Citation: 2005TCC85
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Date: 20050407
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Docket: 2004-3244(EI)
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BETWEEN:
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2972-2899 QUÉBEC INC. (MÉGANTIC MAZDA),
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Appellant,
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And
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THE MINISTER OF NATIONAL REVENUE,
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Respondent,
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And
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SERGE ROSA,
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Intervener.
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REASONS FOR JUDGMENT
Bédard J.
[1] This
is an appeal against a determination under which the work performed by Serge
Rosa from January 1, 2002 to July 17, 2003 for 2972‑2899 Québec Inc.
(Mégantic Mazda), the Appellant, met the requirements of a contract of service,
despite the non-arm’s length relationship that existed between the parties.
[2] By
way of explanation of his determination, the Respondent relied on the following
factual hypotheses:
5. The Minister found that the
worker was employed by the Appellant under a contract of service, based on the
following presumptions of fact:
a) the Appellant was incorporated
on March 4, 1993;
b) the Appellant operated a Mazda
automobile dealership;
c) the board of the Appellant is
made up of Normand Rosa (President), Rollande Lessard Rosa
(secretary) and the worker (Vice President);
d) the worker also held the
position of general manager of the company;
e) the duties of the worker
consisted of managing all the daily activities of the company;
f) the Appellant had 12 employees
during the period at issue;
g) the business hours of the
Appellant are from 9 am to 9 pm from Monday to Friday and several weekends per
year in the context of special promotions;
h) the sales of the Appellant were
between $6 and $8 million annually during the years 2002 and 2003;
i) the worker was paid $690 a week
during 2002 and $720 per week during 2003;
j) the worker also received a
bonus of $3,400 in 2002 and $3,150 in 2003;
k) as part of his job, the worker
used office equipment, the computer system and a car provided by the Appellant;
l) the worker had the same group
insurance benefits as the Appellant's other employees;
m) the hours worked by the worker
were not recorded, but amounted to approximately 50 hours per week;
n) the worker incurred no financial
risk in the performance of his duties;
o) the duties of the worker formed
an integral part of the activities of the Appellant.
6. The worker and the Appellant are
related persons within the meaning of the Income Tax Act since:
a) the three shareholders of the
Appellant are Norman Rosa, with 94.6% of the shares in the Appellant, the
worker, with 4.5% of the shares in the Appellant and Rollande Rosa, with
0.9 % of the shares in the Appellant;
b) Normand Rosa is the father of
the worker;
c) Rollande Rosa is the mother of
the worker;
d) the worker is part of a related
group which controls the Appellant.
7. The Minister also determined
that the worker and the Appellant were deemed to be at arm’s length in the
context of this employment, as the Minister was convinced that it was
reasonable to conclude that the worker and the Appellant would have concluded a
virtually similar contract of employment between them if they had been dealing
with each other at arm’s length, in light of the following circumstances:
a) the worker's pay, including
bonuses and benefits, was similar to what an unrelated employee would have
received in light of the responsibilities and the performance of the worker;
b) the hours of work of the worker
were regular and not inflated;
c) the worker did not personally
provide surety for any loans of the Appellant;
d) the services rendered by the
worker met the needs of the Appellant's business.
[3] The
Appellant admitted all the facts set out in paragraphs 5, 6 and 7 of the
Response to Notice of Appeal, except for the facts set out in paragraphs 5(g),
(n), 7(a) and 7(b), which the Appellant denied, and the facts set out in
paragraphs 5(c), 5(j), which he did not take into account.
[4] It
should be noted that the agent for the Appellant admitted at the start of the
hearing that Serge Rosa was employed by the Appellant under a contract of
service.
[5] It
should be remembered that the Respondent ruled that this employment was
insurable because it was not covered by paragraph 5(2)(i) of the Employment
Insurance Act (the Act). Serge Rosa and the Appellant were deemed under
subparagraph 5(3)(b) of the Act to be dealing at arm’s
length in the context of this employment, since the Respondent was convinced
that it was reasonable to conclude, in light of the all the circumstances, that
they would have concluded a virtually similar contract of work had they been
dealing at arm’s length.
[6] The
Federal Court of Appeal has on numerous occasions defined the role assigned by
the Act to a judge of the Tax Court of Canada. This role does not allow
a judge to substitute his discretion for that of the Minister of National
Revenue (the "Minister"), but it carries with it the obligation to
"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, […] decide whether the conclusion with which the
Minister was "satisfied" still seems reasonable."
[7] In
other words, before deciding whether the conclusion with which the Minister was
satisfied still seems reasonable to me, I must, in light of the evidence before
me, verify whether the allegations of the Minister are, in spite of everything,
well founded in whole or in part, in light of the factors set out at paragraph
5(3)(b) of the Act. It is accordingly appropriate to wonder whether Mr. Serge Rosa
and the Appellant would have concluded a substantially similar contract of
employment if they had been dealing with each other at arm’s length.
[8] The
Appellant had the burden of proving that the Minister had not exercised his
discretionary power in accordance with the applicable principles in this case,
in other words, of proving that he had not examined all the relevant facts or
that he had failed to take into account facts that were relevant. In targeting
the truly important aspects of the evidence, the Appellant sought to
demonstrate that the lack of an arm’s-length relationship with Serge Rosa had
been decisive with regard to the conclusion of the contract of employment at
issue. Serge Rosa and his father, Normand Rosa, the principal shareholder in
the Appellant, testified for the latter. Their testimony was clear and seemed
eminently credible to me. I am of the view that their testimony showed very clearly
that Serge Rosa had enjoyed, throughout the period at issue, the majority of
the rights and privileges normally reserved for the owners of a company. In
this regard, the evidence revealed the following:
i) Serge
Rosa himself decided on the length and date of his vacations, both of which
depended exclusively on his personal needs and travel opportunities open to
him. He had received the equivalent of six and four weeks of paid vacation in
2003 and 2004 respectively.
ii) The
working hours of Serge Rosa were neither controlled nor even recorded.
iii) Serge
Rosa could vary his hours of work as he saw fit. He could take time off at any
point and plan his work in light of his family and personal business,
independently of the needs of the Appellant, because he was able, during his
absences, to entrust the conduct of the business to a trusted employee. All in
all, he determined his own work schedule and duties.
iv) Serge
Rosa's work was not supervised by anyone. His expense accounts were not checked
by anyone. Serge Rosa was, in fact, the directing mind of the Appellant,
because his father was retired. His father no longer made any decisions in the
business. He obtained information orally from time to time from his son
regarding the profitability of the Appellant. Serge Rosa was authorized to sign
cheques for the Appellant on his own and he was in fact the sole signatory of
the Appellant's cheques during the period at issue.
v) His
father would never have delegated the same responsibilities and the same
freedom of action to an individual at arm’s length. Moreover, if
Serge Rosa had left his employment, his father would have sold the
Appellant's business.
vi) Serge Rosa had lent $15,000 in 2004 to restock the
Appellant's account. The father of Serge Rosa did not learn of this until very
recently. It should be noted that Counsel for the Respondent had, in his
pleadings, cast doubt on Serge Rosa's credibility in this regard, in view
of the fact that Serge Rosa had not reported this fact to Martin Croteau, the
Appeals Officer, and had not filed any documentary evidence to support his
testimony in this regard at the hearing. Counsel for the Respondent even noted
that, if this fact had been brought to the attention of the Respondent earlier,
this case might not have been brought before the Court. The agent for the
Appellant, in response to the remarks by Counsel for the Respondent, asked me
to adjourn the hearing for approximately one hour, to allow the Appellant time
to obtain the relevant documentary evidence to support the testimony of Serge
Rosa in this respect, a move that was opposed by Counsel for the Respondent
since she regarded the evidence of the Appellant as closed at that point. I
feel it necessary to note that I did not accede to the request of the agent for
the Appellant, since the testimony of Serge Rosa and his father had persuaded
me that the son had indeed lent this amount to the Appellant. The offer of the
agent of the Appellant to produce evidence thereof merely reinforced my
conviction that Serge Rosa had lent such a sum to the Appellant.
[9] With
regard to the earnings of Serge Rosa, the Respondent alleged, in the response
to the Notice of Appeal, that the earnings of Serge Rosa, including bonuses and
benefits, were similar to what an arm’s-length employee would have received, in
view of the responsibilities and performance of Mr. Rosa. It seems to me that
the Respondent cannot plausibly so conclude, unless the conclusion is based on
information regarding comparable salaries and conditions of employment within
the same industry or a related industry. In this case, the Respondent did not
have such data. At most, the Respondent examined the salary of the father and
compared it to that of the son, and then concluded that the salary received by
Serge Rosa was reasonable in comparison with that of his father. How could the
Respondent establish such a comparison, given that the responsibilities and
duties of the son were totally different from those of the father? The father,
it should not be forgotten, is retired. It should be remembered that Serge Rosa
himself set his salary and that he himself decided on the frequency and size of
the bonuses that he granted himself. These bonuses were determined in light of
Serge Rosa's financial needs and not necessarily in light of his performance.
Would an arm’s-length employee in fact have enjoyed similar privileges, which
are normally reserved for the owners of a company?
[10] In the instant case, the determination that a third party could have
received a substantially similar contract of employment was not warranted by
the facts. It is simply unreasonable and without foundation to conclude that
Serge Rosa and the Appellant would have agreed between them on a substantially
similar contract of employment if they had been dealing with each other at
arm’s length. The preponderance of the evidence indicates that the working
conditions of Serge Rosa, taken overall, were much more comparable to
those of the owner of a business than to those of an employee.
[11] Since the work of Serge Rosa is subject to the provisions of paragraph
5(2)(i) of the Act, it must be excluded from insurable employment
and the appeal must be allowed.
Signed at Ottawa, Canada, this 7th day of April, 2005.
Bédard
J.
Certified true
translation
On this 1st day of
February, 2006.
Garth McLeod,
Translator
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