Citation: 2013 TCC 61
Date: 20130220
Docket: 2012-2508(EI)
BETWEEN:
XIAO ZHU ZHANG,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
This appeal stems from an
application for employment insurance benefits by the appellant, Xiao Zhu Zhang.
Mr. Zhang appeals from a decision made by the Minister of National Revenue that
his employment with a corporation wholly‑owned by his brother was not
insurable for purposes of the Employment Insurance Act.
[2]
The relevant period is from January
1 to September 2, 2011.
[3]
The basis for the Minister’s
decision was that Mr. Zhang was related to the employer and that the terms and
conditions of the employment were not substantially similar to arm’s length terms.
[4]
The relevant provisions are
paragraph 5(2)(i) and subsection 5(3) of the Act, which are reproduced
below.
5. (2) Excluded employment - Insurable employment does not
include
[…]
(i) employment if the employer and
employee are not dealing with each other at arm’s length.
5. (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.
[5]
Since it is clear that Mr. Zhang and the employer are related, the only
question to be determined is whether it was reasonable for the Minister to
conclude that the terms and conditions of Mr. Zhang’s employment were not
substantially similar to arm’s length terms.
[6]
The general principle to be
applied in a case such as this was succinctly described by Campbell J. in Porter
v MNR, 2005 TCC 364:
[13] In summary, the function of
this Court is to verify the existence and accuracy of the facts relied upon by
the Minister, consider all of the facts in evidence before the Court, including
any new facts, and to then assess whether the Minister's decision still seems
"reasonable" in light of findings of fact by this Court. This
assessment should accord a certain measure of deference to the Minister.
Discussion
[7]
Mr. Zhang and his brother, Jing
Song Zhang, both testified at the hearing. To avoid confusion, I will refer to Jing
Song Zhang as the brother in these reasons.
[8]
BTS Express International Inc.
(“BTS”) was incorporated by the brother in 2002 to operate a delivery service
in the greater Toronto area. It was a small company, employing about four people
in the relevant period.
[9]
In an attempt to boost sales, BTS hired Mr. Zhang as a
sales representative in 2011. The written contract of employment provided for a
40 hour work week at an annual salary of approximately $35,000. It was understood
by the parties that some overtime might be required and that this was included
in the annual salary.
[10]
The actual working conditions were
significantly different than the written agreement. The contract stated that
Mr. Zhang was employed as a sales representative. However, Mr. Zhang performed
several other duties as well, such as dispatching, making deliveries and
undertaking minor vehicle repairs. In addition, Mr. Zhang’s hours of work
greatly exceeded the 40 hours per week that was in the written contract. Mr.
Zhang testified that he worked about 50 hours per week, plus occasional
weekends.
[11]
In light of the hours actually
worked, Mr. Zhang negotiated a pay increase shortly after the employment
commenced. The annual salary was increased to approximately $47,000 and it was
paid on a retroactive basis to the start of the employment.
[12]
During the last three months of the
employment relationship with BTS, Mr. Zhang also accepted employment with
a printing company. The purpose of this arrangement was to give Mr. Zhang an opportunity
to become acquainted with the printing company so that BTS could hopefully
obtain their delivery business. The brother was fully behind the plan and Mr.
Zhang was employed by both BTS and the printing company for about three months.
[13]
Mr. Zhang received $11 per hour at
the printing company and his hours of work were slightly less than full time
hours. During this period, he also continued to do some work for BTS.
[14]
Unfortunately, Mr. Zhang’s efforts
were not successful in obtaining the printing company’s delivery business.
After about three months, Mr. Zhang left the printing company and he was also laid
off from BTS as there was not sufficient work.
[15]
The evidence also reveals that Mr.
Zhang needed financial assistance when he started work with BTS. Consequently,
he received a salary advance of approximately $3,700 at the commencement of the
employment. The advance was subsequently repaid over time through deductions
from pay cheques.
[16]
The brother testified that he had interviewed
others for the sales representative job prior to his approaching Mr. Zhang. He
said that those candidates typically asked for remuneration in the
neighbourhood of $50,000, which was more than what he thought BTS could afford.
[17]
During the relevant period, two
drivers were employed by BTS at a rate of about $11 to $13 per hour, plus extra
for overtime.
[18]
In applying the provisions of the Act
to the facts of this case, I have concluded that it was reasonable for the
Minister to conclude that Mr. Zhang and BTS would not have entered into
substantially similar terms and conditions of employment if they were dealing
at arm’s length.
[19]
I note in particular that Mr.
Zhang continued to be employed and paid by BTS during the last three months, even
though he worked on almost a full time basis at the printing company. Although
this arrangement was designed to benefit BTS ultimately, one would expect that,
with an arm’s length employee, BTS would adjust the salary to compensate for
the fact that the employee was also being paid by the printing company. It was
not suggested that BTS had altered the pay. In essence, Mr. Zhang was
double-dipping with BTS’s consent, which is not indicative of arm’s length
dealing.
[20]
In addition, I am not satisfied
that the $47,000 salary paid to Mr. Zhang represents an amount that would be
paid to an arm’s length employee. Mr. Zhang has the burden to establish that an
arm’s length employee would earn a similar salary. That burden has not been
met.
[21]
As an example, the evidence was
lacking in detail regarding the amount of time that Mr. Zhang spent on various
duties. This evidence is crucial to establish whether the salary is arm’s
length because some of the duties, such as deliveries, are typically
lower-paying than a sales representative’s job. In the absence of detailed
evidence as to all the relevant facts, I find that Mr. Zhang has failed to
establish that his salary at BTS represented an arm’s length amount.
[22]
The Crown raised a number of other
factors that further support the Minister’s decision:
(a)
a large pay raise would not be
given at the beginning of employment in an arm’s length relationship,
(b)
a person hired as a sales
representative would not be expected to do non-sales work, and
(c)
an arm’s length
employee would not be given a large salary advance before starting work.
[23]
Taken together, these
factors support the determination by the Minister. I would conclude, therefore,
that the Minister’s decision is
reasonable and that the appeal should be dismissed.
Signed at Ottawa, Ontario this 20th day of February
2013.
“J. M. Woods”
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