Date: 19980105
Docket: 96-1649-UI
BETWEEN:
LINDA FARRAH,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1] The appellant is contesting the respondent’s
determination that her employment with the payer, Maison J.
Farrah Inc., from September 4, 1993, to September 3, 1994, and
from November 7, 1994, to September 9, 1995, was not
insurable.
[2] The respondent based his determination on paragraph
3(1)(a) of the Unemployment Insurance Act
(“the Act”) and argued that there was no contract of
service between the appellant and the payer during the periods at
issue.
[3] The determination was based on the facts set out in
subparagraphs (a) to (p) of paragraph 5 of the Reply to the
Notice of Appeal. They read as follows:
[TRANSLATION]
(a) Hilda Boudreau-Farrah is the payer’s sole
shareholder;
(b) she inherited her shares on May 31, 1990, when her husband
died;
(c) she is the appellant’s mother;
(d) until September 1994, the payer operated a department
store that sold clothing for the entire family, jewellery and
other accessories;
(e) in November 1994, the payer moved its business into the
appellant’s basement and began specializing in selling
plus-size women’s clothing;
(f) Hilda Boudreau-Farrah has never worked for or was involved
in the payer’s business;
(g) she has never looked at the accounting figures for the
payer’s business;
(h) the appellant made all the decisions pertaining to the
payer’s business;
(i) the appellant was free to do as she pleased: she organized
her own work and schedule and set her own salary;
(j) the appellant guaranteed the payer’s $15,000
variable credit contract;
(k) the appellant personally obtained three loans ($15,000,
$20,000 and $10,000) from the Caisse Populaire de
Lavernière to pay the payer’s debts;
(l) the appellant was not paid from September 10 to
November 6, 1994, while she moved the payer’s
business;
(m) the appellant worked for the payer without pay from
October 1995 to February 1996;
(n) the appellant signed the payer’s cheques;
(o) the appellant was not subordinate to the payer;
(p) during the periods at issue, there was no
employer-employee relationship between the appellant and
the payer.
[4] Given that the appellant and the payer are related persons
under paragraph 251(2)(a) and subparagraphs
251(2)(b)(i) and (iii) of the Income Tax Act, after
hearing the appeal I asked counsel for the appellant and the
agent for the respondent to make submissions on the application
of subparagraph 3(2)(c)(ii) of the Act, since in this case
the respondent did not exercise the discretion conferred on him
by that provision. I also offered them an opportunity to submit
additional evidence, if necessary, which they declined to do
since they preferred to confine themselves to written
representations. I will come back to this point below.
[5] In her testimony, the appellant stated that she began
working for the payer as a salesperson in 1980 and did so until
her grandfather died in 1986. She then started managing the
business, since her father, who had inherited the company’s
shares, was already ill. He died in 1990. The appellant’s
mother then became the sole shareholder, and the appellant said
that she continued to manage the business until it was closed in
February 1996. According to the appellant, who said that she had
acquired a great deal of experience in this small family
business, she did all the work normally involved in managing a
business, including the administrative work and the work related
to purchasing and selling.
[6] It is difficult to know exactly what role was played by
the appellant’s mother, Hilda Boudreau Farrah (“Hilda
Farrah”), aside from the fact that during the periods at
issue she was the sole shareholder and director of the payer and
the only person authorized to conduct the payer’s banking
transactions, at least with the National Bank of Canada.[1]
[7] In a statutory declaration dated October 20, 1995, the
appellant twice stated that her mother was never involved in the
business.
[8] According to Danielle Chouinard, an officer involved in
determinations who testified for the respondent, Hilda Farrah was
unable to provide her with any specific information about the
business and said that she was not involved in it; she simply
referred Ms. Chouinard to the appellant. For instance, Hilda
Farrah was unaware of the sales or income of the business. Nor
did she know the number of employees, the appellant’s
salary or the point at which the appellant stopped working.
According to her, the appellant determined her own work schedule.
She also said that the business had always operated at the same
place — she was unaware that it had moved in 1994 —
and that it had operated out of the basement of the home she
owned, in which the appellant lived, only in February 1996.
As far as the financial situation was concerned, Hilda Farrah
said that she knew the business was not doing well. However, she
was not familiar with the line of credit, although she said that
she was acquainted with the financial institution. She also said
that she had gone to see a notary to hypothecate the house, but
she did not provide any details as to the date when that had
occurred. Finally, Hilda Farrah said that she did not examine the
figures and that the appellant did not have to report to her.
[9] In spite of all this, the appellant testified that it was
her mother, whom she saw three or four times a day, who made all
the important decisions about such things as loans, laying off
another employee and, finally, closing the business. According to
her, her mother had a good head for business even though she had
little education. The appellant also said that her mother did not
know the technical details, never worked for the business and
never looked at the figures. The appellant further stated that
she gave reports to and discussed product purchases with her
mother, although she set the sale prices of the products
herself.
[10] The appellant said that she always had a fixed work
schedule, from 9:00 a.m. to 5:00 p.m. She also said that her
salary did not change for several years.
[11] The appellant said that she had no other interest in the
business, since her mother was the sole shareholder. Yet she
signed a $15,000 variable credit contract[2] with the Caisse populaire de
Lavernière on the corporation’s behalf on February
25, 1994, stating that she had been duly authorized by a
resolution of the corporation’s board of directors dated
February 24, 1994. According to the contract, the appellant
provided a general guarantee for the amounts owed by the
corporation under the contract.
[12] No resolution authorizing the appellant to represent the
corporation was adduced in evidence. According to the appellant,
the business was not working out and her mother had decided to
borrow money. The appellant said that she had simply made the
necessary arrangements with the Caisse populaire, which her
cousin managed.
[13] On September 2, 1994, two days before she was apparently
laid off for the first time from September 4 to November 6, 1994,
the appellant obtained a $15,000 personal loan from the same
Caisse populaire.[3] She said, however, that although she had obtained that
loan and the others that will be discussed below in her own name,
they were for the corporation and the corporation was the one
that repaid them. She said that the reason she had not asked her
mother to sign was “to take some pressure off
her”.
[14] According to the appellant, the period from September 4
to November 6, 1994, was when the business was closed
and the move occurred. The appellant admitted that she had
handled the move but had not been paid for it. Moreover,
Exhibit I-5 contains nine bank deposit slips, filed
jointly, that were signed by the appellant during that period and
that total more than $11,500, which shows that there was
nonetheless some activity at a time when she said the business
was closed.
[15] The appellant said that her second employment period
began on November 7, 1994, and ended on September 9, 1995.
She said that she worked only every other week. Another employee
worked as a salesperson during that period. Exhibit I-5
indicates that the appellant continued to make bank deposits
regularly during that time. She said that she was not paid for
making deposits, which took very little of her time. Exhibit
I-7 seems to indicate that the bookkeeping was also done
regularly. However, there is nothing to indicate that the
appellant did not continue to be involved in the business on a
daily basis.
[16] On March 20, 1995, the appellant obtained another
personal loan for $20,000.
[17] The appellant obtained a third personal loan on September
29, 1995, nearly three weeks after the end of the second period
at issue. The appellant admitted that after that employment
period, she worked for the payer until February 1996 and was paid
for some weeks. Exhibit I-6 contains three cheques made out
to her that she signed for the payer. The cheques are dated
September 23, October 6 and October 21, 1995. She said that
she reported those earnings. The appellant said that starting in
November or December 1995, there was almost no more work and only
one customer a week. Yet Exhibit I-7 shows that sales for
those two months amounted to more than $4,000.
[18] During her testimony, the appellant also said that the
reason she had worked without pay some of the time was that the
cost of the building in which the business operated before it
moved had to be paid first, the implication being that the cost
was so high that there was no income left to pay her salary.
[19] The appellant had the burden of proving on a balance of
probabilities that there was a contract of service between her
and the payer during the periods at issue.
[20] Based on an analysis of the evidence adduced, I am not
satisfied that there was a genuine employer-employee
relationship between the payer and the appellant during those
periods. The courts have clearly established that such a
relationship must involve a relationship of subordination, which
cannot exist if there are a number of indications to suggest that
the appellant actually acquired full control of the business that
was officially being operated by the payer. An analysis of all
the evidence adduced shows that it is highly doubtful, to say the
least, that Hilda Farrah made or was even interested in making
any decisions at all as the sole shareholder and director of the
payer, other than giving the appellant complete freedom to
operate the business at her discretion as if she were its real
owner.[4] The
appellant no doubt worked as a salesperson and then as the
manager when her grandfather and father ran the business.
However, according to the evidence adduced, especially with
regard to the years from 1993 to 1995, it really seems that once
the appellant’s mother became the sole shareholder and
director, she played no role in managing the business and showed
only a slight interest, if that, in what was going on in it. The
appellant’s statutory declaration dated October 20, 1995,
and what Danielle Chouinard verified with Hilda Farrah are quite
persuasive in this regard. When the appellant testified at the
hearing, she certainly tried to attribute a key role to her
mother, contrary to what she had stated previously. I find that
her explanation of what she did was not very credible, especially
with respect to her alleged layoff from September to November
1994 and the personal financial commitments she made in both 1994
and 1995. To begin with, there is nothing to show that Hilda
Farrah had anything to do with the fact that the appellant
decided more than once to stop drawing a paycheque while
continuing to run the business without pay, claiming that this
amounted to a termination of her employment. The appellant was
the only person responsible for that decision, which tends to
show that there was no relationship of subordination. In
addition, the financial commitments made by the appellant, given
the risks they involved and the fact that they were, the evidence
suggests, more or less unknown to the person who was supposed to
be running the alleged employer, are also inconsistent with the
status of an employee who had no interest in the business. The
conclusion strongly suggested by this situation is that the
appellant acted as if she were the real owner of the
business.
[21] In the case at bar, it seems to me that these are the
most important and most relevant factors in terms of the need to
prove the existence of a contract of service within the meaning
of paragraph 3(1)(a) of the Act. Precisely because these
factors are present, I cannot conclude that the appellant has
proved on a balance of probabilities that there was such a
contract between her and the payer.
[22] Finally, this conclusion means that I do not have to deal
with the application of paragraph 3(2)(c) of the Act, with
respect to which submissions were made by counsel for the
appellant and the agent for the respondent. Although it is not
necessary for me to analyse that issue here, I will simply state
in closing that I do not think the appeal could have succeeded
under that provision if I had been satisfied that there was a
genuine contract of service between the appellant and the payer
during the periods at issue. It does not seem to me that it can
be concluded from all of the circumstances I have referred to
concerning the appellant’s performance of her work that the
appellant and the payer would have entered into a substantially
similar contract if they had been dealing with each other at
arm’s length.
[23] For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 5th day of January 1998.
“P.R. Dussault”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 16th day of November
1998.
Kathryn Barnard, Revisor
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