Date: 20020205
Docket: 2001-2146(EI)
BETWEEN:
EDWARD BERGEN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
AND
Docket: 2001-2147(EI)
ALLAN BERGEN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
PORTER, D.J.T.C.C.
[1] These appeals were heard on common
evidence by consent of the parties on October 1, 2001 at
Saskatoon, Saskatchewan.
[2] Both Appellants have appealed from
the decisions of the Minister of National Revenue (the
"Minister") dated May 2, 2001, that their respective
employment with Peter Bergen Industries Inc. (the
"Corporation") for the period of January 1, 1999
to November 16, 2000, was insurable under the Employment
Insurance Act (the "EI Act") for
the following reasons, which are the same in each case,
namely:
You were engaged under a contract of service. Furthermore, the
Minister is satisfied that a substantially similar contract of
employment would have been entered into if you had been dealing
with each other at arm's length. Therefore, you were engaged
in insurable employment.
By implication, the Minister accepted that as related persons,
the two Appellants were not considered under section 251 of the
Income Tax Act to be dealing with each other at arm's
length and then exercised his discretion under
paragraph 5(3)(b) of the EI Act.
[3] The decisions were said to be
issued pursuant to section 93 of the EI Act and were based
on paragraphs 5(1)(a), 5(2)(i), and 5(3)(b)
thereof.
[4] The material facts reveal that the
Appellants, between them, controlled 44% of the issued shares in
the Corporation through their own separate corporations, and that
the remaining 56% of the shares were held by other family members
through their respective corporations. The Corporation carried on
a farm equipment manufacturing business. Thus, under the combined
effect of section 251 of the Income Tax Act and paragraphs
5(2)(i) and 6(3)(a) of the EI Act, their
employment, Edward as General Manager, and Allan as Director of
Operations, was automatically excluded by law from insurable
employment, subject to the exception contained in paragraph
5(3)(b) of the EI Act, whereby they are deemed to
deal with each other at arm's length if the Minister is
satisfied of the various criteria set out in that section and
exercises his discretion to allow them through the gate, so to
speak. This the Minister has purported to do and it is those
decisions which are now in issue in these appeals.
[5] I made reference to the nature of
the situation, arising in this matter in my decision in
Crawford & Company Ltd. and M.N.R. (98-407(UI),
98-537(UI) and 98-538(UI)). I adopt what I said in that
case as this is also an instance of the Minister purportedly
exercising his discretion to include employment situations in the
fold of the employment insurance scheme, when the law would
otherwise, in the natural course of events, have excluded
them.
[6] Usually, the Minister is being
asked to open the door to persons claiming benefits on the basis
that the exception should be applied. Appeals constantly come to
the Court after the Minister has refused to exercise his
discretion in their favour. In this case, however, as in the
Crawford case (above), the Minister is proactively
exercising his discretion to bring people into the fold of the
employment insurance scheme, who would not otherwise by operation
of the law, be there. Thus, as a result of the exercise of his
discretion, they are being assessed for premiums. I am of the
view that the law enables him to do that in the appropriate
circumstances, but that such is hardly consistent with the intent
of the amendments made to the Unemployment Insurance Act
in 1990 when this discretion was first introduced. In the House
of Commons André Plourde, MP speaking on behalf of the
government of the day, at the time the amendments to the
Unemployment Insurance Act were introduced, said that Bill
C-21 had provisions to eliminate unfair restrictions on
eligibility of benefits and:
All the changes proposed in Bill C-21 have essentially been
designed to make that system more efficient and equitable and to
meet the needs of workers. (see Hansard June 7, 1989 House of
Commons Debates page 2722)
[7] Nonetheless, as a matter of strict
interpretation of the law, I am satisfied that the legal capacity
for the Minister to do this exists. It is not for the Court
to get involved in policy matters, but I do point out the
differences between the developing practice, as evidenced by
these cases, and the apparent intention of Parliament with
respect to this section, at the time it was introduced, namely to
alleviate the hardship and inequity that would be faced by
related people in genuine virtual arm's length relationships,
who would otherwise be unable to participate in the scheme. There
was never any suggestion that it was designed to provide a large
net to the Minister to go fishing and haul in those he could
catch by exercising his discretion, proactively.
[8] Furthermore, this interpretation
of the section by the Minister seems inherently unfair, in that
if these brothers were not related to the majority shareholders
and the Minister had decided as a matter of fact that they were
dealing with the Corporation at arm's length, they would have
the right to appeal to this Court on a de novo
basis. As it is, because they are related to the majority
shareholders, although the basic law says that they are out of
the scheme, due to the exercise of the discretion by the Minister
they are brought into it against their wishes and have only a
limited right of appeal; that is, their right to appeal is
curtailed by the deference the Court must give to the Minister in
the exercise of his discretion, in these circumstances.
[9] While that deference and the
limited appeal rights seem perfectly logical and fair when people
who are basically excluded by the law are trying to bring
themselves within the terms of an exception, and the Minister is
charged with the responsibility by Parliament to exercise his
discretion, the same cannot be said when the Minister by the
exercise of that discretion, proactively reaches out to bring
people into the scheme in order to collect premiums, when they
have no wish to be there.
The Law relating to a Review of the
Minister's Decision
[10] In the scheme established under the
EI Act, Parliament has made provision for certain
employment to be insurable, leading to the payment of benefits
upon termination, and other employment which is "not
included" and thus carrying no benefits upon termination.
Employment arrangements made between persons, who are not dealing
with each other at arm's length, are categorized as not
included. Brothers and corporations controlled by persons related
to them are deemed not to be dealing with each other at arm's
length pursuant to subsection 251(1) of the Income Tax
Act, which governs the situation. Quite clearly the original
purpose of this legislation was to safeguard the system from
having to pay out a multitude of benefits based on artificial or
fictitious employment arrangements; see the comments of the
Federal Court of Appeal in Paul v The Minister of national
Revenue, #A-223-86 unreported, where Hugessen J. said:
We are all prepared to assume, as invited by appellant"s
counsel, that paragraph 3(2)(c) of the Unemployment Insurance
Act, 1971, ... and subsection 14(a) of the
Unemployment Insurance Regulations, ... have for at least
one of their purposes the prevention of abuse of the Unemployment
Insurance Fund through the creation of socalled
"employer-employee" relationships between persons whose
relationship is, in fact, quite different. That purpose finds
obvious relevance and rational justification in the case of
spouses who are living together in a marital relationship. But
even if, as appellant would have us do, we must look only at
spouses who are legally separated and may be dealing at arm's
length with one another, the nature of their relationship as
spouses is such as, in our view, to justify excluding from the
scheme of the Act the employment of one by the other.
...
We do not exclude the possibility that the provisions may have
other purposes, such as a social policy decision to remove all
employment within the family unit from the operation of the
Unemployment Insurance Act, 1971, as was suggested by
respondent's counsel. (emphasis mine)
[11] The harshness of this situation has
however been tempered by paragraph 5(3)(b) of the
EI Act, which provides for such employment between related
persons deemed to be at arm's length and thus in turn to be
treated as insurable employment, if it meets all the other
provisions, where the Minister is satisfied 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, that it is reasonable to
conclude that they would have entered into a substantially
similar contract if they had (in fact) been dealing with each
other at arm's length.
[12] It may be helpful to reframe my
understanding of this section. For people related to each other
the gate is closed by the statute to any claim for employment
benefits unless the Minister can be satisfied that in effect the
employment arrangement is the same as that which unrelated
persons, that is persons who are clearly at arm's length,
would have made. If it is a substantially similar contract of
employment, Parliament has deemed it to be only fair that it
should be included in the scheme. However, the Minister is the
gatekeeper. Unless he is so satisfied the gate remains closed,
the employment remains excepted and the employee is not eligible
for benefits.
[13] Subsection 93(3) of the EI
Act deals with appeals to and the determination of
questions by the Minister. It requires that:
The Minister shall decide the appeal within a reasonable time
after receiving it and shall notify the affected persons of the
decision.
[14] Thus, the Minister has no discretion
whether or not to decide the question. He is required by law to
do so. If he is not satisfied, the gate remains closed and the
employee is not eligible. If however, he is satisfied, without
more ado or any action on the part of the Minister (other than
notification of the decision) the employee becomes eligible for
benefits, provided he is otherwise qualified. It is not a
discretionary power in the sense that if the Minister is
satisfied he may then deem the employment to
be insurable. He must "determine the question" and
depending on that determination the law deems the employment to
be either at arm's length or not at arm's length. In this
sense the Minister has no discretion to exercise in the true
sense of the word, for in making his decision he must act
quasi-judicially and is not free to choose as he pleases. The
various decisions of the Federal Court of Appeal on this issue
reveal that the same test applies as to a myriad of other
officials making quasi-judicial decisions in many different
fields. (See Tignish Auto Parts Inc. v. M.N.R., 185 N.R.
73, Ferme Émile Richard et Fils Inc. v. M.N.R., 178
N.R. 361, Attorney General of Canada and Jencan Ltd.,
(1997) 215 N.R. 352 and Her Majesty the Queen and Bayside
Drive-in Ltd., (1997) 218 N.R. 150.)
[15] The function of this Court then, upon
appeal, is to review the decision of the Minister and decide
whether it was arrived at lawfully that is in accordance with the
Act and with the principles of natural justice. In the
case Her Majesty the Queen v Bayside et al., supra,
the Federal Court of Appeal laid out certain matters which should
be considered by this Court when hearing these appeals. These
were:
(i) 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) of the
Employment Insurance Act now subsection 5(3) of the EI
Act; or
(iii) the Minister took
into account an irrelevant factor.
[16] The Court went on to say:
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 ... 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.
[17] I remind myself, when reviewing this
case, that it is not for the Court to substitute its opinion of
the evidence for that of the Minister. However, if his or her
manner of arriving at the decision was unlawful in the context of
the judgments set out above, those affected parts of the stated
facts may be disregarded and I must then consider whether that
which is left affords justifiable grounds for the decision. If
those grounds, standing alone, are sufficient for the Minister to
form a decision, albeit that the Court may not agree with it, the
decision must stand. If on the other hand there is no basis left
upon which the Minister might lawfully make such a decision, from
an objective and reasonable point of view, then such decision may
be struck down and the Court can consider the evidence before it
on appeal and make its own decision.
[18] In summary then, if there are
sufficient facts before the Minister for his decision, it is his
or her determination to make and if he or she is
"not satisfied" it is not for this
Court to substitute its view of those facts and say he or she
should have been satisfied. Similarly, if he or she was satisfied
it is not for this Court to substitute its view that he or she
should not have been satisfied (an unlikely scenario in any
event). Only if the decision is reached in an improper manner and
it is unreasonable, from an objective point of view, on the basis
of the facts which were properly before the Minister, may the
Court interfere.
[19] I am fortified in this approach by a
number of decisions of various Courts of Appeal across the
country and the Supreme Court of Canada in related decisions
concerning the issue of various processes under the Criminal
Code, which subsequently came to be reviewed by the Courts and
are in my view analogous to the present situation. The standard
of review of the validity of a search warrant was set out by
Cory, J.A. (as he then was) in Times Square Book Store, Re
(1985) 21 C.C.C. (3d) 503 (C.A.), where he said that it was
not the role of the reviewing judge to look at or consider the
authorization of a search warrant de novo and it was not
open to the reviewing judge to substitute his or her own opinion
for that of the issuing judge. Rather, on review, the first issue
to be decided was whether or not there was evidence upon which a
justice of the peace, acting judicially, could determine that a
search warrant should be issued.
[20] The Ontario Court of Appeal reiterated
and expanded upon this point of view in R. v. Church of
Scientology of Toronto and Zaharia (1987) 31 C.C.C. (3d) 449
C.A. leave to appeal refused. In suggesting that the reviewing
Court look at the "totality of the circumstances" the
Court said at 492:
Obviously if there is not such evidence to provide a basis for
such a belief (that a criminal offence had been committed) it
cannot be said that in those circumstances the justice should be
satisfied. There will, however, be cases where such evidence
(showing reasonable grounds) does exist and the justice could be
satisfied but where he or she is not satisfied and does not
exercise his or her discretion in favour of issuing a search
warrant. In these circumstances, the reviewing judge must not say
that the justice should have been satisfied and should have
issued the warrant. Similarly, if the justice in such
circumstances says that he or she is satisfied and issues the
warrant, the reviewing judge must not say that the justice should
not have been so satisfied.
[21] The Supreme Court of Canada endorsed
this approach in R. v. Garofoli (1990) 2 S.C.R. 1421. The
late Mr. Justice Sopinka, when dealing with the review of the
issue of an authorization to wiretap, then said:
While a judge exercising this relatively new power need not
comply with the Wilson criteria, he should not review the
authorization de novo. The correct approach is set out in
the reasons of Martin J.A. in this appeal. He states ...
If the trial judge concludes that, on the material
before the authorizing judge, there was no basis upon which he
could be satisfied that the pre-conditions for the granting
of the authorization exist, then, it seems to me that the trial
judge is required to find that the search or seizure contravened
s. 8 of the Charter.
The reviewing judge does not substitute his or her view
for that of the authorizing judge. If, based on the record which
was before the authorizing judge as amplified on the review, the
reviewing judge concludes that the authorizing judge could have
granted the authorization, then he or she should not interfere.
In this process, the existence of fraud, non-disclosure,
misleading evidence and new evidence are all relevant, but,
rather than being a prerequisite to review, their sole impact is
to determine whether there continues to be any basis for the
decision of the authorizing judge.
[22] This approach appears to have been
adopted by almost every appellate court in the country. (See
R. v. Jackson (1983) 9 C.C.C. (3d) 125 (B.C. C.A.);
R v. Conrad et al. (1989) 99 A.R. 197; 79 Alta.
L.R.; (2d) 307; 51 C.C.C. (3d) 311 (C.A.);
Hudon v. R. (1989) 74 Sask. R. 204 (C.A.); and
R. v. Turcotte (1988) 60 Sask. R. 289; 39
C.C.C. (3d) 193 (C.A.); R. v. Borowski (1990) 66 Man. R.
(2d) 49; 57 C.C.C. (3d) 87 (C.A.); Bâtiments Fafard Inc.
et autres c. Canada et autres (1991) 41 Q.A.C. 254 (C.A.);
Société Radio-Canada v. Nouveau-Brunswick
(Procureur général) et autres (1991) 104 N.B.R.
(2d) 1; 261 A.P.R. 1; 55 C.C.C. (3d) 133 (C.A.); R. v.
Carroll and Barker (1989) 88 N.S.R. (2d) 165;
225 A.P.R. 165; 47 C.C.C. (3d) 263 (C.A.);
R. v. MacFarlane (K.R.) (1993) 100 Nfld.
& P.E.I.R. 302; 318 A.P.R. 302; 76 C.C.C. (3d) 54
(P.E.I. C.A.). It seems to me most relevant to a review of the
Minister's determination, which is itself a quasi judicial
decision.
The Law Relating to Arm's Length
[23] In the scheme established under the
E.I. Act, Parliament has made provision for certain
employment to be insurable, leading to the payment of benefits
upon termination, and other employment which is not included and
thus carries no benefits upon termination. Employment
arrangements made between persons, who are not dealing with each
other at arm's length, are excluded. Quite clearly the
purpose of this legislation is to safeguard the system from
having to pay out a multitude of benefits based on artificial or
fictitious employment arrangements.
[24] Subsections 5(2) and 5(3) of the
Employment Insurance Act read in part 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
...
[25] Paragraph 251(1)(b) of the
Income Tax Act reads as follows:
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. (emphasis added)
[26] Although the Income Tax Act
specifies that it is a question of fact whether persons were at a
particular time dealing with each other at arm's length, that
factual question must be decided within the cradle of the law and
in reality it is a mixed question of fact and law; see Bowman,
T.C.J. (as he then was) in R.M.M. Canadian Enterprises
et al. v. The Queen, 97 DTC 302.
[27] What is meant by the term
"arm's length" has been the subject of much
judicial discussion both here in Canada, in the United States,
the United Kingdom and in other Commonwealth countries such as
Australia where similar wording appears in their taxing statutes.
To the extent that the term has been used in trust and estate
matters, that jurisprudence has been discounted in Canada when it
comes to the interpretation of taxation statutes; see Locke, J.
in M.N.R. v. Sheldon's Engineering Ltd., 55 DTC
1110.
[28] In considering the meaning of the term
"arm's length" sight must not be lost of the words
in the statute to which I gave emphasis above, "were at a
particular time dealing with each other at arm's
length". The case law in Canada as Bowman, T.C.J. points out
in the R.M.M. case (above) has tended to dwell upon the
nature of the relationship rather than upon the nature of the
transactions. I am not sure that having regard to the inclusion
of these words in the statute, that this approach is necessarily
the only one to be taken, for to do so is to ignore these
somewhat pertinent words, to which surely some meaning must be
given. Perhaps this development has come about as a result of the
factual situations in a number of the leading cases in Canada.
These have tended to involve one person (either legal or natural)
controlling the minds of both parties to the particular
transaction. Thus even though the transaction might be similar to
an ordinary commercial transaction made at arm's length that
itself has not been enough to take the matter out of the non
arm's length" category; see for example Swiss Bank
Corporation et al. v M.N.R., 72 D.T.C. 6470
(S.C.C.).
[29] In effect what these cases say is that
if a person moves money from one of his pockets to the other,
even if he does so consistently with a regular commercial
transaction, he is still dealing with himself, and the nature of
the transaction remains "non arm's length".
[30] However, simply because these leading
cases involved such factual situations, does not mean that people
who might ordinarily be in a non arm's length relationship
cannot in fact "deal with each other at a particular time in
an 'arm's length' manner", any more than it
means that people who are ordinarily at arm's length might
not from time to time deal with each other in a non
arm's length manner. These cases are quite simply examples of
what is not an arm's length relationship rather than
amounting to a definition in positive terms as to what is an
arm's length transaction. Thus at the end of the day all of
the facts must be considered and all of the relevant criteria or
tests enunciated in the case law must be applied.
[31] The expression "at arm's
length" was considered by Bonner, T.C.J. in William J.
McNichol et al. v. The Queen, 97 D. T. C. 111, where at pages
117 and 118 he discussed the concept as follows:
Three criteria or tests are commonly used to determine whether
the parties to a transaction are dealing at arm's length.
They are:
(a) the existence of
a common mind which directs the bargaining for both parties to
the transaction,
(b) parties to a
transaction acting in concert without separate interests, and
(c) "de
facto" control.
...
The decision of Cattanach, J. in M.N.R. v. T R
Merrit Estate is also helpful. At pages 5165-66 he
said:
In my view, the basic premise on which this analysis is based
is that, where the "mind" by which the bargaining is
directed on behalf of one party to a contract is the same
"mind" that directs the bargaining on behalf of the
other party, it cannot be said that the parties were dealing at
arm's length. In other words where the evidence reveals
that the same person was "dictating" the
"terms of the bargain" on behalf of both
parties, it cannot be said that the parties were dealing at
arm's length.
Finally, it may be noted that the existence of an arm's
length relationship is excluded when one of the parties to the
transaction under review has de facto control of the
other. In this regard deference may be made to the decision
of the Federal Court of appeal in Robson Leather Company
v M.N.R., 77 DTC 5106.
[32] This approach was also adopted by
Cullen, J. in the case of Peter Cundill &
Associates Ltd. v. The Queen, [1991] 1 C.T.C. 197, where
at page 203 he says this:
Whether the parties in this case were dealing at arm's
length is a question to be examined on its own particular facts.
...
[33] Many of these cases, as I say, are
premised on the relationship existing between the parties which
was determined to be all conclusive. There is little direct
guidance there, when consideration is being given to the nature
of the transaction or dealing itself. This question has, however,
been quite succinctly dealt with by the Federal Court of
Australia in the case of The Trustee for the Estate of the
late AW Furse No 5 Will Trust v. FC of T, 91 ATC
4007/21 ATR 1123. Hill, J. said when dealing with similar
legislation in that country :
There are two issues, relevant to the present problem, to be
determined under s. 102AG(3). The first is whether the parties to
the relevant agreement were dealing with each other at arm's
length in relation to that agreement. The second is whether the
amount of the relevant assessable income is greater than the
amount referred to in the subsection as the "arm's
length amount".
The first of the two issues is not to be decided solely by
asking whether the parties to the relevant agreement were at
arm's length to each other. The basis in the subsection is
rather upon whether those parties, in relation to the agreement,
dealt with each other at arm's length. The fact that the
parties are themselves not at arm's length does not mean that
they may not, in respect of a particular dealing, deal with each
other at arm's length. This is not to say that the
relationship between the parties is irrelevant to the issue to be
determined under the subsection... [emphasis added]
[34] Bowman, T.C.J. alluded to this type of
situation in the R.M.M. case (above) when he said at page
311 :
I do not think that in every case the mere fact that a
relationship of principal and agent exists between persons means
that they are not dealing at arm's length within the meaning
of the Income Tax Act. Nor do I think that if one retains
the services of someone to perform a particular task, and pays
that person a fee for performing the service, it necessarily
follows that in every case a non-arm's-length
relationship is created. For example, a solicitor who represents
a client in a transaction may well be that person's agent yet
I should not have thought that it automatically followed that
there was a non-arm's-length relationship between them.
The concept of non-arm's length has been evolving.
[35] In Scotland, in the case of Inland
Revenue Commissioners v. Spencer-Nairn 1991 SLT 594 (Ct. of
Sessions) the Scottish Law Lords reviewed a case where the
parties were in a non arm's length situation. They commented
favourably on the approach taken by Whiteman on Capital Gains
Tax (4th ed.), where it was suggested by the author that two
matters that should be taken into account when considering the
words 'arm's length'. These were whether or not there
was separate or other professional representation open to each of
the parties and secondly, perhaps with more relevance to the
situation on hand, whether there was "a presence or absence
of bona fide negotiation".
[36] In the United States the term
"arm's length" was defined in the case of
Campana Corporation v. Harrison (7 Circ; 1940) 114 F2d
400, 25 AFTR 648, as follows:
A sale at arm's length connotes a sale between parties
with adverse economic interests.
[37] I dealt with these cases in Campbell
and M.N.R. (96-2467(UI) and (96-2468(Ul)) and the
principles for which they stand. I adopt all that I said in that
case.
[38] At the end of the day it would seem to
me that what is intended by the words "dealing at arm's
length" can best be described by way of an example. If one
were to imagine two traders, strangers, in the market place
negotiating with each other, the one for the best price he could
get for his goods or services and the other for the most or best
quality goods or service he could obtain, these persons, one
would say, would be dealing with each other at arm's length.
If however these same two persons, strangers, acted with an
underlying interest to help one another, or in any manner in
which he or she would not deal with a stranger, or if their
interest were to put a transaction together which had form but
not substance in order to jointly achieve a result, or obtain
something from a third party, which could not otherwise be had in
the open marketplace, then one would say that they were not
dealing with each other at arm's length.
[39] If the relationship itself (and here it
must again be remembered that the EI Act does
not say "where they are in a non arm's length
relationship" it says "where they are not
dealing with each other at arm's length") is such
that one party is in a substantial position of control, influence
or power with respect to the other or they are in a relationship
whereby they live or they conduct their business very closely,
for instance if they were friends, relatives or business
associates, without clear evidence to the contrary, the Court
might well draw the inference that they were not dealing with
each other at arm's length. That is not to say, however, that
the parties may not rebut that inference. One must however, in my
view, distinguish between the relationship and the dealing. Those
who are in what might be termed a "non arm's length
relationship" can surely deal with each other at arm's
length in the appropriate circumstances just as those who are
strangers, may in certain circumstances, collude the one with the
other and thus not deal with each other at arm's length.
[40] Ultimately if there is any doubt as to
the interpretation to be given to these words I can only rely on
the words of Madam Justice Wilson who in the case of Abrahams
v. A/G Canada, [1983] 1 S.C.R. 2, at p. 10 said this:
Since the overall purpose of the Act is to make benefits
available to the unemployed, I would favour a liberal
interpretation of the re-entitlement provisions. I think
any doubt arising from the difficulties of the language should be
resolved in favour of the claimant.
[41] In the end it comes down to those
traders, strangers, in the marketplace. The question that should
be asked is whether the same kind of independence of thought and
purpose, the same kind of adverse economic interest and same kind
of bona fide negotiating has permeated the dealings in
question, as might be expected to be found in that marketplace
situation. If on the whole of the evidence that is the type of
dealing or transaction that has taken place then the Court can
conclude that the dealing was at arm's length. If any of that
was missing then the converse would apply.
Contract of/for Service
[42] I have absolutely no hesitation
whatsoever in concluding that the Workers were employees of the
company working under contracts of service. Without
considering all the aspects of the four part test generally
referred to in these cases, it is perfectly clear from the
evidence that they were fully integrated into the business of the
Appellant and this is really a non-issue in this case.
[43] The greater issue is the decision of
the Minister bringing the Workers into the fold of the EI
Act as related persons.
Stage I - Review of the Decision of the Minister
[44] The Minister, in coming to his
decisions, is said to have relied upon the following assumptions
of fact, which are the same in each case, except where shown in
parenthesis:
(a) the facts as
admitted above;
(b) the Payer's
business is farm equipment manufacturing;
(c) the Payer's
business is not seasonal;
(d) the Appellant is
one of the shareholders of the Payer;
(e) the shareholders
of the Payer are as follows:
Edward Bergen Holdings
Ltd.
24%
Allan Bergen Holdings
Ltd.
20%
Vic Bergen Holdings Ltd.
20%
A P B Holdings
Ltd.
16%
Karen Katz Holdings
Ltd.
20%
(f) the
Appellant and Allan Bergen are brothers;
(g) Vic Bergen and
Karen Katz are the brother and sister of the Appellant and Allan
Bergen;
(h) Vic Bergen and
Karen Katz are not involved in the day-to-day
operations of the Payer;
(i) the
Appellant has worked for the Payer for over 10 years;
(j) the
Appellant [Edward] is the General Manager of the Payer;
[Allan is the Director of the Payer
(k) the Appellant
performs his duties in the Payer's office, at his home office
and in the field;
(l) the
Appellant does not have a written contract with the Payer;
(m) the Appellant worked
from 7:00 a.m. to 6:00 p.m. Monday through Saturday;
(n) the Appellant
worked other additional hours as required;
(o) the
Appellant's hours and days of work were not recorded;
(p) the Appellant
was not required to prepare any reports in respect of his
hours;
(q) the Appellant
was one of the managers of the Payer's operation;
(r) the Appellant
was paid monthly;
(s) the Appellant
was paid by cheque;
(t) the amount
of remuneration received by the Appellant was an agreed
amount;
(u) other workers
for the Payer were paid on an hourly basis;
(v) the Appellant
was free to chose his hours and days of work;
(w) the Appellant could
hire a helper;
(x) the Payer would
pay any helper hired by the Appellant;
(y) the Payer
provided the Appellant with training;
(z) the Appellant is
required to perform his duties personally;
(aa) the Appellant [Edward] and
Allan Bergen are the only two workers providing the services they
provide;
(bb) the Appellant has signing
authority for the Payer's bank account;
(cc) the Payer provides the
Appellant with medical, life and disability insurance;
(dd) the Payer provided all the
tools and equipment required;
(ee) the Appellant did not incur
any expenses in the performance of his duties;
(ff) the Appellant
is permitted to attend to personal matters during the work
day;
(gg) the Payer has the right to
control the Appellant through the legal requirements applying to
directors and officers of a corporation;
(hh) the services provided by
the Appellant are a necessary and important part of the
Payer's operation and would have to be performed;
(ii) the Appellant
received dividends, in his capacity as a shareholder, from the
Payer based on the profits of the Payer;
(jj) the Payer's
shareholders meet at a yearly annual meeting;
(kk) the Payer issued a T4 to
the Appellant for the 1999 and 2000 years as follows:
1999
2000
Gross
Earnings
$69,887.00 $63,240.00
CPP
1,186.50
1,329.90
EI
994.50
936.00
Tax
Deducted
27,321.68
17,465.21
[Edward]
1999
2000
Gross
Earnings
$70,240.00 $63,240.00
CPP
1,186.50
1,329.90
EI
994.50
936.00
Tax
Deducted
23,524.68
17,465.21
(ll) the Appellant
was employed under a contract of service by the Payer.
[45] Evidence was given on behalf of the two
Appellants by Edward Bergen. He agreed with all of the
assumptions of fact, except items 13(z) and (cc) and of course
the conclusions drawn by the Minister in items 13(mm), (nn) and
(oo).
[46] Specifically, the witness denied that
he and his brother worked from 7:00 a.m. to 6:00 p.m. 6
days per week. What he did say was that in the small town in
which they lived and operated their business, it was often
difficult to hire the kind of trained help that they needed.
Thus, he and his brother ended up having to form several
different trades at all kinds of different times. He described
how sometimes they would have to go into their shop at 7:00 a.m.
on a Saturday because the job had to be done, and there were no
employees willing or able to do it. Sometimes they would have to
paint, sometimes do 'prep' work, sometimes weld and
sometimes do the fabrication work. Thus, although their prime
role was to manage the business, they had to do whatever it took
whenever there was work to be done. Thus, neither of them worked
regular hours. They worked in this way because they felt they
were the owners of the corporation, as opposed to being regular
employees. In assuming the Appellants worked regular hours, the
Minister was incorrect. They worked flexible but often long
hours.
[47] The witness took issue with item (z)
that he was required to perform his duties personally. Whilst
this has more to do with the question whether he was an employee
or and independent contractor, he felt he could hire anybody he
wanted to to take on his duties at any time.
[48] With regard to item (cc), the witness
denied that his disability insurance was paid by the company.
What he did say was that if either he or his brother were to
become ill or die, the other one would simply carry on with the
business. If both of them died or were unavailable, the business
would fold.
[49] With regard to item (gg), this again is
more related to the issue of employee/independent contractor
status. However, the witness denied strenuously that his brother
Vic, sister Karen or his father, took any part whatsoever in the
management of the company. Clearly, however, in law, they would
have had the right to appoint new officers of the company, if
they had chosen to do so.
[50] With respect to item (ii), the witness
said that no dividends had been declared by the company for at
least 5 years and maybe 7; certainly not in the years under
review. It seems to be something of a misunderstanding on the
part of the Minister in this respect as in paragraph 6(c) of the
Reply, he was said to deny that the Appellants could pay
themselves a bonus at any time and stated:
... that the shareholders, as a group, control the decision of
when and how much of a bonus is paid by the Payer.
This is incorrect and shows confusion in the mind of the
Minister between bonuses paid to employees and dividends paid to
all shareholders. The Appellants were solely in charge of
how much they were paid and as we shall see, their economic
interests and expectations were very much intertwined with those
of the Corporation. If the Corporation did well, they paid
themselves bonuses to catch up on their irregular and somewhat
low draws on account of their salaries. The other shareholders
knew nothing of this and had no say in it although it would no
doubt appear in the accounts at the end of the year. If the
Corporation did not do well, the Appellants did not issue
themselves bonuses. This had nothing to do with the profits of
the company after payment of its expenses, including all salaries
and payment of regular employees and the Appellants. Those
profits might have been available for distribution as dividends
between all the shareholders. In fact, in the last several years
including the years under review, that did not happen. The point
is that bonuses could and were awarded by the Appellants to just
themselves as employees. Dividends are something different and
could have been declared to all shareholders, but in fact
were not.
[51] With respect to the matter of the pay,
the witness pointed out that he and his brother Allan were paid
exactly the same, regardless of how much time or effort either
one of them put in, in relation to the other, over a period of a
month. They paid themselves nothing extra for extra time worked
such as Saturdays or holidays. They accumulated no vacation pay
or statutory holiday time. They had been paid hourly as employees
by their father until he retired in 1989 when they bought shares
in the newly formed Corporation. From that time on, the
Appellants ran the company in the fullest sense of that word, as
if it is was their own business. In law, of course, it was owned
by the Corporation. However, they treated it as their own. If
times went well, they paid themselves bonuses. If times became
rough, they were prepared to reduce their salaries, although
there is no evidence of that ever, in fact, having happened.
[52] Another significant aspect of their
salary arrangement, which seems to have been overlooked by the
Minister, concerns how they set up their base salary and decided
upon amounts of their bonuses. Their monthly pay draws were based
on the previous year's profitability of the Corporation. What
they took was well below the amount which would have been paid to
an outside person doing their work. They took $3,000.00 each per
month and the witness said that he could not have hired somebody
from the outside to do the job for $72,000.00 per year, which
would be twice as much. He felt the only way anybody would work
that much for such a low salary was if they had a significant
stake in the ownership of the Corporation.
[53] Over and above the matter of the
monthly draw, the witness described how they established payment
of any bonus. First was the question of the available money in
the Corporation to pay a bonus. Secondly, they would always make
sure that there was enough left in the Corporation to finance
future acquisitions of equipment. Thirdly, they worked the
bonuses around the principle of keeping the company in the lowest
possible tax rate. Thus, what they were paid often had little to
do with the work they actually put in and depended as much upon
the corporate needs as their own. This integration of their
economic interests with those of the Corporation appears not to
have been taken into account by the Minister. It is, of course,
highly relevant.
[54] One further significant factor, not
taken into account by the Minister, was the economic insecurity
which each Appellant faced. Not only did the two Appellants
personally guarantee the corporate line of credit at its bank,
but they also had no written contracts with the Corporation
themselves. All other employees had written contracts. They had
none. They had no assurance that they would ever receive,
anything more than half their hoped-for remuneration, even if
that. Whilst an arm's length employee working as a general
manager could expect to be assured of certain benefits, including
pay and profitability bonuses, they had no such assurance. Their
economic fate was totally cast in with that of the
Corporation.
[55] On top of that, there were an endless
number of differences between their status and regular arm's
length employees. They are typically matters which the Minister
cites, in reported cases across the whole of Canada, as being
examples of not being in a relationship substantially similar to
one that would be entered into by people dealing with each other
at arm's length. In this case, the Minister seems to be
treating them in a different way. They include such things as the
Appellants bringing their own children into the premises when
they worked on Saturdays and let them use corporate equipment,
something forbidden to regular employees; being able to use their
corporate equipment at any time without reference to anybody
else; not being paid overtime or for statutory holidays; being
prepared to reduce their pay in bad times; being able to take
time off anytime either of them chose, without reference to the
corporate schedule of two weeks vacation taken at the same time
every summer; and no reduction in their pay if they took time
off.
[56] The witness also dealt with other
matters, raised in the original ruling, where it was said that
their employer, the Corporation, established their clientele and
their deadlines and priorities. This had, I am sure, more to do
with the issue of employee/independent contractor, but
nevertheless the witness went to great lengths to explain that
the other shareholders, members of his family, did not have the
remotest clue what was going on in the Corporation, who their
clientele was or what their priorities were. He and his brother
dealt with all of those things between themselves without
reference to the other family members. Similarly with the
statement in the original ruling of exposure to risk of loss, the
witness felt that they were exposed as they signed written
guarantees, something arm's length employees would not be
expected to do for their employer.
[57] That was really a summary of the
evidence of the witness. I found him to be an honest,
straightforward and hardworking person and I have no reason not
to accept his evidence on these matters as he stated it.
[58] Evidence was also given by Janice
Affleck, a CPP/EI Rulings Officers with the Canada Customs and
Revenue Agency. She had made the original ruling and was called
on behalf of the Minister to explain her reasons for that ruling.
She said she was aware of the duties and responsibilities of
general managers in businesses operating in small towns. She had
found nothing unusual in the terms of the employment of the
Appellants. That was strange because, with respect, there are a
number of unusual aspects, to which I have already referred. She
went on to use a curious term. She said that she did not find
anything "unreasonable" about the employment
"which would exclude it from insurable employment".
With respect, the issue here has nothing to do with what is
reasonable or unreasonable. Furthermore, the cart seems to be in
front of the horse, so to speak in her mind when she approaches
it from the point of view of nothing excluding the employment.
Rather, when the employment is excluded by law already, the
question at this time is what is there that would bring that
employment into the fold of the insurable employment under the
EI Act.
[59] Finally, Ms. Affleck conceded in
cross-examination that she did not know that the Appellants were
not guaranteed any salary and agreed she would not work for
somebody as an employee if she was not guaranteed a salary.
[60] I am not sure how much of what Ms.
Affleck had to say, should be imputed to the Minister, but her
evidence definitely did seem to confirm that there were some
extremely relevant factors around the terms of employment of the
Appellants, particularly the terms of their remuneration, which
were not taken into account by the Minister.
[61] When I consider these factors which
were not considered by the Minister and which were highly
relevant to the decision he was required to make, I cannot but
come to the conclusion that if he had had them before him for
consideration, he could not, from an objective point of view,
have reasonably and lawfully arrived at the decision that he did.
It is thus not sustainable in law and I must now advance to the
second stage of the appeal process and decide whether on all the
evidence, the parties had they been at arm's length, would
have entered into substantially similar contracts of employment
taking into account all of the circumstances, including
specifically those set out in paragraph 5(3)(b) of the
EI Act.
Stage II: Review of the Evidence
[62] At the outset, I cannot help remarking,
upon the irony of the fact, that in this case, many of the
factors said to have been relied upon by the Minister are
precisely the same types of factors upon which he has been said
to rely upon so often in appeals where he has declined to
exercise his discretion, e.g. setting own hours of work, setting
own salaries, not keeping records of hours worked, taking time
off without having to seek permission, holding pay cheques when
the company was short of funds, to name but a few. I cannot help
but think that if the Minister had been looking through the other
end of the telescope in a situation whereby one of the brothers
had been claiming employment benefits in these circumstances he
would have quickly come to a contrary conclusion. I am not
suggesting any bad faith here, but there does seem to be
something of a double standard being established.
[63] I do not intend to set out all of the
evidence again. I have already referred to the significant facts.
It is clear in my mind, that the two brothers were the company.
Their economic interests were inexorably bound up with those of
the company. Although perhaps they signed the guarantees in their
capacities as shareholders or directors, the fact that they did
so shows an inextricably inter-woven relationship between
the company and the brothers. Their economic interests were tied
to the company and those of the company were tied to theirs, to
such an extent that it could not be said that there was an
independent or adverse economic interest existing between them.
They were the operating mind of the company; they themselves were
related and had a common family economic interest, which was
indivisible from that of the Company. This is exactly the
situation contemplated by Parliament in setting up the employment
insurance scheme, to exclude persons, who are operating or
controlling their own businesses, in an entrepreneurial fashion,
from participating in that scheme and being able to claim
benefits if their employment fails.
[64] That is not to say that people in
management positions running a company, could never be said to be
dealing with that company at arm's length, even if they are
also shareholders. If for example, their contract arrangements
were clearly set out in a formal written contract, and there was
a clear division between their own interests and those of the
Corporation, so that each might profit separately and
independently from the other, that could very well be viewed as a
relationship substantially similar to one which parties, dealing
with each other at arm's length, might make. Where, however,
such as here, the workers virtually are the Company and treat it
as their own affair, to such an extent, for example, they are
willing to forego their salaries if the company is short of
funds, it is a strong indication of entrepreneurial ownership and
of parties not dealing with each other at arm's length.
Conclusion
[65] Taking into account all of the
circumstances, including in particular the extensive hours and
days put in by the brothers, their opportunity to just take leave
without permission from anyone and still get paid, their
willingness to reduce their paycheques if the company was short
of funds, their signing of guarantees for the company, I am of
the firm view that there was no independence of thought or
purpose prevailing between the company and the brothers, there
was no adverse economic interest, their stakes were inextricably
woven together and there was not the bona fide type of separate
negotiation permeating their relationship that one would expect
to find existing between those traders in the marketplace to whom
I referred at some length. Accordingly, I hold that neither of
them were employed in insurable employment.
[66] In the event, the appeals are allowed
and the decisions of the Minister are vacated.
Signed at Calgary, Alberta, this 5th day of February 2002.
D.J.T.C.C.
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