[1] This an application for judicial review by the Attorney General to set aside an Umpire's decision, CUB 55608, which reduced the penalty imposed by the Canada Employment Insurance Commission on Joe Schembri for knowingly misrepresenting his earnings in order to obtain unemployment benefits. The Umpire allowed an appeal from a decision of a Board of Referees which had exonerated Mr. Schembri from any penalty because he was suffering from an addiction to gambling and "should not be penalized for behaviour beyond his control."

[2] Counsel for the Attorney General says that the Umpire was correct to find that the Board erred in law in holding that Mr. Schembri's addiction exonerated him from liability to any penalty, rather than merely mitigated the amount of the penalty. However, counsel submits that the Umpire himself erred when he reduced the penalty imposed by the Commission from 75% to 10% of the amount of the overpayment of the benefits received by Mr. Schembri to which he was not entitled.

[3] Mr. Schembri filed no material in response to the Minister's application for judicial review and did not appear.

[4] The relevant facts are not in dispute. From August 20, 2000, until December 30, 2000, Mr. Schembri reported nil earnings and collected unemployment benefits, even though he was employed in this period and earned $18,741.02. The Commission calculated that Mr. Schembri had received a benefits overpayment of $4,130, which it sought to recover. In addition, the Commission assessed a penalty of $3,097.00 under section 38 of the Employment Insurance Act, S.C. 1996, c. 23, because Mr. Schembri had received unemployment benefits by knowingly misreporting his income contrary to paragraph 38(1)(c).

[5] Mr. Schembri told an agent of the Commission that he had not reported his earnings because of the desperate financial plight that he had been in as a result of his compulsive gambling. The agent's notes of the interview indicate that, because this was Mr. Schembri's first offence, the penalty would normally be 100% of the overpayment. However, the penalty was reduced by 25% to $3,097.00 because of: "extenuating circumstances considered in assessing the penalty - admits fraud but is trying to get counselling because of gambling addiction".

[6] I agree that the Umpire was correct to conclude that the Board of Referees erred in law when it held that Mr. Schembri's financial difficulties at the time that he misrepresented his earnings exonerated him from any penalty for knowingly misrepresenting his income. The test of liability in paragraph 38(1)(c) is whether a claimant "knowingly failed to declare to the Commission all or some of the claimant's earnings for a period ... for which the claimant claimed benefits."

[7] Except in the most extreme situations, such as physical duress, the circumstances in which a claimant makes knowingly false representations can, at the most, only reduce the amount of the penalty: Canada (Attorney General) v. Gauley, 2002 FCA 219 at para. 11. And, as I have already indicated, the Commission did take into account Mr. Schembri's addiction as a mitigating circumstance.

[8] This application for judicial review raises both a substantive and a remedial issue. The substantive issue is whether the Umpire erred in law when he analogized with the criminal law, and reduced the penalty imposed by the Commission because of the financial hardship that the penalty would cause to Mr. Schembri. The remedial issue concerns the roles of the Commission, the Board of Referees, and the Umpire in determining an appropriate penalty for those who have knowingly made misrepresentations in order to obtain benefits to which they were not entitled.

The substantive issue

[9] Counsel for the Attorney General argued that the Commission was not bound to take into account Mr. Schembri's financial circumstances when it determined the penalty that it would impose. Accordingly, counsel said, the Umpire erred in importing from the law of sentencing the principle that the Commission should take into account ability to pay and financial hardship when determining the amount of a penalty. In particular, he argued, unlike a court when sentencing an accused person in a criminal proceeding, the Commission is not obliged to make its own inquiries into the financial circumstances of a claimant when determining a penalty in order to discover whether extenuating circumstances exist that would warrant reducing it.

[10] Counsel for the Attorney General conceded that, if brought to the attention of the Commission, a claimant's financial circumstances when the penalty is assessed are regarded as relevant to the exercise of discretion to impose an appropriate penalty. Departmental instructions issued to insurance agents emphasise both the breadth of the Commission's discretion on the amount of the penalty and the importance of ensuring that it is exercised in light of all the particular circumstances of the individual: Digest of Benefit Entitlement Principles, chapter 18 "False or Misleading Statements" (Human Resources Development Canada: online, < http://www.hrdc-drhc.gc.ca/ae-ei/loi-law/guide-digest/main.shtml #top > last modified:

25 March 2002). For instance, paragraph 18.5.2.1 states:

Finally, it cannot be overemphasized that all extenuating circumstances must be fully documented on the file. This information is essential for providing explanations to the claimant and, especially, for the purposes of an appeal. Although the Commission has the discretion to impose a penalty, it still has to demonstrate that it properly exercised its discretion in light of all relevant considerations.

[11] After a penalty has been imposed, a claimant may request the Commission to exercise its discretion under section 41 of the Employment Insurance Act to, among other things,

... reduce the penalty on the presentation of new facts or on being satisfied that the penalty was imposed without knowledge of ... some material fact.

... annuler la décision qui l'inflige si des faits nouveaux lui sont présentés ou si, à son avis, la décision a été rendue avant que soit connu un fait essentiel ou a été fondée sur une erreur relative à un tel fait.

Hence, on a reconsideration request, a claimant may ask the Commission to reduce the penalty on the ground of financial hardship.

[12] The Commission's letter informing Mr. Schembri of the amount of the penalty confirms that financial hardship is considered to be a relevant factor at the reconsideration stage: the letter advised him that, if paying the penalty would cause him financial hardship, he should contact the Commission to see what arrangements could be made in light of his circumstances. The record does not contain a response by Mr. Schembri to this invitation.

[13] Subparagraph 56(1)(f)(ii) of the Employment Insurance Regulations, SOR/96-332, provides a third opportunity for a claimant to raise financial hardship. This provision expressly empowers the Commission to write off a penalty because payment would cause hardship to the person on whom it had been imposed.

[14] I agree with counsel for the Attorney General that the Commission is not obliged to initiate its own inquiries into a person's financial circumstances before imposing a penalty under section 38 of the Act. First, previous decisions of this Court have held that criminal law principles are not to be imported wholesale into the exercise of the Commission's power to impose administrative penalties: Canada (Attorney General) v. Lai (1998), 229 N.R. 42 (F.C.A.); Turcotte v Canada (Employment Insurance Commission), [1999] A.C.F. no. 311. Second, claimants have ample opportunities to request a reduction of the penalty on the ground of financial hardship at various stages of the process: before the Commission imposes the penalty, on a request for reconsideration, and on appeal to a Board of Referees.

[15] However, when a claimant raises financial hardship with the Commission at any of these stages it must be considered by the decision-maker, who has to decide whether, in all the circumstances of the case, financial hardship considerations warrant a reduction in the penalty. As Richard C.J. said in Canada (Attorney General) v. McLean, 2001 FCA 5 at para. 14:

Where extenuating circumstances come to the attention of the Commission, it has a duty to consider the particular circumstances of the claimant. It follows that any penalty which is imposed must reflect those circumstances. This may be done by a percentage adjustment.

[16] Of course, this is not to say that the Commission must reduce a penalty whenever a person says it would cause financial hardship to pay that amount. Assessing an appropriate penalty is very much a matter for the exercise of the Commission's discretion. For instance, the Commission may not accept that payment would cause the claimant real hardship, or it may conclude that, in all the circumstances, a reduced penalty would be an insufficient deterrent.

[17] In summary, I disagree with the Umpire's conclusion that the Commission made an error in failing to undertake on its own initiative an inquiry into whether it would cause undue hardship to require Mr. Schembri to pay the fine that it proposed to impose. Whether it was nonetheless open to the Umpire to reduce the penalty imposed by the Commission depends on the scope of the statutory powers of both the Board of Referees and the Umpire, to which I now turn.

The remedial issue

[18] The question here is whether the Umpire was entitled to reduce the penalty imposed by the Commission from 75% to 10% of the amount of the overpayment, on the ground that it would cause Mr. Schembri financial hardship if he had to pay the larger amount, especially since he also had to repay the benefits overpayment of $4,130.00.

[19] The administration of the employment insurance scheme is complicated by the existence of two levels of appeal that are different in scope: from the Commission to a Board of Referees, and from a Board to an Umpire. This administrative appellate structure also tends to make the task of the Court more difficult when it is reviewing a decision of an Umpire.

[20] However, writing for the Court in Canada (Attorney General) v. Dunham, [1997] 1 F.C. 462 (C.A.), Marceau J. A. authoritatively clarified the legal principles governing the roles of the Commission, a Board of Referees and an Umpire in determining the amount of a penalty. Thus, he said (at para. 4):

Like any discretionary power, the Commission's discretion must be exercised in good faith and having regard to all the relevant factors, and without being influenced by irrelevant factors, and it is the task of both the Board of Referees and the Umpire to intervene and give the decision that should have been given if the Commission's decision was not the one that should have been given.

[21] From these principles, Marceau J.A. derived two propositions. First, the Commission's exercise of its discretion over the amount of a penalty is not immune from appellate review by a Board of Referees: at paras. 8 and 10. Second, a Board is not at liberty to substitute its view of the appropriate penalty for that of the Commission, unless it finds that the Commission had failed to take into account a relevant consideration (at para. 14) or, presumably, had committed any of the other errors in the exercise of its discretion that Marceau J.A. had identified (at para. 4) as warranting intervention by a Board or an Umpire.

[22] However, Marceau J.A. also held that, in order to establish that the Commission had imposed a penalty without taking into account a factor relevant to the exercise of its discretion, an appellant before a Board of Referees could rely on both the facts before the Commission, and those that were brought to the attention of the Board. This is because an appeal from the Commission to a Board of Referees has been held to be de novo, in the sense that additional evidence can be introduced and the Board must make its own decision based on it.

[23] Thus, after noting the adjudicative nature of proceedings before the Board, and the Board's central role in protecting the rights of insured persons, Marceau J.A. said (at para. 14):

I have no hesitation in believing that we would not be betraying the intention of Parliament if we said that the Board of Referees is not limited to the facts that were before the Commission. In assessing the manner in which the discretion was exercised, it may have regard to facts that come to its own attention. It must find that a relevant consideration was ignored, in that it is not for the Board simply to substitute its discretion for that of the Commission ... The Board, however, may find such an essential consideration, which the Commission ignored, in the material brought to its own attention.

[24] On the basis of these principles, the Umpire in the present case would only have been warranted in reducing the penalty on the ground of financial hardship if this factor had been raised by Mr. Schembri before either the Commission or the Board, and they had failed to take it into consideration.

[25] The appeal to the Umpire is narrow in scope. The grounds of appeal are limited to those on which the Federal Court and the Federal Court of Appeal review federal administrative tribunals, as set out in paragraphs 18.1(4)(a)-(d) of the Federal Court Act, R.S.C. 1985, c. F -7: Employment Insurance Act, subsection 115(2). And, although the appeal from the Commission to a Board is de novo in the sense described above, the appeal from a Board to an Umpire must normally be confined to the record before the Board.

[26] However, if an appellant satisfies an Umpire that a Board of Referees committed a reversible error, the remedies available to the Umpire include the power to "give the decision that the board of referees should have given": Employment Insurance Act, paragraph 117(b). This power is exercisable even where the Board of Referees' decision is discretionary in nature, and authorises an Umpire to impose the penalty that the Commission or the Board should have imposed: Morin v. Canada (Employment and Immigration Commission) (1996), 134 D.L.R. (4^th) 724 (F.C.A.).

[27] Hence, the first question to decide is whether, in determining the proper penalty, the Commission or the Board failed to consider whether it would cause Mr. Schembri financial hardship to require him to pay a penalty of $3,097.00 and, if so, whether, in all the circumstances, a reduction of the penalty was warranted. Since neither the Commission nor a Board is obliged to raise mitigating circumstances on its own initiative, they could only have committed an error of law by failing to consider financial hardship if Mr. Schembri had brought it to their attention.

[28] Thus, in order to establish that the Umpire erred in law by reducing the penalty on the basis of financial hardship, counsel for the Attorney General must satisfy the Court that Mr. Schembri had not raised this issue before either the Commission, when it assessed the penalty, or the Board. Alternatively, if Mr. Schmbri had raised this issue before the Commission or the Board, the Attorney General must show that it had been duly considered.

[29] The record contains no evidence that Mr. Schembri asked the Commission to have regard to his inability to pay the penalty imposed by the Commission. The agent's interview notes state that Mr. Schembri only mentioned the financial difficulties into which his gambling addiction had led him in order to explain why he had falsely stated that he had no earnings when he was receiving unemployment benefits. The notes are silent on Mr. Schembri's finances at the time of the interview.

[30] It would be unreasonable to require claimants, in all circumstances, specifically to ask the Commission to take into account the fact that it would cause them financial hardship to pay a large penalty. Sometimes, it should be obvious to the Commission from what the claimant has said that this is the position. In any event, a claimant who fails to raise the issue of hardship with the Commission before the penalty is assessed can always ask the Commission to reconsider it on this ground, and can raise it before the Board on appeal.

[31] In the present case, however, since the Umpire expressed the view that the Commission is under a positive obligation to inquire into a claimant's ability to pay a penalty, he must have inferred from the facts that Mr. Schembri had not adequately brought his financial situation to the Commission's attention and requested a reduction in the penalty because of his inability to pay. On the record before me, I cannot conclude that the factual inference drawn by the Umpire was made in a perverse or capricious manner or without regard to the material before him.

[32] Similarly, the record lacks evidence establishing that Mr. Schembri submitted to the Board that it would cause him financial hardship if he had to pay the Commission's penalty, as well as repay overpayments of $4,130.00. This consideration is raised in neither Mr. Schembri's written submissions to the Board, nor the Board's reasons for decision.

[33] Of course, Mr. Schembri may have raised the issue of financial hardship in his oral submissions to the Board, which are not part of the record. However, on the basis of the material before the Umpire, and in the absence of evidence to the contrary, the Umpire could only conclude that financial hardship was not raised by Mr. Schembri before either the Commission or the Board as a factor that they should have taken into consideration in assessing the amount of the penalty, but did not. Accordingly, the Umpire ought have held that the Board had no basis for interfering with the amount of the penalty and should have ordered that Mr. Schembri's appeal to the Board be dismissed.

[34] Because the record before the Umpire did not indicate that the issue of financial hardship had been raised before either the Commission or the Board, he was not at liberty to reduce the penalty on the basis of submissions made to him by Mr. Schembri about his financial situation: Canada (Attorney General) v. Girard (1997), 221 N.R. 336 at para. 2 (F.C.A.). The appeal to the Umpire is normally limited to determining whether the Board committed a reversible error on the basis of the material before it.

[35] Since the Board had no power to reduce the penalty on the basis of the material before it, the Umpire could not reduce the Commission's penalty by virtue of an Umpire's power to award the remedy that the Board should have awarded. Because the Board should have dismissed the appeal, in the circumstances of this case the Umpire should have ordered that the appeal to the Board of Referees was dismissed.

[36] For these reasons, I would allow the application for judicial review, set aside the decision of the Umpire, and remit the matter to the Chief Umpire, or to an Umpire designated by him, for

redetermination on the basis that the Umpire erred in law by reducing the penalty imposed by the Commission and that the Board of Referees had no power to exonerate Mr. Schembri from the penalty: Canada (Attorney General) v. Gauley at para. 12.

"John M. Evans"

J.A.

"I agree

J.D.Denis Pelletier J.A."

ROTHSTEIN J.A. (concurring reasons)

[37] I have read the reasons of Evans J.A. I agree that the Commission is not obliged to initiate its own inquiry into a person's financial circumstances before imposing a penalty under section 38 of the Employment Insurance Act. The issue must be raised by the individual. Once it is, the Commission must consider it. However, merely because an individual raises financial hardship, the Commission is not obliged to reduce a penalty. The decision is discretionary and evidence of financial hardship may not be sufficient to persuade the Commission to reduce the penalty. As well, there may be other circumstances that warrant refusing to reduce the penalty.

[38] As I understand the reasons of Evans J.A., he is of the opinion that there is no basis for interfering with the inference drawn from the facts by the Umpire that financial hardship was not raised before the Commission (or the Board of Referees ). As he points out, however, sometimes it will be obvious that financial hardship has been raised. In my respectful view, that is the situation here.

BEFORE THE COMMISSION

[39] Mr. Schembri told the Commission of his gambling addiction as an explanation for his knowingly making false statements in order to obtain Employment Insurance. The Commission's interview notes of April 12, 2001, contain this statement:

He states although he has had very good paying jobs he has lost every cent he ever earned and is in debt with loan companies and private lenders. He states that he became desperate during this time and felt he had to try to and win some money back because he was so far in debt.

I cannot interpret this evidence in any way other than as evidence of financial hardship.

[40] It is true that this statement was made to explain Mr. Schembri's knowingly having made false statements in the fall of 2000. However, I think that the only reasonable inference which can be drawn from this evidence is that if, in the fall of 2000, Mr. Schembri lost every cent he ever earned and was in debt to loan companies and private lenders, he remained in financial difficulty in April 2001 when he was interviewed by the Commission.

[41] I do not think it is necessary for the Commission to use the term "financial difficulty" in its interview notes or in its decision in order to prove that it considered the issue. Where, as here, there are interview notes that show the issue was raised, where reference is made to a gambling addiction, and where the Commission reduced the penalty as a result of "extenuating circumstances," the Commission must have considered these representations as representations of financial difficulty and responded to them.

BEFORE THE BOARD OF REFEREES

[42] Contrary to the findings of Evans J.A., I also think that Mr. Schembri did raise the issue of financial difficulties before the Board of Referees. In his June 4, 2001, written submission, he stated: "I realize I have to start from rock bottom. It's the hardest thing for me right now to let go of gambling and have no money. This is what I think about all day at work. What a mess!!" In the context of appealing the 75% penalty imposed by the Commission, Mr. Schembri's telling the Board that he is at rock bottom and has no money must have been a financial difficulty argument.

[43] Mr. Schembri raised his financial difficulties before the Commission and the Commission responded to those submissions by reducing the penalty it had previously imposed. Although Mr. Schembri raised the issue of financial difficulty before the Board of Referees, the matter had already been considered by the Commission in assessing what penalty to impose. The jurisprudence is settled that in the absence of a legal error committed by the Commission or the submission of new evidence, the Board of Referees may not substitute its view of the appropriate penalty for that of the Commission.

[44] No legal error has been shown to have been made and no new evidence has been submitted. Therefore, the Board erred in interfering with the Commission's assessment of the penalty. The Umpire was correct to allow the appeal from the Board. However, the Umpire erred in reducing the 75% penalty imposed by the Commission to a 10% penalty. Instead, the Umpire should have reinstated the decision of the Commission.

CONCLUSION

[45] I concur that the application for judicial review should be allowed. However, I would simply remit the matter to the Chief Umpire for redetermination on the basis that the appeal from the Board of Referees should be allowed and the penalty imposed by the Commission restored.

"Marshall Rothstein"

J.A.

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-578-02

STYLE OF CAUSE: ATTORNEY GENERAL OF CANADA v. JOE SHEMBRI

PLACE OF HEARING: TORONTO, ONTARIO

DATE OF HEARING: NOVEMBER 6, 2003

REASONS FOR JUDGMENT: EVANS J.A.

CONCURRED IN BY: PELLETIER J.A.

CONCURRING REASONS BY: ROTHSTEIN J.A.

DATED: DECEMBER 4, 2003

APPEARANCES:

Mr. Edwards FOR THE APPLICANT

Mr. Schembri ON HIS OWN BEHALF

SOLICITORS OF RECORD:

Morris Rosenberg FOR THE APPLICANT

Deputy Attorney General of Canada

Ottawa, Ontario

Mr. Schembri ON HIS OWN BEHALF

Windsor, Ontario

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Canada (Attorney General) v. Schembri, 2003 FCA 463

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2003 FCA 463