Date: 19980623
Docket: 96-2207-UI
BETWEEN:
MONA AL-MOSAWER,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1] This is an appeal from a decision of the respondent that the appellant’s employment for the payer, Rafedain Inc. (“Rafedain”), for the period of January 2, 1991 to June 7, 1991 was excluded from insurable employment by virtue of paragraph 3(2)(c) of the Unemployment Insurance Act (the “UIA”).
[2] In rendering his decision, the respondent relied, inter alia, on the facts stated in subparagraphs a) to n) of paragraph 7 of the Reply to the Notice of Appeal. These subparagraphs read:
a) during the said period, the Payer operated a gift shop situated at 1482 Ste-Catherine west in Montreal;
b) Ahmad Kazzaz owned 100% of the shares of the Payer;
c) the Appellant is Ahmad Kazzaz’ spouse;
d) during the said period, the Appellant worked as a saleswoman in the gift shop;
e) during the said period, the Appellant worked approximately 50 hours per week;
f) during the said period, the Appellant was paid 500$ by week;
g) in this kind of business, a salesman is usually paid the minimum rate salary;
h) in June 1991, the Payer sold the gifts shop business to Dhia Salman;
i) during summer 1991, the Payer started another gift shop situated at 1126 Ste-Catherine west in Montreal;
j) in May 1991, the Payer had engaged 3 other employees to work at 1126 Ste-Catherine west;
k) the Payer’s financial statement for the period ending December 31, 1991 shows business losses of 43 000$;
l) the Appellant is related to the Payer within the meaning of the Income Tax Act;
m) the Appellant is not dealing with the Payer at arm’s length;
n) having regard to all 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 Payer would have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length.
[3] Counsel for the appellant admitted subparagraphs c), d), e), h) and j), ignored subparagraph k) and denied all other subparagraphs.
[4] The appellant, who claimed to have had some experience as a saleswoman in Kuwait testified that she was hired to work in a souvenir shop located at 1482 Ste-Catherine West in Montréal, Quebec. She would have been hired by the accountant, Mr. Azam El-Hafed, and by Mr. Khadem Waly[1] whom she described as the owner of the store.
[5] According to her testimony she worked from January 2, 1991 up until June 7, 1991 when the business was sold. She said that she was working six days a week for a salary of $2,000 gross or $1,800 net a month paid in cash. Nevertheless, her record of employment[2] signed by a Mr. M. Al-Saadi, an individual who would have been hired by the payer, Rafedain, a few days before she was laid-off indicates a weekly salary of $500 for 23 weeks of work and total earnings of $10,000. Lack of work is the reason indicated for the end of employment. The appellant said that she did not know Mr. Al-Saadi and had never met him at the store. The application for unemployment insurance benefit completed by the appellant[3] also mentions a salary of $500 a week for 50 hours of work from January 2, 1991 to June 7, 1991. The appellant said that although she was told that she could continue in her employment after the sale of the business, she was laid-off at that time as she was not needed anymore.
[6] The appellant said that Mr. Waly is married to her husband’s sister and currently lives in Teheran, Iran. In the fall of 1990, he came to Canada as a visitor. When the shop opened in January 1991 he was there as was the accountant to supervise the day-to-day operations up until June 1991 when the business was sold. Rafedain was constituted in 1990 and the appellant’s husband, Mr. Ahmad Kazzaz, owned 100% of the shares. However, the appellant said that her husband had no financial interest in the company as he was acting simply as a nominee for Mr. Waly who had invested the money. Also, as Mr. Waly had only a visitor status in Canada she implied that he could not invest under his own name. The appellant said that her husband did sign the cheques for Rafedain but that he never worked at the store in Montréal as he was, from April 1991 to April 1992, working in Toronto.
[7] Mr. Kazzaz also testified that he had no interest in the payer Rafedain and that he was only acting for his brother-in-law, Mr. Waly, who had invested all the money.
[8] A document entitled “Declaration of Mandate”,[4] signed by both of them was submitted in evidence. In that document, Mr. Kazzaz who is described as a “prête-nom” without any financial interest is instructed to proceed to the incorporation of Rafedain, to engage an attorney for that purpose as well as an accountant to look after the administration of the company. As a “prête-nom” Mr. Kazzaz was not to be paid and had no other duty than to sign all the necessary documents and “permit the attorneys, accountants and managers to operate and manage any future investments to be made by the Company”. He was also given the right to change these people or “any employees” and “to fire and engage and generally to act as an unpaid overseer as ... [Mr. Waly’s] prête-nom”.
[9] Mr. Kazzaz admitted that he signed cheques and other documents for Rafedain. Although he was working in the Toronto area during part of the period in issue, he would come periodically to Montréal. He also completed the corporate tax returns in which it is indicated that he is a 100% shareholder of the corporation described as a Canadian controlled private corporation. He said that he does not know whether the financial statements prepared by Mr. El-Hafed in which a loss of $43,390 is reported for the 1991 taxation year is exact. He does not know why Mr. Al-Saadi who was hired to work a few days before the appellant was laid-off in June 1991 would have signed her record of employment. He simply stated that Mr. Al-Saadi was hired to work at the second location operated by Rafedain, at 1126 Ste-Catherine West.
[10] Mrs. Sonia Dion who investigated in 1992 a potential fraud by a group of individuals testified that she had found that some records of employment for the minimum number of 20 weeks or a little more were often signed by employees for one another. Some of these individuals would have been hired to replace others that would have been laid-off around the same time. According to Mrs. Dion, these individuals were highly paid people working in very small gift or souvenir shops. Mr. Kazzaz was on Mrs. Dion’s list.
[11] Mrs. Dion, accompanied by a senior investigator, Mr. Desgroseillers, interviewed Mr. Kazzaz on November 2, 1993. A record of the interview[5] was completed by Mrs. Dion. Mr. Kazzaz refused to sign it as he claimed it was fabricated and did not represent what he had said during the interview.
[12] Mrs. Dion also stated that she never met with the appellant as it proved impossible to get an appointment with her. She did confirm however that the appellant was not involved in any of the other cases under investigation.
[13] Mr. Jean-Pierre Houle, appeals officer for the respondent said that he had made a complete revision of the file but that he had no contact with the appellant. Counsel for the appellant, Mr. Lawrence Diner, whom he had contacted by telephone told him that there was no need to meet with the appellant and that she would call him. Mr. Houle said that she did, at one point, leave a message that she would call back but she never did. For her part, the appellant stated that she had phoned twice and left a message but that no one ever called her back.
[14] In his analysis of the case, Mr. Houle said that he had obtained information from both, Mr. Diner and Mr. Kazzaz, particularly on the fact that although the company’s shares were in the latter’s name he had only invested his brother-in-law’s money.
[15] As to the appellant’s remuneration, Mr. Houle said that he was in possession of her record of employment indicating 23 weeks at $500 a week but total earnings of $10,000. The T-4 information slip completed by the payer also showed total earnings of $10,000 but only $225 of income tax deducted at source. Obviously, something was wrong as figures simply did not add up.
[16] Mr. Houle was also concerned about the level of earnings for a salesperson in a gift or souvenir shop of the same type as the one operated by the payer. After personally investigating the matter by visiting four such shops or boutiques on Ste-Catherine Street he came to realize that it was invariably the minimum wage that was offered for salespersons in that type of shop or boutique.
[17] As the appellant had been paid $10 an hour, almost twice the minimum wage at that time, and, as her husband was the sole shareholder of the company, Mr. Houle concluded that the appellant’s employment was not insurable mainly because he considered that her salary was too high for 1991. The fact that she was laid-off during the high season, just after another employee who had signed her employment record was hired, was also considered.
[18] Counsel for the appellant basically argued that the appellant held an insurable employment because she performed many services for a stated remuneration of $2,000 a month and was under the control or supervision of Mr. Waly, the real owner who had invested in the business and who took an active part in its management for the period in issue.
[19] According to counsel, the fact that the company made losses does not prove that the salary was too high. He also argued that the level of salary is a question to be determined solely between the employer and the employee and that Revenue Canada has nothing to do with that. Moreover, counsel for the appellant argued that there was no indication that the appellant was not dealing at arm’s length with the payer. In his additional written submissions after the hearing he emphasized this point by referring to Black’s Law Dictionary in relation to what is described as factual non-arm’s length situations. Then referring to paragraph 251(2)(a) of the Income Tax Act (the “ITA”), counsel for the appellant acknowledged that individuals connected by blood relationship, marriage or adoption are defined to be related persons and therefore deemed not to deal with each other at arm’s length, but stated the following at paragraph 12 of his submissions:
This word deemed creates a rebuttable presumption, which the facts of this case support.
[20] Counsel for the appellant then stated the following at paragraph 13 of his submissions:
13. Although legally or according to our usage of the terms, Khadem Waly and the Appellant are in-laws, but in-laws in a very restrictive sense. The Appellant and Khadem Waly are not blood relatives and never were. They are only the respective spouses of a brother and sister, neither of whom are directly involved in the present litigation, Ahmad Kazzaz being employed elsewhere and Ahmad Kazzaz’s sister being in the Middle East.
[21] Counsel for the respondent’s basic argument is that the appellant failed to bring sufficient evidence to demonstrate that the respondent acted capriciously or in an arbitrary manner when exercising the discretion conferred in subparagraph 3(2)(c)(ii) of the UIA. The argument is based on the decisions of the Federal Court of Appeal in Tignish Auto Parts Inc. v. M.N.R., July 25, 1994, A-555-93 (C.A.F.) and Ferme Emile Richard et Fils Inc. v. M.R.N. et al., (1995) 178 N.R. 361.
[22] According to counsel for the respondent, the appellant was related to the payer because she was related to her husband who controlled Rafedain (paragraph 251(2)(a) and subparagraphs 251(2)(b)(i) and (iii) of the ITA). According to paragraph 251(1)(a) of the ITA, the appellant and the payer were deemed not to deal with each other at arm’s length and, as they were related, the Minister was empowered to exercise the discretion conferred by subparagraph 3(2)(c)(ii) of the UIA.
[23] Alternatively, counsel for the respondent argued that the appellant was also related to Rafedain if it was Mr. Waly who controlled the corporation. She submitted that the appellant was first related to her brother or sister under paragraph 251(6)(a) of the ITA and that she was also related to her brother-in-law under 252(2)(b)(ii) of the same act. As the appellant was related to Mr. Waly who would have been the individual who controlled Rafedain if one is to accept the declaration of mandate,[6] the appellant would then also be related to Rafedain under subparagraph 251(2)(b)(iii) of the ITA. The decision of this court in the case of Cheryl Lemon v. M.N.R., 94-1101(UI), is cited in support of that argument. The situation would thus be the same as if the appellant had been related to Rafedain because her husband, Mr. Kazzaz, would have had control of the corporation.
[24] However, counsel for the respondent, relying on sections 1451 and 1452 of the Civil Code of Quebec and on the Quebec Court of Appeal decision in the case of Deputy Minister of Revenue (Quebec) v. Zaidi et al., 97 DTC 5549 ((1996) A.Q. no. 2969), submitted that third parties in good faith may or may not avail themselves of an apparent contract or a counter letter. She maintained that the Minister acted correctly in determining that it was Mr. Kazzaz who controlled Rafedain, based on the information provided by Mr. Kazzaz in the T-2 tax return filed for the corporation and signed by him.
[25] First, I have to bring some clarification with respect to the application of some provisions of the ITA referred to by both counsel.
[26] The period of employment in issue in this appeal is from January 2, 1991 to June 7, 1991. By virtue of subparagraphs 3(2)(c)(i) and (ii) of the UIA the question of whether persons are not dealing with each other at arm’s length and the question of whether the employer and the employee are related is to be determined in accordance with the provisions of the ITA. This means, in my opinion, in accordance with these provisions as they applied during the period in issue. Subparagraph 252(2)(b)(ii) referred to by counsel for the respondent does not have any application as that provision applies only after 1992 (see: 1993 S.C. c. 24 subsection 140(1)). For the period in issue, the applicable provision was paragraph 252(2)(a) of the ITA.
[27] Now, as to the deeming provision found in subparagraph 251(1)(a) of the ITA that “related persons shall be deemed not to deal with each other at arm’s length”, I will observe that it has long been established that the word “deemed” used in paragraph 251(1)(a) created a non-rebuttable presumption.
[28] E.A. Driedger in “Construction of Statutes” (2nd ed., Toronto, Butterworths, 1983) at page 25 states that:
The decisions indicate that where a deeming clause states the legal consequences that are to flow from described circumstances, it is prima facie conclusive; but where it merely states a fact that is to be presumed in described circumstances, it is prima facie rebuttable.
(emphasis added)
[29] Early decisions of the Income Tax Appeal Board in Francis v. Minister of National Revenue, 51 DTC 329, No. 25 v. Minister of National Revenue, 51 DTC 331; Western Printers Association Ltd. v. Minister of National Revenue, 51 DTC 345; No. 116 v. M.N.R., 53 DTC 344; Benedet v. M.N.R., 54 DTC 51; Sibbitt v. M.N.R., 54 DTC 65, all indicate one way or another that the expression “deemed not to deal with each other at arm’s length” is “inflexible” and means “conclusively considered”.
[30] Later and more generally, in Scott v. M.N.R., 66 DTC 306 (T.A.B.), at page 308, it was stated:
Deemedseems to be a favourite verb in income tax legislation. The word has been held to be conclusive in its import and immune to any attempted modification of its effect. Its use in the Act affords another instance of the proposition that black may be white, if Parliament so legislates.
(emphasis added)
[31] In The Queen v. Alroy Industries Ltd., 76 DTC 6220, Mr. Justice Décary of the Federal Court - Trial Division stated at page 6224:
I do not believe that in the Income Tax Act the word “deemed” created a presumption that can be rebutted because, in my view, to say so would amount to assert that something that is deemed to be one thing might very well not be so for income tax and I cannot agree with that contention unless there are provisions to that import.
(emphasis added)
[32] In Kushnir et al. v. M.N.R., 85 DTC 280 (T.C.C.), at page 283, Cardin, T.C.J. found that:
The deeming provision of paragraph 251(1)(a), ..., does state the legal consequences of transactions between related persons in that, for tax purposes, they shall be deemed not to deal with each other at arm’s length.
(emphasis added)
[33] He then relied on Mr. Justice Décary’s decision in the Alroy Industries Ltd. case (supra) and concluded that:
[T]he “deeming provision” of paragraph 251(1)(a) ... cannot be rebutted and is a conclusive presumption ....
[34] In the present case, it is clear that the appellant was related to her employer, Rafedain. This is so whether or not her husband, Mr. Kazzaz, controlled the company. If one considers that he did, it is easy to conclude that they were related by application of paragraph 251(2)(a) and subparagraphs 251(2)(b)(i) and (iii) of the ITA. According to paragraph 251(1)(a), the appellant was related to Mr. Kazzaz because they were married together. By virtue of subparagraph 251(2)(b)(i), Rafedain and Mr. Kazzaz would have been related because he would have been the person who controlled the company. Finally, applying subparagraph 251(2)(b)(iii) Rafedain and the appellant would have been related because she was related to the person who would have controlled the company.
[35] Now, if one considers that Mr. Waly was the true owner of the shares and that Mr. Kazzaz acted only as a mandatory or a “prête-nom” the end result is the same: Rafedain and the appellant would still have been related. First, according to paragraph 251(2)(a), individuals are said to be related to each other when they are connected by blood relationship, marriage or adoption. According to paragraph 251(6)(a), persons are connected by blood relationship if one is the brother or sister of the other. Paragraphs 252(2)(a) and (d) as they read in 1991 prescribed that in the ITA “brother” includes brother-in-law and “sister” includes sister-in-law. Mr. Waly being Mr. Kazzaz’ brother-in-law (having married his sister) would then be considered connected to him by blood relationship (as a brother would be) according to paragraph 251(6)(a). Then, applying paragraph 251(6)(b) the appellant and Mr. Waly would be considered connected by marriage because she was married to a person (Mr. Kazzaz) connected to the other (Mr. Waly) by a blood relationship. Being connected to Mr. Waly by marriage the appellant would thus have been related to him according to paragraph 251(2)(a). As she would have been related to the person controlling Rafedain the appellant would finally have been related to Rafedain by application of subparagraph 251(2)(b)(iii) of the ITA. As explained before, such persons are conclusively considered not to deal with each other at arm’s length by virtue of paragraph 251(1)(a) of the ITA.
[36] Where the employer and the employee are not dealing at arm’s length the employment is considered excepted employment and thus not insurable according to paragraph 3(2)(c) and subsection 3(1) of the UIA except in the circumstances described in subparagraph 3(2)(c)(ii) of the same act. This provision reads:
(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.
[37] In Ferme Emile Richard (supra), Mr. Justice Décary of the Federal Court of Appeal stated the following at pages 362-363:
As this Court recently noted in Tignish Auto Parts Inc. v. Minister of National Revenue, July 25, 1994, A-555-93, F.C.A., not reported, an appeal to the Tax Court of Canada in a case involving the application of s. 3(2)(c)(ii) is not an appeal in the strict sense of the word and more closely resembles an application for judicial review. In other words, the court does not have to consider whether the Minister’s decision was correct: what it must consider is whether the Minister’s decision resulted from the proper exercise of his discretionary authority. It is only where the court concludes that the Minister made an improper use of his discretion that the discussion before it is transformed into an appeal de novo and the court is empowered to decide whether, taking all the circumstances into account, such a contract of employment would have been concluded between the employer and employee if they had been dealing at arm’s length.
[38] In Minister of National Revenue v. Bayside Drive-In Ltd., (1998) 218 N.R. 150, the Federal Court of Appeal further explained the role of the Tax Court of Canada when a 3(2)(c)(ii) determination is in issue in the following terms at page 156:
[23] The Tax Court’s role when hearing an appeal pursuant to s. 70(1) is to perform a review function. Because a determination by the Minister under s. 3(2)(c)(ii) is pursuant to a discretionary power, accepted judicial principles require deference to the discretion which the Minister has exercised, unless it has been shown on a balance of probabilities that he exercised that discretion in a manner contrary to law. Only then is the Tax Court entitled to make an independent assessment of the evidence in order to review the correctness of the Minister’s determination. At that stage, there is no new hearing and the parties do not start afresh or anew in the sense of calling their evidence and presenting their arguments again. Rather, the Tax Court must proceed with its independent assessment of the evidence on the basis of the record already before it. Thus, while the Tax Court’s review of the evidence at the second stage of the inquiry is de novo, the appeal itself is not, and cannot be transformed into, a trial de novo.
(emphasis added)
[39] The condition that the employer and employee be related to one another is a condition precedent to the exercise of the ministerial discretion under subparagraph 3(2)(c)(ii) of the UIA not the subject matter of that discretion. Given the circumstances of the present case, it is not really essential to establish with absolute certainty in what manner the appellant and her employer, Rafedain, were really related because one thing remains: as a matter of law they were related to each other one way or another. The condition precedent to the exercise of the discretion conferred upon the respondent by subparagraph 3(2)(c)(ii) of the UIA has thus been satisfied whether or not the Minister was right in considering that they were related because of the appellant’s husband, Mr. Kazzaz.
[40] With respect to the exercise of that discretion, the testimony of Mr. Houle, as well as his report[7], indicates that he conducted his examination on the circumstances of the appellant’s employment seriously and with the information he was provided with although he could not meet with or talk to the appellant herself. In my view, the facts before him and particularly the level of the appellant’s salary compared to the minimum wage rate paid in similar shops, were sufficient to make a determination. Nothing in the evidence presented at trial convinces me otherwise. In fact, that evidence simply does not show, on the balance of probabilities, that the respondent acted in a manner contrary to law or made an improper use of the discretion conferred by subparagraph 3(2)(c)(ii) of the UIA. Such a conclusion puts an end to the matter as I am not, according to the decisions of the Federal Court of Appeal in Tignish Auto Parts (supra), Ferme Emile Richard (supra), M.N.R. v. Jencan Ltd., (1997) 215 N.R. 352 (T.C.C.), Bayside Drive-In Ltd. (supra) authorized to go further and determine whether the respondent was right or wrong in reaching the conclusion he did.
[41] The appeal is dismissed and the decision of the Minister is confirmed.
Signed at Ottawa, Canada, this 23rd day of June 1998.
“P.R. Dussault”
J.T.C.C.