2885981 Canada Inc. v. M.N.R., docket 98-159-UI

Date: 19990303

Docket: 98-159-UI

BETWEEN :

2885981 CANADA INC.,

doing business under the name VENTILATION R. ROBINSON,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

RENÉ CAYA,

MONIQUE GAGNON,

Interveners.

Amended reasons for judgment

Tardif, J.T.C.C.

[1] This is an appeal brought as a result of notices of assessment dated April 24 and June 2, 1997, for the years 1996 and 1997. The assessments were issued for non-payment of unemployment insurance and employment insurance premiums in respect of Monique Gagnon and René Caya, the interveners in this case.

[2] Monique Gagnon and René Caya testified in support of the appeal. They explained the origins of the company 2885981 Canada Inc., doing business under the name Ventilation R. Robinson (the “company”).

[3] At the outset, Ms. Gagnon stated that during the periods in issue Serge Robinson had been a fictitious shareholder. The evidence established that this characterization was essentially based on Ms. Gagnon's lack of understanding of the nature of the participation of each of the shareholders.

[4] Thus, according to the interveners, the fact that Serge Robinson was not physically involved or active in the day-to-day operations of the company made him what they termed a fictitious shareholder.

[5] Neither Mr. Caya nor Ms. Gagnon seemed to be able to make the distinction between shareholder status and employee status, and accordingly, in their view, that fact that Mr. Robinson did not work for the company meant that they could say and conclude that he was a fictitious shareholder. The term “inactive” would, in the circumstances, have been more appropriate, although even then it would not have been a legally sound characterization, since the evidence clearly established that Mr. Robinson fulfilled his responsibilities as a director.

[6] This misinterpretation was undoubtedly to blame for the incorrect information obtained from the Human Resources Development Canada office when the company was first formed. Ms. Gagnon apparently said at that time that only Mr. Caya and she would be involved in the company’s affairs, and accordingly the answer they were given was that they therefore could not hold insurable employment with the company, given that they would not be available and assuming as well that they would control more than 40 per cent of the shares.

[7] In order to determine whether employment is insurable, it is of course important to analyze all of the terms and conditions of the performance of the work, but it is also necessary to have regard to other factors, particularly if the employment in question is held by the shareholders of a company. The same contract of employment may or may not result in insurability, depending on the percentage of voting shares held or controlled by the shareholder whose employment it is.

[8] In the instant case, the evidence established that the interveners and Serge Robinson had each held one third of the issued voting shares until November 14, 1997. It was also established that each of them had invested $40,000 and that none of the shareholders had in law or in fact waived the voting rights associated with the number of shares he or she held.

[9] Ms. Gagnon explained that Mr. Caya and she received a predetermined annual salary based on the economic activities of the company. Her salary was lower than Mr. Caya’s. She essentially handled all of the administrative and accounting duties, while Mr. Caya was responsible for the performance of the contracts on the work sites.

[10] Ms. Gagnon said very clearly that they reported to Serge Robinson regarding administration; each month, she gave him the financial report that she has prepared. Mr. Caya stated that he saw Mr. Robinson very frequently on the work sites. It was also shown that Mr. Robinson had always enjoyed the rights and privileges associated with the shares he held; he was fully entitled to share in any profits there might be. His signature was required in banking matters.

[11] Consequently, there is no doubt that each of the shareholders had full control of the rights associated with his or her shares in the company. No one of them had any ascendancy over the others that might lend credence to the idea that the rights conferred by the shares held had been renounced or waived.

[12] Hence, the work performed both by Ms. Gagnon and by Mr. Caya was subject to the power of control held by the company, which benefited from the work they did. Since each was perfectly aware of the nature of the work he or she had to do, it was not necessary to have a foreman to supervise them; they performed the work in accordance with their knowledge and skills, and reported on that work to the company by means of monthly reports.

[13] Serge Robinson, in his capacity as shareholder-director, was entitled to get involved at any time, as were Ms. Gagnon and Mr. Caya also. It is important to understand that the shareholder-directors of a company may wear two different hats.

[14] In fact and in law, Serge Robinson wore a single hat: he was manager of the company’s affairs, in that he held one third of its shares, which allowed him to question, supervise and control the manner in which the work was performed by the shareholder-workers, namely Ms. Gagnon and Mr. Caya.

[15] As for Ms. Gagnon and Mr. Caya, each wore two different hats, one being that of an employee of the company and the other, identical to Mr. Robinson’s, being that of shareholder-director.

[16] It seems that the interveners made no distinction between the two capacities. Of course, it may be difficult to understand how an employee can at the same time be a boss, in proportion to the shares that he or she controls, but it is nonetheless a fact that it can be so.

[17] On this point, the work that the interveners did, as the person in charge of administration and accounting in Ms. Gagnon’s case, and as the person in charge of performance of the contracts on the work sites in Mr. Caya’s case, was done under genuine contracts of service in that they worked for the company; they received fixed remuneration for their work and were subject to the company’s right and power of control over that work. The fact that the right of control was essentially theoretical and that the interveners never felt that they were subordinate to the authority of the company in terms of how they performed their work, changes nothing as regards the real nature of the corporate structure and the company’s right to control and supervise the work performed by the interveners in their capacity as workers.

[18] Their work was performed using the materials and equipment supplied by the company, which alone could incur losses and make profits.

[19]On October 2, 1997, Serge Robinson offered to sell the shares he held in the company. On October 10, 1997, the interveners agreed to purchase Serge Robinson’s shares.

[20]On November 14, 1997, René Caya and Monique Gagnon each purchased 33 shares in the appellant company, as a result of which each of them held 50 percent of the company’s issued voting shares. Consequently, the interveners each controlled more than 40 percent of the company’s voting shares.

[21]Although nothing changed in terms of the work performed by René Caya and Monique Gagnon as of November 14, 1997, their employment became uninsurable by the mere fact that they each then controlled 50 percent of the voting shares, that is, more than 40 per cent. Although the agreement for the sale of Mr. Robinson’s shares states that the transfer was to be retroactive to January 31, 1997, there was no evidence adduced showing that Mr. Robinson had transferred the rights associated with his shares before the date on which they accepted his offer, namely October 10, 1997. They formally accepted the offer by means of a transfer executed before a notary on November 14, 1997. It should therefore be concluded that Mr. Robinson continued to act as the owner of the shares in question until his offer to sell was accepted on October 10, 1997.

[22]For these reasons, the appeal is dismissed on the basis that the employment held by Ms. Gagnon and Mr. Caya was insurable within the meaning of the Act from January 1, 1996 to October 10, 1997, after which period the interveners’ employment was no longer insurable. The assessments must be revised accordingly.

Signed at Ottawa, Canada, this 21st day of April 1999.

“Alain Tardif”

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 3rd day of February 2000.

Erich Klein, Revisor