Date: 19980615
Docket: 98-29-UI; 98-67-UI
BETWEEN:
CLAUDE OUELLET,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Watson, D.J.T.C.C.
[1] These appeals were heard on common evidence at Rivière-du-Loup, Quebec on June 5, 1998.
[2] The appellant is appealing from the decisions of the Minister of National Revenue ("the Minister") dated October 16, 1997 that the employment held during the periods in question, from July 3 to August 3, 1995 and July 22 to September 28, 1996 with Denise Ouellet, and from October 1 to October 12, 1996 with Nathalie Ouellet, operating "Dépanneur Ouellet Enr.", the payer, is excepted from insurable employment within the meaning of the Unemployment Insurance Act ("the Act") on the ground that they were not dealing with each other at arm's length.
[3] Section 3(2) of the Unemployment Insurance Act reads in part as follows:
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,
(i) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the provisions of the Income Tax Act, and
(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 . . . .
[4] Section 5(2) of the Employment Insurance Act reads as follows:
5. (2) Insurable employment does not include
(a) employment of a casual nature other than for the purpose of the employer's trade or business;
(b) the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation;
(c) employment in Canada by Her Majesty in right of a province;
(d) employment in Canada by the government of a country other than Canada or of any political subdivision of the other country;
(e) employment in Canada by an international organization;
(f) employment in Canada under an exchange program if the employment is not remunerated by an employer that is resident in Canada;
(g) employment that constitutes an exchange of work or services;
(h) employment excluded by regulations made under subsection (6); and
(i) employment if the employer and employee are not dealing with each other at arm's length.
[5] Section 251 of the Income Tax Act reads in part as follows:
Section 251: Arm's length.
(1) For the purposes of this Act,
(a) related persons shall be deemed not to deal with each other at arm's length . . . .
(2) Definition of "related persons". For the purpose of this Act, "related persons", or persons related to each other, are
(a) individuals connected by blood relationship, marriage or adoption . . . .
[6] In Ferme Émile Richard et Fils Inc. v. Minister of National Revenue (1994), 178 N.R. 361, Décary J.A. of the Federal Court of Appeal indicated that in applying s. 3(2)(c)(ii) of the Act the Court must consider whether the Minister's decision "resulted from the proper exercise of his discretionary authority". The Court must first require that the appellant "present evidence of wilful or arbitrary conduct by the Minister, evidence which is generally not easy to obtain".
[7] In Bayside Drive-In Ltd. v. Her Majesty the Queen (1997), 218 N.R. 150, signed on July 25, 1997, Chief Justice Isaac of the Federal Court stated the following for the Court of Appeal:
At the threshold stage of the inquiry, review by the Tax Court is confined to ensuring that the Minister has exercised his discretion in a lawful manner. If, and only if, the Minister has exercised his discretion in a manner contrary to law can the Tax Court then proceed to a review of the merits of the determination.
[8] In arriving at his decisions the Minister relied on the following facts:
[TRANSLATION]
File No. 98-29(UI)
(a) The payer, the appellant's wife, bought the convenience store in May 1994 and operated it until September 30, 1996.
(b) The payer purchased the business for $85,000 by obtaining two loans: one for $35,000 through small business assistance, giving the stock as security, and the second for $50,000 from the Caisse Populaire, giving as security a hypothec on the house owned by the appellant.
(c) The appellant alleges that he was not associated with his wife in operating the business despite the fact that he gave his house as security.
(d) The payer's business was open from 7:30 a.m. to 11:00 p.m. seven days a week; the payer alleges that she was in the business at all times when it was open.
(e) The appellant worked sporadically for construction businesses and rendered services to the payer during the periods at issue.
(f) The appellant performed the following duties: he prepared orders, worked at the cash register, washed the floors, stacked empty bottles, unpacked and shelved goods, and so on.
(g) In 1995 the appellant was on the payer's payroll on July 3 and ceased work on August 3, when he went to work on a construction site.
(h) In 1996 the appellant was on the payroll for 10 consecutive weeks, from July 22 to September 28, which was the minimum number of weeks necessary to re-qualify him for benefits.
(i) During the weeks he was on the payroll the appellant received a salary of $720 a week, that is, 60 hours a week at an hourly rate of $12.
(j) From the time the business opened the appellant was there every day, even while he was working elsewhere, when he was there in the evening and on weekends.
(k) Apart from the periods at issue the appellant worked up to 50 hours a week in the payer's business without pay, as the payer did not have the financial resources to pay him.
(l) When he was on the payer's payroll the appellant received a salary that was obviously excessive compared to the salary usually paid to clerks in this type of business (minimum wage).
(m) In 1996, after receiving unemployment insurance benefits for 30 weeks (the maximum to which he was entitled) until July 20, 1996, the appellant was entered on the payer's payroll on July 22.
(n) The appellant rendered services to the payer without pay outside the periods at issue when he was receiving unemployment insurance benefits.
(o) The records of employment submitted by the appellant do not reflect the actual situation as regards the periods worked and the earnings indicated on them are clearly excessive in relation to the services rendered.
File No. 98-67(UI)
(a) From May 1, 1994 to September 30, 1996 Denise Lagacé-Ouellet operated a convenience store under the trade name "Dépanneur Ouellet Enr.";
(b) Denise Lagacé-Ouellet is the appellant's wife;
(c) as of October 1, 1996 Denise Lagacé-Ouellet leased her convenience store to the payer under a lease with a promise to purchase;
(d) on October 1, 1996 the appellant needed two weeks to qualify to receive employment insurance benefits;
(e) one of the conditions on which the lease with promise to purchase was signed was the undertaking to hire the appellant for two weeks at a weekly salary of $720;
(f) the payer would never have hired the appellant had it not been for the signing of the lease between Denise Lagacé-Ouellet and the payer;
(g) the payer would never have paid the appellant this salary had it not been for the signing of the lease between Denise Lagacé-Ouellet and the payer;
(h) the payer and the appellant were related through the transaction between Denise Lagacé-Ouellet and the payer;
(i) on October 17, 1996 the payer issued a record of employment to the appellant for the period from October 1 to October 12, 1996, that is, for two weeks, at a fixed weekly salary of $720.
[9] At the hearing the appellant admitted, in file No. 98-29(UI), the allegations made in subparagraphs (a) to (d) and (i), denied the facts alleged in paragraphs (e) and (h) and stated that he had no knowledge of the facts alleged in paragraphs (f) and (g). In file No. 98-67(UI), the appellant admitted the allegations made in paragraphs (a) to (k), (m) and (n), and denied the facts alleged in paragraphs (l) and (o).
[10] The burden of proof is on the appellant. He must show on a balance of probabilities that the Minister's decisions are wrong in fact and in law. Each case stands on its own merits.
[11] Having regard to all the circumstances of the case, including the testimony and admissions, I am satisfied that the appellant has failed to establish on a balance of probabilities that the Minister acted wilfully or arbitrarily. The parties were in a de facto non-arm's-length relationship.
[12] The appellant's employment is accordingly excepted from insurable employment under s. 3(2)(c) of the Unemployment Insurance Act and s. 5(2) of the Employment Insurance Act.
[13] The appeals are accordingly dismissed and the Minister's decisions dated October 16, 1997 affirmed.
[14] The witnesses testified frankly, honestly and with credibility: they acted in good faith on the basis of information received from officers of the local office of Human Resources Development Canada (unemployment insurance). I must strongly recommend that the Commission review this case in light of s. 60(1)(f) of the Unemployment Insurance Regulations, which reads in part as follows:
60. (1) . . . [A]n amount owing . . . may be written off by the Commission if
. . .
(f) the Commission considers that, having regard to all the circumstances,
. . .
(ii) the repayment of the . . . amount would result in undue hardship to the debtor.
Signed at Ottawa, Canada, June 15, 1998.
"D.R. Watson"
D.J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 23rd day of November 1998.
Stephen Balogh, Revisor