Citation: 2013 TCC 172
Date: 20130529
Docket: 2012-3086(EI)
BETWEEN:
KALBIR S. PUNI,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Graham J.
[1]
Kalbir Puni is the
owner of one-third of the shares of 0834216 B.C. Ltd. (the “Company”). The
Company employed Mr. Puni from June 6 to November 20, 2011. After he was laid
off by the Company, Mr. Puni made a claim for employment insurance benefits. As
a result of that claim, the Minister of National Revenue issued a ruling
stating that Mr. Puni was not engaged in insurable employment with the Company
during the period in question because, in the Minister’s view, Mr. Puni did not
deal at arm’s length with the Company. Mr. Puni has appealed that ruling.
[2]
Mr. Puni was the only
witness at trial. I found him to be a credible witness.
Facts:
[3]
In 2008, Mr. Puni and
two unrelated individuals named Jesmail Singh Mann and Manjinder Singh Nahal
decided to open a Nando’s Flame-Grilled Chicken franchise in Kamloops, British
Columbia. The 3 men incorporated the Company and each of them took one-third of
the shares.
[4]
As part of the process
of obtaining a Nando’s franchise, at least one of the shareholders was required
to take franchisee training. Among other things, the training taught
franchisees how to work as front staff, back staff, kitchen staff and managers.
Mr. Mann and Mr. Puni both began the training but, due to ill health, Mr. Mann
was unable to complete it. Therefore, Mr. Puni was the only shareholder who completed
the required training.
[5]
The restaurant opened
in the Spring of 2009.
[6]
Mr. Puni was hired by
the Company to manage the restaurant. The shareholders agreed to let Mr. Puni
make all of the day-to-day business decisions for the Company since, as the
manager, he was in the best position to do so. All other decisions were made by
the shareholders on a majority-rule basis.
[7]
Mr. Nahal was involved
with another Nando’s franchise in Abbotsford, British Columbia. As a result,
Mr. Puni sometimes relied on Mr. Nahal’s advice and expertise when dealing with
issues that arose in the business.
[8]
The restaurant did well
through the Spring and Summer of 2009 but business began to slow down in the
Fall.
[9]
In 2010, the Company
began to have cashflow issues. On a number of different occasions, the Company
asked certain employees to hold off cashing their paycheques until the Company
had enough money in the bank to cover those cheques. As the manager, Mr. Puni
was the person responsible for making this request to employees. Mr. Puni
explained that he used a method to select which employees would be asked not to
cash their paycheques. He explained that because he was a shareholder, he was
always the first employee to be asked by the Company to delay cashing his
paycheque. If that was not enough to solve the cashflow problem, the Company
would then ask Mr. Mann’s son, Kubby Mann, to delay cashing his paycheque. If
there was still a cashflow problem, the Company would ask certain other
employees to delay cashing their paycheques. Mr. Puni explained that those
employees were selected based on his understanding of their need for immediate
cash. In other words, if he felt a given employee could afford not to be paid
immediately, he would ask that employee to delay cashing his or her paycheque
instead of asking an employee who appeared to need the money immediately. There
were 3 employees in addition to Mr. Puni and Kubby Mann who were asked to delay
cashing their paycheques at various times from 2010 to 2011. Sometimes they
refused to do so and other times they agreed.
[10]
All of the employees
who were asked to delay cashing their paycheques (including Mr. Puni and Kubby
Mann) were ultimately paid in full.
[11]
In 2010, due to the
Company’s cashflow problems, the shareholders had to lend money to the Company.
Mr. Mann and Mr. Nahal lent their share of money to the Company using their own
funds. Mr. Puni did not have funds available to lend to the Company. As a
result, he advanced his share of the loans by having some of the pay that he
would otherwise have received as an employee credited to his shareholder loan
account. Mr. Puni did not provide any accounting records showing his salary
being added to his shareholder loan. He explained that he was unable to do so
because, due to disputes among the shareholders, he did not have access to the
detailed accounting records. I accept Mr. Puni’s testimony on this matter
despite the lack of documentary support.
[12]
At some point in 2010,
an issue outside of the business caused Mr. Mann and Mr. Nahal to refuse to
speak to each other. As a result, from that point forward, Mr. Puni acted as a
go between for the two men. The two most contentious issues that the
shareholders had to deal with in 2010 and beyond were which employees and
suppliers to delay paying and when to do so.
[13]
Eventually, Mr. Puni
began to feel the financial pinch both of having to lend money to the Company
and of having to delay cashing his paycheques. He advised the Company that he
could not continue to agree to delay cashing his paycheques. As a result, he
was laid off.
[14]
During the period
following Mr. Puni’s layoff, the Company operated without a fully trained
manager. It appears that this lack of oversight by a manager led to an increase
in food costs and slippage.
[15]
In June 2011, the
Company decided to re-hire Mr. Puni as its manager in order to attempt to
control its costs and slippage. Mr. Puni worked for the Company from June 6,
2011 until he was again laid off on November 20, 2011.
[16]
From June 6 to November
20, 2011, Mr. Puni earned approximately $18,000. Approximately $8,000 of that
amount was credited to his shareholder loan. The remaining $10,000 was paid to
him but, as had occurred in 2010, he was once again asked to delay cashing his
paycheques when there were cashflow problems. Mr. Puni was ultimately paid the
approximately $10,000 in full.
[17]
Mr. Puni reported the
full $18,000 as employment income when he filed his 2011 tax return.
Legislation and Applicable Test:
[18]
Subsection 5(1) of the Employment
Insurance Act defines “insurable employment”. Paragraph 5(2)(i)
states that insurable employment does not include “employment if the employer
and employee are not dealing with each other at arm’s length”.
[19]
Subsection 5(3) expands
on arm’s length dealings. It states:
(3)
Arm’s length dealing – 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.
[emphasis
added]
[20]
The test to be applied
by the Court when considering a decision of the Minister under paragraph 5(3)(b)
was summarized by Marceau J.A. at paragraph 4 of the Federal Court of Appeal
decision in Légaré v. Minister of National Revenue, 1999
CarswellNat 1458:
The Act requires the Minister to make a
determination based on his own conviction drawn from a review of the file. The
wording used introduces a form of subjective element, and while this has been
called a discretionary power of the Minister, this characterization should not
obscure the fact that the exercise of this power must clearly be completely and
exclusively based on an objective appreciation of known or inferred facts. And
the Minister's determination is subject to review. In fact, the Act confers the
power of review on the Tax Court of Canada on the basis of what is discovered
in an inquiry carried out in the presence of all interested parties. The Court
is not mandated to make the same kind of determination as the Minister and thus
cannot purely and simply substitute its assessment for that of the Minister:
that falls under the Minister's so-called discretionary power. However, the
Court must verify whether the facts inferred or relied on by the Minister are
real and were correctly assessed having regard to the context in which they
occurred, and after doing so, it must decide whether the conclusion with which
the Minister was “satisfied” still seems reasonable.
[21]
Légaré dealt with paragraph 3(2)(c)(ii) of
the Unemployment Insurance Act. That provision later became paragraph
5(3)(b) of the Employment Insurance Act. I cannot discern any
material difference between the two provisions.
[22]
For paragraph 5(3)(b)
to apply, the employer must be “related” to the employee within the meaning of the
Income Tax Act. The relevant provision of the Income Tax Act is
paragraph 251(2)(b). The relevant portion of that paragraph states that
a related person is:
(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);
[23]
Mr. Puni does not
control the Company nor is he a member of a related group that controls the
Company as he is not related to Mr. Mann or Mr. Nahal by blood, marriage,
common law partnership or adoption. Therefore, Mr. Puni is not “related to the
Company” within the meaning of the Income Tax Act.
[24]
Since Mr. Puni is not
related to the Company, paragraph 5(3)(b) does not apply to him. Thus,
the issue of whether Mr. Puni dealt at arm’s length with the Company or not
must be determined under paragraph 5(3)(a).
[25]
The Respondent submits
that the Court is required to give the same judicial deference to a conclusion
reached by the Minister under paragraph 5(3)(a) that the Court gives to
a similar conclusion reached by the Minister under paragraph 5(3)(b).
I disagree.
[26]
Although the case was
not discussed during argument, the Respondent’s Book of Authorities contained a
copy of the Federal Court of Appeal decision in Vardy Villa Limited v. The
Minister of National Revenue, 2002 FCA 287, (“Vardy Villa”). Like Légaré,
Vardy Villa dealt with paragraph 3(2)(c). The following
paragraphs from Vardy Villa support my view:
[5] Subparagraph 3(2)(c)(ii) cases
involve a two-step procedure, one involving a decision that the employer and
employee are related and, second, a discretionary decision by the Minister
about whether, despite this relationship, the contract of employment is
nonetheless substantially similar to one that would be made if they were at
arm's length.
[6] As for cases under
subparagraph 3(2)(c)(i) of the Act, there is no two-step procedure. If an
unrelated employer and employee are not dealing with each other at arm's
length, in accordance with the provisions of the Income Tax Act, the employment
in issue is “excepted”. There is no need for the Minister to exercise this
discretion and express his satisfaction about the factual matters set out in
subparagraph 3(2)(c)(ii), unless the parties are found to be related. This is
clear because, while the Minister is mentioned in subparagraph 3(2)(c)(ii),
there is no mention of the Minister or his obligation to decide anything in
subparagraph 3(2)(c)(i).
[7] Any decision made
pursuant to subparagraph 3(2)(c)(i) is subject to de novo review by the
Tax Court …
Respondent’s Position:
[27]
Counsel for the
Respondent conceded that the only aspect of Mr. Puni’s relationship with the Company
that caused the Minister to conclude that his employment was non-arm’s length
was the fact that some of his pay was credited to his shareholder loan and some
of his pay was deferred. All other aspects of Mr. Puni’s employment indicated
an arm’s length relationship.
[28]
Counsel for the
Respondent was clear that there was no evidence that Mr. Puni was
attempting to use his purported non-arm’s length relationship with the Company
in order to abuse the employment insurance system but submitted that, as the relationship
was nonetheless non-arm’s length, Mr. Puni was not engaged in insurable
employment.
[29]
The Respondent submits
that the fact that some of Mr. Puni’s pay was credited to his shareholder loan
was strong evidence of the non-arm’s length nature of Mr. Puni’s relationship
with the Company. The Respondent says an arm’s length employee would never have
been asked to make such a loan and that Mr. Puni was not given any choice in
the matter.
[30]
I disagree with the
Respondent’s characterization of these loans. Mr. Puni wore two hats: that of
an employee of the Company and that of a shareholder of the Company. He was compelled
to contribute funds to the Company but that compulsion came from his role as a
shareholder, not his role as an employee. If Mr. Puni had had access to funds the
same way that Mr. Mann and Mr. Nahal did, then he could have simply lent those
funds to the Company and there would have been no impact on his salary. The
compulsion to lend the funds would still have existed but the lending would
have occurred in a different manner. The fact that Mr. Puni was compelled to
lend his salary to the Company arises from the fact that his salary was his
only source of funds, not from his employment relationship. Despite the fact
that the money never actually went into Mr. Puni’s hands but rather was simply
credited to his shareholder loan, I find that he received the employment income
in his role as an employee of the Company and then lent that money to the
Company in his role as a shareholder. Thus, I find that these loans have no
impact on whether Mr. Puni dealt at arm’s length with the Company or not.
[31]
Thus, the only factor
that remains out of the totality of Mr. Puni’s relationship with the Company
that could be said to show a non-arm’s length relationship is the fact that Mr.
Puni was asked to defer cashing his paycheques from time to time. While this is
clearly an unusual term of employment, the evidence indicated that Mr. Puni was
not the only employee to whom the term applied. There were 4 other employees
who were asked to defer cashing their paycheques, 3 of whom had no connection
to the shareholders. The Respondent submitted that the difference between those
employees and Mr. Puni was that they had a choice whether to defer their pay or
not whereas Mr. Puni was required to do so. I disagree. The evidence was clear
that the reason Mr. Puni was laid off in 2010 was that he refused to continue
having his pay deferred. While it was clear that Mr. Puni was always the first
employee asked to defer receiving his paycheque, I do not find this fact alone
to be sufficient to find Mr. Puni and the Company not to have been dealing with
each other at arm’s length when all of the other evidence indicates that they
were.
[32]
The Respondent also
submitted that Mr. Puni was the most influential of the 3 shareholders because
he was the one involved in the day-to-day business. I accept that his
involvement in the day-to-day business would have given Mr. Puni particular
knowledge of the business and that the fact that he was the only shareholder
who had been trained by Nando’s would also give him a certain level of power. I
also accept that Mr. Puni’s role as a go-between due to the breakdown in the
relationship between Mr. Mann and Mr. Nahal would have given him additional power.
However, there is no evidence that Mr. Puni used such power in establishing his
employment relationship with the Company. In fact, the evidence indicates that,
other than the payment issues referred to above, Mr. Puni’s employment
relationship with the Company did not change from 2009 (when Mr. Mann and
Mr. Nahal were getting along) to 2011 (when they were no longer speaking). The
evidence does not suggest that Mr. Mann and Mr. Nahal were naïve shareholders
under the control of Mr. Puni. Mr. Mann had access to information about the
day-to-day operations through the presence of his son Kubby and Mr. Nahal
had expertise about the operation of a Nando’s franchise through his
involvement with his franchise in Abbotsford. Furthermore, any additional power
that Mr. Puni had over the other shareholders was balanced by the lack of power
that he had due to his weaker personal financial position and his dependence on
the Company for his income. I am therefore not prepared to accept that Mr. Puni
had any level of de facto control over the Company.
Conclusion:
[33]
Based on all of the
foregoing, I find that Mr. Puni was engaged in insurable employment from June 6
to November 20, 2011. The Appeal is therefore allowed.
Signed at Ottawa,
Canada, this 29th day of May 2013.
“David E. Graham”
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