Bentolila v. M.N.R., docket 97-554-UI

Date: 19980422

Dockets: 97-554-UI; 97-555-UI; 97-556-UI; 97-562-UI; 97-563-UI; 97-564-UI

BETWEEN:

KIMBERLY LUTZ, GAD BENTOLILA, DAVID COLPITTS, ANDRÉ BENTOLILA,

O/A YABSON'S MANAGEMENT SERVICES,

Appellants,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Lamarre Proulx, J.T.C.C.

[1] These appeals have been heard on common evidence. Only one Appellant appeared at the hearing, that is Mr. Gad Bentolila. He stated that he was authorized to act as agent for the Appellants Kimberly Lutz and David Colpits. To this effect, he presented Exhibits A-1 and A-2. These documents were in the nature of statements of defence and not of mandates, but these documents being signed by the two aforementioned Appellants, the Court accepted these documents as authority for Mr. Gad Bentolila to act on their behalf. As Mr. André Bentolila was not represented, his appeals are dismissed for want of prosecution.

[2] The question at issue in these appeals is whether the Appellants’ employments by Mr. André Bentolila were excepted employments within the meaning of subsection 3(2)(c) of the Unemployment Insurance Act (the "Act"). In the matter of Mr. Gad Bentolila, as he is the son of Mr. André Bentolila, he is related to the alleged employer. In the appeals of David Colpitts and Kimberly Lutz, who were not related by blood, or by marriage to the payor, there is the question as to whether they were in fact not dealing at arm's length with the alleged employer, Mr. André Bentolila.

[3] For the Appellant, Mr. Gad Bentolila, the period at issue is April 1 to August 25, 1995. The facts upon which the Minister of National Revenue (the "Minister"), relied in making his decision under appeal are described at paragraph 4 of the Reply to the Notice of Appeal ("Reply No. 1"), as follows:

(a) the payor operates a management business;

(b) the Appellant is the Payor's son;

(c) in 1993, the Payor bought a house at 484 Sunnyside in Ottawa, which he decided to convert in small apartments to rent to Carleton University students;

(d) the Payor hired his two sons who are Dali Bentolila and Appellant and as well hired his son's two friends, Kimberly Lutz and David Colpitts, to renovate the house mentioned in paragraph (c);

(e) the reason indicated by the Payor to hire the particular four individuals mentioned in paragraph (d) was to qualify them to collect unemployment insurance benefits since they were students and they needed the money;

(f) in 1995, the Payor did not hire any other workers apart from the four persons mentioned in paragraph (d);

(g) the renovations of the building started in 1994 and as of 1996, the renovations were still not finished;

(h) the Appellant was reportedly hired as Project Engineer;

(i) the Appellant was hired for only 22 insurable weeks, which is close to the minimum number of weeks he required to qualify for unemployment insurance benefits;

(j) the Appellant was reportedly paid $3,334.00 per month;

(k) the Appellant was purportedly paid in cash for the first month of his employment but no proof of payment could be provided;

(l) for the year 1995, the Payor reported gross professional income of $56,054.30, salary expense of $58,082.41 and a net loss of $15,446.56;

(m) the Payor deducted Canada pension contributions and unemployment insurance premiums from the Appellant's remuneration yet the Payor did not deduct any taxes from the Appellant's remuneration as required;

(n) in 1994, the Appellant performed the same type of service for the Payor under the same conditions, but was considered as a self-employed person by the Payor;

(o) in 1994, the Appellant reported his income from the Payor as self-employed income on his income tax return:

Gross Income $29,613.00

Net Income $ 7,158.00

(p) the Appellant has not filed his income tax return for the year 1995, therefore his method of reporting the income could not be verified for that particular year;

(q) the engagement of the Appellant by the Payor during the relevant period allowed the Appellant to qualify for unemployment insurance benefits, rather than being based on any business consideration or need;

(r) the Appellant is related to the Payor within the meaning of the Income Tax Act;

(s) 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 not reasonable to conclude that the Appellant and the Payor would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.

[4] For the Appellant Kimberly Lutz, the period at issue is April 1 to July 31, 1995. The facts upon which the Minister relied (I will refer to the Reply in her case as Reply No. 2), are almost identical to those set out in Reply No. 1. Paragraphs 4(b), 4(h), 4(i), 4(n), 4(o), 4(p) and 4(r) of the Reply No. 1 were not reproduced in Reply No. 2. I will now quote the subparagraphs of Reply No. 2 that are different from Reply No. 1: Subparagraphs 4(g), 4(h), 4(i) and 4(o):

(g) the Appellant was reportedly hired as Administrative Assistant, yet there was not enough work of this nature to justify this position;

(h) records showed that most of the supplies and equipment were purchased in 1994 by the Payor;

(i) the Appellant was reportedly hired for exactly 18 weeks, which is the number of weeks she needed to qualify for unemployment insurance benefits;

(o) the Appellant is not related to the Payor, but in fact, the Appellant was not dealing with the Payor at arm's length;

[5] For the Appellant David Colpitts, the periods at issue are April 1 to July 14, 1995 and July 24 to August 25, 1995. I will quote subparagraphs 4(g) and 4(i) of the Reply No. 3, as these paragraphs are the only ones that differ from those of Reply No. 2:

(g) the Appellant was reportedly hired as Project Supervisor;

(i) the Appellant was hired only 21 weeks by the Payor, and he required 20 insurable weeks to qualify for unemployment insurance benefits;

[6] The Appellant Gad Bentolila admitted subparagraphs 4(a) to 4(d), 4(g) to 4(j), 4(o) and 4(p) of the Reply No. 1. He admitted subparagraphs 4(g) of the two other Replies.

[7] Let us deal now with Reply No. 1 which concerns the only person who came to the hearing. Respecting the statement of paragraph 4(a), Mr. Gad Bentolila said that his father owned some rental properties and that this constituted his management business.

[8] Respecting subparagraph 4(c), he stated that the house has not been converted into small apartments but is rather a large rooming house now lodging 17 students. From a house of 1,000 square feet, it was enlarged to a single family dwelling of 5,000 square feet. The house would have been purchased by his father, his mother and his brother Dali for an amount of $150,000. During the periods at issue, the four employees resided at the address given in subparagraph 4(c) of the Reply No. 1, that is 484 Sunnyside, in Ottawa.

[9] Respecting the statement of subparagraph 4(e), he did not know if his father had said that. He denied the content of subparagraph 4(f) by saying that some contractors may have been hired without providing any evidence to this effect.

[10] Respecting his admission of having been hired as a project engineer for the period at issue as mentioned in subparagraph 4(h), he did not produce any documentary evidence to this effect. His oral testimony was that he was acting as a liaison officer with the municipalities to obtain the relevant permits. Otherwise his work was the same as the three other alleged employees. They would have worked all in the basement or on the first floor from early in the morning to 6 p.m. He recalled in cross-examination that he may have taken a summer course in that period.

[11] Respecting the statement of subparagraph 4(j), Exhibit R-3 shows that a cheque received by the Appellant Gad Bentolila was deposited in a joint bank account with his mother and brother.

[12] He did not know about subparagraph 4(l) describing the importantly negative professional income gained by the alleged payor, but income tax returns were produced by counsel for the Respondent as Exhibits R-8 and R-9, which confirmed the allegation of that subparagraph.

[13] The income tax return of the payor, Exhibit R-9, was produced by virtue of paragraph 241(4) of the Income Tax Act. It shows that the payor’s income was constituted of losses in the amount of $10,452.39 pertaining to real estate rentals and of losses in the amount of $15,446.56 regarding professional activities. There was a positive amount of $24,002.88 as pension income.

[14] Respecting the content of subparagraph 4(n), the Appellant said that he performed the same type of work but that the conditions of work were different in that in the previous year he had worked as a contractor and in 1995 he worked as an employee.

[15] Respecting the content of subparagraph 4(o), the Appellant stated that the income derived from work done for his father would have been in the amount of $10,000 in 1994.

[16] Respecting the statement that David Colpitts had been hired as a project supervisor as mentioned in subparagraph 4(g) of Reply No. 2, he admitted that David Colpitts had never worked in the field of construction before.

[17] Ms. Simone Rosengrand testified for the Respondent. She is a coverage officer for the Respondent. She said that respecting Mr. David Colpitts, on July 7, 1995, he had made a claim for unemployment insurance after 15 weeks. He was answered that he needed 20 weeks. He made a further claim on August 8, 1995, having allegedly worked for 5 more weeks. These claims are contained in Exhibit R-6. In both claims, at line 21, it is shown that the claimant was no longer working by reason of shortage of work.

[18] Respecting the Appellant Kimberly Lutz, Ms. Rosengrand said that she had talked to her on the phone first and had asked her what type of work she was doing for the employer. She had answered that she was an administrative assistant doing typing, filing and that sort of work. She was asked to come to the officer’s office and bring with her the work that she had done. In the office, she mentioned that she did renovations as well. The payor had answered that she did work on her computer at her home. Asked where she resided, she answered that she did not live at 484 Sunnyside, Ottawa. However, her tax returns since 1993 show this address. The Minister’s agent said that she needed 18 weeks and that she allegedly worked for this number of weeks.

[19] The payor was asked to bring the invoices to the office of the Minister’s agent. The invoices brought were small in number and all under $100. The payor brought his bank account statements to the office, and these did not show any withdrawal in the amount of $13,000, the amount of salary for the four employees in each of the months in question.

[20] In 1995, the alleged employees were all students at Carleton University and all would be preparing for final exams in the month of April.

[21] Respecting the Appellant Gad Bentolila, the Minister’s agent said that he had told her that he worked during the weekends and, at the same time, attended school during the week.

Arguments and Conclusions

[22] Subparagraph 3(2)(c) of the Act reads as follows:

(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;

[23] Counsel for the Respondent submitted, respecting Mr. Gad Bentolila, that he was related to the employer and that he had not brought any substantiated evidence that, had he not been related to the employer, he would have been employed under the same terms and conditions.

[24] Counsel for the Respondent submitted that regarding the other Appellants they had not appeared to defend their case in person and that their appeals should be dismissed for want of evidence. She also submitted that these Appellants were not dealing at arm’s length with the alleged employer and therefore their alleged employment was excluded by subparagraph 3(2)(c) of the Act.

[25] On this latter aspect, she referred to the three tests commonly used to determine whether the parties to a transaction are dealing at arm’s length. She referred to the Interpretation Bulletin IT-419R, paragraph 16, as follows:

16. The following criteria have generally been used by the courts in determining whether a transaction has occurred at "arm's length":

• was there a common mind which directs the bargaining for both parties to a transaction;

• were the parties to a transaction acting in concert without separate interests; and

• was there "de facto" control.

[26] Counsel for the Respondent stated that in the present circumstances, it was not the first test that would be relevant, as this test is mostly used for corporate entities but not for individuals. In situations dealing with individuals, it is the second test that would be considered.

[27] These tests are have been thoroughly analysed by Bonner, J., in McNichol et al v. TheQueen, 97 DTC 111, at pages 117 and 118 as follows:

The common mind test emerges from two cases. The Supreme Court of Canada dealt first with the matter in M.N.R. v. Sheldon's Engineering Ltd. [(1995) C.T.C. 174, 55 DTC 1110]. At pages 1113-14 Locke J., speaking for the Court, said the following:

Where corporations are controlled directly or indirectly by the same person, whether that person be an individual or a corporation, they are not by virtue of that section deemed to be dealing with each other at arm's length. Apart altogether from the provisions of that section, it could not, in my opinion, be fairly contended that, where depreciable assets were sold by a taxpayer to an entity wholly controlled by him or by a corporation controlled by the taxpayer to another corporation controlled by him, the taxpayer as the controlling shareholder dictating the terms of the bargain, the parties were dealing with each other at arm's length and that s. 20(2) was inapplicable.

The decision of Cattanach, J. in M.N.R. v. T R Merritt Estate [(1969) C.T.C. 207, 69 DTC 5159] is also helpful. At pages 5165-66 he said:

In my view, the basic premise on which this analysis is based is that, where the "mind" by which the bargaining is directed on behalf of one party to a contract is the same "mind" that directs the bargaining on behalf of the other party, it cannot be said that the parties were dealing at arm's length. In other words where the evidence reveals that the same person was "dictating" the "terms of the bargain" on behalf of both parties, it cannot be said that the parties were dealing at arm's length.

The acting in concert test illustrates the importance of bargaining between separate parties, each seeking to protect his own independent interest. It is described in the decision of the Exchequer Court in Swiss Bank Corporation v. M.N.R.[(1971) C.T.C. 427, 71 DTC 5235; aff'd [1972] C.T.C. 614, 71 DTC 6470]. At page 5241 Thurlow J. (as he then was) said:

To this I would add that where several parties — whether natural persons or corporations or a combination of the two — act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the "mind" that directs may be that of the combination as a whole acting in concert or that of any of them in carrying out particular parts or functions of what the common object involves. Moreover as I see it no distinction is to be made for this purpose between persons who act for themselves in exercising control over another and those who, however numerous, act through a representative. On the other hand if one of several parties involved in a transaction acts in or represents a different interest from the others the fact that the common purpose may be to so direct the acts of another as to achieve a particular result will not by itself serve to disqualify the transaction as one between parties dealing at arm's length. The Sheldon's Engineering case [supra], as I see it, is an instance of this.

Finally, it may be noted that the existence of an arm's length relationship is excluded when one of the parties to the transaction under review has de facto control of the other. In this regard reference may be made to the decision of the Federal Court of Appeal in Robson Leather Company Ltd. v. M.N.R., 77 DTC 5106.

[28] As just mentioned, the acting in concert test was enunciated in the case of Swiss Bank Corporation and Swiss Credit Bank v. M.N.R.,(supra). The acting in concert test is considered to be an expansion of the common mind test or the directing mind test being applied to natural persons. As mentioned by Thurlow , J. in the quoted case above, persons may be acting in concert and still be dealing at arm’s length as long as their interests are different. It is therefore important to understand the meaning of the expression "separate interests" appearing in the second test.

[29] On this aspect, I would refer to a decision of the Federal Court of Australia in Furse Estate v. Federal Commissioner of Taxation, 91 ATC 4007 (F.C.A.). I quote at pages 24, 26, 27 and 28:

The tribunal found the parties to the agreement, which was not identified, were not dealing with each other at arm’s length. In so finding the tribunal misunderstood the test that should be applied..., which was not whether the parties to the relevant agreement were at arm’s length with each other, but whether, in relation to the relevant agreement, they were dealing with each other at arm’s length. By applying the wrong test, the tribunal erred in law.

...

The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection. The distinction was pointed out by Davies J. in connection with similar words used in s. 26AAA(4) of the Act in Barnsdall v. Federal Commissioner of Taxation (1988) 88 ATC 4565 at 4568, in a passage, which with respect, I agree:

However, sec. 26AAA(4) used the expression "not dealing with each other at arm's length". That term should not be read as if the words "dealing with" were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the person to whom the taxpayer transferred, but also of the fact that they were not dealing with each other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative.

What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.

[30] It is therefore my view that for the purpose of determining whether non related parties are dealing or not at arm’s length, the Court has to make an assessment, based on a finding of facts whether in respect of a particular dealing, the parties dealt with each other as arm’s length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.

[31] An understanding on how is determined the notion of persons not dealing at arm's length explains why in the first part of paragraph 3(2)(c) of the Act, the employment between persons not dealing at arm's length is definitively excepted contrary to the excepted employment of related persons expressed at subparagraph 3(2)(c)(ii) of the Act, where this excepted employment is no longer excepted when it is an employment that would have existed in a normal labour market where the conditions of the employment are the result of real bargaining.

[32] For non related persons, the character of the transaction between the parties as to whether it is the result of real bargaining and not the relationship between the parties, will determine whether these persons are dealing at arm’s length or not. In the matter of related persons, as defined by the Income Tax Act, they are persons not dealing at arm’s length irrelevant of the transaction. Therefore in this latter situation, the employment is not definitively excepted. If the contract of employment is a genuine one, it will not be an excepted employment.

[33] I shall first deal with Mr. Gad Bentolila’s appeal. He is related to the employer. It is a situation covered by subparagraph 3(2)(c)(ii) of the Act. In his case, the Minister was not satisfied that having regard to all the circumstances of the employment, in particular the remuneration paid and the duration of the work performed, it was 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.

[34] The role of our Court regarding the power of the Minister described in subparagraph 3(2)(c)(ii) of the Act has been examined at length by the Federal Court of Appeal in several decisions among which the decision in Canada v. Jencan Ltd., dated June 24, 1997. I quote:

... The Tax Court is justified in interfering with the Minister's determination under s. 3(2)(c)(ii) - by proceeding to review the merits of the Minister's determination - where it is established that the Minister: (i) acted in bad faith or for an improper purpose or motive; (ii) failed to take into account all of the relevant circumstances, as expressly required by s. 3(2)(c)(ii); or (iii) took into account an irrelevant factor.

...

In other words, it is only where the Minister's determination lacks a reasonable evidentiary foundation that the Tax Court's intervention is warranted. An assumption of fact that is disproved at trial may, but does not necessarily, constitute a defect which renders a determination by the Minister contrary to law. It will depend on the strength or weakness of the remaining evidence. The Tax Court must, therefore, go one step further and ask itself whether, without the assumptions of fact which have been disproved, there is sufficient evidence remaining to support the determination made by the Minister. If that question is answered in the affirmative, the inquiry ends. But, if answered in the negative, the determination is contrary to law, and only then is the Tax Court justified in engaging in its own assessment of the balance of probabilities. ...

[35] The facts described in Reply No. 1 were found to be substantially true and I conclude, regarding Mr. Gad Bentolila, that for the reasons given in paragraphs 38 and 39 of these Reasons, the Minister exercised his discretion with reasonableness when he found that parties dealing at arm’s length would not have entered in the same employment agreement.

[36] Regarding the other Appellants, I cannot but also find that the Minister was correct in fact and in law, in determining that they were not acting at arm’s length with the alleged employer, as the alleged employment agreement that they entered into with the alleged employer was not one that would be the outcome of real bargaining, in other terms, it was not a genuine employment agreement.

[37] The fact that the employer did not come to testify leads me to the conclusion that he was unable to prove that the statement he had made to the Minister’s agent, and which is reproduced in all the Replies, was incorrect. This statement is the following:

(e) the reason indicated by the Payor to hire the particular four individuals mentioned in paragraph (d) was to qualify them to collect unemployment insurance benefits since they were students and they needed the money;

[38] For the year 1995, the employer’s income was negative and by much. At the time of the investigation by the Minister’s agent, the employer was unable to provide evidence of payment of a monthly payroll of $13,000. Regarding the construction works during the period in question, he was unable to bring to the Minister’s agent other invoices than a few invoices of small amounts. The alleged employees did not have the training for which they were allegedly hired. They believed so little in their case that they did not even come to the hearing. Mr. Gad Bentolila came. It may be that he had some experience in construction work and that he did some work, but there is no evidence that he worked the number of alleged hours, in the number of alleged weeks, and that he was paid the alleged salary. Again, it has to be repeated: the employer never provided the evidence of his capacity of payment of all the workers involved, nor did he provide any evidence of the purchase of the materials necessary to sustain such construction works for four employees over a period of five months.

[39] The appeals are dismissed

Signed at Ottawa, Canada, this 22nd day of April, 1998.

"Louise Lamarre Proulx"

J.T.C.C.