Citation: 2008TCC46
Date: 20080122
Docket: 2006-1519(EI)
BETWEEN:
LUANA FRUCHTER,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Jorré, J.
[1] This is an appeal from a decision of the Minister of
National Revenue (the “Minister”) dismissing the Appellant’s appeal from a
ruling
that the Appellant’s employment by Mitchco Inc. from May 1, 2003 to April 16,
2004 was not insurable employment. That decision was based on paragraph 5(2)(i)
and subsection 5(3) of the Employment Insurance Act (the “Act”).
[2] There is no dispute
that the Appellant was employed under a contract of employment and that the Appellant
and the employer were not dealing at arm’s length. The issue is the application
of paragraph 5(3)(b) of the Act which reads:
if the employer is, …, related to the employee, they are deemed to
deal with each other at arm’s length if the Minister… is satisfied that, having
regard to all the circumstances… it is reasonable to conclude that they would
have entered into a substantially similar contract of employment if they had
been dealing… at arm’s length.
[3] The Reply sets out
that in making the ruling, the Minister relied on the following assumptions of
fact:
a) the Payer, incorporated on July 18, 1989,
operates in the sale and distribution of textiles;
b) the Appellant would have started to render
services to the Payer from the very start of its operations;
c) at the beginning of her employment, the
Appellant worked in the office making entries in the accounting books, to do
classification and do purchasing to buy new fabrics;
d) the Appellant helped her husband’s business for
many years, and for some years, she worked without being paid;
e) during the period under review, the Appellant
worked on the road to buy new fabrics; she especially accompanied her husband
when he traveled outside;
f) the Appellant did not have any schedule of work
to respect;
g) on February 14, 2006, the Appellant said to
a representant of the Respondent that during the period under review, she had
weeks when she did not render any service to the Payer;
h) during the period under review, the Appellant
received a fixed salary of $ 750,00 per week and this, without regard to
the hours really worked;
i) during the period under review, the Appellant
did not work much and could not specify how many working hours she had
incurred;
j) the Payer claims that the Appellant worked on
call and that she worked approximately 10 hours per week;
k) if the Appellant worked only 10 hours per
week, she thus received a remuneration of $ 75,00 per hour during that
period;
l) based on the record of employment, the
Appellant was paid for 25 hours per week, thus $ 30,00 per hour;
m) the tasks of the Appellant were tiny and nothing
justifies the remuneration which the Payer paid to her.
[4] During the period
in question, the Appellant was married to Mitchell Gantman who was the only
shareholder of the Payor, Mitchco Inc. The Appellant and Mr. Gantman
separated in May 2004 and subsequently divorced. The Appellant and Mr. Gantman
have two children born in 1991 and 1993 respectively.
[5] Mitchco
manufactured and sold textiles.
[6] The Appellant
testified that during the years her husband was in business, she would help him
in various ways. She helped him in the office with files and the computer. Most
of the time, she went out on the road and would visit stores, bookstores and
libraries seeking out ideas for themes or stories. She would buy garments as
well. The ideas and garments would be used to make storyboards for clothing
manufacturers.
[7] She also testified
that she worked about 25 hours per week and earned over $30,000. (She did
not qualify in what period but based on Exhibit A-1, she earned $37,043.04 in
calendar year 2003 from Mitchco.)
[8] In
cross-examination, she was asked and answered:
Q. Do you recall having said to the agent
that your income was a straight up salary so that your husband can pay less taxes?
A. Yes, I do believe saying that. But I
was receiving a salary based on my work as well.
[9] The Appellant’s
brief evidence of her tasks was very general. She did not describe any kind of
work routine or seasonal cycle to her work.
[10] During the period in
question, the Appellant also had a part-time job at a school for two hours per week.
[11] The Appellant’s
representative filed Exhibit A-2, a document from the Internet showing a
copyright of 2005 and bearing a Government of Canada logo. It appears to be from the Web site
Appareljobs.ca. It shows a median annual salary in Canada of $53,900 for this occupation. It
has a 12-point description on page 1 of the functions of a fashion designer.
[12] The Respondent
called the appeals officer as a witness. Her appeal report was filed as Exhibit
R-1. The record of employment was filed as Exhibit R-2.
[13] Among other things,
she testified about the preparation of her report. In doing so, she spoke to
the Appellant, Mr. Gantman, the Appellant’s accountant and two employees
of the Payor.
[14] She testified that
the Appellant stated to her that:
a) she
did not remember her hourly rate;
b) she
had no fixed work schedule and no minimum or maximum hours;
c) she
would work when her husband told her there was something to do and she would
fit that work into the time she had available taking into account the needs of
the children;
d) she
could not estimate her average number of hours.
[15] In her report on the
appeal (Exhibit R-1), she wrote that:
a) the
Appellant had told her that in the period in issue she did not work very much;
b) the
Appellant had admitted that her salary was paid to split income and save taxes
for her husband and the Appellant stated that she thought this was normal and
referred the appeals officer to her accountant for further information.
[16] She also wrote in
her report that Mr. Gantman stated to her that:
a) he
opened the company in 1998 with three or four employees and had
20 employees when it closed;
b) he
employed the Appellant to do research and development of new styles because of
her experience in fashion and that in doing so she was almost always out of the
office;
c) if
he was starting a new collection, she would go around stores to buy fabrics and
clothing after he gave her an idea of what he wanted. On her return, she would
report to him and show him what she had bought;
d) he
estimated her work at 10 hours per week and could not explain why the record
of employment showed 25 hours per week.
[17] In
cross-examination, the appeals officer stated that she considered the hourly
rate to be too high although she did not offer a basis for that statement such
as some data on salaries for comparable work. She did add that there were
periods for which the Appellant was paid even though not working and that a
salary paid when someone was not working was necessarily too high.
[18] The appeals
officer’s decision was based on a number of factors including what she
considered as too high a rate of remuneration,
the fact that she had worked very little in the period, the Appellant’s
complete control of her schedule and the admission that the salary was for
income-splitting purposes.
[19] In Birkland v. M.N.R., Bowie J. reviewed
the law relating to paragraph 5(3)(b) of the Act. He set out the
test as follows:
4 … This Court’s role, as I understand
it now, following these decisions, is to conduct a trial at which both parties
may adduce evidence as to the terms upon which the Appellant was employed, evidence
as to the terms upon which persons at arm’s length doing similar work were
employed by the same employer, and evidence relevant to the conditions of
employment prevailing in the industry for the same kind of work at the same
time and place. Of course, there may also be evidence as to the relationship
between the Appellant and the employer. In the light of all that evidence, and
the judge’s view of the credibility of the witnesses, this Court must then
assess whether the Minister, if he had had the benefit of all that evidence,
could reasonably have failed to conclude that the employer and a person acting
at arm's length would have entered into a substantially similar contract of
employment…
[20] There is one aspect
of the evidence that stands out. In paragraph 9)g) of the Reply, it states that
the Minister assumed that there were weeks where the Appellant rendered no
services to the Payor although the Appellant continued to be paid. Given that the Appellant’s evidence
simply did not deal with this, I must proceed on the basis that there were such
weeks. Apart from sick leave or vacation leave, employers do not normally pay
employees for not working. This goes beyond flex time arrangements. This
feature by itself is so clearly contrary to an arm’s length arrangement that
the Minister could reasonably have reached the conclusion that he did even if
all the other terms and conditions were arm’s length conditions.
[21] I should note that I
do not regard the statement made by the Appellant during cross-examination that
she worked an average of 25 hours per week as dealing with the issue of whether
there were weeks where she did not work at all — a matter squarely in issue as
a result of paragraph 9)g) of the Reply.
[22] Given this, it is
not strictly necessary for me to deal with other factors but I will make the
following additional comments.
[23] I accept that there
was an income-splitting motivation. Such a motivation by itself is not
necessarily decisive but it certainly is a reason to carefully scrutinize the
terms and conditions of employment.
[24] With respect to
whether the rate of pay is consistent with an arm’s length relationship, that cannot
be determined without establishing how many hours were worked in total during
the period. In itself, $750 for 25 worked hours may very well be
consistent with arm’s length terms of work. An amount of $750 for not working
is not. Further, if the Appellant worked substantially less than 25 hours
during working weeks, then $750 would not be consistent with arm’s length
terms.
[25] While the Appellant
testified that she worked an average of 25 hours, she had previously said
to the appeals officer that she could not provide an estimate and that she had
worked very little in the period. As a consequence, I do not accept the
statement of a 25-hour average and conclude that in the period the actual hours
were significantly less.
[26] I conclude that the
Minister could reasonably have failed to conclude that the employer and a
person acting at arm’s length would have entered into a substantially similar
contract of employment. Accordingly, the appeal will be dismissed.
Signed at Ottawa, Canada, this 22nd day of January 2008.
"Gaston Jorré"
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