REASONS
FOR JUDGMENT
D’Auray J.
A. Background
[1]
The appeals of Messrs. Éric Lalancette,
Christian Martel and Danny Dallaire (“the appellants”) were heard on
common evidence.
[2]
Mr. Lalancette is a tax specialist by training
and has a graduate degree in taxation from the Université
de Sherbrooke.
[3]
Mr. Martel is a chartered professional
accountant and has a graduate degree in financial planning.
[4]
Mr. Dallaire is a chartered professional
accountant and an auditor.
[5]
During the period in dispute, which is from
August 1, 2015 to September 16, 2015, the appellants worked at ARCI
Cabinet Comptable inc. (“ARCI”).
[6]
ARCI provides financial statement preparation
services, bookkeeping, tax services, and income tax return preparation.
[7]
During the 1990s, ARCI had only one shareholder,
Mr. Bernard Fortin. Around 2012, Mr. Martel purchased a portion of
Mr. Fortin’s shares.
[8]
Early in 2005, Mr. Lalancette purchased Mr.
Fortin’s shares and Mr. Fortin retired. Thus, in 2015, Mr. Martel held 51%
and Mr. Lalancette held 49% of voting shares in ARCI.
[9]
In order to provide more service for the
agricultural sector, Mr. Martel and Mr. Lalancette asked Mr.
Dallaire, who has several clients in the agricultural sector, to join ARCI as a
shareholder and an employee.
[10]
Thus, starting on August 1, 2015, Messrs.
Martel, Lalancette and Dallaire each held 33 1/3% of voting shares in ARCI.
Each shareholder also held the same number of preferred shares and were
entitled to a discretionary dividend.
[11]
However, since each of them held less than 40%
of voting shares in ARCI, ARCI asked the Canada Revenue Agency (the “CRA”) to
determine whether the appellants were insurable within the meaning of section 5
of the Employment Insurance Act (the “EIA”).[1] If the
Minister of National Revenue (the “minister”) decides that each of them has
insurable employment, ARCI must make source deductions for each of the
appellants, which ARCI did not do during the period in dispute.
[12]
By letter dated September 16, 2015, the
minister determined that the jobs held by the appellants in the ARCI
corporation were insurable within the meaning of subsection 5(1) of the EIA.
[13]
The period in dispute (August 1, 2015 to
September 16, 2015) is short in length. In 2016, Mr. Dallaire left ARCI
and sold his shares to two shareholders. However, starting in late September 2016,
Mr. Martel and Mr. Lalancette held 50% of voting shares in ARCI, and
therefore, they did not have to make source deductions regarding employment
insurance under the exclusion in paragraph 5(2)(b) of the EIA. According
to that paragraph, a job is not insurable if a person controls more than 40% of
voting shares in the corporation for which the person works.
B. Operation of the ARCI
corporation and the shareholders’ conditions of employment
[14]
In the company, Mr. Lalancette performed
tax advice services for his clients in matters of company transactions and
transfers. He also prepared and reviewed corporate income tax returns.
[15]
Mr. Martel performed financial statement preparation
services and bookkeeping.
[16]
Mr. Dallaire performed the same tasks as Mr. Martel,
in addition to conducting audit engagements.
[17]
During the period in dispute, neither the
appellants nor ARCI rendered services for another accounting firm.
[18]
With respect to management tasks, Mr. Martel is
responsible for bookkeeping, managing employees, and other administrative
tasks. Mr. Lalancette takes care of office maintenance, including the
computer systems.
[19]
ARCI employs one person full time, a chartered
professional accountant, who takes care of bookkeeping at an hourly rate of
$22. During tax season, the corporation employs a chartered professional accountant
at an hourly rate of $30.
[20]
The appellants indicated that ARCI paid them a
salary and according to its ability to pay, dividends could be reported. During
the period in dispute, ARCI paid $1,000 per week in salary to the appellants:
Éric
Lalancette: $35,270 in 2015 and $52,000 in 2016
Christian
Martel: $35,270 in 2015 and $52,000 in 2016
Danny
Dallaire: none in 2015 and $16,270 in 2016
[21]
The appellants are aware that their salaries are
lower than what they would receive if they worked for an accounting firm in
which they were not shareholders.
[22]
During his testimony, Mr. Lalancette indicated
that generally, a person with fifteen years of experience in taxation earns
around $100,000 per year. Messrs. Martel and Dallaire also indicated that
if they worked for an [accounting study], their pay would also be around
$100,000 per year.
[23]
The appellants also indicated that they did not
count the hours that they worked for ARCI. They can work as much as 85 to 90
hours per week. In addition, regardless of the hours worked, their salaries
stay the same.
[24]
The appellants also control their schedules. The
corporation does not impose a minimum number of chargeable hours. As for
vacations, if an appellant decides to take a vacation, he does not have to ask
permission from the other shareholders. They consult each other so that one of
them is present at the office. For example, during the period in dispute, Mr. Lalancette
took five to six weeks of vacation and Mr. Martel took eight weeks of
vacation. The appellants were paid during their vacations.
[25]
The important decisions regarding ARCI were made
collectively by the appellants. Decisions of lesser importance were made
individually. For example, an appellant may refuse to work or accept a new
client. That being said, since ARCI is a small corporation, the appellants
often consult each other and decision-making is done informally.
[26]
However, Mr. Lalancette indicated that if the
appellants did not all concur, the decision made by the majority would prevail
and the dissenter would be bound by that decision. However, there is no
agreement between the shareholders in the event of a conflict between them. The
power relationship is the same for each shareholder.
[27]
Messrs. Martel and Lalancette secured ARCI’s
line of credit with a financial institution, which has also made advances to
the corporation in order to finance accounts receivable. To that end, Mr.
Martel indicated that he used his personal line of credit to make advances to
the corporation.
[28]
At the close of the fiscal year ending 2015, the
balance of the “due to shareholders” box was $92,630. It was $334,956 in 2016.
[29]
The appellants benefit from life insurance, for
which the premiums are paid by the corporation. However, the appellants pay for
their own disability insurance.
[30]
The invoices that are given to clients are in
the name of ARCI, the lease is in the corporation’s name, without personal
endorsement from the shareholders and the work-related expenses are assumed by
ARCI.
[31]
The work tools, such as computers, belong to
ARCI. According to Mr. Lalancette, the profession does not require [translation] “a big toolbox”.
Mr. Dallaire manages his own clientele using software that is distinct
from that of the corporation. He has his own software for invoicing, financial
statements, and preparing income tax returns.
[32]
If ARCI incurred losses and could not repay its
loans, it would be the appellants who would suffer the losses, since they are
the guarantors of the corporation’s borrowings.
[33]
The appellants maintain that they are
self-employed workers; that is, there is no contract of services between them
and ARCI. In addition, they argue that they perform a job that is not insurable
under paragraph 5(2)(i) of the EIA, since they have a
non-arm’s length relationship with their employer.
[34]
The respondent maintains that the appellants
hold insurable employment. In addition, she argues that their jobs are not
excluded from insurable employment in accordance with paragraph 5(2)(i)
of the EIA, which is jobs for which the employer and employee have a
non-arm’s length relationship.
[35]
The issue is determining whether the appellants
held insurable employment within the meaning of paragraph 5(1)(a)
of the EIA from August 1, 2015 to September 16, 2015.
If the appellants held insurable employment in accordance with paragraph 5(1)(a)
of the EIA, were the appellants’ jobs excluded from insurable employment
under paragraph 5(1)(i) of the EIA?
[36]
Insurable employment within the meaning of the EIA
is defined 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;
[37]
Under section 8.1 of the Interpretation
Act, we
must refer to the principles of Quebec civil law, in this case, the concept of
the contract of employment within the meaning of the Civil Code of Québec,
to establish whether there was insurable employment within the meaning of the EIA. [3]
[38]
The relevant provisions of the Civil Code of
Québec that distinguish between a contract of employment and a contract of
service are as follows:
2085. A contract of employment is a contract
by which a person, the employee, undertakes, for a limited time and for
remuneration, to do work under the direction or control of another person, the
employer.
2086. A contract of employment is for a
fixed term or an indeterminate term.
2098. A contract of enterprise or for
services is a contract by which a person, the contractor or the provider of
services, as the case may be, undertakes to carry out physical or intellectual
work for another person, the client or to provide a service, for a price which
the client binds himself to pay.
2099. The contractor or the provider of services
is free to choose the means of performing the contract and no relationship of
subordination exists between the contractor or the provider of services and the
client in respect of such performance.
[39]
The contract of employment therefore includes
three essential elements: the performance of work, remuneration, and a
relationship of subordination.
[40]
This last criterion fundamentally distinguishes
a contract of employment from a contract of enterprise, in that the first
requires the direction or control of the work by the employer.[4]
[41]
A relationship of subordination is established
with the help of several indicators, such as the employee’s integration into
the business, the expectation of profits and risk of losses, and the ownership
of tools. None
of these criteria taken alone is determinative in itself.[6]
[42]
In his testimony, Mr. Martel claims that there
were no contracts of employment between the corporation and the appellants.
However, in law, the parties’ description is only valid if it translates into
factual reality, in the execution and behaviour of the parties.[7]
[43]
The appellants also reported their profits to
the CRA as employment income.
[44]
In this case, I am of the view that a contract
of employment bound each of the appellants to ARCI, since the constituent
elements of a contract of employment are present in this case.
[45]
In fact, the appellants performed accounting or
taxation work on behalf of ARCI. Their work was remunerated by the corporation.
Their salary was fixed and not linked to their productivity or profitability.
[46]
The appellants were also under the control of
the ARCI corporation due to their integration, the opportunity for profits and
the risk of losses, and the ownership of tools, along with the power to
intervene in the corporation.
[47]
The appellants were in fact integrated into
their corporation. They performed work exclusively in behalf of the corporation
and at its premises. It was also the corporation who issued invoices to the
clients of the three appellants.
[48]
The equipment and materials were also supplied
by ARCI.
[49]
As for the effective subordination, the
important decisions for the corporation were always made consensually and
collectively by the appellants. Nevertheless, to evaluate the presence of
control, the relevant question is whether the corporation in fact has this
power, and not whether this power manifested in the facts:
The question the trial judge should have
asked was whether the company had the power to control the way the workers did
their work, not whether the company actually exercised such control. The fact
that the company did not exercise the control or that the workers did not feel
subject to it in doing their work did not have the effect of removing, reducing
or limiting the power the company had to intervene through its board of
directors.[8]
[50]
According to Tardif J. of our Court, a
context of collectivity and consensus does not change this rule in any way:
In the case at bar, the fact that authority
did not seem to be exercisable against the Théorêt brothers and that decisions
concerning the company were made by consensus and collegially does not mean
that the company was deprived of its authority over the work done by the
interveners. The evidence did not show that the company had waived its power to
influence their work or that its right to do so was reduced, limited or
revoked.[9]
[51]
In this case, ARCI’s board of directors never
reduced, limited or revoked its power. It had the power to intervene in the
appellants’ performance of their work. For example, it would have certainly
been able to dismiss one of the appellants or order a certain operation.
[52]
In addition, Mr. Lalancette acknowledged in his
testimony that one of the appellants would have been bound by a majority
decision by them.
[53]
Although the appellants received broad autonomy
in the performance of their professional tasks, they were not protected from
intervention in or control over their work. Case law in this matter is clear,
and we cannot find that there was not a relationship of subordination on the
sole fact that the workers performed their tasks autonomously and without
supervision.
[54]
For all of those reasons, I am of the view that
the relationship that existed between the appellants and ARCI was an “employer-employee”
relationship in nature, and that therefore, there was a contract of employment
between the appellants and ARCI.
[55]
I must now determine whether the appellants’
jobs were not insurable employment under subparagraph 5(2)(b)(i)
and subsection 5(3) of the EIA. The relevant passages in those provisions
are:
(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.
(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;
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.]
[56]
Subsection 251(1) of the Income Tax Act (the
“ITA”) states what constitutes a non-arm’s length relationship:
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;
b) a
taxpayer and a personal trust (other than a trust described in any of
paragraphs (a) to (e.1) of the definition trust in subsection 108(1))
are deemed not to deal with each other at arm’s length if the taxpayer, or any
person not dealing at arm’s length with the taxpayer, would be beneficially
interested in the trust if subsection 248(25) were read without reference to
subclauses 248(25)(b)(iii)(A)(II) to (IV); and
(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.
[Emphasis added.]
[57]
In this case, because the appellants are not
related to each other, only paragraph 251(1)(c) of the ITA
applies. According to that paragraph, persons who are not related to each other
may have a non-arm’s length relationship at a given time. It is after an
analysis of the facts that a court will determine whether there is a non-arm’s
length relationship between unrelated persons.
[58]
I do not concur with the respondent that in this
case, the question to determine is whether, according to paragraph 5(3)(b)
of the EIA, the minister correctly used her discretion, and that the
minister’s decision may only be reversed if I decide that it was not reasonable
for the minister to decide, given all of the factual circumstances, that the
appellants’ jobs were insurable employment.
[59]
Paragraph 5(3)(b) of the EIA
does not apply in this case. That paragraph only applies to persons who are
related under the ITA. In this case, the appellants are not related
persons under the ITA.
[60]
As a result, I must determine whether the
appellants have a non-arm’s length relationship with their employer, ARCI. As I
have already mentioned, in accordance with 251(1)(c) of the ITA,
this determination is one of fact.
[61]
In her written representations, the respondent
mainly relies on the criteria that were elaborated in tax decision in order to
deny any sort of non-arm’s length relationship between the appellants and the
corporation. The respondent also cited the remarks by Archambault J. in Gestion
Yvan Drouin inc. to maintain that an appellant must have control.
[62]
Nevertheless, it is useful to recall that those
criteria were specified by Archambault J. as part of litigation dealing
with subsection 160(1) of the ITA and not for an employment
insurance case. For that purpose, Archambault J. mentioned in that decision
that it is useful, if not essential, to consider Parliament’s objective to
better grasp the scope of the expression “dealing at arm’s length” in a given
provision.
[63]
Furthermore, in Thivierge,[12]
which was also heard by Archambault J., he did not use the criteria
established in cases targeting the ITA in order to determine whether
there was a non-arm’s length relationship between unrelated persons in an
employment insurance context. Archambault J. used criteria that reflect
the object of the EIA,
particularly the conditions of employment:
To illustrate the application of this
decision in the context of paragraph 3(2)(c) of the Act, one may
imagine the following example. Two employers not related to each other agree
that each of them will hire the other’s son under terms and conditions of
employment which persons dealing at arm’s length would not adopt. I believe
that, in these circumstances, that the employment of those persons would be
excepted from insurable employment because of factual non-arm’s length dealing.
One may therefore observe from this example that employment may be excepted
from insurable employment even if the parties are not related to each other.
[Emphasis added.]
[64]
In Quigley Electric Ltd., Hershfield J. adopts the same position as Archambault J.,
that is, that we cannot apply the principles that were set forth in decisions
regarding the ITA. In addition, Hershfield J. is of the view that
the same standard of analysis must be used for both related and unrelated
persons:
[31] I suggest then that to rigidly
apply income tax principles (such as identifying adverse economic interests) in
determining when parties are not, for the purposes of the Act, dealing at arm’s
length, is to apply an analysis that runs contrary to common sense. To
avoid this problem it seems necessary, for the purposes of the Act, to read
into the common law determination of whether parties are dealing at arm’s
length, a determination of whether, having regard to all circumstances of
employment including duration, nature and importance of work performed,
remuneration and other terms and conditions attaching to such employment, the
employment is on terms substantially similar terms to those that would be
entered into by arm’s length parties. His is the standard of arm’s length dealings
taken directly from the Act albeit in the context of related persons. I suggest
that the same standard is meant to apply in the context of unrelated persons.
The emphasis should be on the employment relationship as a whole, not on the
relationship of the parties as a whole.
[Emphasis added.]
[65]
This standard of analysis was reiterated by the
CRA in its publication entitled Not dealing at arm’s length for purposes of
the Employment Insurance Act (EIA), dated December 20, 2016, which
states the following:
In situations where the parties are
non-related, the same circumstances of employment as those with related persons
have to be considered. The analysis of all the circumstances of the employment
is necessary to establish if it is reasonable to conclude that the parties
would have entered into a substantially similar contract of employment if they
had been dealing with each other at arm’s length. If the circumstances are
substantially different, the employee and employer would be considered, in
fact, not to be dealing with each other at arm’s length, and the employment
will not be insurable.
[Emphasis added.]
[66]
Consequently, in light of those decisions and
the CRA publication, I am of the view that in order to determine whether an
unrelated employer and employee are not dealing at arm’s length, I must analyze
all of the circumstances of employment in order to determine whether the
employee and employer will be considered in the facts as having a non-arm’s
length relationship. In other words, would the parties have signed a substantially
similar contract of employment if they were dealing at arm’s length with each other?
C. In
this case, do the appellants’ conditions of employment reveal a non-arm’s
length relationship with the corporation?
[67]
In his written representations, the respondent
argued that in order to determine whether there is a non-arm’s length
relationship, I must consider the status of the appellants not only as
employees, but also as shareholders. According to the respondent, my analysis
must examine comparable conditions of employment, that is: would an employee
who is also a shareholder have accepted a job with substantially similar
conditions?[15]
[68]
I do not concur with the respondent’s claim. In
my view, in order to determine whether there is a non-arm’s length relationship
between an employer and an employee, I do not have to analyze whether an
employee who is also a shareholder would accept a job with substantially
similar conditions. That is not what paragraph 5(2)(b)(i) of the EIA
prescribes. That paragraph refers to the relationship between employer and
employee, and not to the employee-employer-shareholder relationship.
[69]
In order to determine whether there is a non-arm’s
length relationship when the parties are not related, just like for related persons,
I must analyze the circumstances of the employment, and if they are substantially
different, the employee and employer will be considered in the facts as having
a non-arm’s length relationship and the employment will not be insurable.
[70]
In this case, in light of the facts, I am of the
view that there was a non-arm’s length relationship between the employer, ARCI,
and the appellants. As a result, the appellants did not hold insurable
employment.
[71]
What stood out from the evidence was that the
appellants received a salary of $52,000 per year. The respondent did not
dispute the testimony of the appellants in which that salary was far lower than
what the appellants could receive if they worked in an accounting firm. Each of
the appellants has worked for more than fifteen years as a professional in the
fields of accounting and/or taxation.
[72]
In addition, the corporation did not impose any
schedule or minimum of chargeable hours on the appellants. During periods that
were less busy, the appellants could choose to work fewer hours per week or
take leave without consulting each other. However, during busier periods, the
appellants worked from 70 to 85 hours per week and they were not paid for
overtime. The salaries of the appellants were fixed, no matter how many hours
were worked. In my view, those elements argue in favour of a non-arm’s length
relationship between the taxpayer and the corporation.[16]
[73]
The appellants also had a great deal of freedom
as to their vacations. They were free to choose the time and number of weeks of
vacation without asking for permission beforehand from the other appellants.
However, the presence of one of the appellants at the office was required. As
was already indicated, during the period in dispute, Mr. Lalancette took five
to six weeks of vacation and Mr. Martel took eight weeks of vacation. They
were paid during their vacations. Those facts also argue in favour of a non-arm’s
length relationship with the corporation.
[74]
Each of the appellants could refuse a new client
and also refuse to work for a client. In my view, that fact also argues in
favour of a non-arm’s length relationship.
[75]
The important decisions were made by the
appellants. However, the minor decisions were made independently by each of the
appellants. As an example, Mr. Dallaire worked using software that was
different from what the other two appellants used. Generally, an accounting
firm, an employer, would not authorize an employee to use software that is
different from what the corporation uses.
[76]
In addition, Mr. Martel and Mr. Lalancette were
guarantors of the corporation’s line of credit. In an arm’s length
employer-employee relationship, the employee is not the guarantor of the
employer’s line of credit. In that matter, the CRA states in its 2016
publication with respect to dealing at arm’s length that a non-arm’s length
relationship is suggested when:
The employee signs substantial guarantees
that can affect their personal assets or property (and there is not
justification)
[77]
I am of the view that, between Messrs. Lalancette,
Martel and Dallaire and ARCI, there was a non-arm’s length relationship
regarding the period in dispute, from August 1, 2015 to September 16,
2015.
[78]
Consequently, the appeal from each of the three
appellants is allowed.
Signed at Ottawa, Canada, this 28th
day of November 2017.
“Johanne D’Auray”
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