Bureau v. M.N.R., docket 96-1215-UI

Date: 19980109

Docket: 96-1215-UI

BETWEEN:

YVON BUREAU,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

TREMBLAY J.T.C.C.

[1] This appeal was heard at Québec, Quebec on December 2, 1997.

Point at issue

[2] The question is whether the appellant’s employment during the period from May 2 to October 29, 1994 and May 1 to December 8, 1995, with Ferme Bureau Inc., hereinafter referred to as "the payer", which operated a dairy farm, was excepted employment.

[3] According to the respondent, the appellant owned 40 percent, his son 40 percent and his daughter-in-law Cécile Poirier 20 percent of the shares during the period at issue.

[4] The payer owes the appellant $145,750 in the form of a note with no provision for repayment or interest, and the appellant has received no payments on that amount since 1992. Additionally, the appellant holds 139,950 non-voting shares in the payer, which have never paid him any dividends.

[5] The appellant stated that he would never have transferred voting rights in the payer's shares to a person with whom he was dealing at arm's length.

[6] In the appellant's submission, although there were non-arm's length dealings, that had no effect on working conditions, salary and so on.

Burden of proof

[7] The appellant has the burden of showing that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue.[1]

[8] In Johnston, the Court held that the facts assumed by the respondent in support of the assessments or reassessments are also assumed to be true until proven otherwise. The facts assumed by the respondent in the instant case are set out in subparagraphs (a) to (t) of paragraph 5 of the Reply to the Notice of Appeal. That paragraph reads as follows.

[TRANSLATION]

5. In making his determination, the respondent Minister of National Revenue ("the Minister") relied, inter alia, on the following facts:

(a) The payer was incorporated on May 26, 1992 and operates a dairy farm where the herd includes 28 milch cows and 30 to 35 heifers and calves. (admitted)

(b) The payer also has 300 arpents of land under cultivation in hay and corn to feed the herd. (admitted)

(c) The appellant purchased the land from his father and has operated the farm on his own account for 16 years. (denied as worded)

(d) On May 26, 1992 the appellant decided to create the payer and the distribution of the payer's voting shares was as follows:

- the appellant, with 60 percent of the shares;

- Ghislain Bureau, the appellant's son, with 20 percent of the shares;

- Cécile Poirier, Ghislain's wife, with 20 percent of the shares. (admitted)

(e) On July 28, 1992 the payer bought the appellant's farm for $425,700. (admitted)

(f) In consideration of this sale the appellant received 350 Classes F, G, H, I, J and K non-voting shares with a par value of $1 each and a promissory note for $285,750. (denied)

(g) On September 18, 1992 the appellant transferred 20 percent of his voting shares to his son Ghislain without compensation and the new distribution of the payer's voting shares was then as follows:

- the appellant, with 40 percent of the shares;

- Ghislain Bureau, with 40 percent of the shares;

- Cécile Poirier, with 20 percent of the shares. (admitted)

(h) The appellant then lost voting control over the payer's shares, and this occurred without consideration and although he remained the only shareholder who ran a significant financial risk. (denied)

(i) The appellant maintained that he acted in this way because his son wanted to obtain a loan from the Crédit agricole and his wife and he were required to hold 60 percent of the payer's shares in order to obtain a loan of that kind. (admitted)

(j) The payer's other two shareholders, Ghislain Bureau and his wife, invested no money when the payer was created or when the farm was purchased from the appellant by the payer. (admitted)

(k) On September 21, 1992 the appellant sold one of the residences located near the payer's farm to his son Ghislain for $60,000, in consideration of a promissory note for the same amount. (admitted)

(l) From December 28, 1992 onwards the appellant was allegedly hired by the payer periodically to do various duties on the land. (admitted)

(m) During the periods at issue the appellant allegedly received fixed pay of $400 a week and was only paid once a month. (admitted)

(n) The appellant in fact provided services to the payer under a contract of service. (admitted)

(o) The payer owes the appellant the sum of $145,750 in the form of a loan, without any provision for repayment or interest, and the appellant has received no repayment of this amount from the payer since 1992. (denied)

(p) The appellant also held $139,950 of non-voting shares in the payer which never paid him any dividends. (admitted)

(q) The appellant stated that he would never have transferred voting rights over the payer's shares if he had been dealing with an unrelated person. (no knowledge)

(r) The appellant is the father of Ghislain Bureau and the father-in-law of Cécile Poirier, who control the payer's shares, and is thus related to the payer within the meaning of s. 251 of the Income Tax Act. (admitted)

(s) The payer would never have hired an unrelated person on terms substantially similar to those offered the appellant. (denied)

(t) The appellant's period of employment with the payer, from December 28, 1992 to October 2, 1993, was the subject of an appeal which was heard by this Court, and the Court dismissed the appeal, ruling that the employment was excepted from insurable employment under s. 3(2)(c) of the Unemployment Insurance Act. (admitted)

Facts in evidence

[9] In addition to the foregoing admissions, the factual evidence consisted of the testimony of the appellant and his son Ghislain and Exhibits A-1 to A-7.

Appellant's testimony

[10] The appellant explained, and this was subsequently confirmed by his son Ghislain's testimony, that when his son wanted to purchase the farm in September 1992 the Crédit agricole refused to guarantee the $243,000 loan with the Caisse populaire St-Ubalde. The reason was that Ghislain and his wife together only held 40 percent of the shares. The Crédit agricole required that he be owner of 60 percent of the shares.

[11] As the appellant wished to sell the land and his son Ghislain was a sensible boy, he agreed to transfer another 20 percent on September 18, 1992. Additionally, the appellant, in order to protect himself and his wife personally, demanded the sum of $200,000 at the time of the transaction.

[12] According to the witness, there were two houses near the farm: the one which was part of the farm was sold to his son Ghislain in September 1992 for $60,000, payable with a promissory note for the same amount.

[13] The price of $425,700 paid by the payer for the farm on July 28, 1992 [para. [8]: 5(e)] was set by the accountants in this amount as the result of a valuation which they did. The $425,700 included $60,000 for the house.

[14] The appellant maintained that if he had sold the farm to an unrelated person he would undoubtedly have tried to obtain the entire payment in cash. However, he might not have been able to do so. He mentioned a case in which a farmer, selling to an unrelated third party, had to take back a balance as a second mortgage. In any case, the appellant himself was satisfied with the sale, as it was to his son.

[15] During the periods at issue the appellant maintained that he worked 40 to 44 hours a week and was paid $400 a week, with payment every month. The respondent admitted in subparagraph 5(n) of the Reply to the Notice of Appeal that the appellant [TRANSLATION] "in fact performed services for the payer under a contract of service".

[16] The respondent accordingly admitted that s. 3(1)(a) of the Act applies in the appellant's favour and the point at issue is limited to s. 3(2)(c) of the Act.

[17] Further, on the main point raised regarding the employment, namely the salary, the son Ghislain testified that he worked for his father when his father owned the farm, and received $400 a week. Moreover, after the appellant had tried to find employment several times without success, his son hired him at $400 a week, after checking with farmers in the area as to the salary offered to employees hired. It appears that $400 is the weekly salary regularly paid.

[18] Several judgments have been rendered by the Federal Court of Appeal on the effect of s. 3(2)(c) of the Act, including Tignish Auto Parts Inc. v. Minister of National Revenue[2] and Ferme Émile Richard et Fils Inc. and Deputy Attorney General of Canada.[3]

[19] In the first judgment, Tignish Auto Parts Inc. (F.C.A., A-555-93), dated July 25, 1994, the Court quoted counsel for the respondent in whose opinion it concurred:

Under the authority of Minister of National Revenue v. Wrights' Canadian Ropes Ltd., contends the respondent, unless the Minister has not had regard to all the circumstances of the employment (as required by subparagraph 3(2)(c)(ii) of the Act), has considered irrelevant factors, or has acted in contravention of some principle of law, the Court may not interfere. Moreover, the Court is entitled to examine the facts which are shown by evidence to have been before the Minister when he reached his conclusion so as to determine if these facts are proven. But if there is sufficient material to support the Minister's conclusion, the Court is not at liberty to overrule it merely because it would have come to a different conclusion. If, however, those facts are, in the opinion of the Court, insufficient in law to support the conclusion arrived at by the Minister, his determination cannot stand and the Court is justified in intervening.

[20] There are thus four tests which the Tax Court of Canada can apply in deciding whether it is entitled to intervene:

the Minister

(1) did not have regard to all the circumstances;

(2) considered irrelevant factors;

(3) contravened a principle of law;

(4) based his decision on insufficient facts.

[21] The Court continued as follows:

In my view, the respondent's position is correct in law except that it does not indicate what powers the Court enjoys once an intervention is deemed to be justified.

[22] After considering various points, the Court went on to add:

It is therefore appropriate, in the case at bar, to analyze the provisions of the Unemployment Insurance Act under which the jurisdiction of the Tax Court is exercised in order to determine the type of decision it may render.

The Tax Court, not being a superior court of record, has no inherent jurisdiction to refer the matter back to the Minister. It does, however, enjoy implied powers and could, perhaps, on this basis, as claimed by the respondent, refer the matter back to the Minister. But the difficulty here is that the power of the Tax Court to refer back has already been legislated upon. Subsection 70(2) of the Act, which I have reproduced earlier, reads thus:

70. (2) On an appeal under this section, the Tax Court of Canada may reverse, affirm or vary the determination, may vacate, confirm or vary the assessment or may refer the matter back to the Minister for reconsideration and reassessment, and shall thereupon in writing notify the parties to the appeal of its decision and the reasons therefor.

[23] In Ferme Émile Richard et Fils Inc., the Federal Court of Appeal summarized Tignish Auto Parts Inc. as follows:

... As this Court recently noted in Tignish Auto Parts Inc. v. Minister of National Revenue, July 25, 1994, A-555-93, F.C.A., not reported, an appeal to the Tax Court of Canada in a case involving the application of s. 3(2)(c)(ii) is not an appeal in the strict sense of the word and more closely resembles an application for judicial review. In other words, the Court does not have to consider whether the Minister's decision was correct: what it must consider is whether the Minister's decision resulted from the proper exercise of his discretionary authority. It is only where the Court concludes that the Minister made an improper use of his discretion that the discussion before it is transformed into an appeal de novo and the Court is empowered to decide whether, taking all the circumstances into account, such a contract of employment would have been concluded between the employer and employee if they had been dealing at arm's length.

[24] The question now is whether the Minister's decision in the instant case results from the proper exercise of his discretion.

[25] The Minister based his final decision primarily on allegations 5(o) to (r). They read as follows:

(o) The payer owes the appellant the sum of $145,750 in the form of a loan, without any provision for repayment or interest, and the appellant has received no repayment of this amount from the payer since 1992. (denied)

(p) The appellant also held $139,950 of non-voting shares in the payer which never paid him any dividends. (admitted)

(q) The appellant stated that he would never have transferred voting rights over the payer's shares if he had been dealing with an unrelated person. (no knowledge)

(r) The appellant is the father of Ghislain Bureau and the father-in-law of Cécile Poirier, who control the payer's shares, and is thus related to the payer within the meaning of s. 251 of the Income Tax Act. (admitted)

[26] These allegations relate partly to the situation in which the appellant stands with regard to the transaction by which the farm was transferred from the father to the payer. The son had to acquire a majority of the payer's shares in order to obtain the necessary financing (see para. [10]). All these facts therefore lead to the fundamental finding of fact that the appellant is related to the payer, a fact which is not in dispute.

[27] However, this fact by itself cannot be a basis for the respondent's conclusion in the following allegation (para. [8]: 5(s)):

(s) The payer would never have hired an unrelated person on terms substantially similar to those offered the appellant.

[28] The facts creating the non-arm's length relationship are not in themselves a sufficient basis for concluding that the terms on which he was hired were similar to those offered an unrelated person.

[29] There is no relevant fact, that is, a fact relating to the actual substance of the case, to indicate that there was any benefit associated with the hiring which an unrelated person would not have received. This is the essence of 3(2)(c). The only fact that might be relevant is the salary of $400 a week. According to the evidence, Ghislain received this salary from the appellant in previous years and it is the salary generally paid for a farm employee (para. 17).

[30] The respondent accordingly relied on facts creating the relationship between the parties but not on facts pertaining to the remuneration paid or the terms and conditions of employment as set out in 3(2)(c). In my view, therefore, there is no basis for the respondent's conclusion. As the respondent in any case admitted that the appellant did perform services for the payer, the Court concludes that there are valid grounds for the appeal.

[31] The appeal is allowed and the determination by the Minister reversed.

Signed at Québec, Quebec, January 9, 1998.

Guy Tremblay

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 16th day of November 1998.

Kathryn Barnard, Revisor

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