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Citation: 2003TCC723
Date: 20031028
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Dockets: 2002-2734(EI)
2002-468(EI)
2002-470(EI)
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BETWEEN:
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CLIFFORD DEVOE,
SANDRA PIERCEY
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Appellants,
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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
(Edited
from the transcript of Reasons for Judgment delivered orally from the Bench on
August 13, 2003 at Corner Brook, Newfoundland)
Campbell, J.
[1] These
three appeals were heard together on common evidence. The Appellants, Sandra
Piercey and Clifford Devoe, were the only witnesses called, with evidence also
taken via teleconferencing call in respect to the Appellants' solicitor, John
Bruce.
[2] According
to the evidence of Sandra Piercey, she began a common‑law relationship
with Clifford Devoe in late 1994 or early 1995. They had a child in 1996. In
July 1995, they acquired a property from Clifford Devoe's father. A mortgage
was placed on this property with the Codroy Valley Credit Union in 1995. Sandra
Piercey stated that she left the relationship and vacated this property in 1997.
She and the child lived with her parents while Mr. Devoe continued to reside in
this property acquired in 1995.
[3] In
1999 Sandra Piercey was a student and as part of her program, she completed a
business plan on boat tours and rentals. She decided she would make this
business plan a reality and contacted Clifford Devoe with a business proposal.
Mr. Devoe had been leaving Newfoundland for a number of years to work part time
on a seasonal basis in Nova Scotia. He received $12.00 per hour in Nova Scotia
and worked long workweeks in construction. She offered Mr. Devoe employment in
her proposed new business in exchange for permission to operate the business
from the property which was still in both of their names. Mr. Devoe gave
evidence that he preferred to stay in Newfoundland to work, provided he
received comparable wages.
[4] At
the time this arrangement was made, the Appellants were still separated. They
did not resume co-habitation until November of 2000. During the first season of
operation, which was approximately May or June until October of 2000, the
evidence was that the parties did not co-habit and retained separate residences
during this time. According to the evidence of Ms. Piercey, Mr. Devoe was hired
to handle the boat tours, to assist with the small boat rentals and to
construct wharves, rock walls and a playground. Mr. Devoe had knowledge of the
river, sand shoals and land markers, as he had lived his entire life by the
water. In addition, he had a guide license for salmon fishing and had
completed, at the request of Ms. Piercey, First Aid courses and kayaking
courses. She reached an oral agreement with Mr. Devoe to hire him in the year
2000 for $10.00 per hour for a 70-hour workweek.
[5] In
February of 2000, Ms. Piercey applied for a $30,000.00 business loan with
Gateway Development Association. She obtained the loan in her personal name.
There were no co-signers or guarantors. Her evidence was that all decisions in
the year 2000 were made by her and there was no input by Mr. Devoe. She also
owned all of the assets and borrowed her father's tools to construct the rock
wall, wharves and playground. She stated Mr. Devoe may have used his own
hammer.
[6] After
the business-ceased operations in October for the 2000 season, the Appellants
revived their relationship. In early 2001, they decided to incorporate the
business which had been previously operated as a sole proprietorship under Ms.
Piercey's name. The primary concern in incorporating the business was to limit
liability in respect to the operations. This was confirmed by the evidence of
Mr. Bruce, the Appellants' solicitor, who incorporated the company.
[7] Sandra
Piercey confirmed in her evidence that the ability to obtain EI benefits was
also a consideration. The shareholders of the company were Sandra Piercey with
34 percent of the shares, Clifford Devoe with 33 percent and Clifford's
brother, Vincent, with 33 percent. Vincent owned the property adjacent to the
property owned by the Appellants. It was on Vincent's property that the playground
was constructed. Vincent was living in Nova Scotia and employed with the
Military. He was close to retirement and wanted to be involved in this business
when he returned to Newfoundland. Shareholders' meetings were held regularly
and if Vincent was not present personally, he participated via telephone.
[8] The
appeal of Sandra Piercey covers the period May 14, 2001 through to August 31,
2001. The sole issue in the Piercey appeal is whether she was employed by
Sparkling Waters Boat Tours and Rentals Limited pursuant to a contract of
service. The Minister denied her claim for employment insurance benefits for
this period, on the basis that she was not so employed by the company. The
Respondent argued that the company did not exist as a separate entity and that
since the company and Sandra Piercey were one and the same, she basically was
employed by herself. In denying Piercey's 2001 EI claim, the Minister made the
assumptions, which I have summarized as follows:
- Pre-incorporation
Sparking Waters was operated by Piercey as a sole proprietorship, "more in
the nature of a partnership between herself and Clifford Devoe".
- In 2001, Piercey
continued to operate the business as a partnership between herself and Devoe.
- Sparkling Waters
did not compensate either Piercey or the other landowners for the business use
of the property.
- Sparkling Waters
used, in its business, boats and other assets owned by Piercey.
- Sparkling Waters
did not have its own bank account and instead, used the account of proprietorship
under Piercey's name.
- Piercey
performed the same administrative and customer service duties for Sparkling
Waters before and after incorporation.
- And therefore,
there is no contract of service between Piercey and Sparkling Waters.
[9] In
2001, the business had been incorporated and both Piercey and Devoe were
shareholders. The primary driving force in the incorporation was protection
from personal liability. This was confirmed by the evidence of Piercey and of
John Bruce, solicitor, who completed the incorporation. Mr. Bruce expressed his
concern that the company obtain adequate insurance and erect appropriate
signage on the property. Piercey also testified that one of the reasons for
incorporation was to enable the parties to collect benefits. There is nothing
improper in individuals arranging their affairs to take advantage of such
payments. Here there was no evidence to suggest that here was anything illegal
or improper in the procedure employed by the Appellants.
[10] It was clear from the evidence of Mr. Bruce and the Appellant, Sandra
Piercey, that it was the intention of Ms. Piercey to roll over the assets of
the proprietorship, which she had operated, to the company pursuant to section
85 of the Income Tax Act. Mr. Bruce confirmed that he advised the
Appellants on this matter and prepared both a lease document and a bill of
sale. He provided these to the Appellants with instructions to complete a list
of assets with valuations and to contact an accountant in this regard. The
originals of these documents could not be located by Mr. Bruce or anyone
else. The bill of sale (page 34 of Exhibit A-1) was executed by Ms. Piercey and
dated May 4, 2001, but it was not witnessed. It appeared from the evidence that
she included the amount of $300.00 as a consideration paid to Sandra Piercey by
the company for the assets, although this amount did not reflect the true value
of the assets which, I believe, are closer to a value of $25,000.00. It was
clear from Piercey's evidence that she did not fully comprehend the nature of
the documents. She had a general idea of what Mr. Bruce intended to accomplish,
but she is not a solicitor and has no legal training and, therefore, did not
truly understand the nature of the documents she signed. Her evidence was that
it was her intention to transfer the business assets to the company. Whether
this was actually accomplished legally is not relevant to the issue before me.
I believe it is sufficient that the evidence supports that she fully intended
to transfer the assets and executed the bill of sale to accomplish this intent.
No schedule of assets was attached to this bill of sale, but she confirmed that
she had completed one and given it to the accountant, as per Mr. Bruce's
directions. She believed she had transferred the assets to the company and
that, in 2001, it was the company that owned the assets and tools of this
business. There was no evidence to the contrary and I accept that the company
was the intended owner of the tools, being the boats and equipment, necessary
to operate this business. I do not draw any unfavourable inference against the
Appellant except to say that her solicitor could have been more diligent in
following these documents through to correct completion.
[11] In respect to the control issue, regular shareholders' meetings were
held according to the evidence of Ms. Piercey. Minutes of these meetings were
recorded, (Exhibit R-2) and when Vincent Devoe could not be present, he
participated via telephone. Decisions were made at these meetings as to how the
business operations would be carried out. Ms. Piercey did not have the
control that she previously exercised in the year 2000 when she operated the
business as a proprietorship. Although the bank account still continued in her
name, she explained that she was attempting to avoid the bank fees charged for
changing the name on the account to the corporate name. She testified, however,
that the bank was fully aware that the business was now operated through the
company. In respect to the final two factors, chance of profit and risk of
loss, there is a risk of loss and a chance of profit for the shareholders of
the company, but not as employees of the company. Employees and shareholders in
a company have distinct and separate roles. A shareholder/employee is not
automatically precluded from benefits. The shareholders met and made decisions
affecting their duties as employees. Appellant counsel cited the integration
factor, but I refer him to the federal case and I believe this is the correct
pronunciation Mirchandani v. Canada, [2001] F.C.J. No. 269. I believe
this factor has been relegated now to a more minor, if not insignificant, role
in deciding such cases.
[12] Although the business operated as a sole proprietorship in 2000, it is
clear from the evidence that the company incorporated in early 2001 was and
remains a viable business operation. It was a separate entity from Piercey
after the incorporation and clearly she intended that it be operated in that
manner. There is no evidence to suggest that she was continuing the business as
a proprietorship. It was the company that now possessed the assets, the chance
of profit, the risk of loss and the control over the business operations. The
business was no longer a proprietorship under the sole direction of Piercey. I
simply do not accept that this company was, in any way, set up as a sham
operation. There is no evidence to substantiate that this company was part of
some elaborate scheme to obtain EI benefits. Although Vincent was not involved
in daily operations, he did participate regularly in shareholders' meetings,
where decisions were made on a regular basis. This was part of his future
retirement plans. This business continues today and, in fact, is growing. An
office, mini golf course and garage have been added and there are plans to
continue to increase operations. Although the evidence was not absolutely
clear, it appeared that the company did not pay rent for the use of the land. The Federal Court in Canada v. Société
d'exploitation des ressources de la Vallée Inc. et al., [1984] 61 N.R. 131 (F.C.A.) stated
that being paid to work on one's own land was not necessarily uninsurable
employment. That ruling stated that what matters, in determining insurability,
is the creation of a link of subordination between the employer and the
employee, and not where the work is done. This factor alone is not
determinative of this issue, particularly where a link of subordination has
been established as it has been here.
[13] I conclude therefore, that Sandra Piercey was engaged by Sparkling
Waters Boat Tours and Rentals Limited for the period May 14, 2001 through to
August 31, 2001 in insurable employment within the meaning of
paragraph 5(1)(a) of the Act, as there was contract of
service between the Appellant, Sandra Piercey, and the Payor company. Her
appeal is therefore allowed.
[14] I turn now to the two appeals of Clifford Devoe. The first appeal
covers the period July 6, 2000 through to October 6, 2000. The second appeal is
for the period July 23, 2001 through to October 26, 2001. The Minister has
submitted that for the 2000 appeal period, there was no contract of service
between Mr. Devoe and Sandra Piercey because they were actually in partnership
in the operation of this business. In the appeal for 2001, the Minister has
argued that there is no contract of service between Mr. Devoe and the company
as they were simply continuing the partnership. In addition for this particular
appeal the Minister denied the claim on the basis that Devoe's employment was
excepted employment, as he was in a non-arm's length relationship with the
company within paragraph 5(2)(i) of the Act.
[15] In denying Devoe's 2000 EI claim, the Minister made the following
assumptions and I will summarize those:
- Devoe was paid
primarily to improve the properties owned by himself, Piercey and Vincent.
- Revenue
generated by the business was insufficient to cover the cost of his wages.
- Devoe was not
compensated for the business use of the property.
- Devoe was not
expected to work predetermined hours.
- Devoe's working
relationship with Piercey was in the nature of a partnership.
[16] The key to Devoe's
2000 appeal is whether he was a partner or an employee of the business. If
Devoe was a partner in Sparkling Waters prior to its incorporation, then, of
course, his EI appeal for the year 2000 must fail. When I look at the facts, it
is clear that it was Piercey alone who formulated the idea of boat tours and
rentals, developed a business plan, obtained the necessary financing, purchased
the assets and equipment and generally oversaw the business operations in the
2000 season. Devoe did not share in the profits or losses and owned none of the
assets or equipment which the business used. He did not resume his relationship
with Piercey until November 2000, one month after the business operation ceased
for that season. In addition, it was Piercey who obtained the necessary
financing via a development grant. Devoe did not set his own hours, as his
testimony indicated that sometimes Piercey would request that he leave at a
certain hour and return in several hours to work late into the evening. His
direction came from Piercey, not only in respect to these hours, but also in
respect to tasks to be completed. There was nothing in the conduct of the
parties from which one could infer that Devoe and Piercey were partners in this
business. It is clearly Piercey's business in the year 2000. No license was
required to give these boat tours, although Devoe had a salmon guide license
and knowledge of the water,
which were valuable assets for such an employee to have. However, Piercey gave
evidence that she was capable herself of giving these tours and, in fact, did
so in the 2001 season.
[17] It is true that on September 28, 2000,
Piercey and Devoe acquired a second mortgage on their property, some of the
proceeds of which were used to pay off the Sparkling Waters loan. The timing of
this mortgage is important. It was acquired just several days before Devoe
finished his employment in the 2000 season. I am therefore placing less
importance on this factor than if the mortgage had been acquired at the
beginning of the 2000 season.
[18] There was no evidence to suggest that the
$10.00 an hour rate of pay offered by Piercey to Devoe would be out of line for
an individual hired to complete the tasks and handle the boat tours that was
expected of Devoe. The fact that the business revenue was not sufficient to
offset the wages paid to Devoe is not a factor which points either strongly to
a partnership or employee relationship. This was the first year of a new
business. Many businesses operate at a loss in the start-up years. The business
today is still growing and adding assets. It is true that the Appellant was not
paid for the use of his property, although being offered a job that enabled him
to remain in Newfoundland instead of returning to Nova Scotia may
certainly be viewed as partial compensation. I have previously referred to the
case of Canada v. Société d'exploitation des ressources de la Vallée Inc. et
al., where the Federal Court found that being paid to work on one's own
land is not necessarily uninsurable employment. The case is directly on point
here. The evidence has clearly established a link of subordination here between
Devoe and Piercey. Devoe was clearly an employee of the sole proprietorship
operated by Piercey in the year 2000. A lease agreement was entered into,
although not properly executed. Although the intention was present to pay rent
of $50.00 monthly for the use of the property, the fact that no rent was paid
cannot alter the employee/employer relationship which the facts have
established.
[19] And finally, I turn to the assumption
relating to work related duties of Devoe which the Minister claims "...
were primarily to improve the property owned by himself, the Payor and Vincent
Devoe". The facts have proved that this is only partially correct. The
work duties which Devoe completed brought about only one possible improvement
to this property and that was the erection of the rock wall at the edge of
their property, but which was actually on government land. It did have the
potential of improving their property by preventing soil erosion. All other
improvements including the wharves and playground were removed and stored at
the end of each season.
[20] I therefore allow Devoe's appeal for this
period of employment in the year 2000 based upon my finding that he was an
employee only of the proprietorship operated by Piercey.
[21] In denying Devoe's 2001 EI claim, the
Minister made the following assumptions and again, I will summarize:
- Sparkling Waters
did not compensate any of the landowners for the business use of their
property.
- It can be inferred
that although Devoe was not on the payroll of the company until July 23, 2001,
he was the sole tour guide of the business for the entire season and Piercey
was not a licensed guide.
- Devoe was not
expected to work predetermined hours, nor was a record kept of the hours, which
he worked.
- Devoe therefore,
was not employed pursuant to a contract of service with the company.
- Devoe was related
to the company and not dealing at arm's length.
- Having regard to
all the circumstances of his employment, the remuneration paid, the terms and
conditions of employment, duration and nature and importance of the work
performed, it was not reasonable to conclude that Devoe and the company would
have entered into a substantially similar contract of employment if they had
been dealing with each other at arm's length.
[22] Although during the 2001 season Devoe was a
shareholder of the employer corporation and made some improvements to the
property, which he and Piercey owned, these facts alone do not automatically
make Devoe's employment uninsurable. I have already concluded that Devoe's work
duties did not relate primarily to property improvements as suggested by the
Minister. In addition, I have also concluded that the corporation was not a
sham, but a viable company. Devoe did not own or have any personal share of the
tools, assets and equipment. I previously concluded in deciding Piercey's
appeal, these were owned by Piercey and transferred to the corporation in 2001.
When cross-examined as to his possible use of his own truck to move oars, boats
and other corporate assets, Devoe was clear in his evidence that his truck was
customized and he would never use it to move these items. Devoe's activities
stayed much the same in 2001, although he did not commence employment until
July 23 of that year. Piercey testified that Devoe was not hired until the
business got busy enough to re-hire him and that she did the guide tours until
he was re-hired. Shareholders' meetings were held on a regular basis and Devoe
took his direction from these meetings. He did not take draws. He continued to
be paid a regular wage of $10.00 per hour for the 70-hour workweek. Although he
sometimes worked more than 70 hours per week, he testified that he was used to
doing this in seasonal employment. He used the expression that he was "...
required to make hay while the sun shines" to illustrate a similar
practice in other seasonal employment he had in the past.
[23] I conclude that Devoe was an employee
during the period of employment in 2001 pursuant to a contract of service with
the company.
[24] In the alternative, the Minister has argued
that Devoe was non-arm's length to the company. Pursuant to the definition of
"related persons", contained in section 251 of the Income Tax
Act, having again resumed his common-law relationship with Piercey and
together owning 67 percent of the corporate shares, Devoe falls within the
definition provided in this section. The Minister made the determination that
Devoe's employment was excepted employment within 5(2)(i) of the Act,
as Devoe and the Payor company were not dealing with each other at arm's
length. The issue is whether this determination by the Minister was made in a
lawful manner.
[25] In respect to all these determinations,
there is a standard of review which this Court must observe. The case of Attorney
General of Canada v. Jencan Ltd., [1998] 1 F.C. 187 is often quoted as
setting the standard which binds this Court. This Court may only interfere with
the Minister's determination where the Minister acted in bad faith or for an
improper purpose or motive, failed to take into account all of the relevant
circumstances or took into account an irrelevant factor. The case of Tignish
Auto Parts Inc. v. Canada (M.N.R.), [1994] F.C.J. No. 1130 (F.C.A.)
requires that this Court undertake a two-stage inquiry on an appeal from such a
determination. The test is well summarized in the case of Bayside Drive‑In
Ltd. v. M.N.R., [1997] F.C.J. No. 1019 at paragraph 15 where it states:
At the threshold stage of the inquiry,
review by the Tax Court is confined to ensuring that the Minister has exercised
his discretion in a lawful manner. If, and only if, the Minister has exercised
his discretion in a manner contrary to law can the Tax Court then proceed to a
review of the merits of the determination. It is only by limiting the first
stage of the inquiry in this manner that the Tax Court exhibits the degree of
judicial deference required when faced with an appeal from a discretionary
determination.
The Federal Court of Appeal stated in the case of Ferme
Emile Richard v. M.N.R., [1994] F.C.J. No. 1859 at paragraph 4:
... In other words, the Court does not have
to consider whether the Minister's decision was correct: what it must consider
is whether the Minister's decision resulted from the proper exercise of his
discretionary authority.
I must therefore verify whether the facts relied on by
the Minister in his determination were real and were correctly assessed and
considered, having regard to the context in which they occurred. The Court,
however, may not simply substitute its assessment for that of the Minister,
even if it would have reached a different conclusion.
[26] Assumption (l) now has been rebutted as the
evidence supports that prior to July 23 when Devoe was hired, Piercey
completed these guide tour duties as required. The Appellant's evidence which
was not contradicted was that a tour guide did not have to be licensed.
Assumption (m) is not completely correct as Piercey also conducted work when
necessary as a tour guide prior to July 23. Assumption (h) has been
rebutted as Piercey's evidence was that she conducted the tours prior to Devoe
being hired and in any event, she did not need to be licensed to do this work.
Assumption (o) has been rebutted. Devoe was, in fact, a licensed guide, but for
salmon fishing which had nothing to do with his duties for this operation.
There was no evidence to suggest that he performed any of the tours for the
company prior to July 23. Assumption (q) is only partially correct. Devoe
was required to work 70 hours per week, which was predetermined together with
the hourly wage of $10.00. In addition, there was no evidence to suggest $10.00
was an unreasonable amount.
[27] These assumptions were critical to the
Minister's determination. The cumulative effect of all of my above comments on
these assumptions is that the Minister erred in several instances in stage one
of the inquiry in that irrelevant factors were considered and some relevant
factors were not. The Appellant has met the onus at this stage. The second
stage of the inquiry involves a consideration of whether or not the Appellant
has established on a balance of probabilities that a similar contract of
service would have been entered into between the parties had they not been
related. I am satisfied here that the Appellant's employment was not contrived
or concocted. The work Devoe performed was essential to the operation of the
company. There was no evidence to suggest that the $10.00 hourly rate is
unreasonable. The amount was a negotiated rate in the 2000 season and continued
into the 2001 season. Devoe worked a minimum of 70 hours per week. I place
little importance on the fact that he worked in excess of 70 hours on occasion,
as he testified that he generally worked at seasonal jobs where he quite often
worked additional hours to get the job done for other employers. The tools were
provided by his employer. The shareholders provided the direction through
regular meetings for which records were kept. I am satisfied that a similar
contract of service would have been entered into with an unrelated or arm's length
individual. The appeal for Devoe for the 2001 period is, therefore, allowed.
[28] In summary, all three appeals are allowed
and the determinations of the Minister are varied on the basis that the
Appellants were engaged in insurable employment for the periods in question.
Signed at Ottawa, Canada, this 28th day of October, 2003.
Campbell,
J.
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