Tupper v. M.N.R., docket 1999-2889-EI

Date: 20000211

Docket: 1999-2889-EI

BETWEEN:

JOHN D. TUPPER,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

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

[1] This is an appeal by John D. Tupper, hereinafter called the "Appellant", from a determination and decision by the Minister of National Revenue, hereinafter referred to as the "Respondent", except where the context otherwise requires, dated March 26, 1999, wherein the Respondent determined that the employment of the Appellant by Tupper’s Trucking and Backhoeing Limited, hereinafter referred to as the "Payor" from May 9, 1994 to September 17, 1994, June 5, 1995 to September 15, 1995, February 19, 1996 to November 22, 1996 and January 13, 1997 to October 24, 1997 was not under a contract of service as there was no employee-employer relationship and the Respondent based his decision on paragraph 5(1)(a) of the Employment Insurance Act, hereinafter referred to as the “EI Act” and paragraph 3(1)(a) of the Unemployment Insurance Act, hereinafter referred to as the “UI Act”.

[2] The Respondent in making his decision relied on the following assumptions of fact:

"(a) The Payor was a corporation duly incorporated under the laws of the Province of Nova Scotia on January 14, 1985;

the Payor operated a business involved in the provision of excavation, trucking and snow removal;

the only shareholder and director of the Payor, since incorporation, has been Donald Tupper ("Donald");

since incorporation, during the UI and EI periods in question and to the present, Donald has been employed full time with the Department of National Defence;

since incorporation Donald has lived in Lahr, Germany, Oromocto, New Brunswick and Hatchett Lake, Nova Scotia;

the Appellant’s duties were operating a backhoe and supervising other employees;

Donald did not at the time of incorporation, and still does not, have any knowledge or experience in the management or operation of a business involved in the services provided by the Payor;

Donald did not have any involvement in the operation or management of the Payor;

the Appellant, not Donald, signed all financial statements and Income Tax returns;

Donald did not sign any loans or financing for the Payor;

the Appellant was the only person to sign for any loans or financing for the Payor;

the Appellant usually signed loans on behalf of the Payor without consultation with Donald;

the Appellant, not Donald, had signing authority on the business bank account;

the Appellant signed all cheques issued by the Payor, whether during or outside the UI and EI periods in question, including his own paycheques;

Donald has not, since incorporation, taken any funds out of the business as Director’s fees, dividends or shareholder’s loans;

the building from which the Payor operated is located on land owned by the Appellant;

although the Appellant alleges that rental is paid for the use of the land owned by the Appellant on which the Payor has his place of business, he has not declared this income;

the Appellant, not Donald, is involved in the estimating or finalizing of contracts;

the Appellant kept track of the Appellant’s hours of work;

no one on behalf of the Payor kept track of the Appellant’s hours of work;

the Appellant was paid a weekly wage based on 54 hours of work whether that number of hours were worked, not worked or exceeded;

the use of the corporation structure was an attempt by the Appellant and Donald to qualify the Appellant for UI and EI benefits to which, otherwise, he would not be entitled;

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

[3] At the outset of the hearing the Appellant admitted assumptions (a) through (f), (i), (m), (p) and (r) but denied each and every other assumptions therein set out.

[4] In the alternative the Respondent in his Reply to the Notice of Appeal submitted that if the Court determined that there was in fact a contract of service, the employment of the Appellant was not insurable employment because it was excepted employment, since the Appellant and the Payor were not dealing at arm’s length within the meaning of paragraph 3(2)(c) of the UI Act and within 5(2)(i) of the EI Act as those sections relate to the periods in question.

[5] In support of his alternative ground, the Respondent relied on the following additional assumptions of fact:

"(a) The Appellant is the brother of Donald;

the business uses the Appellant’s personal telephone to conduct its business;

the Payor pays the Appellant’s personal portion of the telephone charges;

the Appellant also performed services for the Payor outside the UI and EI periods in question without remuneration;

the Appellant was not on the payroll during periods when there were employees that he supervised;

the Appellant was related to the Payor within the meaning of the Income Tax Act, as amended;

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".

[6] Counsel for the Appellant moved that the Court strike the alternate ground since the Respondent’s determination as contained in his letter dated January 6, 1998 and his decision contained in his letter of March 26, 1999 made no mention of a determination or a decision based on such an alternate ground. Admitted in evidence with the consent of Counsel for the Respondent were three letters dated January 6, 1998, September 21, 1998 and March 26, 1999 marked as Exhibits A-1, A-2 and A-3 respectively.

[7] As I understand the process, Exhibit A-1 is notice to the Appellant of the initial view of the Respondent relating to the employment of the Appellant during the periods in question. Both the UI Act and the EI Act provide that the Respondent is required to give notice to persons affected by a determination or a decision, of his intention to decide the appeal and an opportunity to supply the Respondent with such information as he or she should consider important. Exhibit A-1 was such a letter and did not represent a final determination or decision by the Minister. Paragraph 2 reads as follows:

"Your work with Tupper’s Trucking & Backhoeing Limited during the periods under review cannot be considered as insurable employment as you were not an employee performing services under a contract of service."

[8] In the Court file is a letter dated April 21, 1998 by one John W. Crosby, a chartered accountant, to the Chief of Appeals in reply to the letter of January 6, 1998 (supra) providing information in respect to the Appellant’s employment and indicating the Appellant’s intent to appeal the Minister’s intended decision.

[9] On September 21, 1998, the Assistant Director of Appeals wrote, not to Mr. Crosby but to the Appellant, a letter (Exhibit A-2), presumably in reply to the letter of the former seeking additional information "which we require from you to assist the Minister in making his decision in your case." A questionnaire was included with a request that it be completed and returned. There is no indication in the Court file whether the questionnaire was ever completed and returned. Paragraph 4 of the letter reads as follows:

"Paragraph 3(2)(c) of the Unemployment Insurance Act/5(2)(i) of the Employment Insurance Act states that employment where the worker and the payor are not dealing at arm’s length (i.e. they are related), is excepted employment (i.e. not insurable). The employment may be deemed to be at arm’s length if the Minister of National Revenue is satisfied that having regard to all the circumstances of the employment, it is reasonable to conclude that the payor and worker would have entered into a substantially similar arrangement (i.e. pay, duration of work, importance of work, terms and conditions of work, etc.) with an unrelated person."

[10] On March 26, 1999 Exhibit A-3 was sent to the Appellant. After setting out in paragraph 1 the periods of employment that were in issue the letter continued in paragraph 2 as follows:

"It has been decided that the employment was not insurable for the above mentioned periods because there was no employee-employer relationship and, therefore, no contract of service."

[11] The letter went on to say that the Appellant could appeal the decision within the statutory 90-day period. Counsel for the Appellant filed with this Court a Notice of Appeal dated June 11, 1999.

[12] Section 18 of the Tax Court of Canada Act deals with the Informal Procedure for appeals under the Income Tax Act and subsection 18.29(1) inter alia makes subsection 18.15(4) applicable to Part IV of the Employment Insurance Act under which an appeal to this Court is authorized. Subsection 18.15(4) reads as follows:

"(4) Notwithstanding the provisions of the Act out of which an appeal arises, the Court, in hearing an appeal referred to in section 18, is not bound by any legal or technical rules of evidence in conducting a hearing for the proposes of that Act, and all appeals referred to in section 18 shall be dealt with by the Court as informally and expeditiously as the circumstances and considerations of fairness permit."

[13] In the exercise of its jurisdiction, where the Informal Procedure is utilized the Court must be careful to make certain that the rights of the Appellant to a fair and impartial hearing are not violated.

[14] In paragraph 10 of the Reply to the Notice of Appeal the Respondent submitted:

"10. The Minister did not advise the Appellant that he was not engaged in insurable employment with the Payor during the UI and EI periods in question pursuant to paragraphs 3(2)(c) of the UI Act and paragraph 5(2)(i) of the EI Act; the Minister had considered those paragraphs while completing his investigation of the circumstances surrounding the Appellant’s engagement."

[15] "While completing his investigation" must refer to the time between the serving of the Respondent’s determination and decision on the Appellant and the filing and service of his Reply to the Notice of Appeal. One would expect that the Respondent would have completed his investigation before making his determination and decision.

[16] Section 71 of the UI Act and subsection 104(2) of the EI Act makes any decision or determination of the Respondent final and binding for all purposes of the respective Acts. The decisions and determination of the Respondent were final on March 26, 1999 and his investigation should have been completed at that time. To permit the Respondent to expand his decisions or determinations after the Appellant launched his appeal would, in my view, be unfair but in the face of the legislation be illegal.

[17] The Appellant’s motion to strike the Respondent’s Reply as it relates to paragraph 3(2)(c) of the UI Act and paragraph 5(2)(i) of the EI Act is granted.

[18] The Appellant’s evidence may be summarized as follows.

[19] Donald Tupper, a brother of the Appellant, incorporated the Payor in 1985. He created the company to be a source of work and business that he could follow after his retirement. He had never been involved in such a business before and no evidence was led to show that he knew anything about such a business.

[20] He appointed the Appellant to manage the business while he tended to his career in the Canadian Armed Forces where he is still in service. Such management included the supervision of all employees.

[21] During the periods in question Donald Tupper served in Canada and in peace keeping missions in Europe and Africa.

[22] The Appellant was the President and Secretary-Treasurer of the Payor and its sole signing officer.

[23] The Appellant was a backhoe operator before the incorporation and would during the periods in question continue to perform that service for the Payor. He was paid at the rate of $15.00 per hour for all his services. All employees and the Appellant kept their own time cards and these were turned in daily to the office manager Sandra Muir who later became wife of the Appellant.

[24] The Appellant resided in Pictou, Nova Scotia where the Payor carried on business.

[25] The office and the equipment garage of the Payor were on the residential property of the Appellant but no rent was paid by the Payor. The Payor did reimburse the Appellant for the increase in property taxes resulting in an increased assessment on the land.

[26] Donald Tupper would return there from time to time when on leave from the services and he and the Appellant would discuss the business. The Payor also used the personal telephone of the Appellant and in turn paid the phone bill including any of the Appellant’s personal long distance charges.

[27] At the time of incorporation, Donald Tupper financed the purchase of a backhoe for the Payor and was repaid by the Payor out of revenues. Some years later he again participated in the purchase of equipment by way of a loan of $6,000 which again was repaid out of revenue. Equipment was also purchased by the Payor on the signature of the Appellant with the other equipment of the Payor being pledged as security.

[28] The Appellant hired all other employees and at times delegated that authority to Sandra Muir. He testified that she knew as much about the business as he did and needed very little direction.

[29] All expenses incurred in the operation of the business were paid by the Payor.

[30] From time to time when the backhoe services were not required the Appellant would lay himself off without pay. However, if trucking or other services were in demand at that time, he would keep other employees working. During his own layoff he continued to visit the office premises from time to time and continued to sign all cheques.

[31] Donald Tupper has never participated in the profits of the business and has never received any other remuneration from the Payor.

[32] From time to time the Appellant did not cash his pay cheques. He either did not need the money or the Payor’s bank account was in an overdraft position and the Appellant did not want to attract additional interest. No evidence was led as to who would have guaranteed repayment of the overdraft in the event of default.

[33] During the submissions after the parties’ cases were closed, Counsel for the Appellant submitted that applying the tests set out in Wiebe Door Services Ltd. v. Minister of National Revenue [1986] 3 F.C. 553, the relationship between the Appellant and the Payor was one of employer-employee. However those tests are designed to assist the Court in determining the legal relationship between an employer and a person engaged when the issue is whether the person is engaged under a contract of service or a contract for service.

[34] The Respondent in his determination and decision did not decide that there was no contract of service between the Appellant and the Payor because there was a contract for service, only that there was no contract of service. In other words there was no legal relationship between the Appellant and the Payor at all.

[35] In Navennec v. Minister of National Revenue (1992) 150 N.R. 307 (F.C.A.), the Court determined that when the issue before the Court was whether a person was engaged by a company under a contract of service as distinguished from a situation where the issue was whether the person was engaged under a contract of service or a contract for service, the tests in Wiebe Door (supra) were not applicable. Desjardins, J.A. who wrote the decision for the majority discussing the trial judge’s uses of those tests in determining the issue said at 312:

"[11] In my opinion the Tax Court of Canada judge wrongly directed himself on the law.

[12] The challenge by the Minister concerned the true nature of the contract of service, not as opposed to a contract for services but as opposed to the situation, in which the owner of the business finds himself, namely someone working for himself.

[13] The tests in Wiebe Door Services Ltd. v. M.N.R. (1986), 70 N.R. 214; 87 D.T.C. 5025 (F.C.A.)*, were thus not applicable, as the Minister’s objection concerned the nature of the legal relations existing between the applicant and the corporation..."

[36] This view was repeated by Desjardins J.A. who wrote the judgment for the majority in Bouillon v. Minister of National Revenue, 203 N.R. 227. While the facts in this case are different than those of the case at bar, they are illustrative of a situation where a corporation under which a person is purportedly operating is in fact a mere fiction. The facts in that case may be summarized as follows.

[37] Bruno Bouillon, Jean-Pierre Bouillon and Ghislain Bélanger became shareholders in an existing company. In order to finance payment of the shares, the company borrowed $25,000. Bruno Bouillon and Belanger endorsed the loan and both became debtors of the company for $12,500 each.

[38] Bruno Bouillon and Bélanger were each issued 40% of the capital stock of the company (200 shares) and Jean-Pierre was issued 20% (101 shares). Jean-Pierre paid no money for the shares.

[39] Jean-Pierre later transferred his shares to one Yves Levasseur without any money being transferred. Raynald Gaudreau later acquired the shares from Levasseur in payment for work performed on behalf of the company.

[40] Four years later the company declared a dividend of $25,000 payable in amounts of $12,500 each to Bruno and Bélanger, but did not pay out any money. The loans to Bruno and Bélanger were cancelled by the company. Only Bruno signed the minute book evidencing the dividend and the cancellation but the minutes indicated that Bélanger was present. Gaudreau did not receive any dividend.

[41] Bruno and Bélanger were cement finishers. During the periods in question, the company held a contract with a corporation finishing the exteriors of buildings. The corporation supplied the materials and the company supplied the tools. Bruno worked with Bélanger whom he described as his partner.

[42] Bruno regularly gave Gaudreau an account of his expenses and activities. Meetings were held every two weeks or so and the company’s business was discussed.

[43] The company had a $5,000 line of credit guaranteed by Bruno and Bélanger.

[44] Bruno testified that no one was supervised or was the leader. Each employee knew the teams work schedule. Bruno and Bélanger signed all the cheques.

[45] The learned trial judge found that there was no employee relationship between Bruno and the company and applied the tests in Wiebe Door (supra) in reaching that conclusion. Desjardins J.A. in commenting on the judge’s decision stated at p. 231:

"[10] I believe that the trial judge incorrectly defined the issue. It is not a question in this case of determining whether there was a contract of service as opposed to a contract for services, but rather of deciding if there was in reality a contract of any nature whatsoever between the applicant and the payer. According to the evidence, Jean-Pierre Bouillon, Yves Levasseur and Raynald Gaudreau did not pay any money for the purchase of 20% of the payer’s shares. The accountant received these shares for services rendered, not to Yves Levasseur but to Cimentek B.S. L. Inc., despite the fact that Yves Levasseur previously held these shares.

[11] The perplexing situation thus described casts serious doubt on the payer’s existence as an entity distinct from its main shareholders, Bruno Bouillon and Ghislain Bélanger. These two have acted as if the third "shareholder" did not exist, even to the point of excluding him from the dividend. They had complete control (Carmelo Scalia v. Minister of National Revenue (May 19, 1994), A-222-93 (F.C.A.)) over the payer, which played only a role of convenience and served as a screen for their activities. I find that no agreement whatsoever existed between the applicant and the payer, let alone a contract of service. I conclude that the applicant worked for himself during the relevant periods." (The underlining is mine)

[46] In Navennec (supra) Desjardins J.A. in discussing the test to be applied in determining whether there was a contract of service between the applicant and the payor said at page 313:

"[14] Reference must be made to the criteria laid down by the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen [1984] 1 S.C.R. 536; 53 N.R. 241; 84 D.T.C. 6305.

[15] It is true that in Stubart the question was whether a company could, for the avowed purpose of reducing its tax, conclude an agreement by which its future profits were transferred to a subsidiary in order to take advantage of the latter’s loss carry-forward; but the rules are still applicable to the case at bar when it must be determined whether the applicant has, in short, arranged his affairs so as to be able to collect unemployment insurance benefits; and whether despite appearances he nevertheless remains the true owner of all his property, despite its sale to the company, and the sole holder of the shares despite their sale to his wife and sons.

[16] The parties in the case at bar are related; but what matters is to establish whether by their agreements they did what they said they intended to do. Did the applicant in fact intend to make the company a family business or did he retain control of it? Did his wife and children in fact intend to pay off their promissory notes by the profits they received from the business or by other income? – or did they never intend to do so? Were these legal obligations clear and executory, or was it a facade?

[47] There is a well-recognized rule of evidence that the failure of a party or witness to lead evidence, which was in the power of the party or witness to give 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 evidence or a witness (See Murray v. Saskatchewan [1952] 2 D.L.R. 499 at pages 505-506).

[48] While the legal and technical rules of evidence are relaxed in these informal proceedings, the above rule relates to the weight of evidence and parties are still required to lead the best evidence available or give some reason for their failure to do so.

[49] The Appellant was the only witness to testify on his behalf and as a result that evidence must be considered self-serving. While the Respondent admitted the existence of the Payor and that Donald Tupper was the only director and shareholder thereof, no independent evidence, either oral or documentary, was called or produced to show he participated in the business either as a financier or a supervisor or in some way exercised some measure of control. It was absolutely essential under the circumstances that the Court hear from the alleged owner of the Payor, Donald Tupper. In Bouillon and Navennec (supra) evidence was led to expose the whole corporate structure and share transactions which gave the Court in each case an opportunity to assess the intention of the parties and measure of control exercised.

[50] In the case at bar, the evidence clearly shows that the Appellant supervised himself, approved his own hours of work and paid himself. The only evidence that indicates that Donald Tupper was aware of the business was that he returned home to Pictou from time to time and he and the Appellant discussed things.

[51] In Scalia v. Canada (Minister of National Revenue (supra) Marceau J. said at page 2:

"On analysing the evidence, however, we find that the applicant had such ascendancy over the company, its activities and the board of directors ... that there could not have been the independent relationship between himself and the company that is necessary to the creation of a true subordinate relationship ... the control that a corporation which is an employer may exercise over the person who completely dominates it is more fictitious than real".

[52] I would adopt the above comments and apply them to the case at bar.

[53] The Appellant has failed to lead any credible evidence to demolish assumptions (j), (k), (q), and by his evidence admitted assumptions (g), (h), (l), (n), (o), (s), (t) and (u) originally denied by the Appellant. The Appellant has failed to lead prima facie evidence to demolish the assumptions made by the Respondent.

[54] I find that the Appellant was the business and exercised total domination over it to the exclusion of Donald Tupper.

[55] I dismiss the Appellant’s appeal and confirm the determination and decision of the Respondent.

Signed at Rothesay, New Brunswick, this 11^th day of February 2000.

"M.F. Cain"

D.J.T.C.C.