Ange-Albert Allard
|
16.67 %
|
16.67%
|
|
Yvon Vincent
|
33.33 %
|
33.33%
|
|
Jasmin Allard
|
33.33%
|
33.33 %
|
[23]
According to the testimonies of Francine, Yvon and
Jasmin, the shares of VYF and Vipro are divided so that the two young shareholders,
Yvon and Jasmin, will each hold 50% of the shares when Francine and Ange-Albert
retire.
[24]
Francine, Yvon and Jasmin are the directors of VYF
and Vipro.
[25]
Yvon, Francine and Jasmin were paid based on their
financial needs and not on the companies’ profits. In that regard, they all testified
that they preferred to reinvest in the companies rather than increase their
salaries. For them, it is important that the companies prosper. To that end, they
did not pay themselves bonuses or dividends.
[26]
During the period in issue, from January 1, 2102,
to February 13, 2013, the annual pay was as follows:
|
Francine
|
$72,800
|
|
Yvon
|
$82,700
|
|
Jasmin
|
$80,600
|
[27]
During the hearing, Francine, Yvon and Jasmin testified
that their pay was the same for a number of years and that as of the date of the
hearing, their pay had not changed.
[28]
Although Francine and Yvon work for VYF and
Vipro, they do not receive pay from Vipro. As for Jasmin, although he works for
VYF and Vipro, he does not receive pay from VYF.
[29]
Francine is responsible for Human Resources for
VYF and Vipro. VYF has approximately 75 employees and Vipro has approximately 16
employees. Francine is also in charge of following up with clients and, where
necessary, with the installers.
[30]
Yvon is in charge of sales, marketing and distribution
for VYF and Vipro. He also performs other tasks where necessary.
[31]
Jasmin is responsible for operations and
anything related to rubber mats for animals. He also installs mats for animals
for VYF. He also continues to manufacture fertilizer as part of the Vipro’s operations.
[32]
Francine and Yvon both testified that that they
work long hours. For example, Francine works from 7 a.m. to 6 p.m. She also
works weekends. As she considers herself the owner of VYF and Vipro, she states
that she is available at all times.
[33]
As for Yvon, he stated that his schedule is
variable. He often starts work at 5 a.m. and if there is a loading issue, whether
it be in the morning, the evening or at night, he is the one who is called to
handle it. He works 50 to 70 hours per week.
[34]
Jasmin also stated that his work schedule is
variable. He stated that he works until the work has been completed. For instance,
the day prior to the hearing he worked from 5 a.m. to midnight.
[35]
Francine, Yvon and Jasmin have never received overtime
pay from VYF and Vipro, whereas their other employees are paid for overtime
worked.
[36]
As for vacation leave, Francine, Yvon and Jasmin
each have six weeks’ vacation. VYF and Vipro close down for two weeks over the
Christmas period and during the two weeks of construction holidays in Quebec. They
never ask each other for permission to take vacation. They all stated that they
have always been available during their vacation. Furthermore, they take
advantage of that time to participate in agricultural fairs, as they provide an
opportunity for them to meet with their clients and to acquire new clients.
[37]
Francine and Jasmin have group insurance
coverage provided by the companies. Yvon does not have coverage.
[38]
Francine, Yvon and Jasmin can individually sign
the cheques of VYF and Vipro without a co-signer.
[39]
They also all testified that they make the decisions
necessary in their respective areas of work, without having to consult with
each other beforehand.
[40]
The directors’ meetings are more like family
councils. They discuss the direction of the companies during meals. They never vote
and their discussions and decisions are not confirmed in writing.
[41]
Francine, Yvon and Jasmin stated that they never
wanted to have a non‑member of the immediate family join them. For them,
it is important that their businesses remain family businesses.
[42]
In 2012, VYF and Vipro purchased a new building.
To that end, Francine, Yvon, Ange-Albert and Jasmin guaranteed the loans taken
out by VYF and Vipro for approximately two million dollars. They are also
responsible for the outstanding balances on the corporate credit cards used by
some of the employees of VYF and Vipro.
[43]
The Minister relied on the following facts to
determine that there was a contract of service between the companies, Francine,
Yvon and Jasmin:
(a) the
worker was paid every two weeks, like all the other employees of the appellant;
(b) the
worker’s salary was determined by the appellant’s shareholders;
(c) the
salary paid by the appellant to the worker is comparable to that offered on the
job market for this type of work, according to the information published by
Emploi Québec;
(d) the
worker’s pay was reasonable and would have been
substantially similar if the appellant and the worker
had an arm’s length relationship;
(e) the
worker worked for the appellant, not only as an employee, but also as a
director and shareholder;
(f) the
tasks performed by the worker were required and essential to the appellant’s operations;
(g) as
a manager, the worker assumed the responsibilities commonly associated with
this type of position;
(h) the
hours worked by the worker were not unreasonable, given the nature of his duties
with the appellant;
(i) the
worker had coverage under the appellant’s group insurance plan, like all the
other employees;
(j) the
worker was employed by the appellant year-round, as required by his activities;
(k) the
expertise and skills acquired by the worker over the years were relevant and
similar to those that an arm’s length employee would have been required to have
to perform the same duties;
(l) the
terms and conditions of employment, the hours of work, and the nature and importance
of the worker’s work are similar to those that would have prevailed in an arm’s
length relationship.
[44]
Ms. Laroche is the Rulings Officer for the Canada
Revenue Agency (the CRA). She reviewed the files of VYF and Vipro. During her
testimony, she stated that she spoke with Francine and Jasmin by telephone. She
said she asked Francine and Jasmin questions using a pre-determined
questionnaire. She noted the answers they provided. As for Yvon, she relied on
what Francine and Jasmin had to say to make her decision. Ms. Laroche did not explain
why she did not contact Yvon. The questionnaires with the answers written by
Ms. Laroche were not filed in evidence.
[45]
During her testimony, Ms. Laroche stated that
the hours worked by Francine, Yvon and Jasmin appeared reasonable to her given
that they worked for their companies.
[46]
Ms. Laroche also filed in evidence documents from
Emploi Québec that indicated that the average annual income for a full-time
Human Resources director was $58,000 in 2005 in central Quebec and $74,000 in
Quebec as a whole. In that same document it was also reported that a Human
Resources director’s hourly salary in Quebec in 2010 and 2012 was as follows:
|
Hourly salary
in Quebec (2010-2012)
|
|
|
First quartile (or the lower half)
|
between $24.00 and $25.99
|
|
Median
|
between $32.00 and $33.99
|
|
Third quartile (or the upper half)
|
between $44.00 and $45.99
|
[47]
Again according to documents from Emploi Québec filed
in evidence by Ms. Laroche, the average annual income for a full-time director of
sales, marketing and advertising was $65,000 in 2005 in central Quebec and $76,000
in Quebec as a whole. According to the document by Emploi Québec, the hourly salary
for a director of sales and marketing in Quebec in 2010 and 2012 was as
follows:
|
Hourly salary
in Quebec (2010-2012)
|
|
|
First quartile (or the lower half)
|
between $22.00 and $23.99
|
|
Median
|
between $30.00 and $31.99
|
|
Third quartile (or the upper half)
|
between $42.00 and $43.99
|
[48]
Ms. Laroche stated that she did not analyze any
factors other than pay, working conditions, duration of employment and whether
the employment was integrated into the business, i.e., the importance of the
work performed.
[49]
According to Ms. Laroche, in light of the
criteria examined, it was reasonable for the Minister to conclude, having
regard to all the circumstances, that VYF and Francine, VYF and Yvon, and Vipro
and Jasmin would have entered into substantially
similar contracts of employment if they had been dealing with the employer at
arm’s length.
Analysis
[50]
In my opinion, the Minister’s decision is not reasonable,
as he misapprehended and omitted material facts in these cases.
[51]
First, the respondent failed to take into
account that Francine, Yvon and Jasmin and VYF and Vipro are one in the same. The
evidence reveals that Francine, Yvon and Jasmin are the directing minds of the
companies. The companies’ decisions are made based on their family’s economic
interests. In addition, their economic interests are inextricably linked to
those of the companies. To that end, Francine, Yvon and Jasmin personally guaranteed
the loans taken out by VYF and Vipro for approximately two million dollars. They
also guaranteed the outstanding balances on the corporate credit cards used by
the employees of VYF and Vipro.
[52]
In my view, had they been dealing with the companies at arm’s length, Francine, Yvon and Jasmin would
not take such financial risks. For instance, Francine’s financial risk is very
high knowing that she only holds 16.67% of the shares in the companies. Furthermore,
Francine, Yvon and Jasmin would not be as invested in the companies by working
countless hours. They would not have therefore entered
into substantially similar contracts of employment if they had been dealing
with the companies at arm’s length.
[53]
The companies are managed by Francine, Yvon and
Jasmin as if they are the owners of the company’s assets. They have a common vision,
the prosperity of the companies so as to ensure that when Francine retires, her
shares and the shares of her spouse Ange-Albert Allard will be distributed between
Yvon and Jasmin. The companies’ decisions are made orally during family meals. The
long hours worked, the ongoing investment in the companies and the financial risks
would not be borne by Francine, Yvon and Jasmin if they
had been dealing with the companies at arm’s length.
[54]
Since the incorporation of VYF in 1998, the pay
has been based on Francine and Yvon’s financial needs. This approach continued
so that the company could prosper. It is clear that had
Francine, Yvon and Jasmin been
dealing with the companies at arm’s length, they would not have agreed to salaries that were not market-based.
[55]
I am also of the view that it was not reasonable
for the Minister to conclude that Francine, Yvon and Jasmin should agree to be available
24/7, to work 60 to 70 hours per week and to respond to any emergency at all
times without compensation for overtime.
[56]
Although the documents from Emploi Québec filed
by the respondent have limited probative value, as the bases for those documents
are unknown, it is interesting to note that the average annual income disclosed
by those documents for a Human Resources director in 2005 was between $58,000 and
$74,000 per year. According to that same document, however, a Human
Resources director’s hourly salary is from $44 to $45.99 in 2012, the
year at issue. If we were to assume that Francine worked 50 hours per week in 2012,
based on said document her salary should have been between $114,400 and $119,548.
If the same calculation is made for a 60-hour work week, Francine’s salary
should have been between $137,280 and $143,468, which is significantly higher
than the salary of $72,800 received by Francine in 2012.
[57]
Again according to the documents from Emploi
Québec, a director of sales, marketing and advertising in 2005 earned an
average annual salary of $65,000 in central Quebec and $76,000 in
Quebec as a whole. However, the document indicates that the hourly salary in
the third quartile was between $42.00 and $43.99 in 2012. Based on
that document, Yvon’s salary in 2012 should have been between $109,200 and
$114,348 for 50 hours and between $131,040 and $137,228 for 60 hours,
which is also higher than what Yvon received, $82,700.
[58]
Moreover, in that regard, Francine, Yvon and Jasmin
testified that they would not accept to work for similar pay and working conditions
for another employer. They also stated that they would not agree to having someone
who is not part of the family join the companies.
[59]
The Minister also concluded that there was a
relationship of subordination between VYF and Francine, VYF and Yvon, and Vipro
and Jasmin. I am of the view that the evidence showed the opposite. Francine,
Yvon and Jasmin make decisions in their respective areas without consulting the
other directors. The authorization of the other directors is not required with
respect to their leave, work schedules and vacation. Obviously, they notified
each other in advance of their leave, which is, in my opinion, a matter of courtesy
and work organization, but this does not create, however, a relationship of
subordination.
[60]
In light of my conclusions, I do not need to
decide the specific objective of paragraph 3(2)(i) of the Act, but I
would like to adopt the comments made in a number of decisions regarding
paragraph 3(2)(i) of the Act.
[61]
To this effect, I would refer to the comments of
Justice Woods in C&B Woodcraft Ltd v. The Minister of National Revenue,
2004 TCC 477. She wrote the following at paragraphs 7 to 13 of her Reasons for
Judgment:
[7] The statutory scheme for
determining whether a person related to the employer is engaged in insurable
employment is not easy to decipher. One question that has arisen is whether the
Minister’s decision making power under these sections is final and what role
the Tax Court has in reviewing these decisions. Another question that has
received less attention is how the legislation applies to a person who does not
wish to be within the employment insurance scheme. I would make a few comments
about this question before considering the facts of this particular case.
[8] If paragraphs 5(2)(i)
and (3)(b) are read literally, a person who is related to the employer
is deemed not to be insurable, the employee and employer are not required to
pay premiums and the employee is not entitled to benefits - unless the Minister
is satisfied that the employment terms are arm's length. Typically the Minister
makes this determination when a person makes an application for employment
insurance benefits. However, in this case, the Minister made the determination
in the context of the requirement to pay premiums. Does paragraph 5(3)(b)
contemplate that the Minister would make this kind of determination?
[9] To date this court has
accepted, albeit reluctantly, that the Minister has the power to make a
determination under paragraph 5(3)(b) to require premiums. The statute
been considered to be broad enough as a matter of strict construction to give
the Minister this power: see Hoobanoff Logging Ltd. v. M.N.R., [1999]
T.C.J. 856 (T.C.C.). The following is from Deputy Judge Porter’s decision:
I am of the view that the law enables him to do that in the
appropriate circumstances, but that such is hardly consistent with the intent
of the amendments made to the Unemployment Insurance Act in 1990 when
this discretion was first introduced. ...
Nonetheless, as a matter of strict interpretation of the
law, I am satisfied that the legal capacity for the Minister to do this exists.
(Paragraphs
11 and 12)
[10] The legislative history suggests
that paragraph 5(3)(b) was enacted as a relieving measure so that
persons would not be denied employment insurance benefits unless the denial
could be justified on a basis other than the relationship between the parties.
Prior to the enactment of paragraph 5(3)(b) in 1990, a person who was
employed by a spouse was simply excluded from the employment insurance scheme.
In the case of Canada v. Druken, [1989] 2 F.C. 24 (F.C.A.), this
exclusion was held to be discriminatory and contrary to the Human Rights Act.
As a result, the provision was struck down and held to be unenforceable. The Druken
decision led to an amendment to the legislation shortly thereafter. The new
provision, now in paragraph 5(3)(b), ensures that a person will not be
denied employment insurance benefits if the employment terms are essentially
arm's length terms.
[11] When one looks at the legislative
history and the statutory provisions together, I would have thought that the
scheme was that persons related to their employer would not be eligible for
employment insurance unless they could satisfy the Minister that they should
qualify based on the arm's length test that is provided in paragraph 5(3)(b).
If this is the statutory scheme, then under the so-called modern approach to
statutory construction, paragraphs 5(2)(i) and 5(3)(b) should not be
interpreted in a manner that Parliament did not intend. As a result I have some
doubt that paragraph 5(3)(b) gives the Minister the power to mandate
that someone who is related to the employer should pay employment insurance
premiums.
[12] Not only is this
Ministerial power not clear on the words of the statute, but the fact that the
power is partly discretionary makes it quite unfair in a self-assessing system.
Persons must decide whether to pay premiums and risk that the Minister will
refuse benefits. On the other hand, if they do not pay premiums, the Minister
can require premiums on a retroactive basis.
[13] For these reasons, it is not clear to me that Parliament
intended the Minister to have the type of power that was exercised in this
case. It is not necessary that I make a finding on this, however, because of
the conclusion that I have reached on the particular facts of this case.
Disposition
[62]
Consequently, the decisions of the Minister that
the employment of Francine Vincent Allard, Yvon Vincent and Jasmin llard insurable
employment are vacated. I declare that their employment is not insurable
employment.
[63]
The appeals are allowed.
Signed at Ottawa,
Canada, this 8th day June 2015.
“Johanne
D’Auray”
Translation certified true
on this 19th day of August 2015
Daniela Guglietta, Translator
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