Date: 19980705
Dockets: 97-1369-UI; 97-1372-UI
BETWEEN:
FABIENNE SYNNOTT, ÉRIC VALCOURT,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Prévost, D.J.T.C.C.
[1] These appeals were heard on common evidence at Québec, Quebec on June 5, 1998.
[2] In the case of Fabienne Synnott the appeal is from a decision by the Minister of National Revenue (“the Minister”) dated May 7, 1997 that her employment with Gestion Éric Valcourt Inc. (“the payer”) from June 12 to August 6, 1994 was not insurable because it was employment in which the employee and employer were not dealing with each other at arm’s length.
[3] In the case of Éric Valcourt the appeal is from a decision by the Minister on the same date that his employment with the payer from May 1 to August 28, 1994, May 14 to September 16, 1995 and May 20 to September 8, 1996 was not insurable for the same reason, and also because he had de facto control over more than 40 percent of the voting shares in the company.
[4] In the first case paragraph 5 of the Reply to the Notice of Appeal reads as follows subsequent to an amendment to subparagraph (n) authorized at the hearing:
[TRANSLATION]
5. In arriving at his decision the respondent Minister of National Revenue relied inter alia on the following facts:
(a) the payer operates a business selling, repairing and renting bicycles and certain other sports equipment; (A)
(b) since January 15, 1994 Éric Valcourt, the appellant’s spouse, has held 35 percent of the payer’s voting shares, and Louis Valcourt, Éric’s father, has held 65 percent; (A)
(c) the payer’s business is located in the residence of the appellant and her spouse; (DAD)
(d) since 1994 Éric Valcourt, who already had experience repairing bicycles, has done mostly sales and repair work; (A)
(e) the appellant helped Éric with sales and could also do minor repairs; (DAD)
(f) in 1994 the appellant needed eight weeks of work to be eligible to receive unemployment insurance benefits; (A)
(g) in 1994 the appellant was paid from June 12 to August 6, that is, for eight weeks; (A)
(h) the payer’s books for 1994 show income from March to November, with the busiest months being April, May, June, July and August; (A)
(i) the appellant worked for the payer without pay after the period at issue, keeping the books among other things; (DAD)
(j) the alleged work period does not coincide with the business's busiest period or with the period actually worked by the appellant; (D)
(k) the appellant was available seven days a week as the payer’s business was located in her residence; (ASA)
(l) during the period at issue the appellant earned the same amount as her spouse, a gross amount of $624 a week; (A)
(m) in view of its financial position, the payer would not have paid a salary such as this to an outsider; (D)
(n) in 1994 the payer reported gross income of $101,336 and net losses of $10,052 A.G.; (A)
(o) the appellant was related to the payer within the meaning of the Income Tax Act; (A)
(p) in these circumstances it is not reasonable to conclude that the appellant’s contract of employment would have been substantially similar if she had been dealing with the payer at arm’s length. (D)
[5] In the second case the Notice of Appeal contains the male appellant's version of the facts and it is appropriate to reproduce it here:
[TRANSLATION]
1. On January 15, 1994 the appellant Éric Valcourt and his father Louis Valcourt purchased the shares held by Henri Lepage in Gestion Henri Lepage Inc.; (A)
2. For several years Gestion Henri Lepage Inc., a management company, had operated a business selling and repairing bicycles known as “Bicycles Bernières Enr.”; (NK)
3. On March 2, 1994, by means of an amendment to its articles, Gestion Henri Lepage Inc. became Gestion Éric Valcourt Inc., the payer, although the payer's name should have been “Gestion Louis et Éric Valcourt Inc.”, as mentioned in the payer’s minute book; (NK)
4. The payer’s activities have always been and still are seasonal, with the busy period being from late March to late September each year, and the business is closed outside this seasonal period; (D)
5. The business was purchased in light of financial forecasts submitted by Henri Lepage, which were based inter alia on the 1993 financial statements and the opening balance sheet; (NK)
6. The business was purchased for $60,000, $25,000 of which was paid in cash by the appellant’s father and $35,000 by means of a loan to the payer from the Royal Bank, and since the appellant was insolvent, the payer’s loan was obtained with a guarantee from Louis Valcourt, the appellant’s father; (D)
7. There were two reasons for buying the business, one of which was to make money in the medium term while the other was to create employment for the appellant, who was coming home to Quebec; (NK)
8. The appellant’s father has extensive business experience, having been in business for 25 years; he has and has had businesses in excavation (landscaping), aviation, outfitting and, since 1994, the sale and repair of bicycles; (NK)
9. The appellant, on the other hand, is a person with manual skills who is a mechanic by training and previously had a business repairing bicycles and small engines; (NK)
10. At the end of 1993 the appellant and his family, who were living in Alberta, had to return to Quebec at short notice after the appellant’s spouse lost her employment; (NK)
11. On his return to Quebec the appellant did not have a penny and had no place to live and no employment; (D)
12. After the payer purchased the business the appellant and his wife bought the residence from which the business is run on February 1, 1994, and as their home in Alberta had not been sold it was a guarantee given by the appellant’s father that made it possible to purchase this residence; (DAD)
13. The space occupied by the payer’s business is independent of the appellant’s living space, and they also have separate entrances and parking areas; (NK)
14. The appellant holds 35 percent of the payer’s voting shares and his father holds 65 percent; (A)
15. During the first few months of the payer’s operations each year, the payer’s activities consist essentially of selling bicycles; (NK)
16. Its activities subsequently expand to include bicycles repairs; (NK)
17. During 1994, 1995 and 1996 the appellant’s periods of employment were as follows:
- from May 1 to August 28, 1994;
- from May 14 to September 16, 1995; and
- from May 20 to September 8, 1996; (D)
18. During these periods the appellant’s terms of employment were the same; (A)
19. It was the payer, through the appellant’s father, that decided when the appellant’s employment would begin and end; (D)
20. During his periods of employment the appellant received customers, repaired and sold bicycles, ordered parts, looked after the inventory and so on; (A)
21. The appellant’s usual work schedule depended on the hours when the business was open; (A)
22. Ordinarily the appellant's father did not directly supervise him (unless his father was present). Thus, the appellant was free to use his own work methods. However, he gave his father regular reports on his work and, from a financial perspective, major expenditures had to be authorized by his father; (D)
23. In 1994, 1995 and 1996 the appellant was paid by the week regardless of the number of hours worked; (A)
24. In 1994 the appellant’s salary was fixed according to what Henri Lepage was paid in 1993, namely $600 a week; (NK)
25. In 1996, in view of the payer’s losses, the appellant’s salary was reduced to $500 a week. It was of course not the appellant who ordered that his salary be reduced; (D)
26. In 1994, 1995 and 1996 the appellant’s salary was always paid regularly. He is owed no salary at the present time; (A)
27. The tools used by the appellant in performing his duties were all owned by the payer; (A)
28. The appellant has never invested money in the payer; (D)
29. The appellant has taken no financial risks in the payer. If any risk could be ascribed to the appellant it would have to be based on the fact that he is a shareholder of the payer. In such a case, his risk would not exceed the proportion of shares he holds in the payer, that is, 35 percent; (D)
30. In any case, the payer needed an employee to operate the business. If the appellant were to terminate his employment the payer would hire another employee on terms of employment similar to those of the appellant; (D)
31. In 1995 and 1996 the appellant was the only employee listed on the payer’s payroll, while in 1994 the appellant’s spouse was on the payer’s payroll for a period of eight weeks; (A)
32. In 1994, 1995 and 1996 the appellant’s father worked for the payer from March to early July. He did so without pay as an interested shareholder, and in order to keep busy; (D)
33. In 1994, 1995 and 1996 it was the appellant’s spouse, under the instructions of the spouse of the appellant’s father, who made entries in the payer’s journal, remittances to various government authorities, deposits and so on; (NK)
34. The appellant’s principal (and indeed only) function in the day-to-day administration of the payer was to sign its cheques, as he had no liking for and/or interest in the payer’s paperwork; (DAD)
35. The payer’s accountant Georges Bégin was also Henri Lepage’s accountant. It was Mr. Bégin who made up the payer’s financial statements in 1994, 1995 and 1996; (A)
36. For information purposes the following data come from the financial statements of Gestion Henri Lepage Inc. (1993) and the payer (1994, 1995 and 1996):
|
YEAR |
1993 |
1994 |
1995 |
1996 |
|
Sales |
126,086 |
101,336 |
105,803 |
87,359 |
|
Salaries |
15,983 |
16,880 |
11,562 |
11,683 |
|
Net income |
11,654 |
(10,052) |
(8,685) |
(14,721) |
(DAD)
37. In light of the facts alleged in paragraphs 1 to 36 hereof, the appellant’s employment for the payer was genuine employment held under a contract of service. There was sufficient control of the appellant and the tools were owned by the payer. The appellant assumed no financial risk as an employee; any risk would be as a shareholder and in proportion to the shares held. Finally, the appellant’s employment was an integral part of the payer’s activities; (D)
38. The salary paid and the terms of the appellant’s employment were reasonable and corresponded to those received by Henri Lepage in previous years. If the appellant had stopped working the payer would have hired another employee on similar terms of employment; (D)
39. Further to the respondent’s decision not to treat the appellant’s employment as insurable in the three aforementioned employment periods, the Canada Employment Insurance Commission is claiming the sum of $39,420 from the appellant. (NK)
GROUNDS OF APPEAL
The employment held by the appellant Éric Valcourt with Gestion Éric Valcourt Inc. during the periods from May 1 to August 28, 1994, May 14 to September 16, 1995 and May 20 to September 8, 1996 was insurable because it was held under a contract of service within the meaning of the Unemployment Insurance Act and the Employment Insurance Act.
The appellant and the payer were dealing with each other at arm’s length.
The appellant did not have de facto control over more than 40 percent of the payer’s voting shares.
[6] In the Reply to the Notice of Appeal the respondent wrote:
[TRANSLATION]
1. He admits the facts set out in paragraphs 1, 14, 18, 20, 21, 23, 26, 27, 31 and 35 of the Notice of Appeal.
2. He has no knowledge of the facts set out in paragraphs 2, 3, 5, 7, 8, 9, 10, 13, 15, 16, 24, 33 and 39 of the Notice of Appeal.
3. He denies the facts alleged in paragraphs 4, 6, 11, 17, 19, 22, 25, 28, 29, 30, 32, 37 and 38 of the Notice of Appeal.
4. He denies as drafted the facts set out in paragraphs 12, 34 and 36 of the Notice of Appeal.
[7] To make these reasons easier to read the Court has indicated after each paragraph of the Notice of Appeal whether the respondent admitted it (using the letter “(A)”), had no knowledge thereof (using the letters “(NK)”), denied it (using the letter “(D)”) or denied it as drafted (using the letters “(DAD)”).
[8] Paragraph 8 of the Reply to the Notice of Appeal reads as follows subsequent to an amendment to its subparagraph (n) authorized at the hearing:
[TRANSLATION]
8. In arriving at his decision the respondent Minister of National Revenue relied inter alia on the following facts:
(a) the payer operates a business selling, repairing and renting bicycles and certain other sports equipment; (A)
(b) since January 15, 1994 the appellant has held 35 percent of the payer’s voting shares and the appellant’s father Louis Valcourt has held 65 percent; (A)
(c) the payer’s business is located in the appellant’s residence; (DAD)
(d) since 1994 the appellant, who already had experience repairing bicycles, has done mostly sales and repair work; (A)
(e) in 1994 the payer paid salaries to two persons, the appellant and his spouse Fabienne Synnott, while in 1995 and 1996 the payer paid only the appellant; (A)
(f) in 1994, 1995 and 1996 the appellant was paid for 16, 18 and 16 weeks respectively, that is, the minimum to be eligible to receive unemployment insurance benefits; (A)
(g) the payer’s books show income from March to November in 1994 and from March to December in 1995 and 1996; (A)
(h) the appellant worked for the payer without pay before and after each of the periods at issue; (D)
(i) the alleged work periods do not coincide with the business's periods of activity or with the periods actually worked by the appellant; (D)
(j) the payer's business was open seven days a week until June 24 and six days a week thereafter; (A)
(k) the appellant had no fixed work schedule, as he was available during the store's business hours, and did not make a record of his hours; (A)
(l) in 1994 and 1995 the appellant received a fixed weekly salary of $624 regardless of the number of hours or days he worked; (A)
(m) in 1996 the payer reduced the appellant's salary to $525 a week in view of the negative financial performance; (A)
(n) the payer’s financial statements disclose the following income:
|
1994 |
1995 |
1996 |
|
|
Gross income |
$101,336 |
$105,803 |
$87,359 |
|
Net losses |
(10,052) A.G. |
(8,685) |
(14,721) |
(A)
(o) in November 1994 the appellant stood surety jointly with Louis Valcourt for a $40,000 loan to the payer from the Royal Bank of Canada; (DAD)
(p) the appellant signed all cheques relating to the operation of the payer's business; (DAD)
(q) the appellant was related to the payer within the meaning of the Income Tax Act; (A)
(r) in these circumstances it is not reasonable to conclude that the appellant’s contract of employment would have been substantially similar if he had been dealing with the payer at arm’s length. (D)
[9] In the preceding extract from the replies to the notices of appeal the Court has indicated, in parentheses after each subparagraph, the comments made by counsel for the appellants at the start of the hearing:
(A) = admitted
(D) = denied
(ASA) = admitted subject to amplification
(DAD) = denied as drafted
Appellants’ evidence
According to Louis Valcourt
[10] Henri Lepage was getting old and decided one day to sell his shares in Gestion Henri Lepage Inc.
[11] He and Louis Valcourt agreed on a price and Mr. Valcourt paid a down payment of $50,000 (Exhibit A-2) out of his own pocket on December 15, 1993.
[12] Mr. Valcourt's son Éric was returning from Western Canada and he wanted to create work for him as he was unemployed.
[13] The payer then took out loans from the Bank and the Caisse Populaire; Louis Valcourt guaranteed them and the contract was signed.
[14] His son was hired for the first time on May 1, 1994.
[15] When the bicycles arrive sales begin and the busy season in this type of business, depending on the weather, is from April to August.
[16] Henri Lepage was there until June and the business was swamped with work.
[17] That is why Mr. Valcourt hired the female appellant on June 12, 1994.
[18] He has his own outfitting operation to look after, and its peak period is from June 15 to late August: he was far away but he frequently telephoned the bicycle business where the appellants were working.
[19] He returned from his outfitting operation on about August 15 or 16, 1994.
[20] The female appellant was very good in the bicycle shop but, as business drops off in August, he laid her off on August 6: his son could then handle the work by himself.
[21] The season ended with a deficit, and he was very disappointed but told himself [TRANSLATION] “We will recover”. He then drew up a budget for 1995 in consultation with his friend Mr. Lepage.
[22] The appellants’ weekly salaries were determined based on the advice of Mr. Lepage and his accountant Georges Bégin.
[23] Georges Bégin acted initially for Henri Lepage.
[24] Louis Valcourt laid his son off on August 28, 1994 as he could then handle the work by himself.
[25] In March and April 1995 it was he who looked after bicycle sales, and he did not need his son until May 14 of that year.
[26] Business was quite good but it was still [TRANSLATION] “not thriving”.
[27] When he returned from the outfitting operation in 1995 he took over from his son, who then had to look after his two young children.
[28] He then [TRANSLATION] “cracked down” again but there was another loss, which was a fresh disappointment to him.
[29] He had originally seen more opportunities in the business for his son than for himself.
[30] His son returned to work in 1996 but he [TRANSLATION] “was not feeling well”, and he accordingly had to close the shop for five days during the peak season.
[31] Sales declined with each passing year.
[32] The financial statements (Exhibit A-1) prepared by Georges Bégin for 1994, 1995 and 1996 contain the figures set out in paragraph 36 of the Notice of Appeal of Louis Valcourt's son.
[33] Lepage's business was sold for $60,000 and the house for $100,000. After Louis Valcourt's down payment of $50,000, a balance of $110,000 remained. The appellants borrowed $75,000, for which Mr. Valcourt stood surety, from the Caisse Populaire, and he himself borrowed another $40,000 from the Bank. The balance of $5,000 was the working capital.
[34] The business's street address is the same as that of the house.
[35] Louis Valcourt told his son about his December 1993 discussions with Henri Lepage: his son then returned from Alberta heavily in debt.
[36] It was on his accountant’s advice that the transaction was made retroactive to January 1, 1994.
[37] At the outset he asked the notary to transfer 35 percent of the shares to his son and 65 percent to himself.
[38] His son was supposed to become director and vice-president or secretary and he was to keep the position of president for himself.
[39] According to the contract (Exhibit I-1) dated January 15, 1994 between Henri Lepage, as the seller, and Louis Valcourt and his son, as the purchasers, six and a half of the ten Class A shares in the capital stock of Gestion Henri Lepage Inc. purchased at that time were purchased in Mr. Valcourt's name, while three and a half were purchased in his son's name.
[40] The contract also indicates that this company was doing business as “Bicycles Bernières Enr.” and that it undertook to sign all the documents necessary the enable the company to continue doing business under that trade name.
[41] Mr. Valcourt's son did not pay for his 35 percent of the shares as he had no money.
[42] He may have invested a few dollars in the company when it was short of money, but that was all.
[43] In a resolution (Exhibit I-1) dated January 15, 1994 by the directors of Gestion Henri Lepage Inc., it was resolved to appoint Éric Valcourt president and secretary and Louis Valcourt vice-president and to change the company's trade name to “Gestion Éric Valcourt Inc.”
[44] Louis Valcourt must not have read these minutes carefully before signing them as it was actually he who was president.
[45] The payer’s ledger (Exhibit I-2) indicates under [TRANSLATION] “Bank” a loan of $40,000 in February 1994 and a loan payment of $676.37 the following April.
[46] Louis Valcourt is not an accountant but hires one, and while he was unable to explain these entries, the accountant would do so later in the hearing.
[47] There was clearly an error as the accountant told him at some point in March 1995 that it was not usual for the company to pay interest on a loan which he had taken out personally.
[48] In the 1996 ledger (Exhibit I-3), there are [TRANSLATION] “loan credit” entries but Louis Valcourt could not explain them.
[49] In 1994 he assumed personal responsibility for the business's credit line but he no longer did so in 1995 and 1996.
[50] He was aware that in early 1995 the company had a credit line of $20,000 with the Royal Bank and that he was responsible for this.
[51] However, he thought that the provincial registration was in the name of “Gestion Louis et Éric Valcourt Inc.”
[52] He or his son signed the business's cheques, but for amounts of over $200 his son had to have at least his oral authorization.
[53] In early November the business shuts down and [TRANSLATION] “we do not even heat it”. Operations resume in March or April.
[54] At one point Louis Valcourt had the idea of renting snowboards and cross-country skis. The business accordingly bought a few snowboards, but this was a total failure and the idea was dropped.
[55] He is personally liable in this matter for up to $160,000 and has to keep an eye on things.
[56] He even goes there in winter, [TRANSLATION] “dressed warmly”, to prepare for the coming year and to clean the rooms.
[57] Éric Valcourt did mostly repair work and Fabienne Synnott handled sales; she also did the accounting after Louis Valcourt's wife showed her how.
[58] The 1995 ledger (Exhibit I-4) was prepared by Fabienne Synnott but she was not paid for this as the company did not have the resources to pay her.
[59] The banks contacted Louis Valcourt directly, or in any case [TRANSLATION] “it was his responsibility”.
[60] Éric Valcourt's records of employment (Exhibit I-5) indicate as employer either Boutique Cyclic, a trade name of the payer, Bicycle Bernières Enr., a trade name of Gestion Henri Lepage Inc., or both of these trade names.
[61] The reason they give [TRANSLATION] “Box 489, Schefferville” as the employer’s address is that all documents were sent to Louis Valcourt there at his outfitting operation.
[62] Louis Valcourt signed the records of employment for 1994 and 1995 but Fabienne Synnott signed the one for 1996.
[63] The minute book (Exhibit A-3) includes a resolution dated May 29, 1994 that reads as follows:
[TRANSLATION]
The directors note that the name of the company has been changed to “Gestion Éric Valcourt Inc.”, whereas their intention was that the name should be “Gestion Louis et Éric Valcourt Inc.”
In view of the expense that would result, it is agreed to wait for a more substantial change in the articles before changing the company’s name.
. . .
The president asked that all expenses of over $200 be approved in advance by himself either orally or by fax.
[64] This was signed by Louis Valcourt as president and by Éric Valcourt as secretary.
[65] The $50,000 he gave Henri Lepage included $25,000 for the business and $25,000 for the house itself, although the receipt (Exhibit A-2) states [TRANSLATION] “down payment on house purchase”.
[66] The minute book also indicates that share certificate No. 5 made out to Éric Valcourt was signed by Louis Valcourt as president and secretary and that the same was true for certificate No. 4 made out to Louis Valcourt.
According to the accountant Georges Bégin
[67] Henri Lepage was Georges Begin's client and he wanted to sell. There was an agreement as to the price and Mr. Bégin handled the transaction as an expert.
[68] However, it was the notary who prepared the documentation.
[69] It was only then that Georges Begin learned that Louis Valcourt had a son.
[70] The business was originally profitable.
[71] Henri Lepage’s salary was $500 to $600 a week while his wife received $100 to $150 a week.
[72] Georges Bégin could not say how long the business's peak period was.
[73] It was he who told Louis Valcourt what salary to pay his son.
[74] The financial statements (Exhibit A-1) reveal that salaries and fringe benefits were $15,983 in 1993 and $16,880 in 1994.
[75] It was because of an error by the Bank that the $40,000 loan was made in the company’s name. It was Louis Valcourt who purchased Henri Lepage’s shares, whereas Éric Valcourt did not invest a penny.
[76] The loan should therefore have been made to Louis Valcourt.
[77] Georges Bégin asked the Bank to make the necessary correction and this was done, but it took a long time because of a change in managers.
[78] In 1994 the company did not have a bank loan, but in 1995 it obtained a $4,000 credit line.
[79] The item [TRANSLATION] “$5,000 rental expenses” in the financial statements (Exhibit A-1) was merely a tax expenditure, as the amount was not paid annually to the owner of the building, whose name Georges Bégin did not know.
[80] Henri Lepage had no employees other than his wife.
[81] The Bank at all times considered that the $40,000 loan had in fact been made to Louis Valcourt.
According to Fabienne Synnott
[82] Fabienne Synnott is a teacher who worked in Western Canada, but her position was abolished.
[83] She then returned to Quebec and worked in informatics for a time before her father-in-law offered her work in the store upon Henri Lepage's departure because of all the work to be done there at that time of the year.
[84] She does a lot of cycling and is good in sales, and she worked in the shop as long as there was work for her there.
[85] However, she was pregnant and began finding it hard to work as they did; they never stopped working and did not see the days pass by.
[86] She greeted customers, determined what they needed, identified problems with their bicycles, moved bicycles and went to get parts.
[87] Before being hired to work at the shop she took her husband's and father-in-law's dinners to them at the shop.
[88] Her salary was determined by Louis Valcourt.
[89] She prepared the ledger in 1993, 1994 and 1995.
[90] She did so based on the bank records and followed her mother-in-law's instructions: this took her 10 to 20 minutes a month.
[91] She also made up cheques as instructed by her mother-in-law and made bank deposits once a week to be of service.
[92] This could take her two hours a month in peak periods.
[93] In 1994, before being hired, she also worked without pay for an hour and a half to two hours a month, and after being laid off she continued to do so until November.
[94] She was not hired for administrative duties but to work in sales.
[95] In 1995 and 1996, she worked almost full time as a teacher.
[96] The reason why according to an entry in the ledger (Exhibit I-2) she received a cheque for $332.24 on April 22 is that she occasionally made purchases for the store at Price Club, paid for them herself and was reimbursed by cheque.
[97] The deed of obligation dated February 1, 1994 (Exhibit I-6) indicates that she and her husband borrowed $75,000 on the land and house located at 503 Rue Vire-Crête in Bernières, with Louis Valcourt as surety.
[98] She and her husband made the payments on this hypothec.
[99] The deed of obligation dated June 6, 1996 (Exhibit I-7) for $105,000 partly [TRANSLATION] “replaced” the preceding one.
[100] This was because the house and the business had to be enlarged by adding a second floor.
[101] Two thirds of this investment was for the business and one third for the house based on the surface area each of them occupied.
[102] The business has not repaid this debt and pays only interest on the $40,000 loan mentioned earlier.
According to Éric Valcourt
[103] Éric Valcourt has been trained as an automobile mechanic, loves the outdoors and took up cycling when he was very young.
[104] He did mostly repair work at the business in question but also did some sales.
[105] His work schedule was fixed by the boss, his father.
[106] Before and after the periods at issue his father asked him for technical advice and he gave it without charge.
[107] In the last period at issue he suffered a “burnout”.
[108] He invested nothing in the business and was never its president, although he signed as such on the resolution of January 15, 1994 (Exhibit I-1) and on share certificates 4 and 5.
[109] He never received his share of the rent of $5,000 a year for the store.
[110] The reason he gave Schefferville as his employer’s address on his claim for unemployment insurance benefits (Exhibit I-8) on September 16, 1996 was in case information had to be sought from his father.
[111] He did sign the payer’s cheques but the banks usually contacted his father about its finances.
[112] In the evening an answering machine located in the house took calls from customers.
[113] Éric Valcourt signed a statutory declaration (Exhibit I-9) on October 23, 1996.
[114] In it he is described as [TRANSLATION] “proprietor”.
[115] It states (p. 1):
[TRANSLATION]
I acknowledge that I am the proprietor of 35 percent of Gestion Éric Valcourt Inc. . . . I operate the business in its entirety with the assistance of my spouse Fabienne Synnott.
[116] This was the first time he had been investigated and he was still “burned out” and totally [TRANSLATION] “exhausted”.
[117] The following also appears in that declaration (p. 2):
[TRANSLATION]
We established at the outset by oral agreement that Gestion Éric Valcourt Inc. should pay rent to use the personal premises, but we have not collected rent since the beginning. It is also true that some gasoline bills have not been reimbursed by the company.
[118] The rent should have been paid but was not.
[119] The following also appears in the declaration:
[TRANSLATION]
I receive a salary . . . during the peak period from April to October . . . and from October to April I render services and do work by appointment but am not paid . . . . I do not report my work on my unemployment cards because I am not paid . . . . We are considering reducing my salary in peak periods so as to pay me a weekly salary throughout the year for the work I do . . . .
[120] Unemployment insurance is not worthwhile but resembles welfare, and Éric Valcourt would prefer to have a smaller salary paid year-round.
[121] The cheque for $800 dated May 14, 1996 which the company gave him represented an advance on his September 1995 salary.
[122] While the statutory declaration was being taken down the [TRANSLATION] “kid” was bawling. The investigator was arrogant and twisted Éric Valcourt's words as he liked. Mr. Valcourt was in good faith.
[123] The respondent called no witnesses.
Argument
According to counsel for the appellants
[124] The Minister is relying mainly on the facts that Éric Valcourt worked for the payer without pay before and after each of the periods at issue and that the periods allegedly worked do not coincide with the business's periods of activity or with the periods he actually worked.
[125] That is the cornerstone of the Minister's argument.
[126] He has not taken into account the father’s work before and after the periods at issue.
[127] If the Court considers the statutory declaration reliable, it contradicts the testimony at the hearing.
[128] The appellants’ child cried during the investigator's visit.
[129] The investigator did not meet with Louis Valcourt to question him.
[130] Éric Valcourt’s salary was approximately the same as that of Henri Lepage.
[131] Despite the fact that he and the payer were not dealing with each other at arm’s length, his salary fell in 1996.
[132] The accountant has no interest in these matters and was very credible.
[133] Louis Valcourt’s testimony was not rebutted and the evidence is that he works in the business when he is not at his outfitting operation.
[134] There are two cases and the Court could decide them differently.
[135] An outsider could have been hired to do more or less the same work as Éric Valcourt.
[136] The Minister unnecessarily inundated the Court with documents irrelevant to its decision.
[137] In Attorney General of Canada v. Jencan Ltd. (A-599-96), it was held (at p. 12) that the Court should pass to a review of the merits of the Minister’s determination only where it concludes that the Minister has exercised his discretion in a manner contrary to law.
[138] The Minister did not take into account the fact that Louis Valcourt worked in the business, so the Court may assess the credibility of the testimony.
[139] In Attorney General of Canada v. Jolyn Sport Inc. (A-96-96), Hugessen J.A. wrote for the Federal Court of Appeal (at p. 4):
In every appeal under section 70 the Minister’s findings of fact, or “assumptions”, will be set out in detail in the reply to the Notice of Appeal. If the Tax Court judge, who, unlike the Minister, is in a privileged position to assess the credibility of the witnesses she has seen and heard, comes to the conclusion that some or all of those assumptions of fact were wrong, she will then be required to determine whether the Minister could legally have concluded as he did on the facts that have been proven. That is clearly what happened here and we are quite unable to say that either the judge’s findings of fact or the conclusion that the Minister’s determination was not supportable, were wrong.
[140] The hypothecs are not mentioned at all in the replies to the notices of appeal.
[141] In Attorney General of Canada v. Madeleine Sabourin (A-641-96), Denault J.A. wrote for the Federal Court of Appeal (at p. 1):
The applicant contends that the judge erred in finding that the Minister had “exercised his discretion arbitrarily in that, by failing to take into account all the circumstances surrounding the employment in question, he did not draw the appropriate conclusions from the facts he had before him”.
[142] The application for judicial review in that case was dismissed.
[143] In Eddy Sorensen v. Attorney General of Canada (A-177-96), Chevalier D.J. wrote for the Federal Court of Appeal (at pp. 2-3):
[TRANSLATION]
. . . the record contains uncontradicted, corroborated and at first glance conclusive evidence that the remuneration paid to the applicant, the terms and conditions and the importance of the work performed by him are circumstances from which it may reasonably be concluded that parties dealing with each other at arm’s length would have entered into a substantially similar contract of employment, in accordance with s. 3(2)(c)(ii).
[144] The same should be the case here.
According to counsel for the respondent
[145] Jencan, dated June 24, 1997, and Her Majesty The Queen v. Bayside Drive-In Ltd. et al. (A-626-96 to A-629-96), dated July 25, 1997, were decided after the cases cited by counsel for the appellants.
[146] In Jencan the Chief Justice of the Federal Court wrote for the Court of Appeal (at p. 18):
The Tax Court is justified in interfering with the Minister's determination under subparagraph 3(2)(c)(ii) — by proceeding to review the merits of the Minister's determination — where it is established that the Minister: (i) acted in bad faith or for an improper purpose or motive; (ii) failed to take into account all of the relevant circumstances, as expressly required by paragraph [sic] 3(2)(c)(ii); or (iii) took into account an irrelevant factor.
[147] None of these grounds apply in the instant case.
[148] The resolution (Exhibit I-1) shows that it was Éric Valcourt who was appointed president of the company, and both he and his father signed it.
[149] The share certificates also indicate that he was president.
[150] It is true that the resolution of May 29, 1994 in the minute book (Exhibit A-3) appointed Louis Valcourt president and Éric Valcourt secretary, but there are contradictions in the documentation submitted by the appellants.
[151] There are admitted errors in the ledgers and there was allegedly an error by the bank. Louis Valcourt should have surrounded himself with more competent people.
[152] The rent of $5,000 a year was not paid to the appellants.
[153] It was Fabienne Synnott who signed her spouse's record of employment in September 1996.
[154] Éric Valcourt's claim for benefits (Exhibit I-8) is dated September 16, 1996 and gives Schefferville as the payer's address, although Louis Valcourt was no longer there.
[155] The statutory declaration (Exhibit I-9) indicates that the interview lasted from 2:45 p.m. to 4:20 p.m., and Fabienne Synnott countersigned it as a witness.
[156] It is clear that the investigator had no reason to report incorrect facts.
[157] In both cases the appellants were paid for only the minimum number of weeks to be eligible to receive unemployment insurance benefits.
[158] The evidence does not disclose whether Louis Valcourt was met by the investigator and no conclusion can be drawn from that.
[159] In Éric's case, subparagraph (h) was denied but the evidence is to the contrary.
[160] The ledgers indicate activities for periods far longer than those at issue.
According to counsel for the appellants in reply
[161] The accountant explained the mistake regarding the $40,000 loan in his testimony.
[162] The investigator had quotas to meet.
[163] Fabienne Synnott signed only as a witness to her husband's statutory declaration and that does not mean she was in agreement with it.
[164] The fact that the appellants were paid for only the minimum number of weeks they needed to be eligible for benefits is irrelevant.
Analysis
Fabienne Synnott's appeal
[165] Ms. Synnott admitted that her spouse and her father-in-law hold respectively 35 percent and 65 percent of the payer's voting shares.
[166] Although the business is not located in their residence, it is in the same building. The fact that it is not located in their residence is irrelevant to the Court's decision as the street address is the same.
[167] To identify problems with bicycles she first had to try to determine what was wrong. It is clear that she worked for the payer when she was not being paid.
[168] Her salary was quite high compared to that of Henri Lepage's spouse and the business's deficit should also be considered.
[169] In these circumstances, it is not reasonable to conclude that the contract of employment would have been substantially similar if she had been dealing with the payer at arm's length.
[170] Louis Valcourt said that the reason the female appellant was not paid outside the period at issue was that the company did not have the resources to pay her.
[171] The female appellant was not paid her share of the rent for the part of the house occupied by the business and someone dealing with her employer at arm's length would certainly have required payment thereof.
[172] Towards the end of the period at issue she was pregnant and had difficulty continuing with her work.
[173] She is undoubtedly good at sales, but that is not what the Court has to decide.
[174] The transaction at Price Club is not relevant to the outcome of this case.
[175] An unrelated person would certainly not have taken out a hypothec two thirds of which was for the store without receiving rent in return.
[176] Fabienne Synnott's appeal must therefore be dismissed.
Éric Valcourt's appeal
[177] Éric Valcourt admitted that he holds 35 percent of the payer's shares and that his father holds 65 percent. If the business made a profit, he would be entitled to his share even though he had not invested anything, and an unrelated person would definitely not have received such a benefit.
[178] The payer's company name is of little relevance to the Court's decision.
[179] There is no doubt that it was Louis Valcourt who organized the payer's finances, but he and his son were not dealing with each other at arm's length.
[180] It is usual for a majority shareholder to have the last word in running a business. The male appellant admitted he was paid by the week regardless of the number of hours he worked, and an unrelated person certainly would not have been so paid.
[181] The reduction of his salary in 1996 is irrelevant to the Court's decision.
[182] The male appellant took a risk with his shares, as their value can vary depending on the company's business.
[183] The fact that the father may also work in the business is irrelevant to the Court's decision.
[184] The male appellant can sign the payer's cheques with some restrictions, and it is not clear that an unrelated employee would also be able to do this.
[185] In his Notice of Appeal the male appellant said that he and the payer were dealing with each other at arm's length, but he later admitted subparagraph (q) of the Reply to the Notice of Appeal.
[186] It was proven that the male appellant worked for the payer without pay before and after each of the periods at issue.
[187] In these circumstances it is not reasonable to conclude that the male appellant's contract of employment would have been substantially similar if he had been dealing with the payer at arm's length.
[188] Although Louis Valcourt's purpose in starting this business to create employment for his son is praiseworthy, that is not what the Court has to decide in order to resolve this case.
[189] In the Reply to the Notice of Appeal the Minister relied on only s. 5(2)(i) of the Employment Insurance Act and s. 3(2)(c) of the Unemployment Insurance Act, and ss. 251 and 252 of the Income Tax Act, or in other words the existence of a non-arm's length relationship, and it is on this basis alone that the Court must decide.
[190] Éric Valcourt's "burnout" was most unfortunate, but that is not what the Court must consider in arriving at its decision.
[191] All the transactions necessary to operate the business are of interest, but what must be noted is that the male appellant borrowed by means of a hypothec in order among other things to enlarge the house, that he did not collect his share of the rent, and that an unrelated person would not have done so.
[192] The mistake with respect to the $40,000 loan is not relevant to the conclusion, nor is the plan to rent snowboards and cross-country skis. The same is true of the Schefferville address on certain documents and of the presidency of the payer, as Louis Valcourt was the majority shareholder.
[193] Éric Valcourt is undoubtedly a competent mechanic, but that is not at issue in the instant appeal.
[194] An unrelated person would certainly not have agreed to receive messages for the store on his personal answering machine in the evenings.
[195] In his statutory declaration, which was written when his memory was fresher, Éric Valcourt acknowledged that he owned 35 percent of the payer and that he operated it with his spouse.
[196] He said that the rent should have been paid but was not.
[197] He added that he was not reimbursed for certain gasoline bills and that he did not report his work outside the period because he was not paid for it.
[198] An unrelated person would certainly not have agreed to wait until May 1996 to be paid $800 in salary owed since September 1995.
[199] There is no evidence that his statutory declaration was signed as the result of undue pressure. In any case his spouse countersigned it as a witness; she did not tell the Court whether she agreed with it.
[200] The evidence does not disclose whether the investigator questioned Louis Valcourt and no conclusion can be drawn from this.
[201] It is true that the Court could draw other conclusions but there was work without pay outside the periods at issue in both cases.
[202] The facts in evidence could serve as a legal basis for the conclusion drawn by the Minister.
[203] He took all the circumstances of the employment into account.
[204] As a result of Jencan, the male appellant cannot win his appeal.
[205] It was Fabienne Synnott who signed Éric Valcourt's record of employment in 1996.
[206] There is no evidence that the investigator had quotas to meet.
[207] While it may not be relevant that in both cases the paid weeks correspond exactly to the minimum required, these are to say the least strange coincidences.
[208] Éric Valcourt's appeal must therefore also be dismissed.
[209] The two subject decisions are accordingly affirmed.
Signed at Laval, Quebec, July 5, 1998.
“A. Prévost”
D.J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 30th day of December 1998.
Stephen Balogh, Revisor