Citation: 2010 TCC 404
Date: 20100816
Docket: 2010-316(EI)
BETWEEN:
JOLAYNE ANVIK,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
This is an appeal of a
decision by the Minister of National Revenue (the "Minister") dated
November 13, 2009 that the appellant's employment with Balancing Act
Bookkeeping Services Ltd. (the "Payor") for the period from
January 1, 2007 to March 31, 2009 was excluded from insurable
employment. That period was in fact divided into two parts for each of which
there was a different reason for excluding the employment from insurable
employment.
[2]
For the period from
January 1, 2007 to April 5, 2008, the appellant controlled more than
40% of the voting shares of the Payor and her employment was accordingly excluded
from insurable employment by virtue of paragraph 5(2)(b) of the Employment
Insurance Act ("the Act"). For the period of from April 6,
2008 to March 31, 2009, the Payor and the appellant were not dealing at
arm's length and the Minister was not satisfied that they would have entered
into a substantially similar contract of employment if they had been dealing
with each other at arms' length, hence the employment was excluded from
insurable employment by virtue of paragraph 5(2)(i) and
subsection 5(3) of the Act.
[3]
The appellant does not
dispute that, with respect to the first period, she did control more than 40% of
the Payor's voting shares and that, during that period, her employment was therefore
excluded from insurable employment pursuant to paragraph 5(2)(b) of
the Act. It is also not disputed that the appellant and the Payor are
related persons as defined in subsection 251(2) of the Income Tax Act,
since the appellant is the spouse of the person who controls the Payor. What is
disputed is the Minister's decision that he was not 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 was 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.
[4]
Before considering the
evidence in this case, it seems appropriate to state what the function of this
Court is when it comes to the exclusion provisions found in
subsections 5(2) and (3) of the Act. The Federal Court of Appeal in
Denis v. Canada (Minister of National Revenue), 2004 FCA 26, held that:
The function of the Tax Court of Canada judge in an appeal from a
determination by the Minister on the exclusion provisions contained in
subsections 5(2) and (3) of the Act is to inquire into all the facts with the
parties and the witnesses called for the first time to testify under oath, and
to consider whether the Minister's conclusion still seems reasonable. However,
the judge should not substitute his or her own opinion for that of the Minister
when there are no new facts and there is no basis for thinking that the facts
were misunderstood (see Pérusse v. Canada (Minister of National Revenue - M.N.R.),
[2000] F.C.J. No. 310 (Fed. C.A.), March 10, 2000).
[5]
In deciding as he did
in the present case, the Minister relied on the following assumptions of fact:
(a)
the Payor was in the business of providing
bookkeeping services; (admitted)
(b)
the Payor's business was set up for the
Appellant; (denied)
(c)
the Payor began operating in 2005; (admitted)
(d)
the Payor's business operated year round; (admitted)
(e)
prior to April 6, 2008, the share structure of
the Payor was as follows: (admitted)
|
the Appellant
|
50%
|
|
Arvid
|
50%
|
(f)
after April 5, 2008, the share structure of
the Payor was as follows: (admitted)
|
the Appellant
|
35%
|
|
Arvid
|
65%
|
(g)
the Appellant was the wife of Arvid; (admitted)
(h)
the Appellant's duties included running the
business, obtaining the clients and doing bookkeeping; (admitted)
(i)
on April 10, 2008, the Appellant and the
Payor entered into a written agreement which included the following: (admitted)
(i)
position of senor bookkeeper,
(ii)
the Appellant will report to Arvid,
(iii)
effective April 16, 2008,
(iv)
compensation of $42,000 annual salary paid semi‑monthly,
(v)
the Appellant will work a minimum of 35 hours
per week, and
(vi)
the Appellant is entitled to 3 weeks
vacation;
(j)
the Payor operated out of the Appellant's
personal residence; (admitted)
(k)
the Appellant started working for the Payor when
it began operations; (admitted)
(l)
the Appellant worked full‑time for the
Payor from January 1, 2007 to March 31, 2009; (admitted)
(m)
the Appellant ceased working for the Payor when
she went on maternity leave; (denied)
(n)
prior to April 6, 2008, the Appellant
earned a set salary of $750.00 per month; (denied)
(o)
after April 5, 2008, the Appellant earned a
set annual salary of $42,000.00; (admitted)
(p)
after April 5, 2008, the Payor paid the
Appellant on a semi‑monthly basis; (admitted)
(q)
prior to April 6, 2008, the Appellant took
an artificially low salary to remain below taxable levels; (denied)
(r)
the Appellant's wage was arbitrarily adjusted to
the greatest advantage of the Appellant; (denied)
(s)
the Appellant had the ability to manipulate her
remuneration; (admitted)
(t)
for the period January 1, 2007 to
March 31, 2009, the Appellant's remuneration was not reasonable; (denied)
(u)
the Payor did not offer any benefit plans; (admitted)
(v)
the Appellant's earnings were as follows: (admitted)
|
Date
|
Amount
|
Date
|
Amount
|
Date
|
Amount
|
|
1/1/2007
|
$750.00
|
1/3/2008
|
$750.00
|
2/1/2009
|
$1,750.00
|
|
2/2/2007
|
$750.00
|
4/2/2008
|
$750.00
|
16/1/2009
|
$1,750.00
|
|
1/3/2007
|
$750.00
|
1/3/2008
|
$750.00
|
2/2/2009
|
$1,750.00
|
|
3/4/2007
|
$750.00
|
1/4/2008
|
$820.00
|
16/2/2009
|
$1,750.00
|
|
1/5/2007
|
$750.00
|
1/5/2008
|
$1,634.85
|
2/3/2009
|
$1,750.00
|
|
6/6/2007
|
$750.00
|
16/5/2008
|
$1,513.69
|
16/3/2009
|
$1,750.00
|
|
3/7/2007
|
$750.00
|
1/6/2008
|
$1,191.08
|
1/4/2009
|
$1,750.00
|
|
1/8/2007
|
$750.00
|
16/6/2008
|
$1,727.85
|
|
|
|
14/9/2007
|
$750.00
|
1/7/2008
|
$1,750.00
|
|
|
|
2/10/2007
|
$750.00
|
16/7/2008
|
$1,750.00
|
|
|
|
1/11/2007
|
$750.00
|
1/8/2008
|
$1,750.00
|
|
|
|
4/12/2007
|
$750.00
|
15/8/2008
|
$1,685.62
|
|
|
|
31/12/2007
|
$1,600.00
(bonus)
|
31/8/2008
|
$146.15
|
|
|
|
|
|
16/9/2008
|
$1,528.00
|
|
|
|
|
|
1/10/2008
|
$1,512.54
|
|
|
|
|
|
16/10/2008
|
$1,750.00
|
|
|
|
|
|
1/11/2008
|
$1,750.00
|
|
|
|
|
|
16/11/2008
|
$1,750.00
|
|
|
|
|
|
1/12/2008
|
$1,750.00
|
|
|
|
|
|
16/12/2008
|
$1,709.85
|
|
|
(w)
the Appellant normally worked from 8:00AM to
4:30PM, Monday to Friday; (admitted)
(x)
the Appellant normally worked around 35 hours
per week; (admitted)
(y)
the Appellant's hours of work were somewhat
flexible; (admitted)
(z)
the Appellant's hours and days of work remained
consistent before and after April 5, 2008; (admitted)
(aa)
the Appellant kept a record of her hours work[ed];
(admitted)
(bb)
if the Appellant worked more than 35 hours
in a week, she had the choice of banking the hours or receiving overtime; (admitted)
(cc)
the Appellant was knowledgeable and fully
trained in accounting and bookkeeping; (admitted)
(dd)
prior to forming the Payor, the Appellant worked
for an arm's length accounting firm; (admitted)
(ee)
the Appellant was the heart of the Payor's business;
(admitted)
(ff)
the Appellant ran the Payor's business; (admitted)
(gg)
Arvid had no specific bookkeeping training; (denied)
(hh)
Arvid held an engineering degree which he
completed in June 2009; (denied)
(ii)
the Payor's business finances were managed by
both the Appellant and Arvid; (denied)
(jj)
the Appellant had signing authority for the
Payor's bank account; (admitted)
(kk)
the management of the Payor remained consistent
before and after April 5, 2008; (denied)
(ll)
the Payor issued T4s containing the following
income: (admitted)
|
|
Appellant
|
Arvid
|
|
2006
|
$ 9,286
|
$ 9,286
|
|
2007
|
$10,600
|
|
|
2008
|
$27,969
|
|
|
2009
|
$14,198
|
|
(mm)
the Payor issued dividends as follows: (admitted)
|
|
Appellant
|
Arvid
|
|
2006
|
$ 539
|
$ 539
|
|
2007
|
$28,277
|
$11,784
|
|
2008
|
|
$ 1,762
|
(nn)
the intention of both the Appellant and the
Payor was employment; (admitted)
(oo)
the Appellant was employed under a contract of
service with the Payor; (admitted)
(pp)
prior to April 6, 2008, the Appellant
controlled more than 40% of the voting shares of the Payor; (admitted)
(qq)
the share structure change on April 6, 2008
was designed to enable the Appellant to qualify for employment insurance
maternity benefits; (admitted)
(rr)
the Payor got rid of all of its clients when the
Appellant went on maternity leave; (denied)
(ss)
the Payor's business decisions were made based
on what was best for the Appellant; (denied)
(tt)
the Payor's business decisions were not made in
an arm's length manner; (admitted)
(uu)
the Payor's business decisions were not
reasonable; (denied)
(vv)
the Appellant stated that her employment
conditions changed after April 5, 2008 as Arvid became more involved in
managing the business, her salary became based on industry standards and she no
longer signed paycheques, and (admitted)
(ww)
the Minister considered all of the relevant
facts that were made available to the Minister. (admitted)
[6]
The appellant does not
dispute the facts set out under "duration" and "terms and
conditions" headings in the appeals officer's review of the circumstances
of her employment contained in the Report on an Appeal. Indeed, the appeals
officer concludes in that report that the duration and terms and conditions of
the appellant's employment were such as could reasonably be expected in an
arm's length arrangement. It is the appeals officer's conclusions regarding the
nature and importance of the work as well as with respect to remuneration that
the appellant argues were unreasonable in the circumstances.
[7]
The appellant was very
candid throughout her testimony. When she and her husband married in July 2005,
they incorporated the Payor; they were equal shareholders and both were directors
of the Payor. They shared ownership for income-splitting purposes as her
husband was a full-time student. The services provided by the Payor were all performed
by the appellant. She was the only employee; she did all the work and made all
the decisions; her remuneration was paid partly in the form of salary and
partly in the form of dividends and was not based on the number of hours she
worked. The nature of the Payor's business corresponded with the appellant's
expertise.
[8]
In late 2007 and early
2008, the appellant and her spouse made the decision to have children. In order
to qualify for maternity leave benefits under the unemployment insurance
maternity benefits program, the appellant sold some of her voting shares to her
spouse, keeping only 35% of all the voting shares in the Payor and thereby
avoiding the exclusion set out in paragraph 5(2)(b) of the Act.
She also resigned, effective April 16, 2008, as director of the Payor (see
Exhibit A‑3). She readily admits that she wanted to qualify for employment
insurance benefits.
[9]
On April 10, 2008,
as stated in subparagraph 6(i) of the Reply to the Notice of Appeal, the
appellant and the Payor entered into a written agreement. The appellant was
hired, effective April 16, 2008, as a senior bookkeeper, was to report to
her spouse, was to work 35 hours per week and was entitled to three weeks'
vacation. Her new salary was, according to the appellant, based on the market
value for equivalent work and not arbitrarily adjusted to her advantage as alleged
by the appeals officer. In order to determine her salary, the appellant and the
Payor relied on a market value determination based on the Robert Half 2008
Salary Guide. The annual salary for a full charge bookkeeper, adjusted to a
35-hour week, ranged from $39,716 to $53,500. The salary itself was found to be
reasonable by the appeals officer as the appellant's rate of pay was in line
with market rates. She also found that the appellant was paid on a regular
basis and for the actual hours she worked.
[10]
The day-to-day operation
of the Payor's business remained the same after April 10, 2008, except
with regard to what the appellant describes as higher management. Her spouse's
role increased substantially. He now made the decisions about new clients; he
signed all the payor's cheques; he changed the billing process; he was
consulted on billings; he decided if dividends were to be paid; he reviewed the
time sheets, he wrote letters to clients concerning new fee schedules; he made
any major decisions regarding the Payor's business. The appellant admits she was
the one with the expertise to run the business but says that after the sale of
the shares, her spouse had sole control of the business.
[11]
On January 15,
2009, the appellant sent a letter to the Payor advising of the intended start
date for her maternity leave, which was at first to be March 13, 2009 but was
later deferred to March 31 by mutual agreement. She was last paid on
March 31, 2009.
[12]
Prior to the
appellant's departure, the Payor had between 30 and 40 clients, which were all
let go until July 2009 when the Payor took back four or five who had been waiting
for the appellant's return. The appellant went back to work for the Payor in
July 2009, but with reduced hours.
[13]
The appellant's spouse,
Arvid Anvik, testified that the Payor was incorporated to provide family income
while he was an engineering student. He admits that, prior to the purchase of
his wife's shares in April 2008, he had very little control of the business. All
of that changed considerably after his purchase of the shares. Henceforth, he
made sure that there was a sufficient cash flow to pay the bills, reviewed and
increased the rates charged even though his co‑shareholder did not agree,
reviewed the invoices, and made all major decisions. He did not replace the
appellant when she left on her maternity leave as he had by then completed his
studies and was entering the work force. He did, however, hire a bookkeeper on
a part-time basis (10 to 15 hours per month) in March 2010, so that the Payor
could catch up on some clients' files.
[14]
In terms of his
bookkeeping background, Mr. Anvik took an accounting course at the high
school level and did some bookkeeping for a non‑profit organization
during his high school years. Asked who had control over the Payor, he answered
that he did.
[15]
The appeals officer who
made the recommendations to the Minister regarding the appellant also testified.
She explained why she concluded that, for the period from April 6, 2008 to
March 31, 2009, the appellant and the Payor were not dealing at arm's
length and that the appellant's employment was therefore excluded from
insurable employment.
[16]
On the issue of
remuneration, the appeals officer does not dispute that the appellant's rate of
pay for that period was in line with market rates. What she does take exception
to is the fact that the appellant's pay was arbitrarily adjusted to the
advantage of the appellant. Prior to April 2008, the appellant was paid a
salary of $750.00 a month and took the remainder of her remuneration in the
form of dividends, whereas from April 2008, she received no dividends and her salary
was increased to market value. This change was not based on market forces, but was
made so that the appellant would qualify for EI benefits and was thus intended
to benefit the appellant. In her report, the appeals officer stated the
following: "In an arm's length arrangement, where the payor and the worker
are bargaining with separate economic interests, one would expect the worker to
bargain for the best rate of pay possible and the payor to bargain for the most
skilled worker it can get at a rate the business can afford". The appeals
officer continued as follows:
To view the situation another way, imagine that the worker had consistently
owned 35% of the shares (rather than being distracted by a change in share
ownership). Prior to April 6, the worker took an artificially low salary,
to remain below the personal income tax exemption threshold, and took the
remainder of her remuneration in the form of dividends. After that date, the
worker was contemplating and preparing for EI benefits and her salary was
increased to "market rates", a five fold increase. Had one reviewed
the entire period with a view to arm's length versus non‑arm's length,
this would not be considered reasonable and would, because of the ability to
manipulate the remuneration based on concerns other than normal market forces,
indicate a non‑arm's length arrangement.
[17]
On the issue of the nature
and importance of the work, the appeals officer wrote the following:
When the worker was working full time for the business it had 30 to
40 clients. The business now has just four clients, a drop of ten fold. The
clients are those whose needs are simple enough that only data entry is
required, or their needs can be met in the four hours a week the worker decided
she wants to work and with which she can still qualify for benefits.
The worker stressed that the business remains viable and paid out
dividends to the shareholders. However, the business paid the worker an
artificially low salary so that she could remain below the income tax exemption
threshold, and also thus creating far greater profits for the business. To then
say the business is viable is obtuse. It was the worker herself to stated that
the business's finances are managed "as a partnership with our personal
decisions", as is clear when reviewing the worker's employment. It creates
a situation where the business ceases to be run according to the same
principles that guide a business in the open marketplace and instead is run
according to what would be best for the family; i.e. it creates a non‑arm's
length situation. It is not reasonable to conclude that an arm's length
business, run based on separate economic interests, would simply be content to
remain "viable" while allowing its client base to dwindle to
practically nothing. One would not reasonably expect a business to gear its
client base to the four hours of work per week that the worker can put in and still
be eligible for EI benefits.
Further, all parties concede that the worker was/is the "heart
of the business". She had the knowledge, training and experience to form a
company that offered specialized bookkeeping services. While she and her
husband were equal shareholders, the worker ran the company. Once the worker
sold some of her shares to her husband, there was an effort made to have him
become more involved in the decisions regarding business operations and to
"keep him in the loop". However, accounting was not Arvid's area of
expertise and he would need to rely heavily on the expertise of the worker.
Though this is often the case where a worker is engaged for their expertise, in
this case, the worker was always at the centre of the business. Though she referred
to Arvid as the boss and indicated that he made decisions, regarding loans,
when to bill and approving paycheques and reimbursements, and whether to pay
dividends, the statement rings hollow when further examined. The worker
conceded no loans were contemplated, discussed or taken; customers were
generally billed monthly and when there was the occasional exception, Arvid
made the decision because the worker "kept him in the loop"; approved
the payroll yet payroll documents show the worker was paid a set salary on a
semi‑monthly basis; and decided when to pay dividends though as
previously noted, Jolayne and Arvid made all financial decisions together and
ran the business's finances as a partnership with personal decisions. One could
reasonably conclude that there was, in fact, little change – merely window
dressing to create an artificial distance between the worker and the payor – and any change in the running of the business was less about
substance and more about appearance.
The job is of such a nature and importance that one would not
reasonably expect the same in an arm's length arrangement.
[18]
I will first deal with
the remuneration issue. It is not disputed in the present case, that the rate
of pay of the appellant, after she reduced her shareholding below 40%, reflected
market rates and was reasonable. This new rate of pay was substantially
different than that prior to the reduction in her shareholding, and rightly so.
Prior to the reduction, her employment with the Payor was excluded from insurable
employment by reason of the number of voting shares she owned. At that time,
she was an equal shareholder with her spouse and the decision that her
remuneration be paid in the form of salary and dividends was theirs to take as
long as everything was done within the confines of the law. When the appellant
sold some of her shares to reduce her ownership and resigned as a director of
the Payor, she wanted her employment to qualify for EI benefits, but at the
same time she, along with the Payor, to which she was related, had to satisfy
the requirements of the Act in that her contract of employment had to be
substantially similar to one that would have been entered into by parties dealing
at arm's length.
[19]
In order to achieve
that, the appellant sold some of her shares, resigned as a director, and abandoned
the control she had over the Payor so that her spouse could assume the
responsibilities of majority shareholder and sole director of the Payor. It may
appear that the salary adjustment made in that process was to the greatest
advantage of the appellant in that it may have qualified her for higher EI
benefits, but it came at a price, as described above.
[20]
There is nothing in the
law that prevents contracts of employment between related persons, and if their
contract of employment is substantially similar to one that would have been entered
into by parties dealing at arm's length, the employee may qualify for EI
benefits. The appellant does not deny that what she and the Payor did here was with
a view to helping her obtain EI benefits during her maternity leave. So they
rearranged their affairs and their relationship to achieve that.
[21]
The first big hurdle
was to fix a rate of pay that would be a fair market rate and reflect the type
and amount of work done. She looked at the Robert Half 2008 Salary Guide,
among others, and came up with an annual salary of $42,000 to be paid semi‑monthly
for a 35-hour week, and she was to have three weeks' vacation, as per the
April 10, 2008 written agreement they entered into. No one disputes that
the appellant provided her services to the Payor as agreed. I do not find, as
the Minister did, that the appellant's rate of pay was arbitrarily adjusted to
the greatest advantage of the appellant.
[22]
I agree with the
Minister that if one were to review the entire period in light of the arm's
length versus non‑arm's length issue, the remuneration would not be
considered reasonable as it was based on concerns other than market forces and
would indicate a non‑arm's length arrangement, but this is not what we
are doing. Although we are dealing with a period that includes the period prior
to the reduction in the appellant's shareholding, I find it inappropriate not
to sever this latter period as the reasons for excluding the employment from
insurable employment are totally different for this period. I therefore find
that the Minister's decision on the issue of remuneration is not reasonable.
[23]
With regard to the
issue of the nature and importance of the work, the Minister appears to put a
lot of emphasis on the fact that one would not reasonably expect a business
like the Payor to gear its client base to the four hours of work per week that
the appellant could put in and still be eligible for EI benefits. With respect,
I do not believe that either what transpired outside the period under appeal or
the new arrangements agreed to between the Payor and the appellant should be
considered in determining the nature and importance of the work during the
period under appeal. During the period under appeal, the appellant worked the
full week agreed to and did the work necessary to satisfy the Payor's 30 to 40 clients.
[24]
The Payor's decision to
close down the business for a period of time and not hire a replacement for the
appellant was, it seems to me, one that it was entitled to take. The
appellant's spouse testified that his reason for so deciding was that he had
completed his studies and was entering the work force. This new fact renders more
acceptable the Payor's decision to reduce its client base and not replace the
appellant.
[25]
The appellant may have
been, and was no doubt, the heart of the business, but the services rendered by
the Payor to its clients could have been provided by hiring someone with
similar credentials to those of the appellant. The decision not to do so rested
with the Payor, but that does not make the work performed by the appellant during
the relevant period any less important.
[26]
Although it may appear,
on the face of it, that the change in ownership of the shares did not change
the way the business of the Payor was conducted, the fact remains, nevertheless,
that, legally, it did create a different situation that cannot be ignored and
is more than appearance.
[27]
For these reasons, the
appeal is allowed and the decision of the Minister is vacated.
Signed at Quebec, Quebec, this 16th day of August 2010.
Angers
J.
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