Spagnolo v. M.N.R., docket 97-1063-UI

Date: 19980428

Docket: 97-1063-UI

BETWEEN:

MARIA SPAGNOLO,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

(Delivered orally from the Bench at Toronto, Ontario, on March 19, 1998)

Mogan, J.T.C.C.

[1] This appeal arises under the provisions of the Unemployment Insurance Act (now the Employment Insurance Act). The Appellant is the wife of Dominic Spagnolo. In November 1995, Dominic and his brother, Rocco, purchased a convenience store (on a 50/50 basis) at the corner of St. Clair Avenue and Lansdowne, in the City of Toronto. The brothers incorporated 1138324 Ontario Inc. (“the Company”), which operated the variety store under the name “M & G Variety Store”.

[2] At the time of purchase, Dominic was employed in a grocery store and Rocco was employed as a butcher. It was decided between the two of them that Dominic would give up his employment and take on the full-time job of operating the variety store, but that Rocco would keep his employment as a butcher. The result was that Dominic was responsible for operating the store from a proprietor’s point of view in the daytime, and Rocco would operate it in the evening after he had finished his employment as a butcher. The Appellant, as the wife of Dominic, worked regularly in the store operating the cash register, stocking the shelves, taking inventory and ordering fresh produce on a regular basis. Also, she cleaned the store and generally did all tasks to make it an attractive convenience store. These facts concerning the acquisition of the business and the way it was operated came from the evidence of the Appellant who was the only witness in this appeal.

[3] The Appellant stated that she worked at the convenience store six days per week, from 8:30 a.m. until 9:00 p.m., with breaks for lunch and supper. She did not work on Sundays because Dominic and Rocco operated the business on that day. The Appellant was expecting a baby when she first went to work at the store on November 27, 1995. She worked the following five months at the store to April 26, 1996, a period of 22 weeks. She had to stop work at that time because she was coming near the end of her pregnancy and, indeed, her son was born on May 2, 1996. She stated she had expected him to be born around June 1st, but that he was one month early. She also said that she not only worked hard at the store but was on her feet most of the time. Because of the advancing months of her pregnancy, she developed serious varicose veins in her legs carrying the weight of her child. Her doctor advised her at the end of April 1996 that she had an extraordinarily bad condition of varicose veins and I have no reason to disbelieve her. Apparently, it has taken two years to get over the worst effects of the varicose veins.

[4] By way of corroborating her employment at the store, the Appellant produced a four-page document (Exhibit A-1) signed by 60 or 70 individuals who were customers of the store. This document was carefully prepared and entitled “Employment Status - Maria Spagnolo” and sets out:

This is to verify the employment status of Maria Spagnolo and M & G Variety from November 27, 1995 to April 26, 1996.

In signing, you agree to have seen Maria Spagnolo perform her daily responsibility ... as an employee of M & G Variety during the above noted time period.

The Appellant stated that the document was prepared after this appeal began when she realized that she may need corroboration of the fact that she worked in the store. Because she did not go back to work after the birth of her son on May 2, 1996, her husband took the document to the store and had it signed by customers who had known her. I accept Exhibit A-1 and, although it is hearsay in a technical sense, I have no reason to disbelieve the evidence of the Appellant that she worked long hours at the store in that five-month period and probably became known to many of the regular customers. Therefore, on the question of her working in the store, I find the Appellant to be totally credible.

[5] When the Appellant concluded her work, she applied for unemployment insurance benefits. Her application was denied under paragraph 3(2)(c) of the Unemployment Insurance Act. It is an extraordinary provision because it grants to the Minister of National Revenue a certain discretion which has been described by the Federal Court of Appeal in recent years. Subsection 3(1) of the Act states:

3(1) Insurable employment is employment that is not included in excepted employment and is ...

The important condition in this appeal is to determine whether the Appellant’s employment was excepted employment. Subsection 3(2) of the Act states:

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;

The Federal Court of Appeal has interpreted subparagraph 3(2)(c)(ii) as granting to the Minister a discretion to determine whether the terms of employment are similar or substantially similar to a contract of employment that might have existed between persons dealing with each other at arm’s length.

[6] In this appeal, the first question is whether the parties were at arm’s length. The Unemployment Insurance Act incorporates certain provisions from the Income Tax Act, and specifically section 251. I am satisfied that the Appellant was not dealing at arm’s length with the Company because it was owned by her husband and his brother, each as to a 50% interest. Therefore, there was a non-arm’s length relationship between the Appellant and the Company.

[7] The second question is whether the Minister of National Revenue properly exercised his discretion under paragraph 3(2)(c) of the Act. If he did, then it is not up to me to interfere with his decision. I cannot substitute my judgment or my appraisal of the facts unless the Minister failed to exercise his discretion in a lawful manner. I will refer briefly to the recent decision of the Federal Court of Appeal in Attorney General of Canada v. Jencan Limited, (1997) 215 N.R. 352 decided on June 24, 1997. That decision confirmed the two earlier decisions in Tignish Auto Parts Inc. v. M.N.R. (1996) 185 N.R. 73 and Ferme Emile Richard et Fils Inc. v. M.N.R. (1995) 178 N.R. 361. In the Jencan case, Isaac C.J. made the following statement:

... The Tax Court is justified in interfering with the Minister’s determination under subparagraph 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 paragraph 3(2)(c)(ii); or (iii) took into account an irrelevant factor.

Also, earlier in the same case, Isaac C.J. had stated:

The decision of this Court in 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 first stage, the Tax Court must confine the analysis to a determination of the legality of the Minister’s decision. If, and only if, the Tax Court finds that one of the grounds for interference are established can it then consider the merits of the Minister’s decision. ...

Accordingly, I have to determine first whether one of the above three grounds for interference was established.

[8] The first ground is whether the Minister acted in bad faith or for an improper purpose or motive. There is no evidence that he did. Therefore, that ground does not come into play. The second ground is whether the Minister failed to take into account all of the relevant circumstances; and the third one is whether the Minister took into account an irrelevant factor. I shall consider these two grounds together. What did the Minister take into account when he exercised his discretion? Did he omit some relevant circumstances or did he take into account irrelevant circumstances? Because those two questions are in the same field, I propose to turn my attention to what the Minister took into account when he exercised his discretion. What he had in mind is set out in paragraph 6 of the Reply to the Notice of Appeal. It is a lengthy paragraph containing approximately 23 or 24 assumptions of fact on which the Minister relied. The non-arm’s length factors are clearly established and I will not deal with them.

[9] There are some facts, however, assumed by the Minister which, according to the uncontradicted evidence of the Appellant, proved to be wrong. I shall review various paragraphs of the Reply containing facts relied on by the Minister and although he refers to the Company as the “payor”, I shall substitute with the word “Company”.

6(f) the Company engages non-family members on an hourly basis with their hours of work recorded by the Company;

According to the Appellant the Company did not hire any non-family members for any significant period. She stated that there was a teenager hired briefly but, in effect, there were no permanent or permanent part-time non-family employees of the Company engaged on an hourly basis.

6(g) non-family members engaged by the Company as cashiers and clerks were generally paid the minimum wage rate for actual hours worked;

Again, according to the Appellant, there was so little work done by non-family employees that it is not significant to consider. She stated that when she stopped working, her husband and his brother simply increased their efforts and did not hire a permanent replacement but only intermittent casual labour.

6(h) the Company engages family members, such as the Appellant, on a set salary with no record of their hours of work;

The Appellant categorically denied that statement. She said she is the only family member who worked in the store and no other family members were engaged. She also acknowledged that she did not have any hours of work recorded and she said that since it was a small family enterprise, people operated on the honour system and it was not necessary to record hours of work. Certainly, in a convenience store, if it was her duty to be on call during the daytime anybody would know whether she was in the store or not.

[10] The Minister also assumed that the Company had engaged the services of the Appellant for only the stated period and did not engage the services of anybody else when she stopped working. This would indicate that her services were either redundant or simply padding a family payroll. I believe the Appellant’s evidence has proved that she did work hard. When she stopped working, the fact that her husband and brother-in-law did not hire a full-time replacement does not mean that she was not providing a necessary and valuable service. It just means that they were trying to save on expenses.

[11] What concerns me most in this appeal is the salary paid to the Appellant, the absence of any record of hours worked, a significant conflict of evidence as to how many days she worked each week; and lastly, the method of payment to the Appellant. Dealing with those in order, there was simply no record of her hours of employment; she was paid a salary of $500 per week; she states that she worked about a 12-hour day, six days a week from Monday to Saturday. That would be 60 hours per week for which she was paid $500 or an hourly rate of just less than $9.00.

[12] The evidence concerning the number of days she worked each week is in conflict. The Respondent entered as Exhibit R-1 a questionnaire which was completed on or about January 24, 1997 by the accountant who provided accounting services to both the Company and the Appellant. The Appellant said that she provided the information to the accountant but that Exhibit R-1 was in fact filled out in his handwriting. Therefore, I look on the document as being authored by the Appellant even though she stated it was completed in the accountant’s handwriting but with information provided by her. I have to assume that because, if it was completed by the accountant, the Appellant must have sat down with him and gone over the answers to the questions because there are many questions in this 15-page document. Specifically the following question is contained on page 7:

Q. What was the worker’s rate of pay?

A. $500 per week, average week 50 hours, about $10.00/hour.

If the Appellant worked six days per week for 12 hours per day as she described, that would be 60 hours per week. If she worked only 50 hours a week, I would infer that she worked only a five-day week. There was no explanation for this discrepancy. There is a conflict between the answer on page 7 of the questionnaire setting out 50 hours per week and the Appellant’s testimony that she worked six days per week, 12 hours per day.

[13] It is unfortunate that there was no evidence given by the employer. The Appellant said that her brother-in-law, Rocco, was in the courtroom, but he did not volunteer to give any testimony and her husband, Dominic, was not in the courtroom. Therefore, I have no way of knowing what the attitude of the two proprietors was with respect to compensation and days and hours worked.

[14] The other disturbing feature of this appeal is what I would call the method of payment, that is to say, cheques issued by the Company to the Appellant. The Respondent entered 22 cheques (Exhibit R-4) for the 22 weeks worked. Those cheques are all dated on a Friday and they run consecutively from Friday, December 1, 1995 to Friday, April 26, 1996. All the cheques are issued by the Company on its Canadian Imperial Bank of Commerce account payable to the Appellant. Each cheque is in the same amount of $383.67 which would be the Appellant’s gross salary for the week, less the source deductions for income tax, unemployment insurance premiums, Canada Pension Plan contributions and any other relevant deductions. Exhibit R-4 also includes copies of the reverse side of each cheque which shows that the Appellant endorsed all of the cheques. The Minister assumed in paragraph 6(q) of his Reply that:

6(q) the Company arranged to have the Appellant endorse her weekly pay cheques and the amounts deposited to the Company’s business bank account;

That is a damaging assumption because it looks like the cheque was made out to the Appellant which she just endorsed and handed back either to her husband or her brother-in-law and they, in turn, deposited it back into the Company’s bank account. The Appellant said that that was not so; that she would endorse the cheque back to the Company and would receive cash to save her from going all the way to her bank which was not close to the store. Because she was pregnant at the time, she would have needed either her father or a family member to drive her to the bank. Therefore, it was more convenient to receive cash and so she would endorse the cheques back to the Company.

[15] I find this portion of her evidence difficult to accept. It is the only part of her evidence which I doubt because it could so easily have been corroborated by documents but there were no documents produced. The Appellant confirmed that she had a bank card. Most people know that with a bank card and bank machines scattered through the various branches of all chartered banks, a person is able to do banking at any branch. There is no satisfactory explanation of why the Appellant did not deposit her cheques in an identified bank account of her own.

[16] The Minister continues with the following assumptions of fact in the Reply to the Notice of Appeal:

6(r) there is no record to indicate that the Company actually had the cash on hand to pay her or documentary evidence to indicate that cash payments to her were actually made in all cases;

6(s) the six (6) cheques dated from December 1, 1995 to January 5, 1996 are all numbered sequentially and were all cashed on January 9, 1996 and deposited into the Company’s business bank account;

6(t) the Company did not have sufficient cash on hand on January 9, 1996 to cash the Appellant’s pay cheques noted in paragraph (t) - total face value of which was $2,302.02;

The $2,302 is the aggregate of six cheques from December 1, 1995 to January 5, 1996. Those assumptions of fact put a serious burden on the Appellant to prove that she really did get paid on a regular basis; that the money was paid to her like any other arm’s length employee would have been paid; and that she was entitled to keep it and not lend it back to the employer. This is an area of evidence that can easily be documented if an employee maintains her own bank account; makes regular deposits to her bank account on pay-day; and then can be seen to use her own funds from time to time by drawing them out of her bank account. There was no document in evidence to prove that any of the cheques in Exhibit R-4 issued to the Appellant were deposited to her bank account. Indeed, the damaging assumptions of fact made by the Minister in subparagraphs 6(q), (r), (s) and (t) put a significant burden on the Appellant to prove not only that she was paid on a regular basis like an arm’s length employee, but that she was permitted to retain the funds. The Company could have produced bank records showing that the cheques actually issued to the Appellant were cashed with no corresponding deposit back into the Company’s account.

[17] The end result is that with these damaging assumptions of fact about the method of payment, the Appellant has not sought to disprove them in either way: either to show that she actually received the payments in a timely manner, like an arm’s length employee would on pay-day; or her employers (her husband and brother-in-law) did not show that they issued the cheques on a regular basis and that those cheques were in fact cashed by the Appellant and the funds were not paid back to the Company.

[18] The circumstances in subparagraph 3(2)(c)(ii) are spelled out in the following detail:

3(2)(c)(ii) ... 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;

To return to the commencement of the Appellant’s testimony, there is no doubt in my mind that she worked long hours for the Company owned by her husband and his brother and that she worked hard, but that does not satisfy the onus on the Appellant. She has to prove that, “having regard to all the circumstances of the employment” (and payment of an employee by an employer is one of the most important circumstances of any employment) it is reasonable to conclude that she and the Company would have entered into a substantially similar contract if they had been dealing with each other at arm’s length. In other words, if the Appellant were at arm’s length with the Company, would she have deferred the receipt of her pay or endorsed her cheques back to her employer?

[19] In conclusion, I have to find against the Appellant because the evidence concerning the method in which she was paid is, in my view, at odds with what an arm’s length employee would expect in her circumstances. Very briefly, the first six cheques, numbered 20 to 25 consecutively and dated December 1, 1995 to January 5, 1996, although dated a week apart, were all deposited in the Company’s account on January 9, 1996. Then, for February 2, 9, 16 and 23, 1996, those cheques are numbered 67, 69, 71 and 73 and they were all deposited on February 23, 1996. Also, for the weeks of March 1 and 8, cheque numbers 101 and 102 were deposited together on March 12, 1996. For March 15 and 22, cheque numbers 103 and 104 were deposited together on March 26, 1996. The cheques for March 29 and April 5, being numbered 105 and 138 were deposited on April 9, 1996. And the last two cheques, numbers 146 and 148 dated April 19 and 26, were deposited on April 30, 1996. There is a pattern of payment which is not consistent with an arm’s length employee who would be paid on a weekly basis with a salary of $500 per week.

[20] Coming back to the statements in Jencan, there is no evidence to indicate that the Minister failed to take into account all of the relevant circumstances or that he took into account irrelevant factors of substance. The errors which appear in the assumed facts are not substantial in relation to the overall picture. They are detailed but not substantial. In the case of The Queen v. Bayside Drive-In Ltd., (1998) 218 N.R. 150, a decision of the Federal Court of Appeal on July 25, 1997, the following statement is made:

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. ...

I cannot find that the Minister made his determination in a manner contrary to law.

[21] Looking at the broad spectrum of the facts assumed in the Reply to the Notice of Appeal, I find that the substantive facts are relevant and I cannot find on the evidence of the Appellant that there was any relevant factor that the Minister did not take into account. The Appellant would want me to give significant weight to the hard work she performed in those five months when her husband and his brother first acquired the business. There is no doubt that she did her share to make the business a success in the early months of ownership, but that does not overcome the facts that she was not at arm’s length with the employer Company, and the method of paying her was not a condition which people at arm’s length would have accepted. For these reasons, the appeal is dismissed.

Signed at Ottawa, Canada, this 28th day of April, 1998.

"M.A. Mogan"

J.T.C.C.