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Citation: 2004TCC238
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Date: 20040413
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File: 2003‑2243(EI)
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BETWEEN:
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ARMOIRES G. BARON INC.,
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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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NICOLAS BARON,
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Intervenor.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
[1] This
appeal was heard at Québec, Quebec, on November 27, 2003.
[2] It
must be determined whether the employment of the "Worker"
Nicholas Baron, during the period from January 1, 2002 to
February 4, 2003, was insurable within the meaning of the Employment
Insurance Act (the "Act").
[3] On
January 13, 2003, the Appellant asked an authorized employee of the
Canada Customs and Revenue Agency (CCRA) to make a decision regarding the
eligibility of the employment of the Worker, Nicolas Baron, when he was
employed by the Appellant for the period beginning November 1, 1999.
[4] On
February 4, 2003, the authorized official notified the Appellant that
the Worker's employment with him, from January 1, 2000 (sic)
to February 4, 2003, was insurable under paragraph 5(1)(a)
of the Act.
[5] In
addition, it was notified that, in accordance with the Act, a request for a
decision must be made prior to June 30 of the year following the year to
which the question relates; as a result, the right of appeal was granted only
for the period from January 1, 2002 to February 4, 2003.
[6] On
February 18, 2003, the Appellant appealed the decision with respect
to the insurability of the Worker's employment to the CCRA Appeals Division,
without specifying the periods.
[7] On
February 26, 2003, the Respondent notified the Appellant that, since
the Act did not give him the right to appeal for the period from
January 1, 2000 to December 31, 2001, he would only
consider the request for the period from January 1, 2002 to
February 4, 2003.
[8] By
letter dated May 23, 2003, the Respondent informed the Appellant of
his decision that the employment from January 1, 2002 to
February 4, 2003, was insurable, since it met the requirements of a
contract of service, and there was thus an employer-employee relationship
between the parties.
[9] Furthermore,
the Minister notified the Appellant of the decision that, despite the non‑arm's‑length
relationship between it and the Worker within the meaning of
subsection 251(2) of the Income Tax Act, it was reasonable to
conclude, given the remuneration paid, the terms and conditions, the duration and the nature and
importance of the work performed, that it and the Worker would have entered into a substantially similar contract of employment if they had
been dealing with each other at arm's length during that period.
[10] In making his decision, the Minister relied on the following
presumptions of fact which were admitted or denied by the Appellant:
[TRANSLATION]
(a) The Appellant
operated a business that manufactured kitchen and bathroom cabinets and
custom-made furniture. (admitted)
(b) Gabriel Baron,
the Worker's father, was the Appellant's sole shareholder. (admitted)
(c) Gabriel Baron
monitored activities and made administrative decisions on behalf of the
Appellant. (admitted)
(d) The Worker
never signed for or made himself personally liable for business or other loans;
Gabriel Baron is the business' only authorized signatory. (admitted)
(e) Before the
Worker was hired, Gabriel Baron was the only employee of the Appellant.
(admitted)
(f) In 2002,
the Appellant hired seven employees including Gabriel Baron, the Worker, and some
temporary employees during the summer. (denied)
(g) The Worker's
main responsibilities were: (denied)
- To prepare, build
and finish furniture.
- To manage the
Appellant's workshop.
- To manage the
projects and supervise the workshop employees.
- Occasionally
assemble plans and projects with the assistance of his father.
- To order materials.
- To deliver orders
with installers.
- To collect cheques
from the Appellant's clients.
(h) The Worker
carried out the majority of the Appellant's workshop tasks. (admitted)
(i) At the
beginning of 2002, the Worker was paid between $10 and $11/hour because he was
finishing his cabinet-making course. (admitted)
(j) At the
beginning of the summer of 2002, his pay increased to $12.50/hour and, at the
beginning of 2003, to $15/hour. (admitted)
(k) The Worker
could work between 30 and 50 hours per week, but on average worked
40 hours per week. (denied)
(l) The Worker
was paid by cheque for 40 hours of work per week. (admitted)
(m) The Worker
incurred no expenses as part of his work. (denied)
(n) The Worker
received a fixed weekly pay and did not share in the Appellant’s chance of
profit or risk of loss. (denied)
(o) The
Appellant's other workers were paid between $10 and $15/hour based on their
experience. (admitted)
[11] At the hearing, the Appellant had the worker, Nicolas Baron,
testify. He testified that with his father, he had participated in hiring
seven of the Appellant's employees in 2002. He wanted to clarify that with his
father he assembled manufacturing plans and projects more than occasionally. He
added that on average he worked, not 40 hours per week, but between 50 and
60.
[12] The Worker incurred no expenses except for his travel to get the
necessary materials from suppliers, which represented between 15 and
30 kilometres per week.
[13] In his testimony, the Worker stated that his father had the last word
in the operation of the business, but that he still had control over his
decisions. The Worker confirmed that he had no signing authority. He
described the Appellant as a family business that had no written employment
contracts. He added that bad debts were the responsibility of the company,
and the company provided him with all of the work tools.
[14] The Appellant disputes this decision and writes in a letter of appeal
to CCRA that [TRANSLATION] "Nicolas
is the business' successor. He is beginning to take on management
responsibilities (he manages two employees) and is consulted when important
decisions are made . . . Nicolas receives bonuses based on the
company's performance." According to the Appellant's statements, another
employee would not have had similar working conditions if there had been an
arm's‑length relationship between them.
[15] Furthermore, the following facts were collected by the investigators
and are part of the appeals officer's report that was filed as Exhibit I‑1.
[16] When the Worker installs furniture, he is paid approximately $18/hour
in accordance with the standards of the Commission de la construction du
Québec. The Worker is paid by cheque always made out to his name. The rate of
pay is set by the Appellant. The Worker was always paid for each pay period. He
has two weeks paid vacation in summer, as do the other employees, and one
week in the fall, in September. The Worker has never provided services or
performed work without being paid.
[17] At the beginning, the Worker received an hourly wage between $8 and
$10, while he was taking cabinet‑making courses. However, for several
months, he has been paid $15/hour.
[18] Business days and hours are Monday to Friday, from 7:30 a.m. to
noon, and 1 p.m. to 4:30 p.m. The Worker is at his job from Monday to
Friday and sometimes on the weekend, he might go to the workshop to see if
everything is under control. His work hours are from 7:00 a.m. or
7:15 a.m. to 4:45 p.m. or 5:00 p.m. He always comes in a bit
before the other employees in order to prepare the jobs and he closes the
workshop at the end of the day. The work hours were set by the company and
Nicolas keeps those hours, but he always arrives before the workshop opens and
he closes the workshop at the end of the day. The hours of work were not
recorded anywhere. The Worker was always paid for 40 hours per week. If he
works more than 40 hours, he would work less another week. The Worker's
length of employment was not pre-determined; one day he will take over for his
father.
[19] The Worker took a cabinet‑making course for two years, from
2000 to 2002, and obtained his trade school diploma. His father gave him this
practical training.
[20] When the Worker's father is at the factory, he supervises and approves
the Worker's work. He say that his son supervises himself when he is not at the
factory, which happens, since certain weeks he could very well be there only
two or three days because he often visits a showroom he opened in Québec.
[21] In his report, the appeals officer states that the Appellant could
have terminated the Worker's services if there had not been enough work or if
there had been fraud or another similar incident. The equipment and the tools
required by the Worker for his carpentry work are provided free of charge by
the Appellant and the Worker incurs no expenses when performing his duties.
[22] The Appellant decides whether the work must be redone, provides the
materials, is responsible for the cost of bad debts, guarantees the quality of
the work and pays the liability insurance premiums.
[23] The Appellant does not share the chance of profit and the risk of loss
with the Worker, but, if they complete a good contract, the Appellant might
give him a bonus. The Worker is personally responsible for rendering services
to the Appellant.
[24] Other workers performed the same duties at the business as did
Nicolas Baron, but they were not supervisors. They were assigned only to
manufacturing. Depending on their experience, they earned between $10 and $11/hour,
but one of them earned $15 because he had 20 years of experience.
All these workers were paid by cheque and there was no difference in how
these other workers were treated.
[25] The Worker stated to the investigators that he was not responsible for
reporting to the Appellant since they all worked together. He stated that he
could hire assistants without the consent of his father, but that he could not
fire them without his consent. He added that he had, in fact, hired two
assistants in 2002 and, at the beginning of 2003, he had hired another.
[26] The Worker and the Appellant's sole shareholder are related persons
under subparagraph 251(2)(b)(iii) of the Income Tax Act.
Related persons are deemed not to deal with each other at arm's length under
subsection 251(1) of this same Act.
[27] The Act states that all employment under which the employer and
employee are not at arm's length is excluded from insurable employment except
when it is reasonable to conclude that such employment would have existed under
similar working conditions if the parties had dealt with each other at arms'
length.
[28] Subsection 5(1) of the Act reads in part:
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;
. . .
[29] Subsections 5(2)
and (3) of the Act read in part:
5.(2) Insurable employment does not include
. . .
(i) employment if the employer and
employee are not dealing with each other at arm's length.
(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.
[30] Section 251 of
the Income Tax Act contains the following particular section:
251. (1) For the purposes of this Act,
(a) related persons shall be deemed
not to deal with each other at arm's length; and
. . .
(2) For the purpose of this
Act, "related persons", or persons related to each other, are
(a) individuals
connected by blood relationship, marriage or adoption;
(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 251(2)(b)(i) or 251(2)(b)(ii);
[31] The burden of proof is on the Appellant. The latter must establish on
the balance of probabilities that the Minister's decision is unfounded in fact
and in law. Each case is unique.
[32] The Appellant is asking this Court to overrule the Minister's
decision. In carrying out this mandate, this Court is subject to the rules
established by the Federal Court of Appeal, which are outlined in the following
cases: Canada (Attorney General) v. Jencan Ltd.
(C.A.), [1998] 1 F.C. 187, and Massignani
v. Canada (Minister of National Revenue – M.N.R.), [2003]
F.C.J. No. 542.
[33] In this context, the Federal Court of Appeal, in Jencan, supra, stated the following
at paragraphs 31 and 37:
The decision of this
Court in Tignish, supra, requires that the Tax Court undertake a
two‑stage inquiry when hearing an appeal from a determination by the
Minister under subparagraph 3(2)(c)(ii). At the first stage, the
Tax Court must confine the analysis to a determination of the legality of the
Minister's decision. . . .
. . . The Tax Court
is justified in interfering with the Minister's determination under
subparagraph 3(2)(c)(ii)-by proceeding to review the merits of the
Minister's determination-where it is established that the Minister: (i) acted
in bad faith or for an improper purpose or motive; (ii) failed to take into
account all of the relevant circumstances, as expressly required by
paragraph 3(2)(c)(ii); or (iii) took into account an irrelevant
factor.
[35] It is also appropriate to note the statement of Justice Létourneau of
the Federal Court of Appeal in Massignani, supra, at
paragraph 2:
First, the deputy judge failed to consider
and fulfill his role under the Unemployment Insurance Act, S.C. 1970‑71‑72.
c. 48 (the "Act"), paragraph 3(2)(c), a role that
this Court described in Légaré v. Canada (1999), 246 N.R. 176
and Pérusse v. Canada (2000), 261 N.R. 150, which were
followed in Valente v. Minister of National Revenue,
2003 FCA 132. This role does not allow the judge to substitute his
discretion for that of the Minister, but it does encompass the duty 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": see Légaré, supra,
at page 179, Pérusse, supra, at page 162.
[36] In compliance with paragraph 5(3)(b) of the Act, it is
appropriate to determine whether the Minister, when exercising his mandate,
correctly assessed the facts that he retained or assumed, considering the
context in which they occurred. A review of the Worker's employment, in light
of paragraph 5(2)(i) of the Act, revealed the following
facts: the Worker's pay, at the beginning of the period at issue, it was
$12.50/hour and at the end of the period, at the beginning of 2003, it was
$15.00/hour, all paid by cheque. On occasion the Worker received bonuses from
the Appellant when the business completed a good contract. The evidence
revealed that this occurred one to three times per year and that the bonus
could vary between $100 and $150. The Worker's salary was slightly less that the
average pay of a cabinetmaker at the beginning of the period at issue, but at
the end of the period, it was equal to it. The Worker enjoyed three weeks of
paid vacation per year but did not have any fringe benefits. The other
workers of the Payor received an hourly wage that varied between $10 and $15
according to their experience and they were all paid by cheque. They had
two weeks paid vacation per year during the holiday season. The salary of all
workers was determined by the Appellant. According to the evidence, the
Worker's salary was reasonable and in accordance with established standards.
[37] With respect to the terms and conditions of employment, it was
established that the workers' schedules were 40 hours per week, but the
Worker was scheduled for between 50 and 60 hours per week. All the
employees, including Nicolas Baron, the Worker, worked from Monday to
Friday and they all worked in the Appellant's workshop.
[38] Gabriel Baron supervised his employees' work daily, since he
worked with them and he could speak to them when a situation arose. The Worker
had the skills required for his job, since the Appellant's sole shareholder had
given him the practical training and he had a trade school diploma in cabinet
making and millwork.
[39] With respect to the duration of the employment, it was established
that business operated year round, manufacturing kitchen and bathroom cabinets
and custom-made furniture. Before July 2002, the business' workshop was at
the home of the Payor's sole shareholder, Gabriel Baron, and his son, the
Worker, had always been involved in this field. When he finished secondary
school, the Worker began to work for the Appellant and over the ensuing
two years, he took a cabinet‑making course for professional
development. One day, the Worker will take over the family business. With
respect to the nature and importance of the Worker's work, the evidence showed
that it related to the Appellant's operations, which had sales of $202,384.00
as of February 28, 2002. In 2001, the Appellant had
two employees, including the Worker, but in 2002, it had seven.
Thus the business was growing both in terms of employees and of working
space. The Appellant had rented an office in July 2002 and opened a
showroom in Québec. Since the Worker had been in contact with the business
continuously since he was young, he was very familiar with its operation and
his duties were very important. Also, according to the evidence, if he had not
been available, the Appellant would have had to hire another person to do this
work.
[40] It must therefore be concluded that if they had been at arm's length,
the Appellant and the Worker would still have reached a similar contract of
employment.
[41] Since the employment is not excluded from insurable employment, it must
now be determined whether the Worker's work is truly insurable employment
within the meaning of paragraph 5(1)(a) of the Act, in accordance with
the tests in Wiebe Door Services Ltd. v. M.N.R., [1986]
3 F.C. 553 in which the Federal Court of Appeal listed four basic
elements that distinguish a contract of service from a contract for services.
These are: a) degree of control; b) ownership of the tools; c) chance of profit
and risk of loss; and d) the degree to which the employee is integrated in the
employer's business.
[42] The evidence clearly showed that the Appellant owned the tools.
The Worker received a regular salary plus bonuses according to the
company's performance; there was therefore no chance of profit or risk of loss
for the Worker. Moreover, the Worker was integrated into the company's
operations; he did not work for himself.
[43] In Industries J.S.P. Inc. v. Canada (Minister of National Revenue –
M.N.R.), [1999] T.C.J. No. 423, Justice Tardif of this Court
summarized the facts, similar to those of the case at issue, in this way:
Marie‑Claude Perreault testified and
gave a number of examples to describe and explain her interest, enthusiasm and
fervour and that of her brothers with respect to the interests of the appellant
company, which operates in the difficult and highly competitive field of
furniture building.
Sharing major strategic responsibilities in the
company controlled by Jacques Perreault, who holds 1,000 voting but
non‑participating shares, Marie‑Claude Perreault and her
brothers left nothing to chance in ensuring the company's well‑being and
development.
Each family member was paid more than a
reasonable salary and, at year-end, received a bonus that varied depending on
the economic performance of the company and the quality of the work performed.
Major decisions were made jointly and by
consensus. The family members each devoted at least 60 hours [per
week] to their respective duties for the company.
The balance of evidence, therefore, was that the
Perreault family members dedicated themselves totally and entirely to the
company's business. They invested in it most of their available time (at least
60 hours [per week]) to ensure that the company could succeed in a
difficult market where competition is stiff.
The family members affected by the Minister's
decision held important, essential positions and were paid salaries probably
lower than those the company should have paid to third parties for performing
similar duties. This fact alone led the agent for the appellant company to
state and conclude that their employment was excluded from insurable employment
under paragraph 3(2)(c) of the Unemployment Insurance Act
("the Act").
. . .
Contributing to and being a partner in the
management, administration or development of a business, particularly a small
business, means that a person's job description is strongly marked by
responsibilities characteristic of those often fulfilled by actual business
owners or persons holding more than 40 per cent of the voting shares in
the company employing them. In other words, in assessing remuneration, at this
level of responsibility, caution must be exercised when a comparison is made
with the salaries of third parties; often there are advantages that offset the
lower salaries.
and concluded that the employment of these members of the same family,
although not at arm's length, was not excluded from insurable employment.
[44] It was established that the Appellant's sole shareholder never gave up
control of the business. The Worker testified that [translation] "My father has the final word
. . . I did not have the authority to sign . . ."
[45] According to the case law, the power of control is important to the
analysis of the facts under this test, not the actual exercise of control. In
this matter, the power of control was demonstrated by the ownership of shares
in the business. In fact, the Worker's father always held all the shares.
[46] The evidence revealed that all the work tools were the Appellant's
property. In addition, it was proven that the Worker had no chance of profit or
risk of loss, except that he could receive bonuses according to the business'
performance. Finally, the Worker's employment was an integral part of the
business and his salary was not business income.
[47] This Court must conclude that the Minister made his decision according
to the tests mentioned above. He exercised his power legally and in compliance
with the case law contained in Jencan and Massignani, supra,
and Métal Laurentide Inc.
c. Canada (Ministre du Revenu national - M.R.N.), [2003] A.C.I. no 263.
[48] As a result, this Court determines that the Worker's employment during
the period at issue was insurable, since the Worker was bound to the Appellant
by a contract of service, within the meaning of paragraph 5(1)(a)
of the Act.
[49] In addition, despite the non‑arm's‑length relationship
between the Appellant and the Worker, this Court is convinced that it is
reasonable to conclude that the Appellant and the Worker would have entered into a substantially similar contract if
they had been dealing with each other at arm's length.
[50] The appeal is dismissed and the Minister's decision is confirmed.
Signed at Grand Barachois, New Brunswick, this 13th day
of April 2004.
Deputy Justice Savoie
Translation certified true
on this 18th day
of August 2004.
Shulamit Day, Translator
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