REASONS
FOR JUDGMENT
Campbell J.
[1]
The Appellant is appealing a determination by
the Minister of National Revenue (the “Minister”)
that he was not engaged by Cloud River Outfitters Ltd. (the “Payer”) in insurable employment for various periods
commencing January 23, 2006 and ending October 2, 2010. The Minister made
this determination after concluding that the Appellant and Payer were not
dealing with each other at arm’s length and their employment was therefore
excluded employment pursuant to paragraph 5(2)(i) of the Employment
Insurance Act (the “Act”). Because the
Appellant and the Payer were related persons as defined in subsection 251(2) of
the Income Tax Act (the “ITA”), the
Minister concluded that they would not have entered into a substantially
similar contract of employment if they had been dealing with each other at
arm’s length.
The Facts
[2]
The Appellant holds 34 percent of the Payer’s
shares. His son and daughter own the remaining shares equally. The Payer’s
business focuses on providing hunting excursions, primarily to Americans,
within the Province of Newfoundland and Labrador during the months of September
and October in each year. It also occasionally offers fishing excursions during
the summer months. The business is seasonal and according to the evidence of
both the Appellant and his daughter, Shelley Payne‑House, attendance at
trade shows, in the United States throughout the winter months, is required in
order to promote the business. According to their evidence, the trade show
attendance was the primary method of advertising because the majority of their
clients were from the United States.
[3]
Shelley Payne-House is the Payer’s administrator
as well as one of its shareholders. She stated that her duties included
bookkeeping, dealing with clients and licences, coordinating employees and
occasionally attending trade shows.
[4]
While the Payer maintains only one fishing camp,
there are four or five hunting camps maintained. According to the daughter’s
evidence, in addition to attending the trade shows in the winter months, camp
lodges must be maintained and repaired, docks constructed and trails cut. The
lodges are all remote and must be accessed by float plane. Employees generally
stay at the camps throughout the fall.
[5]
The Appellant has been working for the Payer
since 2006 pursuant to a verbal agreement. The Payer employs approximately
twenty employees, including cooks and guides, who are paid weekly rather than
hourly. According to the evidence, the Appellant was paid $50 more weekly than
other employees due to his increased responsibilities. The daughter stated that
employees’ wages were comparable to those paid by other outfitters in the area.
She also stated that employees generally did not pick up their weekly
paycheques until the end of the season, when they returned from the camps,
unless their wives picked them up. Occasionally employees, including the
Appellant, required personal items and those items were purchased for them and
deducted from their paycheque amounts. No records were produced to support this,
nor were other employees called as witnesses to confirm this, and the cheques
that were available did not match the earnings listed on the Record of
Employment. The Appellant also attended the trade shows and was paid for this
in the winter months. His daughter stated that the Appellant attended three to
four trade shows yearly. She explained that the Payer chooses the trade shows
depending on where the majority of its clients originate.
[6]
The Appellant and his daughter also own and
operate a second family outfitting company called Portland Creek Outfitters.
Family representation at the trade shows was also required for this second
company. However, it was unclear from her testimony whether the Appellant would
be representing the Payer or this second company at those shows. Although the
daughter was vague respecting the number of yearly trade shows they attended in
the years 2006 to 2010, it appeared to be in the vicinity of at least three to
four yearly. Her evidence was unclear as to the shows that they attended each
year and she did not have supporting records with her for reference. She did
not provide the payroll register that would have indicated which of the Payer’s
employees attended those shows between 2006 and 2010. Neither did she provide
records to confirm the Payer’s actual attendance at those shows. The Appellant
maintained a United States bank account in his own name and when the Payer
received payment in U.S. funds, some of those monies were deposited to this
personal account to cover future trade show expenses. The Appellant would pay
the expenses directly and submit his receipts for reimbursement after the trade
shows. He also had a U.S. Visa card in his own name which he used in a similar
manner to pay those expenses.
[7]
The Appellant testified that, after he finished
Grade 10, he worked at Newfoundland Zinc Mine for ten years while doing guide
work part-time. In the early 2000’s, he was employed as a commercial fisherman.
Around 2005, he became involved with the outfitting business. He stated that
his duties for the Payer consisted generally of preparing lodges for the
hunting season, ordering food, ensuring licences were sold, cleaning lodges
after the season, hiring pilots and guides, providing some guide work himself
and completing other tasks as required. He did not maintain a set work
schedule. His attendance at the trade shows was important for the personal
contact with hunters. He stated that he could spend weeks in the United States attending these shows during the winter months.
[8]
The Appellant testified that his wages, that he
actually received for a period, might not necessarily match his overall rate of
pay as he could have amounts deducted for personal items purchased for him
while in the camp. While he admitted to sometimes working for the Payer outside
the employment periods, he stated that it was only for minimal periods and
generally because clients preferred to deal with him directly.
[9]
The third witness to testify was Kevin Matheson,
the Appeals Officer at the time who dealt with this matter at the objection
stage. On direct examination, he testified that he requested the Payer’s
general ledger, payroll ledger, corporate registry, receipts relating to the
Appellant’s expenses when he attended U.S. trade shows, bank statements,
cancelled cheques, copy of the business card and proof that the Payer had paid
for booths at these trade shows.
[10]
The payroll ledger would confirm that all
employees were treated in the same manner as the Appellant alleges, but Mr.
Matheson testified that he received only some portions of the ledger.
[11]
Cancelled paycheques were required to show that
the Appellant was actually paid but, again, only some cancelled cheques were
provided.
[12]
The bank statements were required so that they
could be matched to the cancelled paycheques to confirm that the amounts, that
the Appellant was alleged to have received from the Payer, actually came out of
the Payer’s bank account. However, he received only the bank statements for
2007 and he was still unable to match those 2007 statements with the limited
number of cancelled cheques that the Appellant did provide to him.
[13]
Only a few of the expense receipts in respect to
travel in the United States in 2007 and 2009 were provided. He received no
receipts for the other periods under appeal. This was the only evidence Mr.
Matheson received and it did not link the travel to the trade shows. He
received no evidence to support the Payer’s attendance and registration at
those trade shows nor did he have evidence that the Appellant was paid for all
of the hours he claimed to have worked.
[14]
Although Appellant Counsel, on cross-examination,
suggested that Mr. Matheson could have done more to ensure that the
Appellant understood what was being requested in terms of specific documents to
support their position, Mr. Matheson testified that he did everything he could
to assist them in overturning the ruling that he was reviewing.
The Appellant’s
Position
[15]
The Appellant does not contest that he is not
dealing with the Payer at arm’s length according to subsection 251(1) of the ITA
and that the employment, therefore, would be excluded employment pursuant to paragraph
5(2)(i) of the Act. However, the Appellant submits that his employment
with the Payer is insurable for those periods because, even though he was
related to the Payer, the parties should be deemed to be dealing with each
other at arm’s length pursuant to paragraph 5(3)(b) of the Act based on
the fact that they would have entered into a substantially similar contract of
employment had they been dealing with each other at arm’s length.
[16]
To support this position, the Appellant argued
that his contract of employment had been previously reviewed and that it was
determined to be in compliance with the regulations; that his rate of pay was
similar to the rates of other employees that worked for the Payer; that his
rate of pay was comparable to the market rates received by employees of other
outfitting companies in the area; and that he did not have a fixed work
schedule because it suited the Payer’s needs which were dependant upon client
needs.
The Respondent’s
Position
[17]
The Respondent argued that the Appellant and
Payer would not have agreed to the terms of their employment had they not been
dealing with each other at non-arm’s length because:
a) Remuneration: An employee, dealing
at arm’s length with a Payer, would not settle for less wages than originally
agreed to. According to information submitted by the Appellant, he received a net
pay of $448.76 weekly when he should have been receiving a net pay of $564.11
weekly, according to the source deduction information published by Canada
Revenue Agency (“CRA”) [Tab 13, Exhibit R‑1].
b) Terms and conditions: No
documentation was provided to support the Appellant’s position that he
represented the Payer at U.S. trade shows. The few travel expense receipts that
were submitted do not support whether the Appellant was attending the trade
shows as a representative of the Payer or of Portland Creek Outfitters.
Incomplete records that were submitted did not support the Appellant’s claim
that he worked generally for the Payer. Only some cancelled cheques were
provided and no bank statements. Consequently, it is impossible to determine if
the Appellant actually attended all of those shows or whether he worked all the
hours he claimed in his Record of Employment or whether he was paid for all the
recorded hours.
c) Duration: It cannot be determined
if the Record of Employment accurately reflects the Appellant’s employment
duration with the Payer because of the lack of information and documentation
and the absence of a set work schedule.
d) Nature and importance of the work:
It is difficult to determine the nature of the additional tasks performed by
the Appellant for the Payer because of the lack of information and
documentation which was provided.
Analysis
[18]
What constitutes insurable employment is dealt
with in paragraph 5(1)(a) of the Act. Excluded employment is dealt with
in paragraph 5(2)(i):
5(2) Excluded
employment – Insurable employment does not include
[…]
(i)
employment if the employer and employee are not dealing with each other at
arm’s length.
[19]
The term “at arm’s length” is referenced further
in 5(3)(a) and (b):
5(3) Arm’s length
dealing – 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.
[20]
The relevant portions of subsections 251(1) and
(2) of the ITA define “arm’s length”:
251(1) Arm’s length. For the purposes
of this Act,
(a) related persons shall be deemed not to deal with each
other at arm's length;
[…]
(c) in any other case, it is a question of fact whether
persons not related to each other are, at a particular time, dealing with each
other at arm's length.
251(2) Definition of “related persons”. For the purpose of this Act, “related
persons”, or persons related to each other, are
[…]
(b) a corporation and
(i) a person who
controls the corporation, if it is controlled by one person,
(ii) a person who is a
member of a related group that controls the corporation, or
(iii) any person
related to a person described in subparagraph 251(2)(b)(i) or 251(2)(b)(ii);
and
[…]
[21]
The decision of Justice Bowie in Birkland v
M.N.R., 2005 TCC 291, [2005] TCJ No. 195, provides a summary of the
evolution of the role of this Court as it relates to paragraph 5(3)(i) of the Act
and the relevant caselaw. At paragraph 2, he provided his understanding of the
present state of the law in this area:
2 During the hearing before me there was some discussion as to
the role of this Court in cases arising under paragraph 5(3)(b) of the Act.
This question has been the subject of a number of decisions of the Federal
Court of Appeal during the past decade or so. The earlier cases, decided under
paragraphs 3(1)(a) and 3(2)(c) of the Unemployment Insurance
Act, held that the Minister's opinion was insulated from appeal in this
Court, unless it could be shown that in the course of forming that opinion he
had committed what might be termed an administrative law error. As the words of
subparagraph 3(2)(c)(ii) conferred a discretion on the Minister, this
Court had no mandate to simply substitute its opinion for that of the Minister.
However, if in the course of the hearing of an appeal the Appellant were able
to show that the Minister had erred in law in forming his opinion, then this
Court's function was to proceed to a de novo determination of the
paragraph 3(2)(c)(ii) (now 5(3)(b)) question whether the terms of
the employment contract could reasonably be considered to be those that arm's
length parties would have arrived at. In other words, after finding that the
Minister's decision was vitiated by an administrative law error, and only then,
could this Court substitute its opinion for that of the Minister as to the
paragraph 3(2)(c) question.
[22]
After a discussion of the Federal Court of
Appeal decisions in Légaré v Canada (MNR), [1999] FCJ No. 878 (FCA), and
Pérusse v Canada (MNR), [2000] FCJ No. 310, Justice Bowie, at paragraph
4, summarizes as follows:
…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 (re‑produced
above) and from … the judgment of Richard C.J., concurred in by Létourneau and
Noel JJ.A., in Denie c. Ministre du Revenue national.
[…]
This Court’s role,
as I understand it now, following these decisions, is to conduct a trial at
which both parties may adduce evidence as to the terms upon which the Appellant
was employed, evidence as to the terms upon which persons at arm’s length doing
similar work were employed by the same employer, and evidence relevant to the
conditions of employment prevailing in the industry for the same kind of work
at the same time and place. Of course, there may also be evidence as to the
relationship between the Appellant and the employer. In the light of all that
evidence, and the judge’s view of the credibility of the witnesses, this Court
must then assess whether the Minister, if he had had the benefit of all that
evidence, could reasonably have failed to conclude that the employer and a
person acting at arm’s length would have entered into a substantially similar
contract of employment. That, as I understand it, is the degree of judicial
deference that Parliament’s use of the expression “if the
Minister of National Revenue is satisfied …” in paragraph 5(3)(b) accords
to the Minister’s opinion.
[23]
The Birkland decision did not reference
the decision of the FCA in Livreur Plus Inc. v MNR, 2004 FCA 68,
[2004] FCJ No. 267, even though Birkland was rendered one year
subsequent to that case. There is inconsistent caselaw in respect to whether Livreur
introduced an additional element to the test set out in Légaré and Pérusse.
In Khaila v The Queen, 2013 TCC 370, [2013] TCJ No. 325, Justice Woods
was of the view that Livreur did introduce an additional element,
however, she noted that, since it was not universally applied, she chose to
follow Birkland.
[24]
Respondent Counsel referred me to the case of Denis
v Canada (MNR), 2004 FCA 26, [2004] FCJ No. 400, where, at paragraph 5, the
then Chief Justice Richard stated the test in the following manner:
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).
[25]
If I follow Birkland and apply the
reasoning in Légaré and Pérusse, the Appellant has the onus of
establishing new facts that were either not before the Minister when the
determination was made or that the Minister misunderstood the facts which were
known at the time of the determination.
[26]
Appellant Counsel submitted that the sworn
testimonies of the Appellant and his daughter, being credible, should be
sufficient to demolish the Minister’s assumptions of fact relied upon in the
Reply. Further, the Appellant argued that incomplete records should not be a
bar to being successful in the appeal.
[27]
While credible oral testimony may be sufficient
in certain circumstances, and in the absence of relevant records, to demolish
the assumptions of fact, jurisprudence has also established that a negative
inference should be drawn against the party who is in the position of being
able to provide pertinent evidence to the Court but who, for whatever reason,
does not provide it.
[28]
At the ruling stage, the Appellant was given the
opportunity to provide supporting documentation to CRA but he failed to do so.
The evidence supports that the Appeals Officer specifically requested those
documents which would support the Appellant’s position. Although the Appellant
repeatedly promised to provide them to CRA, he never complied. Contrary to
Appellant Counsel’s suggestions that Mr. Matheson, the Appeals Officer, did not
take proactive steps in obtaining the necessary records from the Appellant, the
evidence supports that he took reasonable steps in attempting to have the
Appellant comply with his requests. At page 82 of the transcript, he testified
that he made himself available, telephoned them and left messages giving his
phone and fax numbers, inviting the Appellant to contact him if he had
questions on the requirements. At page 84 of the transcript, Mr. Matheson
stated “…that was my main concern, get the information to
be able to overturn the ruling to help the appellants out. … I really tried my
hardest, I really did.” Appellant Counsel’s suggestion that the CRA
questionnaire was misleading or that Mr. Matheson had a duty to explain to the
Appellant, for example, what a general ledger was is without merit. In a self‑assessing
system, it is the taxpayer that is responsible for maintaining sufficient
records to support their position and to be able to provide those records when
called upon to do so. The types of hand-holding exercises, that Appellant
Counsel would have CRA officials engage in, are unwarranted and unrealistic. In
any event, I am satisfied that Mr. Matheson fulfilled any obligation which
he may have had to solicit the appropriate documentation from the Appellant. At
page 81 of the transcript, in response to questions concerning the information
requests, he stated:
There’s some fax
cover sheets in here as proof that we had correspondence and that more
information was coming, more information was coming, and I was hoping that that
information would come, I really was because I did not want to be sitting here
today, so I was really hoping that I would get the information available to
overturn this ruling.
[29]
Regardless, the hearing before me provided yet
another opportunity for the Appellant to provide the additional records that
would support his position. The Appellant did provide a few more expense
receipts for motel rooms, gas and ferry costs, but only in respect to trade
shows in 2006 and 2007. In addition, some cheques, representing salary payments
to the Appellant in 2006 and 2007, were produced. The Appellant also produced a
record of his earnings, but for 2009 only. This additional documentation,
however, is sketchy. Although it confirms that the Appellant did work for the
Payer and received some pay, which the Minister did not dispute, the records
remain insufficient to establish and support which actual periods the Appellant
worked and the pay amounts he actually received. There is nothing additional
that would allow me to reach any different conclusion than the Minister
reached. Without pay stubs, all of the cancelled cheques and payroll records
and the bank statements, it is impossible to confirm that the Appellant’s
periods of employment, at the pay rate and hours he claimed he worked, actually
occurred. In addition, there were alternate methods of corroborating some of
the Appellant’s evidence. For example, other employees could have been called
to testify in support of his position that the Payer treated him in the same
manner as its other employees.
[30]
With respect to the trade shows, I believe that
the Appellant attended at least some of them, if not all of them. However, the
evidence remains unclear which shows and how many he attended in any year,
where those shows were located and whether, in fact, even if he attended, he
was representing the Payer or his other company, Portland Creek Outfitters.
There is nothing before me that would allow me to draw any conclusion respecting
whether, even if he attended every one of these shows, he was there as an owner
of the Payer or as an employee. I have very little documentation, except for a
few receipts in 2006 and 2007, that would support trips on behalf of the Payer
to these shows. The evidence also suggests that, on occasion, other employees
attended on behalf of the Payer. There is no evidence to support the
Appellant’s contention that he worked 70 hours weekly as an employee during
these trips. The Appellant’s use of his own U.S. bank account and his personal U.S. credit card for payment of these trips is not indicative of an arm’s length
relationship between the Appellant and the Payer. I had no proof of trade show
bookings for booths which might have confirmed the Appellant’s attendance.
[31]
When Respondent Counsel canvassed the
lack of documentation with the Appellant’s daughter, her response varied from: “Yes, there is records there [sic]. I just have to find
them.” (Transcript, page 23) to: “…my payroll
records are home, but I can get them.” (Transcript, page 28). When asked
about records that would support her testimony that some employee cheques might
have deductions for purchase of personal items on their behalf, she testified: “No, I never thought about bringing them.” (Transcript, page
34). When asked if she had cheques respecting other employees to support her
testimony that the Payer paid the Appellant in the same manner as the other
employees, she stated that: “I can get you some. I don’t have them with me
today.” (Transcript, page 33). When asked if she could produce the payroll
records to confirm who the Payer’s employees were during the winter months, she
stated: “I can get – my payroll records are home, but I can get them.”
(Transcript, page 28).
[32]
By the time the
Appellant was before this Court, and with the added benefit of representation
by legal counsel, he and his daughter should have been very aware of what would
be required by this Court to support their position as opposed to that of the
Minister. The daughter testified that she had the documentation, but simply
neglected to bring it to Court or could not immediately locate it because the
office was under renovations. I suspect that the reason that those documents
were not produced in Court was that they did not support the testimony of the
Appellant and his daughter.
[33]
In addition to the
lack of documentation, the testimony of both the Appellant and his daughter was
vague and imprecise. The daughter peppered her responses with phrases such as: “it
probably would have been the same;” “it’s possible;” “I guess to some extent;” “not
right off the top of my head;” and “I would have to go back through all the
receipts [which were not produced in Court] and that stuff to give you the
actual dates.”
[34]
There was also some
conflicting and contradictory information and evidence provided by the parties
at both the rulings and appeals levels (Appeals Report, Exhibit R‑1, Tab
10). This conflicting information concerned payment for the tasks the Appellant
performed.
[35]
In summary, without
specifics concerning the trade shows, his work and the wages that the Appellant
claims he received generally as an employee of the Payer, I can come to no
different conclusion than that of the Minister. There is almost a complete lack
of documentation, although the parties claim that it exists. Without those
supporting records, I am unable to confirm the extent to which the Appellant
actually performed the tasks, the length of time he spent on those tasks,
including the travel to trade shows, and whether he was actually paid for all the
hours recorded in the Record of Employment. The oral testimony is vague and
seemingly less than straightforward, leaving me with the impression that
documents, which could otherwise substantiate their evidence, were not produced
because they, in fact, would not support the Appellant’s position.
[36]
For these reasons, the
appeal is dismissed, without costs, as there is nothing before me that would
allow me to draw any conclusion that would be different from the Minister’s.
Signed at Vancouver, British Columbia, this 27th day of May 2014.
“Diane Campbell”
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