Lakhani v. M.N.R., docket 97-111-UI

Date: 19980505

Dockets: 97-111-UI; 97-112-UI; 97-267-UI

BETWEEN:

JITENDRA LAKHANI, ARUN LAKHANI, SUNIL LAKHANI,

Appellants,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

Reasons for Judgment

Porter, D.J.T.C.C.

[1] These appeals were heard on common evidence at Toronto, Ontario on February 24 and 25, 1998 by consent of the parties.

[2] Each Appellant appeals the separate determination of the Minister of National Revenue (the "Minister") dated October 31, 1996 that his employment with Microbest Computers Inc., the Payor, from April 1, 1988 to April 30, 1993 was not insurable employment under the Unemployment Insurance Act (hereinafter referred to as the "Act"). The reason given for the determination was that:

"Your employment was excepted from insurable employment because you were not dealing at arm's length, nor were you deemed to be dealing at arm's length with the Payor, Microbest Computers Inc."

The determinations were said to be made pursuant to paragraph 3(2)(c) of the Act.

[3] The established facts reveal that the three Appellants are brothers and each, at the material times, owned one third of the outstanding shares of the company. Thus, pursuant to section 3 of the Act and subsection 251(1) of the Income Tax Act, as related persons, they are in law deemed not to deal with each other at arm's length. Accordingly, the employment in question is subject to the exception contained in subparagraph 3(2)(c)(ii) of the Act, categorized as "excepted employment", that is to say it is not employment which triggers the payment of unemployment insurance benefits upon its termination. The Minister has determined that the employment does not fall within the exception and the Appellants have each appealed that decision.

The Law

[4] In the scheme established under the Act, Parliament has made provisions for certain employment to be insurable, leading to the payment of benefits upon termination, and other employment which is "excepted" and thus carrying no benefits upon termination. Employment arrangements made between persons, who are not dealing with each other at arm's length, are categorized as "excepted employment". Brothers, who control a company, are deemed not to be dealing with the company at arm's length pursuant to subsection 251(1) of the Income Tax Act, which governs the situation. Quite clearly, the purpose of this legislation is to safeguard the system from having to pay out a multitude of benefits based on artificial or fictitious employment arrangements.

[5] The harshness of this situation has however been tempered by subparagraph 3(2)(c)(ii) of the Act, which provides for such employment between related persons to be deemed to be at arm's length and thus in turn to be treated as insurable employment, if it meets all the other provisions,where the Minister is satisfied having regard to all the circumstances (including those items that are set out) that it is reasonable to conclude that they would have entered into a substantially similar contract if they had (in fact) been dealing with each other at arm's length. It may be helpful to reframe my understanding of this section. For people related to each other the gate is closed by the Act to any claim for insurance benefits unless the Minister can be satisfied that in effect the employment arrangement is the same as that which unrelated persons, that is persons who are clearly at arm's length, would have made. If it is a substantially similar contract of employment, Parliament has deemed it to be only fair that it should be included in the scheme. However the Minister is the gatekeeper. Unless he is so satisfied the gate remains closed, the employment remains excepted and the employee is not eligible for benefits.

[6] Section 61 of the Act deals with appeals to and determination of questions by the Minister. Subsection 61(6) requires that

"...the Minister shall, with all due despatch, determine the question raised by the application..."

[7] Thus the Minister has no discretion whether or not to decide the question. He is required by law to do so. If he is not satisfied, the gate remains closed and the employee is not eligible. If however he is satisfied, without more ado or any action on the part of the Minister (other than notification of the decision) the employee becomes eligible for benefits, provided he is otherwise qualified. It is not a discretionary power in the sense that if the Minister is satisfied he may then deem the employment to be insurable. He must "determine the question" and depending on that determination the law deems the employment to be either at arm's length or not at arm's length. In this sense the Minister has no discretion to exercise in the true sense of the word, for in making his decision he must act quasi-judicially and is not free to choose as he pleases. The various decisions of the Federal Court of Appeal on this issue reveal that the same test applies as to a myriad of other officials making quasi-judicial decisions in many different fields. See Tignish Auto Parts Inc. v. M.N.R., 185 N.R. 73, Ferme Émile Richard et Fils Inc. v. M.N.R., 178 N.R. 361, Attorney General of Canada and Jencan Ltd., (1997) 215 N.R. 352 and Her Majesty the Queen and Bayside Drive-In Ltd., (1997) 218 N.R. 150.

[8] The function of this Court then, upon appeal, is to review the decision of the Minister and decide whether it was arrived at lawfully that is in accordance with the Act and with the principles of natural justice. In the case of Her Majesty the Queen v. Bayside et al., (supra) the Federal Court of Appeal laid out certain matters which should be considered by this Court when hearing these appeals. These were: (i) whether the Minister acted in bad faith or for an improper purpose or motive, (ii) whether the Minister failed to take into account all of the relevant circumstances as especially required by subparagraph 3(2)(c)(ii) or (iii) whether the Minister took into account an irrelevant factor.

[9] The Court went on to say:

"It is only if the Minister made one or more of these reviewable errors that it can be said that his discretion was exercised in a manner contrary to law, and...the Tax Court Judge would be justified in conducting his own assessment of the balance of probabilities as to whether the respondents would have entered into substantially similar contracts of service if they had been at arm's length."

[10] It has been submitted by counsel for the Appellants that the decisions of the Minister in the cases before me, were biased and furthermore that the facts stated in his Replies to these appeals give the appearance of bias. It was also argued that the stated facts upon which the Minister relied were in many cases wrong or misapprehended. Again I remind myself, when reviewing these submissions, that it is not for this Court to substitute its opinion of the evidence for that of the Minister. However, if his or her manner of arriving at the decision was unlawful in the context of the judgments set out above, those affected parts of the stated facts may be disregarded and I must then consider whether that which is left affords justifiable grounds for the decisions. If those grounds, standing alone, are sufficient for the Minister to form a decision, albeit that the Court may not agree with it, the decision must stand. If on the other hand there is no basis left upon which the Minister might lawfully make such a decision, from an objective and reasonable point of view, then such decision may be struck down and the Court can consider the evidence before it on appeal and make its own decision. In summary then, if there are sufficient facts before the Minister for his decision, it is his or her determination to make and if he or she is "not satisfied" it is not for this Court to substitute its view of those facts and say he or she should have been satisfied. Similarly, if he or she was satisfied it is not for this Court to substitute its view that he or she should not have been satisfied (an unlikely scenario in any event). Only if the decision is reached in an improper manner and it is unreasonable from an objective point of view, on the basis of the facts which were properly before the Minister, may the Court interfere.

[11] I am fortified in this approach by a number of decisions of various Courts of Appeal across the country and the Supreme Court of Canada in related decisions concerning the issue of various processes under the Criminal Code, which subsequently came to be reviewed by the Courts and are in my view analogous to the present situation. The standard of review of the validity of a search warrant was set out by Cory, J.A. (as he then was) in Times Square Book Store, Re (1985) 21 C.C.C. (3d) 503 (C.A.), where he said that it was not the role of the reviewing judge to look at or consider the authorization of a search warrant de novo and it was not open to the reviewing judge to substitute his or her own opinion for that of the issuing judge. Rather, on review, the first issue to be decided was whether or not there was evidence upon which a justice of the peace, acting judicially, could determine that a search warrant should be issued.

[12] The Ontario Court of Appeal reiterated and expanded upon this point of view in R. v. Church of Scientology of Toronto and Zaharia (1987) 31 C.C.C. (3d) 449 C.A. leave to appeal refused. In suggesting that the reviewing Court look at the "totality of the circumstances" the Court said at page 492:

"Obviously if there is not such evidence to provide a basis for such a belief (that a criminal offence had been committed) it cannot be said that in those circumstances the justice should be satisfied. There will, however, be cases where such evidence (showing reasonable grounds) does exist and the justice could be satisfied but where he or she is not satisfied and does not exercise his or her discretion in favor of issuing a search warrant. In these circumstances, the reviewing judge must not say that the justice should have been satisfied and should have issued the warrant. Similarly, if the justice in such circumstances says that he or she is satisfied and issues the warrant, the reviewing judge must not say that the justice should not have been so satisfied."

[13] The Supreme Court of Canada endorsed this approach in R. v. Garofoli (1990) 2 S.C.R. 1421. The late Mr. Justice Sopinka, when dealing with the review of the issue of an authorization to wiretap, then said:

"...While a judge exercising this relatively new power need not comply with the Wilson criteria, he should not review the authorization de novo. The correct approach is set out in the reasons of Martin J.A. in this appeal. He states...

If the trial judge concludes that, on the material before the authorizing judge, there was no basis upon which he could be satisfied that the pre-conditions for the granting of the authorisation exist, then, it seems to me that the trial judge is required to find that the search or seizure contravened s. 8 of the Charter.

The reviewing judge does not substitute his or her view for that of the authorizing judge. If, based on the record which was before the authorizing judge as amplified on the review, the reviewing judge concludes that the authorizing judge could have granted the authorization, then he or she should not interfere. In this process, the existence of fraud, non-disclosure, misleading evidence and new evidence are all relevant, but, rather than being a prerequisite to review, their sole impact is to determine whether there continues to be any basis for the decision of the authorizing judge."

[14] This approach appears to have been adopted by almost every appellate court in the country. (see R. v. Jackson (1983) 9 C.C.C. (3d) 125 (B.C. C.A.); R. v. Conrad et al. (1989) 99 A.R. 197; 79 Alta. L.R.; (2d) 307; 51 C.C.C. (3d) 311 (C.A.); Hudon v. R. (1989) 74 Sask. R. 204 (C.A.); and R. v. Turcotte (1988) 60 Sask. R. 289; 39 C.C.C. (3d) 193 (C.A.); R. v. Borowski (1990) 66 Man. R. (2d) 49; 57 C.C.C. (3d) 87 (C.A.); Bâtiments Fafard Inc. et autres c. Canada et autres (1991) 41 Q.A.C. 254 (C.A.); Société Radio-Canada v. Nouveau-Brunswick (Procureur général) et autres (1991) 104 N.B.R. (2d) 1; 261 A.P.R. 1; 55 C.C.C. (3d) 133 (C.A.); R. v. Carroll and Barker (1989) 88 N.S.R. (2d) 165; 225 A.P.R. 165; 47 C.C.C. (3d) 263 (C.A.); R. v. MacFarlane (K.R.) (1993) 100 Nfld. & P.E.I.R. 302; 318 A.P.R. 302; 76 C.C.C. (3d) 54 (P.E.I. C.A.). It seems to me most relevant to a review of the Minister's determination, which is itself a quasi-judicial decision.

Stage 1 - Analysis of the Minister's decision

[15] I turn now to consider in detail how each of the Appellants, through their counsel, challenges the decision of the Minister. It is apparent that the facts upon which the Minister relied to form his determination were assembled from a form of questionnaire completed by each Appellant and filed as Exhibits A-2, A-8 and A-10.

[16] The stated facts upon which the Minister relied are set out in the Replies to the Notices of Appeal. They are in effect the same in each case, although their respective positions with the company, their duties and the names of their respective wives changed according to the context of each appeal. The stated facts are as follows:

"7(a) the Appellant is married to Shobha Lakhani;

(b) Jitendra Lakhani (Appellant's brother) is married to Jayshree Lakhani (the Appellant's sister-in-law);

(c) Sunil Lakhani (the Appellant's brother) is married to Maria Candida Lakhani (the Appellant's sister-in-law);

(d) on March 3, 1988, the Payor was incorporated by the Appellant and his two brothers;

(e) the Appellant and his two brothers each owned one third of the outstanding shares of the Payor, during the period in question;

(f) the Payor was in the business of retail selling and servicing of personal computers and software;

(g) all of the Payor's business operations ceased on or about May 5, 1993;

(h) on October 1, 1993, the Appellant, the two brothers previously noted and a third brother, Praful Lakhani, incorporated Atrium Impex International Ltd. ("Atrium");

(i) the Appellant and his brothers owned all of Atrium's outstanding shares up to November of 1993, at which time they transferred all their shares to their wives;

(j) Atrium was in the business of exporting health and beauty products - corporate records indicate that all health and beauty products were shipped to Atrium Impex (UK) Ltd.;

(k) all of Atrium's business operations were to have ceased on or about August 31, 1995;

(l) both the Payor and Atrium were controlled by a related group, of which the Appellant was a member;

(m) both businesses were family businesses where the Appellant, his wife, brothers and sisters-in-law worked;

(n) regardless of the nature and importance of the work performed, the Appellant and his two brothers each received from the Payor the same salary in the amount of $27,738.00 for 12 months in 1991, $25,500.00 for 12 months in 1992, and $11,116.00 for 4 months in 1993;

(o) regardless of the nature and importance of the work performed, the Appellant's wife and two sisters-in-law each received from the Payor the same salary in the amount of $18,500.00 for 12 months in 1992 and $6,855.00 for 4 months in 1993;

(p) the Appellant and his brothers all had signing authority with respect to the Payor's bank account;

(q) the Appellant and his brothers, either severally or jointly, controlled the day-to-day operation of the Payor's business;

(r) the Appellant and his brothers, either severally or jointly, controlled the Payor's assets;

(s) at all material times, all major business decisions, including the terms and conditions of their own employment and the employment of their wives, were made by the Appellant and his brothers;

(t) during the period in question, the Payor's business was in fact operated as a partnership or joint venture of the Appellant and his two brothers;

(u) any arrangements between the Payor and the Appellant were verbal and the Payor did not have a written contract with the Appellant;

(v) during the period in question, the Appellant and his brothers were purportedly engaged by the Payor to perform various duties, as follows:

the Appellant - President, Director, in charge of purchasing, administration and banking,

Jitendra Lakhani - Secretary/Treasurer, Director, in charge of shipping, receiving and managing service staff,

Sunil Lakhani - Vice President, Director, in charge of sales networking, managing sales staff;

(w) during the period in question, the Appellant and his brothers were to be paid a fixed monthly salary by cheque for their services;

(x) during the period in question, the Payor did not record or set the Appellant's hours of work;

(y) unlike the Payor's unrelated workers, the Appellant and his brothers had variable hours of work and, depending on the job being done, were free to determine their own work schedule;

(z) unlike the Payor's unrelated workers, the Appellant and his brothers were neither supervised by the Payor with respect to the day-to-day performance of their duties nor were they controlled by the Payor with respect to the manner in which they worked;

(aa) during the period in question, the Appellant was not required to report to the Payor;

(bb) the Appellant had full control with respect to the terms and conditions of his purported employment with the Payor;

(cc) the Appellant is a member of the related group which owns all of the Payor's outstanding shares and is accordingly related to the Payor within the meaning of the Income Tax Act;

...

8. The Appellant was not employed pursuant to a contract of service."

[17] Counsel for the Minister conceded that paragraphs (h) to (m) to the extent that they relate to a different business, Atrium, are irrelevant. The Appellants agree with items (a) to (g), (l), (p) to (s), (u), (w), (x) and (cc). They disagree in whole or in part with items (h) to (m) conceded to be irrelevant, (n), (o), (t), (v), (y), (z), (aa) and (bb).

[18] Paragraph 12 of the Reply to the Notice of Appeal claimed in the alternative that there was no contract of service between the respective Appellants and the company. The Minister through counsel abandoned that position at the hearing of the appeal. One is nevertheless left wondering how much, if any, that claim affected the determination of the Minister on the remaining matters albeit it is not expressed in the letters advising the results of the determination.

[19] I do make the general comment that the manner in which the stated facts were assembled and put before the Minister is somewhat strange. The Appellants were given no opportunity to challenge them before the decisions were made and indeed the first time that they became aware of them was after they filed their appeals and received a reply to those appeals from the Deputy Attorney General of Canada. Who assembled the original set of facts and the form in which they were put before the Minister remains a mystery. What is clear is that the Appellant had no opportunity to challenge or comment upon them before the decision of the Minister was taken. This would hardly seem to accord with the rules of natural justice. In any event that is how it was done. As it turns out, however, the evidence before me clearly revealed that many of the stated facts are wrong, were irrelevant or did not include other relevant matters and were slanted by coloured language which left a distorted impression of what in fact was taking place within the company. I will deal with each of them in turn: -

- Items (h) to (m): Counsel for the Minister concedes that these facts were irrelevant. They should not have been within the Minister's consideration. It is hard to know what effect they had upon the determination, prejudicial or otherwise.

- Item (n): The suggestion in the words "regardless of the nature and importance of the work" is that the Appellants were being paid even if they did nothing. In fact the converse was true. It is clear from the evidence that they were each very hard working and quite possibly underpaid for their work. The Minister in this appeal seems to be hung up on salaries rather than an hourly rate of pay and that approach is a little difficult to understand. There are many employees in all walks of life, including government, who work for salaries and do not count the hours they put in. They are paid to do the job and they put in whatever time and do whatever is necessary to get the job done. It is noteworthy that the questionnaires reveal that the other employees were also on salaries, so this stated fact in itself is really irrelevant.

- Item (o): The same comments apply to the salaries paid to the wives, although the evidence in their cases is far from clear as to what they really did to earn their salaries.

- Item (t): The Appellants deny that the business was in fact operated as a partnership or joint venture of the brothers personally.

- Item (v): The duties of the Appellants are set out virtually the same as the Appellants themselves set them out in their respective questionnaires. The use of the word "purportedly" is an unfortunate choice of word by the person who assembled the facts. It indicates that he or she did not believe what the Appellants said in this respect. That is judgmental rather than factual and it is not the function of that person but rather of the Minister to form those opinions. This comment therefore is somewhat prejudicial. Counsel for the Appellants would have me go further and view it as suggesting fraud on the part of the Appellants, which would be very prejudicial. I would not go that far, but it is hard to know what effect this comment had upon the determination of the Minister. It may even have led to the erroneous conclusion in paragraphs 8 and 12 that there were no contracts of service when clearly the evidence revealed that there were.

- Items - (y) and (z): It is true that the Appellants worked on a salary basis. However it was not put before the Minister, that the evidence revealed that they worked extremely hard and long hours. The slant or suggestion in item (y) is that they could leave whenever they wanted. In fact the evidence was that they kept each other, as well as the rest of the employees, fully accountable to get the job done. Weekly meetings, both administrative and sales, were held to achieve this. These highly relevant facts were not before the Minister and thus he failed to take them into account.

- Item (bb): Again the words "purported employment" appear. That smacks again of disbelief on the part of the assembler of facts and leaves an extremely erroneous impression of the true situation. I find that it is highly prejudicial.

- Items (dd) and (ee): These are the very decisions that the Minister had to make. They are not facts but rather the expressed opinion of the person assembling the facts.

[20] Finally in this stage of the process, counsel for the Appellants submitted that the Minister failed to take into account relevant facts in that he failed to communicate with the trustee in bankruptcy and obtain further information from him. I do not agree. The Appellants were in a better position to relay all the necessary information to the Minister and the Minister's failure in this respect I do not consider to be pertinent.

[21] In my opinion, when I view all of the irrelevancies that were taken into account by the Minister, the slanted opinions put before him and the failure to provide him with the true picture, with all the full and relevant facts revealed by the evidence, the Minister's determination cannot stand. These are reviewable errors. I am led to the conclusion that if one eliminated all the irrelevancies and took out the slanted and prejudicial opinions, there would have been insufficient facts for him to have made, on an objective and reasonable basis, the determination which he did. I must now advance to the second stage of the appeal process and decide whether on all of the evidence, the parties, had they been at arm's length, would have entered into a substantially similar contract of employment, taking into account all of the circumstances including those specifically set out in paragraph 3(2)(c) of the Act.

Stage 2 - Review of the evidence

[22] I was most impressed by the evidence of the three Appellants. They were obviously hard working people throughout the periods of time in question. I also found that they were honest with the Court when giving their evidence.

[23] They had formed a limited company and they worked legitimately and industriously to keep the business of the company going. They assigned between themselves areas of responsibility from purchasing, finances, assembly, administration through to sales. They held each other accountable at weekly meetings. All that is consistent with dealing at arm's length. They ran into some bad luck, in that whilst they had a huge inventory of stock, the price of the same fell by some 50% badly affecting their sales and forcing them into bankruptcy. I have a great deal of sympathy for them in this respect. This was not a seasonal type of situation. Their plans were to carry on the business long term into the future. When the business failed, they had no resources left. Thus they applied for the first time for unemployment insurance benefits. The point I make is that I am quite satisfied that they did not set up their business arrangements in order to collect unemployment insurance benefits, as is often the case. I am certain that nothing was further from their minds.

[24] There is no doubt that they were employed in genuine employment. The question however is whether or not they would have entered into substantially similar contracts of employment if they had, in fact, been dealing at arm's length. Subparagraph 3(2)(c)(ii) of the Act specifically requires consideration to be given to the remuneration paid and the nature and importance of the work amongst other things. It is clear to the Court that the Appellants each worked for less than most of the other employees of this company. It was said in evidence that this was done to keep down the costs of the company so that they could ensure for themselves long-term jobs. That however was not a consideration of the other employees. It is also not clear to the Court what part the salaries paid to the wives played or what work they actually did for the company. They may have worked very hard for the company but that was not established by the evidence. The arrangement has all the appearance of income splitting, which may have been perfectly legitimate, if the wives actually did the work. The Court also noticed that other employees were paid overtime whilst the Appellants who worked extensive long hours were not.

Conclusion

[25] I am not of the view that persons dealing with an employer at arm's length would be inclined to take on a management position in a corporation where they were often doing the same work alongside the employees whom they were supervising and at the same time accept a considerably lower salary than that paid to those other employees. I am also not at all sure that such persons would be able to arrange for salaries to be paid to their respective wives at a level of 75% of their own, for unspecified work. In short whilst I accept that the work performed by the Appellants was genuine I am not satisfied that the financial arrangements they made with the company were substantially similar to those that would have been made had they in fact been at arm's length. The onus, of course, to establish this falls upon them and they have in my view failed to meet this onus.

[26] All three appeals are accordingly dismissed and the decisions of the Minister are confirmed.

Signed at Calgary, Alberta, this 5th day of May 1998.

"M.H. Porter"

D.J.T.C.C.