Citation: 2006TCC546
Date: 20061024
Docket: 2006-990(EI)
BETWEEN:
WILFRID PAQUET ET FILS LTÉE,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Savoie D. J.
[1] This appeal was
heard at Québec, Quebec, on August 24, 2006.
[2] It is an appeal
from the decision of the Minister of National Revenue
("the Minister") regarding the insurability of the employment of
Michel Paquet and Steeve Paquet ("the workers") while working for the
Appellant from January 1, 2004, to June 23, 2005 ("the
period in issue").
[3] On December 16,
2005, the Minister notified the Appellant of his decision that the workers were
employed in insurable employment during the period in issue.
[4] In rendering his
decision, the Minister relied on the following assumptions of fact:
[TRANSLATION]
5. (a) The Appellant incorporated on July 26, 1968. (admitted)
(b) The Appellant operated a business that
traded in, transported and milled pine, spruce and fir lumber. (admitted)
(c) The Appellant's business operated throughout the year.
(admitted)
(d) The Appellant operated from Monday to noon
on Saturday, and the lumber drying kilns operated seven days a week. (admitted)
(e) The Appellant's main supplier of lumber
(80%) was located in the United States. (admitted)
(f) The Appellant employed 110 employees per year.
(admitted)
(g) At September 30, 2004, the Appellant had done
more than $38 million dollars in business for the fiscal year. (admitted)
(h) The workers have been with the Appellant
for several years, and their experience has earned them positions of
responsibility. (admitted)
(i) The Appellant was run by three managers:
Roger Paquet and the two workers. (admitted)
(j) Roger Paquet was in charge of purchasing
and finance. (admitted)
(k) Michel Paquet was in charge of human
resource management (except truckers), production, control in the mill,
and equipment projects. (admitted)
(l) Steeve Paquet was in charge of the sale
of wood chip residues, the transportation of lumber, the four shipping
employees, the two travelling salespeople, and the Québec sales office.
(admitted)
(m) The workers reported to the Appellant with
respect to their decisions. (denied)
(n) The workers had variable schedules during
the week. (denied)
(o) The workers worked at least 55 hours per
week. (denied)
(p) The workers had an annual salary of
$48,100 and their gross weekly pay was $925. (admitted)
(q) The workers received their pay by direct
deposit on a regular basis. (admitted)
(r) Roger Paquet was paid an annual salary of
$60,000. (admitted)
(s) The workers worked at the Appellant's
place of business. (admitted)
(t) The workers worked for the Appellant throughout
the year. (admitted)
(u) The workers went on vacation when the mill
closed during the construction holiday. (admitted)
(v) The workers had no expenses to incur in
the performance of their duties. (admitted)
(w) All the materials and equipment that the
workers used belonged to the Appellant, including a pickup truck for which the
Appellant paid the expenses. (admitted)
(x) The workers' work was integrated into the
Appellant's activities. (admitted)
[5] The Appellant and the workers are related within
the meaning of the Income Tax Act because
[TRANSLATION]
6.(a) The Appellant's only shareholder with
voting shares was Placements G.R.W. Paquet Inc. (admitted)
(b) Placements G.R.W. Paquet Inc. was held by
9025-5829 Québec Inc. (Roger
Paquet) 68.4% of shares
9082-9839 Québec Inc. (Michel
Paquet) 15.8% of shares
9082-9656 Québec Inc. (Steeve
Paquet) 15.8% of shares (admitted)
(c) Roger Paquet is Michel Paquet and Steeve Paquet's father.
(admitted)
(d) The workers are members of a related group
that controls the Appellant. (admitted)
[6] The Minister also determined that the
Appellant was deemed to deal with the workers at arm's length in relation to
their employment because he agreed that it was reasonable to conclude that the
Appellant and the workers would have entered into a substantially similar
contract of employment if they had been dealing with each other at arm's
length, having regard to the following circumstances:
[TRANSLATION]
7.(a) The Appellant was an active corporation.
(admitted)
(b) On December 8, 2005, Roger Paquet told a
representative of the Respondent that the Appellant and the workers never
signed a written employment contract. (admitted)
(c) On December 8, 2005, Roger Paquet told a
representative of the Respondent that the workers' salaries had been determined
by the shareholders based on what the Appellant was able to pay, as well as the
economic context and the ability to support a family appropriately. (denied)
(d) An unrelated worker's salary would be
based on the same reasoning. (denied)
(e) The gross weekly remuneration of $925 was
reasonable in the opinion of the Appellant's shareholders. (denied)
(f) The workers' remuneration was reasonable
having regard to their role, duties and experience as well as the Appellant's
ability to pay. (denied)
(g) The workers' positions were managerial.
(denied)
(h) It is normal for a manager to have a
variable and regular schedule. (denied)
(i) The workers were entitled to annual
vacations. (admitted)
(j) On December 8, 2005, Roger Paquet told a
representative of the Respondent that the three shareholders met monthly to
examine the financial statements and discuss important purchases. (denied)
(k) The Appellant's important decisions were
made by the three shareholders, not the workers. (admitted)
(l) The workers never lent the Appellant any
money. (admitted)
(m) The workers were not personally liable for
the Appellant's lines of credit. (admitted)
(n) The workers ran no financial risks in
working for the Appellant. (denied)
(o) In keeping with the Appellant's needs, the
workers provided services throughout the year. (admitted)
(p) The workers' functions were necessary and
essential to the smooth operation of the Appellant's business. (admitted)
(q) the terms and conditions, duration, nature
and importance of the workers' work were reasonable. (denied)
[7] The Appellant
called its accountant Yves Paulin, C.G.A., as a witness, along with Roger
Paquet, the Appellant's majority shareholder; his son, the worker
Steeve Paquet, who holds 15.8% of the Appellant's shares; and his brother
Michel Paquet, the other worker, who also owns 15.8% of the Appellant's
shares. Following a discussion between the parties, it was agreed that Michel
Paquet's testimony would be similar to his brother's and would therefore be
superfluous.
[8] The evidence
discloses that Wilfrid Paquet purchased a sawmill in 1956. At the time,
the sawmill was located very close to Route 173, very close to the U.S.
border, and Wilfrid Paquet employed four people and produced 500,000 feet of
lumber per year.
[9] In 1962, Wilfrid
Paquet, wishing to expand his business, purchased a small lumber mill located
at the intersection of Routes 173 and 269 in Armstrong (a town that was later
renamed St-Théophile). The business is located there today.
[10] In 1968, Wilfrid
Paquet incorporated his company under the name WILFRID PAQUET & FILS with
his three sons Raymond, Roger and Gérard as his associates. The business
specialized in the harvesting of hardwood lumber at the time.
[11] In 1984, Roger
Paquet and his sons Raymond and Gérard had a second mill built, and opened
INDUSTRIES PAQUET, a subsidiary of WILFRID PAQUET & FILS
that specialized in the harvesting of spruce and fir, leaving pine-related
operations to WILFRID PAQUET & FILS.
[12] The business now
operates on 80 acres of land. The site comprises two sawmills, a planer, a
residue boiler, ten compartment kilns, and three warehouses for the dry pine,
and there are five trucks on the road.
Background
[13] In 1997, a
consultant suggested methods to ensure that the business would be able to
change guard smoothly. Roger Paquet had been concerned about the succession
issue for three years. Both of Roger Paquet's sons grew up in the business and
expressed an interest in pursuing it as a career. The matter was studied for
three years until 1999, when the workers became shareholders upon purchasing
Gérard Paquet's shares. The workers had been introduced to the Appellant's
operations when they were still young. Steeve Paquet began to work there in
1987 and his brother Michel began to work there in 1993. They were involved in
every aspect of the business and became familiar with the operations of the
mill and of the business in general.
[14] Roger Paquet testified
that he would already have sold the business if it had not been for the two
workers and their involvement in it.
[15] After implementing
the plans for the intergenerational transfer of the business from an
operational, management and long-term planning perspective, the Appellant
made some major capital asset purchases. From 2000 to 2005, $6,848,673 worth of
assets were purchased. It was established that both workers were fully involved
in the decisions leading up to this major expansion, in which significant
investments were made in order to purchase kilns, automatic graders, grader
rooms and several trucks, among other assets. The evidence discloses that this
major expansion was an initiative of the workers, who planned it and carried
it out.
[16] The Appellant wanted
to show how the workers had been an integral part of the management of the
business since 1999, but it also wanted to point out that they will be playing
an even more decisive role effective October 1, 2006, when each of them will
own 33⅓% of the shares, like their father Roger Paquet.
In order to illustrate the foregoing, the Appellant produced
Exhibit A‑3, reproduced below, at the hearing:
[TRANSLATION]
GROUPE PAQUET
VS
STEEVE PAQUET and MICHEL PAQUET
Oct. 1, 1999 9082-9839 Québec Inc.,
100% of which is controlled by Michel Paquet, purchases 15.8% of the shares of
Groupe Paquet for $312,500.
9082-9656 Québec
Inc. 100% of which is controlled by Steeve Paquet, purchases 15.8% of the
shares of Groupe Paquet for $312,500.
2002-2005 $6,848,673 in capital
investments.
2003-2005 Planning of corporate
reorganization for the purpose of raising Michel Paquet and Steeve
Paquet's holdings to 33⅓% each.
2006 Corporate
reorganization in progress in order to increase Steeve and Michel Paquet's
share ownership as of October 1, 2006. Following the reorganization, the common share capital at
October 1, 2006, will be allocated as follows:
9025-9829 Québec Inc.
(Roger-father) 33⅓%
9082-9656 Québec Inc.
(Steeve-son) 33⅓%
9082-9839 Québec Inc.
(Michel-son) 33⅓%
100%
[17] It was established
that the workers did not report to the Appellant. The evidence also
disclosed that the workers had no fixed schedule, and that they worked an
average of 65 hours a week. Moreover, the workers were on call 24 hours a
day, 7 days a week, for emergencies. These emergencies, such as problems with
kilns which were in operation 24 hours a day, and problems related to trucks or
customs, could require a half-hour to four hours of additional work each week.
[18] The Appellant has
proven that the workers' salaries were determined by the shareholders,
including the workers, who were concerned about the financial health of the
business and were content to be paid a salary lower than the industry norm,
having regard to the number of hours devoted to their duties and their
responsibilities in the business. In addition, the evidence has established
beyond a doubt that the Appellant could have paid the workers a higher salary,
having posted a net profit of $832,967 in 2004.
[19] The Appellant
submitted Exhibit A-8, a document regarding average salaries in Quebec, in support of his
claim that the workers' salaries were below the industry norm. Citing research
at the University
of Liverpool, the document states
that a sales manager in Montréal, Quebec earned $66,056 to $115,335. At the hearing,
Steeve Paquet stated that a sales director in the Beauce region would have
earned a salary in excess of $100,000 per year.
[20] The Minister adduced
no evidence at the hearing other than the investigators' report, but he
expressed serious doubts about the accuracy of the information contained in
Exhibit A‑8. Nevertheless, the Appellant proved that the salary paid
to the workers is well below the level of people who work in the same field
under similar circumstances. This Court is of the opinion that the workers have
proven that they made sacrifices for the family business by working long hours
for a salary well below the industry average. It was also proven that they were
destined to take over the family business and that much of this takeover had
already occurred.
[21] The evidence
establishes, on a balance of probabilities, that Roger Paquet manages the
business along with the two workers, who, for their part, are involved in all
purchasing and sales projects. A single signature of any of those three people
is enough to bind the business. It must be noted that the Appellant's
controller is not an authorized signatory even though he is a member of the
board of directors. The evidence discloses that the Appellant's purchases can
amount to roughly $500,000 a week.
[22] The business has a
line of credit of roughly $6,000,000, which is guaranteed by Roger Paquet as
well as the assets and inventory of the business and its accounts receivable.
The Appellant argued that Roger Paquet's guarantee is essentially symbolic
because the assets of the business, especially the lumber and other inventory,
would be sufficient to cover the debt since they are in great demand.
The workers did not lend any money to the business, nor did they guarantee
the line of credit. It was determined that their personal guarantee was unnecessary.
[23] Roger Paquet is the
majority shareholder of the business but has never exercised his veto power at
board meetings. At the hearing, he stated that the decisions at the quarterly
board meetings are a three-person affair. The day-to-day and operational
decisions are also made by the three people, or by the workers only.
[24] In order to
illustrate the workers' total freedom of action, Roger Paquet said that he
never makes any purchases for the business without talking to the workers. He
added that he devotes only 50% of his time to the Appellant's business.
He takes leave more and more frequently and draws less income from the
Appellant than the others. He specified that the workers' management decisions
are more important than his own.
[25] The evidence
discloses that the workers would refuse to work for a salary equal to their
current one if they were not shareholders of a family business and were not
destined to take over that business in the short term.
[26] The Appellant has
persuasively argued that a stranger at arm's length would never work under the
same conditions as the workers. While the workers get two weeks' vacation a
year, they must always have their cell phones with them in the event of an
emergency.
[27] The Appellant
acknowledges Roger Paquet's majority shareholder status and legal power.
However, while all the Appellant's witnesses acknowledged his legal power, they
stated that the facts on the ground are different. Roger Paquet never exercised
his veto power on the board or in the day-to-day operations of the business.
He himself stated that he never exercised it, and that he would discuss any
such situation with the workers if it arose. He added that the workers already
had total freedom of action in every aspect of the business, and he specified
that despite his status, he would make no purchases without talking to the
workers, and that the workers often made the decisions that were more important
to the business than his.
[28] What, then, is in
dispute here? First of all, the Minister determined that the workers held
insurable employment within the meaning of paragraph 5(1)(a) of the
Act. In addition, the Minister determined that, despite the non arm's length
dealings between the workers and the Appellant, their employment was not
excluded under paragraph 5(2)(i) of the Act because the Appellant was
deemed to deal with the workers at arm's length under paragraph 5(3)(b)
of the Act and the Minister was satisfied that it was reasonable to conclude,
having regard to all the circumstances, that they would have entered into a
substantially similar contract of employment if they had been dealing with each
other at arm's length.
[29] Counsel for the
Respondent submits that this Court, like the Minister, should find that the workers'
jobs were insurable. In support of this submission, she argues that despite all
the freedom and authority that they were granted in the performance of their
duties, and despite their position within the business, they were still
subject to the power of the board of directors, on which they sat as minority
shareholders and directors, and were under the de jure power of that
board, on which Roger Paquet sat as the majority shareholder.
[30] For his part,
counsel for the Appellant submits that the complete absence of a relationship
of subordination, an important element of a contract of service under the Act
and the most important element of the concept of an employment contract under
the Civil Code of Québec, has the effect of excluding the workers' employments
from insurable employment under paragraph 5(1)(a) of the Act and from
the concept of "contract of employment" within the meaning of article
2085 of the Civil Code of Québec.
[31] Having found, based
on the evidence, that the relationship between the parties appears more likely
to constitute insurable employment than not, this Court, like the Minister,
must conduct a more thorough analysis and determine whether the employments are
excluded under paragraph 5(2)(i) of the Act by reason of the non arm's
length dealing.
[32] I reproduce the
relevant portion of the Act below:
INSURABLE
EMPLOYMENT
5(2) Insurable
employment does not include
(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),
(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.
[33] The circumstances
set out in paragraph 5(3)(b) should be examined in light of the evidence
adduced at the hearing.
Remuneration paid
[34] It has been
established that the workers' salaries were set at $48,000 per year. The
Appellant's case aims to show that, given their duties, their responsibilities
and the number of hours that they worked, this amount was markedly lower than
the industry norm. The Appellant produced Exhibit A‑8 in support of
its claim that the average salary in the industry for similar employment would
be roughly $78,724. As for the worker Steeve Paquet, he argues that a sales
director in the Beauce region would earn more than $100,000 per year. It was
also established that the Appellant could have paid the workers a much higher
salary during the period in issue given the net profits that it earned. In
addition, the worker Steeve Paquet argued that he would not work for a salary
of $48,000 per year if he were at arm's length from the business and were not
destined to take it over.
Terms and conditions and
duration of employment
[35] The workers have
been working for the Appellant since 1987 and 1993, respectively. They do not
count their hours. Each of them works at least 65 hours per week, plus
emergencies, which can account for four or five additional hours per week. They
each take two weeks of annual paid vacation, but must have their cellular
phones on them at all times in case of an emergency. They must always be available
to respond to emergencies, which arise frequently. They have the benefit of a
company vehicle, but the vehicle is also a work instrument for them.
They both work full‑time.
Nature and importance of work performed
[36] Among other things,
Michel Paquet was responsible for the management of the human resources (other
than truckers) in the business, and for production, control in the mill, and
equipment projects. As for Steeve Paquet, he was responsible for the sale of
wood chip residues, the transportation of lumber, the four shipping employees,
the two travelling salespeople, and the Québec sales office. Both of them
enjoyed total autonomy in the performance of their duties and did not report to
anyone. The workers are the next generation of the business. They make all
the decisions as would a chief executive officer. Their work is essential to
the Appellant's business. Without them, the majority shareholder would
undoubtedly already have sold his business.
[37] The question that
must be asked is as follows: Would a stranger have worked as the workers did
for a salary that is considerably below the industry average? Would that
stranger have worked as much unpaid overtime without adequate time off? Without
repeating all the terms and conditions of the workers' employment, we must
examine this determination by the Minister and ask whether it is reasonable to
conclude that the Appellant and the workers would have entered into a
substantially similar contract of employment if they had been dealing with each
other at arm's length.
[38] Having closely
examined all the circumstances surrounding the workers' employment as mandated
by paragraph 5(3)(b) of the Act, this Court finds that the facts do not
support such a conclusion.
[39] In Légaré v.
Canada (Minister of National Revenue – M.N.R.), [1999] F.C.J. No.
878, the Federal Court of Appeal set out the principles that must be applied in
order to solve the problem faced by this Court:
The Act requires the Minister to make a determination based on his
own conviction drawn from a review of the file. The wording used introduces a
form of subjective element, and while this has been called a discretionary
power of the Minister, this characterization should not obscure the fact that
the exercise of this power must clearly be completely and exclusively based on
an objective appreciation of known or inferred facts. And the Minister's
determination is subject to review. In fact, the Act confers the power of
review on the Tax Court of Canada on the basis of what is discovered in an
inquiry carried out in the presence of all interested parties. The Court
is not mandated to make the same kind of determination as the Minister and thus
cannot purely and simply substitute its assessment for that of the Minister:
that falls under the Minister's so-called discretionary power. However, the
Court must 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.
[40] The Appellant bore
the burden of proof — that is to say, the burden of proving that the Minister's
presumptions of fact are wrong. The Appellant has discharged this burden in
many ways.
[41] In view of the
evidence, this Court must find that the facts inferred or relied on by the
Minister are not real and were not correctly assessed having regard to the
context in which they occurred. The determination that must be made based on
the evidence adduced at the hearing is that the conclusion with which the
Minister was "satisfied" does not still seem reasonable.
[42] Consequently, the
appeal is allowed and the decision rendered by the Minister is vacated.
Signed at Grand-Barachois, New
Brunswick, this 24th day of
October 2006.
"S.J. Savoie"
Savoie D. J.
Translation
certified true
on this 18th day
of July 2007.
Brian McCordick,
Translator
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