Squires v. M.N.R., docket 97-1646-UI

Date: 19990201

Docket: 97-1646-UI

BETWEEN:

MARY SQUIRES,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

MANUELS PLUMBING AND HEATING LTD.,

Intervenor.

Reasons for judgment

Cuddihy, D.J.T.C.C.

[1] This appeal was heard in St-John’s, Newfoundland, on December 7, 1998.

I- The appeal

[2] This is an appeal from a decision by the Minister of National Revenue (the "Minister") of June 19, 1997, where it was determined that the employment of Mary Squires (the "Appellant" ) with Manuels Plumbing and Heating Ltd. (the "Payor") from March 4 to May 3, 1996 and May 31 to November 7, 1996, was not insurable within the meaning of the Unemployment Insurance Act (the "old Act") now known as the Employment Insurance Act (the "new Act ") because, according to the Minister, the Appellant and the Payor were not dealing with each other at arm’s length within the meaning of paragraph 3(2)(c)(ii) of the old Act and paragraph 5(2)(i) and subsection 5(3) of the new Act and thus the said employment was excepted.

II- The facts

[3] In rendering his decision, the Minister relied on the facts and reasons outlined in his Reply to the Notice of Appeal and particularly in paragraph 4 as follows:

"4.(a) the Payor is a corporation, duly incorporated under the laws of the Province of Newfoundland;

(b) at all material times, Herbert Squires was the Payor's sole shareholder;

(c) Herbert Squires is the brother of the Appellant's deceased spouse;

(d) the Payor operates the plumbing and heating business year-round from the home of Herbert Squires and is open seven days per week;

(e) the Payor's monthly revenues for the fiscal year ended January 31, 1997 are as follows:

MONTH EARNINGS

February, 1996 $34,992

March, 1996 $31,123

April, 1996 $32,248

May, 1996 $14,292

June, 1996 $13,431

July, 1996 $ 9,766

August, 1996 $26,287

September, 1996 $19,064

October, 1996 $34,011

November, 1996 $32,603

December, 1996 $29,300

January, 1997 $30,443

TOTAL EARNINGS $307,567

(f) the Appellant received 2 Records of Employment from the Payor related to the periods in question; the first was for the 9 week period from March 4, 1996 to May 3, 1996 (the "first period") and showed 9 weeks of insurable employment and the second was for the 23 week period from May 31, 1996 to November 7, 1996 (the "second period") and showed 12 weeks of insurable employment;

(g) the Appellant's alleged duties during the first period included bringing the Payor's accounts payable up to date and converting the accounts payable to the McBee System;

(h) the Appellant's alleged duties during the second period included maintaining the Payor's accounts payable and updating and maintaining the accounts receivable and cash sales journals;

(i) the Appellant actually performs the majority of the Payor's bookkeeping function including preparation of all records required by the accountant for the preparation of the financial statements;

(j) the Appellant was shown on the Payor's payroll as having worked 15 or 20 hours in each week where services were performed and the Appellant was paid $234 per week regardless of the number of hours worked;

(k) wages paid by the Payor to other workers were based on the number of hours actually worked;

(l) the Payor did not provide an office for the Appellant and she performed the services from her residence and from Hilltop Manor Inc.;

(m) Hilltop Manor Inc. was a nursing home which the Appellant was hired to manage on a 24 hour basis from September 1, 1996 to November 15, 1996;

(n) the Appellant was able to perform the services for the Payor when her personal obligations and nursing home duties allowed;

(o) the Payor did not control the Appellant's hours of work and did not have first call on the Appellant's time;

(p) the Appellant was not supervised by anyone on behalf of the Payor;

(q) the Appellant returned to the Payor's payroll subsequent to the period in question but was not paid for services performed at the time of the Respondent's review;

(r) the Appellant and the Payor entered into an artificial arrangement whereby the Appellant received Records of Employment from the Payor which would qualify her for unemployment Insurance benefits and the Payor received year-round bookkeeping services without the requirement to pay year-round wages;

(s) the Appellant and the Payor are factually not dealing at arm's length.

5. In the alternative, the Minister has also considered the following:

(a) there was no contract of service between the Appellant and the Payor."

[4] The Appellant, as to paragraph 4, admitted the allegations in subparagraphs (a) to (c), (e) to (g), (k), (m) and (n). The allegations in subparagraphs (d) and (l) were admitted with explanations to be given at the hearing. The allegations in subparagraphs (h) to (j) and (o) to (s) were denied. The Appellant denied the allegation in subparagraph (a) of paragraph 5.

III- The Law and Analysis

[5] i) Definitions from the Employment Insurance Act

"employment" means the act of employing or the state of being employed;

"Insurable employment" has the meaning assigned by section 5;

Paragraph 5(1)(a) of the new Act reads as follows:

"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;

..."

"Excluded employment"

[6]Paragraph 5(2)(i) and subsection 5(3) of the new Act read as follows:

"(2) Insurable employment does not include

...

(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."

[7] iii) Definitions from the Income Tax Act

Arm's length and Related persons

Section 251 of the Income Tax Act reads in part as follows:

"Section 251. Arm's length.

(1) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm's length; and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.

(2)Definition of "related persons". For the purpose of this Act, "related persons", or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption;

(b) a corporation and

(i) a person who controls the corporation, if it is controlled by one person,

(ii) a person who is a member of a related group that controls the corporation, or

(iii) any person related to a person described in subparagraph (i) or (ii) ..."

IV- Arm’s length test - Court decisions

[8] In Noranda Mines Limited and The Minister of National Revenue, [1987] 2 C.T.C. 2089, at page 2093, Bonner, J. of the Tax Court of Canada stated as follows:

" The process just described, especially step (d), is not typical of what one might expect of parties dealing with each other at arm's length.

The question of the presence or absence in fact of an arm's length relationship has been explored by the courts in many cases. The Supreme Court of Canada dealt first with the matter in M.N.R. v. Sheldon's Engineering, Ltd., [1955] C.T.C. 174; 55 D.T.C. 1110. At page 180 (D.T.C. 1113) Locke, J., speaking for the Court, said the following:

""Where corporations are controlled directly or indirectly by the same person, whether that person be an individual or a corporation, they are not by virtue of that section deemed to be dealing with each other at arm's length. Apart altogether from the provisions of that section, it could not, in my opinion, be fairly contended that, where depreciable assets were sold by a taxpayer to an entity wholly controlled by him or by a corporation controlled by the taxpayer to another corporation controlled by him, the taxpayer as the controlling shareholder dictating the terms of the bargain, the parties were dealing with each other at arm's length and that Section 20(2) was inapplicable.""

The decision of Cattanach, J. in M.N.R. v. T.R. Merritt Estate, [1969] C.T.C. 207; 69 D.T.C. 5159, is also helpful. At page 217 (D.T.C. 5165) he said:

""In my view, the basic premise on which this analysis is based is that, where the "mind" by which the bargaining is directed on behalf of one party to a contract is the same "mind" that directs the bargaining on behalf of the other party, it cannot be said that the parties were dealing at arm's length. In other words where the evidence reveals that the same person was "dictating" the "terms of the bargain" on behalf of both parties, it cannot be said that the parties were dealing at arm's length.""

A few years later the importance of bargaining between separate parties, each seeking to protect his own independent interest, was again emphasized in the decision of the Exchequer Court in Swiss Bank v. M.N.R., [1971] C.T.C. 427; 71 D.T.C. 5235. At page 437 (D.T.C. 5241) Thurlow, J. (as he then was) said:

""To this I would add that where several parties - whether natural persons or corporations or a combination of the two - act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the "mind" that directs may be that of the combination as a whole acting in concert or that of any of them in carrying out particular parts or functions of what the common object involves. Moreover as I see it no distinction is to made for this purpose between persons who act for themselves in exercising control over another and those who, however numerous, act through a representative. On the other hand if one of several parties involved in a transaction acts in or represents a different interest from the others the fact that the common purpose may be to so direct the acts of another as to achieve a particular result will not by itself serve to disqualify the transaction as one between parties dealing at arm's length. The Sheldon's Engineering case (supra), as I see it, is an instance of this.""

Finally, it may be noted that the existence of an arm's length relationship is excluded when one of the parties to the transaction under review is in a position in which he has de facto control of both parties. In this regard reference may be made to the decision of the Federal Court of Appeal in Robson Leather Company Ltd. v. M.N.R., [1977] C.T.C. 132; 77 D.T.C. 5106.

The issue in this appeal is essentially one of fact. The onus rests on the appellant to establish on the balance of probabilities that Noranda and Orchan did in fact deal with each other at arm's length. That onus has not been discharged."

[9] And further at page 2095:

"...A finding that the same mind directed the actions of both parties to the transaction does not, in my view, involve a finding that the mind was not, as regards both corporations, acting honestly, in good faith and with the best interests of both corporations in view.

On behalf of the appellant stress was also laid on the admitted fact that the consideration flowing from Orchan represented fair market value. The arm's length test looks to the presence or absence of the power to influence or control. An unusual result may well be indicative of the absence of an arm's length relationship, but the fact that a result is typical of what might be expected between parties who do deal at arm's length does not negative the existence of a non-arm's length relationship."

(underlining by undersigned)

[10] In 1991 in the case of Peter Cundill & Associates Ltd. v. Her Majesty the Queen, [1991] l C.T.C. 197, Cullen, J. at page 203 stated as follows:

" Whether the parties in this case were dealing at arm's length is a question to be examined on its own particular facts. Many factors are relevant in the determination of the issue, such as ownership and control of a corporation. However, share control (or absence of it) is not necessarily conclusive; it is only a factor to be considered in determining the question of arm's length (Robson Leather Co. v. M.N.R., [1974] C.T.C. 872; 74 D.T.C. 6666, Collier, J. affd [1977] C.T.C. 132; 77 D.T.C. 5106 (F.C.A.)).

In Interpretation Bulletin IT-419 Revenue Canada suggested the following factors will determine whether or not dealings are at arm's length:

(a) the existence of a common mind which directs the bargaining for both parties to a transaction,

(b) parties to a transaction acting in concert without separate interests, and

(c) de facto control.

The criteria enunciated in IT-419 have also been the criteria consistently considered by the courts. In this case, it appears the factor that will illuminate the situation is determining the controlling mind of these two corporations. If the "mind" acting for one party is the same "mind" directing the second party, then they cannot really be said to be dealing at arm's length (Oryx Realty Corp. and Shofar Investment Corp. v. M.N.R., [1972] F.C. 33; [1972] C.T.C. 35; 72 D.T.C. 6018; affd [1974] 2 F.C. 44; [1974] C.T.C. 430; 74 D.T.C. 6352 (F.C.A.)."

[11] In Penner et al. v. The Queen; 94 D.T.C. 6567, at page 6590, Teitelbaum, J. of the Federal Court said:

" I agree with the Plaintiff's submission that the facts of this case do not support a conclusion that a common mind existed which directed the bargaining for both parties to the transaction. Further, the above, in my view, is consistent with the object and spirit of the SRTC provisions of the Act, which were enacted to permit research companies to effectively renounce their tax benefits in favour of investors who purchased qualifying securities.

Further, I am not persuaded by the evidence that either party to this transaction did, or had the power to exert, de facto control over the other."

(underlining by the undersigned)

[12] From these cases, parties are not dealing at arm's length when the predominant consideration or the overall interest or the method used amount to a process that is not typical of what might be expected of parties that are dealing with each other at arm's length.

[13] Parties will not be dealing with each other at arm's length if there is the existence of a common mind which directs the bargaining for both parties to a transaction or that the parties to a transaction are acting in concert without separate interests or that either party to a transaction did or had the power to influence or exert control over the other. The dealings of the parties are not consistent with the object and spirit of the provisions of the law and they do not demonstrate a fair participation in the ordinary operation of the economic forces of the market place[1].

[14] Therefore, the existence of a combination of one or several of these initiatives that would be inconsistent or interfere, in due process negotiating between employer and employee and with the object and intent of the legislation, will not survive the arm's length test.

[15] The Court is also bound to insure in analyzing all the circumstances and the accepted evidence that the parties are not defeating the purpose of the legislation[2].

[16] The Court has a duty to scrutinize with care the conditions of the relations between a Worker and a Payor in every case[3].

[17] The Appellant had the burden of establishing on a balance of probabilities that an arm’s length relationship existed between her and the Payor.

[18] Each appeal, however, must be decided on the facts particularly established and on its own merits.

Brief summary of evidence and analysis

[19] The Appellant and Herbert Squires, were heard in support of the appeal. Exhibits A-1 to A-3 and R-1 and R-2 were filed in the Court record.

[20] The Appellant in explaining the allegation in subparagraph (d) of the Reply to the Notice of Appeal produced two series of pictures (Exhibits A-1 and A-2). The first series A-1, would explain why she did not wish to work in the Payor’s shed which is cluttered with all sorts of equipment tools, material, etc. In addition, the sanitary conditions of the place did not encourage her to work there. The Appellant worked out of an office in her home (Exhibit A-2). This plumbing and heating business operates year-round and is open seven days a week. Herbert Squires is the person in charge and has his own small working office.

[21] In answer to the allegations in subparagraphs (g) and (h) of the Reply to the Notice of Appeal, the Appellant said that she did the accounts payable. She did the bank reconciliation and during a couple of weeks when the Payor’s wife was on holidays, she brought the accounts receivable and cash sales journal up-to-date. The Payor's wife does the accounts receivable, cash sale journals, bank deposits and payroll.

[22] The Appellant said that during her first period of employment she brought the Payor’s 1995 books up-to-date for the auditor by posting them on the McBee System. During her second period of employment from May 31 to November 7, 1996, she brought his 1996 books up-to-date and posted all the information on the McBee System. She also did the bank reconciliation. She worked two weeks at 20 hours a week and the other weeks at 15 hours a week.

[23] In response to subparagraph (i) of the Reply to the Notice of Appeal, the Appellant stated that she did not do the majority of the Payor’s books. She only did the accounts payable, the bank reconciliation and other duties which consisted of errands.

[24] In response to subparagraph (j) of the Reply to the Notice of Appeal, she worked only every two weeks since there was not enough work every week. She filed her earnings record for 1996 together with copies of her two records of employment (Exhibit A-3).

[25] In answer to subparagraphs (l), (m) and (n) of the Reply to the Notice of Appeal, the Appellant did say that she performed her duties, as stated previously, from an office she had in her home. She also admitted being hired to manage Hilltop Manor Inc. from September 1 to November 15, 1996 on a 24-hour basis. She did perform the services at this place when her personal obligations and nursery home duties allowed.

[26] In answer to subparagraph (o) of the Reply to the Notice of Appeal, the Appellant said that Herbert Squires controlled her work. "We discussed the hours and how long it would take. I said hopefully, I could do it 15 hours a week and he did have first call on my time".

[27] The Appellant also said that she set up an office at Hilltop Manor Inc. where there were only twelve residents. She received a record of employment from Hilltop Manor Inc. which was not shown to the Court by either party.

[28] In answer to subparagraph (p) of the Reply to the Notice of Appeal, the Appellant stated that Herbert Squires was her "distinct supervisor".

[29] In response to subparagraph (q) of the Reply to the Notice of Appeal, the Appellant admitted that she returned to the Payor’s payroll after her second period of employment "in February of 1997 to finish the 1996 books".

[30] The Appellant was paid as shown in the payroll records filed in the Court record by the Respondent. The Minister alleged that the Appellant was not paid for services performed at the time of the Respondent’s review. The Court can only assume that the payroll records would have been in the possession of the Minister at the time he reviewed the Appellant’s appeal. It was difficult then to conclude that the Appellant was not paid in 1997.

[31] In cross-examination, the Appellant admitted that her responsibilities at Hilltop Manor Inc. required her to be "responsible for the building, the people and the staff, 24 hours a day". She stayed on site and was paid by-weekly.

[32] She was asked to produce her records of employment (Exhibit R-1). She at this point said: "I was paid by the hour, I kept track of the hours and phoned them to Junior" (Herbert Squires). "I prepared both records of employment and Doreen Squires, Herbert Squires' wife was the payroll clerk of the Payor".

[33] The Appellant was also cross-examined with the payroll records (Exhibit R-2). She was shown certain weeks where the Appellant’s net pay was lower than usual. The Appellant explained that she asked the payroll clerk to take out more income tax one week and less another week because she did not want "to get stung with income tax". What I understood from this answer was that she would request that enough amounts of income tax would be deducted from her pay cheque so that she would not be caught at tax time by having to pay a large amount of overdue taxes. This did not appear to the Court as being unusual.

[34] Herbert Squires testified that he and his brother (Fred) who was the Appellant's husband started the Payor’s business many years ago. Fred Squires died in 1988. The Appellant had been working for the Payor at that time. As a result of the death of her husband, the Appellant could no longer work at the Payor’s business. Herbert Squires then had to hire someone to do the work which had been carried out by the Appellant. The Appellant trained Doreen Squires, Herbert Squires' wife to do the payroll, the accounts payable and the bank deposits. A couple of months after her husband’s death, the Appellant could no longer look after the books. She did express, however, at the time that if she could she would return.

[35] In 1994 and 1995, the Payor had a bookkeeper by the name of Paul Moore who worked for a period of two years, eight hours a day at $6.00 an hour. Paul Moore fell sick and could no longer perform the duties. It was at this time that Mary Squires became interested once again in doing the books for the Payor. He paid her $15.00 an hour. The Appellant would come in every two weeks and pick up all the invoices. Her work was well done. The Payor did not mind if the Appellant was doing his books while she worked at Hilltop Manor Inc. He said "as long as the books got done and I had no problems with Income Tax". He knew the hours of work of the Appellant when her cheque was made out and it must be accepted that the Payor had a right of supervision over the Appellant although she was not working in his presence.

Concluding analysis summary

[36] On June 19, 1997, the Minister advised the Appellant that she and the Payor were not dealing at arm’s length. In the Reply to the Notice of Appeal, the main allegation of the Minister was that the Appellant and the Payor entered into an artificial arrangement, whereby the Appellant received a record of employment from the Payor which would qualify her for unemployment insurance benefits and the Payor received year-round bookkeeping services without the requirement to pay year-round wages. The Minister also concluded that the Appellant and the Payor were factually not dealing at arm’s length. The Minister then alleged in the Reply to the Notice of Appeal that in the alternative he considered that there was no contract of service between the Appellant and the Payor.

[37] The decision of June 19, 1997, and the allegation in the Reply to the Notice of Appeal appeared to the Court as two different positions adopted by the Minister.

[38] The Appellant and Herbert Squires were the only witnesses heard. The Appeals' Officer was not heard. No evidence was submitted to contradict the evidence of the Appellant or her witness. These two inexperienced persons did appear to the Court as truthful, who in their own way, explained to the best of their ability what took place.

[39] The evidence did show in my view the existence of a contract of service. The Appellant was hired and was paid a salary. She, in fact, was hired as a replacement for Paul Moore. Her salary and her hours of work did not appear exaggerated. The fact of her working at her residence did not appear to be the subject of much concern. One difficulty was the fact that she worked at Hilltop Manor Inc. from September 1 to November 15, 1996 and at the same time carried out her bookkeeping duties for the Payor. The evidence showed that she was asked by her sister to go to Hilltop Manor Inc. for that short period until the building was sold. In fact, she lived there. The presence of the Appellant at that place according to the evidence was temporary and she would have a lot of time at her disposal to do the Payor’s bookkeeping duties, that is at least how I viewed the evidence. It would therefore not be impossible to carry out both occupations at the same time. Then one may argue, who was supervising the Appellant? The Payor knew of this situation and accepted that this work be carried out at that place. One can only assume that this temporary situation did not affect the genuine contract of work between the Appellant and the Payor.

[40] May I add, it would have been helpful to have had the point of view of the Appeals' Officer if anything to the contrary or other evidence was available.

[41] Once the serious allegations of the Minister are explained and dispelled and the Court is left with truthful, acceptable and uncontradicted evidence, it cannot conclude on any other evidence but that put before the Court by the witnesses together with the admitted allegations.

[42] As a result of what I heard in this case, the Appellant has established on a balance of probabilities that she and the Payor did not enter into an artificial arrangement as alleged in subparagraph (r) of the Respondent’s Reply to the Notice of Appeal.

[43] As a result, I can only conclude that there was an arm’s length relationship between the Appellant and the Payor.

IV- Decision

[44] The appeal is allowed and the decision of the Minister is vacated.

Signed at Dorval, Quebec, this 1st day of February 1999.

" S. Cuddihy "

D.J.T.C.C.

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