Tax Court of Canada Judgments

Date: 19990203

Docket: 97-1560-UI

BETWEEN:

FRANÇOIS PARENT,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for judgment

Archambault, J.T.C.C.

[1] François Parent is appealing from a decision by the Minister of National Revenue (Minister) finding that Mr. Parent did not hold insurable employment with Daniel Parent, François Parent and Gilles Savard, who carried on business under the firm name Déboisement du Nord Enr. (DN partnership), from August 9 to October 26, 1996 (relevant period). According to the Minister, the services provided by François Parent were not so provided under a contract of service (contract of employment). The Minister also made another decision, on June 9, 1997, finding that Mr. Parent held insurable employment with Daniel Parent, who carried on business under the firm name Déboisement du Nord Enr., from July 29 to August 8, 1996. Mr. Parent is not contesting this latter decision. In arriving at the decision under appeal, the Minister relied on the facts set out in paragraph 8 of the Reply to the Notice of Appeal. They are as follows:

[TRANSLATION]

(a) on April 18, 1996, Daniel Parent filed a declaration of registration as a natural person operating a sole proprietorship under the name Déboisement du Nord; [admitted]

(b) on July 26, 1996, Déboisement du Nord Enr. obtained a contract from Hydro-Québec for tree removal along transmission lines in the Lac St-Jean area; [admitted]

(c) because of a cash shortage, Daniel Parent decided to go into partnership with the appellant and Gilles Savard to perform the contract; [admitted]

(d) on August 9, 1996, Daniel Parent, Gilles Savard and the appellant filed a declaration of registration of partnership stating that they were the three partners and were acting under the name Déboisement du Nord; [admitted]

(e) the payer’s turnover was $99,718.65 and its net profit was $14,832.79; [admitted]

(f) like the other two partners, the appellant received a third of the net profit; [admitted]

(g) during the period at issue, the appellant acted as the payer’s only foreman since he was the only partner on site, the other two being in the Québec area;

(h) the payer reimbursed the appellant for his gasoline, housing and food expenses, which it did not do for its other employees;

(i) the appellant was operating his own business.

Facts

[2] Daniel Parent, who is François Parent’s brother, owns all the shares of a corporation named Services d’arbres de la Capitale Inc. (Services d’arbres). Since 1991, that corporation has been operating a tree pruning and trimming business. Hydro-Québec is among its main clients. Services d’arbres prunes and trims the trees along the lines of Hydro-Québec’s electrical power distribution network, that is, the lines running alongside streets and roads.

[3] In 1996, business dropped off for Services d’arbres. There were not many contracts for the maintenance of Hydro-Québec’s distribution network. However, Hydro-Québec put out tender calls for brush cutting along its transmission lines crossing fields and forests. Such a contract (brush-cutting contract) was offered in the area of Roberval on Lac St-Jean, but Hydro-Québec required that the tendering businesses have their head office in the area. The head office of Services d’arbres is in the Québec area. To circumvent that problem, Daniel Parent filed with the Inspector General of Financial Institutions, on April 18, 1996, a declaration of registration as a natural person operating a sole proprietorship. He called his business Déboisement du Nord Enr. and gave an address in Anse-St-Jean, Chicoutimi, as its elected domicile.

[4] Daniel Parent obtained the brush-cutting contract from Hydro-Québec and the work began on July 29, 1996. He hired François Parent as the foreman. François Parent had apparently worked for Services d’arbres regularly since 1991. His weekly wages were $500. He was also allegedly entitled to 10 percent of the profits made by Daniel Parent on the project.

[5] Daniel Parent also hired other employees of Services d’arbres from the Québec area to work in the Lac St-Jean area. They were paid on an hourly basis. Unfortunately, the work did not advance as quickly as planned. It should be noted that brush cutting was a new activity for Daniel Parent. It is not quite the same as tree pruning and trimming.

[6] Mr. Parent also had serious financial problems and was thinking of terminating the brush-cutting contract: he either had to find new financing or abandon the project. After about two weeks, he asked his employees to come back to Québec.

[7] Gilles Savard, a police investigator and longtime friend of François and Daniel Parent, offered to go into partnership with Daniel Parent for the purpose of carrying out the project and to provide the financing needed to perform the brush-cutting contract. He believed that the project would be profitable and hoped to make a profit from it. He obtained a $20,000 loan from his brother-in-law and invested the money in the DN partnership.

[8] Since he knew nothing about arboriculture and did not want to take any chances, Mr. Savard demanded that François Parent continue to be the foreman and that he share in the profits. The partnership was thus to include François Parent, and the profits were to be divided equally among the three men. On August 9, 1996, Gilles Savard filed a declaration registering the DN partnership with the Inspector General of Financial Institutions. The declaration stated that the members of that general partnership were Gilles Savard, Daniel Parent and François Parent.

[9] According to François Parent, he had already returned to the Lac St-Jean area when Mr. Savard filed the declaration of registration, and he was therefore informed by telephone that he was part of the DN partnership. Daniel Parent’s accountant was very familiar with François Parent’s situation. He knew that he held seasonal employment with Services d’arbres and depended on unemployment insurance benefits when he was out of work. After contacting an official from the Unemployment Insurance Commission, the accountant told François Parent in early August 1996 that his status as a member of the DN partnership would not prevent him from being eligible for unemployment insurance benefits. François Parent said that that opinion put his mind at ease and that he did not think about the matter again until someone from the Unemployment Insurance Commission advised him that he had not held insurable employment with the DN partnership because he was one of its partners.

[10] To prove that there was a relationship of subordination between him and Daniel Parent and Gilles Savard, François Parent asked them to testify at the hearing. Mr. Savard’s testimony showed that he was involved in managing the DN partnership. He said that he was in touch with François Parent regularly. He became involved because he wanted to be sure that the project would succeed and that he could repay his $20,000 loan and receive his profits.

[11] When Daniel Parent testified, I asked him whether he had ever, before or after the brush-cutting contract, paid his brother François Parent bonuses calculated on the basis of the profits made in carrying out a project on which his brother had been the foreman. He did not remember paying François Parent any such bonuses.

[12] After completing the brush-cutting contract, the DN partnership ceased carrying on business. Daniel Parent explained that Hydro-Québec had dropped its requirement that contractors have their head office in the area where the work was to be performed.

[13] François Parent was the last witness to testify. He said that he continued to receive wages of $500 from the DN partnership after August 8, 1996. He also said that, prior to 1991, he worked for another corporation, owned by his brother and another shareholder, and received bonuses representing a percentage of the profits from work for which he had been foreman. He maintained that his brother no doubt must have forgotten that fact.

[14] François Parent also stated that he had had financial problems and had gone bankrupt in 1995. He filed a bankruptcy judgment by the Superior Court dated January 29, 1996, granting him a conditional discharge as follows:

[TRANSLATION]

. . .

DISCHARGES the debtor conditional upon him paying the trustee, for distribution among the creditors, an additional $2,500 payable in advance or over a period no longer than two years;

On proof of such payment, the debtor shall be discharged, subject, however, to the creditors’ rights and debtor’s liabilities under section 178 of the Bankruptcy and Insolvency Act. . . .

[Emphasis added.]

Mr. Parent stated that he paid that $2,500 debt with income he earned during the ice storm in January 1998.

[15] Before concluding this account of the facts, I would like to point out that I did not find François Parent very open at the hearing. When the trial began, I asked him whether he had ever appeared before this or any other court and I then explained to him how we were going to proceed. After observing the manner in which he went about filing his documentary evidence, I complimented him. Counsel for the Minister went even further, saying that he did better than many lawyers.

[16] When François Parent examined his two witnesses, he often asked leading questions in spite of the objections of counsel for the Minister. I therefore explained to him what it meant to ask leading questions, and I emphasized to him that it was important to avoid doing so in respect of important facts in order to ensure the greater credibility of his witnesses. Despite several reminders from me, François Parent continued to ask numerous leading questions.

[17] On none of those occasions was François Parent honest enough to admit his legal knowledge and experience. However, at the end of his case, during his cross-examination by counsel for the Minister and in response to questions I put to him, he admitted that he had practised as a lawyer for six years. By way of explanation, he stated that he had not pointed this out earlier because he was embarrassed by the fact that he was no longer a practising lawyer and was now working as a foreman. If I had known he was a lawyer, I would certainly not have tolerated so many leading questions from him.

François Parent’s arguments

[18] François Parent argued that the work he did for the DN partnership as a foreman after August 8, 1996, in performing the brush-cutting contract was exactly the same work he had done for Daniel Parent from July 28 to August 8, 1996. It was also similar to the work he did for Services d’arbres before and after the brush-cutting contract. According to him, the one-third share of the profits he was given represented an increase in the 10-percent bonus to which he would have been entitled if the partnership had not been formed. He argued that his brother Daniel and Gilles Savard exercised control over his work. He also insisted that he did not take part in any decisions on the administration of the partnership or participate in managing its business.

[19] François Parent raised as well the issue of the application of article 2226 of the Civil Code of Québec (C.C.Q.), which provides that a bankrupt ceases to be a member of a partnership.

Analysis

[20] The first issue to be decided is whether François Parent was one of the members of the DN partnership. First of all, it should be noted that he admitted when the hearing of his appeal began that he had gone into partnership with Daniel Parent and Gilles Savard. It should be pointed out that as a former lawyer, François Parent must have known what he was doing by admitting that fact. In any event, the evidence as a whole shows that he was one of the members of the DN partnership.

[21] Article 2186 of the C.C.Q. defines “contract of partnership” as follows:

ART. 2186. A contract of partnership is a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits.

It is not necessary that the contract be in writing. It can be a verbal contract. The existence of such a contract is confirmed in the case at bar by the declaration of registration signed by Gilles Savard, which stated that the DN partnership was a general partnership and that its three members were Daniel Parent, François Parent and Gilles Savard. There is thus prima facie evidence that a partnership made up of those three individuals existed.[1]

[22] François Parent maintained that he never met with Gilles Savard and his brother Daniel at the same time to form the partnership. However, he admitted being told that he would receive a one-third interest in the profits, and he said that he was happy about it. The fact that he shared in the DN partnership’s profits is certainly another indication that he was a member of that partnership.

[23] In my view, the fact that François Parent was told by the accountant that his status as a partner would not prevent him from being eligible for unemployment insurance benefits also confirms that he knew he was one of the members of the DN partnership, which seemed to suit him just fine given the assurances he had received from the accountant. If the declaration of registration had wrongly named him as one of the three partners, he would certainly have taken steps to correct it. Yet there is nothing in the evidence to show that he took such steps.

[24] In addition, the DN partnership owned mobile equipment and brush cutters. A depreciation allowance appeared in its income statement for the 1996 fiscal year. When I asked François Parent whether he had received a share of the proceeds of disposition of the partnership’s property, he was unable to answer. In any event, he did not deny receiving a share or claim that he was not entitled to one.

[25] The fact that Gilles Savard and Daniel Parent knew that François Parent would not be able to contribute financially to paying for any losses is not an obstacle to the existence of a contract of partnership between them and him. Although there is no evidence showing that they did so, it was open to them to agree among themselves that François Parent would not contribute to paying for the partnership’s losses. However, under article 2203 of the C.C.Q.,[2] such an agreement could not have been set up against third persons. As well, François Parent’s contribution to the partnership could have been limited to activities, as provided for in article 2186 of the C.C.Q.

[26] The fact that Mr. Parent did not participate in the partnership’s decisions does not necessarily mean that he was not a partner. Article 2216 of the C.C.Q.[3] provides that every partner is entitled to participate in collective decisions and may not be prevented from exercising that right by the contract of partnership. There is nothing in the evidence to show that François Parent could not participate in the partnership’s decisions. The fact that he did not does not necessarily mean that he was not entitled to do so. A distinction must be drawn between the right to participate in decisions and the failure to exercise that right. Moreover, a partner may delegate management of the partnership to one of the other partners. Articles 2212 and 2213 of the C.C.Q. provide as follows:

ART. 2212. The partners may enter into such agreements between themselves as they consider appropriate with regard to their respective powers in the management of the affairs of the partnership.

ART. 2213. The partners may appoint one or more fellow partners or even a third person to manage the affairs of the partnership.

[27] François Parent argued that he could not be a member of the DN partnership because he was an undischarged bankrupt. The first question to be decided in this regard is when he was discharged pursuant to the Superior Court’s decision of January 29, 1996. The conditional discharge of a bankrupt raises an issue as to when the bankrupt actually discharged from his or her debts. The effect of conditional discharge is discussed by Anne Michaud in her article “La libération de dettes en matière de faillite”, (1979-80) 14 R.J.T. 269, at page 275:

[TRANSLATION]

It may also be asked what general effect such a conditional order of discharge has on the bankrupt’s status. Under the law, there are two types of conditions: suspensive and resolutory. If conditional discharge is suspensive in nature, the debtor remains bankrupt until the prescribed conditions are fulfilled; on the other hand, if it is resolutory in nature, the debtor is discharged immediately but resumes bankrupt status if he or she does not comply with the judgment. This question of the nature of conditional discharge does not seem to have ever been thoroughly addressed in Canadian case law or academic writing, and the courts are divided, with some viewing conditional discharge as suspensive and others seeing it as resolutory.

[28] Ms. Michaud next examines the two lines of cases and the language the courts use in their orders depending on which possibility they choose. Basically, she concludes that conditional discharge cannot be suspensive because suspensive discharge is a separate type of discharge specially provided for in paragraph 172(2)(b) of the Bankruptcy Act. She writes at page 276:

[TRANSLATION]

Accordingly, when the court makes a simple conditional order, the debtor is discharged immediately and loses bankrupt status. However, when the court sets a time or a date for the discharge in addition to attaching conditions thereto, the discharge is suspended not as a result of the conditions alone but based on the express intention of the court in accordance with its power to so make a dual order.

[Emphasis added.]

[29] In this case, the language of the judgment seems clear: “On proof of such payment [of $2,500], the debtor shall be discharged . . . .” (See paragraph [14] above.) Thus, François Parent kept bankrupt status until January 1998, when he paid the $2,500. It follows that he was still bankrupt when the DN partnership was formed.

[30] As a bankrupt, did François Parent have the capacity to become a partner? He is relying on article 2226 of the C.C.Q., which provides that a bankrupt ceases to be a member of a partnership. According to François Parent, even though the partnership’s declaration of registration stated that he was a partner, he could not legally be one because it was prohibited by article 2226 of the C.C.Q.

[31] In my view, that argument is unfounded. Partnerships are governed by the Civil Code of Québec, which sets out all the terms and conditions that apply to them from their formation to their dissolution. I do not think that article 2226 of the C.C.Q. has the meaning that François Parent wishes to give it. Prior to the reform of the Civil Code, partnerships were dissolved automatically when one of the partners went bankrupt. Authors H. Roch and R. Paré wrote the following on this point:[4]

[TRANSLATION]

Since our article draws no distinction, any interdiction of a partner for any reason whatsoever will dissolve the partnership, since interdiction changes the partner’s legal position. However, it is acknowledged that the parties may agree in the contract of partnership that the partnership will continue despite the interdiction of one of them. . . .

As regards bankruptcy, the reason is that a bankrupt partner no longer offers the other partners the assurances of responsibility and proper administration they counted on from him and also that they can no longer count on being able to take effective action against the bankrupt partner with respect to any obligations he may have toward the partnership.

[32] The new article 2226 of the C.C.Q. changes this former state of the law. Partnerships can now survive despite the bankruptcy of a partner. Only the bankrupt partner ceases to be a partner. Although, as far as I know, there is no recent decision dealing with that article and in particular with the bankruptcy of a partner, its purpose has been confirmed by the Minister’s comments.[5] In the case at bar, however, the partners formed the DN partnership at a time when François Parent was already bankrupt.

[33] Moreover the wording of the new article indicates that a bankrupt ceases to be a partner at the time he or she becomes bankrupt, although the article does not prevent such a person from becoming a partner. As well, nothing in either the Civil Code of Québec or the Bankruptcy and Insolvency Act provides that a bankrupt cannot become a member of a partnership.[6]

[34] Since partnership is a contract, the Civil Code of Québec’s rules on contracts are applicable.[7] The only attribute needed in order to become a member of a general partnership is therefore the capacity to contract.[8] There is no provision in the Civil Code of Québec stating that a bankrupt does not have the capacity to contract. However, the Code does provide that a bankrupt is disqualified from holding office as a director of a legal person (art. 327 C.C.Q.). The Bankruptcy and Insolvency Act must therefore be referred to. Based on a review of the capacities and incapacities of a bankrupt set out in that Act, it would seem that a bankrupt retains the capacity to contract, subject to a few restrictions. In his article “The ‘Status’ of a Bankrupt”, (1975) 10 C.B.R. 105, H.R. Poultney lists the capacities and incapacities of a bankrupt. He states the following at pages 106-7:

These are disabilities or incapacities which other citizens of the state do not have. The Bankruptcy Act provides that:

1. A bankrupt may not engage in trade or business without disclosing, to all persons with whom he transacts business, that he is a bankrupt.

2. A bankrupt may not obtain credit of $500 or more without disclosing that he is bankrupt, except for the supply of necessaries for himself and his family.

3. A bankrupt ceases to have capacity to dispose of or otherwise deal with his property subject to certain limited exceptions. His property vests in his trustee, on trust for distribution to his creditors. He ceases to have capacity to maintain certain causes of action, such as claims for damages to his property which was vested in his trustee. He does however retain the right to sue for injuries to his person or feelings, since this is not a property interest which vests in his trustee. A bankrupt does retain the capacity to deal with any property he acquires after bankruptcy and before the intervention of the trustee of his estate.

4. A bankrupt cannot be appointed a proxy by one of his creditors to vote at any meeting of his creditors.

5. A bankrupt does not have the legal capacity to make a second assignment in bankruptcy while he is undischarged.

6. A bankrupt may become disentitled by order of the court, to receive mail addressed to him.

7. A bankrupt ceases to be able to make a proposal under the Bankruptcy Act except with the prior approval of the inspectors of his estate.

Poultney also noted that a number of other statutes may provide for certain disqualifications in the case of a bankrupt. For example, a bankrupt is disqualified from being a director of a corporation.[9] However, there is no similar provision with regard to being a partner. A bankrupt retains the capacity to contract but must inform the other contracting party of his or her status in accordance with section 199 of the Bankruptcy and Insolvency Act.

[35] Thus, in view of these comments, François Parent could be a member of a general partnership provided he informed the other partners of his status. The evidence showed that Daniel Parent and Gilles Savard knew that François Parent had gone bankrupt. Thus, despite his status as an undischarged bankrupt, François Parent had the capacity to become a partner.

[36] Given the conclusion that François Parent was a member of the DN partnership when he provided services during the relevant period, could he have been an employee of that partnership at the same time? In other words, can a contract of employment exist between a partner and his or her partnership? The Civil Code of Québec defines “contract of employment” as follows:

ART. 2085. A contract of employment is a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer.

[37] Here, François Parent had agreed to contribute his activities to the partnership. He performed his work not for remuneration but rather in exchange for the right to receive his share of the partnership’s profits. In my view, the $500 he received was a non-recoverable advance on the profits that the DN partnership might make.

[38] In addition, he did not work according to the instructions and under the direction or control of “another person”. Unlike a joint-stock company,[10] a partnership is not considered to be a person separate from its partners. The partnership’s business is that of the partners. The partnership’s assets belong to the partners. François Parent was thus working for himself. His work was therefore not done according to the instructions and under the direction or control of another person as required by article 2085 of the C.C.Q. Accordingly, there was no contract of employment between Mr. Parent and the DN partnership.

[39] Judge Lamarre reached similar conclusions in Carpentier v. M.N.R., 95-1684(UI):

In view of the features associated with a contract of partnership both under the C.C.L.C. and under the C.C.Q. and the tests used by the courts to determine whether a contract of service exists, it seems clear to me that a partner cannot be an employee in his own partnership. Since as partner he participates in the decision-making of the partnership in pursuit of the common goal of the partnership and shares in profits and losses, he is automatically in control and therefore cannot at the same time act as a subordinate to himself, even if there are several partners.

[40] The same view was taken by Judge Teskey in J. & S. Young Ltd. v. M.N.R., [1990] T.C.J. No. 819, Judge Tardif in Godin v. M.N.R., 94-1384(UI), and Judge St-Onge in Pitre v. Canada, [1998] A.C.I. No. 743 (file Nos. 97-1737(UI) and 97-1738(UI)), as well as by authors A. Edward Aust and Lyse Charette in The Employment Contract, 2nd ed., Cowansville, Éditions Yvon Blais, 1993, at page 26.

[41] For these reasons, François Parent’s appeal is dismissed.

Signed at Ottawa, Canada, this 3rd day of February 1999.

“Pierre Archambault”

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 21st day of October 1999.

Erich Klein, Revisor

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