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Citation: 2003TCC348
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Date: 20030520
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Docket: 2002-3705(EI)
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BETWEEN:
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INTERIOR NETWORKING GROUP LTD.,
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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
Beaubier, J.T.C.C.
[1] This appeal from a decision of the
Respondent respecting Employment Insurance premiums was heard at
Kelowna, British Columbia, on May 7, 2003.
[2] The Appellant called Robert
Sibson, Jeremy Fichtner and Paul Berisoff to testify. The
Respondent did not call any witnesses. The decision appealed from
is dated June 28, 2002 respecting the Appellant, the witnesses
and Kevin Ludbrook. It assessed employment insurance
premiums and stated:
This letter concerns the appeal against the assessments dated
November 6, 2001 for Canada Pension Plan contributions in the
amount of $3,295.80 and employment insurance premiums in the
amount of $10,296.28, plus applicable penalty and interest, for
the 2000 and 2001 taxation years.
It has been decided to confirm these assessments. This is
because Kelvin Ludbrock, Robert Sibson, Paul Berisoff and Jeremy
Fichtner were providing services to Interior Networking Group Ltd
pursuant to a contract of service in the 2000 and 2001 taxation
years.
If you disagree with this decision, you may appeal to the Tax
Court of Canada within 90 days of the mailing date of this
letter. Details on how to appeal can be found in the enclosed
attachment.
The decision in this letter is issued pursuant to subsection
27.2(3) of the Canada Pension Plan and subsection 93(3) of
the Employment Insurance Act and is based on paragraph
6(1)(a) of the Canada Pension Plan and paragraph 5(1)(a)
of the Employment Insurance Act.
[3] The appeal is for the stated
reason that the individuals are shareholders of the Appellant and
that their employment is excluded employment under paragraph
5(2)(i) of the Employment Insurance Act (the
"Act"), since they did not deal with each other
at arm's length. Section 5 reads:
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;
(b)
employment in Canada as described in paragraph (a) by Her
Majesty in right of Canada;
(c) service
in the Canadian Forces or in a police force;
(d)
employment included by regulations made under subsection (4) or
(5);
(e)
employment in Canada of an individual as the sponsor or
co-ordinator of an employment benefits project.
(2) Insurable
employment does not include
(a)
employment of a casual nature other than for the purpose of the
employer's trade or business;
(b) the
employment of a person by a corporation if the person controls
more than 40% of the voting shares of the corporation;
(c)
employment in Canada by Her Majesty in right of a province;
(d)
employment in Canada by the government of a country other than
Canada or of any political subdivision of the other country;
(e)
employment in Canada by an international organization;
(f)
employment in Canada under an exchange program if the employment
is not remunerated by an employer that is resident in Canada;
(g)
employment that constitutes an exchange of work or services;
(h)
employment excluded by regulations made under subsection (6);
and
(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.
4. The
Commission may, with the approval of the Governor in Council,
make regulations for including in insurable employment
(a)
employment outside Canada or partly outside Canada that would be
insurable employment if it were in Canada;
(b) the
entire employment of a person who is engaged by one employer
partly in insurable employment and partly in other
employment;
(c) employment
that is not employment under a contract of service if it appears
to the Commission that the terms and conditions of service of,
and the nature of the work performed by, persons employed in that
employment are similar to the terms and conditions of service of,
and the nature of the work performed by, persons employed under a
contract of service;
(d) employment in
Canada by Her Majesty in right of a province if the government of
the province waives exclusion and agrees to insure all its
employees engaged in that employment;
(e) employment in
Canada by the government of a country other than Canada or of any
political subdivision of the other country if the employing
government consents;
(f)
employment in Canada by an international organization if the
organization consents; and
(g) the tenure of
an office as defined in subsection 2(1) of the Canada Pension
Plan.
5. The
Commission may, with the approval of the Governor in Council and
subject to affirmative resolution of Parliament, make regulations
for including in insurable employment the business activities of
a person who is engaged in a business, as defined in subsection
248(1) of the Income Tax Act.
6. The
Commission may, with the approval of the Governor in Council,
make regulations for excluding from insurable employment
(a) any
employment if it appears to the Commission that because of the
laws of a country other than Canada a duplication of
contributions or benefits will result;
(b) the
entire employment of a person who is engaged by one employer
partly in insurable employment and partly in other
employment;
(c) any
employment if it appears to the Commission that the nature of the
work performed by persons employed in that employment is similar
to the nature of the work performed by persons employed in
employment that is not insurable employment;
(d) the
employment of a member of a religious order who has taken a vow
of poverty and whose remuneration is paid directly or by the
member to the order;
(e) any
employment in which persons are employed hardly at all or for
nominal remuneration; and
(f) any
employment provided under regulations made under section 24 or
under employment benefits.
7. The
Commission may, with the approval of the Governor in Council,
make regulations defining, for the purposes of this section, the
expressions "casual nature", "government", in
relation to a government of a country other than Canada or of a
political subdivision of the other country, and
"international organization".
[4] Paragraphs 8 to 12 inclusive of
the Reply to the Notice of Appeal read:
8. In so
assessing and confirming the Assessments against the Appellant,
the Minister relied on the following assumptions:
a) the Appellant
is a limited company;
b) the
Appellant is in the business of computer software development
technology;
c) the
Appellant's shares were owned equally by Kevin Ludbrook
("Ludbrook"), Robert Sibson ("Sibson"), Paul
Berisoff ("Berisoff") and Jeremy Fichtner
("Fichtner");
d) the
Shareholders are not related;
e) the
Shareholders were all directors of the Appellant;
f) in
June 2001, Ludbrook resigned and his shares in the Appellant were
divided equally amongst Sibson, Berisoff and Fichtner;
g) Sibson is
the president of the Appellant;
h) Sibson also
acts as the sales and marketing manager;
i)
Fichtner is the Appellant's secretary treasurer;
j)
Fichtner is the director of internet services for the
Appellant;
k) Berisoff is
the service manager for the Appellant;
l) in
addition to the Shareholders, the Appellant also employs hourly
employees;
m) the Appellant did
not maintain records of the hours worked by its Shareholders;
n) the
Appellant had the right to direct and control the services of the
Shareholders;
o) under the
terms of a written agreement the Shareholders are prohibited from
being engaged in any business which competes with the
Appellant;
p) all tools
and equipment used in the performance of services by the
Shareholders are supplied by the Appellant;
q) the
Appellant paid wages to the Shareholders for their services as
employees;
r) the
Appellant reimburses the Shareholders for all expenses incurred
in the course of performing their duties;
s) the
Shareholders were not in business for themselves; and
t) the
Appellant employed the Shareholders under a contract of
service;
B. THE STATUTORY
PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH
HE INTENDS TO SUBMIT.
9. He relies
on paragraph 5(1)(a), subsection 2(1) and sections 82, 85 and 92
of the Act and section 251 of the Income Tax
Act.
10. He submits that the
Appellant has been correctly assessed for Premiums that were
required to be withheld and remitted from the remuneration paid
to the Shareholders under section 85 of the Act, together
with penalties and interest, as the Shareholders were employed by
the Appellant under a contract of service within the meaning of
paragraph 5(1)(a) of the Act.
11. He further submits
that the Appellant and the Shareholders were dealing with each
other at arm's length pursuant to section 251 of the
Income Tax Act and therefore their employment was not
excluded by virtue of paragraph 251(2)(b) of the Income Tax
Act.
12. He further submits
that the Appellant failed to withhold and remit to the Receiver
General any amounts in respect of the Premiums, as required, and
accordingly is liable for the unremitted amounts together with
penalty and interest thereon, and has been correctly assessed in
accordance with sections 82 and 85 of the Act.
[5] Pursuant to paragraph 251(1)(c),
of the Income Tax Act, in this case, it is a question of
fact as to whether the shareholders were not dealing with the
Appellant at arm's length in 2000 and 2001.
[6] Assumptions a), b), c), d), e),
f), g), h), i), j), k), l), m), o), p), q) and s) were not
refuted by the evidence.
[7] The following evidence of the
witnesses is accepted:
1. Salaries of the
Three Witnesses
(a) They were paid about
¾ of what they could get from similar jobs in the Kelowna
area where they worked, had they worked a regular 8 hour day, 5
days a week.
(b) They consistently worked an
average of 12 hours per day for 5 days each week and often longer
hours and more than 5 days.
(c) They were paid twice each month,
but each year the Appellant could not pay them for about 2 pay
periods. Their paycheques were frequently 1 to 3 weeks late.
(d) Other employees were always paid
on time.
2. Control
The three witnesses were also directors. They met once a week
on Tuesday evenings and decided all matters unanimously by
consensus and without a recorded vote. Because the
Appellant's business was marginal they decided matters at
these meetings relating to $500 expenditures, or if one of the
directors needed money when their salaries could not be met,
whether that director should be advanced $100. Mr. Ludbrook left
the Appellant in June, 2001 after the exercise of a
"shotgun" clause in the shareholders' agreement by
the witnesses when he acted independently and without the
knowledge of the other directors in a number of corporate
matters. However in both 2000 and 2001, the three witnesses
together dictated the operations of the Appellant and of
themselves in unison for the Appellant and the shareholders with
the Appellant's benefit as the paramount consideration.
3. Sharing of Tasks by
the Directors
All of the directors did the Appellant's janitor work,
shopped for necessary incidentals and were not reimbursed by the
Appellant for these expenditures, travelled in their own vehicles
without any mileage or other expense payments, used their own
cell phones for the Appellant's business without
reimbursement. They did divide up tasks - Mr. Sibson sales and to
some degree, management; Mr. Fichtner web tasking; and Mr.
Berisoff technical matters and installations.
4. Financing
All of the witnesses had to advance money to the Appellant
with their credit cards at times. All of them made shareholders
loans of one kind or another to the Appellant at times. All of
them are still owed money by the Appellant.
5. Ability to be
Replaced
Mr. Ludbrook was not replaced. The Appellant could not hire a
replacement for any of the witnesses for the wages they were
paid. When Mr. Berisoff's wife had a baby and he needed more
money, and hired on elsewhere, the Appellant closed down when it
could not replace him for even $10,000 more per year. The Court
finds that each of the witnesses was equally essential to the
Appellant's operation and, similarly, could not be replaced
by the Appellant on the terms and conditions under which the
witnesses were employed. Each of the witnesses is now working in
the same areas as they did for the Appellant for at least 50%
better pay, and at normal working hours in their respective
fields. The Court finds that the departure of any of the
witnesses from the Appellant's employ during the periods in
question would cause the Appellant to fail, as in fact it did
when Mr. Berisoff left.
[8] All of the witnesses started out
and stayed with the Appellant in the hope or "dream"
that they would own their own successful business. None had a
clear idea if this would mean higher wages, dividends, capital
gains or all three. They are believed when they testified that in
their decision-making as directors, they put the company and its
well-being and survival first. The evidence is that they acted
and decided in unison for this purpose.
[9] Thus, contrary to assumption n),
the directors exercised the right to direct and control the
services of the shareholders and they did so together.
[10] The three directors, together were the
bargaining agent for themselves and the Appellant. Their common
interest was that the corporation's business would succeed
and they acted in concert for that purpose. The only time they
diverged was when Mr. Berisoff needed money to support his family
and decided to leave the Appellant, whereupon the other two
directors offered him $10,000 more per year than they could have
and he felt that he could not accept that in fairness to the
others and to the Appellant. Even then all of them were, although
divergent, acting in concert for the success of the
Appellant.
[11] The witnesses exercised hands-on, daily
de facto control and spoke to each other so as to act in
concert on daily decisions, as Mr. Sibson testified. He is
believed.
[12] For these reasons, the Court finds that
the Appellant and the witnesses, Robert Sibson, Jeremy Fichtner
and Paul Berisoff, did not deal with each other at arm's
length. As a result their employment and that of Mr. Ludbrook by
the Appellant is excluded employment. The appeal is allowed. The
Appellant is awarded such costs as are allowed under the
Act.
Signed at Ottawa, Canada this 20th day of May, 2003.
J.T.C.C.
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