Canada (Minister of national Revenue) v. Vardy Villa Ltd., 2002 FCA 287

                                                                                                                               Date: 20020717

                                                                                                                           Docket: A-142-01

                                                                                                   Neutral citation: 2002 FCA 287

CORAM:        DESJARDINS J.A.

LINDEN J.A.

SEXTON J.A.

BETWEEN:

                                   THE MINISTER OF NATIONAL REVENUE

                                                                                                                                          Applicant

                                                                          and

                                                    VARDY VILLA LIMITED

                                                                                                                                      Respondent

                                                 REASONS FOR JUDGMENT

LINDEN J.A.

[1]                 The Deputy Tax Court Judge, in these five consolidated applications, decided inter alia, that he lacked jurisdiction to decide this case on the basis of an absence of an arm's length relationship between the corporate respondents and the individual respondents which might have led to a decision that the employment in question was not insurable according to subparagraph 3(2)(c)(i) of the Employment Insurance Act. Paragraph 3(2)(c) reads:

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;

[2]                 He so decided because he felt bound by the decision of this Court in Candor Enterprises v. M.N.R. (2000), 264 N.R. 169, a case involving related spouses, which held that the Minister could not raise, as an alternative ground, this particular matter in the Reply to the Notice of Appeal without first having expressly determined that the employment was not insurable on that specific basis, that is, subparagraph 3(2)(c(ii).

[3]                 In my view, the Deputy Tax Court Judge erred in extending the reach of the Candor Enterprises decision which dealt only with a case under subparagraph 3(2)(c)(ii), and not with any case under subparagraph 3(2)(c)(i) of the Employment Act.

[4]                 The Deputy Tax Court Judge wrongly applied the Candor Enterprises case to a case under subparagraph 3(2)(c)(i), which does not require, as does subparagraph 3(2)(c)(ii), that the Minister, in a case where the employer is related to the employee, be satisfied about certain facts in order to decide whether the contract of employment would be substantially similar if they had been dealing at arm's length.

[5]                 Subparagraph 3(2)(c)(ii) cases involve a two-step procedure, one involving a decision that the employer and employee are related and, second, a discretionary decision by the Minister about whether, despite this relationship, the contract of employment is nonetheless substantially similar to one that would be made if they were at arm's length.

[6]                 As for cases under subparagraph 3(2)(c)(i) of the Act, there is no two-step procedure. If an unrelated employer and employee are not dealing with each other at arm's length, in accordance with the provisions of the Income Tax Act, the employment in issue is "excepted". There is no need for the Minister to exercise this discretion and express his satisfaction about the factual matters set out in subparagraph 3(2)(c)(ii), unless the parties are found to be related. This is clear because, while the Minister is mentioned in subparagraph 3(2)(c)(ii), there is no mention of the Minister or his obligation to decide anything in subparagraph 3(2)(c)(i).

[7]                 Any decision made pursuant to subparagraph 3(2)(c)(i) is subject to de novo review by the Tax Court and, consequently, the issue may be raised for the first time as an alternative ground in the Reply to a Notice of Appeal (see Capello v. Canada (M.N.R.) [2000] T.C.J. 220, para. 6).

[8]                 It is clear that an appeal under section 70 of the Act challenges the Minister's "determination", not the reasons for that determination. As Chief Justice Isaac explained in Schnurer v. Canada (Minister of National Revenue) [1997] F.C. 545 at p. 556, at para. 16:

The authorities in this Court clearly establish that in a section 70 appeal, the Tax Court must focus on the validity of the Minister's determination, and not on the validity of the Minister's specific reasons, or the subsections of the Unemployment Insurance Act relied upon, for that determination.

[9]                 This principle has been embedded in our jurisprudence since Attorney General of Canada v. Doucet (1993), 172 N.R. 374 at para. 10 (F.C.A.) where Justice Marceau stated:

It is the Minister's determination which was at issue before the Judge, and that determination was strictly that the employment was not insurable. The Judge had the power and duty to consider any point of law that had to be decided in order for him to rule on the validity of that determination. This is assumed by s. 70(2) of the Act and s. 71(1) of the Act so provides immediately afterwards, and this is also the effect of the rules of judicial review and appeal, which require that the gist of a judgment, which is all that is directly at issue, should not be confused with the reasons given in support of it.

[10]            In this case, therefore, the Minister's determination was merely that the employment in question was not insurable. While the reason initially given by the Minister was that there was no contract of service (para. 3(1)(a)), there was added in the Reply to the Notice of Appeal the alternative ground of no arm's length. The authorities permit this, as is evidenced in Schnurer and Doucet, supra, and Candor Enterprises does not bar this procedure, as explained above. Subject to the Candor Enterprises exception, the Tax Court has the jurisdiction to decide any question of law necessary to determine whether the worker's employment was insurable. It had the jurisdiction to consider subparagraph 3(2)(c)(i), even though it was not raised until the Reply to the Notice of Appeal was filed in the Tax Court.

[11]            There is no unfairness in this, for the worker receives notice of the alternative basis for the Minister's decision at the time the Reply to the Notice of Appeal is filed, so that there is time to prepare pleadings in response, evidence, and legal arguments to counter the new allegation. There is no surprise at all involved in this.

[12]            The application should, therefore, be allowed, the decision of the Deputy Tax Court Judge should be set aside and the matter should be remitted to the Chief Judge of the Tax Court of Canada, or his delegate, to determine whether subparagraph 3(2)(c)(i) excepts the employment in issue on the basis of the facts originally presented and any other evidence that may, with the permission of the Deputy Tax Court Judge, be adduced.

                                                                                                                                  "A.M. Linden"                   

                                                                                                                                                     J.A.

"I concur

Alice Desjardins"

"I concur

J. Edgar Sexton"