Date: 19991101
Docket: 97-2088-UI
BETWEEN:
ELIAS (LOUIS) SKOTIDAKIS,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for judgment
Charron, D.J.T.C.C.
[1] This appeal was heard at Montréal, Quebec, on July 8, 1999, to determine whether the appellant held insurable employment within the meaning of the Unemployment Insurance Act (“the Act”) from May 8, 1995, to March 22, 1996, when he worked for Skotts Leathers Inc., the payer.
[2] By letter dated September 24, 1997, the respondent informed the appellant that the employment was excepted from insurable employment because “there existed a non-arm’s length relationship between yourself and Skotts Leathers Inc.” during the period at issue.
Statement of the facts
[3] The facts on which the respondent relied in making his decision are set out as follows in paragraph 6 of the Reply to the Notice of Appeal:
[TRANSLATION]
(a) The payer, which was incorporated on August 18, 1993, ran a factory that made leather and suede clothing. (admitted)
(b) All of the payer’s voting shares were owned by 2951011 Canada Inc. (admitted)
(c) John, Angelo, Nick and Bobby Skotidakis, the appellant’s sons, were equal owners of the voting shares of 2951011 Canada Inc. (admitted)
(d) The payer declared bankruptcy on July 2, 1996, and 2951011 Canada Inc.’s four shareholders all declared personal bankruptcy in February 1997. (admitted)
(e) The appellant began working for the payer in May 1995, when he closed Neuilly Fashions Ltd., of which he was the sole shareholder. (admitted)
(f) In 1995, the payer purchased Neuilly Fashions Ltd.’s equipment and continued operations at that company’s place of business with the same employees as that company. (denied)
(g) The appellant claims that he had no direct financial involvement in the payer, but he admits that he invested about $40,000 in the business over the years. (denied)
(h) The appellant, like his sons, had to furnish personal security of about $50,000 to the owner of the building where the payer operated. (denied)
(i) The payer operated with about 20 employees, including the appellant, his spouse and his four sons. (admitted)
(j) The appellant worked as foreman of the sewing production department. (admitted)
(k) The appellant’s work mainly involved ensuring that the employees met quality standards and performance deadlines; he also assigned work to the employees. (denied)
(l) Unlike employees of the factory who were paid by the hour, the appellant was paid a fixed salary. (denied)
(m) The appellant worked in the payer’s factory, generally during its business hours. (admitted)
(n) The appellant worked five days a week during the busiest periods and sometimes worked just two days a week during the “quieter” periods, although he still received his full pay. (denied)
(o) The record of employment submitted by the appellant shows that he was paid $600 a week, whereas his wages could vary between $500 and $1,000 a week depending on how much money was taken in. (denied)
(p) The weekly earnings as shown on the record of employment and in the payer’s payroll journal and the earnings noted on the T4 slips issued by the payer are not consistent. (denied)
(q) The record of employment shows that the appellant stopped working on March 22, 1996, whereas the payer’s payroll journal shows that he was paid until April 23. (denied)
(r) The appellant provided services to the payer without pay outside the period at issue and was paid for certain periods without providing services to the payer. (denied)
[4] The appellant admitted the truth of all the facts alleged in the subparagraphs of paragraph 6 of the Reply to the Notice of Appeal except those he denied, as indicated in parentheses at the end of each subparagraph.
Testimony of John Skotidakis
[5] John was the payer’s president, and he and his three brothers, Nick, Angelo and Bobby, were officers of the payer. The four brothers each owned 25 percent of the voting shares of 2951011 Canada Inc., which in turn owned all of the payer’s voting shares. John, Nick, Bobby and Angelo are the appellant’s sons. John worked for the payer as a leather products manufacturer for its customers: Suzy Shier, Le Château, Eviva and Aldo. The payer created, cut and sewed its clothing for sale to its customers, including Neuilly Fashions Ltd. After a year of production, the payer purchased Neuilly Fashions Ltd. on or about December 15, 1995, and began making its own clothing, while Neuilly Fashions Ltd. was dissolved. The appellant was then hired to supervise production. He worked from May 8, 1995, to March 23, 1996, from 7:00 a.m. to 4:00 p.m. and was paid $600 gross a week, with some exceptions. The other employees, including John, Nick, Bobby and Angelo, were also paid fixed weekly salaries. The receptionist, the accountant and the designer, including Rula Bolos, Litsa Savvas, Lillian Howbouni, Luc Renaud and Hassan El Neufi, all received fixed salaries. John was in charge of sales and management, Nick was in charge of shipping, Bobby was in charge of the office and the bookkeeping and Angelo was in charge of cutting the clothing. Financial decisions were made by John and his accountants (Schwartz, Levinsky and Feldman). The payer’s lawyers were Seymour, Malkovitch and Kravitz. The payer’s bank was the Hongkong Bank, where loans were obtained and deposits made. If necessary, the payer’s shareholders stood surety. Since the appellant was not a shareholder, he did not sign the guarantees provided. John made the major decisions in consultation with his brothers, but he could make the day-to-day decisions alone. The payer had sales of between $1,000,000 and $3,000,000 during the three years it operated. The appellant received no profits in any form whatsoever from the payer. The payer’s first lease on the sixth floor of 125 Chabanel Street was negotiated by Neuilly Fashions Ltd., while the lease for suites 610 and 615 was negotiated by John with the owner, Barry Gurman. The payer thus leased premises of 15,000 square feet for five years, and John signed the lease with Bobby and the appellant because the appellant had stood surety for Neuilly Fashions Ltd.’s lease. The lessor required another surety for the payer’s lease, and the appellant had to sign another guarantee covering the payer’s lease. The payer borrowed $40,000 from the mother of 2951011 Canada Inc.’s shareholders but never borrowed from their father, the appellant in this case.
[6] The payer went bankrupt on July 2, 1996, and 2951011 Canada Inc.’s four shareholders did so in February 1997. The appellant had begun working for the payer in May 1995 and stopped doing so when Neuilly Fashions Ltd. was shut down.
[7] In February or March 1996, Nick quit his job. At about the same time, another one of John’s brothers left his position. John was having liquidity problems, could not find the money he needed to pay his debts and could no longer collect his accounts. He lost his home, his business and his car, which were swallowed up in his bankruptcy. Even his marriage failed. On September 15, 1995, John left his managerial position to make way for the appellant and try to salvage something from the situation (Exhibit I-3). According to John, the appellant always worked all the days stated on his record of employment, although he was sometimes paid late because of shortfalls in the payer’s bank account. The payer began operating in August 1993 and did not purchase Neuilly Fashions Ltd. until December 1995. The appellant began working for the payer earlier, in May 1995, when he closed Neuilly Fashions Ltd.
Testimony of Elias (Louis) Skotidakis
[8] A tailor by trade, Elias was the sole shareholder of Neuilly Fashions Ltd. from 1989 to December 1995, when he sold his business to the payer. After practising that trade for 37 years, he began working for the payer in May 1995 as a contractor. Neuilly Fashions Ltd. was actually sold in May 1995, but the sale was not completed until December 1995, when the shareholders obtained a loan to pay the appellant. The appellant was hired to work for the payer immediately, when the parties shook hands to conclude the sale. He worked as the factory foreman. In actual fact, the resolution recording the sale (Exhibit I-1) was dated December 15, 1995, and set the sale price at $305,000 to enable the vendor to pay all his debts. The entire transaction was completed between Elias and John by mutual consent. At the time, the payer had already been operating Elias’s business for six months and he was already working for it. The payer paid him the salary he had previously received from Neuilly Fashions Ltd., namely $600 a week, for working as foreman. He reported on his work to John, the president of the payer’s company. It was John who, as president, made all the payer’s decisions. Elias has never received unemployment insurance benefits in the past. He did not invest anything in the payer. He is 56 years old. He worked 40 hours a week. On March 22, 1996, John decided to lay Elias off because of the payer’s problems. The payer moved from the fifth and sixth floors to the second to reduce expenses. Production did not resume because the bank refused to provide the payer with the necessary funds. Elias stood surety for the payer when the lease was renewed because that obligation already existed before Neuilly Fashions Ltd. was sold to the payer. Elias admitted that the payer may have advanced him money once or twice when he was in need of it, but he said that it never paid him unearned wages. In June 1996, Elias went back to the payer at its lawyer’s request to negotiate an arrangement with creditors that would be favourable to the payer.
[9] When asked about the payer’s resolution (Exhibit I-3) dated September 15, 1995, Elias said that the document was written and signed not on that date but in June 1996 by Mr. Malkovitch, the payer’s lawyer. During the time he worked for the payer in 1995, Elias earned $33,880 (Exhibit I-4). In 1996, he earned an income of $10,800 from January 1 to March 22 (Exhibit I-5). After the payer’s bankruptcy, Elias also declared bankruptcy.
Testimony of Francine Perreault
[10] The payer cannot produce the paycheques. Exhibit I-5 is a T4 showing $10,800 in income from employment. The number of applicable weeks according to the 1996 record of employment is 12, and 12 weeks times the $600 that the appellant said he earned comes to $7,200. However, there are documents stating otherwise.
Evidence admitted without prejudice
[11] By letter dated July 19, 1999, counsel for the appellant informed the Court that:
[TRANSLATION]
As promised, we are hereby sending you the results of our search with the Inspector General of Financial Institutions, which confirms, as was asserted at the hearing on July 8, that the directors of Skotts Leathers Inc. were:
• John Skotidakis President
• Angelo Skotidakis Vice-president
• Bobby Skotidakis Secretary
• Nick Skotidakis Treasurer
It is therefore clear that Elias Skotidakis was never registered as a director of the company, not even when the resolution filed with the Court was signed.
. . .
Vincent Chiara, Counsel
Analysis of the facts in light of the law
[12] It must now be determined whether the appellant’s activities fall under the concept of insurable employment, that is, whether or not there was a contract of employment. It must then be determined whether the appellant would have received such favourable treatment if he had been dealing with the payer at arm’s length. I will look at each of these two issues in turn.
[13] The courts have established four essential tests for identifying a contract of employment. The leading case in this area is City of Montreal v. Montreal Locomotive Works Ltd., [1947] 1 D.L.R. 161. The tests are as follows: (1) control; (2) ownership of the tools; (3) chance of profit; and (4) risk of loss. In Wiebe Door Services Ltd. v. M.N.R., the Federal Court of Appeal added the degree of integration. This list is not exhaustive, however.
[14] The evidence showed that the appellant was hired by the payer on May 8, 1995, to control its production; he worked under John’s supervision, and there was a relationship of subordination between them. He worked 40 hours a week from 7:00 a.m. to 4:00 p.m. and was paid a weekly salary of $600 by cheque. The machines and other tools were owned by the payer. The appellant did not receive any dividends from the payer, since he was not a shareholder. However, since he had stood surety for Neuilly Fashions Ltd.’s lease, he had to guarantee payment of the payer’s lease when it expired and was renewed by the payer. It was the payer that owned by business. Finally, the appellant did his work on the payer’s premises and was very much integrated. I conclude that the appellant genuinely worked for the payer.
[15] The next issue to be considered is the effect of the non-arm’s length relationship. Since the payer and the appellant were related persons, they had a real non-arm’s length relationship under subsections 251(1) and (2) of the Income Tax Act, and the Minister exercised his discretion by excepting the appellant’s contract from insurable employment.
[16] Subsection 3(2) of the Unemployment Insurance Act reads in part as follows:
(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 . . . .
[17] Under section 251 of the Income Tax Act, related persons are deemed not to deal with each other at arm’s length. When persons are related to each other, there can be no insurable employment unless the Minister of National Revenue is satisfied otherwise in accordance with subparagraph 3(2)(c)(ii) of the Unemployment Insurance Act, supra.
[18] The Federal Court of Appeal has rendered a number of important decisions on the application of paragraph 3(2)(c) of the Unemployment Insurance Act.
[19] In Ferme Émile Richard et Fils Inc., 178 N.R. 361, rendered on December 1, 1994, the Federal Court of Appeal summarized Tignish Auto Parts Inc. as follows:
. . . As this court recently noted in Tignish Auto Parts Inc. v. Minister of National Revenue, July 25, 1994 . . . an appeal to the Tax Court of Canada in a case involving the application of s. 3(2)(c)(ii) is not an appeal in the strict sense of the word and more closely resembles an application for judicial review. In other words, the court does not have to consider whether the Minister’s decision was correct: what it must consider is whether the Minister’s decision resulted from the proper exercise of his discretionary authority. It is only where the court concludes that the Minister made an improper use of his discretion that the discussion before it is transformed into an appeal de novo and the court is empowered to decide whether, taking all the circumstances into account, such a contract of employment would have been concluded between the employer and employee if they had been dealing at arm’s length.
[20] The Honourable Chief Justice Isaac of the Federal Court stated the following in rendering the Court of Appeal's decision in Attorney General of Canada v. Jencan Ltd. (1997), 215 N.R. 352:
On the basis of the foregoing, the Deputy Tax Court Judge was justified in interfering with the Minister’s determination under s. 3(2)(c)(ii) only if it was established that the Minister exercised his discretion in a manner that was contrary to law. And, as I already said, there are specific grounds for interference implied by the requirement to exercise a discretion judicially. The Tax Court is justified in interfering with the Minister’s determination under s. 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 s. 3(2)(c)(ii); or (iii) took into account an irrelevant factor.
[21] In view of the evidence adduced and the documents filed by the parties, it seems clear that the respondent took into account all of the circumstances, excluded the irrelevant factors, complied with the accepted principles of law and based his decision on sufficient facts. Given the many contradictions in the evidence and the fact that the evidence is sufficient to justify the respondent’s decision that the parties would not have entered into such a contract if they had been dealing with each other at arm’s length, the appeal is dismissed and the Minister’s decision is affirmed.
Signed at Ottawa, Canada, this 1st day of November 1999.
“G. Charron”
D.J.T.C.C.