Citation: 2007TCC594
Date: 20071005
Dockets: 2007-643(EI)
2007-711(EI)
BETWEEN:
KAREN LENOVER,
MARGARET VANDERENDE,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Boyle, J.
[1] The Appellants in these proceedings,
Mrs. Lenover and Mrs. VanderEnde, are appealing the Minister’s
determination that they are in insurable employment for purposes of the Employment
Insurance Act. It is their position they were not in insurable employment
because either (i) they dealt at arm’s length with their employer Handy Bros. Climatecare
Inc., or (ii) if they did not deal at arm’s length with their employer, their
employment arrangements were also not on arm’s length terms. These two cases
were, by agreement of the parties, heard together on common evidence.
Standard of review
[2] The standard of review in such a case is
whether the Minister’s conclusion was properly arrived at and is reasonable in light
of the evidence before her as supplemented before the Court. See, for example,
the decisions of the Federal Court of Appeal in Légaré v. Canada, [1999]
F.C.J. Nº878 and in Pérusse v. Canada, [2000] F.C.J. Nº310 as well as
this Court’s 2005 decision in Birkland v. Canada, [2005] F.C.J. Nº195.
Facts
[3] Handy Bros. Climatecare Inc. (“Climatecare”),
the Appellants’ employer, is a heating and cooling business run by two families,
the Lenovers and the VanderEndes. Each family indirectly owns 50% of the
company.
[4] At the relevant time, the shares of
Climatecare were wholly-owned by Handy Bros. Ltd.. Mr. and Mrs. Lenover
owned 50% of the shares of Handy Bros. Ltd. Mr. Lenover owned 26% and
Mrs. Lenover owned 24%. The other 50% of Handy Bros. Ltd. was held by the
VanderEndes. Initially, they were owned as to 26% by Mr. VanderEnde and as
to 24% by Mrs. VanderEnde. Part way through 2005, the VanderEndes
reorganized their shareholdings and their 50% of Handy Bros. was thereafter
owned by VanderEnde Investments Inc. which was in turn owned as to 52% by
Mr. VanderEnde and 48% by Mrs. VanderEnde.
[5] Each of the VanderEndes and the
Lenovers were directors of Climatecare and officers of Climatecare.
Mr. Lenover was the President and his principal day‑to-day
responsibility was for generating residential sales. Mrs. Lenover held the
office of Treasurer and her day-to-day responsibility was primarily that of Payroll
and Human Resources manager. She was also responsible for Marketing and
Advertising as well as Credit and Collections. Mr. VanderEnde was the Secretary
of the company and his primary day-to-day responsibility was for securing
commercial sales. Mrs. VanderEnde held the office of Vice-President and
her primary day-to-day responsibility was for accounts receivable and for
warranty administration (i.e.: ensuring they were paid by manufacturers for
repairs done on units still under warranty).
[6] Climatecare employed almost 30 people in
its business, including the four owners. All of the employees other than the
four owners were paid on an hourly basis, that is, their hours were recorded as
was their sick time and vacation time. In contrast, Mrs. VenderEnde and
Mrs. Lenover were salaried employees whose hours were not recorded, whose
sick time was not recorded and who were not paid overtime.
[7] The Minister is not challenging whether
the Appellants really worked in the business. Clearly they did and they worked
very hard in significant and responsible positions. The basis of the Minister’s
challenge is that it would have been reasonable for Climatecare to employ arm’s
length people on a similar salaried basis to do their work. The Minister did
not take the same position with respect to the Appellants’ husbands and this is
what is of concern to the four owners and their company.
[8] The Appellants did testify and provide
corroborating evidence of their base salaries. The Minister’s assumption and
the evidence is that they were also in receipt of employment bonuses. However,
neither of the Appellants nor the Crown entered those amounts in evidence.
Given that the amount of remuneration for the employment is one of the specifically
enumerated considerations for purposes of paragraph 5(3)(b) of the EI
Act in considering whether the terms of employment were arm’s length, this
makes it difficult if not impossible for me to conclude whether or not the
Minister’s determination on that point was reasonable. This may prove
problematic if not fatal to whoever has the onus of satisfying me that the Minister’s
determination was appropriate or inappropriate as the case may be.
[9] All four owners described the Climatecare
business and corporation being run in an entirely consensual manner. Each of
the four owners managed their particular sphere of responsibility on a
day-to-day basis. Whenever any differences arose on any bigger picture aspect
of the business or the corporation, consensus was actively developed and a
decision supported by all four was made.
[10] The evidence is that within the office and
among the staff Mrs. VanderEnde and Mrs. Lenover were regarded by the
other employees as owners involved in key decision-making areas. At the very
least, they certainly had management and supervisory roles within the
organization that none of the other employees fulfilled.
[11] Each of the four owners put
their personal financial covenants and their personal assets at risk in order
for Climatecare to qualify for surety bonds needed in certain of its commercial
contracts. There was also evidence that they each supported the CIBC bank lines
personally.
The Minister’s assumptions
[12] Were the Minister’s assumptions in fact
correct? Daniel Lenover, Climatecare’s President, testified that the
assumptions pleaded by the Minister in Mrs. Lenover’s case were generally
correct except as regards to:
Paragraph 10(l): Mrs.
Lenover’s duties were not what are set out by the Minister in the Reply but are
as generally described above;
Paragraph 10(o): the
Appellants each worked two-and-a-half days a week not two days;
Paragraph 10(q): the
Appellants’ hours were not recorded by the employer;
Paragraph 10(t): no
vacation pay was paid or received nor were vacations or vacation entitlements
recorded;
Paragraph 10(v): the
Payer did not provide dental, eye prescription or like benefit plans to
the Appellants. Neither Appellant’s coverage was as employee but as the spouse
of a covered employee; and
Paragraph 10(x): the
Appellants were not supervised by the Payer’s managers. They were the
Payer’s managers and each of the four owners managed themselves within their
own spheres of responsibility.
[13] The corresponding
corrections to the Minister’s assumptions came out in evidence in
Mrs. VanderEnde’s case as well.
[14] In the VanderEnde
Reply, the Minister made an additional assumption:
“Paragraph 8(j): the
VanderEndes and the Lenovers controlled the day-to-day operations of the
business and made the major business decisions for the business.”
[15] Given this
assumption, which was entirely supported by the evidence, it is difficult to
see how the Minister could reasonably have reached different conclusions as
regards to the wives than as regards to the husbands (except as regards to
Mr. VanderEnde for the latter half of the year following the VanderEnde
Investments reorganisation). This assumption is inconsistent with the
Minister’s assumptions in 10(x) and 8(z) and the Crown’s position that the husbands
supervised the wives and the wives’ work.
[16] The Minister relied significantly in
argument on the Appellants’ answers to Question 10 in the Non Arm’s Length
Worker’s Questionnaire (Exhibit A-4). This question asks “Who supervised you?”
Mrs. VanderEnde wrote “Management”. Mrs. Lenover wrote
“Dan Lenover and Harold VenderEnde”. In fact, the fuller picture
which emerged clearly at trial was as described above.
[17] I should add that notwithstanding the
Appellants’ Notice of Appeal, the Appellants conceded at trial that they were
employed by Climatecare under an oral contract of service. This was the only
reasonable interpretation of the evidence in any event.
Legislation
[18] The relevant
provisions of the EI Act are as follows:
5.(1) Subject to
subsection (2), insurable employment is:
(a) employment
in Canada by one or more employers, under any express or implied contract of
service or apprenticeship, written or oral, whether the earnings of the
employed person are received from the employer or some other person and whether
the earnings are calculated by time or by the piece, or partly by time and
partly by the piece, or otherwise;
5.(2) Insurable employment does not
include:
(b) the
employment of a person by a corporation if the person controls more than 40% of
the voting shares of the corporation;
[…]
(i) employment
if the employer and employee are not dealing with each other at arm’s length.
5.(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.
[19] The definition of insurable employment for
purposes of the EI Act is
set out in section 5. Paragraph 5(2)(i) excludes employment if the
employer and the employee are not dealing with each other at arm’s length.
Paragraph 5(3)(a) says arm’s length is to be determined in accordance
with the Income Tax Act.
[20] The definition of arm’s length in section
251 of the Income Tax Act provides that (i) related persons are
deemed not to deal at arm’s length and (ii) it is a question of fact
whether or not non-related persons deal at arm’s length.
[21] Paragraph 5(3)(b) of the EI Act adds
a further deeming rule to the meaning of arm’s length in addition to its
meaning and the deeming rules in the Income Tax Act. By its opening
words, the paragraph 5(3)(b) rule only applies if the employer is
related to the employee within the meaning of the Income Tax Act. If an
employee related to the employer does not deal at arm’s length with the
employer for purposes of the Income Tax Act (which will always be the
case given the definitions of arm’s length and related), they will nonetheless
be deemed to deal with each other at arm’s length for EI purposes if the
Minister 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. Paragraph
5(2)(i) looks at whether the relationship of the employer and the
employee is such that they are not dealing with each other at arm’s length. In
contrast, paragraph 5(3)(b) looks at the terms of employment to
determine if those employment terms reflect an arm’s length arrangement
notwithstanding the non‑arm’s length relationship.
[22] I need also refer to paragraph 5(2)(b)
of the EI Act, since that is relevant to Mr. VanderEnde, even
though his EI matters are not before the Court. Paragraph 5(2)(b)
excludes from insurable employment the employment of a person who controls more
than 40% of the voting shares of the corporation. While this section had used
to look to the shares controlled by the person and his or her spouse, for the
year in question it only looks at the employee’s holdings.
Analysis and Conclusion
[23] In Canada (Canada Employment and Immigration
Commission) v.
Gagnon, [1988] 2 S.C.R. 29, the Supreme Court of Canada (at page 47) described
the language of the employment insurance legislation as not being a model of
clarity. Those who have to deal with it regularly might consider that to have
been a judicious understatement. The dispute in this case arises because the
definition of insurable employment incorporates the arm’s length and related concepts
and definitions from the Income Tax Act. The interpretation of the
concept of factual non-arm’s length for purposes of the Income Tax Act
is normally made in an income tax setting. It is certainly not the norm to
consider minority shareholders, even those holding approximately 25%, to not
deal with the corporation at arm’s length for income tax purposes. See for
example CRA’s Interpretation Bulletin IT‑419R2 "Meaning of Arm’s
Length" at paragraph 32.
Was the Appellants’ relationship with
Climatecare arm’s length?
[24] I had anticipated that the Crown’s
position would be that the employer Climatecare and each of Mrs. VanderEnde
and Mrs. Lenover were factually arm’s length and that their employment was
therefore not excluded employment described in paragraph 5(2)(i). That
appeared to me to have been the basis of the Minister’s decision on the Appellants’
administrative appeal of the CRA ruling. It reads “it has been determined that
Karen Lenover and Handy Bros. Climatecare Inc. were dealing with each
other at arm’s length, as a matter of fact and, therefore, Karen Lenover
was not excluded from insurable employment.” Mrs. VanderEnde’s
determination letter is similar. However, the Crown’s position is that the
wives did not deal at arm’s length with Climatecare for purposes of the Income
Tax Act. The Crown’s position is that the Minister’s reason in her decision
letters, although ambiguous, was intended to communicate that the wives were
dealing at arm’s length with Climatecare only as a result of the application of
the paragraph 5(3)(b) deeming provision. The Minister’s clarified
position is consistent with paragraph 5 of the Lenover Reply and paragraph 3 of
the VanderEnde Reply. That is, it is the Minister’s position that each of
Mrs. Lenover and Mrs. VanderEnde did not deal at arm’s length with
Climatecare for purposes of paragraphs 5(2)(i) and 5(3)(a). If so,
they are non-arm’s length for EI purposes unless paragraph 5(3)(b) of
the employment insurance legislation deems them to be arm’s length nonetheless.
[25] Was the Minister’s
determination that each of Mrs. Lenover and Mrs. VanderEnde did not
deal at arm’s length with Climatecare for purposes of the Income Tax Act
properly arrived at and reasonable? There is no evidence to conclude it was not
properly arrived at. While it is not obvious that a significant non-controlling
shareholder of a corporation will not be dealing at arm’s length with the
corporation for the purposes of the Income Tax Act, it was a
determination reasonably open to the Minister. Whether or not this Court would
have reached the same conclusion is not the test. I note that the Minister
reached a similar conclusion on this point for the husbands as well,
notwithstanding that she went on to conclude that the paragraph 5(3)(b)
deeming rule did not apply to deem the husbands to be arm’s length for EI
purposes.
Were the Appellants’ related to
Climatecare?
[26] Having concluded
that the Minister’s initial determination that Mrs. Lenover and
Mrs. VanderEnde did not deal at arm’s length with Climatecare for Income
Tax Act purposes was a reasonable determination properly arrived at, the next
question is whether the Minister’s determination that the paragraph 5(3)(b)
deeming rule nonetheless then deemed the wives to be dealing at arm’s length
with Climatecare for EI purposes was also properly arrived at and reasonable.
[27] Paragraph 5(3)(b) can only apply by
its wording if Mrs. Lenover and Mrs. VanderEnde are each related
to their employer Climatecare for purposes of the Income Tax Act. The
Crown argued that Climatecare and each of the Appellants were related to each
other by virtue of subparagraph 251(2)(b)(ii) of the Income Tax Act
dealing with related groups that control a corporation. Neither the VanderEndes
nor the Lenovers controlled the corporation as each couple only had a 50%
interest. The VanderEndes and the Lenovers were not related to each other. The
definition of related group in subsection 251(4) of the Income Tax Act requires
that each member of the group be related to every other member of the group.
This cannot be met and the Appellants are therefore successful in their appeals.
[28] At the hearing, I agreed to the
Crown’s request for an additional 30 days to make written submissions in
support of its position that each of Mrs. VanderEnde and Mrs. Lenover
were related persons and therefore paragraph 5(3)(b) of the Employment
Insurance Act could apply. In those written submissions, the Crown conceded
that paragraph 5(3)(b) was not applicable to these appeals. To the
extent the Crown’s written submissions go beyond the issue of related for
purposes of paragraph 5(3)(b), and seek to argue that the Appellants
were arm’s length for purposes of paragraph 5(2)(i), I am not
considering them. The written submissions were “to be limited to the related
issue”. This limitation was chosen by the Crown when offered the chance to make
only written submissions on paragraph 5(2)(i) and paragraph 5(3)(b)
in their entirety or to proceed with oral argument except only as regards the
question of being related for purposes of paragraph 5(3)(b). It would be
procedurally unfair in the case of self-represented Appellants to allow the
Crown to make written submissions contrary to the extensive substantive
argument made by the Crown at the hearing, contrary to concessions expressly
made at the hearing and, according to the Crown, contrary to the Minister’s assumptions
and the basis for her decision.
Is the Appellants’ employment on
arm’s length terms?
[29] Since neither of the Appellants is related
to their employer Climatecare, it is not necessary to review the terms of their
employment to see if their employment is nonetheless on arm’s length terms. The
provision in paragraph 5(3)(b) is not applicable to all non-arm’s length
employees, only to employees who are non-arm’s length because they are related
to the employer. It does not by its terms, and its interaction with the
definitions in the Income Tax Act, extend to employees who are found to
be factually non-arm’s length with the employer. The reason for this is not
apparent. However, it is clear that the Minister’s decision that the two wives
are in insurable employment was not properly arrived at since on a plain
reading of paragraph 5(3)(b) it cannot apply.
[30] If it were relevant, I am satisfied that,
had the Appellants been related to Climatecare, a determination that the terms
of their employment were arm’s length was probably not unreasonable. The
employment of arm’s length managers and supervisors on a salaried basis with no
payment for overtime and no formal recording of hours is not at all uncommon.
This is discussed in the Lacroix c. Canada, [2007] A.C.I. Nº87 decision
of Mr. Justice Archambault with which I concur and consider
apposite here. My one qualification in the case before me is that I do not know
the amount of the bonuses which the Minister was required to consider.
[31] On the issue of whether their employment
was on arm’s length terms, the Appellants relied heavily on the fact that each
of them had put their personal financial assets and personal assets on the line
for the company for bonding and banking purposes. In their submissions, this
distinguished them from all of the other employees (other than their husbands).
I do not believe that, at least in the circumstances of this case, those
actions or considerations are relevant to a review of the terms of their
employment for purposes of paragraph 5(3)(b). The financial support they
gave the company was given in their capacity as shareholder and not as
employee. That is why the other employees did not give it. This means that this
contribution may be relevant to the determination of whether the relationship
between the company and the Appellants was arm’s length but is not particularly
helpful in the consideration of whether the terms of their employment were
arm’s length.
The Appellants’ Husbands:
[32] The Appellants questioned how it could
have been reasonable for the Minister to determine that they were in insurable
employment when their husbands were not, given that each of the four of them
was an indirect minority shareholder. The Minister’s decision on this point may
have been reasonable in the case of the Appellants even if it was inconsistent
with her decision regarding the husbands since they are not appellants.
[33] Once the VanderEndes put
VanderEnde Investments Inc. in place, Mr. VanderEnde’s employment was
excluded by virtue of paragraph 5(2)(b) since he controlled more than
40% of the voting shares of the corporation. Use of the verb control in this
exception is not defined by reference to the concept of control in the Income
Tax Act nor otherwise defined in the employment insurance legislation. In
contrast to the Income Tax Act which looks to control of corporations,
this exception looks to control of the voting shares of the corporation. Prior
to the amendment removing the reference to the person’s spouse, this section would
also have excepted Mrs. VanderEnde’s employment. See for example Dupuis v. M.N.R,
[1988] 90 N.R. 399 (F.C.A.). Given that amendment, I do not believe it is open
to interpret the concept of controlling voting shares of a corporation as
extending to controlling together with one’s spouse more than 40% of the shares.
[34] In the early part of 2005, prior to the
VanderEnde Investments reorganization, and throughout 2005 in the case of
Mr. Lenover, Mrs. Lenover and Mrs. VanderEnde believe they were
in a similar position in their relationship and employment with the company as
their husbands. It was the Crown’s explanation that the key distinction between
the husbands and the wives is that the wives were supervised by the husbands.
This was largely in reliance on the answer to Question 10 of the Non Arm’s
Length Worker’s Questionnaire dealing with supervision. As detailed above, the
evidence at trial was more complete and expansive. The Crown also argued that
the husbands were the directing minds and principal decision-makers of the
overall business except as regard those specific aspects delegated to the wives
as in the areas of payroll, human resources, accounts receivable, etc. He
relied also on paragraph (z) of the assumptions in Mrs. VanderEnde’s
case, which is similar to assumption (x) in Mrs. Lenover’s case, that
“the Appellant was supervised by the Payer’s managers.” He clarified that the
reference to the Payer’s managers was to the husbands. That explanation, assumption,
and position at trial are not supported by the evidence and appear completely
at odds with assumption (j) in the VanderEnde Reply that “the VanderEndes and the
Lenovers control the day-to-day operations of the business and made the major
business decisions for the business.”
[35] The appeals of each
of the Appellants, Mrs. Lenover and Mrs. VanderEnde, are allowed and
Minister’s decision that the Appellants were in insurable employment with their
employer is varied to reflect that they were not in insurable employment.
Signed at Ottawa, Canada, this 5th day of October 2007.
"Patrick Boyle"
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