Date: 19981216

Docket: 97-561-UI

BETWEEN:

YAFFA ABIHSIRA,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for judgment

MacLatchy, D.J.T.C.C.

[1] This appeal was heard in Toronto, Ontario, on December 7, 1998.

[2] The Appellant was employed with A.M. Wholesale & Retail Inc. (the "Payor") and is the wife of the principal and 100% shareholder of the Payor. The Payor applied to the Respondent for the determination of the question of whether or not the Appellant was employed in insurable employment while engaged by the Payor for the period from August 21, 1995 to July 11, 1996 within the meaning of the Unemployment Insurance Act (the "Act").

[3] The Respondent informed both the Appellant and the Payor that it had been determined that the Appellant's engagement with the Payor during the period in question was not insurable employment for the reason that the Appellant and the Payor were not dealing with each other at arm's length within the meaning of paragraph 3(2)(c) of the Act. The Respondent exercised his discretion under subparagraph 3(2)(c)(ii) and decided that the contract of employment would not be deemed to be at arm's length.

[4] The Respondent relied on the facts set forth in paragraph 9 of the Reply to the Notice of Appeal.

[5] The Respondent, before trial, asked that subparagraph (p) be deleted as the information set forth was incorrect. The Respondent further relied on paragraph 3(2)(c) of the Act and on sections 251 and 252 of the Income Tax Act as amended.

[6] The meaning of what is and what is not insurable employment is set forth in subsection 3(1) of the Act 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;"

[7] Subsection 3(2) of the Act 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] The provisions of the Income Tax Act, as amended, set out the test for an arm's length relationship which is to be used for the purposes of paragraph 3(2)(c) of the Act. 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

(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 in subparagraph (i) or (ii) . . ."

[9] The legislation was passed as a safeguard for the system of paying benefits out to persons who qualify on artificial or fictitious employment relationships, but the Act further provides that notwithstanding that related persons are not dealing at arm's length, the Minister, if satisfied, having regard to all the circumstances of the employment (including the remuneration paid etc. as set forth in the section), could determine that the parties were dealing with each other at arm's length and that it is reasonable to conclude that they would have entered into a substantially similar contract to that which existed.

[10] In these circumstances, it is clear the parties are related and are deemed to be dealing with each other at arm's length. The Minister did then determine that having regard to all the circumstances of the employment (as set forth in the section) it was not reasonable to conclude 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.

[11] It is not the mandate of the Court to second guess the Minister and merely substitute its opinion for his based on the evidence.The Minister's decision is made pursuant to a discretionary power, as opposed to a quasi-judicial decision and thus this Court must show judicial deference to the Minister's determination when he exercises that power (Isaac, C.J., Federal Court of Appeal, Attorney General of Canada and Jencan Ltd. (1997) 215 N.R. 352). However, if there are specific grounds for interference where it is established that the Minister: (i) acted in bad faith or for an improper purpose or motive; (ii) failed to take into account all of the relevant circumstances, as expressly required by subparagraph 3(2)(c)(ii); or (iii) took into account an irrelevant factor - then the Tax Court is justified in interfering with the Minister's determination.

[12] The Appellant, Michel Abihsira, the Payor's sole shareholder, Victor Amar (a manager for the Payor, at one time) and Toby Mamann, all gave evidence to the Court, all of which was creditable and trustworthy and which was not disputed nor weakened by cross-examination. The Appellant and the Payor disagreed with the following facts as set forth in the Respondent's Reply:

- subparagraph (e): they both agreed that the Appellant made many of the major business decisions and performed many of the day-to-day functions of the business. The Payor was freed up to make the necessary "deals" with suppliers leaving the Appellant to take over his previous responsibilities of the day-to-day operation of the business;

- subparagraph (f): the evidence given disclosed that the Appellant was personally responsible for the operation of the Lawrence Plaza store and not the Payor as the Respondent alleged;

- subparagraphs (g) and (h): the evidence also refuted the allegations that an unrelated worker managed the Lawrence Plaza store and that person handled most of the store merchandising, ordering, sales, supervising of staff and opening and closing of the store. There was no unrelated worker hired and, in fact the Appellant performed all of the aforesaid duties;

- subparagraph (i): the evidence of the Payor was especially strong relative to this issue. He claimed he attempted to hire someone to perform as manager of the Lawrence Plaza store but who must also have the expertise to operate the computer software system that had been introduced and be bilingual in order to deal with the managers in the three stores in Quebec and be able to discuss the inventories of those stores and shift those inventories as required. Not only was he unable to find such an employee but any that applied wanted a larger salary than he had agreed to pay to the Appellant. The salary of the Appellant was quite reasonable in the circumstances having regard to the hours of employment actually performed by her;

- subparagraph (j): the Payor took firm issue with the allegation of the Respondent concerning the Appellant's hours of employment. The hours of work were much in excess of those alleged, most days of the week they were from about 9:00 a.m. to 7:00 p.m. and never did she spend as little as 12 hours a week, in fact it was close to that on a daily basis. Monday to Friday continued at this rate for her employment term and included alternate Sundays from 11:00 a.m. to 5:00 p.m;

- subparagraph (l): the experience of the witnesses who testified was that a store manager in the Toronto area in their line of endeavour was paid in the range of $30,000 to $32,000 during the time in question. The Payor said the Appellant was much more than a store manager and, hearing the duties she performed, his statement was supported by the evidence. The Court found this to be correct. She performed the duties of a general manager for the whole operation of the business. Her duties included checking all shipments of goods received, comparing the items against the shipping receipt as well as with the original order placed, the ticketing of and pricing of the items, the shipping of some part or all of the items to the various stores of the Company, constant communication with all stores to determine their individual sales and inventories and ordering the transfer of items between those stores to improve sales and to control inventories, making decisions on which items should be placed "on sale", performing all functions required to operate the computer system newly installed in the Company, preparation of payroll cheques for the other employees (which were signed by the Payor), making deposits into the bank of the sales from the Lawrence Plaza store and checking the bank statements to verify the deposits made from the other stores, making all the managerial decisions for the Lawrence Plaza store including display and merchandising arrangements operation of inventories, buying and pricing of goods, and the supervising of employees.

[13] The Appellant stated that the volume of work became so onerous that she finally had to hire someone to assist her with the computer duties.

[14] The only way the Tax Court can interfere with the Minister's discretion, as exercised, is to ensure that such exercise of discretion was performed in a lawful manner. If the discretion was exercised in a manner contrary to law, can the Tax Court review the merits of the determination. This is the first stage.

[15] The Court has been satisfied that the Minister failed to take into account all of the relevant circumstances as required by subparagraph 3(2)(c)(ii) and that his discretion was exercised in a manner contrary to law. The Court is, therefore, justified in conducting its assessment of the balance of probabilities as to whether the Appellant and the Payor would have entered into substantially similar contracts of service if they had been at arm's length.

[16] The Minister failed to take into account the 'actual' duties of the Appellant, the hours of her employment and the responsibilities shouldered by her in the day-to-day operation of the Payor. The determination made was based on incorrect and incomplete facts. Having reviewed the evidence before the Court, the appeal is allowed. The Appellant and the Payor, in the circumstances, were dealing with each other at arm's length and the Appellant was employed in insurable employment while engaged by the Payor for the period from August 21, 1995 to July 11, 1996 within the meaning of the Act.

[17] The appeal is allowed and the decision of the Minister is vacated.

Signed at Toronto, Ontario, this 16th day of December 1998.

"W.E. MacLatchy"

D.J.T.C.C.