REASONS
FOR JUDGMENT
Appeal heard on September 27, 2017, at
Chicoutimi, Quebec
and decision delivered orally by conference call on
November 21, 2017, at Ottawa, Canada.
Smith J.
I. Introduction
[1]
Corporation 9215-9144 Québec Inc., the appellant
in this case, is appealing a decision by the Canada Revenue Agency (hereinafter
the “Agency”) on November 10, 2015, which was
delivered under the provisions of the Employment Insurance Act (hereinafter
the “Act”). The Agency found that Pierre Allard’s employment was insurable
employment under subsection 5(1) of the Act for the period from January 1, 2013
to November 9, 2015.
[2]
More specifically, the Agency found that
although Mr. Allard was not dealing at arm’s length with the employer,
according to the exception set out in paragraph 5(2)(i) of the Act, it was
reasonable to find, given all the circumstances, that the employer and Mr.
Allard would have entered into a substantially similar contract of employment
if they were dealing with each other at arm's length, as set out in paragraph
5(3)(b) of the Act.
[3]
For its part, the appellant is appealing the
decision and maintains that Mr. Allard directly or indirectly controlled the
employer, either as a shareholder or creditor, or even as an administrator—and secondly, given his role and all the circumstances, it was
unreasonable for the Minister to find that the employer would have entered into
a rather similar work contract had they been dealing with each other at arm’s
length.
[4]
Before reviewing the facts, I will first point
out that it is well-established that the Tax Court of Canada has the authority
to review the Minister’s decision, but that it does not involve substituting
its assessment of the facts for that of the Minister, but rather to verify
whether the facts retained by the Minister are real and have been correctly
assessed. Ultimately, the Court must decide whether the conclusion with which
the Minister was satisfied still seems reasonable in light of the facts. This
is the approach that was explained by the Federal Court of Appeal in Légaré
v. Canada, [1999] F.C.J. No. 878 (QL), which the respondent cited.
A. The relevant facts
[5]
The basic facts are not being challenged. Mr.
Allard, his brother Gaston, and his sister Nicole were the owners of a building
in Chicoutimi in which there was a restaurant operated by third parties.
[6]
In the 1990s, Mr. Allard and his brother
incorporated a corporation, Pizza Rodi Resto Inc., which acted as the purchaser
of business capital. Each brother held 50% of the shares, although only Pierre
Allard had an active part as administrator and manager of the restaurant. He oversaw
all aspects of management, including cooking, with the help of some of his
family members, including his son, his daughter, and his son-in-law. In
particular, his son was in charge of deliveries.
[7]
After a period of about 10 years, until 2009,
the restaurant enjoyed some success, such that Mr. Allard and his brother
decided to incorporate a new corporation—the appellant in this case—to open a
second restaurant in Jonquière.
[8]
In terms of the corporation’s organization, Mr.
Allard was still the sole administrator, but a third of the shares were granted
to his son Karl, not due to a capital contribution, but to give him the chance
to build wealth.
[9]
The restaurant in Jonquière had the same menu as
in Chicoutimi. Mr. Allard still assumed the role of manager, even though he
also had to deal with multiple tasks as needed, such as cooking.
[10]
It was financially difficult in the beginning,
and the Chicoutimi corporation had to advance up to $300,000 in funds. During
that time, Mr. Allard was managing both restaurants and was on call seven days
a week, but eventually, business improved.
[11]
During the period in question, Mr. Allard
received a salary from the corporation Pizza Rodi and, as indicated in Exhibit
A‑1, he received the following amounts from the appellant:
|
2010
|
$18,110
|
|
2011
|
$1,785
|
|
2012
|
$13,719
|
|
2013
|
$20,451
|
|
2014
|
$26,520
|
|
2015
|
$50,561
|
[12]
Following the Minister’s decision, which is the
subject in this case, Mr. Allard reduced his salary from the appellant to
$2,900 for 2016, as he conducted a transfer of profits from the appellant to
the corporation Pizza Rodi.
[13]
I will add that the appellant challenged certain
assumptions of fact upon which the Minister relied, including paragraph
8(f)—that is to say, that the three shareholders made all the important
decisions for the appellant by consensus; paragraph 8(i) that the worker and
the appellant had entered into a verbal agreement in Chicoutimi; paragraph 8(j)
that the worker was working as the appellant’s director/manager; paragraph 8(r)
that the worker was remunerated according to a set annual salary; paragraph
8(u) that the worker’s annual salary corresponded to the median hourly wage of
the job market in Quebec for workers who perform similar duties to those
carried out by the worker—and finally, paragraph 8(bb) under which, if the
worker could not perform his duties, the appellant had to find a replacement
for him.
[14]
Mr. Pierre Allard and his certified accountant,
Mr. Potvin, testified for the appellant, whereas Mr. Luc Falardeau testified
for the respondent.
B. The question of control — paragraph 5(2)(b) of the Act
[15]
The first issue in dispute is whether Pierre
Allard directly or indirectly controlled more than 40% of the appellant’s voting
shares.
[16]
According to Mr. Falardeau’s testimony, the
Minister found that Mr. Allard only held 33% of the shares, so no one had de
jure control of the corporation. There was no shareholder agreement that
could have granted legal control to a shareholder.
[17]
However, Mr. Allard clearly testified that not
only was his brother inactive, but that his son had received shares not in
exchange for a cash contribution, but to allow him to build wealth following
the corporation’s potential success. According to Mr. Allard’s testimony, he
had control of the corporation due to his role as administrator and the non-arm’s
length dealing between him and his son. In other words, even though he only
held 33% of the shares, he effectively had control of the corporation—at least,
up to 66% of the shares. I accept Mr. Allard’s testimony on this matter.
[18]
However, jurisprudence has clearly established
that the notion of control under paragraph 5(2)(b) of the Act is a mixed
question of law and fact. First, it must be determined who the shareholder is,
and then see if there are circumstances hindering the shareholder in the free
and independent use of his right to vote and, if applicable, to see who can
legally exercise that right in the shareholder’s place.
[19]
It is also well established that whoever has
administrative and operational control of a corporation does not necessarily
control its ‑shares.
[20]
In this case, it is acknowledged that Mr. Allard
only hold 331/3% of
the shares and that there is no evidence that would allow to conclude that his
son, Karl Allard, was stripped of his right to vote, or hindered the free
exercise of that right to vote in any way.
[21]
As for the fact that Mr. Allard holds 50% of the
shares of the corporation Pizza Rodi Resto, which made a loan to the appellant
corporation, it is my view that without any further evidence, these facts are
not relevant in analyzing the appellant’s question of control.
[22]
Consequently, I believe that the Minister’s
conclusion on this question was reasonable and supported by the facts, so there
are no grounds to conclude that Pierre Allard was excluded under paragraph
5(2)(b) of the Act.
II. Non-arm’s length and arm’s length dealing
[23]
I now turn to the second issue in dispute, i.e.
whether notwithstanding the non-arm’s length dealing between the appellant and
Mr. Allard, it was reasonable to conclude that a substantially similar contract
of employment would have been entered into if they were dealing with each other
at arm’s length, pursuant to paragraph 5(3)(b) of the Act.
[24]
As explained above‑, Mr. Falardeau
testified for the respondent. He explained that he had reviewed the criteria in
that paragraph, including i) the remuneration paid, ii) the terms and
conditions of the employment, as well as the duration, nature, and importance
of the work performed—before finding that Mr. Allard’s employment was similar
to that of a manager in food services, making around $50,000 a year, according
to Exhibit I‑1.
[25]
I understand Mr. Allard’s arguments that he was
the sole administrator and that he could not enter into a contract with
himself. That said, I accept the respondent’s arguments that legally, Mr.
Allard wore two hats—that of the corporation’s administrator, but also that of
employee.
[26]
That said, the issue is still whether it was
reasonable to find that a substantially similar contract would have been
entered into at arm’s length.
[27]
With respect in particular to the salary paid,
even if Mr. Allard received an amount via direct deposit every other week like
the other employees, there is no evidence that would allow the Court to find
that a third party would have accepted the salary paid for the years 2010 to
2014, especially for the years 2011 and 2012, when he only received $1,785 and
$13,719.
[28]
According to Mr. Allard’s testimony, he had a
broad discretion with respect to the amount paid, and that despite the
regularity of the payments on a yearly basis, it was in fact payment of the
available profits.
[29]
Even if the Court finds that the amount paid in
2015, the sum of $50,561, is an amount that the appellant could have paid to a
third party, the fact remains that the salary paid in 2016, $2,900, indicates
once again that it was rather a distribution of profits that did not arise from
insurable employment, but rather from the administrative role assumed by Mr.
Allard.
[30]
In my opinion, it would be artificial to find
that the appellant would have entered into a substantially similar contract
with a third party. Rather, it is my view that no third party would have
accepted these conditions of employment.
[31]
I therefore find that the Minister’s decision
was in fact unreasonable, given all the circumstances.
[32]
I distinguish this situation from the decision
by the Tax Court of Canada in F. Ménard Inc. v. M.N.R., 2009 TCC 208, in
which during the period in question, the payor had paid a sum of $75,000 to
three brothers, who were also shareholders and administrators of a corporation
that had been founded by their father. I note that the salary had been paid
continuously and without interruption, and that each brother had a
well-established role in the company, which led the Tax Court of Canada to find
that they were insurable employment. In this case, the appellant was in the
start-up phase. There were large fluctuations in the salary, and it is highly
unlikely that a third party would have accepted such conditions.
[33]
The respondent also drew the Court’s attention
to Puni v. M.N.R., 2013 TCC 172—a decision by the Tax Court of Canada in
which the Court found that a shareholder held insurable employment during the
period in question. I draw a distinction with this decision, noting that the
Court had also found that the role of shareholder was distinct from that of an
employee, and that in fact, it was clear that the employee in question was not
a member of a group connected to control of the corporation. This was obviously
not the case in this matter, where Mr. Allard did in fact control the appellant
as an administrator.
III. Conclusion
[34]
In view of the foregoing, I arrive at two
conclusions. The first is that Pierre Allard’s employment cannot be exempt
under paragraph 5(2)(b) of the Act because he did not control more than 40% of
the shares with the appellant’s right to vote. The second conclusion is that
Mr. Allard and the appellant were not dealing at arm’s length within the meaning
of paragraph 5(2)(i) of the Act — but that it was unreasonable for the Minister
to conclude, given all the circumstances, that a substantially similar contract
of employment would have been entered into if they were dealing with each other
at arm’s length, within the meaning of paragraph 5(3)(b) of the Act.
[35]
For the reasons above, the appeal is allowed.
Signed at Ottawa, Canada, this 18th day of December 2017.
“Guy Smith”
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