Date: 19971110
Dockets: 96-405-UI; 96-407-UI; 96-406-UI; 96-408-UI
BETWEEN:
BAYSIDE DRIVE-IN LIMITED, DAVID MUSIAL, ANNE T. MUSIAL,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Margeson, J.T.C.C.
[1] The matters before the Court at this time for decision are those of Bayside Drive-In Limited v. The Minister of National Revenue, 96-405(UI) and 96-407(UI); David Musial v. The Minister of National Revenue, 96-406(UI) and Anne T. Musial v. The Minister of National Revenue, 96-408(UI).
[2] The periods of time in issue have been referred to by the parties and the periods of time of course for the alleged employer, who is an Appellant in two of the cases, are the same periods of time for which the Appellants Anne T. Musial and David Musial were alleged to have been working.
[3] In the case of Anne T. Musial it was July 6 to November 13, 1992; June 28 to November 12, 1993 and September 10 to December 3, 1994. For David Musial it was from May 17 to October 2, 1992; May 17 to October 1, 1993 and May 22 to October 7, 1994.
[4] The Court allowed the application of the agent for the Respondent to amend the Reply to Notice of Appeal (Reply) and this was done by consent.
[5] The issues in all the cases are the same and that is whether or not during the periods in question the Appellants, Anne Musial and David Musial, were engaged in insurable employment while allegedly employed by Bayside Drive-In Limited, (the employer).
[6] The only evidence given on behalf of the Appellants was that of Mr. Gregory J. Musial. He is the father of one Appellant and the husband of the other Appellant. He signed the Records of Employment (ROE) and also completed the application for unemployment insurance benefits. Gregory J. Musial was acting as agent for both of the Appellants and also for the Appellant Company.
[7] It is to be noted that the Appellant Anne T. Musial was not present in Court to give direct evidence or to be cross-examined. The Appellant David Musial was not present to give evidence in his own case, to subject himself to cross-examination nor to be able to refute the allegations as set out in the Reply on behalf of the Respondent. It is to be noted that very few of the allegations contained in the Reply have been refuted or even attempted to be refuted and in essence they remain intact in all of these cases. Some of the allegations of fact contained in the Replies of course are significant.
[8] The Agent for the Appellants testified and said that the business in question was started in June, 1960. In July 1976 they incorporated the business. This was done on the advice of an accountant. The accountant is not here. But in any event, suffice it to say that it is obvious that according to the evidence of the agent here today they accepted his advice. They concluded that because they had incorporated the company and that no one shareholder owned 40% or more of the shares of the incorporated body, it was possible for the Appellants to be engaged in insurable employment with the Payor. They considered this employment to be convenient and practical and made them eligible for unemployment insurance benefits if the time arose when they would be unemployed.
[9] It was obvious from the beginning that this was a seasonal business, that the time would come soon when there was no work and that they would be seeking unemployment insurance benefits. It was quite obvious that that was a major part of the consideration and they were advised that they would be considered to be in insurable employment.
[10] This is not a criticism of Mr. Musial for the information that he received. He sought advice and received it. Unfortunately he did not receive enough advice. It is not every time that somebody works for a limited company, even if they do not own 40% of the shares, that it will be insurable employment.
[11] Insurable employment is a specific type of employment. It is employment under a contract of service and in light of the provisions of paragraph 3(2)(c) of the Unemployment Insurace Act, (the Act) and the provisions regarding excepted employment, insurable employment is other than excepted employment. If an employment is under a contract of service and the contract of service would not have been entered into with parties unrelated, it is not insurable employment.
[12] The Act provides that the Minister is entitled to make a decision based upon his finding that a similar contract of service would not have been entered into with parties unrelated. When he does that, then it is the duty of the Appellants in a case such as this to show that the Minister was incorrect in making the decision that he did.
[13] The Tax Court of Canada, in following the cases of Ferme Émile Richard et Fils Inc. v. M.N.R., December 1, 1994, A-172-94 (F.C.A.) and Tignish Auto Parts Inc. v. M.N.R., July 25,1994, A-555-93 (F.C.A.) and other cases which have followed, would have to find itself to be in a trial de novo situation first of all to overturn the decision and, secondly, if it did find that it was in a trial de novo situation it would have to find that a similar contract of service would have been entered into with parties that were unrelated in order for the Appellants to be successful. Those are the two burdens that the Appellants have upon them in this case. They are not light burdens.
[14] Unfortunately there was a dearth of evidence given in these cases to satisfy the Court as to all the requirements of which the Court has to be satisfied in order to render a favourable decision for the Appellants.
[15] The Agent for the Appellants said that since all of the Appellants worked, each held less than 40% of the shares, he believed that they were going to be able to be considered to be in insurable employment. Their claims were not questioned until June of 1995 and then Revenue Canada required the records of the employer so as to determine whether or not this was insurable employment. Ultimately, Revenue Canada decided that this was not insurable employment because of the conclusion that it was excepted employment under paragraph 3(2)(c) of the Act.
[16] The Agent for the Appellants said that they started working in April of each year. During the years in question, on April 1st, there was not enough business to pay David the full salary and they agreed that as soon as there were enough funds that he would go on the books as an employee. His salary, he said, took this into account. Various exhibits were introduced by consent, including the Applications for Unemployment, the Records of Employment, a statement from Workers’ Compensation, payroll information, financial information, some Department of Health material and these have all been considered by the Court in making the decision that it does.
[17] The evidence made it clear that during the periods in question, by times, the two Appellants and Mr. Gregory Musial himself were working. There were also some other employees who were unrelated.
[18] In cross-examination Mr. Musial said that in each year they began the business around April 1st and concluded around November 30th of each year. All three shareholders worked probably from April 1st in each year to November the 30th, although they were not on the payroll and were not paid all that period of time. They only went on the payroll when there was enough income with which to pay them.
[19] As the Court understands his evidence he said, "We each collected unemployment insurance until we were on the payroll." He said that all non-related employees were paid on the basis of an hourly salary and a record was kept of the hours which they worked. He said, "Once we were on the payroll we took a full salary each week." Normally the business was open from 11:00 a.m. to midnight, seven days a week.
[20] The witness said that when he worked he received $600 a week. In 1995 David received $675 a week. He said, "We were doing a bit but not being paid," referring to his wife and himself, I presume. "David was doing the work. He did the books and he helped out as much as he could at the business itself. He assisted in hiring staff, training staff, picking up supplies. He helped him to manage the business."
[21] Before 1990 this witness controlled the company. After 1990 he still made all the major decisions but he made them after receiving input from the other shareholders according to his evidence. Before 1990, he believed that only David was eligible for unemployment insurance benefits. “After 1990 we all qualified." David's shares were a gift. He did not make any payment for them. He had no investment in the business. All the shareholders had signing authority, although only one person was needed to sign a cheque.
[22] The Appellant, David Musial, used his own personal vehicle for work and he was only repaid the cost of gas. He was not paid repairs, he was not paid insurance nor any other costs of maintenance of the vehicle in any way. He picked up supplies. He hauled garbage away. The witness said that he performed the duties as set out in the Notice of Appeal.
[23] He was referred to paragraph (k) of the Reply and he said that there were additional duties that David did in addition to those set out in paragraph (k). David opened the business seven days a week at 11:00 in the morning and worked until midnight and then closed the business. He ordered supplies. He did pricing. He was a back-up cook from 12:00 to 1:30 and from 4:00 to 6:00 in the afternoon. He was on call at peak times. He checked the stock and compared prices daily and he checked inventories. He was in charge of storing perishables. He drove to the suppliers to get supplies. He was in charge of maintenance of the equipment, particularly two large soft ice cream machines which required regular cleaning and sanitizing. The coolers, the fryers and the CO2 system were also the responsibility of David.
[24] He did admit that they were all paid bonuses as employees, not as shareholders and that no other employee who was non-related received any bonus. All shareholders received the same pay irregardless of the number of hours that they worked. “They worked more like 80 hours a week.” That was inconsistent with some of the documents, but that is what he said.
[25] The Records of Employment of Anne and David, the two Appellants, were introduced for the years in question by consent and these ROEs set out the periods of time during which they worked and the amounts of money that they received. The witness did say that the Appellant Anne Musial took a one-week vacation period. She was on Workers’ Compensation for two weeks. But the documents made it clear in the end that during these two weeks for which she claimed Workers’ Compensation she was not claiming to be an employee.
[26] Exhibit R-3 was a Workers' Compensation pay stub. Mr. Musial said that Anne Musial took her vacation before she was hurt. At least that is what he thought. Then he said that he did not know and then he said that, "Anyway, she did take one week in October." The son took a week in August. All the unrelated employees received 4% vacation pay and not vacation.
[27] He was asked how the pay was determined for David and for the other Appellant. He said that he decided. He was asked why and he said that it was a combination of factors. The minimum wage was roughly $5.50 to $6.00 an hour. He said that it would cost a lot more for him to hire somebody else even at the going minimum wage rate, in light of the number of hours that David and his wife put in and in light of the extreme duties that they had to perform while they were working. He admitted that all the unrelated employees had their hours kept strictly and that they were paid on the basis of the number of hours that they worked multiplied by the minimum wage or the wage rate which they received at the time, which was $5.50 to $6.00.
[28] David took a vacation in August. This was referred to as the busiest season of the year. He was asked why David received a raise when Anne did not and he said that David performed more duties than Anne. He admitted that Anne Musial received a $10,000 in bonus in 1993, $5,000 for 1992 and $5,000 for 1993. The witness received a retirement allowance himself of $46,000 in 1994.
[29] The Record of Employment of Anne Musial was put in as an exhibit. For 1994 it showed 12 weeks. This witness said that they worked, meaning himself and Anne Musial, in 1994 when they were not on the payroll, when they were not being paid. His evidence was that all unrelated employees received $5.75 to $6.00 an hour in 1992, 1993 and 1994. He admitted to having prepared the unemployment insurance applications for both of the Appellants and identified Exhibits R-5, R-6 and R-7, the unemployment insurance applications for David and Exhibits R-8 and R-9, the unemployment insurance applications for Anne. He admitted that Exhibit R-9 was not factual. The information contained in Exhibit R-9, Questions No. 27, 30 and 31, was not correct. Likewise, for Exhibit R-8, page 2, Questions No. 27, 30 and 31, the answers were incorrect.
[30] He wished he had not put in these hours. He did not know why he put them in. He did not think it was reasonable to put in the actual hours that they worked because there were so many of them. Exhibit R-7, with respect to David Musial also contained information that was incorrect.
[31] He identified David Musial's ROEs for 1992, 1993 and 1994. These ROEs showed that David took vacation in August. Again, with respect to Exhibit R-6, the information contained therein was incorrect. "I don't know why I did not put the correct information in" was his answer.
[32] Exhibit R-13 was the payroll information or statement which was put in by consent and it showed that Anne Musial did not get paid for the two weeks when she was on Workers’ Compensation. The Appellant tendered and rested.
Argument of the Respondent
[33] In argument, the Agent for the Respondent took the position that all of the shareholders performed services for the business when they were not on the payroll. All related employees were paid on the basis of salaries irregardless of the number of hours that they worked. All related employees received vacation. Unrelated employees were paid on an hourly basis. Their records of hours were kept. They were only paid for the hours that they worked. They were paid the minimum wage. They were paid vacation pay under the Vacation Pay Act rather than being given vacation like the related employees were. There were no set hours for the Appellants and no record of their hours was kept. They received the same pay regardless of the hours that they worked.
[34] The records showed that David Musial worked 40 hours and Anne Musial worked 48 hours and this information, according to the witness, was incorrect. But that is what it showed. If that was correct and if the Court should accept that that was the hours that they worked, then the amount of pay that they received was substantial for the amount of work that they did according to the evidence.
[35] David Musial only received gas for the use of his vehicle. He used the vehicle in business. That is not normal. He was not paid for wear and tear, he was not paid for insurance. This is not indicative of an arm's length relationship. It was unreasonable to have three managers on the payroll at the same time and to have all those other employees as well. Why would they have three managers on, that being David, Anne and the witness, Greg Musial?
[36] The duties for Anne were basically the same as the duties for the others and yet her pay would be roughly $18.50 an hour and theirs was $6.00 an hour. She was being paid roughly $12.00 more. David's duties were mainly in maintenance and yet he was paid roughly $23.00 to $37.00 an hour, which was an unusually high amount of money.
[37] Under the appropriate provisions of the Income Tax Act, (I.T.A.) sections 251 and 253, the Respondent relied upon the non-arm's length relationship. This was a non-arm's length relationship. The two Appellants were a related group under the I.T.A. and they were dealing with each other at non-arm's length. It was reasonable for the Minister to have concluded that this was not insurable employment, that it was excepted employment and this Court should not overturn that finding. A similar contract of service would not have been entered into with parties unrelated.
Argument of the Appellants
[38] In argument, the Agent for the Appellants said that the business was operated to provide employment for students, basically during the summer. It also provided, of course, employment for the two Appellants. It catered to the tourist traffic. David's duties were much more numerous and onerous, much more valuable than those referred to by the Agent for the Respondent. David was not overpaid. The business would not have been able to fetch the services of somebody else for that kind of money.
[39] The hours worked according to the information contained in the exhibits was incorrect. Those are only accommodation figures. The agent admitted that the information was not correct, even though it was supplied by him and presumably given to the appropriate authorities so that they could draw a reasonable conclusion as to whether or not this was insurable employment. How they would do that without the right information is difficult to imagine.
[40] But in any event, the witness for the Appellants said that that's all it was, the information was an accommodation, an oversight on his part. They acted honestly. They had advice from an accountant. They thought that it was insurable employment since each shareholder owned less than 40% of the shares. The claims were not questioned until January. Why did the appropriate authorities wait that long and put them into this difficult position? "We were shocked," he said, "when we found that out." The wages in any event were not excessive. This was insurable employment.
Analysis and Decision
[41] As the Court indicated in its opening remarks, it is the duty of the Appellants in a case like this to establish on a balance of probabilities that this was insurable employment. In order to show that it was insurable employment the Appellants must satisfy the Court on a balance of probabilities that the evidence established that they were employed under contracts of service which would have been entered into with parties who were unrelated and that the Minister was wrong in concluding that this was not insurable employment.
[42] As the Court also indicated, in a case where paragraph 3(2)(c) of the Act is brought into issue, the Court's duty is a two-step process: 1) to determine first of all whether or not there was a contract of service. This does not seem to be argued here; 2) if there was a contract of service, was it one which would be entered into with parties unrelated. In that light it is the Court's duty to first look at the facts before it and determine whether or not it is in a trial de novo situation. In other words, did the Minister err in some principle of law, did he misconstrue appropriate facts, did he consider facts which were inappropriate, did he not take into consideration appropriate facts, did he misinterpret the facts before him, did he act unjustly or did he act non-judicially, to such an extent that the Court should open the matter up and look at it from a trial de novo situation?
[43] Secondly then, if the Court says that it is in a trial de novo situation, it must decide whether, on the facts of the case before it, it should find that a similar contract of service would have been entered into with parties unrelated and therefore the Minister's decision should be overturned.
[44] In this particular case the Court is satisfied beyond any question of doubt that this was not insurable employment, by any reasonable measuring stick of what amounts to insurable employment. The evidence in this case has very few indicia of insurable employment.
[45] The Court is not satisfied, first of all, that it is in a trial de novo situation because the Court is not satisfied, taking into account the presumptions contained in the Reply and the evidence given before it today, the documentary evidence as well as the viva voce evidence, that the Minister misconstrued any evidence, that he took into account any information which was incorrect (except of course that there has been an amendment made to the Reply and the Court has to take that into account). That is different from what the Minister had before him. But on the other essential elements, the nature of the employment and the nature of the contracts of service, the Minister had all that information before him.
[46] The Court is not satisfied, that considering the amendment, in light of the evidence given here today and the documents presented, that the Minister made any error in law or in fact, that she misapplied the evidence or failed to consider any appropriate evidence, that would put the Court in a trial de novo situation today. But if the Court is wrong on that and if some Court should decide that this Court should have considered itself to be in a trialde novo situation, then the Court goes on and considers whether or not a similar contract of service would have been entered into with parties unrelated. This Court is satisfied that it would not have been.
[47] The only reason that contracts of service of this nature, if they were contracts of service, were entered into with these Appellants was because they were related. The Court looks at the nature of the employment itself, the fact that no hours were kept for their pay, the fact that they were paid relatively high wages, the fact that they worked for periods of time when they were not paid, when they were not on the payroll.
[48] This employment was basically employment of convenience for the family and it was based upon faulty information that they received or else a false interpretation of the information that they received from their accountant. If he led them to believe that every time a person is retained by a body corporate whose shareholders are related to the employer, that that automatically means that they are engaged in insurable employment so long as the shareholders do not control over 40% of the shares, then that was faulty information. If he did not say that to them and then the Appellants decided that they would always be in insurable employment for some other reason, then that was a faulty interpretation of the information that the accountant may have provided.
[49] The Court is not exactly sure what the accountant would have told them because he was not here to testify.
[50] Further, the rates of pay were not shown to have been reasonable. There was a record kept of the hours of all the employees who were unrelated. There was no record kept of the hours of the employees who were related. Bonuses were given to all the employees who were related. No bonuses were provided to employees who were unrelated. The employees who were unrelated just received vacation pay. The employees who were related received vacations.
[51] In David Musial's case the Court would be hard pressed to explain why in the busy season of the year that Appellant, with the important position that he was in, would have been allowed to take his vacation in the middle of the busy season, except for the reasons that he was related. No other reasonable employer would have allowed an essential employee to go off on vacation during that period of time when he knew that they were going to be finished in November, he only started work in April and that every day during the busy season is very important for that type of a business.
[52] The Court also looked at the financial statement. The financial statements were only for the years 1995 and 1994. In 1995 there was a loss of $5,202 and in 1994 there was a loss of $23,651. The Court has not been provided with any financial information for the years in question here. The financial picture does not play a significant role insofar as the Court’s decision is concerned.
[53] In addition to the factors which the Court has already referred to, it is obvious that each of the employees was not subject to control or supervision of the company as such. There was no breakdown showing how these people were retained, how their contracts of service were developed and on what basis they were paid. There is no indication as to exactly how many hours they were supposed to work or what was the basis for the contracts of service when they entered into them.
[54] There was no indication that there were any Minutes kept of the company itself which set out the company's needs for the year, why these people in particular were retained, what their duties were to be and what the basis of the remuneration was to be. Certainly there was no satisfactory basis upon which this Court could conclude that their wages were reasonable under the circumstances.
[55] The differences between the terms and conditions of employment of the Appellants who were related and those employees who were not related makes it quite clear that a similar contract of service would not have been entered into with parties unrelated.
[56] The Court will have to dismiss the appeals and confirm the Minister's determination.
"T.E. Margeson"
J.T.C.C.