Date: 19981112
Dockets: 97-1847-UI; 97-1852-UI
BETWEEN:
HARSHA RAITHATHA,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] Khatau Daya Management Ltd., operating as Silverstone Learning Centre, (the "Payor Silverstone") and N.S.D. Management Corporation Ltd., operating as Twin Towers Day Nursery (the "Payor Twin Towers") 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 Silverstone for the periods from January 4, 1994 to February 25, 1994 and from December 4, 1995 to May 3, 1996 and by the Payor Twin Towers for the period from February 28, 1994 to July 29, 1994 within the meaning of the Unemployment Insurance Act (the "Act").
[2] The Respondent informed the Appellant and the payors that it had been determined that the Appellant's engagement with the payors during the periods in question was not insurable employment for the reason that the Appellant and the payors were not dealing with each other at arm's length within the meaning of paragraph 3(2)(c) of the Act.
ISSUES
[3] Was the Appellant employed in "insurable employment" with the Payor Silverstone during the periods from January 4, 1994 to February 25, 1994 and from December 4, 1995 to May 3, 1996 (the "relevant periods").
[4] Was the Appellant employed in "insurable employment" with the Payor Twin Towers during the period from February 28, 1994 to July 29, 1994 (the "relevant period").
PLEADINGS IN RELATION TO THE PAYOR SILVERSTONE
[5] The Appellant made no pleadings of fact in the Notice of Appeal but argued that:
- the contracts of service were valid;
- the Appellant and the Payor Silverstone dealt with each other at arm's length; and
- the terms and conditions of employment were comparable to those of parties at arm's length.
[6] The Respondent relied on the following presumptions of fact:
- the Payor Silverstone's shares are wholly owned by Noor Daya and he controls all aspects of the Payor Silverstone's business. Noor Daya also owns and controls N.S.D. Management Corporation Ltd. that operates as the Payor Twin Towers. Both payors are located in the same building and, in combination, can accommodate up to 139 children;
- from January 4, 1994 to February 25, 1994, the Appellant worked part time (16 hours/week) doing some bookkeeping, purchasing groceries and toys, obtaining and reviewing flyers, and reporting to the president of the Payor Silverstone on day care issues identified by reading newspapers. For this, the Appellant was paid a salary of $330 every two weeks (i.e. at a rate of $165/week or $8,580/annum);
- the Appellant received unemployment insurance benefits until January 22, 1994;
- from December 4, 1995 to May 3, 1996, the Appellant worked full time (35 hours/week) at $500/week ($26,000/annum) performing the same duties listed above;
- the Appellant had no set time of work, received no training, was not supervised to any great extent, had an office key and could come and go as needed. The Appellant's employment was only temporary insofar as it could be terminated at any time depending on the owner's health;
- between the relevant periods the Appellant was employed by the Payor Twin Towers and worked on a full time basis (35 hours/week) performing essentially the same duties that she performed at the Payor Silverstone during the relevant periods;
- no income tax was deducted from the Appellant's pay since the Payor Silverstone's accountant said that he knew ahead of time that no tax would be payable.
[7] On the basis of the preceding presumptions of fact the Respondent made the following arguments:
- the duties performed do not justify hiring the Appellant for 35 hours per week. The decision to hire the Appellant for 35 hours per week to perform duties she performed in 16 hours per week indicates a non-arm's length contract of employment;
- while the Appellant and the Payor Silverstone were not related they were not in fact dealing with each other at arm's length within the meaning of paragraph 3(2)(c) of the Act;
- a person dealing with a payor at arm's length would have been paid only for hours worked and not on a fixed salary basis;
- the purported employment of the Appellant by the Payor Silverstone during the relevant periods allowed the Appellant to qualify for unemployment insurance benefits and were not based on any business consideration or need;
- there was no contract of service between the Appellant and the Payor Silverstone;
- 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 not reasonable to conclude that 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.
PLEADINGS IN RELATION TO THE PAYOR TWIN TOWERS
[8] The Appellant made no pleadings of fact in the Notice of Appeal but argued that:
- the contract of service was valid;
- the Appellant and the Payor Twin Towers dealt with each other at arm's length; and
- the terms and conditions of employment were comparable to those of parties at arm's length.
[9] The Reply to the Notice of Appeal laid out the following presumptions of facts:
- the Payor Twin Towers is a day care facility and its shares are owned by Noor and Sadru Daya (50% each). Noor Daya controls the Payor Twin Towers' business as well as another day care facility, the Payor Silverstone, which is located in the same building and, together, the two facilities can accommodate up to 139 children;
- the Appellant worked on a full time basis (35 hours/week) earning a flat salary of $1,500 every two weeks ($39,000/annum) for performing the following duties: some bookkeeping, purchasing and sorting groceries and toys, obtaining and reviewing flyers and reviewing newspapers in order to report to the president on day care issues;
- the Appellant had no set time of work, received no training, was not directly supervised, could come and go as needed, and her employment was only temporary insofar as it could be terminated at any time depending on the owner's health;
- for the seven weeks prior to the relevant period the Appellant was employed by the Payor Silverstone and worked on a part time basis (16 hours/week) performing essentially the same duties performed on a full time basis at the Payor Twin Towers during the relevant period;
- the Appellant's unemployment insurance benefits expired on January 22, 1994; and
- no income tax was deducted from the Appellant's pay during the relevant period since the Payor Twin Towers' accountant knew ahead of time that no tax would be payable.
[10] On the basis of these presumptions of fact, the Respondent made the following arguments:
- the decision to hire the Appellant on a full time basis to perform the same duties she performed with the Payor Silverstone on a part time basis is indicative of a non-arm's length contract of employment;
- while the Appellant and the Payor Twin Towers were not related they were not, in fact, dealing with each other at arm's length within the meaning of paragraph 3(2)(c) of the Act;
- in arm's length employment, an employee would have been paid only for hours worked and not on a flat salary basis;
- the purported engagement of the Appellant by the Payor Twin Towers during the relevant period allowed the Appellant to qualify for unemployment insurance benefits and was not based on any business consideration or need;
- there was no contract of service between the Appellant and the Payor Twin Towers; and
- 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 not reasonable to conclude that the Appellant and the Payor Twin Towers would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.
SIGNIFICANT EVIDENCE WITH RESPECT TO THE
PAYOR SILVERSTONE AND THE PAYOR TWIN TOWERS
[11] Mr. Noor Daya controlled all aspects of the two payors Silverstone and Twin Towers (the operation of day care centres for children). One location was in Rexdale and the other in Etobicoke.
[12] Mr. Daya, in January 1994, was under a lot of personal stress and pressure to the point he was being treated for depression.
[13] At that time, he advised his outside accountant that he needed some assistance in executing daily tasks in relation to finding, buying, storing and delivering food supplies to the day care centres. The position was to continue until Mr. Daya's health improved.
[14] The accountant, who was not related to Mr. Daya, suggested his wife (the Appellant) might be interested in the position.
[15] After a discussion with the Appellant and Mr. Daya, she was hired and engaged on a part time basis, which was eventually followed by a full time engagement.
[16] The Appellant originally received her on the job training from Mr. Daya during the part time employment and then performed the tasks on her own when the work transcended to full time employment. The focus of the training included how to purchase food in the most cost-effective way including reviewing newspapers and advertisements. She was also taught to review and point out newspaper articles about the day care industry to Mr. Daya. This was done because during that period of time, the industry was facing dramatic changes in government policies.
[17] The business centres (Rexdale and Etobicoke) and the business office and storage area (Scarborough) were separated from one another by some distance and required extensive travel to go from location to location.
[18] The Appellant worked on a daily basis, followed a set pattern and was under the supervision of Mr. Daya. The work was repetitive, continuing, and organized.
[19] The source of the employment income (i.e. which employer paid her) was chosen by Mr. Daya as a business decision; however, the work of the Appellant was done in relation to both payors at the same time.
LEGISLATION AND JURISPRUDENCE
[20] Subsection 3(1) of the Act says, inter alia, that "insurable employment" is employment that is not "excepted employment". Subsection 3(2) lists what is considered "excepted employment" for the purposes of the Act. Paragraph 3(2)(c) says specifically that employment is "excepted employment" if the employer and employee are not dealing at arm's length. Subparagraph 3(2)(c)(i) says that the question of whether persons are dealing at arm's length shall be resolved by reference to the Income Tax Act. Subsection 251(1) of the Income Tax Act says that it is a question of fact whether persons not related to one another were, at a particular time, dealing at arm's length or not. While it is necessary to consider all the circumstances when deciding this question, the courts have employed three inquiries to determine whether unrelated parties were dealing at arm's length in a particular transaction:
- was there a common mind directing bargaining for both sides?
- were the parties acting in concert and without separate interests?
- was there de facto control by one party?
ANALYSIS
[21] From the evidence in this case, I find the assumptions of the Minister of National Revenue (the "Minister") were demolished on several significant points.
[22] When the Appellant worked part time, she assisted Mr. Daya and in effect learned how to perform the duties. When she was employed full time, she performed the tasks on her own. This explained the wage differential between the relevant periods.
[23] The locations of businesses and the office and storage area were separate and distant from one another. Thus, the time required to travel from place to place was considerable.
[24] The Appellant received training and was supervised in the performance of her tasks by Mr. Daya.
[25] Income tax deductions were made from the Appellant's pay.
[26] The basis of pay was negotiated between Mr. Daya and the Appellant. Mr. Daya made the offer and the Appellant accepted.
[27] The period of work involved was related to and dependent on the health of Mr. Daya.
[28] From the evidence no other motivation appears to have governed the length of the employment.
CONCLUSIONS
[29] The employment of the Appellant by the payors were made by Mr. Daya on behalf of the payors. Mr. Daya made it quite clear in relation to the businesses he made the decisions by himself without influence from anyone else.
[30] The relationship between Mr. Daya and the Appellant's husband was that of client and external retained accountant without any other economic fetters. The Appellant's husband did not, nor did he attempt to, control or influence the decision-making processes of Mr. Daya and his businesses. There was no common mind directing the bargaining as between Mr. Daya's businesses and the Appellant. The parties had separate interests and acted independently.
[31] I find the Appellant dealt with the payors at arm's length.
[32] The Appellant and the payors, as admitted in the pleadings, are not related. Given this admission, the Respondent's plea that paragraph 3(2)(c) is applicable is without foundation. The Minister does not have discretion when the Appellant and the payors are not "related".
CONTRACT OF SERVICE ANALYSIS
[33] The payor corporations, by way of Mr. Daya, controlled, directed and supervised the Appellant in the performance of her duties.
[34] The Appellant did not have the opportunity of profit nor did she have the risk of loss in the employer-employee relationship between herself and the payors.
[35] The payors provided the tools for the Appellant to perform her tasks.
[36] The combined force of all the operations was to the effect the Appellant was integrated into the businesses of the payors.
DECISION
[37] The appeals are allowed and the determinations of the Minister are reversed.
Signed at Ottawa, Canada, this 12th day of November 1998.
"D. Hamlyn"
J.T.C.C.