Citation: 2008TCC679
Date: 20081219
Docket: 2007-4951(EI)
BETWEEN:
HCR DATA SERVICES LTD.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The Appellant
filed an appeal from the determination by the Respondent that the employment of
Chris Hantke by the Appellant during the period from January 1, 2003 to December 31, 2006 (the “period
of employment”) was insurable employment for purposes of the Employment Insurance Act
("Act"). It is the position of the Appellant that the
employment of Chris Hantke by the Appellant throughout the period of employment
was not insurable employment.
[2]
Subsection
5(2) of the Act provides in part that:
Insurable employment does not include
...
(i) employment if the employer and employee
are not dealing with each other at arm's length.
[3]
Subsection
5(3) of the Act provides that:
(3) For the purposes of
paragraph (2)(i),
(a) the
question of whether persons are not dealing with each other at arm's length
shall be determined in accordance with the Income Tax Act; and
(b) if the
employer is, within the meaning of that Act, related to the employee,
they are deemed to deal with each other at arm's length if the Minister of
National Revenue is satisfied that, having regard to all the circumstances of
the employment, including the remuneration paid, the terms and conditions, the
duration and the nature and importance of the work performed, it is reasonable
to conclude that they would have entered into a substantially similar contract
of employment if they had been dealing with each other at arm's length.
(emphasis added)
[4]
As a
result, if Chris Hantke and the Appellant were not dealing with each other at
arm’s length and were not related, his employment by the Appellant would not be
insurable employment as his employment would be excluded by paragraph 5(2)(i)
of the Act and paragraph 5(3)(b) of the Act would not be
applicable. Paragraph 5(3)(b) of the Act only applies if Chris Hantke
was related to the Appellant. While Chris Hantke was (and is) related to his
father, Gary Hantke (who owned one-half of the shares of the Appellant),
the issue is whether Chris Hantke was related to the Appellant.
[5]
The
determination of whether the Appellant and Chris Hantke were dealing with each
other at arm’s length is to be made in accordance with the provisions of the Income
Tax Act. As well, the question of whether the Appellant and Chris Hantke
were related during the period of employment is to be determined as provided in
the Income Tax Act.
[6]
Subsection
251(1) of the Income Tax Act provides in part as follows:
251. (1) For the purposes of this Act,
(a) related persons shall be deemed not
to deal with each other at arm's length;
…
(c) … it is a question of fact whether
persons not related to each other are at a particular time dealing with each
other at arm's length.
[7]
Subsection
251(2) of the Income Tax Act provides in part as follows:
(2) For the purpose of this Act, “related
persons”, or persons related to each other, are
…
(b) a corporation and
(i) a person who controls the
corporation, if it is controlled by one person,
(ii) a person who is a member of a related
group that controls the corporation, or
(iii) any person related to a person
described in subparagraph (i) or (ii); and
[8]
Gary Hantke and Theodor Redekop
were carrying on an accounting business as a partnership under the name Hantke,
Coffey, Redekop & Co. The Appellant was incorporated to employ the staff
that performed the accounting duties for the clients of the partnership. One‑half
of the shares of the Appellant were held by Gary Hantke and the remaining
shares were held by Theodor Redekop. Gary Hantke and Theodor Redekop were
not related to each other. The Articles of Association of the Appellant
provided that the president of the company would have a second or casting vote
in the event of a tie. Gary Hantke held the position of president of the Appellant
throughout the period of employment.
[9]
Gary Hantke, who is an accountant
and is not a lawyer, represented the Appellant. In the Notice of Appeal, the
Appellant stated in part as follows:
Chris was a CGA student when he
became employed by HCR Data Services Ltd. on June 3, 2002. (Chris became a CGA in
September 2007.) Right from the start Chris was being groomed for a partnership
in the firm of Hantke, Coffey, Redekop & Co. For this reason, the
relationship between employer and employee is not an arm’s length relationship.
[10]
In the Notice of Appeal, the
Appellant also describes the paragraph of its articles of association that
provides that the president of the Appellant has a second or casting vote. The
Appellant also states in the Notice of Appeal that “de facto control
of [the Appellant] belongs to Gary Hantke”. For the purposes of determining
whether the Appellant and Chris Hantke were related to each other, the issue
will be whether Gary Hantke had de jure control not whether Gary Hantke
had de facto control. The Supreme Court of Canada in Duha
Printers (Western) Ltd. v. The Queen 98 DTC 6334, [1998] 1 S.C.R.
795, [1998] 3 C.T.C. 303 stated that:
35 It
has been well recognized that, under the Income Tax Act, “control” of a
corporation normally refers to de jure control and not de facto
control. This Court has repeatedly cited with approval the following test, set
out by Jackett P. in Buckerfield's, supra, at p. 507:
Many
approaches might conceivably be adopted in applying the word “control” in a
statute such as the Income Tax Act to a corporation. It might, for example,
refer to control by “management”, where management and the board of directors
are separate, or it might refer to control by the board of directors. ... The
word “control” might conceivably refer to de facto control by one or
more shareholders, whether or not they hold a majority of shares. I am of the
view, however, that in Section 39 of the Income Tax Act [the former section
dealing with associated companies], the word “controlled” contemplates the
right of control that rests in ownership of such a number of shares as carries
with it the right to a majority of the votes in the election of the
board of directors. [Emphasis added.]
Cases in which
this Court has applied the foregoing test have included, inter alia, Dworkin
Furs, supra, and Vina-Rug (Can.) Ltd. v. Minister of National
Revenue, [1968] S.C.R. 193 (S.C.C.).
[11]
In the Reply that was filed in
this matter, paragraph 1 provides as follows:
1. The
Minister of National Revenue (the “Minister”) admits the following facts stated
in the Notice of Appeal:
a) the
period under appeal was from January 1, 2003 to December 31, 2006 (the
“Period”);
b) Chris
Hantke (the “Worker”) is the son of Gary Hantke (“Mr. Hantke”) and was an employee
of the Appellant during the Period;
c) Mr.
Hantke and Theodor Redekop (“Mr. Redekop”) were the only partners in the
accounting firm of Hantke, Coffey, Redekop & Co. (the “Accounting Company”)
during the Period;
d) the
Appellant managed and employed the staff that perform the accounting duties for
the clients of the Accounting Company during the Period;
e) during
the Period, the Appellant employed:
i) Certified General
Accounting (“CGA”) students,
ii) workers who had obtained
their CGA designation, and
iii) other workers.
f) Mr.
Hantke and Mr. Redekop:
i) each
held 50% of the voting shares in the Appellant during the period,
ii) were
the only shareholders in the Appellant during the Period,
iii) were
both directors in the Appellant during the Period, and
iv) held
the positions of President and Treasurer/Secretary, respectively, during the
Period.
g) Mr.
Hantke held the position of Chairman in the Appellant during the Period;
h) The
Worker was a CGA student when he became employed by the Appellant on June 3,
2002;
i) The
Worker obtained his CGA designation in September, 2007; and
j) the
relationship between the Appellant and the Worker is a non-arm’s length
relationship.
(emphasis added)
[12]
The admission by the Respondent
that the Appellant was not dealing at arm’s length with Chris Hantke was not
based on any finding or assumption that Chris Hantke was related to the
Appellant (the statement that Chris Hantke was related to the Appellant was not
made until the fifth paragraph in the Reply). It is simply an unconditional
statement in the first paragraph of the Reply that the Respondent admits that
the relationship between the Appellant and Chris Hantke is a non-arm’s length
relationship.
[13]
As noted above, the question of
whether a corporation and an individual are related is answered by applying the
provisions of subsection 251(2) of the Income Tax Act. In this
case, since Gary Hantke and Theodor Redekop are not related to each other and
each own one-half of the shares of the Appellant, Chris Hantke will only
be related to the Appellant if Gary Hantke controls the Appellant as a result
of the casting or second vote that he had as the president of the Appellant.
[14]
The Supreme Court of Canada in the
case of Minister of National Revenue v. Dworkin Furs (Pembroke)
Limited [1967] C.T.C. 50, [1967] S.C.R. 223, 67 D.T.C. 5035 stated as
follows:
14 In
the case of Allied Business Supervisions Limited, Alexander Aaron was the owner
of 50 per cent of the issued shares while two other individuals, Joseph Tomney
held 31 per cent and Roy N. Hall 19 per cent respectively. Aaron and Tomney
were elected directors of the company on December 17, 1959 for an indefinite
period until their term of office shold be changed by the shareholders at a
subsequent shareholders' meeting. On the same day Aaron was elected president
of the company.
15 This
company was incorporated under the Saskatchewan Companies Act, R.S.S. 1953, c.
124. The company adopted at its Articles of Association Table A of the
Companies Act. Article 46 of Table A reads:
46. In the
case of equality of votes whether on a show of hands or on a poll, the chairman
of the meeting at which the show of hands takes place or at which the poll is
demanded shall be entitled to a second or casting vote.
16 It
was urged on behalf of the appellant that the fact that Aaron as president had
at meetings of shareholders and directors a second or casting vote gave him
control of the company within the Buckerfield's definition of controlled. Thurlow,
J. held that the existence of the right to exercise a second or casting vote
did not give Aaron control. He said:
the
casting vote, unlike the votes arising from shareholding, which are exercisable
without responsibility to the company or to other shareholders is in my opinion
not the property of the holder, but is an adjunct of an office.
and with this I agree.
(emphasis added)
[15]
The Canada Revenue Agency, which
is the same Agency that determined that the Appellant and Chris Hantke were
related and that his employment was insurable, publishes interpretation
bulletins on various matters. In Interpretation Bulletin, IT-64R4 —
Corporations: Association and Control [Consolidated] dated October 13, 2004,
the Canada Revenue Agency stated in paragraph 16 that:
Effect of casting vote
¶16. Where the
voting shares of a corporation are divided evenly between two persons, the fact
that the chairperson of a shareholder's meeting may have the right to cast a
deciding vote does not give that person de jure control of the corporation where
the deciding vote is conferred on that person as chairperson of the meeting and
not by ownership of voting shares (see Aaron's (Prince Albert) Ltd. et al. v.
MNR, also known as Allied Business Supervisions Ltd. v. MNR, 66 D.T.C. 5244,
[1966] C.T.C. 330 (Ex. Ct.) — confirmed in MNR v. Dworkin Furs (Pembroke) Ltd.,
67 D.T.C. 5035, [1967] C.T.C. 50 (S.C.C.)). (However, the holding of a “casting
vote” in the above circumstances may constitute de facto control as defined in
subsection 256(5.1).)
[16]
As a result of the decision of the
Supreme Court of Canada in Dworkin Furs, Gary Hantke did not control the
Appellant for the purposes of subsection 251(2) of the Income Tax Act.
This decision of the Supreme Court of Canada was acknowledged by the Canada
Revenue Agency in Interpretation Bulletin IT-64R4. However, the Reply simply
states in paragraph 5 that the “Minister further decided that the Worker was
related to the Appellant”. It appears that this decision was made without
considering the decision of the Supreme Court of Canada in Dworkin Furs
as acknowledged by the Canada Revenue Agency in Interpretation Bulletin IT-64R4.
[17]
Since Gary Hantke did not control
the Appellant for the purposes of subsection 251(2) of the Income Tax Act,
Chris Hantke was not related to the Appellant. Therefore, as provided in
paragraph 251(1)(c) of the Income Tax Act, it is a question of fact
whether Chris Hantke was dealing at arm’s length with the Appellant. Since the
Respondent unconditionally admitted that Chris Hantke was not dealing at arm’s
length with the Appellant and since there is no basis for a determination that
Chris Hantke was related to the Appellant (and no basis for this conclusion was
stated in the Reply and, as a result of the decision of the Supreme Court of
Canada in Dworkin Furs, could not be supported in any event), the Reply
as drafted leads to a conclusion that the appeal should be allowed and does not
disclose any basis in law to dismiss the appeal.
[18]
Following the hearing of this
matter when the issue of the decision of the Supreme Court of Canada in Dworkin
Furs was raised with counsel for the Respondent, she requested time to
consider this case. Subsequently counsel for the Respondent filed a written
submission in which it is acknowledged that Chris Hantke and the Appellant
were not related but counsel for the Respondent then sought to raise the
argument that the Appellant and Chris Hantke were dealing with each other at
arm’s length, notwithstanding the clear admission by the Respondent in the
Reply that their relationship was a non-arm’s length relationship.
[19]
In my opinion it is not
appropriate for counsel for the Respondent to raise this additional argument
following the hearing. Given the very clear admission by the Respondent in the
Reply that the relationship between the Appellant and Chris Hantke was a
non-arm’s length relationship (which would be a question of fact since they
were not related), it is not appropriate for counsel for the Respondent to
effectively try to withdraw this admission after the conclusion of the hearing
when the Appellant is unable to adduce any additional evidence with respect to
whether Chris Hantke and the Appellant were dealing with each other at arm’s
length. The issue, as defined by the pleadings, was whether the terms and conditions
of the employment would have been substantially similar if they would have been
dealing with each other at arm’s length. (This issue, as noted above, would
only be relevant if Chris Hantke and the Appellant were related.) The focus was
on the terms and conditions not on how they dealt with each other. There may
have been additional evidence that the Appellant might have wanted to introduce
if the issue would have been recharacterized before the hearing. It is not
appropriate for counsel for the Respondent to recharacterize the issue in this
way in this case following the hearing.
[20]
In Ritonja v. The Queen,
2006 TCC 346, 2006 DTC 3140, Chief Justice Bowman (as he then was) stated that:
10 To
permit the respondent to rely for the first time at trial on a brand new basis
of disallowance would violate a fundamental rule of procedural fairness. See Poulton
v. Canada, 2002 2 C.T.C. 2405, approved by Federal Court of Appeal in Burton
v. The Queen, 2006 D.T.C. 6133. In Poulton, at pages 2408-2410, I
set out my view on points raised by the Crown at the last minute against taxpayers
who are not represented by counsel.
[11] On the eve of trial the respondent brought motions to amend
the replies to add to sections C and D a reference to paragraph 6(1)(b).
The motion was fully argued at the commencement of trial. I denied the
respondent's motions and gave fairly extensive oral reasons. I shall summarize
them briefly.
[12] This court and the Federal Court of Appeal have
traditionally been fairly liberal in granting amendments….
…
[16] Why then did I not allow the amendment here as was done in
the above cases? Well, there is a world of difference between large public
corporations, and multinationals with batteries of senior counsel to protect
them and millions of dollars at stake and small taxpayers, unrepresented by
lawyers, with relatively small amounts of money in issue.
[17] Procedural fairness requires that in cases governed by the
informal procedure the Crown not be permitted at the 11th hour to spring a brand
new argument on a taxpayer. Had the appellants known from the outset or at
least a reasonable time before trial that the Crown was going to rely on
paragraph 6(1)(b) their approach might have been entirely different and
they could have called evidence to rebut the assertion that the amounts were
"allowances" within the meaning of paragraph 6(1)(b) or that
they were exempted from the operation of that paragraph by subsection 6(6). Had
I granted the Crown's motions and allowed the amendment the appellants would
have been entirely justified in requesting an adjournment and this would have
resulted in an undue delay of these relatively small informal appeals. I cannot
emphasize too strongly that it is of consummate importance that the court in
the informal procedure be vigilant to ensure that the unrepresented taxpayer
not be deprived of procedural fairness.
[18] I quite agree that by denying the Crown's motion to amend to
refer to paragraph 6(1)(b) I may have deprived it of what might be a
very potent argument. However the Crown's loss of these appeals because it
slipped up and failed to refer to a provision that might have helped it is not,
in the scheme of things, a jurisprudential or fiscal catastrophe. What is far
more important is that unrepresented taxpayers in the informal procedure be
given every benefit of procedural fairness. To force them to confront the
complexities of paragraph 6(1)(b) and subsection 6(6) on the eve of
trial would do the administration of justice irreparable damage.
[21]
In the Federal Court of Appeal in Burton v. The
Queen, 2006 FCA 67, [2006] 2 C.T.C. 286, 2006 DTC 6133, Justice Rothstein
(as he then was) stated that:
12 As
I understand his reasoning, Bowman A.C.J.T.C. was of the view that in cases
governed by the informal procedure, the Tax Court should not always be willing
to grant a motion by the Crown "at the eleventh hour to spring a brand new
argument on a taxpayer". Where an adjournment results "in undue
delay" of "relatively small informal appeals", the Tax Court
judge must carefully exercise his or her discretion in deciding whether to
allow the amendment and the consequent adjournment. He notes that in informal
appeals, denying the Crown the opportunity to amend at the last minute would
not result in a "jurisprudential or fiscal catastrophe".
[22]
If the Respondent in an informal
procedure would be unlikely to be allowed to spring a brand new argument at the
eleventh hour, the Respondent should not be allowed to spring the new argument
following the conclusion of the hearing. Since the issue was whether the terms
and conditions of the employment would have been substantially similar if they
would have been dealing with each other at arm’s length, there was some
evidence related to the dealings between Chris Hantke and the Appellant. Chris
Hantke had stated that he could book time off on very short notice while the
arm’s length employees were required to give more notice of when they wanted to
book time off. As well, Chris Hantke stated that he accepted less compensation
from the Appellant than his colleagues did from other employers because he
wanted to work with his father. There may also have been additional evidence in
relation to the dealings between Chris Hantke and the Appellant that might have
been introduced if the issue of whether they were dealing with each other at
arm’s length would have been identified as an issue in the pleadings.
[23]
Counsel for the Respondent, in her
written submissions, seems to have assumed that if she would have been allowed
to raise the new argument that the Appellant and Chris Hantke were dealing at
arm’s length, that the onus of proof would have remained with the Appellant.
Counsel for the Respondent stated in the written submission that “the evidence
has not shown that the Appellant and the Worker were in a factual non-arms
length relationship”. This would suggest that the Appellant would have had the
onus of establishing this.
[24]
In Loewen,
[2004] F.C.J. No. 638, 2004 FCA 146, Justice Sharlow, on behalf of the Federal
Court of Appeal, made the following comments:
11 The constraints on the Minister that apply to the
pleading of assumptions do not preclude the Crown from asserting, elsewhere in
the reply, factual allegations and legal arguments that are not consistent with
the basis of the assessment. If the Crown alleges a fact that is not
among the facts assumed by the Minister, the onus of proof lies with the Crown.
This is well explained in Schultz v. R. (1995), [1996] 1 F.C. 423, [1996] 2
C.T.C. 127, 95 D.T.C. 5657 (Fed. C.A.) (leave to appeal refused, [1996]
S.C.C.A. No. 4 (S.C.C.)).
(emphasis
added)
[25]
Leave to appeal the decision of
the Federal Court of Appeal in Loewen to the Supreme Court of Canada was
refused (338 N.R. 195 (note)).
[26]
If the onus of establishing facts
that are not assumed by the Minister rests with the Respondent then the onus of
establishing facts contrary to those admitted by the Respondent must also rest
with the Respondent. If the Respondent would have been permitted to raise the
new argument then the Respondent would have had the onus of establishing the
new fact that the Appellant and Chris Hantke were dealing at arm’s length.
[27]
Counsel for the Respondent also
referred to several cases that distinguish between an employment relationship
and an independent contractor relationship. However, since the position of the
Appellant is that Chris Hantke was an employee of the Appellant and the
position of the respondent was that Chris Hantke was an employee, the relevance
of these cases is not clear. Both parties agree that Chris Hantke was an
employee of the Appellant throughout the period of employment.
[28]
In Fournier v. The Queen, 2005
FCA 131, the Federal Court of Appeal addressed the issue of whether costs could
be awarded in a proceeding where the applicable rules did not provide for the
awarding of costs. Justice Létourneau of the Federal Court of Appeal stated
that:
11 The
judge stated that he had no jurisdiction to impose costs on an appellant who
unnecessarily delayed an appeal process initiated within an informal proceeding.
I should point out that the Tax Court of Canada has the inherent jurisdiction
to prevent and control an abuse of its process: see Yacyshyn v.
Canada, [1999] F.C.A. No. 196 (F.C.A.).
12 The
awarding of costs is one mechanism for preventing or remedying abusive delays
or procedures: see Blencoe v. British Columbia (Human Rights
Commission), [2000] 2 S.C.R. 307, at paragraphs 179 and 183. In Sherman
v. Canada (Minister of National Revenue - M.N.R.), [2003] 4
F.C. 865, at paragraph 46, this Court addressed the issue in the following
terms:
It is now generally accepted that an award of costs may perform more than
one function. Costs under modern rules may serve to regulate, indemnify and
deter. They regulate by promoting early settlements and restraint.
They deter impetuous, frivolous and abusive behaviour and litigation.
They seek to compensate, at least in part, the successful party who has
incurred, sometimes, large expenses to vindicate its rights.
[Emphasis added by Justice Létourneau.]
[29]
The Federal Court of Appeal in
that case set the costs at $1,000.
[30]
Based on this decision of the
Federal Court of Appeal, costs were awarded against the Crown in an appeal
under the Act in Zinck v. Minister of National Revenue,
2007 TCC 592.
[31]
In my opinion it is an abuse of
process for the Respondent to pursue this matter to a hearing based on a Reply
that, as drafted, leads to a conclusion that the appeal should succeed. As
well, it was not appropriate for the Respondent to attempt to raise new issues
that are in contradiction to the clear admissions in the pleadings following
the hearing, at a time when the Appellant would be precluded from submitting
any additional evidence to deal with this matter.
[32]
In this particular case, costs
should be awarded against the Respondent and therefore the Appellant shall be
entitled to costs of $1,000 to be paid by the Respondent.
[33]
The Appellant’s appeal
under the Act from the decision of the Respondent that the employment of
Chris Hantke was insurable employment within the meaning of section 5 of the Act
during the period from January 1, 2003 to December 31, 2006 is allowed and the
matter is referred back to the Minister of National Revenue for reconsideration
on the basis that the employment of the Appellant during this period was not
insurable employment under section 5 of the Act. The Respondent shall
pay costs of $1,000 to the Appellant.
Signed at Halifax, Nova Scotia, this 19th day of December 2008.
“Wyman W. Webb”
Email this Content