CORAM:THE CHIEF JUSTICE
STONE J.A.
McDONALD J.A.
BETWEEN:
A-626-96
HER
MAJESTY THE QUEEN
Applicant
-
and -
BAYSIDE
DRIVE-IN LTD.
Respondent
A-627-96
HER
MAJESTY THE QUEEN
Applicant
-
and -
ANNE
T. MUSIAL
Respondent
A-628-96
HER
MAJESTY THE QUEEN
Applicant
-
and -
BAYSIDE
DRIVE-IN LTD.
Respondent
A-629-96
HER
MAJESTY THE QUEEN
Applicant
-
and -
DAVID
MUSIAL
Respondent
REASONS
FOR JUDGMENT
THE CHIEF JUSTICE
These are applications
for judicial review of a judgment of the Tax Court of Canada, pronounced on 10
July 1996, allowing the respondents' appeals from determinations made by the
Minister of National Revenue ("the Minister") that the respondents
were not engaged during the relevant periods in insurable employment with
Bayside Drive-In Ltd. ("the payor"), within the meaning of the Unemployment
Insurance Act.
The applications were heard together, and these reasons are intended to dispose
of all of them. A copy of the reasons will be filed in each of the files
mentioned in the style of cause.
Facts
The payor is a
corporation duly incorporated under the laws of the Province of Nova Scotia.
It operates a fast-food restaurant on a seasonal basis, from 1 April to 30
November of each year. At all material times, the payor was a family-owned and
family-run business, the outstanding shares of which were owned equally (33
1/3%) by the respondent Anne Musial ("Anne"); her spouse, Gregory
Musial ("Gregory"); and their son, the respondent David Musial
("David"). Before 1990, David owned only a 5% interest in the payor,
but in that year his parents transferred to him the balance of his present 33
1/3% interest.
David, Gregory and Anne
were all employed by the payor during the relevant periods. However, Gregory's
employment by the payor is not in issue as he did not appeal to the Tax Court
from the determination made by the Minister in relation to the insurability of
his employment.
David was employed as
operations manager by the payor from 1 April to 30 November in each of the
years 1992, 1993 and 1994. His duties included ordering stock, paying the sales
staff, cleaning, maintenance, cooking when necessary, and closing up at the end
of each business day. Although he worked approximately 40 hours per week from
1 April to 30 November, David only received remuneration for his services from early
May to October of each year. In 1992, he received a salary of $12,500 and a
shareholder bonus in the amount of $6,000. In 1993, he received a salary of
$13,000 and a shareholder bonus in the amount of $8,000. In 1994, he received a
salary of $13,500 and a shareholder bonus in the amount of $10,000. In
addition, he was paid his full salary for vacations which he took in August of
each year.
Anne was also employed by
the payor from 1 April to 30 November in each of the years 1992, 1993 and
1994. She worked approximately 48 hours per week. Her duties included
scheduling and supervising the staff and cleaning the restaurant. In 1992,
although she worked the entire season, Anne only received remuneration for her
services from 7 July to 17 November. For that period, she was paid a salary of
$10,500 and a shareholder bonus in the amount of $5,000. In 1993, she only
received remuneration from 28 June to 12 November. For that period, she was
paid a salary of $12,500 and a shareholder bonus in the amount of $10,000. She
was also paid her full salary for vacations in October of each year. For the
reason given below, her employment in 1994 is not in issue.
By way of contrast,
non-shareholder employees of the payor were paid at the rate of $5.75 to $6.00
per hour, and 4% of their earnings at the end of each season in lieu of
vacation.
On 12 June 1995, the
respondents filed an application pursuant to paragraph 61(3)(a) of the Act
for a determination by the Minister as to whether Gregory, Anne and David were
employed in insurable employment with the payor for the years 1992, 1993 and
1994.
By letters dated 3
November 1995, the respondents were informed that the Minister had determined
that Gregory, Anne and David were not employed by the payor in insurable employment.
The Minister held, in accordance with paragraph 3(2)(c) of the Act, that
they were in excepted employment because they and the payor were not dealing
with each other at arm's length. The relevant provisions of the Act
read:
3. (1)
Insurable employment is employment that is not included in excepted employment
...
...
3. (2)
Excepted employment is ...
(c) subject to paragraph (d), employment where the
employer and employee are not dealing with each other at arm's length and, for
the purposes of this paragraph,
(i)the question of whether persons are not dealing with
each other at arm's length shall be determined in accordance with the
provisions of the Income Tax Act, and
(ii)where the employer is, within the meaning of that
Act, related to the employee, they shall be 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;
Gregory did not appeal
the determination made by the Minister. The respondents Anne and David appealed
to the Tax Court of Canada pursuant to subsection 70(1) of the Act.
David appealed with respect to his employment by the payor in the years 1992,
1993 and 1994. Anne appealed the determination only with respect to her
employment in the years 1992 and 1993. She did not appeal the Minister's
determination with respect to her employment in 1994 because she did not have
the minimum number of insurable weeks required to qualify for benefits under
the Act, whether or not her employment was insurable within the meaning
of subsection 3(1).
Judgment of the Tax Court
The learned Tax Court
Judge reversed the determination made by the Minister and allowed the
respondents' appeals. In reasons for judgment delivered from the bench on 27
June 1996, the Tax Court Judge held that he was entitled to conduct the appeals
as "trials de novo" because, in his view, the Minister had
failed to give sufficient weight to the facts before him; specifically, the
work performed by the respondents and their contributions to the payor's
success. His dispositive reasons on this threshold issue read:
As was
determined by the Federal Court of Appeal in the cases of Tignish and Ferme
Richard, in order for me to consider these appeals as trials de novo
I must first find that the Minister, in making his determination, acted
inappropriately or capriciously or did not have all of the relevant facts
before him or did not give sufficient importance to those facts. In arriving
at that initial finding, the evidence produced and the credibility of the
witness is important. In these appeals several exhibits were produced and the
only testimony was given by Gregory Musial, who spoke not only for the Payor
but also for the two workers [Anne and David]. Because of this evidence
and the credibility of Gregory Musial, which is accepted, I have concluded that
I am entitled to treat these appeals as trials de novo. The Minister
seems to have concluded that the element of the change in share control,
coupled with the apparently large wages paid for hours worked were crucial. In
my view, I do not find that the Minister gave sufficient importance to the work
put in by the workers and their contribution to the Payor's success.
[Emphasis
added]
The Tax Court Judge then
proceeded to review the merits of the determination made by the Minister.
Based on the evidence presented at the hearing of the appeal, he held that,
having regard to all of the circumstances of employment, it was reasonable to
conclude on the balance of probabilities that the respondents and the payor
would have entered into substantially similar contracts of employment if they
had been dealing with each other at arm's length. He, therefore, concluded that
the Minister erred in failing to exercise the discretion conferred upon him by
subparagraph 3(2)(c)(ii) to deem the respondents and the payor to be at arm's
length for the purposes of the Act. Accordingly, he allowed the
respondents' appeals.
Analysis
Paragraph 3(2)(c) of the Act
exempts from insurability employment where the worker and the payor are not
dealing with each other at arm's length. Subparagraph 3(2)(c)(i) states
expressly that the question of whether or not persons are dealing with each other
at arm's length "shall be determined in accordance with the provisions of
the Income Tax Act." There is no dispute in this case that the
respondents are "related persons" within the meaning of section 251
of the Income Tax Act.
Paragraph 251(2)(b)(ii) provides expressly that a corporation and a person who
is a member of a related group that controls the corporation are "related
persons". The relevant parts of section 251 read:
251. (1)
For the purposes of this Act,
(a) related persons shall be deemed not to deal with
each other at arm's length; and
...
(2) For
the purpose of this Act, "related persons", or persons related to
each other, are
(a) individuals connected by blood relationship,
marriage or adoption;
(b) a corporation and
...
(ii)a person who is a member of a related group that
controls the corporation, or
...
In subparagraph
3(2)(c)(ii), however, Parliament has conferred upon the Minister a
discretionary power to deem "related persons" to be at arm's length
for the purposes of the Act where the Minister, having regard to all of
the circumstances of employment, forms the opinion that the related persons
would have entered into substantially similar contracts of service if they had
been at arm's length. The words "if the Minister of National Revenue is
satisfied" in subparagraph 3(2)(c)(ii) make it clear that Parliament
intended to confer upon the Minister an administrative discretion to make the
determination. In this case, the Minister declined to exercise his discretion
in favour of the respondents. The threshold issue before the Tax Court Judge
was, therefore, whether the Minister made his determination in a lawful manner.
In Attorney General of
Canada v. Jencan Ltd.,
this Court recently had occasion to reaffirm the principles governing review by
the Tax Court of Canada of ministerial determinations under subparagraph
3(2)(c)(ii). I do not propose to repeat in detail the analysis contained in the
reasons for judgment in that case. It is sufficient for the purposes of
disposing of these applications for judicial review to restate the governing
principles first laid down by this Court in Tignish Auto Parts Inc. v. M.N.R.
Tignish, supra,
requires that the Tax Court undertake a two-stage inquiry when hearing an
appeal from a determination by the Minister under subparagraph 3(2)(c)(ii). At
the threshold stage of the inquiry, review by the Tax Court is confined to
ensuring that the Minister has exercised his discretion in a lawful manner.
If, and only if, the Minister has exercised his discretion in a manner contrary
to law can the Tax Court then proceed to a review of the merits of the
determination. It is only by limiting the first stage of the inquiry in this
manner that the Tax Court exhibits the degree of judicial deference required
when faced with an appeal from a discretionary determination.
The specific grounds
which justify interfering with the exercise of a statutory discretion,
including the discretion given to the Minister by subparagraph 3(2)(c)(ii) of
the Act, are well known.
The Tax Court Judge was justified in interfering with the determination made by
the Minister under subparagraph 3(2)(c)(ii) only if he was satisfied that the
Minister made one or more of the following reviewable errors: (i) the Minister
acted in bad faith or for an improper purpose or motive; (ii) the Minister
failed to take into account all of the relevant circumstances, as expressly
required by paragraph 3(2)(c)(ii); or (iii) the Minister took into account an
irrelevant factor. It is only if the Minister made one or more of these
reviewable errors that it can be said that his discretion was exercised in a
manner contrary to law, and hence that the Tax Court Judge would be justified
in conducting his own assessment of the balance of probabilities as to whether
the respondents would have entered into substantially similar contracts of
service if they had been at arm's length.
In this case, the Tax
Court Judge concluded that his interference on appeal was justified because, in
his opinion, the Minister had not given "sufficient importance to the work
put in by the workers and their contribution to the Payor's success." The
view that a failure by the Minister to give "sufficient importance" (i.e.,
weight) to specific facts is a ground for reversible error is not supported by
the jurisprudence of this Court and, in my respectful view, is wrong in
principle. By questioning not the relevance or truth of the facts relied upon
by the Minister but simply the weight to be attached to the various facts otherwise
properly considered, the Tax Court Judge, in effect, overruled the Minister's
discretionary determination without first having concluded that the
determination had been made in a manner contrary to law. In doing so, he
improperly substituted his own independent assessment of the evidence for that
of the Minister, thereby usurping the discretionary authority which Parliament
clearly and unambiguously entrusted to the Minister.
There is no indication in
the reasons for judgment that the Minister made any reviewable error in
exercising his discretion. There is no indication, for example, that the
Minister failed to consider a relevant factor pertaining to the respondents'
circumstances of employment. If the Minister considered all of the relevant factors
in coming to his determination, and did not consider any irrelevant factors,
the Tax Court Judge was not entitled to interfere with that determination
merely because he would have placed greater emphasis on some facts and less on
others than the Minister did.
The failure to restrict
the threshold inquiry to a review of the legality of the determination made by
the Minister appears to derive from the view that, as soon as the Tax Court
Judge was satisfied that the Minister had made any error in his assessment of
the evidence, the appeal was transformed into a "trial de novo".
The term "de novo"
was first used in this context in Tignish, supra. Desjardins J.A.
stated for the Court that if the Tax Court finds that the Minister exercised
his discretion under subparagraph 3(2)(c)(ii) in a manner contrary to law, the
appeal to the Tax Court becomes a "de novo situation".
Desjardins J.A. went on to provide the following definitions of "de
novo" from Black's Law Dictionary:
De
novo: Anew; afresh; a second time. A venir
de novo is a writ for summoning a jury for the second trial of a case which
has been sent back from above for a new trial.
De
novo trial: Trying a matter anew; the
same as if it had not been heard before and as if no decision had been previously
rendered.
Hearing
de novo: Generally, a new hearing or a hearing for the second time,
contemplating an entire trial in the same manner in which matter was originally
heard and review of previous hearing. On hearing "de novo" court
hears matter as court of original jurisdiction and not appellate
jurisdiction.
[emphasis
added by Desjardins J.A. in Tignish, supra]
I agree that if the Tax
Court Judge is satisfied that the Minister exercised his discretion in a manner
contrary to law, the Tax Court is in a de novo situation in the sense
that it must undertake an independent review of the evidence in
order to assess the merits of the Minister's determination. Unfortunately,
however, the use of the term "de novo" has, in some cases, led
to confusion regarding the nature of the proceedings in an appeal to the Tax
Court pursuant to subsection 70(1) from a determination by the Minister under
subparagraph 3(2)(c)(ii). In my respectful view, the confusion may be due in
part to a misinterpretation of the statement by Décary J.A. in Ferme Emile
Richard et Fils Inc. v. M.N.R. et al. that, where the Minister exercises
his discretion illegally, the proceedings before the Tax Court are
"transformed into an appeal de novo".
The proceedings in the
Tax Court are not, and cannot be transformed into, a trial or appeal de novo
in the formal sense of this term, as the Tax Court Judge in this case
improperly assumed. As reflected in the definitions quoted above, a de novo
hearing is one in which the reviewing tribunal determines the facts and issues
based solely on the evidence before it, without regard to the determination in
the inferior tribunal.
The Tax Court's role when
hearing an appeal pursuant to subsection 70(1) is to perform a review function.
Because a determination by the Minister under subparagraph 3(2)(c)(ii) is
pursuant to a discretionary power, accepted judicial principles require
deference to the discretion which the Minister has exercised, unless it has
been shown on a balance of probabilities that he exercised that discretion in a
manner contrary to law. Only then is the Tax Court entitled to make an
independent assessment of the evidence in order to review the correctness of
the Minister's determination. At that stage, there is no new hearing and the
parties do not start afresh or anew in the sense of calling their evidence and
presenting their arguments again. Rather, the Tax Court must proceed with its
independent assessment of the evidence on the basis of the record already
before it. Thus, while the Tax Court's review of the evidence at
the second stage of the inquiry is de novo, the appeal itself is not,
and cannot be transformed into, a trial de novo.
This distinction would,
perhaps, be of little consequence were it not for the fact that the concept of
transforming the Tax Court's jurisdiction into an ¨appeal¨ or ¨trial¨ de
novo has, in some cases, led to a premature review of the merits of
ministerial determinations under subparagraph 3(2)(c)(ii) of the Act;
that is, without a clear finding that the Minister exercised his discretion in
a manner contrary to law. This is one such case. The object of review by the
Tax Court is to ensure that the Minister exercised his discretion lawfully. If
he did, the inquiry ends there. The Tax Court is not entitled to treat the
proceedings as a "trial de novo" simply because it would have
come to a different conclusion on the merits had it decided the issue at first
instance. This is, however, precisely what the Tax Court Judge did in this case.
In acting as he did, the Tax Court Judge erred in law.
For all of these reasons,
I would allow the applications for judicial review, set aside the decision of
the Tax Court Judge, and refer the matters back to the Tax Court of Canada for
a new hearing before a different judge in a manner consistent with these
reasons.
"Julius A. Isaac"
C.J.
"I agree.
A.J. Stone J.A."
"I agree.
F.J. McDonald J.A."
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