Date: 20020107
Docket: 2001-203(EI)
BETWEEN:
BARBARA GEORGE,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Cain, D.J.T.C.C.
[1] This is an appeal by the Appellant
from the decision of the Respondent dated November 1, 2000 that
the employment of the Appellant by Harold George (the
"Payor"), operating as St. Peters Irving, from June 22,
1998 to December 12, 1998 and from January 25, 1999 to
December 3, 1999 (the "periods in question") was not
insurable employment for the following reasons:
(a) the Appellant was not employed
pursuant to a contract of service within the meaning of paragraph
5(1)(a) of the Employment Insurance Act (the
"Act");
(b) the Appellant's employment was
excepted employment as the Appellant and the Payor were not
dealing with each other at arm's length within the meaning of
paragraph 5(2)(i).
[2] The Respondent based his decision
on the following assumptions of fact:
(a) the Payor began
leasing an Irving service station in March, 1998 which sells gas
and parts as well as offering the services of a mechanic;
(b) the service
station is open for business 12 to 14 hours per day, 7 days
per week, 52 weeks per year;
(c) the Appellant is
the Payor's spouse;
(d) the Appellant
did the Payor's bookkeeping and her duties included payroll
and related remittances, HST remittances, accounts receivable and
payable and whatever else needed to be done;
(e) the Appellant
performed her duties from a spare room in their family home;
(f) the
Appellant was not required to report for work at the Payor's
business location and he delivered the bookkeeping records to the
Appellant at their family home;
(g) the Appellant
was not required to work specified hours or days and she
determined when and how she would perform her duties;
(h) the Appellant
was not subject to review or supervision by the Payor;
(i) prior to
the initial payroll period, the Appellant performed bookkeeping
duties for the Payor without remuneration;
(j) between
payroll periods the Appellant continued to perform the
Payor's bookkeeping duties without remuneration;
(k) during the
calendar year 1999 the Appellant continued to perform the
Payor's bookkeeping duties without remuneration during those
weeks where she is not included on the Payor's payroll;
(l) the
Appellant performed the Payor's bookkeeping duties year round
regardless of whether she was on the payroll or not;
(m) the Payor did not have
sufficient funds available to pay the Appellant for all the
duties she performed;
(n) the Appellant
was in receipt of employment insurance benefits while not on the
Payor's payroll;
(o) the Payor
subsidized his bookkeeping costs with employment insurance
benefits;
(p) the Appellant
was included on the Payor's payroll based on the qualifying
requirements for employment insurance benefits rather than on the
Payor's need for her services;
(q) there was no
contract of service between the Appellant and the Payor;
(r) the Appellant
was related to the Payor within the meaning of the Income Tax
Act;
(s) the Appellant
was not dealing with the Payor at arm's length;
(t) 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 not reasonable
to conclude that the Appellant 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.
[3] The Appellant admitted assumptions
(a) to (c) inclusive, (e), (n) and (r) but denied every other
assumption hereinabove set out.
FACTS
[4] From the evidence adduced by the
Appellant and the facts set out in the Appellant's Notice of
Appeal which were admitted by the Respondent in his Reply, the
Court makes the following findings of fact.
[5] In March of 1998, the Payor
commenced business as a garage and service station at St. Peters,
Nova Scotia.
[6] From March to June of that year,
his wife, the Appellant, performed the services of a bookkeeper
without remuneration.
[7] In June the Payor engaged her to
perform the same services at the rate of $10.00 per hour. Most of
her duties were performed at home and the Appellant decided what
hours she would work. From time to time during the periods in
question she would perform odd tasks for the station without
remuneration. She also performed these and other services for the
Payor outside of the periods in question without
remuneration.
[8] Her duties included posting to the
general ledger and payroll ledger; preparing the payroll and
cheques; preparing HST remittances and paying bills.
DECISION
[9] The Appellant was represented by a
Member of the Legislative Assembly of Nova Scotia (the
"Agent") who is also a lawyer by profession. However
the Agent advised the Court that there was no solicitor-client
relationship between he and the Appellant and he was appearing
only in an agency capacity.
[10] The Agent, at the outset of the
hearing, objected to the use of an unspecified statutory
declaration allegedly made by the Appellant to a representative
of Human Resources Development Canada on the basis that the
taking of the statement violated the Canadian Charter of Rights
and Freedoms. Counsel for the Respondent cited authorities in
support of its taking and use at trial. The Agent offered nothing
in reply. The Court, familiar with the jurisprudence in support
of the Respondent's submission, ruled that the declaration,
if made by the Appellant, would be admissible if proposed by the
Respondent.
[11] The Appellant called only the Payor in
support of her appeal. Generally his evidence supported the facts
hereinabove found and in particular he admitted that from time to
time both during and outside of the periods in question the
Appellant performed services without remuneration. He testified
that she had no specific hours of work and that he did not
consider work performed, while she was not on the payroll, as
employment. He testified that he did not pay her for the period
March to June of 1998 as she was doing the work, without
remuneration, to help him start up the business.
[12] No documentary evidence or other
evidence was introduced by which the Court might have tracked the
performance of the Appellant and in particular the amount of work
required to perform her duties.
[13] The Payor testified that he kept a
record of the Appellant's hours of work on slips of paper,
gave that information to the Appellant and then destroyed them.
This contradicted the Appellant's admission in her Notice of
Appeal that she kept her own hours of work.
[14] The fact found by the Court support
assumptions (f), (g), (i), (j), (k), and (l) that were denied by
the Appellant.
[15] The Appellant closed her case without
calling any additional evidence although she was present in
Court.
[16] The Respondent at the opening of his
case called the Appellant. The Agent objected on the grounds that
she was not compellable. The Court ruled that she was present and
compellable. The Respondent withdrew her request and submitted
that she would rely on the adverse inference that the Court
should draw as a result of her failure to testify. The Respondent
closed his case without calling any evidence.
[17] In Hickman Motors Limited v. The
Queen, [1997], 2 S.C.R. 336, the Supreme Court of
Canada outlined the principles applicable when a person
challenges the assumptions made by the Minister of National
Revenue. In that case the Court was dealing with assumptions made
by the Minister in making an assessment in a tax matter. The
principles apply equally well to assumptions made by the Minister
in a ruling under the Act. L'Heureux Dubé
J. said at p.378:
It is trite law that in taxation the standard of proof is the
civil balance of probabilities ... and that within balance
of probabilities, there can be varying degrees of proof required
in order to discharge the onus, depending on the subject matter
... The Minister, in making assessments, proceeds on assumptions
... and the initial onus is on the taxpayer to
"demolish" the Minister's assumptions in the
assessment ... The initial burden is only to "demolish"
the exact assumptions made by the Minister but no more ...
This initial onus of "demolishing" the
Minister's exact assumptions is met where the appellant makes
out at least a prima facie case ...The law is settled that
unchallenged and uncontradicted evidence "demolishes"
the Minister's assumptions...
Where the Minister's assumptions have been
"demolished" by the appellant, "the onus ...
shifts to the Minister to rebut the prima facie case" made
out by the appellant and to prove the assumptions ...
Where the burden has shifted to the Minister, and the Minister
adduces no evidence whatsoever, the taxpayer is entitled to
succeed ..."
[18] A prima facie case is one supported by
evidence which raises such a degree of probability in its favour
that it must be accepted if believed by the Court unless it is
rebutted or the contrary is proved. It may be contrasted with
conclusive evidence that excludes the possibility of the truth of
any other conclusion than the one established by that
evidence.
[19] To satisfy the obligation of
demolishing the assumptions of the Respondent, the Appellant was
required to call sufficient evidence to establish a prima facie
case. There is a well recognized rule of evidence that the
failure of a party or witness to give evidence, which was in the
power of the party or witness to give and by which the facts
might have been elucidated, justifies the court in drawing the
inference that the evidence of the party or witness would have
been unfavourable to the party to whom the failure was
attributed. The party against whom the inference operates may
explain it away by showing circumstances that prevented the
production of such a witness. (Murray v. Saskatchewan,
[1952] 2 D.L.R. 499, at pp. 505-506)
[20] The Appellant was present in Court and
she was a compellable witness. No explanation was offered as to
why she was not being called. These two facts justify the Court
in inferring that her evidence would have been unfavourable to
her appeal. The evidence of the Payor did not demolish the
assumptions on which the Minister could reasonably find that that
employment of the Appellant was excepted employment within the
provisions of the Act. The Appellant failed to establish a
prima facie case and her appeal must be dismissed.
[21] The Appellant was not represented by
counsel and although her agent was a lawyer she did not have
official legal representation. The Court should therefore explain
in some detail the reason why her employment was excepted under
the Act.
[22] Subsections 5(2) and 5(3) of the
Act read as follows:
(2) Insurable employment does not include:
. . .
(i)
employment if the employer and employee are not dealing with each
other at arm's length.
(3) For the purpose 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 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."
[23] Section 251 of the Income Tax
Act reads in part as follows:
"Section 251. Arm's length.
(1) For the purposes of
this Act,
(a) related
persons shall be deemed not to deal with each other at arm's
length; and
(b) it
is a question of fact whether persons not related to each other
were at a particular time dealing with each other at
arm's length.
(2) Definition of
"related persons". For the purpose of this
Act, "related persons", or persons related to each
other, are
(a) individuals
connected by blood relationship, marriage or adoption;
...
[24] The application of the jurisprudence in
respect to the principles applicable to non-arm's length
transactions under the Income Tax Act of Canada were
canvassed extensively in a judgment of this Court in Parrill
v. Canada (Minister of National Revenue-M.N.R.),
[1996] T.C.J. No. 1680, Court files Nos. 95-2644(UI)
& 95-2649(UI) inclusive by Cuddihy T.C.J. which
judgment was affirmed by the Federal Court of Appeal, [1998]
F.C.J. No. 836 DRS 98-16759.
[25] The learned Judge concluded from an
examination of the relevant authorities that parties are not
dealing with each other at arm's length when the predominate
consideration or the overall interest or the method used amount
to a process that is not typical of what might be expected of
parties who are dealing with each other at arm's length. He
further stated that parties are not dealing with each other at
arm's length if there is the existence of a common mind that
directs the bargaining for both parties to a transaction; or that
the parties to a transaction are acting in concert without
separate interests; or that either party to a transaction did or
had the power to influence or exert control over the other; and
that the dealings of the parties are not consistent with the
object and the spirit of the provisions of the law and they do
not demonstrate a fair participation in the ordinary operation of
the economic forces of the market place (See Attorney General
of Canada v. Rousselle et al. 124 N.R. 339).
[26] The learned Judge concluded that the
existence of a combination of one or several of these initiatives
that would be inconsistent or interfere, in due process
negotiating between employer and employee and with the intent of
the legislation, will not survive the arm's length test. The
Court is also bound to insure, in analyzing all the circumstances
and the accepted evidence, that the parties are not defeating the
purpose of the legislation. (See Tanguay v. Unemployment
Insurance Commission (1986) 68 N.R. 154.
[27] The relationship created by the Payor
and the Appellant cannot survive the above test. The parties
agreed that from March to June the Appellant would work without
remuneration, that she would be paid for a period that satisfied
the minimum requirements that would qualify her to be entitled to
benefits under the Act and she worked without remuneration
outside the periods in question. There was present a common mind
directing the bargaining between the Appellant and the Payor and
they were acting in concert without separate interests.
[28] The process of structuring the salaries
in the way described is not in keeping with what might be
expected of a true arm's length relationship that should
demonstrate the real ordinary operation of the economic forces of
the market place unhindered by arrangements or transactions that
are not consistent with the object or intent of the law.
[29] The special provisions of the
Act, relating to the employment of relatives, are
restrictive and the principle of arm's length relationship is
difficult to grasp by the majority of law persons.
[30] When the Unemployment Insurance
Act (the forerunner of the Act) was enacted, relatives
were disqualified from drawing benefits even if the work was at
arm's length. Subsequently the Act was amended to
permit relatives to receive benefits provided that their
employment status could meet the arm's length test.
[31] A relative, who works and is paid
during a period in question, like the Appellant did in this case,
may not qualify for benefits under the Act. In the case at
bar the Appellant did work and was paid. But she also worked both
before during and after the periods in question without
remuneration. In order to qualify for benefits, the Appellant
must have been able to show that the Payor would have been able
to employ a stranger for the full term during which she worked,
that is, both before during and after the periods in question,
under the same terms and for the same remuneration. She failed to
establish such a relationship by cogent evidence.
[32] It was reasonable for the Respondent to
find that a stranger would not have worked without remuneration
from March to June and to continue to work without remuneration
during and outside of the periods in question.
[33] The benefits under the Act are
designed for those persons who are gainfully employed and become
unemployed because of lack of work or for some specific reason
permitted by the Act. A person is not permitted by design
to create employment for the purpose of ultimately qualifying for
benefits. Such a scheme is not consistent with the purposes and
aims of the legislation. In Tanguay (supra) Pratte
J. quoting Donaldson L.J. in describing the purpose and intent of
employment insurance said at p. 157:
In my judgment it is crucial to reaching a decision on this
appeal to remember that this is an insurance scheme, however it
may be funded, and that it is an insurance against unemployment.
It is of the essence of insurance that the assured shall not
deliberately create or increase the risk. (the underlining
is the Court's)
[34] The Respondent came to the conclusion
that the periods in question were created by the Appellant for
the sole purpose of permitting her to qualify for benefits under
the Act. The Court finds that on the evidence such a
conclusion was justified.
[35] The Court finds that during the periods
in question there was no contract of service. The relationship
between the Payor and the Appellant was more akin to one of
partnership.
[36] In the alternative if a contract of
employment did exist, the employment created thereunder was not
at arm's length and is thereby excepted employment under the
Act.
[37] The appeal is dismissed and the
decision of the Respondent is confirmed.
Signed at Rothesay, New Brunswick, this 7th day of January
2002.
D.J.T.C.C.
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