Citation: 2010 TCC 207
Date: 20100419
Docket: 2009-3401(EI)
BETWEEN:
FABIEN MÉNARD,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
This is an
appeal from a determination according to which the respondent decided that the
work performed by Fabien Ménard (the worker) from
January 1, 2007, to December 31, 2007, and
January 1, 2008, to February 24, 2009, for Transport GMS
Ménard Inc. (the payer) met the requirements of a contract for services,
despite the absence of an arm's length relationship between the parties.
[2]
The respondent's determination was based on the
following facts set out in paragraphs 5, 6 and 7 of the Reply to the Notice of
Appeal:
[Translation]
a.
The payer was incorporated on December 12, 1985. (admitted)
b.
The payer operated a
wood-transporting business in Quebec and Ontario using flatbed trucks, that is, trucks with
trailers without sides. (denied)
c.
The payer owned seven
ten-wheel trucks. (denied)
d.
During the period at issue,
the payer employed up to 35 people. (admitted)
e.
The appellant
was the payer's manager. (denied)
f.
The appellant's tasks
included obtaining contracts, hiring employees, distributing trucks, seeing to
their mechanical maintenance and helping the truckers. (denied as worded)
g.
The appellant worked around
40 hours per week for the payer. (denied)
h.
The payer's truckers worked
over 40 hours per week. (denied as worded)
i.
The appellant also worked
about 25 hours per week for the company Transport Lauri Inc. (denied)
j.
Transport Lauri Inc. was a
subsidiary of the payer whose share capital was held entirely by the payer. (admitted)
k.
The business offices of the
payer and Transport Lauri Inc. were at the same place. (admitted)
l.
The appellant worked at the
payer's office, in the yard, at the garage or on the road as needed. (denied
as worded)
m.
The appellant was paid $790
per week by the payer and $450 per week by Transport Lauri Inc. (admitted)
n.
The appellant was paid
weekly. (admitted)
o.
The appellant had one or two
meetings per year with the other shareholders in addition to telephone ones as
needed. (denied)
p.
The shareholders received
copies of monthly financial statements in order to follow the payer's
development. (denied)
q.
The payer's important
decisions were made by all the shareholders. (denied)
r.
There was no shareholder
agreement. (admitted)
s.
The shareholders' voting
rights were not impeded. (denied)
6. The appellant and the payer
were not dealing with each other at arm's length within the meaning of the Income
Tax Act, because
(a)
The following shareholders
held voting shares in the payer: (admitted)
|
the appellant
|
25%
|
|
Guillaume Ménard
|
25%
|
|
Simon Ménard
|
25%
|
|
Normand Ménard
|
25%
|
(b)
The appellant is the brother
of Guillaume, Simon and Normand Ménard. (admitted)
(c)
The appellant is related to
a related group that controls the payer. (admitted)
7.
The Minister also determined that the appellant was
deemed to be dealing with the payer at arm's
length in the context of his employment
because he was satisfied that it was 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, taking into account the following
circumstances:
(a)
The appellant worked as the
manager of the payer and had to ensure that everything was working well. (denied
as worded)
(b)
The appellant's tasks were
essential to the payer's activities. (admitted)
(c)
It is reasonable to believe
that an arm’s-length shareholder would have performed similar work. (denied)
(d)
Since 1997, the appellant
worked full time year round. (admitted)
(e)
The appellant was paid for
his tasks. (admitted)
(f)
It is reasonable to believe
that an arm's-length person would work year round. (denied)
(g)
The appellant did not have a
set schedule. (admitted)
(h)
An unrestrictive schedule is
often used for management positions. (denied as worded)
(i)
An arm's-length person could
have had the appellant's work hours. (denied)
(j)
The shareholders determined
the appellant's salary. (denied)
(k)
The appellant's salary of
$790 per week was indexed and increased on the same schedule as employee
salaries. (denied)
(l)
The appellant's salary was
reasonable given his management tasks. (denied)
[3]
It must be noted again
that the respondent determined that the
employment was insurable because it was not subject to paragraph 5(2)(i)
of the Employment Insurance Act (the Act). In fact, the worker and the payer
were found, under paragraph 5(3)(b) of the Act, to have an arm's‑length
relationship in the context of this employment,
since the respondent found it was reasonable
to conclude that the worker and the payer
would have entered into a substantially similar contract of employment if they
had been dealing with each other at arm's length.
[4]
The worker
testified. I note that Sylvain Mercier, the payer's internal
accountant, and Wilbrod Poulin, the payer's external auditor, testified in
support of the worker's position, while only Réginald Côté, the insurance
officer who determined that the worker's employment was insurable within the
meaning of the Act for the relevant periods, testified in support of the
respondent's position.
[5]
The Federal Court of
Appeal has repeatedly defined the role conferred on Tax Court of Canada judges by the Act. That role
does not allow a judge to simply substitute his or her discretionary decision
for that of the Minister of National Revenue (the Minister). Rather, it
requires that the Court "verify whether the facts inferred or relied on by
the Minister are real and were correctly assessed having regard to the context
in which they occurred, and after doing so, it must decide whether the
conclusion with which the Minister was 'satisfied' still seems
reasonable." (see Légaré v. Canada (Minister of National Revenue – M.N.R.), [1999] F.C.J. No. 878 (QL),
at paragraph 4).
Testimony of Sylvain Mercier
[6]
Mr. Mercier,
who has been employed by the payer since 1999, basically explained the
following in his testimony:
(i)
The worker was
the only manager for the payer and its subsidiary.
(ii)
He
practically never met with the other shareholders of the payer in the context
of his job and therefore never discussed the payer's business with them.
(iii)
He received
instructions only from the worker.
(iv)
He gave the
monthly financial statements for the payer and its subsidiary only to the
worker.
Testimony of Wilbrod Poulin
[7]
Mr.
Poulin's testimony basically states that
(i)
Since 1975,
he has been the external auditor and senior consultant for all businesses
belonging to the worker and his brothers.
(ii)
The worker
and his brothers Guillaume and Simon held equal parts of the shares of Les
Entreprises Forestières St-Magloire Inc. (Enterprises FM).
(iii)
Simon
Ménard (the worker's brother) was employed as a mechanic by Entreprises FM.
(iv)
Guillaume Ménard
(the worker's brother) was employed by Entreprises FM as president and chief
executive officer.
(v)
Normand Ménard
(the worker's brother) was also employed by Entreprises FM, but only as a truck
driver.
(vi)
The worker
could do as he pleased within the payer's business and subsidiary and make any
decisions he deemed appropriate.
For example, Mr. Poulin explained that the payer
acquired its subsidiary in 2004 for $500,000, on the worker's initiative, who,
to his knowledge, did not even consult with his brothers before buying it. In
addition, Mr. Poulin explained that he and the worker had negotiated and
obtained for the payer a bank loan of $450,000 to enable it to purchase the
subsidiary without obtaining the consent of the payer's Board of Directors.
(vii)
To his
knowledge, the payer's shareholders and directors met very rarely.
(viii)
He gave the
payer's financial statements to Guillaume, the payer's brother.
Testimony of the worker
[8]
The worker testified that
(i)
He was the
president and chief executive officer of the payer.
(ii)
He had no
specific work schedule to follow, but usually worked 69 hours per week, namely,
from 8 a.m. to 8 p.m. Monday to Friday and from noon to 7 p.m. on Saturday. The worker also
explained that he dedicated about 95% of his time to the payer and about 5% of
his time to its subsidiary.
(iii)
He could do
as he pleased within the business of the payer and its subsidiary and take any
decisions he considered appropriate. Accordingly, the worker explained that he
determined his work schedule (and could change his work hours as he pleased)
and that he determined his pay. To illustrate
his autonomy within the business, the worker explained that he had even
acquired the payer's subsidiary at the price of $500,000 and financed that acquisition
with the help of Wilbrod Poulin without obtaining the approval of his
co-shareholders and co-directors or even consulting them. At most, the worker admitted that he had informed his
brother Guillaume of that acquisition. His
brother had apparently asked him the following question: [Translation] “Did you consult with
Wilbrod [Poulin]?”
(iv)
The last
meeting of the payer’s shareholders or directors took place in 2006.
(v)
He had
frequent telephone conversations with his brother Guillaume. In regard to that,
the worker explained that those conversations were in regard to the exchanges
of service between the payer and Entreprises FM (of which he held a third of
the share capital), which was managed by his brother Guillaume.
[9]
I should
immediately note that the worker's testimony in paragraphs (ii) to (v) above
simply does not seem credible to me given the initial statements that he made
to Mr. Côté on February 24, 2009 (which were repeated by his
brother Guillaume on the same day). In fact, Mr. Côté, whose credibility
is not to be doubted, testified and indicated in his report (see Exhibit I-2)
that the worker had told him the following:
(i)
The worker's salary was set
by all of the payer’s shareholders;
(ii)
All the important decisions
concerning the payer's business were made by the payer's shareholders (who I
repeat were also the payer's directors).
(iii)
The payer's four
shareholders, who were also its directors, met once or twice per year.
(iv)
They also met informally (by
telephone) with their brothers as needed.
(v)
The shareholders received
monthly financial statements.
I would add that, in any case, it seems
implausible to me that a worker, even if he is a shareholder of his business,
could determine his own salary or make decisions regarding the payer's business
without the consent of the other shareholders or directors of the payer. I am
of the view that, in this case, the worker would informally advise the other
shareholders and directors of the payer of the important decisions that he
intended to make with regard to the payer's business to obtain their agreement. I am of the
opinion that the worker interpreted his brothers' silence as tacit agreement
with the decisions that he intended to make. I
am also of the opinion that the other shareholders and directors, in this case,
almost never prevented the worker from making important decisions concerning
the payer's business simply because they relied on the worker's good judgment
and on his good management, which was at the root of the good financial results
generated by the payer.
[10]
In addition, the
evidence disclosed the following:
i)
The cheques
drawn on the bank account of the payer and its subsidiary had to be signed by
the worker and by Mr. Mercier (director of finance for the payer and its
subsidiary) to be issued validly.
i.The
payer's shareholders had each granted the payer a $5,000 loan without interest
when the payer's business was incorporated. Those loans have not yet been
repaid by the payer.
ii.In
addition to the $5,000 loan mentioned above, the worker granted other loans
without interest to the payer including a loan of $50,000 in 2004 granted to
the payer to enable it to buy the subsidiary. The loan has not yet been repaid. In regard to
this, I note that the loans granted the payer by the worker totalled $66,418 as
of September 30, 2009.
iii.The
payer's obligations with respect to the use of credit cards were guaranteed by
the worker.
Analysis
[2]
The first
question I will have to answer is this: was the worker employed by the payer
under a contract of service?
[3]
When the courts must
define concepts from Quebec private law for the purpose of applying
federal legislation such as the Employment Insurance Act, they must
follow the rule of interpretation in section 8.1 of the Interpretation Act.
To determine the nature of a Quebec employment contract, the relevant provisions of the Civil Code of Québec (the
Civil Code) must be relied on, at least since June 1, 2001.
[4]
In the
Civil Code a separate chapter is dedicated to the "contract of
employment" (articles 2085 to 2097).
[5]
According to the
definition of Article 2085, a contract of employment
. . . is a contract by which a person, the
employee, undertakes for a limited period to do work for remuneration,
according to the instructions and under the direction or control of another
person, the employer.
[6]
In this
case, it seems evident that the worker worked for the payer in exchange for
remuneration. However, the worker maintains that there was no relationship of
subordination between him and the payer. In other words, he
maintains that his work was not supervised and that, moreover, he could do as
he pleased within the business and make any decisions he deemed appropriate.
The evidence showed, of course, that the worker had
great autonomy in carrying out his tasks, but that for all important decisions
concerning the payer and its subsidiary, he had to consult informally with the
three other shareholders of the payer, who were also the payer's directors.
Indeed, did the worker not tell Mr. Côté during
the first telephone interview on February 24, 2009, that his salary
was established by the payer's shareholders? Did the worker not also state
during that interview that all the important decisions were made by all the
payer's shareholders? Did Guillaume Ménard not
also confirm those facts to Mr. Côté during a telephone interview held on
the same day, that is, February 24, 2009? The worker, who bore the burden of proof, simply did not
satisfy me that there was no relationship of subordination between him and the
payer. Accordingly, I find that the worker was
employed under a contract of service.
[7]
The second
question I will have to answer is this: does the Minister's decision still seem
reasonable given the appellant's evidence? It should be
recalled that the Minister was required to determine whether it was reasonable
to conclude that the worker would have entered into a substantially similar
contract of employment with the payer if they had been dealing with each other at arm's
length. There was no question of determining whether working conditions
necessarily reflected market conditions although, generally, this can be a
relevant matter worth considering. In my view, in
regard to the issue of whether, for the purposes of paragraph 5(3)(b),
the payer and the worker would have entered into a substantially similar
contract of employment, it must be taken into account that the worker was not
only a manager of the payer but also one of its owners. There is no
indication in paragraph 5(3)(b) of the Act that the worker's financial interests
in the business must be disregarded. Consequently, it is possible to construct an abstract case
involving a worker holding 25% of the share capital in the payer with which he
is dealing at arm's length, in addition to being one of the four directors of
the payer and its manager. The question that
had to be decided by the Minister could then be reworded as follows: if the
worker held a quarter of the shares in the payer, was a director and the only
manager of the payer, and was dealing with the payer at arm's length, would he
have entered into a substantially similar contract?
[8]
The Court
can take judicial notice that the worker who is both a paid employee of an
employer and (as a shareholder) an owner of that employer would act differently
from a mere paid employee. In
fact, the salary of someone who is a paid employee and shareholder may take
into account the fact that salaries not paid will be retained earnings that could be reported as dividends at a future date.
Workers who are also shareholders must often keep the company's financial needs
in mind, especially if the company is experiencing cash-flow problems. This probably explains why the worker agreed not to receive
his salary for one month in 2007.
[9]
Does the Minister's
decision still seem reasonable? Was it reasonable for
the Minister to conclude that the worker who was also a shareholder would have
entered into a substantially similar contract of employment if he were dealing
with the payer at arm's length? In my opinion,
the worker did not succeed in demonstrating
that the Minister's decision seemed unreasonable. This is not a case where the Court
should intervene to substitute its opinion for that of
the Minister. It is true that some of the Minister's assumptions were disproved
at the hearing. However, there remained sufficient evidence to justify the
Minister's decision. Had the worker not had a
financial interest in the payer, he would probably not have been available at
all hours of the day to respond to emergencies and he would probably not have
agreed to grant such advantageous loans to the payer. The evidence did not show that the payer constrained the
worker to do these things. This, too, is the
normal behaviour of a worker who is also a shareholder in his employer,
regardless of whether or not he is dealing with it at arm's length. An
employee who is a shareholder in the employer, whether or not the relationship
is at arm's length, is generally more dedicated to the employer than a mere
worker would be, as it is more in that person's interest to be. It bears
repeating that there is nothing unusual about this.
[10]
Moreover,
it is perfectly normal for a senior manager (and even more so where he is also
a shareholder in the employer) to have considerable autonomy in the performance
of his duties. In this respect, the worker did not satisfy me at all that
he could do as he pleased within the business and make any decisions he deemed
appropriate. It is true that the evidence
showed that the worker enjoyed a great deal of autonomy in performing his
duties, but he had to consult informally with the other shareholders and
directors before making any major decisions concerning the payer and its
subsidiary, essentially to obtain their consent.
[11]
If the
worker had worked only ten hours per week all year long and received such pay,
I would have rendered a different decision. In fact, the worker did not
demonstrate that another worker who was also a shareholder in the payer would
have received or agreed to very different pay from that received by the worker,
in light of all the circumstances. In fact, the worker did not even allege that
an arm’s‑length person would not have accepted such pay in light of all
the circumstances.
[12]
In my view,
any worker who held 25% of the share capital of the payer would have entered
into a substantially similar contract with the payer, even if they were not
dealing with each other at arm's length. Furthermore, did the worker
not tell Mr. Côté during the first telephone interview on
February 24, 2009, that, had he been working for an arm's length
person, he would have accepted the same conditions of employment (see Exhibit
I-2, page 7)?
[13]
For all of these
reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 19th day of
April 2010.
"Paul Bédard"
on this 20th day
of June 2010
François Brunet,
Revisor
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