Tax Court of Canada Judgments

Date: 19980219

Dockets: 97-518-UI; 97-519-UI; 97-521-UI; 97-523-UI; 97-37-CPP; 97-38-CPP; 97-39-CPP; 97-40-CPP; 97-45-CPP; 97-46-CPP; 97-47-CPP; 97-48-CPP; 97-524-UI; 97-41-CPP; 97-525-UI; 97-42-CPP; 97-527-UI; 97-43-CPP; 97-528-UI; 97-44-CPP

BETWEEN:

TIGNEY TECHNOLOGY INCORPORATED, TIGNEY RESEARCH INC., LESLIE MARK DELONG, NANCY DELONG, PAUL DELONG, GEORGE RITCHIE,

Appellants,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Hamlyn, J.T.C.C.

[1] Edward DeLong is the majority shareholder of Tigney Technology Incorporated ("Tigney Technology"), which is the 100% owner of Tigney Research Inc. ("Tigney Research"). Edward's children Leslie Mark, Paul and Nancy DeLong, and George Ritchie (who is not Edward's child) were employed by Tigney Research for various periods between the 1991 and 1996 taxation years. The Minister of National Revenue (the "Minister") determined that the employees were not "insurable" within the meaning of the Unemployment Insurance Act (“UIA”) and the Employment Insurance Act (“EIA”) for the relevant periods and therefore they did not qualify for unemployment insurance or employment insurance payments, because they were not employed pursuant to a "contract of service".

[2] Secondly, the Minister determined that the employees were not insurable pursuant to the UIA and EIA because the employer and the employees were not dealing with each other at arm’s length and under the circumstances it was not 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.

[3] The Minister also determined that Canada Pension Plan (“CPP”) contributions were not payable on earnings paid to the employees between January 1, 1996 and December 31, 1996, because they were not employed pursuant to a contract of service within the meaning of the CPP. The employees and the corporations appeal from the determinations of the Minister on the basis that the employees of Tigney Research were employed under an oral contract of service and with certain specified terms, and that it is reasonable to conclude that they would have entered into substantially the same contract had the employer and employees been at arm’s length. Because common issues of fact surround all the appeals, the appeals were heard together.

FACTS

[4] A Partial Agreed Statement of Facts was filed. It reads:

1. Tigney Technology Incorporated ("Tigney Technology") is in the business of research and development and has developed, owns and controls the right to certain patents, technical information and other know-how and experience relating to, inter alia, a process for separating fibrous materials into its various components and, in respect of this, is also in the business of licensing these patents and know-how, as well as supplying, selling and franchising equipment and plants for use in practicing the patents and know-how.

2. Tigney Technology has been operating since approximately 1982.

3. At all relevant times, the shareholders of Tigney Technology were as follows:

Shareholder Percentage of Shares

Edward DeLong ("Edward") 84%

Nancy DeLong ("Nancy") 3[1]

Bruce DeLong 3

Leslie Mark DeLong ("Mark") 4¹

Daniel Mayo 1

Other 5

4. Paul DeLong ("Paul"), Nancy, and Mark are Edward's children.

5. Paul, Nancy, and Mark are directors of Tigney Technology.

6. Tigney Technology owns 100% of the shares of Tigney Research Inc. ("Tigney Research").

THE MINISTER'S POSITION

[5] The Minister submits that:

1. ... the relationship between the Appellant Tigney Technology Incorporated ("Tigney Technology") and each of the Appellants George Ritchie ("George"), Nancy DeLong ("Nancy"), Leslie Mark DeLong ("Mark"), and Paul DeLong ("Paul") was "employment of convenience" entered into by the parties in order to enable George, Nancy, Mark and Paul to earn sufficient insurable earnings and insurable weeks of employment to qualify for unemployment insurance benefits.

2, As the work relationship between Tigney Technology and George, Nancy, Mark and Paul was employment of convenience, ... the work relationships must be examined closely to determine whether the employment is insurable. ... [I]n the cases at hand, the work relationships were not genuine employment and, therefore, not insurable pursuant to s. 3(1)(a) of the Unemployment Insurance Act (the "Act").

...

3. With respect to Nancy, Mark, and Paul, it is further submitted that Tigney Technology and each of these individuals would not have entered into substantially similar contracts of employment if they had been dealing with each other at arm's length.

4. The Respondent considered all the circumstances of the employment, including remuneration paid, terms and conditions, duration, and nature and importance of work performed. Therefore, the Respondent's decision that the employment of Nancy, Mark, and Paul was "excepted employment" within the meaning of s. 3(2)(c) of the Act was reasonable and reached in a fair and proper manner.

THE APPELLANTS' POSITION

[6] The Appellants submits that the worker Appellants were employed by Tigney Research under an oral contract of service under paragraph 3(1)(a) of the UIA and that this Court is justified in intervening in the Minister's determination under paragraph 3(1)(c) of the UIA[2] and reversing the determination in that it was reasonable to conclude that each of the DeLong Appellants and Tigney Research would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.

THE EVIDENCE

[7] Between 1991 and 1996 all the worker Appellants worked for Tigney Research. Edward DeLong was the person in charge of the operations of Tigney Research. Edward’s training was in engineering and physics and his prior work career was in the scientific research and development industry.

[8] Dr. George Ritchie ("George") was an experienced research chemist, who was the director of research for Tigney Research. In this capacity he directed the procedure for experiments and scientific analysis for Tigney Research. Leslie Mark DeLong ("Mark") was the bookkeeper and was responsible for telecommunications and other general office duties. He had had several years of on the job training under the supervision of his father. Paul DeLong ("Paul") was the pilot plant manager. His background training was in refrigeration and air conditioning, and his duties with Tigney Research included the operation of the testing equipment. Between 1993 and 1996, Nancy DeLong ("Nancy") was responsible for legal archives and other related duties. Prior to this Nancy operated her own small business.

[9] The worker Appellants, when employed, worked by the week, had regular hours of employment, worked on Tigney Research’s premises and used Tigney Research’s equipment, supplies and tools. They all were under the ultimate supervision and direction of Edward DeLong and Tigney Research.

[10] The worker Appellants described the work they did, the funding problems of the corporation, the necessity of cyclic periods of employment and lay-off.

[11] The workers Paul, Mark and Nancy were previously found to be under contracts of service and insurable. The Appellants further stated the nature of the employment and the employment relationship had not changed before or after the Respondent's previous rulings.

[12] The evidence in relation as to who was the employer was mixed. George stated Tigney Research and Tigney Technology were, in his mind, the same. He received pay checks from Tigney Technology and pay stubs from Tigney Research. I conclude for the purposes of this litigation the two corporations were joint employers. (Hereinafter, the joint employers will be referred to as "Tigney").

[13] The Respondent called a witness who had investigated Tigney and it’s employees and made a report to the Minister in regards to the employment of the workers. The witness told the Court that his general work focus was to detect and investigate cases of fraud.

[14] The investigator had prepared a chart (exhibit R-2) which showed the chronology of the various worker Appellants’ periods of employment and benefits claimed.

[15] He found:

- the periods of employment and benefits of Mark, Paul and Ritchie were continuous and synonymous;

- that generally, Nancy's employment was during the others' benefits period with some overlap;

- that Mark signed the Record of Earnings ("ROE") for Paul and Nancy and that Edward signed for Mark's ROE.

[16] The investigator's conclusion was the "family creates 20 weeks of work for themselves in order to continue collecting UI benefits" while the business appeared to be a year-round business. This was a result of a review of a list of clients (exhibit R-3), information received from Revenue Canada that income for one year for Tigney was over $800,000[3] and the investigator's analysis under the chronological work/benefits chart (exhibit R-2). The investigator did confirm he was presently being sued by the Appellants for $175,000 as a result of his investigation of these claims.

[17] The investigator sent his findings to an Appeals Officer at Revenue Canada who made the determinations for the Minister under the UIA and EIA.

[18] After reviewing the previous rulings reports and the worker Appellants' files and the representations of the payor's solicitor the Appeals Officer concluded that:

- Mark, Paul and Nancy performed work services (banking transactions) for Tigney during periods of lay-off;

- during the periods of lay-off, the Appellants Mark, Paul and Nancy were not remunerated;

- the duration of the employment was not geared to the activity of the employer;

- and the duration of the employment did not coincide with the work.

[19] On cross-examination the Appeals Officer stated that he did not receive information or consider whether clients contracts were paid in full, i.e. no inquiry was made about receivables. Thus cash flow problems were not considered.

ANALYSIS

CONTRACT OF SERVICE

[20] In regards to the workers' employment with Tigney, I accept the following as fact: the workers were paid on a biweekly basis; the workers performed their duties on the premises of Tigney and used the equipment, tools and supplies of Tigney.

[21] The workers were paid only wages and did not participate in the profits of Tigney, nor did they bear any financial risk in the performance of the company.

[22] The services of the workers in the whole scheme of the Tigney operations was for the business and benefit of Tigney, and the workers services were integrated into the business of Tigney.

[23] This litigation results from the Respondent's view that the employment of the workers was an employment of convenience, that is, the employment periods were only for the purpose of allowing the workers to earn sufficient insurable earnings and insurable weeks of employment to qualify for insurance benefits. The Respondent has concluded the employment of the workers was not genuine employment and therefore was not insurable under the UIA and EIA.

[24] The evidence of the workers was to the effect that Tigney's funding diminished from time to time, forcing Tigney to lay-off employees until funding could be restored. Aside from research and development, the business life of Tigney included a series of arbitration, scientific research tax litigation, patent applications and other legal matters, all of which materially affected the funding supply.

[25] The primary basis of the Respondent's concern is that the pictorial view of the work periods and the lay-off periods in exhibit R-2 appears to be cyclic in nature and appears to operate for the benefit of the workers. Certainly this first appearance demands the Court to carefully scrutinize all the facts.

[26] After a careful review of the evidence, I conclude that while the work periods and the lay-off periods at first glance appear orchestrated to serve the workers' interests, in fact the lay-off periods were as a result of funding short-falls and therefore were primarily for the benefit of Tigney.

[27] It came out in evidence that from time to time during lay-off periods the DeLong workers completed ROE forms or did some minimal banking transactions on behalf of Tigney. (Paul said he may have spent up to one hour per week doing these tasks without remuneration). While this is significant, on its own and in the overall scheme of things, it does not lead me to the conclusion that the workers were not employed pursuant to a contract of service.

[28] On the contrary, the worker Appellants' evidence in relation to the work economic climate, the work performed, the forced periods of lay-off and the evidence of the classic tests in relation to control, profits, losses, ownership of tools as well as the combined force of the whole scheme of the payor's business leads this Court to a conclusion that the worker Appellants were engaged under 'genuine' employment contracts of service.

EXCEPTED EMPLOYMENT

[29] For UIA and EIA purposes, the question of whether persons are dealing with each other at arm's length is a question of fact which must be determined in accordance with section 251 of the Income Tax Act. It is clear that Tigney and the worker Appellants DeLong were not dealing with each other at arm’s length. In these circumstances, it is incumbent upon the Minister to determine whether, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and nature and importance of the work performed, it is reasonable to conclude that the parties would have entered into substantially similar contracts of employment had they been dealing with each other at arm’s length.

[30] The inquiry or review of the Respondent's exercise of discretion in a non-arm's length situation is a twofold inquiry:

a) whether the discretion conferred on the Respondent was properly exercised; and

b) if it was not properly exercised, it is reasonable to conclude that a related employer and employee would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.

[31] The focus of the first part of the inquiry considers, inter alia, whether the Minister failed to consider all relevant circumstances.

[32] The Minister found the DeLong Appellants were engaged in "excepted employment" within the meaning of paragraph 3(2)(c) of the UIA. The Appeals Officer stated that he considered the fact that the DeLong's performed minimal banking duties or filled out forms during periods of lay-off was a significant deviation from arm's length employer-employee relations, and that this non-remunerated service would have affected the work relationship to the point that each of the DeLong workers would not have entered into substantially similar contracts of employment if they had been dealing with each other at arm's length.

[33] The Respondent's findings included:

a) the related worker Appellants continued to do work during periods of lay-off;

b) the duration of the employment was not geared to the activity of the payor;

c) the related worker Appellants performed duties outside of their employment.

[34] On the evidence, the Minister does not appear to have considered in his determination the importance of the work performed by the workers, the skill of the workers (i.e. education and the acquired on the job training of the workers at Tigney), the financial funding problems of Tigney and the economic climate of Tigney (i.e. funding problems and the necessity of lay-off periods).

[35] From all the evidence, I conclude contrary to the Respondent's findings:

a) the related worker Appellants did not perform their normal work duties during lay-off periods. The related worker Appellants did minimal record keeping without remuneration to ensure all the worker Appellants would receive benefits;

b) the company (payor) because of serious cash flow problems had to operate in a cyclic basis, i.e. a period of work followed by a period of lay-off depending on cash flow;

c) the duration of work was driven by economic realities and the payor did not operate testing on a year-round basis.

[36] I further conclude the Respondent's discretion was exercised contrary to law because the Respondent failed to take into account all relevant circumstances.

[37] Given the type of operation, scientific research and development, the cash flow problems, the terms and conditions of the employment, the duration of the employment and the specialised work rendered by the related worker Appellants and their need (the workers') to be employed in their specialised areas at Tigney, I believe on review of all the evidence had the parties been at arm's length it is reasonable to conclude they would have entered into substantially similar contracts of employment.[4]

DECISION

[38] The appeals of George Ritchie, Nancy DeLong, Paul DeLong, Leslie Mark DeLong are allowed and the determination that these Appellants were not employed in insurable employment is reversed and that the appeals of the payor corporations are allowed and the determination that the payor corporations did not engage the Appellants George Ritchie, Nancy DeLong, Paul DeLong and Leslie Mark DeLong in insurable employment is reversed.

Signed at Ottawa, Canada, this 19th day of February 1998.

"D. Hamlyn"

J.T.C.C.

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