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Citation: 2004TCC346
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Date: 20040505
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Docket: 2003-2079(EI)
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BETWEEN:
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COLLEEN FEADER,
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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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REASONS FOR JUDGMENT
Miller J.
[1] On November 18, 2002, the Minister
of National Revenue decided that Colleen Feader's employment
from September 12, 2000 to June 16, 2002, was not insurable, as
she was not dealing at arm's length with the employer, 893396
Alberta Ltd., operating as Big Al's Steak & Pizza. The
Minister was also not satisfied the Appellant and the employer
would have entered into a substantially similar contract of
employment if they had been dealing at arm's length.
Ms. Feader appeals the Minister's decision.
[2] Prior to September 2000, Big
Al's restaurant was owned and operated by Ms. Feader's
fiancé's uncle. He wished to get out of the business.
Mike Smilley, Ms. Feader's fiancé, was interested in
taking over the restaurant, but could not afford to. He
approached his fiancée's father, Ken Feader, who
agreed to buy the restaurant. No written documents were presented
at trial describing this deal, but it was clear from Ms.
Feader's testimony that she and her fiancé, now
husband, were eventually to pay back what she called the loan
from her father, and assume ownership of the business. No
payments have yet to be made on retiring this debt.
[3] Ms. Feader had never worked in a
restaurant before, but she started at Big Al's in
September 2000 as a waitress and a cook. She also took care of
certain paperwork, including the payment of bills, signing
cheques (including her own salary cheques) and some limited
bookkeeping. In the questionnaire that she completed for Canada
Customs and Revenue Agency she described her position as
co-manager with Mr. Smilley. She worked six days a week from
11:00 a.m. to 1:00 a.m. On Sunday she worked from 11:00 a.m. to
9:00 p.m. She took no vacation time during the relevant period,
other than the odd weekend and some statutory holidays.
[4] Ms. Feader received $1,875 twice a
month, other than the very first cheque which was only $1,250.
Appropriate employment insurance premiums, Canada Pension Plan
contributions and federal tax source deductions were taken from
these salary payments. The amount was not negotiated but was
simply set by her father.
[5] Ms. Feader denied in her
questionnaire that the salary was based on what she and her
fiancé needed to live on. She also denied that she
received less if business of the restaurant was slow. She
confirmed that the amount she received was a combined annual
salary for her and her fiancé, except for a period in 2002
while he was ill. She did not refute this statement in her oral
testimony, though had indicated she was unaware of the deal
between her father and her fiancé regarding payment.
[6] Ms. Feader produced printouts of
copies of cheques indicating she received regular cheques, other
than in December 2001 for which there was no payment, and in
March 2001, when she received a payment of $1,608 instead of the
$1,875. She testified that she cashed all the cheques, though
occasionally held off for a week or more, if she did not need the
money. In her questionnaire with CCRA she confirmed that she
would hold off cashing the cheques, if the company's finances
would not permit. Again she did not refute this earlier
statement. Her reported income was $12,500 in 2000, $37,233 in
2001 and $12,540 in 2002.
[7] Depending on the time of year, the
restaurant could employ between five and ten employees, all of
whom were on an hourly rate from $6.00 for servers to $9.00 for
an experienced cook. Ms. Feader was not required to track her
hours, as were these other employees.
[8] In June 2002, there was a fire at
the restaurant which required that it be shut down until
September. Ms. Feader only helped out as needed after that,
though did not draw any salary or wage for doing so.
[9] Pursuant to subsection 5(3) of the
Employment Insurance Act, insurable employment does not
include employment if the employer and employee are not dealing
with each other at arm's length. There is no question that
Ms. Feader and the employer were not prima facie dealing
with each other at arm's length. Subsection 5(3) however goes
on to stipulate:
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.
[10] The Federal Court of Appeal has
clarified in recent years the approach to the analysis of
paragraph 5(3)(b) of the Act. In
Légaré v. M.N.R.[1] Justice Marceau stated:
4 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.
[11] And in the recent decision of
Quigley Electric Ltd. v. M.N.R.,[2] Justice Malone
stated:
7 A
legal error of law is also said to have been committed when the
Judge failed to apply the legal test outlined by this Court in
Légaré v. Canada (Minister of National
Revenue) (1999) 246 N.R. 176 (F.C.A.) and Perusse v.
Canada (2000) 261 N.R. 150 (F.C.A.). That test is whether,
considering all of the evidence, the Minister's decision was
reasonable
...
10 In my analysis,
the Judge correctly followed the approach advanced by this Court
in Canada (A.G.) v. Jencan Ltd. [1998] 1 F.C. 187 (C.A.),
namely, that the Minister's exercise of discretion under
paragraph 5(3)(b) can only be interfered with if she acted in bad
faith, failed to take into account all relevant circumstances or
took into account an irrelevant factor.
Although Justice Marceau made no mention of Canada (A.G.)
v. Jencan Ltd.,[3] Justice Malone, in his decision
subsequent to Légaré, does confirm the
applicability of the three-prong inquiry as to when the
Minister's exercise of discretion can be interfered with. I
distil from these cases the following role of this Court: to
determine if the Minister acted in bad faith, failed to take into
account all relevant circumstances or took into account an
irrelevant factor, and, only if the Minister so acted, to then
determine if the conclusion with which the Minister was satisfied
still seems reasonable.
[12] I wish to be clear that this is a case
of an individual who, due to the non-arm's length
relationship with her employer, falls outside the scheme of the
Act and appeals to the Minister's discretion to let
her in. This is not a case of the Government attempting to rely
on paragraph 5(3)(b) to bring a related individual into
the scheme of the Act.
[13] There is no issue of Ministerial bad
faith in this case. The Appellant does contend though that the
Minister took into account an irrelevant factor, that is the
ownership arrangement between the Appellant's father, the
Appellant and her fiancé, which the Appellant's
counsel referred to as speculative. The Appellant argues that
because no payments have ever been made by the Appellant or her
fiancé to the Appellant's father, towards the
acquisition of the restaurant, the Appellant's deal to
ultimately own the restaurant is irrelevant. I agree the
ownership issue is irrelevant, though for different reasoning.
Ms. Feader acknowledged that she and her fiancé basically
ran the business as if it were their own. How else to explain her
14-hour days, six days a week plus 10 hours on Sunday? But it is
the employment arrangement itself that is at issue, not the
reason for the employment arrangement. Whether Ms. Feader owned
and ran the restaurant, or ran the restaurant with a deal to
ultimately own it, goes only to whether the relationship is
arm's length or non-arm's length. In this case the
non-arm's length nature of the relationship is clearly
established.[4] In
effect there are two steps for the Minister to address: first, is
there a non-arm's length relationship determined in
accordance with the Income Tax Act? and second, if there
is, is the Minister satisfied, on an appeal from an employee
seeking insurability, that it is reasonable to conclude the
parties would have entered into a substantially similar contract
of employment if they had been dealing with each other at
arm's length. The circumstances the Minister must regard
under the second inquiry are those listed in paragraph
5(3)(b) of the Act: remuneration, terms and
conditions, duration and nature and importance of work performed.
At the second stage, the Minister is not directed to regard
circumstances relevant to the first stage of the inquiry which
establishes the non-arm's relationship.
[14] The Appellant also argues that the
Minister improperly relied on a fact which has been proven to be
incorrect. In the Reply the Minister made the following
assumptions:
(q) the actual
salary that the Appellant received was based on the amount that
the Payor could afford to pay her and on the amount she needed in
order to live;
(r) if the business
could not afford it, the Appellant would either delay cashing her
cheque or would not take her full salary;
(s) the
Appellant's remuneration was paid irregularly;
The Appellant at trial testified that she was issued cheques
of $1,875 twice a month. While she acknowledged she did not
always cash the cheques immediately, she confirmed she always
received the cheques. Even in the questionnaire completed for
CCRA, she stated "no" in answer to the following two
questions:
2. The
worker's salary was based on what the worker and the
fiancé needed to live on and what the business could
afford.
4. In the past
year, business was slow and the worker's pay was less
depending on cash flow. This was also the worker's
choice.
Having found the Minister failed to take into account the
relevant circumstances of the Appellant's regular paycheque,
and in effect relied upon an inaccurate fact, and also that the
Minister took into account the irrelevant fact of the ownership
arrangement, it is left for me to determine if the Minister's
conclusion in such circumstances still seems reasonable. I
believe it does.
[15] I cannot identify any other relevant
facts the Minister failed to consider, nor irrelevant facts the
Minister relied upon, so I will review the circumstances of the
Appellant's employment simply disregarding the two
misunderstandings of the Minister.
[16] There is no issue that the duration and
the nature and importance of the work done by Ms. Feader reflects
that of a valued full-time employee, similar to an arm's
length employment arrangement. To assess the reasonableness of
the Minister's decision that Ms. Feader's employment
arrangement was not substantially similar to one entered into
between parties dealing at arm's length, requires a close
examination of the factors of remuneration and terms and
conditions. Dealing first with remuneration, and relying upon the
income for the one full year of work in 2001 of $37,233,
Ms. Feader was paid a commercially reasonable salary. It was
not out of line with the other workers, if you break
Ms. Feader's salary down into an hourly rate. She worked
approximately 375 hours a month or 4,500 hours in the year and
received $37,233 or just over $8.00 an hour. But, she
acknowledged that the income, though received by her, was to
cover the work of both her and her co-manager fiancé. In
that light, the remuneration falls far short of what would be
paid in an arm's length relationship for the hours worked.
More significantly, what arm's length employee pays one
employee the salary of two people? While she worked occasionally
after the fire, she was not paid. Remuneration shifted from her
hands to her fiancé's. There was no suggestion this
was done to manipulate the employment insurance system. What it
does illustrate, however, is the flexibility of the non-arm's
length arrangement; a flexibility generally unavailable in an
arm's length relationship.
[17] Also, payments were not always
immediately cashed, one of the reasons given was the financial
strength of the employer. This would not be an expectation of an
arm's length employee. Ms. Feader could control this,
not just by not cashing a signed cheque but, because she had
signing authority, by not signing the payroll cheques in the
first place. Finally, from Ms. Feader's description of her
duties, compared to her fiancé's, it was her
fiancé who served more as a manager, while she did those
duties normally paid by way of an hourly wage. She had no
opportunity for overtime. I am satisfied based on the factor of
remuneration alone, the Minister's conclusion that Ms.
Feader's employment was not substantially similar to an
arm's length employment agreement remains reasonable.
[18] With respect to the terms and
conditions, the one that overshadows any other is the exorbitant
hours of work required of Ms. Feader. She also did not take any
vacation time throughout the relevant period. These facts do not
suggest a substantially similar arm's length contract. I find
the Minister's conclusion again remains reasonable.
[19] Removing the misunderstandings upon
which the Minister relied, there remain sufficient factors for
the Minister's conclusion to still be seen as reasonable.
Based on that result, I cannot displace the Minister's
finding that Ms. Feader was not engaged in insurable
employment. The appeal is dismissed.
Signed at Ottawa, Canada, this 6th day of May, 2004.
Miller J.
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