Tax Court of Canada Judgments

Date: 19991020

Dockets: 96-1834-UI; 97-100-UI; 96-1835-UI

BETWEEN:

MATTHEW McCARTHY,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

AND

BETWEEN:

LEROY McCARTHY,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Bowie, J.T.C.C.

[1] These three appeals are brought from determinations of the Minister of National Revenue that the employment of Matthew McCarthy and Leroy McCarthy for the relevant periods of time was not insurable employment by reason of paragraph 3(2)(c) of the Unemployment Insurance Act. The time periods in question for Matthew McCarthy are August 15, 1994 to January 6, 1995 and May 1, 1995 to September 22, 1995. For Leroy McCarthy the period is May 1, 1995 to October 27, 1995.

[2] The two Appellants are brothers, and during those time periods they were employed as labourers by McCarthy Brothers Limited (the company). Although there was some confusion in the evidence about the shareholdings in that company, it is not now disputed that Francis McCarthy was, at the material times, the beneficial owner of all, or virtually all, of the shares. Francis McCarthy is the father of the two Appellants. There is therefore no doubt that the relationship between the Appellants and the company was not an arm's length one.

[3] The appeals come to this Court in the following way. The two Appellants applied for unemployment insurance benefits, after being laid off at the end of the periods of employment set out above.[1] Their applications for benefits were reviewed by the appropriate officer of the Department of Human Resources Development, who then requested a ruling from the Minister of National Revenue (the Minister) under the Unemployment Insurance Act as to whether the employment could be considered insurable employment. These matters do not move swiftly. Matthew McCarthy had made his second application for benefits before the first one had become the subject of a decision. All three applications came to be dealt with together, and a rulings officer of Revenue Canada, having interviewed the applicants and their father by telephone, and having reviewed certain documents obtained from the company, concluded that their employment was not insurable employment. An appeals officer of Revenue Canada reviewed the file that had been accumulated by the rulings officer, and interviewed the applicants and Francis McCarthy by telephone. She also had several telephone conversations with Kathleen McCarthy, the wife of Francis McCarthy, who does office work and bookkeeping for the company. Her investigation culminated in a report of 11 pages which concluded with this recommendation:

It is recommended that Minister's Notification be issued to the effect that Matthew McCarthy, while engaged by McCarthy Brothers Ltd. during the period in question, was not in insurable employment pursuant to the provisions of paragraph 3(2)(c) of the Unemployment Insurance Act.

I note that the recommendation makes no specific mention of Leroy McCarthy, but the following appears at the bottom of page 2: "PLEASE NOTE THAT THIS IS MASTER FILE FOR ASSOCIATED FILE 0272385 Leroy McCarthy". The appeals officer's report was signed by her on June 10, 1996, and it was apparently signed by somebody whose title was "Reviewer", on June 18, 1996. It was then passed to the Chief of Appeals, who signed a form letter to each of the Appellants advising them of the adverse results. The operative paragraph of those letters reads as follows:

It has been decided that this employment was not insurable for the following reason: - the employment was not at arm's length between McCarthy Brothers Ltd and yourself.

[4] Effectively, then, these appeals are from the conclusions and recommendations of the appeals officer, which derived legal substance from their endorsement by the Chief of Appeals, acting under the authority delegated by the Minister to the person holding that office.

[5] The provision of the Act that governs is subsection 3(2):

3(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,

...

(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.

[6] It is clear from the jurisprudence that I am justified in interfering with the Minister's determination under this subparagraph only if it established before me that the Minister's discretion was not exercised in a manner consistent with the law. Then, and only then, I may substitute my discretion for that of the Minister, based upon all of the evidence before me.[2] I must, therefore, first review the decision-making process within Revenue Canada, to determine whether or not it was conducted in accordance with the principles which control the exercise by Ministers of discretionary power that has been given to them by statute.

[7] The two Appellants and their father, Francis McCarthy, all testified, among other things, as to the interviews with them which were conducted by telephone by Mr. Brittain, the rulings officer, and by Germaine Landry, the appeals officer. Mr. Brittain and Ms. Landry also testified as to these interviews, and as to the manner in which they arrived at their conclusions. There was substantial disagreement among them as to what was said during the telephone interviews. They all appeared to me to be credible witnesses, and I think it likely that there were genuine misunderstandings during the interview process, both as to the questions being asked, and as to some of the answers being given. Mr. Brittain and Ms. Landry both arrived at the conclusion that there were discrepancies in the account of the working relationships that they were given by Matthew McCarthy, Leroy McCarthy and Francis McCarthy. To some extent, these inconsistencies resulted from answers given to them by Francis McCarthy. For example, he would not acknowledge to them that his son Matthew was living in a common-law relationship with Thérèse Caissie, who was the company's bookkeeper. From all of the evidence, I conclude that there was nothing sinister about this, but that Francis McCarthy simply did not accept the relationship that existed, and so would not acknowledge it to a stranger over the telephone.

[8] Differences in the use of terminology led the rulings officer and the appeals officer to believe that the Appellants had run the company while their father was recovering from by-pass surgery. This was certainly not the case. In fact, Francis McCarthy ran the company before, during and after his hospitalization. One of the Appellants indicated to them that he was supervised in his work by his father, and the other indicated that he was supervised by Rod Demmings. In fact, the two brothers worked from time to time at different job sites, and both their father and Mr. Demmings supervised them from time to time. Both Mr. Brittain and Ms. Landry placed great significance on these and other rather insignificant discrepancies. Ms. Landry, in her report, said as follows:

NOTE:We have noted the following conflicting statements between the payor and the two workers, and also their version of the facts to Rulings Officer, Bob Brittain.

1. Voluntary work: The workers both stated that they had never worked on voluntary basis for the payor. The payor, on the other hand stated that they both did, (As he had previously stated to Rulings Officer – specifically for Mathew McCarthy from March 1, 1995 until May 1, 1995, and from Sept. 23, 1995 to November 1995).

2. Hours of work: Leroy McCarthy stated that he worked from 6:30 am to 5:30 pm, Monday to Friday and Saturday until noon. Matthew McCarthy stated that he worked from 7 or 7:30 a.m. to 5 or 5:30 pm, Monday to Friday, and occasionally on Saturday until noon. The payor, on the other hand stated that their hours were neve fixed, due to the nature of the work.

3. Supervision: Leroy McCarthy stated that he was supervised by Ron Demmings who was foreman. Matthew McCarthy stated that he was supervised by his father.

4. Payor's illness & subsequent return to work: Matthew McCarthy's signed statement to HRD officials indicates that he & brother Leroy were running the business, since their father had gotten sick a few years ago, and that he no longer worked other than advising them. During the course of our interviews, both workers and the payroll stated that Francis McCarthy had returned to work in the Spring of 1994; however, Francis McCarthy had previously advised Rulings Officer, on January 1st, 1996 that he was then only just getting back "in the groove" of work.

5. Therese Caissie's relationship: The payor stated that she was not related to the family and that she did not live in common-law with any family member either. Matthew McCarthy stated that Therese is his common-law spouse.

On the next two pages of her report the following appears:

... Due to conflicting statements from all parties involved, it was difficult to confirm, if in fact the workers were running the business for the payor during his illness. Based on their lack of honesty, we can only conclude that they likely were, based on the signed declaration of Matthew McCarthy to HRD officials. It would appear that the payor's true intentions were to accommodate his sons and possible other family members as well for UI benefits.

...

... We have noted several discrepancies in their statements and their lack of honesty was evident.

Based on these noted facts, we can only conclude that the employment was not treated at arm's length between the workers and the payor.

[9] This conclusion that the Appellants had been dishonest in their attempts to obtain unemployment insurance benefits amounted to a finding of criminality on their part. In my view, it was not a finding warranted by the evidence. Equally important, it was a finding arrived at, at least in part, on the basis of information obtained and impressions formed from the interviews with their father, and from the information as to company records obtained from their mother, about which they apparently knew nothing. It was wrong to make such a serious finding against them, without first giving them the opportunity to explain these apparently conflicting facts. It is clear from the evidence given before me that most, if not all, of those conflicting facts were susceptible of an explanation which was consistent with the Appellants being quite honest and straightforward in their dealings with the Department of Human Resources Development and Revenue Canada. The Minister's obligation to afford procedural fairness to the Appellants,[3] or applicants as they were at that time, was breached, and the decision therefore cannot stand.[4]

[10] I do not mean to suggest that in every case the applicant for benefits must be told exactly what information the Minister's employees have obtained from other sources. The exact components of the right to procedural fairness vary with the circumstances of the case. What is essential is that the individual must know the case he has to meet, in order to be able to do so. That right is all the more important in a case such as this, where what is alleged amounts to fraud in the pursuit of benefits, which is, of course, an offense.

[11] In accordance with the judgment in Jencan, it is now my task to consider all the evidence before me, and to come to a conclusion as to whether, having regard to various factors referred to in subparagraph 3(2)(c)(ii) of the Act, it might reasonably be concluded that these two Appellants would have been employed by the company upon substantially similar terms if they and the company had been dealing with each other at arm's length.

[12] The position taken by the Appellants in their evidence, and supported by the evidence of their father, was that they were treated in the just the same way as all the other employees of the company. Francis McCarthy testified that they, like all the other employees, were laid off and rehired according to the order of seniority. He also testified that they were junior employees, that their duties were the same as those of others who had been longer with the company, and that they were treated in exactly the same way as those other employees at the job site. As I understood the evidence, all the employees had esssentially the same duties and responsibilities except Mr. Demmings, who was the foreman, and Richard Sirois, who was a concrete finisher. On cross-examination, Francis McCarthy admitted that the wages of Matthew and Leroy were reduced at times when the company had cash flow problems, although the wages of other workers were not because, as he put it, the others were married and had children.

[13] Marshall Wright was an employee who was junior to the Appellants. He earned $8.00 per hour in the 1994 construction season, and for the first three weeks of 1995. His rate was increased to $10.00 per hour for the week of April 21, 1995 and following. The Appellants were paid between $9.50 and $11.00 per hour during 1994, and $10.00 per hour from May 1995 onward, but with their vacation pay deferred.

[14] Such evidence as there was concerning the nature of the work done by the two Appellants and the other employees suggests that the Appellants were being paid at a rate commensurate with the conditions, duration, nature and importance of the work they performed, in relation to the rates paid to other employees doing similar work. The foreman, Rod Demmings, was paid a somewhat higher rate than others. Richard Sirois was a concrete finisher, and was paid a flat weekly salary, which gave him substantially higher weekly earnings than the other employees, who were paid hourly. The Appellants' rates of pay seem to have been similar to what arm's length employees were paid to do the same job. Marshall Wright was paid less in 1994, but he was inexperienced at that time. Much was made of the fact that after August, 1994, the vacation pay of the Appellants was deferred to be paid the following spring, rather than being paid with their weekly pay. The suggestion was that this was a significant difference from the other similar employees. What the Act requires is that it be reasonable to conclude that, if dealing at arm's length with each other, the Appellant and employer would have entered into a substantially similar contract. I do not consider this minor variation in the terms of employment to be so significant that one could not reasonably so conclude. It is clear from the evidence of the Appellants that they did not consider either the minor reductions that they took in their pay, or the deferral of their vacation pay, to be significant changes in the terms of their employment. It should not be forgotten that in parts of the country where employment is scarce, many people would prefer to make minor concessions when the employer's cash flow requires it, rather than find themselves unemployed. Like many small businesses, McCarthy Brothers Limited is susceptible to cash flow difficulties. I do not consider it unlikely that arm's length employees would make the minor concessions that these Appellants made in order to keep their jobs.

[15] Considering all of the evidence, then, and having regard to all of the factors spelled out in subparagraph 3(2)(c)(ii) of the Act, I am of the view that it would be reasonable to conclude that the two Appellants and the company would, if they had been dealing with each other at arm's length, have entered into substantially similar contracts of employment for the periods in question.

[16] The appeals are therefore allowed and the determinations are referred back to the Minister for reconsideration and redetermination on the basis that Leroy McCarthy for the period May 1, 1995 to October 27, 1995 and Matthew McCarthy for the periods August 15, 1994 to January 6, 1995 and May 1, 1995 to September 22, 1995, were engaged in insurable employment.

Signed at Ottawa, Canada, this 19th day of October, 1999.

"E.A. Bowie"

J.T.C.C.

---