Roscoe v. M.N.R., docket 97-1358-UI

Date: 19991214

Docket: 97-1358-UI

BETWEEN:

LAURIE ROSCOE,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Cain, D.J.T.C.C.

[1] This is an appeal by Laurie Roscoe, hereinafter called the "Appellant", from a ruling of the Minister of National Revenue, hereinafter called the "Respondent", that she was not employed in insurable employment while engaged by Resort Unlimited Company Limited, hereinafter called the "Payor", for the period July 1 to September 16, 1994, June 1 to September 1, 1995 and from June 3 to June 29, 1996 within the meaning of the Unemployment Insurance Act and for the period June 30 to August 23, 1996 within the meaning of the Employment Insurance Act.

Respondent's Assumptions

[2] In making his decision the Respondent relied on the following assumptions:

"(a) the Appellant and her spouse, Britt, owned 35% of the shares and the remainder were owned by Britt's brother, Barry and his spouse, Janice Roscoe, and Britt's sister, Terry, and her spouse, Wayne Boucher;

(b) the directors of the Payor during the UI and EI periods in question were the shareholders named in subparagraph 6(c);

(c) the Payor operated a riding stable in the Baddeck area of Cape Breton, Nova Scotia, that was involved in providing lessons and the boarding and sale of horses;

(d) the principal period of activity for the business was the summer months;

(e) the hours of operation were from dawn to dusk during the summer months;

(f) prior to the incorporation of the Payor, the business was the sole proprietorship of the Appellant;

(g) the business and the barn owned by the Payor, valued at $100,000.00, were located on property owned by the Appellant and her spouse;

(h) during the UI and EI periods in question, the directors and shareholders, other than the Appellant and her spouse, were located in the Annapolis Valley in Nova Scotia and were not available and did not provide any direction or control to the Appellant in the performance of her duties;

(i) during the UI and EI periods in question, the Appellant's spouse was employed in the construction trade and not available during weekdays to provide any direction or control to the Appellant in the performance of her duties;

(j) the directors and shareholders, other than the Appellant and her spouse, had no experience or knowledge in the operation of a riding stable;

(k) prior to December 1996, there were no shareholders or directors meetings held by the Payor;

(l) prior to December 1996, the directors of the Payor other than the Appellant and her spouse, did not have any knowledge of the manner in which the business was being operated or managed;

(m) prior to December 1996, the shareholders and the directors, other than the Appellant and her spouse, were not aware of the financial status of the business;

(n) the shareholders and the directors of the Payor, other than the Appellant and her spouse, were not aware of the wage being paid to the Appellant or the manner in which it was determined;

(o) since incorporation of the Payor, no money was paid to any of the shareholders or directors other than the amounts paid to the Appellant;

(p) the Appellant's duties were providing riding lessons, feeding the horses, cleaning the stables, grooming horses and selling horses;

(q) the Appellant earned $400.00 per week during the UI and EI periods in question;

(r) the Appellant worked for the Payor during the hours of operation from dawn to dusk;

(s) the Appellant performed services for the Payor outside the UI and EI periods in question without remuneration;"

[3] The Appellant agreed with the assumptions set out in paragraphs (b), (c), (d), (e), (g), (h), (j), (o), (p), (q), (r) and (s). She disagreed with the assumptions set out in paragraphs (a), (f), (i), (k), (l), (m) and (n). Paragraphs (t), (u) and (v) are submissions and questions of law for the Court to decide:

"(t) the Appellant was related to the Payor within the meaning of the Income Tax Act;

(u) the Appellant was not dealing with the Payor at arm's length;

(v) 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 not reasonable to conclude that the Appellant and the Payor would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length."

Appellants Evidence

[4] The Appellant moved to Baddeck on the Island of Cape Breton in Nova Scotia, in 1982.

[5] She was a school teacher by training but was unable to find permanent work. She established a business on the property owned by she and her husband called Rocking Horse Ranch, boarded horses, taught riding and when available did substitute teaching.

[6] In 1986, the Payor was incorporated and commenced a similar business. Rocking Horse Ranch ceased to exist.

[7] The Payor's share issue was structured on the basis that the Appellant could work during the summer months and be laid off in the late fall and draw unemployment insurance benefits. The Appellant was advised by Federal agencies to whom applications for grants were made that the Payor's seasonal business would only survive if staff could be retained in the off season and the only way that could occur was to give them an opportunity to draw unemployment during that off season.

[8] Federal grants were applied for and received and with the financial help of the Appellant's family, the Payor was able to construct an indoor training facility on the property of the Appellant. No ground rent was paid by the Payor. It was expected that such a facility would increase activity during the inclement weather and hopefully during the winter months. The office of the Payor was in the residence of the Appellant and no rent was paid.

[9] Initially the business prospered and reached a peak in 1992. At that time the Appellant's salary was increased to $400 a week. From that year on it was all down hill for the business.

[10] The Appellant was paid only for 20 weeks in the spring, summer and fall months, the number of weeks necessary for qualification for unemployment insurance benefits.

[11] The Appellant retired in 1996 and she and her husband have moved from the area. The Payor still owns and operates the facility.

[12] In addition to the activities set out in assumption (p) above, the Payor also provided day care for children during the summer months which allowed young children to take advantage of all of the facilities and instruction. Sometimes these children were boarded over night in the Appellant's home but the Appellant was not reimbursed by the Payor for providing this facility.

[13] When the business started to decline, the Payor concentrated only on buying and selling horses.

[14] In respect to the assumptions that the Appellant did not agree with she testified:

"(1) Assumption (a) - that her husband and herself only owned approximately 33% of the issued capital stock of the Payor;

(2) Assumption (f) – that the business of Rocking Horse Ranch was not sold to the Payor but was discontinued;

(3) Assumption (i) – that while her husband was away from time to time on work and taking courses, he was available from time to time to assist and be knowledgeable of the affairs of the Payor;

(4) Assumption (k) – that meetings of directors and shareholders were held once a year but no written minutes of those meetings were prepared;

(5) Assumption (l) – that the other shareholders would not have knowledge of the day to day activities of the business but were aware generally what the day-to-day duties of the Appellant were;

(6) Assumption (m) – that the other shareholders were advised once a year of the financial status of the Payor;

(7) Assumption (n) – that the other shareholders were aware of the Appellant's salary and approved the increase to $400."

Respondent's evidence

[15] The Respondent called David Shaw who at the time of the ruling by the Respondent was an appeals officer with Employment and Immigration Canada.

[16] In that role he interviewed the Appellant and the other shareholders. He could find no evidence of supervision of the Appellant. He did confirm that her duties were as she testified and that she made an initial investment of $40,000 from loan from family sources.

[17] His interview with the other shareholders revealed that only the Appellant and her husband were knowledgeable of the business. Shareholders Wayne Boucher and his wife knew of the relationship of the Appellant to the Payor but had no real knowledge of the business and its day-to-day administration.

Decision

[18] The Appellant filed with the Court a revenue and expense ledger (Exhibit A-1) for the years 1994, 1995 and 1996. The purpose of this ledger was to support the Appellant's contention that the Payor suffered a loss of $473.36 in 1995.

[19] I was unable to determine from the ledgers how the above loss was calculated, but that loss is of little significance as it relates to the issues here.

[20] I was surprised to find the following entries of expense:

May 1994

Scotia Bank Visa (Bus trip) $1,800 Promotion and travelling

Scotia Bank Visa (travelling) $1,000 " "

July 1994

Scotia Bank Visa $ 941.13 " "

March 1995

Scotia Bank Visa $ 83.00 " "

April 1995

Scotia Bank Visa $ 410.69 " "

October 1995

Scotia Bank Visa $ 677.88 " "

November 1995

Scotia Bank Visa $1,231.21 " "

December 1995

Scotia Bank Visa $ 404.96 " "

May 1996

Scotia Bank Visa $ 113.81 " "

June 1996

Scotia Bank Visa $ 61.40 " "

_________

$6,724.08

This expenditure of $6,724.08 was all charged to "Promotion and Travelling" and was incurred during the final years of the Payor's operation under the management of the Appellant when by her own admission the business was failing.

[21] No evidence was led by the Appellant in respect to the ledgers. The notation "bus trip" would appear to have nothing to do with the Payor's business and there is no identifiable revenue entry to offset this expenditure so as to tie it to any of the operations of the Payor. Unfortunately revenue entries were made in lump sum and were not identified as to source in the ledgers. Revenue is reported in May 1994 $3,414.33 of which $2,000 is from a loan. Revenue for June 1994 is $4,061.00 of which $2,000 is another loan. Total revenue for the two months is just a few hundred dollars above the $2,800 expenditure. The $1,000 expenditure would appear to have been expended at the same time or in conjunction with the expenditure of $2,800.

[22] While there is nothing illegal about a shareholder receiving a loan, if this was a loan, from a company to fund a personal trip. It should be set up in the accounts as such and when repayment is made an appropriate offset entered.

[23] It may very well be that the above expenditures were made for the benefit of the Appellant and were subsequently repaid. However, they do represent a course of conduct that would not be countenanced in an employment relationship that was at arm's length. Such transactions should have been approved by the Board of Directors and minutes in support of that approval made and signed by the Board.

[24] At the outset of the hearing, the Appellant was advised that the onus was on her to prove that she was entitled to the benefits she had received.

[25] In Hickman Motors Limited v. The Queen [1997] 2 S.C.R. 336, the Supreme Court of Canada outlined the principles applicable when a person challenges the assumptions made by the Respondent. In that case the Court was dealing with assumptions made by the Minister in making an assessment in a tax matter. The principles apply equally well to assumptions made by the Respondent in a ruling under the Unemployment Insurance Act. L'Heureux Dubé J. said at p. 378:

"It is trite law that in taxation the standard of proof is the civil balance of probabilities: ... and that within balance of probabilities, there can be varying degrees of proof required in order to discharge the onus, depending on the subject matter: ... The Minister, in making assessments, proceeds on assumptions ... and the initial onus is on the taxpayer to "demolish" the Minister's assumptions in the assessment ... The initial burden is only to "demolish" the exact assumptions made by the Minister but no more: ...

This initial onus of "demolishing" the Minister's assumptions is met where the appellant makes out at least a prima facie case: ... The law is settled that unchallenged and uncontradicted evidence "demolishes" the Minister's assumptions: ...

Where the Minister's assumptions have been "demolished" by the appellant, "the onus ... shifts to the Minister to rebut the prima facie case" made out by the appellant and to prove the assumptions: ...

Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed: ..."

[26] A prima facie case is one supported by evidence which raises such a degree of probability in its favour that it must be accepted if believed by the Court unless it is rebutted or the contrary is proved. It may be contrasted with conclusive evidence which excludes the possibility of the truth of any other conclusion than the one established by that evidence.

[27] To satisfy the obligation of demolishing the assumptions of the Respondent was required to call sufficient evidence to establish a prima facie case. There is a well-recognized rule of evidence that the failure of a party or witness to give evidence, which was in the power of the party or witness and by which the facts might have been elucidated, justifies the Court in drawing the inference that the evidence of the party or witness would have been unfavourable to the party to whom the failure was attributed. The party against whom the inference operates may explain it away by showing circumstances which prevented the production of such a witness (see Murray v. Saskatchewan [1952] 2 D.L.R. 499, at pages 505-506.)

[28] She was also advised that in respect to the Respondent's submission under paragraph 3(2)(c) of the Unemployment Insurance Act or paragraph 5(3)(b) of the Employment Insurance Act that the Payor and the Appellant were related, were not dealing at arm's length and that the Payor would not have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length, the Court was required to exhibit a high degree of judicial deference in reviewing the Respondent's determination.

[29] The Federal Court of Canada in Attorney General of Canada (Applicant) and Jencan Ltd. (Respondent) (1997) 215 N.R. 352, set out the criteria by which the Tax Court of Canada should exercise its jurisdiction in dealing with appeals in respect to rejected claims for employment insurance benefits by the Respondent where the Respondent exercises his discretion under paragraphs 3(2)(c) of the Unemployment Insurance Act or 5(3)(b) of the Employment Insurance Act. These criteria may be summarized as follows.

[30] In the exercise of its jurisdiction, this Court must exhibit a high degree of judicial deference in reviewing the Respondent's determination. While the Court has authority to decide questions of law and fact, the Court's jurisdiction is circumscribed.

[31] While the process is called an appeal, in reality the process most resembles a judicial review, where the Court does not have to decide whether the Respondent's determination was correct but whether it resulted from a proper exercise of his discretionary authority.

[32] Failure to take into account all of the relevant circumstances required by the Employment Insurance Act or taking into consideration irrelevant facts would result in an improper exercise of that discretion.

[33] The Court does not have the right to substitute its decision for that of the Respondent because the Court would have come to a different conclusion on the facts relied on by the Respondent. However, since the Appellant is not privy to the Respondent's decision and has the onus of proving his or her case, the Appellant has a right to bring new evidence to challenge the assumptions of facts relied by the Respondent. If after considering all of the evidence, the Court finds the facts on which the Respondent acted are insufficient in law to support his determination, the Court is justified in scrutinizing that determination and if it finds it legally wanting, of intervening.

[34] An assumption of fact that is disproved at trial may not necessarily constitute a defect which renders the Respondent's determination contrary to law. It will depend on the strength and weakness of the remaining evidence. The Court must go one step further and ask itself whether without the assumptions of facts that have been disproved there is sufficient evidence to support the Respondent's determination.

[35] In summary the Payor's operation was in fact a continuation of the same type of business carried on by the Appellant under the name of Rocking Horse Ranch. The Appellant operated the Payor's business with the help of her husband.

[36] The shareholders and directors, other than the Appellant and her husband, had little knowledge of and took little interest in the day-to-day operation. They clearly made no investment in the operation and the suggestion by the Appellant that they made inquiries about dividends from time to time must surely have been in jest. Otherwise dividends would have been paid during the good years from 1987 to 1992 when business was good. None had enough interest to appear at the hearing and support the position of the Appellant.

[37] The Payor company was created by the admission of the Appellant to ensure that she and other training staff could draw benefits during the winter months when business would be slack. The share capital of the Payor was issued so that the Appellant would have less than 40 % and the balance to close relatives who became shareholders to assist and accommodate the Appellant.

[38] I could not help but be impressed with the honesty and sincerity of the Appellant. She kept repeating that she was appealing the ruling for the benefit of the unemployed and not for her personal gain. It was easy to see that she really wanted the operation to succeed, not only for her own benefit but for the benefit of the community in which she lived. With some better advice and guidance she might have made the scheme work.

[39] I am satisfied that the Appellant did not have a contract of service with the Payor in the sense that there was a relationship of subordination between the parties notwithstanding that she was paid by the Payor. Also she was not operating at arm's length with the Payor.

[40] In addition I am not satisfied that the Payor would have entered into a contract with the Appellant to perform her duties and manage the affairs of the Payor in the manner in which she did.

[41] She has failed to demolish the assumptions of the Respondent and has failed to show that the exercise of discretion of the Respondent under paragraph 3(2)(c) of the Unemployment Insurance Act and paragraph 5(3)(b) of the Employment Insurance Act was contrary to law, that is that he acted in bad faith or for an improper motive or purpose, that he failed to take into account all the relevant circumstances or that he took into account an irrelevant factor.

[42] I dismiss the appeal and confirm the decision of the Respondent.

Signed at Rothesay, New Brunswick, this 14th day of December 1999.

"Murray F. Cain"

D.J.T.C.C.