Date: 200012015
Docket: A-636-98
CORAM: DÉCARY J.A.
SHARLOW J.A.
MALONE J.A.
BETWEEN:
CANDOR ENTERPRISES LIMITED
APPLICANT
- and -
THE MINISTER OF NATIONAL REVENUE
RESPONDENT
Heard at Halifax, N.S., on Wednesday, September 27, 2000
JUDGMENT delivered at Ottawa, Ontario, on Friday, December 15, 2000
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: DÉCARY J.A.
MALONE J.A.
Date: 200012015
Docket: A-636-98
CORAM: DÉCARY J.A.
SHARLOW J.A.
MALONE J.A.
BETWEEN:
CANDOR ENTERPRISES LIMITED
APPLICANT
- and -
THE MINISTER OF NATIONAL REVENUE
RESPONDENT
REASONS FOR JUDGMENT
SHARLOW J.A.
This is an application for judicial review of the decision of the Tax Court of Canada rendered on September 14, 1998, [1998], T.C.J. No. 804, which upheld a determination by the Minister of National Revenue that the employment of the applicant Ross Pentz with the applicant Candor Enterprises Limited between January 6, 1995 to January 6, 1996 and between April 29 to December 17, 1996 was not insurable employment under the Unemployment Insurance Act, 1970-71-72, c. 48, c. 61 or pensionable employment under the Canada Pension Plan, R.S.C. 1985, c. 8.
The applicants commenced six appeals in the Tax Court to challenge these decisions: 96-98(CPP), 96-99(CPP), 96-1877(UI), 96-1878(UI), 97-875(UI), 97-992(UI). The appeals were heard together in the Tax Court and dismissed. Six separate applications for judicial review were commenced (A-636-98, A-637-98, A-638-98, A-639-98, A-640-98, A-641-98) and then consolidated into one proceeding under A-636-98 by order of Linden J.A. dated December 3, 1998.
It is common ground that the resolution of the issues under the Unemployment Insurance Act will be determinative for purposes of the Canada Pension Plan, and that the relevant facts are the same for both of the periods in issue.
Facts
The applicant Candor Enterprises Ltd. was incorporated on November 6, 1992 under the Companies Act of Nova Scotia, c. 81, R.S.N.S. 1989. Candor had one shareholder at the time of its incorporation. Her name was then Carla Elizabeth Hutton but in 1994, she married the applicant Ross Pentz and changed her surname to his. For convenience I will refer to her as Ms. Pentz even though some of the relevant facts predate her marriage.
Candor initially operated a silviculture and tree farm business from a 100 acre tree lot in Waterville, Nova Scotia. Ms. Pentz, who was employed full time as a health record technician, had limited experience in the silviculture business. As far as the business of Candor was concerned, she relied on Mr. Pentz.
Mr. Pentz is an experienced forester. He had worked for the Department of Natural Resources for two years and for the Lunenberg Forestry Group for approximately seven years as a manager overseeing the silviculture and marketing aspects of the business. For that work, he was paid $14 per hour. He also worked as a private consultant in wood lot management and as manager of a forestry co-op. He holds licences as a scaler, Christmas tree grader and pesticide applicator.
Mr. Pentz started to work with Candor in 1993 on a part-time basis. He was paid $12.50 per hour. He did all kinds of work: planting, cutting, shearing, record keeping and administration. He also was responsible for obtaining contracts for Candor and negotiating the terms of those contracts.
While Mr. Pentz worked for Candor, he also carried on a separate business of his own, operating a farm and tree lot. He owned his own tools, a truck and a baler, which he used in his own business and in his work with Candor. Candor also owned some tools that Mr. Pentz used.
Candor did not pay Mr. Pentz for the use of his small tools, but paid him for the use of his baler based on the number of trees baled, as did third parties for whom he did contract work. Mr. Candor accounted for his tree baling revenue as income of his business. Candor also paid Mr. Pentz for the use of his truck at a per diem rate if he was required to use it for Candor's business.
After the marriage in 1994, Mr. Pentz carried on his work with Candor exactly as before, except that over the next two years, the business of Candor expanded to include painting, wood chipping contracts and driveway sealing. Mr. Pentz worked in those aspects of the business, as well as the forestry aspects, while continuing to operate his own business. One of his tasks was to find work for Candor and negotiate the terms on which that work would be done.
The terms upon which Mr. Pentz worked for Candor were never reduced to writing, but there are payroll records and documents evidencing payment, including cancelled cheques. In most cases the terms of the contracts he undertook for himself and for Candor were oral, and often evidenced only by invoices or deposit slips.
Mr. Pentz was never a shareholder of Candor and did not lend money to Candor. On occasion when Candor owed him money but did not have cash, he agreed to a delay in payment.
The degree to which the work of Mr. Pentz was controlled by Ms. Pentz was a matter of some dispute. The Tax Court Judge found that Mr. Pentz was not supervised or controlled in the performance or manner in which he carried out his work. He said at paragraph 34 of his reasons:
| It is accepted that Carla Pentz would have visited some sites and discussed certain things with the Worker [Mr. Pentz], but the evidence at the hearing was not persuasive and dealt a great deal with generalities. However, when the Court felt obligated to put further questions to the witnesses in order to understand the workings of the Payor [Candor], it appeared clear that the Minister was right in concluding that Carla Pentz was not involved in the day-to-day operations or management of the Payor as it is known in the field or market place. |
The business of Candor is seasonal, and as a result the services of Mr. Pentz were not required on a year round basis. The periods in which Mr. Pentz did not work for Candor because no work was available are referred to in the evidence as periods of "lay-off".
The first lay-off that is relevant for present purposes began on January 6, 1996. The Minister's decision relating to the preceding period, from January 6, 1995 to January 6, 1996, is set out in a letter to Candor dated August 1, 1996. It reads as follows:
| This letter concerns your request for a determination on the insurability, for unemployment insurance purposes [...] of Ross Pentz's employment with you from January 6, 1995 to January 6, 1996. |
| It has been decided that this employment was not insurable for the following reason: you and the worker were not dealing at arm's length and therefore, the employment was excepted from insurable employment. In the alternative, the employment was not insurable or pensionable as the worker was not engaged under a contract of service. There was no employee/employer relationship. |
| The decision in this letter is [...] based on subsection 3(1) of the Unemployment Insurance Act [...]. |
The second lay-off that is relevant for present purposes began on December 17, 1996. The Minister's decision relating to the preceding period, from April 22, 1996 to December 17, 1996, is set out in a letter to Candor dated May 5, 1997. It reads as follows:
| This letter concerns your request for a determination on the insurability, for unemployment insurance purposes, of Ross Pentz's employment with you from April 22, 1996 to December 17, 1996. |
| It has been decided that this employment was not insurable for the following reason: the worker was not engaged under a contract of service. There was no employee/employer relationship. |
| The decision in this letter is [...] based on paragraph 3(1)(a) of the Unemployment Insurance Act [...]. |
The relevant parts of section 3 of the Unemployment Insurance Act read 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 piece, or partly by time and partly by piece, or otherwise;
[...]
(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; [...] |
|
|
| 3. (1) Un emploi assurable est un emploi non compris dans les emplois exclus et qui est, selon le cas :
a) un emploi exercé au Canada pour un ou plusieurs employeurs, en vertu d'un contrat de louage de services
ou d'apprentissage exprès ou tacite, écrit ou verbal, que l'employé reçoive sa rémunération de l'employeur ou d'une autre personne et que la rémunération soit calculée soit au temps soit aux pièces, soit en partie au temps et en partie aux pièces, soit de toute autre manière;
[...]
(2) Les emplois exclus sont les suivants :
[...]
c) sous réserve de l'alinéa d), tout emploi lorsque l'employeur et l'employé ont entre eux un lien de dépendance et, pour l'application du présent alinéa :
| (i) la question de savoir si des personnes ont entre elles un lien de dépendance étant déterminée en conformité avec la Loi de l'impôt sur le revenu, |
| (ii) l'employeur et l'employé, lorsqu'ils sont des personnes liées entre elles, au sens de cette loi, étant réputés ne pas avoir de lien de dépendance si le ministre du Revenu national est convaincu qu'il est raisonnable de conclure, compte tenu de toutes les circonstances, notamment la rétribution versée, les modalités d'emploi, ainsi que la durée, la nature et l'importance du travail accompli, qu'ils auraient conclu entre eux un contrat de travail à peu près semblable s'ils n'avaient pas eu un lien de dépendance; [...] |
|
|
The Tax Court Judge dismissed the appeals and confirmed the Minister's decisions on the basis that there was no contract of service. While he recognized that it was not necessary to go on to consider whether the Minister erred in determining that Candor and Mr. Pentz did not deal at arm's length, he indicated that he would not have intervened in that determination. Candor and Mr. Pentz seek judicial review of the decision of the Tax Court Judge.
Determination of no contract of service -- standard of review
It is argued for the applicants that on the threshold question of the existence of a contract of service, which is the question asked by paragraph 3(1)(a) of the Unemployment Insurance Act, the Tax Court Judge erred by engaging in a judicial review of the Minister's decision, rather than making an independent judicial determination as he should have done.
The correct approach to this issue is explained as follows by Isaac C.J., as he then was, in Minister of National Revenue v. Jencan Ltd., [1998] 1 F.C. 187, (1997), 215 N.R. 352 (F.C.A.) at paragraph 24:
| The Minister's determination under s. 3(1)(a) that the Worker's employment is not pursuant to a contract of service is a quasi-judicial decision subject, on appeal, to independent review by the Tax Court. |
Although some of the language used by the Tax Court Judge in his reasons might have been more appropriate to a judicial review than a Tax Court appeal, I do not accept that the Tax Court Judge failed to make an independent judicial determination of the issue. Reading his reasons in their entirety, I conclude that the Tax Court Judge considered the factual assumptions stated in the Minister's pleadings against all the evidence before him, as he was required to do, and concluded that there was a sound basis for the conclusion that there was no contract of service. In my view, the Tax Court Judge did not apply an incorrect standard of review.
Whether a contract of service must be "genuine"
The concluding paragraph of the reasons of the Tax Court Judge refers to a "genuine" contract of service, as opposed to simply a contract of service or, in the words of paragraph 3(1)(a) of the Unemployment Insurance Act, an "express or implied contract of service." It is argued that by using the word "genuine" the Tax Court Judge was applying an additional test of "bona fides" that is not stated in the statute.
The use of the word "genuine" to modify "contract" in this context may be redundant, but it does not suggest the application of an extra-statutory legal test. In my view, the quality of "genuineness" of the contract of service is implicit in paragraph 3(1)(a). If, for example, there is an allegation that there is such a contract and the allegation fails because evidence is not believed, or because a document that purports to set out the terms of the contract is not genuine, the conclusion must be that there is no contract of service. Perhaps that conclusion is best stated in those words, but it would not be incorrect to say that there is no genuine contract of service.
Legal test for determining whether there is a contract of service or a contract for services
The principles to be applied in determining whether there is a contract of service are well established by the jurisprudence, notably the leading case of Wiebe Door Services Ltd. v. Minister of National Revenue, [1986] 3 F.C. 553, [1986] 2 C.T.C. 200, 87 D.T.C. 5025 (F.C.A.). It is argued for the applicants that the Tax Court Judge did not apply those principles correctly and failed to consider certain of the factors in the "fourfold test" in Wiebe Door.
In this case, as in most cases where there is a dispute as to the insurability of employment, the Tax Court Judge was faced with two competing theories. The Crown contended that the work Mr. Pentz did for Candor was work he did as part of his own business. Mr. Pentz admitted that he had his own business, but contended that he was also an employee of Candor and that his employment with Candor was independent of his business.
Many of the undisputed facts could be seen as consistent with either theory because it was admitted that Mr. Pentz had his own business. For example, the fact that Candor paid Mr. Pentz a fixed rate of $12.50 per hour is equally consistent with the theory that he was an hourly paid employee and the theory that he was performing services as a self-employed contractor. Similarly, the fact that Mr. Pentz was paid separately for the use of his baler may have resulted in a shift of part of the economic risk of the ownership of the baler from Mr. Pentz to Candor, but that is true of all businesses that rent equipment to others, and thus it is consistent with the conclusion that the payments were revenue of his business and that the services he performed for Candor that required the use of the baler were part of his business.
I do not propose to discuss all of the points raised by the applicants in support of the submission that the Tax Court Judge erred in his application of the four-fold test from Wiebe Door. It is enough to say that my reading of his reasons persuades me that he was well aware of the guiding principles and how they should be applied. It may be that another judge faced with the same evidence might have put different weight on the various factors. However, that in itself cannot justify setting his decision aside. I am unable to discern any indication that the Tax Court Judge, in accepting the Crown's theory over that of the applicants, misunderstood or misapplied any of the relevant principles or erred in any other respect.
Findings of Fact
It is argued for the applicants that the Tax Court Judge erred in three findings of fact that were critical to his determination that there was no contract of service. One is the finding that Candor's only asset was cash. That is consistent with the factual assumptions of the Minister but is contradicted by the evidence of Ms. Pentz that Candor had some minor equipment, some ongoing contracts, and some goodwill. Another is the finding that Mr. Pentz was free to arrange his own self-employment and could decide when he would be on the Candor payroll and when he would be self-employed. That too is consistent with the factual assumption of the Minister but is contradicted by the evidence of Mr. Pentz. The third is the finding that a certain wood chipper and painting tools were owned by Mr. Pentz, a point on which there is no factual assumption by the Minister and no direct evidence.
The Tax Court Judge was not obliged to accept the evidence of Ms. Pentz or Mr. Pentz on any of these factual questions. On the first two findings of fact referred to above, the Tax Court Judge rejected their evidence and was left with unrebutted factual assumptions by the Minister. He did not err in relying on those assumptions.
As to the third point, I am unable to discern the evidentiary basis for his conclusion as to the ownership of the wood chipper and painting tools. However, considering the remainder of the evidence that provides ample support for the conclusion that there was no contract of service, I am unable to ascribe much significance to this one factual conclusion.
Conclusion -- contract of service
On the basis of the foregoing reasons, I am satisfied that the Tax Court Judge did not err in concluding that there was no contract of service between Candor and Mr. Pentz during the relevant periods. That is sufficient to dismiss this application for judicial review. However, a number of issues were argued with respect to subparagraph 3(2)(c)(ii), and I wish to comment on the most important of them.
Subparagraph 3(2)(c)(ii) -- arm's length contract
The existence of a contract of service does not determine the insurability of employment in every case. Where the employee and employer are "related" to each other within the meaning of the Income Tax Act, R.S. C. 1985, c. 1, (5th supp), a further question arises under subparagraph 3(2)(c)(ii). The question is whether "the Minister of National Revenue is satisfied that, having regard to all of 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".
There is no doubt that in this case Mr. Pentz and Candor were "related" during the periods in question because he was the spouse of Candor's sole shareholder. Therefore, if the Minister had concluded that there was a contract of service, the Minister was required to consider subparagraph 3(2)(c)(ii). Or, if the Minister had determined that there was no contract of service, he could have determined in the alternative that if there was a contract of service, by virtue of subparagraph 3(2)(c)(ii), the employment was "excepted employment":M.N.R. v. Schnurer Estate, [1997] 2 F.C. 545, (1997), 208 N.R. 339 (F.C.A.).
In fact, the Minister's letter dated August 1, 1996 indicates that the Minister made these alternative determinations with respect to the period between January 6, 1995 to January 6, 1996. However, the Minister's letter dated May 5,1997, which relates to the period between April 29 to December 17, 1996, says nothing about subparagraph 3(2)(c)(ii). For that period, subparagraph 3(2)(c)(ii) is raised for the first time in the Minister's pleadings filed in the Tax Court in response to the notices of appeal.
This Court has said on several occasions that the Minister's determination of the question asked by subparagraph 3(2)(c)(ii) is a discretionary decision that cannot be reversed by the Tax Court or this Court unless the Minister has not considered all relevant circumstances, has considered irrelevant factors, or has acted in contravention of some principle of law. This has led to a direction to the Tax Court to undertake what is referred to as a two step inquiry. In the first step, the question is whether the Minister committed one of the enumerated errors. Only if there is such an error would the second step occur, which is an independent review of the evidence to determine the question anew based on the evidence that was before the Minister and that may be adduced on the appeal to rebut any factual assumptions stated in the pleadings filed by the Minister in the Tax Court pleadings. See, for example, Tignish Auto Parts Inc. v. M.N.R. (1994), 185 N.R. 73 (F.C.A.); Minister of National Revenue v. Bayside Drive-In Ltd. (1997), 218 N.R. 150 (F.C.A.), [1997] F.C.J. No. 1019 (Q.L.).
There is some question as to whether a determination by the Minister under subparagraph 3(2)(c)(ii) is correctly described as "discretionary", and whether the two step procedure suggested in these cases is necessary or helpful. Where a statute requires the Minister to be "satisfied" on a factual question, the Minister's deliberations can lead to nothing more than a factual determination. I refer to the decision of Marceau J.A. in Légaré v. Ministre du Revenue national (1999), 246 N.R. 176 (F.C.A.) at paragraph 4:
| [4] 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. |
Marceau J.A. elaborated on this statement in Pérusse v. Canada (Minister of National Revenue), 2000 F.C.J. No. 310 (F.C.A.) at paragraph 15 (the emphasis is mine):
| [para15] The function of an appellate judge is thus not simply to consider whether the Minister was right in concluding as he did based on the factual information which Commission inspectors were able to obtain and the interpretation he or his officers may have given to it. The judge's function is to investigate all the facts with the parties and witnesses called to testify under oath for the first time and to consider whether the Minister's conclusion, in this new light, still seems "reasonable" (the word used by Parliament). The Act requires the judge to show some deference towards the Minister's initial assessment and, as I was saying, directs him not simply to substitute his own opinion for that of the Minister when there are no new facts and there is nothing to indicate that the known facts were misunderstood. However, simply referring to the Minister's discretion is misleading. |
Regardless of the characterization of the Minister's determination under subparagraph 3(2)(c)(ii) or the approach to be taken by the Tax Court in an appeal of such a determination, it seems clear that the question of the application of subparagraph 3(2)(c)(ii) is not properly before the Tax Court unless the question posed in that provision is first determined by the Minister. That suggests, in my view, that the Minister should not raise subparagraph 3(2)(c)(ii) for the first time in the pleadings filed in response to an appeal to the Tax Court, because there will have been no determination by the Minister from which an appeal can be brought.
It would follow that in this case, if the Tax Court Judge had found that there was a contract of service, he should have allowed the appeal with respect to the period April 29, 1996 to December 17, 1996, because for that period there was no Ministerial determination under subparagraph 3(2)(c)(ii) for him to consider. As there was a Ministerial determination under subparagraph 3(2)(c)(ii) for the earlier period, January 6, 1995 to January 6, 1996, the Tax Court Judge would have been obliged to consider the appeal from that decision if he had found that there was a contract of service.
However, as indicated above, the Tax Court Judge correctly concluded in this case that there was no contract of service for the two periods in question. Therefore, nothing in this case turns on any determinations that the Minister made or failed to make under subparagraph 3(2)(c)(ii) in respect of those periods.
Conclusion
The applications for judicial review in this case and in A-637-98, A-638-98, A-639-98, A-640-98, A-641-98 should be dismissed with costs.
Karen R. Sharlow
J.A.
"I agree
Robert Décary"
"I agree
Brian Malone"
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