[OFFICIAL ENGLISH TRANSLATION]
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Citation: 2004TCC482
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Date: 20040716
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Docket: 2003-2882(EI)
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BETWEEN:
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LES GRAPHIQUES BUSCOM 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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REASONS FOR JUDGMENT
Deputy Judge Savoie
[1] This appeal was heard at Montreal,
Quebec, on March 26, 2004.
[2] The appeal concerns the
insurability of the employment held by
Mr. Denis Fillion and Mr. Alexandre Laporte, the
Workers, when they were employed by the Appellant from January 1,
2002, to May 22, 2003. The Minister of National Revenue
(the "Minister") informed the Appellant on August 1, 2003,
that the Workers' employment was insurable employment. The
Minister based the decision on the following presumed facts:
a) the
Appellant runs a computer and software sales business
(accepted);
b) the main
product the Appellant sells is AUTOCAD, a software package
(accepted);
c) The
Appellant tailors the software to the customer's needs, provides
training to software users and ensures it is integrated
(accepted);
d) The
Appellant's main customers are manufacturing or engineering firms
(accepted);
e) The
Appellant's offices are open Monday to Friday from 8:30 a.m. to
5:00 p.m. (accepted);
f) the
Workers sit on the Appellant's board of directors (denied);
g) Mr.
Denis Fillion is Vice-President, Operations and Technology
(accepted);
h) Mr.
Alexandre Laporte is Vice-President, Sales and Marketing
(accepted);
i) The
board of directors meets every Monday (accepted);
j) As
directors, the Workers are called upon to make decisions
involving the Appellant's operations (accepted);
k) Mr.
Denis Fillion's main duties involve the firm's
infrastructure, choosing product lines, assessing products,
technological orientation and technical resources, and hiring
staff in his division (accepted);
l)
Mr. Alexandre Laporte looks after everything outside the
firm, that is, he looks after product marketing, advertising and
sales, supplier relations and hiring staff in his division
(accepted);
m) the Workers work
at the Appellant's place of business (accepted);
n) They
generally work during the Appellant's business hours
(denied);
o) The
Appellant provides the Workers with the necessary equipment
(accepted);
p) They do not
incur any expenses as part of their normal duties; the Appellant
covers all of their expenses (accepted);
q) like the
Appellant's other employees, the Workers have health insurance
and wage-loss insurance coverage (denied);
r) as
directors on the Appellant's board of directors, they also have
disability insurance and life insurance coverage (denied);
s) the Workers
are entitled to three weeks of vacation a year, which is standard
in the firm (accepted);
t) each
of the Workers is entitled to an extra week of holidays at
Christmastime (accepted);
u) The
Workers, like all of the Appellant's other employees, are
entitled to six days of paid sick leave a year (denied);
v) In 2002,
Mr. Denis Fillion's annual salary was $98,353 and
Mr. Alexandre Laporte's was $107,824 (accepted);
w) Each of the
Workers' salaries was based on comparable salaries in the
industry (accepted);
x) The
Appellant had the authority to monitor the Workers' work
(denied);
y) the
Workers' duties are integrated into the Appellant's activities
(accepted).
[3] The Appellant accepted all the
Minister's presumed facts, except those in paragraphs (f), (n),
(q), (r), (u) and (x).
[4] The Appellant responded to the
Minister's Reply to the Notice of Appeal in a document provided
at the hearing and entered into evidence as Exhibit A-1.
[5] This evidence provided by the
Appellant at the hearing is reproduced almost entirely as
follows:
[...]
3- We accept
allegation 5, except for subparagraphs f, n, p, r, u and x;
We add the following to the subparagraphs indicated:
f) the
Workers are also shareholders in the corporation and are subject
to a unanimous shareholder agreement.
This situation occurred in 1993 further to an estate freeze the
purpose of which was to:
a) plan
corporate management succession;
b) enable them
to benefit from their individual contributions to the
corporation's success;
c) allow them
to inherit an operational corporation that they had a hand in
building.
n) They often
and regularly work longer than the corporation's hours of
business. They are usually the first to arrive and the last to
leave. They often work evenings and weekends. When they travel or
vacation, they remain in contact with the office via their
cellular telephones and their laptop computers. They ensure
that at least one of them is present in the office to ensure that
management is present. They are not paid extra or given
additional leave for this. In this way, they act like any
business owner.
q, r) These two allegations must
be considered together and confirm their special status. As
a result of paragraph (r) in particular, the requirements of the
unanimous shareholder agreement are met.
u) These are
the basic conditions for everyone. The board of directors,
however, has no doubt that this condition would be applied
differently for directors.
x) Work
methods are not monitored. The work must meet standards,
which comply with legislation and good corporate governance
practices.
The President does not have the technical knowledge required to
check work methods.
[...]
5- We reject
allegation 7. Denis Fillion and Alexandre Laporte were
made responsible for the management and orientation of the firm
based on confidence, bonding, a common vision, and their
demonstrated skill. Denis Fillion and Alexandre
Laporte are also subject to a shareholder agreement that is much
more stringent than the usual agreement with other
employees. Denis Fillion is also an engineer and was
originally brought into the company to eventually take over the
reins.
[...]
8- Together,
Denis Fillion and Alexandre Laporte have effective control over
the firm. They do not have the usual contract of employment
signed by other employees. They are shareholders because they
have a non-arm's-length relationship with the firm.
We will explain later how the current situation came into
being.
[...]
CONTROL:
The Payer can control their work through the fact that they
are present on the work premises. In their respective
departments, they are the only ones who can decide how and why
decisions are made. They have technological and commercial
knowledge of the products and services with which customers are
provided.
The fact that they are subject to a shareholder agreement
which requires key decisions to be unanimous does not change
their effective control. Mr. Jean-Marc Fillion, the
shareholder who has legal control, is subject to the same
rules. However, the absolute control they have in their
respective area means that there is no possibility for the
controlling shareholder to act.
Further, they have a very strict penalty clause concerning
competition. This clause is not found in the other
contracts.
It seems that these non-competition clauses for
shareholders are much more strictly applied in the
jurisprudence.
OWNERSHIP OF TOOLS:
The computers and office equipment is the property of BusCom
of which they are shareholders. However, the real work tools,
such as technological knowledge and business contacts, are
clearly under their effective control. This was made possible
through their non-arm's length relationships. No other
employee has this level of control.
RISK OF FINANCIAL LOSS/CHANCE OF FINANCIAL PROFIT:
Their labour compensation is only part of the financial
compensation. Their interest in the firm's capital stock
means that profit can increase or decrease greatly depending on
whether the firm earns profits or incurs losses.
Further, the unanimous shareholder agreement forces them to
invest additional amounts if necessary, and endorse lines of
credit or loans when required.
Since the firm has a $250,000 line of credit, their losses
could be quite sizeable.
INTEGRATION
Their work is completely integrated into BusCom's
activities. The effective control they have over their work
stems from the fact that they are shareholders.
[6] Further, the Appellant maintains
that in his recommendation to the Minister, the Appeals Officer
failed to take the following facts into account:
In 1993, shareholders JM Fillion, Monique Choquette and
Denis Fillion implemented estate freeze techniques.
The following are the three goals of this estate freeze in
order of importance:
1- Ensuring
the firm's management succession. All new shareholders had to
carve out a place for themselves in the hierarchy and the
performance of work.
This was part of their management training to ensure a
replacement for the President and Founder JM Fillion when he
retires.
More than 10 years have passed and D Fillion and
A Laporte have developed leadership and knowledge recognized
by all. It can now be said that the authority has been
transferred successfully. The current President does not
make any decisions in the normal course of operations. He
acts primarily as a mentor and carries out routine administrative
duties on a part-time basis.
2- Ensuring
participation in the firm's profits. The value of the firm
was set at $800,000 when the estate freeze occurred.
This amount was paid over the years to the existing
shareholders when the estate freeze occurred: JM Fillion,
Monique Choquette and D. Fillion.
The firm had 1,887,000 in shareholder equity as at December
31, 2002. This is not of any value unless the firm remains
operational or is sold to a buyer who runs the firm.
The shareholders' interest is therefore:
JM Fillion
$622,000
D
Fillion
$434,000
A Laporte
$340,000
H
Fillion
$245,000
P
Fillion
$245,000
Since the controlling shareholder JM Fillion no longer manages
the firm on a day-to-day basis and everything is based on D
Fillion's and Alexandre Laporte's decisions, we can immediately
see their financial losses if they decided to leave the firm.
Since JM Fillion would be unable to resume effective control,
the firm would undoubtedly be wound up for a lower value.
[7] The Appellant also added that:
Graphiques BusCom Inc. is a family SME in the true meaning of
the term. Each of the shareholders plays a key role in the firm
through their non-arm's length relationship. If a member of
management left, the impact would be too great to continue.
The current controlling shareholder, JM Fillion, no longer
wants to return to full-time work or to start training the
succession again. The de facto heirs of the firm are
in control and their future is in their hands.
[8] The Minister concluded that the
Workers' employment was insurable because the employment met the
requirements of a contract of employment. The circumstances
surrounding this employment were examined to determine whether
the criteria in Wiebe Door Services Ltd. v. M.N.R, [1986]
3 F.C. 553, that is, control, ownership of tools, chance of
profit and risk of loss, and integration had been met in the case
at hand.
[9] The Minister further concluded
that Denis Fillion, a Worker, and the Appellant, were related
persons within the meaning of the Income Tax Act pursuant
to the grounds set out in paragraph 6 of the Reply to the Notice
of Appeal.
[10] However, the Minister deemed, after
analyzing paragraph 5(3)(b) of the Employment Insurance
Act, that they were dealing with each other at arm's length
because the Minister was satisfied that, having regard to all the
circumstances of the employment, it was reasonable to conclude
that Denis Fillion, the Worker, and the Appellant would have
entered into a substantially similar contract of employment if
they had been dealing with each other at arm's length.
[11] In 2679965 Canada Inc. (d.b.a.
Produits de Piscine Vogue) v. Canada (Minister of National
Revenue - M.N.R.), [2003] T.C.J. No 476, this Court had
to rule on a dispute involving facts substantially similar to
those in the case at hand. The following is a summary of
the presumptions of fact set out in paragraph 5 of the Reply to
the Notice of Appeal in that decision:
a) the
Appellant was incorporated on January 7, 1991;
b) the
Appellant did business as Produits de Piscines Vogue;
c) the
Appellant manufactured and distributed pools and accessories;
d) Gestion
Lebuis et Associés Inc. was the Appellant's sole
shareholder;
e)
the shareholders of Gestion Lebuis et Associés Inc.
were:
Guy
Lebuis
60% of voting shares
Gilles
Lebuis
20% of voting shares
Paul
Guay
20% of voting shares
f) Guy
Lebuis is the father of Gilles Lebuis;
g) Paul Guay
is not related to Gilles or Guy Lebuis;
h) the
Appellant has approximately $28 million in annual sales and
employs between 75 and 130 employees, depending on the
season;
i) the
Appellant's President, Guy Lebuis, was present in the Appellant's
offices every day;
j) the
Appellant's board of directors met regularly and made important
decisions;
k) Gilles
Lebuis, a Worker, was the Appellant's Vice-President of
Marketing;
l)
Worker Lebuis's duties involved R & D, marketing and sales;
m) Worker Paul Guay
was the Appellant's Vice-President of Finance;
n) Worker Paul
Guy's duties involved human resources, operations, accounting,
finances and the Appellant's legal concerns;
o) the Workers
worked Monday to Friday, Gilles Lebuis from 8:00 a.m. to 5:00
p.m., and Paul Guay from 8:00 a.m. to 8:00 p.m.;
p) the Workers
worked for the Payer year-round;
q) the
Workers' fixed annual salary was $90,000;
r) the
Appellant provided the Workers with an automobile;
s) the Workers
had group insurance coverage like all the employees;
t) the
Appellant covered all the Workers' work-related expenses;
u) the Workers
had no risk of loss or chance of profit other than their
salary;
v) the Workers
worked on the Appellant's premises;
w) all the equipment
the Workers used belonged to the Appellant;
x) the
services rendered by the Workers were an integral part of the
Appellant's activities.
[12] This Court has retained and would like
to reproduce the following relevant facts from that decision:
[TRANSLATION]
Paragraph 5(e) was denied because 2 percent of the shares held
were voting shares and 18 percent, participating shares. In
connection with the statement in paragraph 5(i) to the effect
that the Appellant's president reported to work at the
Appellant's offices every day, Mr. Gilles Lebuis explained that
in 2001, his father was 68 years old. He was in the office for a
few hours only and he was no longer involved in the day-to-day
management of the firm. He was no longer the firm's guiding
force.
Mr. Gilles Lebuis explained that in 2001, he and Paul Guay
made the decisions. They acted as partners and equals.
[...]
In connection with paragraphs 5(o) and 5(v), the Workers worked
on the Appellant's premises, but also at home in the
evening. They kept in touch when on vacation.
With regard to the group insurance coverage similar to that for
all the Workers mentioned in paragraph 5(s), their life insurance
coverage was different. Further, each of the partners had
taken out a $2-million life insurance policy on the life of the
other partner. If they were traveling at the same time,
they did not travel together.
[...]
In 2001, Mr. Lebuis was the Vice-President of marketing, R & D
and public relations. He stated that he arrived at the
office at about 8 a.m. and left at about 6:30 p.m. He has
the irregular hours of an independent contractor. He
chooses his hours. He is the first to arrive and the last
to leave.
He and Mr. Guay had decided on the $90,000 salary, which dated
back to 1996 and was based on the firm's ability to pay or
performance and the financial requirements of the two
partners.
[...]
Mr. Paul Guay is a chartered accountant and Vice-President
of finance. He says that he rarely leaves the office before
8 p.m. He does not report to anyone. He and
Mr. Gilles Lebuis work together. In September 2002,
both decided to pay themselves a $150,000 salary.
Mr. Jean-Pierre Houle, appeals officer, testified that in the
case as hand, there was one person dealing with the Payer at
non-arm's length and another at arm's length. He therefore
felt that the conditions of employment of Mr. Lebuis were similar
to those of another employee dealing with the Appellant at arm's
length. These were the conditions of Mr. Guay, who,
according to the witness, dealt with the Payer at arm's
length. He found nothing surprising in the fact that the
two Workers had set their own salary and conditions of employment
because these same two people set the salaries and
determined the conditions of employment of employees in
general. In his report, he described as a fact that the
Appellant was jointly managed by both people.
Analysis and conclusion
The appeals officer's decision was based on the fact that one of
the Workers had an arm's-length relationship which enabled him to
establish a comparable. It was therefore easy for him to decide
that the conditions of employment of the other Worker were
similar to those of a person dealing at arm's length.
[...]
In Fournier v. M.N.R., [1991] T.C.J. No. 7,
Justice Dussault ruled that when the parties to a
transaction act in concert, when they have similar economic
interests or they act with a common intent, it is generally
admitted that they are not dealing at arm's length.
In the case at hand, the two Workers involved are also two of the
Appellant's decision-makers. The evidence clearly showed
that they act in conjunction with the Appellant and they are the
people who run it. It seems clear that there is a non-arm's
length relationship between the Appellant and the Worker-officer,
Mr. Guay.
The issue in the case at hand is therefore not determining
whether there is a subordinate relationship between the Appellant
and the two Worker officers, as required under paragraph 5(1)(a)
of the Act, but to determine whether these employments are
excepted employment pursuant to paragraphs 5(2)(i) and 5(3)(b) of
the Act.
The Minister's decision was based on the premise that the
Appellant and Mr. Guay were dealing at arm's length. This
premise is incorrect. I am therefore allowed to review this
decision. Let us look at the salary. A salary that
remains unchanged from 1996 to 2001, and then is increased by
$60,000 a year in 2002, is not a salary that follows the usual
rules in the labour market. The hours of work, involvement
and autonomy of the Workers are also not those of employees
dealing at arm's length with the employer.
I conclude, based on the remuneration, the duration, and the
nature and importance of the work performed that the Workers and
the Appellant would not have entered into a substantially similar
contract of employment if they had been dealing with each other
at arm's length.
[13] Since there are such similarities
between the afore-mentioned 2679965 Canada Inc. (d.b.a.
Produits de Piscine Vogue) decision and the case at hand, I
can apply the principle therein.
[14] However, to continue the Minister's
analysis, that is, pursuant to paragraph 5(1)(a) of the
Employment Insurance Act, bear in mind that the courts
have determined the insurability of employments based on the
criteria established in the afore-mentioned Wiebe Door
Services Ltd. v. M.N.R. decision.
[15] Further to the analysis, in concluding
as the Minister did, the Minister deemed that the Appellant had
the authority to control the Workers' work by being present on
the firm's premises, attending various monthly and annual
meetings, and being involved in the return obtained by the Worker
at the end of the year. Provision is also made in the
shareholders agreement that key decisions must be unanimous.
[16] The Minister also concluded that the
Appellant had provided the tools, that since the Workers were
paid a fixed salary, they had no chance of profit or risk of loss
in their normal duties.
[17] Finally, the Minister concluded that
the Workers' respective duties were fully integrated into the
Appellant's activities.
[18] However, in the Reply to the Notice of
Appeal, which was reproduced above, the Appellant provides
another perspective on the analysis of employments using the
criteria provided. In the opinion of this Court, the
analysis of employments provided by the Appellant using the
control of the ownership of tools, chance of profit and risk of
loss criteria is very convincing.
[19] Consideration should be given to
certain passages in 671122 Ontario Ltd. v. Sagaz Industries
Canada Inc., [2001] 2 S.C.R. 983 where the Supreme Court of
Canada examined the relative importance of these criteria in an
analysis such as that before the Court. In paragraphs 46
and 47 of this decision, Justice Major wrote:
In my opinion, there
is no one conclusive test which can be universally applied to
determine whether a person is an employee or an independent
contractor. Lord Denning stated in Stevenson Jordan,
supra, that it may be impossible to give a precise definition
of the distinction (p. 111) and, similarly, Fleming observed that
"no single test seems to yield an invariably clear and
acceptable answer to the many variables of ever changing
employment relations . . ." (p. 416). Further, I agree with
MacGuigan J.A. in Wiebe Door, at p. 563, citing Atiyah,
supra, at p. 38, that what must always occur is a search
for the total relationship of the parties:
The most that can profitably be done is to examine all the
possible factors which have been referred to in these cases as
bearing on the nature of the relationship between the parties
concerned. Clearly not all of these factors will be relevant in
all cases, or have the same weight in all cases. [...]
Although there is no universal test to
determine whether a person is an employee or an independent
contractor, I agree with MacGuigan J.A. that a persuasive
approach to the issue is that taken by Cooke J. in Market
Investigations, supra. The central question is whether the
person who has been engaged to perform the services is performing
them as a person in business on his own account. In making this
determination, the level of control the employer has over the
worker's activities will always be a factor. However, other
factors to consider include whether the worker provides his or
her own equipment, whether the worker hires his or her own
helpers, the degree of financial risk taken by the worker, the
degree of responsibility for investment and management held by
the worker, and the worker's opportunity for profit in the
performance of his or her tasks.
[20] With respect to the foregoing, this
Court is of the opinion that using the criteria in the
aforementioned Wiebe Door Services Ltd. to analyze the
Workers' employment does not lead to the conclusion that
contracts of employment are involved because the only criterion
that leads to this conclusion is the integration criterion.
[21] This Court is of the opinion that this
conclusion is justified because of the unrefuted evidence the
Appellant provided in Exhibit A-1. This conclusion is also
supported by the afore-mentioned 2679965 Canada Inc. (d.b.a.
Produits de Piscine Vogue) and 671122 Ontario Ltd. v.
Sagaz Industries Canada Inc. decisions.
[22] Therefore, this Court must conclude
that the Workers did not occupy insurable employment during the
period at issue because the employment was not governed by a
contract of employment within the meaning of paragraph
5(1)(a) of the Employment Insurance Act.
[23] Consequently, the appeal is allowed and
the Minister's decision is vacated.
Signed at Grand-Barachois, New Brunswick, the 16th day of July
2004.
Savoie, D.J.
Certified true translation
Colette Beaulne
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