Melnick v. M.N.R., docket 97-311-UI

Date: 19980915

Docket: 97-311-UI

BETWEEN:

MARTIN MELNICK,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1] This appeal was heard in St. Catharines, Ontario on September 4, 1998. Both parties were represented by counsel. Martin Melnick ("Worker") appeals from a determination of the Minister of National Revenue ("Minister") according to which the employment of the Worker during the period from May 8, 1995 to November 3, 1995 with Sorensen Concrete & Pools ("Payor") was excepted from insurable employment within the meaning of the Unemployment Insurance Act ("Act") because the Worker and the Payor were not dealing with each other at arm's length and that it was reasonable for the Minister to conclude that the Worker and the Payor would not have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.

[2] The applicable provision of the Act is subsection 3(2) which, so far as material, reads as follows:

"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;

..."

[3]Before proceeding further, it is important to examine the nature of the inquiry that this Court must make in an appeal from a determination by the Minister under paragraph 3(2)(c) of the Act.

[4]In Bayside Drive-In Ltd. and Her Majesty the Queen, (1997) 218 N.R. 150, the Federal Court of Appeal stated as follows:

The Tax Court Judge was justified in interfering with the determination made by the Minister under subparagraph 3(2)(c)(ii) only if he was satisfied that the Minister made one or more of the following reviewable errors: (1) the Minister acted in bad faith or for an improper purpose or motive; (ii) the Minister failed to take into account all of the relevant circumstances, as expressly required by paragraph 3(2)(c)(ii); or (iii) the Minister took into account an irrelevant factor. 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 hence that 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.

[5]Further, in Attorney General of Canada and Jencan Ltd. (1997) 215 N.R. 352, the Federal Court of Appeal said:

Having found that certain assumptions relied upon by the Minister were disproved at trial, the Deputy Tax Court Judge should have then asked whether the remaining facts which were proved at trial were sufficient in law to support the Minister's determination that the parties would not have entered into a substantially similar contract of service if they had been at arm's length. If there is sufficient material to support the Minister's determination, the Deputy Tax Court Judge is not at liberty to overrule the Minister merely because one or more of the Minister's assumptions were disproved at trial and the judge would have come to a different conclusion on the balance of probabilities. 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.

In my opinion the Worker has established that the Minister failed to take into account all of the relevant circumstances or took into account an irrelevant factor. My reasons for so concluding are as follows:

1. Several assumptions contained in the Minister's Reply have been proven to be incorrect or not complete as explained below:

(a) Assumption 6(e) states that Michael Melnick, the father of the Worker and the sole shareholder of the Payor company died in October, 1995. The evidence is he died in July, 1995 following a heart attack.

(b) Assumption 6(j) states the Worker made the major decisions. The evidence was that prior to his death in July, 1995 the Worker's father made the major decisions for the business and it was only after that date that the Worker essentially became the controller of the business responsible for the day to day operations.

(c) As to assumption 6(l) of the Reply, the Worker confirmed that after his father's death, the Worker had signing authority over the Payor's bank account. He explained that this was simply a matter of convenience because his mother, the then owner of all of the shares of the Payor, had nothing to do with the business and had entrusted its entire operation to the Worker.

(d) With respect to assumptions 6(s) and 6(t) of the Reply, the evidence was that the Worker's salary from the Payor was $3,000 gross per month in 1994 and $3,350 gross per month in 1995 (i.e., $20,100 for the six month season). The Worker testified that he worked six months in 1995 and only five months in 1994. In effect, his monthly raise from 1994 to 1995 was just slightly higher than 10%. He further testified that "everyone got a bit of a raise in 1995". Also, on the issue of salaries, the Worker, after his father's death, was the chief person in charge of the business. Of the 15 other employees, three key employees had salaries which were not much less than those of the Worker. For example, in the 1995 season, Bruce Taylor, a service manager, received $18,502, Elizabeth Currie, the store manager, received $17,000 and Aaron Sinclair, a construction foreman, received $17,275.

(e) As to assumption 6(u) of the Reply, the Worker confirmed that indeed four of his monthly salary cheques in the net amounts of $2,164 each were redeposited into the bank account of the Payor's business. He explained the reason for this was firstly, a lack of cash in the business at start-up time in May with the result that he agreed with his mother to redeposit the cheques. The Worker added that he owed $13,000 to his father (and therefore to his mother, the universal legatee of his father) and that the redepositing of the four cheques was essentially to pay back part of that indebtedness.

(f) Further, on being asked how could he live without having the monies represented by the four cheques, the Worker stated that his common-law wife had a job with the T-D Bank earning approximately $33,000 a year and that this saw them through the four month period.

(g) With respect to his hours of work, the Worker testified that his rate of pay was essentially based upon an estimated 44 hour week and that his hours of work were in many cases dictated by the nature of the work and weather conditions. In other words, one could simply not stop pouring cement at 5:00 p.m. but would have to continue until the job was completed. Further, sometimes the job would be completed earlier than say 5:00 p.m. and there would not be sufficient time to commence another job and therefore the Worker would leave work early. Further, the hours would fluctuate when it was impossible to pour cement or do similar work because of weather conditions.

[6]Having thus resolved the threshold issue, I find that I am justified in conducting my own assessment and that assessment, based on the evidence of the Worker, is that on a balance of probabilities the Worker has established that, having regard to all of 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 was reasonable to conclude that the Worker 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.

[7]Therefore the appeal is allowed and the determination of the Minister is reversed.

Signed at Ottawa, Canada this 15th day of September 1998.

"T.P. O'Connor"

J.T.C.C.