Citation: 2011 TCC 501
Date: 20111101
Docket: 2010-2792(EI)
BETWEEN:
KIMBERLY JOHNSON,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1]
This appeal is from a
decision of the Minister of National Revenue (the “Minister”) that the Appellant and her
husband’s Corporation, Kimberly Transport Ltd. (Transport) were not deemed to
be dealing with each other at arm’s length within the meaning of
paragraph 5(3)(b) of the Employment Insurance Act (the “Act”).
[2]
The Minister’s position
is that, having regard to all of the circumstances of her employment, a similar
contract of employment would not exist between parties dealing with each other
at arm’s length during the period from July 17, 2008 to July 17, 2009.
[3]
The Appellant submits
in part:
1. Kimbely Johnson was employed by Kimberly Transport Ltd. (the
“Company”) continuously for the period between inter alia, April 2006 and July
17, 2009, save and except for a period of maternity leave between April 2006
and April 2007.
2. The Company is owned and operated by the Appellant’s husband,
Thomas Johnson.
Duties performed
3. Kimberly Johnson performed the following duties for the Company,
namely, banking, auditing, payroll, posting invoices, accounts receivable,
cheque processing, cheque preparation, correspondence with accountant and/or
lawyers, completing correspondence with Canada Revenue Agency and Work Safe BC,
preparation and design of letters and administrative tasks.
4. [. . . ] 60% of her duties at home, 25% of her duties at the office
of the Company and 15% of the time she was travelling.
5. Daily time sheets [were kept] on a regular basis and in the usual
course of business.
[. . .]
Employment History
7. April 27, 2006 – Kimberly Johnson gave birth to her second child.
8. April 2007 – Kimberly Johnson returned to work.
9. April 2007 – July 17, 2009 – Kimberly Johnson worked for the
Company.
[. . .]
11. The business records of the Company indicate that between 2005
and 2008 the revenues of the Company more than doubled (2005 - $1,801,799,
2008-$3,987,353). The substantial increase in the Company revenues support the
fact that Kimberly Johnson was required to work on a full time basis for the
Company. [. . .]
12. [. . .] At the end of Kimberly Johnson’s maternity leave in April
2007, she was trained to complete the detailed work and auditing. It took her
about 6 months for her to learn and master the work. At the same time, she also
took on the work that she had done previously for the Company prior to her
maternity leave in April 2006.
13. [. . .] Kimberly Johnson was able to work from home to allow her
to get the work done and it was more efficient for her to work from home
compared to the high stress that would have occurred if she had worked at the
Company office. At the same time, she completed some of her work from the
office.
[. . .]
17. [. . .] until the birth of her third child, completed ROEs, RG
remittances, WCB remittances and the like. The accountant completed the PST and
GST returns.
18. Kimberly Johnson gave birth to her third child in July 2009. She
applied for maternity benefits.
[. . .]
25. Kimberly Johnson kept an accurate record of her time in the same
manner as all employees have done for the Company. Drivers for the Company keep
a drivers summary sheet, the staff at the office location use a punch card and
clock system.
[4]
The following
assumptions of fact are taken from the Minister’s Reply to the Notice of
Appeal:
a) the Payor’s (Transport) business provided long haul trucking and
related transport services;
b) the Appellant is married to Tom Johnson, the sole shareholder of
the Payor;
c) the Appellant began working for the Payor in 2005;
d) the Appellant alleged that her duties included banking, auditing
and processing invoices, posting invoices, processing payments, auditing and
processing payroll, dealing with employees on payroll related issues,
correspondence with the accountant, correspondence with department of
transportation, WCB, CRA and other business contacts, design and preparative of
letters, filing, attending to phone calls, reviewing of driver log books
cleaning the office and other administrative duties;
e) the Appellant was paid at the rate of $17.00 per hour during the
Period;
f) the Payor’s office hours were from 7:00 a.m. to 5:00 p.m. Monday
to Friday;
g) the Appellant recorded her hours manually while the unrelated
office workers used a punch clock located at the Payor’s office;
h) the Appellant’s record of hours of work show the Appellant
working from 3 to 9 hours per day, from 29 to 41 hours per week;
i) the majority of the Appellant’s duties were performed from the
family home;
j) the Appellant was not required to work a defined number of hours
in a given time period;
k) the Payor did not schedule the Appellant’s hours;
l) the Appellant had two young children at home during the Period;
m) the Payor submitted t4’s for the Appellant for the 2008 and 2009
taxation year as EI exempt;
n) the Appellant did not work the number of hours as reported in the
record of employment;
o) the Payor implemented a new software package for the business in
November 2008 which significantly reduced administration through efficiencies
in audit, billing, preparation of billings and payments; and
p) the Appellant was not replaced when she went off on maternity
leave with her third child.
[5]
Paragraph 5(2)(i)
of the Act provides that insurable employment does not include
“employment if the employer and employee are not dealing with each other at
arm’s length.” It is conceded that the Appellant was not dealing with Transport
at arms length because her husband was the sole shareholder. There is an
exception in paragraph 5(3)(b).
[6]
The Appellant’s
position is that she meets the criteria in paragraph 5(3)(b) which
states the following:
(3) For the purposes of paragraph (2)(i),
(a) the question of whether persons are not dealing with each other
at arm’s length shall be determined in accordance with the Income Tax Act and
(b) if the
employer is, within the meaning of that Act, related to the employee, they are
deemed to deal with each other at arm’s length if the Minister of National
Revenue is satisfied that, having regarding 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.
[With emphasis]
[7]
Bowie J. of this Court provided a helpful clarification and
summary of the somewhat convoluted case law with respect to the function of
this Court in an appeal from the Minister’s determination under subsection 5(2)
and 5(3) of the Act.
[8]
In Birkland v.
Minister of National Revenue
he stated in paragraph 4:
This
Court's role, as I understand it now, following these decisions, is to conduct a trial at which both
parties may adduce evidence as to the terms upon which the Appellant was
employed, evidence as to the terms upon which persons at arm's length doing
similar work were employed by the same employer, and evidence relevant to the
conditions of employment prevailing in the industry for the same kind of work
at the same time and place. . . . In the light of all that evidence, and the
judge's view of the credibility of the witnesses, this Court must then assess
whether the Minister, if he had had the benefit of all that evidence, could
reasonably have failed to conclude that the employer and a person acting at
arm's length would have entered into a substantially similar contract of
employment.
[9]
Having heard all of the
evidence of both parties, I must assess whether the Minister’s conclusion was reasonable.
Analysis
[10]Without
doubt there was an oral contract of employment between the Appellant &
Transport. The question is whether, having considered all of the evidence, I
can reasonably conclude that Transport would have entered into a similar
contract with a non-related worker.
[11]I
will deal with the following circumstances of the Appellant’s employment:
a) her remuneration;
b) the work she performed;
c) the terms and
conditions; and
d) the duration and nature
and importance of the work performed.
[12]The
Respondent did not seriously contest the Appellant’s $17.00 per hour. The
Appellant’s duties of employment required a high level of trust and maturity,
and there is no evidence presented to conclude that $17 an hour is not a fair
rate for administrative tasks of a sensitive nature. There are no submissions
regarding the hourly wages received by arm’s length employees for similar work
from the same employer.
[13]The
Appellant argues that several remuneration–related elements wrongfully
influenced the Minister’s assessment. First, although the original 2008 and
2009 T4s were marked as non-insurable, this was merely an error on the part of
the company accountant, and she presented evidence of amended T4s. The
Respondent does not dispute that the errors on the T4s were rectified and the
appropriate deductions taken. The Respondent added that the Appellant was the
only employee who logged her hours manually rather than using a punch-clock
like the arm’s length employees. The accuracy of this is inconclusive.
[14]Significantly,
the Minister found that the Appellant was paid during a period when she was not
working, and worked during a period that she was not getting paid. The
Appellant concedes that she was mistakenly paid for the week of July 20, 2009
when her maternity leave actually began on July 17, 2009, but submits that it was
the payroll company’s mistake, and the employer honestly reported the
Appellant’s true last day of work on her record of employment. This may be
correct, yet in arranging one’s records to take advantage of the exception in
5(3)(b) one must act scrupulously.
[15]During
the appellant’s maternity leave, she contacted the Canada Revenue Agency on her
employer’s behalf. She rationalized that she was merely doing her employer a
favour, and urges me to recognize the marketplace reality of small companies,
where the same norms as those found in larger companies are not applicable, and
employees are occasionally willing to undertake such favours. While simply
performing a task without pay on behalf of her employer is hardly enough to
show that parties at arm’s length would not have agreed to a substantially
similar contract, it is a significant factor that most be considered in the
larger employment context.
[16]In
Fruchter v. The Minister of National Revenue, Jorré J. stated
the following in paragraph 20:
There is one aspect of the evidence that stands out. In
paragraph 9)g) of the Reply, it states that the Minister assumed that there
were weeks where the Appellant rendered no services to the Payor although the
Appellant continued to be paid.[8] Given that the
Appellant’s evidence simply did not deal with this, I must proceed on the basis
that there were such weeks. Apart from sick leave or vacation leave, employers
do not normally pay employees for not working. This goes beyond flex time
arrangements. This feature by itself is so clearly contrary to an arm’s length
arrangement that the Minister could reasonably have reached the conclusion that
he did even if all the other terms and conditions were arm’s length conditions.[9]
[17]Here,
unlike Fruchter, there are not weeks of pay without work, but rather
just one week, which the Appellant attributes to an honest mistake by their
payroll company. There is, however, no evidence of the employer requesting the
extra pay returned, a fact that seems strikingly particular to a non-arm’s
length employment context. The quantity of her work without pay is somewhat
insignificant. In Samson v. Minister of National Revenue, the Appellant
had made 135 bank deposits and prepared and signed a total of 623 cheques
during a period that she was not on the payor’s payroll and, because of the
magnitude and nature of the work, Little J. concluded the Minister was correct
in deciding the employment of that Appellant was not insurable. The work
performed by the Appellant in the current appeal following the termination of
her employment was not to the same extent as in Samson.
[18]While
the work performed by the Appellant may have been minimal and her pay without
work may have been an error, it cannot be ignored. The Minister’s decision was
strongly influenced by the flexible hours and home work location available to
the her which did not match the employer’s usual office hours and location for
work conducted. This is the strongest of the Minister’s submissions.
[19]The
Appellant submits that all employees at the company could follow such a
schedule and these accommodations reflect a general trend in job places to
allow employees flexibility to accommodate their family responsibilities. I
accept the Respondent’s answer that no evidence was provided of other employees
in the office actually having such an arrangement for their schedules. The
evidence of the Appellant and her husband suited their present day needs and I
do not give it the weight of an unrelated witness.
[20]Without
corroborating evidence, I do not accept that other employees could also work
away from the office at times nor do I accept the example of company truck drivers,
who, one assumes, would have an entirely different set of tasks with out of
office work being the norm. I conclude that the Appellant’s terms and
conditions relating to her work location and schedule were built around her
childcare needs. There was no corroborated evidence of other employees making
similar arrangements.
[21]I
accept that the Appellant was a responsible and motivated employee and that
Transport accommodated her schedule and home needs to retain her. I give only
minimal weight to the Minister’s position that her workload should have
decreased with the introduction of new booking software. Computer software
rarely offers immediate efficiency.
[22]The fact that no replacement was hired when the Appellant
went on leave is cogent evidence, although not conclusive. In Lash v.
Minister of National Revenue,
no replacement was hired for the employee in question but the Court did not
consider that factor as conclusive that the employee was benefiting from more
favourable terms than would exist in an arm’s length relationship.
[23]The Appellant
placed considerable emphasis on her submission that the Court is presented with
new evidence at trial; the company’s financial statements showing a large
increase in income from 2006 to 2009. She argues that these financial
statements demonstrate the importance of her work and support the volume of
hours she recorded. The Minister already had access to this information in
another format when he made his determination.
[24]In
evaluating the role of the increasing income of the company and its impact on
the Appellant’s employment duties, it is useful to consider Eagle Canyon Adventures
Inc. v. Minister of National Revenue.
In that case, the Tax Court of Canada allowed the Appellant’s appeal, noting
that the employer needed someone with the employee’s bookkeeping skills because
the revenue of that company had increased by over 150%. There, the Appellant had
also set up a computer system to aid with the bookkeeping tasks. Unlike the
current case, however, in Eagle the computer system explained what allowed
her to start her work season later in subsequent years. Here, the Appellant’s hours
did not diminish with the new system. Instead, she claims the new system had no
impact on the number of hours she worked.
[25]Considering all of the factors outlined above, the
role of the Court is now to decide if the Minister’s decision was reasonable.
The Appellant urges the Court to consider Huang v. Minister of National
Revenue,
where Rowe J. recalled his observation in his previous decision, Docherty v. Minister of National Revenue, as to the standard that should be applied in
inquiring if the employment contract is substantively similar to one that may
have arisen had the parties been operating at arm’s length:
[25] The
template to be utilized in making a comparison with arm's length working
relationships does not require a perfect match. That is recognized within the
language of the legislation because it refers to a "substantially similar
contract of employment". Any time the parties are related to each other
within the meaning of the relevant legislation, there will be idiosyncrasies
arising from the working relationship, especially if the spouse is the sole
employee or perhaps a member of a small staff. However, the object is not to
disqualify these people from participating in the national employment insurance
scheme provided certain conditions have been met. To do so without valid
reasons is inequitable and contrary to the intent of the legislation.
[26]This is not
a case where the idiosyncrasies of a small company or related parties working
together explain the aspects of the employment contract that indicate a
non-arm’s length relationship: the time-keeping method, the flexible schedule,
the ability to work remotely, the work done without pay, the pay done without
work, and the lack of a replacement. These factors combined to provide the
Minister with sufficient reason to conclude that the parties were not operating
at arm’s length. While none of these indicators are necessarily conclusive on
their own, together they point to non-arm’s length conditions of employment.
The Court’s role in reviewing the Minister’s decision is not to replace the
Minister’s decision with the Court’s own opinion. Rather, the Court must simply
decide if the Minister’s conclusion was reasonable, and, in this case, it was. The
factors that support this decision include:
a) By and large,
the Minister’s assumption of facts are accurate.
b) Upon her taking
leave, she was not replaced.
c)
She worked at home combining her care for her children with her employment
responsibilities.
d)
She had discretionary and flexible hours.
e)
While possibly through error, she performed work for Transport without pay and
received pay without work.
[27]On a final
note, the Appellant should not misconstrue the dismissal of her appeal in this
case as calling into question the reality of her employment and the value of
the tasks that she performed for the company. As explained by Bowie J. in Glacier
Raft Co. v. Minister of National Revenue:
9 I
should make it clear that although I am bound to dismiss the appeals, I was
impressed with all the witnesses... I have no doubt that Anne and Elizabeth
worked as hard as, and probably harder than, the other guides. Nor do I doubt
that Mr. Murphy relied heavily on their experience, not only when he bought the
company in 1995, but thereafter as well. This is certainly not a case of
employment of convenience being created for the benefit of members of the
family so that they could take unfair advantage of the employment insurance
system. Nevertheless, the terms of the Act are reasonably clear, and
when related parties enter into employment contracts they must be scrupulous to
see that the terms do not differ from those on which the employer employs other
workers, or on which the workers could find work with other employers, if they
wish the employment to be insurable under the Act.
[28]In this
case, the overall combination of evidence led the Minister to conclude that a
substantively similar employment contract would not exist between arm’s length
parties. The Minister’s conclusion was reasonable and should stand.
Signed at Ottawa, Canada, this
1st day of November 2011.
“C.H. McArthur”
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