Dipersio v. M.N.R., docket 97-1890-UI

Date: 19990607

Dockets: 97-1890-UI; 97-1922-UI

BETWEEN:

HECTOR G. DIPERSIO, KEVIN McNEIL,

Appellants,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

KNIGHTS OF COLUMBUS,

Intervenor.

Reasons for judgment

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

[1] These appeals were heard on common evidence in Sydney, Nova Scotia, on May 5, 1999.

I- The appeal

[2] These are appeals from two decisions by the Minister of National Revenue (the "Minister") of August 13, 1997, where it was determined that the employment of Hector G. Dipersio from June 27 to November 11, 1994, from August 5 to December 9, 1995 and from August 26 to December 13, 1996, and the employment of Kevin McNeil from July 11 to November 26, 1994 and from September 4 to November 25, 1995 while employed by the Knights of Columbus (the "Payor") were excepted within the meaning of paragraph 3(2)(c) of the Unemployment Insurance Act (the "old Act") now known as subsection 5(3) of the Employment Insurance Act (the "new Act ") because the Appellants and the Payor were not dealing with each other at arm’s length and that the terms and conditions of employment between them constituted a factual non-arm’s length relationship.

[3] In addition the Minister alleged that the Appellants and the Payor acted in concert to manipulate the duration that the Appellants would be on the Payor’s payroll in order to ensure that the Appellants would qualify for unemployment insurance benefits.

II- The facts

[4] In rendering his decisions the Minister relied on the facts and reasons outlined in the Respondent’s Replies to the Notices of Appeal which form part of this decision as if recited at length herein.

[5] The Appellant, Hector G. Dipersio, through his counsel, in appeal No. 97-1890(UI) as to paragraph 7 of the Reply to the Notice of Appeal, admitted the allegations in subparagraphs (e) and (f). The allegations in subparagraphs (a), (b), (d) and (g) to (l) were admitted with explanations to be given at the hearing. The allegations in subparagraphs (c) and (m) to (p) were denied.

[6] The Appellant, Kevin McNeil, through his counsel, in appeal No. 97-1922(UI) as to paragraph 6 of the Reply to the Notice of Appeal, admitted the allegations in subparagraphs (e) to (g). The allegations in subparagraphs (a) to (d), (h) and (i) were admitted with explanations to be given at the hearing. The allegation in subparagraph (j) was ignored. The allegations in subparagraphs (k) to (n) were denied.

III- The Law

[7] i) Definitions from the Unemployment Insurance Act

"employment_ means the act of employing or the state of being employed."

"Insurable employment"

Subsection 3(1) of the Unemployment Insurance Act reads as follows:

"3(1) Insurable employment is employment that is not included in excepted employment and 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;

[...]"

"Excepted employment"

Subsection 3(2) reads in part as follows:

"(2) Excepted employment is:

...

(c) subject to paragraph (d), employment where the employer and employee are not dealing with each other at arm's length and, for the purposes of this paragraph,

(i) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the provisions of the Income Tax Act, and

(ii) where the employer is, within the meaning of that Act, related to the employee, they shall be 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..."

[8] ii) 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 by subparagraph (i) or (ii)..."

[9] iii) The interpretation Act R.C.S., C.I.-21

Section 12 of the Interpretation Act R.C.S., C.I.-21 stipulates:

"...Every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects."

[10] IV- The Arm's length test - Court Decisions

For the purpose of this judgment I will reiterate what I said in the case of Wilga Parrill & al., 95-2644 (UI)

" The case law provides guidelines as to what determines that unrelated persons are or are not dealing at arm's length.

In Noranda Mines Limited and The Minister of National Revenue, [1987]2 C.T.C. at p. 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. (underlining by undersigned)

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 be 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 Compagny 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..."

And further at p. 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)

In 1991 in the case of Peter Cundill & Associates Ltd. v. Her Majesty the Queen [1991] l C.T.C., Culen, 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.)."

In Penner et al. v. The Queen; 1994, D.T.C. 6567 at 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)

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.

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 and that 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].

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.

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

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

..."

V- Analysis

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

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

[13] It is the determination of the Minister that is appealed. In the case of Desroches v. M.N.R. (A-1470-92), March 10, 1994 (1994) 167 N.R. 316 at 319 and 320, Desjardins, J.A. of the Federal Court of Appeal says:

"...However, in the final analysis, as this court held in Attorney-General of Canada v. Jacques Doucet June 21, 1993, A-1487-92 (F.C.A.), at p. 6 it is the Minister's determination which is at issue, namely that the employment was not insurable because the applicant and the payer were not bound by a contract of service. The function of the Tax Court of Canada judge extended to considering the record and the evidence in its entirety. Accordingly Marceau, J.A., speaking for the court, said the following in Doucet:

The judge had the power and duty to consider any point of fact or law that had to be decided in order for him to rule on the validity of that determination. This is assumed by s. 70(2) of the Act and s. 71(1) of the Act so provides immediately afterwards...

The trial judge could go as far as deciding that there was no contract between the parties. ..."

[14] If there is a doubt in the interpretation, it must favour the claimant and there is nothing that prevents a taxpayer from benefiting from a social program if the requirements of the law are respected. This is what Judge Hugessen, F.C.A., described in Attorney General of Canada v. Rousselle et al., decision of October 31, 1990 (1991) 124 N.R. 339 at 340:

"I do not think it is an exaggeration to say, in light of these facts, that if the respondents did hold employment this was clearly "convenience" employment, the sole purpose of which was to enable them to qualify for unemployment insurance benefits. These circumstances certainly do not necessarily prevent the employment from being insurable, but they imposed on the Tax Court of Canada a duty to look at the contracts in question with particular care; it is apparent that the motivation of the respondents was the desire to take advantage of the provisions of social legislation rather than to participate in the ordinary operation of the economic forces of the market place."

[15] The Court therefore has a duty to scrutinize with care the conditions of the relations between a worker and a payor in every case.

[16] Furthermore, subsections 70(2) and 71(1) of the Unemployment Insurance Act grant to the Tax Court broad remedial powers that would permit the Court to resolve any dispute of a factual nature and to reverse, affirm or vary the Minister's determinations.[4]

[17] Hector G. Dipersio, Kevin McNeil and David Guy were heard in support of the appeals. David Shaw, the Appeals Officer, was heard on behalf of the Respondent. Exhibits A-1, A-2, B-1 to B-3 and R-1 to R-8 were filed in the Court record.

[18] The Knights of Columbus is a non-profit religious organization, whose main objectives are charity, unity, fraternity and patriotism.

[19] The Santa Maria Council No: 2024, has been situated in Sydney, Nova Scotia for close to 80 years (Exhibit A-2). In each council there is a Grand Knight who is the person in authority, who also heads committees. The Knights of Columbus council cannot own property. In order to do so they must form a Columbian Club which is prevalent in each city where Knights of Columbus meet. This facility is in operation on a year-round basis. All members of the Knights of Columbus are also members of the Colombian Club.

[20] The Colombian Club operates a banquet and dance hall and beverage facility in Sydney Mines, Nova Scotia. The revenues generated by this facility are for charity. The members of the Knights of Columbus are also called upon to do volunteer work for the community. This volunteer work can be carried out on the premises of the facility or elsewhere as required by the local council of the Payor.

[21] Mr. David Guy, the Grand Knight of the Payor, gave a factual explanation of how, as the head of the bar committee in June of 1994, he eventually hired the Appellants.

[22] The Appellants were hired according to the budget that was prepared for the fiscal year beginning on July 1, 1994 and subsequent years. The Appellants were hired according to contracts which were entered into by the parties (Exhibits A-1 and B-1). The Appellants worked for the periods of work found in their applications for benefits (Exhibits R-1 to R-3, R-5 and R-6).

[23] The main allegations of the Respondent were that the Appellants continued to perform substantially similar duties on a volunteer basis after they were removed from the Payor’s payroll each year, received sometimes cash amounts when bar-tending on a volunteer basis and did not report cash earnings received from the Payor while in receipt of unemployment insurance benefits. The Respondent also alleged that the Appellants and the Payor acted in concert to manipulate the duration that the Appellants would be on the Payor’s payroll in order to ensure that the Appellants would qualify for benefits and that in doing so the Payor benefitted from the arrangement by having its wage expenses subsidized by unemployment insurance benefits while it retained the Appellants' services free of charge at a greatly reduced rate.

[24] The Appellants gave evidence which explained what actually took place. Their evidence was truthful and acceptable. It was explained that they were hired and they were paid a salary. They were laid off essentially because the monies budgeted for their services had run out. The salaries paid were not excessive for the type of work they were doing and this fact was not disputed by the Respondent.

[25] The point of contention was the fact that once they were laid off, they continued to volunteer their services to the Payor. One must recognize that the Appeals Officer was looking at the situation as a business running and operating under the normal activity of the market place. He reasoned: how can you pay a salary, lay the worker off because the budget runs out and have him volunteer to do the same or similar duties afterwards? The answer, according to the evidence, is that the Knights of Columbus is not a business as such in the market place. It is a non-profit organization. It makes no profit. If it does make any money it is to give it away. In order to generate funds for charity, it must carry out certain activities. These activities are sponsored and organized by the members who are all volunteers whether they work for the Payor or elsewhere. Because of the high rate of unemployment in the region it would appear that certain volunteers were out of work. The Payor with a budget could create employment for some of its members. There is nothing illegal in benefiting from a social program if it is done legally as pointed out earlier. In these cases as the budget ran out, the employees were let go. It did not appear that they worked throughout those years for the minimum number of weeks in order to qualify for benefits. They did return to volunteer but with others and not on a full-time basis. Instead of staying home and doing nothing, they voluntarily, as did the other members, helped out in somewhat similar and other functions

[26] The Appeals Officer did say that if they had not returned to the premises they may not have had any difficulty. However one must realize that, as members of the Knights of Columbus, these Appellants would be penalized from volunteering and from fraternizing with other members because they were drawing unemployment insurance benefits. For that matter would a Knight of Columbus, who would be laid off work for another payor, have his situation challenged because he volunteered to do some service in conjunction with other members of the Knights of Columbus on and maybe off the premises of the Santa Maria Council? I think not.

[27] The Appeals Officer of course had some difficulty with the case since the Rulings Officer had decided in the case of the Appellant Hector Dipersio Jr. (Exhibits A-1-12), that his employment was excepted since he was not dealing at arm’s length with the Payor because he was related to Hector Dipersio Sr., his father, who was also a Knight of Columbus. In the case of the Appellant Keven J. McNeil (Exhibit B-2), the Rulings Officer concluded that this Appellant was not an employee of the Payor.

[28] The Appeals Officer, in his analysis of the situation, concluded that although the Appellants and the Payor were not related to each other they were not at arm’s length. It is accepted that this type of situation is not every day occurrence and may give some difficulty to Appeals Officers. It is also true that Payors also have to demonstrate that the employment is genuine.

[29] The evidence has disproven the allegation of the Respondent to the effect that the Appellants and the Payor acted in concert to manipulate the duration that the Appellants would be on the Payor’s payroll in order to ensure that the Appellants would qualify for unemployment insurance benefits.

[30] The evidence of David Guy, who acted for the Payor, whose evidence was not contradicted and who was a truthful witness, fully explained the hiring of these two Appellants. The financial statements and books of the Payor were kept in such a fashion that no doubt could be cast on them and must be accepted as representing what took place close to four or five years ago.

[31] I am satisfied that the Appellants and the Payor did enter into real contracts of service; there was no evidence of manipulation or arrangements that would identify a non-arm’s length relationship, as was shown in the case of Parrill (supra).

[32] I noted a discrepancy in the work period of 1995 for Keven McNeil. His record of employment (Exhibit R-7) shows his work period from September 4 to November 25, 1995. In his application for benefits (Exhibit R-6) his work period is described from September 16 to November 25, 1995. These documents were not made up by the Appellant and this discrepancy was noted by the Respondent but was not determinative in the decision of the Minister or of this Court.

[33] I do not consider these decisions to be precedent for any other past or future periods of employment of the Appellants or other workers with the Payor or anyone else, the Minister maintaining the right to investigate any other periods of employment of workers for unemployment insurance purposes.

[34] This judgment applies to the Appellants for the periods of employment under review only, because these are the only periods of work that may be considered by this Court.

VI- Decision

[35] The appeals are allowed and the decisions of the Minister are vacated.

Signed at Dorval, Quebec, this 7th day of June 1999.

"S. Cuddihy"

D.J.T.C.C.

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