Tax Court of Canada Judgments

Date:19980323

Dockets: 96-1435-UI; 96-1437-UI; 96-1912-UI; 96-1915-UI; 96-2118-UI; 96-2119-UI

BETWEEN:

ANNA INSALACO, GIUSEPPE INSALACO, RINA GENOVA, JOSEPH GENOVA, ANTONIO INSALACO, SILVANA INSALACO,

Appellants,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

Cuddihy, D.J.T.C.C.

[1] These appeals were heard on common evidence in Toronto, Ontario, on December 2, 1997 and February 17, 1998.

I- The appeals

[2] These are appeals from six determinations by the Minister of National Revenue (the "Minister") of May 9 and September 11, 1996, where it was determined that the employment of Anna Insalaco from May 30 to November 12, 1993 and from May 30 to October 29, 1994, the employment of Giuseppe Insalaco from May 30 to November 12, 1993, the employment of Rina Genova from May 30 to October 29, 1993 and from May 30 to November 12, 1994, the employment of Joseph Genova from May 30 to November 1, 1993, the employment of Antonio Insalaco from May 30 to November 1, 1993, and the employment of Silvana Insalaco from May 30 to November 12, 1993 and from May 30 to November 12, 1994, while employed by Goreway Construction and Paving Limited (the "Payor") were excepted within the meaning of paragraph 3(2)(c) of the Unemployment Insurance Act (the "Act") because the Appellants and the Payor were not dealing with each other at arm’s length.

II- The facts

[3] In rendering his decisions the Minister relied on the facts and reasons outlined in paragraph 5 of his six Replies to the Notices of Appeal which form part of this decision as if recited at length herein.

[4] The Appellant, Anna Insalaco, through her representative A. Natale, in appeal no : 96-1435(UI) as to paragraph 5 of the Reply to the Notice of Appeal, admitted the allegations in subparagraphs (a) to (p), (x) and (ad). The allegations in subparagraphs (q) to (w), (y) to (ac), (ae) and (af) were denied.

[5] The Appellant, Giuseppe Insalaco, through his representative A. Natale, in appeal no : 96-1437(UI) as to paragraph 5 of the Reply to the Notice of Appeal, admitted the allegations in subparagraphs (a) to (p), (r), (s), (u), (v), (ab) and (ac). The allegation in subparagraph (q) was admitted with explanations to be given at the hearing. The allegations in subparagraphs (t), (w), (x) to (aa), (ad) and (ae) were denied.

[6] The Appellant, Rina Genova, through her representative A. Natale, in appeal no : 96-1912(UI) as to paragraph 5 of the Reply to the Notice of Appeal, admitted the allegations in subparagraphs (a) to (f) and (j) to (m). The allegations in subparagraphs (g) and (n) to (p) were admitted with explanations to be given at the hearing. The allegations in subparagraphs (h), (i) and (q) to (x) were denied.

[7] The Appellant, Joseph Genova, through his representative A. Natale in appeal no : 96-1915(UI) as to paragraph 5 of the Reply to the Notice of Appeal, admitted the allegations in subparagraphs (a) to (f), (j) to (n), (p), (q), (s) and (t). The allegations in subparagraphs (g), (o) and (r) were admitted with explanations to be given at the hearing. The allegations in subparagraphs (h), (i), (u) and (v) were denied.

[8] The Appellant, Antonio Insalaco, through his representative A. Natale in appeal no : 96-2118(UI) as to paragraph 5 of the Reply to the Notice of Appeal, admitted the allegations in subparagraphs (a) to (j), (l), (m), (q) to (v), (x), (y), (aa) and (bb). The allegation in subparagraphs (k), (n) to (p), (w), (z), (cc) and (dd) were denied.

[9] The Appellant, Silvano Insalaco, through his representative A. Natale in appeal no : 96-2119(UI) as to paragraph 5 of the Reply to the Notice of Appeal, admitted the allegations in subparagraphs (a) to (e), (h) to (k), (p) to (s), (z), (bb) and (dd). The allegations in subparagraphs (f), (g), (n), (o), (t), (u) and (y) were admitted with explanations to be given at the hearing. The allegations in subparagraphs (l), (m), (v) to (x), (aa), (cc), (ee) and (ff) were denied.

III- The Law and Analysis

[10] i) Definitions from the Unemployment Insurance Act

"employment" means the act of employing or the state of being employed;

"Insurable employment"

[11] Subsection 3(1) reads as follows:

"3. (1) Insurable employment is employment that is not included in excepted employment and is

(a) employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise;

..."

"Excepted employment"

[12] Subsection 3(2) 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 ..."

(d) the employment of a person by a corporation if the person controls more than forty per cent of the voting shares of that corporation;"

[13] ii) Definitions from the Income Tax Act

Arm's length and Related persons

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; and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing 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;

(b) a corporation and

(i) a person who controls the corporation, if it is controlled by one person,

(ii) a person who is a member of a related group that controls the corporation, or

(iii) any person related to a person described in subparagraph (i) or (ii) ..."

[14] The Appellants have the burden of proving their cases. Each appeal however must be decided on the facts particularly established and on its own merits.

[15] It is the determinations of the Minister that are appealed. In the case of Sylvie Desroches v. M.N.R. (A-1470-92), at page 3 of the Reasons for Judgement, Desjardins, J.A. of the Federal Court of Appeal says:

"...However, in the final analysis, as this Court held in Attorney-General of Canada v. Jacques Doucet, it is the Minister's determination which is at issue, namely that the employment was not insurable because the applicant and the payer were not bound by a contract of service. The function of the Tax Court of Canada judge extended to considering the record and the evidence in its entirety. Accordingly Marceau J.A., speaking for the Court, said the following in Doucet:

The judge had the power and duty to consider any point of fact or law that had to be decided in order for him to rule on the validity of that determination. This is assumed by s. 70(2) of the Act and s. 71(1) of the Act so provides immediately afterwards...

The trial judge could go as far as deciding that there was no contract between the parties..."

[16] If there is a doubt in the interpretation, it must favour the claimant and there is nothing that prevents a taxpayer from benefitting from a social program if the requirements of the law are respected. This is what Judge Hugessen, F.C.A., described in Attorney General of Canada v. Rousselle et al., decision of October 31, 1990 (124 N.R. 339):

"I do not think it is an exaggeration to say, in light of these facts, that if the respondents did hold employment this was clearly "convenience" employment, the sole purpose of which was to enable them to qualify for unemployment insurance benefits. These circumstances certainly do not necessarily prevent the employment from being insurable, but they imposed on the Tax Court of Canada a duty to look at the contracts in question with particular care; it is apparent that the motivation of the respondents was the desire to take advantage of the provisions of social legislation rather than to participate in the ordinary operation of the economic forces of the market place."

[17] The Court therefore has a duty to scrutinize with care the conditions of the relations between a worker and a payor in every case.

[18] Furthermore, subsections 70(2) and 71(1) of the Unemployment Insurance Act grant to the Tax Court broad remedial powers that would permit the Court to resolve any dispute of a factual nature and to reverse, affirm or vary the Minister's determinations.[1]

[19] All the Appellants were heard in support of the appeals. Exhibits R-1 to R-22 were filed in the Court record.

[20] Antonio Insalaco is married to Silvana Insalaco. Giuseppe Insalaco is married to Anna Insalaco. Antonio and Giuseppe Insalaco are brothers.

[21] Joe Genova is married to Rina Genova. They are not related to the Insalaco appellants.

[22] The Payor was incorporated on February 28, 1991. From February 28, 1991 to September 27, 1993, all of the Payor’s outstanding voting shares were owned by the Insalaco family. Each of the four members owning 1/4 of the shares.

[23] On September 28, 1993, two thirds of the Payor’s outstanding voting shares were owned by the Insalaco family of four, each member owning 1/6 of the shares. The other third of the outstanding voting shares were owned by the Genova family of two, each member owning 1/6 of the shares.

[24] The Payor is in the construction business and specializes in paving, concrete curbs, etc. The business is seasonal and generally operates from May/June to October/November.

Working contract of Anna, Giuseppe, Antonio and Silvana Insalaco

[25] These Appellants were related to the Payor within the meaning of the Income Tax Act. Their work periods under review all began on May 30, 1993. It was admitted that Silvana and Anna Insalaco were put on the Payor’s payroll each season to work in the office at a weekly salary of $600. It was admitted that Giuseppe and Antonio Insalaco were also on the payroll each season to work outside in the field at a weekly salary of $700. It was admitted that at all material times, the Payor engaged in the services of a full-time bookkeeper. The bookkeeper, Suzan DiMichele would go in the office once a week and also took care of the invoicing of the Payor at its office after the office workers were laid off work.

[26] The Minister, according to the evidence, took into consideration the working arrangements and conditions of these Appellants. He analyzed the payroll, the work carried out by the Appellants, the seasonal type of business, the duties of the Appellants, the fact that two other shareholders, sometime in 1993, invested into the Payor, and the fact that the Insalaco members still owned two thirds of the Payor’s shares.

[27] The Minister also took into consideration the wages that always remained the same for each respective Appellant before and after the arrival of the two new minority shareholders. He especially took note and analyzed the duration, the nature and the importance of the work performed and all the circumstances surrounding the employment of these Appellants. Furthermore, the Minister noted that the business activity of the Payor continued substantially after the Appellants were no longer on the payroll and it was admitted by Antonio Insalaco, in the Reply, that he, Giuseppe Insalaco and Joe Genova all worked without pay, outside the periods during which they were on the Payor’s payroll. In fact, no real records were kept of the hours worked.

[28] Did the Minister except the employments of the Insalaco family members within the meaning of subparagraph 3(2)(c)(ii) of the Act?

[29] The Federal Court of Appeal in Attorney General of Canada and Jencan Limited [2] has outlined the principles which must guide the Tax Court when dealing with an appeal under 3(2)(c)(ii) of the Act as follows:

“The decision of this Court in Tignish, supra, requires that the Tax Court undertake a two-stage inquiry when hearing an appeal from a determination by the Minister under subparagraph 3(2)(c)(ii). At the first stage, the Tax Court must confine the analysis to a determination of the legality of the Minister’s decision. If, and only if, the Tax Court finds that one of the grounds for interference are established can it then consider the merits of the Minister’s decision. As will be more fully developed below, it is by restricting the threshold inquiry that the Minister is granted judicial deference by the Tax Court when his discretionary determinations under subparagraph 3(2)(c)(ii) are reviewed on appeal. Desjardins J.A., speaking for this Court in Tignish, supra, described the Tax Court’s circumscribed jurisdiction at the first stage of the inquiry as follows:

...Subsection 71(1) of the Act provides that the Tax Court has authority to decide questions of fact and law. The applicant, who is the party appealing the determination of the Minister, has the burden of proving its case and is entitled to bring new evidence to contradict the facts relied on by the Minister. The respondent submits, however, that since the present determination is a discretionary one, the jurisdiction of the Tax Court is strictly circumscribed. The Minister is the only one who can satisfy himself, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions and importance of the work performed, that the applicant and its employee are to be deemed to deal with each other at arm's length. Under the authority of Minister of National Revenue v. Wrights' Canadian Ropes Ltd., contends the respondent, unless the Minister has not had regard to all the circumstances of the employment (as required by subparagraph 3(2)(c)(ii) of the Act), has considered irrelevant factors, or has acted in contravention of some principle of law, the court may not interfere. Moreover, the court is entitled to examine the facts which are shown by evidence to have been before the Minister when he reached his conclusion so as to determine if these facts are proven. But if there is sufficient material to support the Minister’s conclusion, the court is not at liberty to overrule it merely because it would have come to a different conclusion. If, however, those facts are, in the opinion of the court, insufficient in law to support the conclusion arrived at by the Minister, his determination cannot stand and the court is justified in intervening.

In my view, the respondent's position is correct in law...[3]

In Ferme Émile Richard v. M.N.R., this Court confirmed its position. In obiter dictum, Décary J.A. stated the following:

As this Court recently noted in Tignish Auto Parts Inc. v. Minister of National Revenue, July 25, 1994, A-555-93, F.C.A., 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.[4]

Section 70 provides a statutory right of appeal to the Tax Court from any determination made by the Minister under section 61, including a determination made under subparagraph 3(2)(c)(ii). The jurisdiction of the Tax Court to review a determination by the Minister under subparagraph 3(2)(c)(ii) is circumscribed because Parliament, by the language of this provision, clearly intended to confer upon the Minister a discretionary power to make these determinations. The words "if the Minister of National Revenue is satisfied" contained in subparagraph 3(2)(c)(ii) confer upon the Minister the authority to exercise an administrative discretion to make the type of decision contemplated by the subparagraph. Because it is a decision made pursuant to a discretionary power, as opposed to a quasi-judicial decision, it follows that the Tax Court must show judicial deference to the Minister’s determination when he exercises that power. Thus, when Décary J.A. stated in Ferme Émile, supra, that such an appeal to the Tax Court "more closely resembles an application for judicial review", he merely intended, in my respectful view, to emphasize that judicial deference must be accorded to a determination by the Minister under this provision unless and until the Tax Court finds that the Minister has exercised his discretion in a manner contrary to law.

If the Minister’s power to deem “related persons” to be at arm’s length for the purposes of the UI Act is discretionary, why, one might ask, does the right of appeal to the Tax Court under section 70 apply to subparagraph 3(2)(c)(ii) at all? The answer is that even discretionary powers are subject to review to ensure that they are exercised in a judicial manner or, in other words, in a manner consistent with the law. It is a necessary incident of the rule of law that all powers granted by Parliament are of an inherently limited nature. In D.R. Fraser and Co. Ltd. v. Minister of National Revenue, Lord Macmillan summarized the legal principles which ought to govern such review. He stated:

The criteria by which the exercise of a statutory discretion must be judged have been defined in many authoritative cases, and it is well settled that if the discretion has been exercised bona fide, uninfluenced by irrelevant considerations and not arbitrarily or illegally, no court is entitled to interfere even if the court, had the discretion been theirs, might have exercised it otherwise.[5]

Lord Macmillan’s comments were quoted with approval by Abbott J. of the Supreme Court in Boulis v. Minister of Manpower and Immigration.[6] See also Friends of the Oldman River Society v. Canada (Minister of Transport)[7] and Canada v. Purcell.[8]

Thus, by limiting the first stage of the Tax Court’s inquiry to a review of the legality of ministerial determinations under subparagraph 3(2)(c)(ii), this Court has merely applied accepted judicial principles in order to strike the proper balance between the claimant’s statutory right to have a determination by the Minister reviewed and the need for judicial deference in recognition of the fact that Parliament has entrusted a discretionary authority under this provision to the Minister.

On the basis of the foregoing, the Deputy Tax Court Judge was justified in interfering with the Minister’s determination under subparagraph 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 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 3(2)(c)(ii); or (iii) took into account an irrelevant factor.”

[30] The Tax Court in dealing with an appeal under subparagraph 3(2)(c)(ii) of the Act must undertake a two-stage inquiry.

[31] The Tax Court is justified in interfering with the Minister’s determination only if it is established that the Minister exercised his discretion in a manner that was contrary to law. 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 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 3(2)(c)(ii); or (iii) took into account an irrelevant fact".

[32] In other words, the Court does not have to consider whether the Minister's decision was correct. What the Court must consider is whether the Minister's decision resulted from the proper exercise of his discretionary authority.

[33] 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 the employee, if they had been dealing with each other at arm's length.

[34] No other documents were provided to the Court except those filed by the Respondent. No documentation was filed by any of the Appellants that would have been different from that examined by the Minister.

[35] The evidence before me did not show that the Minister acted in bad faith or for an improper purpose or motive. The Minister took into account all of the relevant circumstances as expressly required by subparagraph 3(2)(c)(ii) of the Act. No evidence before me showed that the Minister took into account an irrelevant or any other important fact that could have persuaded the Court to intervene.

Working contract of Joseph & Rina Genova

[36] Joseph Genova is married to Rina Genova. They are not related to the Insalaco Appellants.

[37] These Appellants had the burden of establishing on a balance of probabilities that an arm’s length relationship existed between them and the Payor.

[38] Rina Genova stated that she and her husband invested $25,000 each in the Payor in January of 1993, and that when they entered the partnership with the Payor, she would become an employee. She worked as a receptionist, 40 hours a week at the same salary as the other office workers. She described her duties. The evidence did not establish who she replaced, when she started work. She admitted that being a shareholder it was her concern what the other office workers were being paid. She stated "we all had a meeting and it was decided $600 for all the ladies". I understood from the evidence that Anna and Silvana Insalaco and Rina Genova were paid the same wages, that they all worked in the same office, that their hours were never recorded, that their duties appeared to be similar and that they received their pay cheques late, according to the cash flow available. Rina Genova also said "we would receive a percentage of profits according to the percentage of shares we had". She could not remember whether any profits were made.

[39] Giuseppe (Joseph) Genova testified that he became a partner in the Payor in 1993 and that he was approached by Giuseppe Insalaco. He was asked to become a partner. He confirmed that he and his wife both invested $25,000 each in the Payor. The agreement was that he would overlook the Payor’s affairs. He was paid $700 per week. His expenses were paid by the Payor. He was the general manager and said "I overlooked the whole company. I report to myself. I report to no one. I make the decision of any move that has to be made. The men take my orders as far as the job is concerned. The ladies earned $600. I established the salary based on their experience. I hired the wives because of their experience. If I were to hire someone else, I would pay them the same, more or less. They put in 50 hours a week. If they stay late, it is up to them. They are not paid extra hours. Some pay cheques were issued four or five at one time". He further said that Anna and Silvana Insalaco took care of all the books, one did the accounts payable and the other the accounts receivable and that Susan DiMichele, the accountant, attends the office of the Payor once a week to go over the accounts, does the trial balancing, prepares the records of employment and also does the invoicing, "after the other employees left work". When asked by the Court why the office employees did not stay on the job to do this work instead of being laid off, he replied "it was because it wasn’t that much". He also admitted that he directed the bookkeeper while he was laid off work and receiving unemployment benefits, that the bookkeeper was paid by the hour and that the rent of the office was paid by the month at a rate of $500.

[40] Under cross-examination, he was asked to file a draft agreement (Exhibit R-16) entered into by the Payor and all the Appellants, dated September 20, 1993, after Joseph and Rina Genova began working for the Payor and after they invested their money. The witness was also shown GST reports (Exhibit R-21). He stated that the Court could rely upon these reports which show sales of the Payor for the periods ending April 30, 1993 at $56,085, July 31, 1993 at $716,172 and October 31, 1993 at $728,354 and January 30, 1994 at $418,261.

[41] No other documents were filed by the Appellants Giuseppe or Rina Genova that would demonstrate new facts that were not before the Minister.

[42] The Minister decided that Joseph (Giuseppe) and Rina Genova were in fact not dealing with the Payor at arm’s length. Was he correct? Have these two Appellants shown on a balance of probabilities that they were in an arm’s length relationship?

[43] The case law provides guidelines as to what determines that unrelated persons are or are not dealing at arm's length.

[44] In Noranda Mines Limited and The Minister of National Revenue, (1987) 2 C.T.C. at p. 2093, Bonner J. of the Tax Court of Canada stated as follows:

"The process just described, especially step (d), is not typical of what one might expect of parties dealing with each other at arm's length.

The question of the presence or absence in fact of an arm's length relationship has been explored by the courts in many cases. The Supreme Court of Canada dealt first with the matter in M.N.R. v. Sheldon's Engineering, Ltd., [1955] C.T.C. 174; 55 D.T.C. 1110. At page 180 (D.T.C. 1113) Locke, J., speaking for the Court, said the following:

Where corporations are controlled directly or indirectly by the same person, whether that person be an individual or a corporation, they are not by virtue of that section deemed to be dealing with each other at arm's length. Apart altogether from the provisions of that section, it could not, in my opinion, be fairly contended that, where depreciable assets were sold by a taxpayer to an entity wholly controlled by him or by a corporation controlled by the taxpayer to another corporation controlled by him, the taxpayer as the controlling shareholder dictating the terms of the bargain, the parties were dealing with each other at arm's length and that Section 20(2) was inapplicable.

The decision of Cattanach, J. in M.N.R. v. T.R. Merritt Estate, [1969] C.T.C. 207; 69 D.T.C. 5159, is also helpful. At page 217 (D.T.C. 5165) he said:

In my view, the basic premise on which this analysis is based is that, where the "mind" by which the bargaining is directed on behalf of one party to a contract is the same "mind" that directs the bargaining on behalf of the other party, it cannot be said that the parties were dealing at arm's length. In other words where the evidence reveals that the same person was "dictating" the "terms of the bargain" on behalf of both parties, it cannot be said that the parties were dealing at arm's length.

A few years later the importance of bargaining between separate parties, each seeking to protect his own independent interest, was again emphasized in the decision of the Exchequer Court in Swiss Bank v. M.N.R., [1971] C.T.C. 427; 71 D.T.C. 5235. At page 437 (D.T.C. 5241) Thurlow, J. (as he then was) said:

To this I would add that where several parties - whether natural persons or corporations or a combination of the two - act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the "mind" that directs may be that of the combination as a whole acting in concert or that of any of them in carrying out particular parts or functions of what the common object involves. Moreover as I see it no distinction is to made for this purpose between persons who act for themselves in exercising control over another and those who, several parties involved in a transaction acts in or represents a different interest from the others the fact that the common purpose may be to so direct the acts of another as to achieve a particular result will not by itself serve to disqualify the transaction as one between parties dealing at arm's length. The Sheldon's Engineering case (Supra), as I see it, is an instance of this.

Finally, it may be noted that the existence of an arm's length relationship is excluded when one of the parties to the transaction under review is in a position in which he has de facto control of both parties. In this regard reference may be made to the decision of the Federal Court of Appeal in Robson Leather Compagny Ltd. v. M.N.R., [1977] C.T.C. 132; 77 D.T.C. 5106.

" The issue in this appeal is essentially one of fact. The onus rests on the appellant to establish on the balance of probabilities that Noranda and Orchan did in fact deal with each other at arm's length. That onus has not been discharged."...

And further at p. 2095

"...A finding that the same mind directed the actions of both parties to the transaction does not, in my view, involve a finding that the mind was not, as regards both corporations, acting honestly, in good faith and with the best interests of both corporations in view.

On behalf of the appellant stress was also laid on the admitted fact that the consideration flowing from Orchan represented fair market value. The arm's length test looks to the presence or absence of the power to influence or control. An unusual result may well be indicative of the absence of an arm's length relationship, but the fact that a result is typical of what might be expected between parties who do deal at arm's length does not negative the existence of a non-arm's length relationship."

(underlining by undersigned)

[45] In 1991 in the Case of Peter Cundill & Associates Ltd. v. Her Majesty the Queen [1991] l C.T.C., Culen, J. at page 203 stated as follows:

"Whether the parties in this case were dealing at arm's length is a question to be examined on its own particular facts. Many factors are relevant in the determination of the issue, such as ownership and control of a corporation. However, share control (or absence of it) is not necessarily conclusive; it is only a factor to be considered in determining the question of arm's length (Robson Leather Co. v. M.N.R., [1974] C.T.C. 872; 74 D.T.C. 6666, Collier, J. affd [1977] C.T.C. 132; 77 D.T.C. 5106 (F.C.A.)).

In Interpretation Bulletin IT-419 Revenue Canada suggested the following factors will determine whether or not dealings are at arm's length;

(a) the existence of a common mind which directs the bargaining for both parties to a transaction,

(b) parties to a transaction acting in concert without separate interests, and

(c) de facto control.

The criteria enunciated in IT-419 have also been the criteria consistently considered by the courts. In this case, it appears the factor that will illuminate the situation is determining the controlling mind of these two corporations. If the "mind" acting for one party is the same "mind" directing the second party, then they cannot really be said to be dealing at arm's length (Oryx Realty Corp. and Shofar Investment Corp. v. M.N.R., [1972] F.C. 33; [1972] C.T.C. 35; 72 D.T.C. 6018; affd [1974] C.T.C. 430; 74 D.T.C. 6352 (F.C.A.)."

[46] In Penner et al. v. The Queen; 1994 C.C.H. Canadian Limited, p. 6568, Teitelbaum, J. of the Federal Court said:

"I agree with the Plaintiff's submission that the facts of this case do not support a conclusion that a common mind existed which directed the bargaining for both parties to the transaction. Further, the above, in my view, is consistent with the object and spirit of the SRTC provisions of the Act, which were enacted to permit research companies to effectively renounce their tax benefits in favour of investors who purchased qualifying securities.

Further, I am not persuaded by the evidence that either party to this transaction did, or had the power to exert, de facto control over the other." (underlining by the undersigned)

[47] From these cases parties are not dealing at arm's length when the predominant consideration or the overall interest or the method used amount to a process that is not typical of what might be expected of parties that are dealing with each other at arm's length.

[48] Parties will not be dealing with each other at arm's length if there is the existence of a common mind which directs the bargaining for both parties to a transaction or that the parties to a transaction are acting in concert without separate interests or that either party to a transaction did or had the power to influence or exert control over the other. The dealings of the parties are not consistent with the object and spirit of the provisions of the law and they do not demonstrate a fair participation in the ordinary operation of the economic forces of the market place[9].

[49] Therefore, the existence of a combination of one or several of these initiatives that would be inconsistent or interfere with the negotiating between employer and employee and with the object and intent of the legislation, will not survive the arm's length test.

[50] The Court is also bound to ensure in analyzing all the circumstances and the accepted evidence that the parties are not defeating the purpose of the legislation[10].

[51] The members of the Insalaco family detained the majority of the voting shares of the Payor. The Payor was in a difficult financial state. The two members of the Genova family invested in the Payor and Joseph Genova became the General manager. According to the Insalacos', he took over the control of the Payor. However, Giuseppe and Antonio Insalaco and Joe Genova as of September 20, 1993 had signing authority for the Payor. The monies were or appear to have been invested in the Payor as of January 1993. Who ran the Payor then? What was the arrangement? None of the Appellants was working in January of 1993. The pay period for each of the Appellants begins on May 30, 1993. What were the real arrangements between the Payor represented by the Insalaco members of the corporation Payor and the future Genova members of the corporation Payor at the beginning of the pay periods on May 30, 1993.

[52] Furthermore, the questionnaire (Exhibit R-5) which was sent to Anna Insalaco, certified by Joseph Genova (General manager) on March 21, 1996, indicates that the Payor had no shareholders and that none of the workers were related to any of the shareholders because there are no shareholders. This is in direct contradiction with the evidence and with the list of shareholders (Exhibit R-19). The same questionnaire approved by Joseph Genova, reveals no duties or secondary duties of the worker. No other questionnaire was shown to the Court.

[53] The Minister also noted, as the evidence shows, that the periods of employment of Joseph and Rina Genova began on May 30, 1993 and that they would have invested in the Payor in January 1993, a period previous to the draft agreement dated September 20, 1993. Was Joseph Genova running the company before the agreement? What were the real business relations between the Payor and the Appellants, Joseph and Rina Genova? It is difficult to say. The evidence of the witnesses heard must be analyzed with caution.

[54] The Minister saw much more documented evidence than that shown to the Court. The Minister’s allegations of fact indicate that the Genova Appellants were not in an arm’s length relationship, even though they were not related to the Payor.

[55] From the evidence I heard and saw of the witnesses, it did appear that the Payor was not in a position of necessary independence that would create a real situation of subordination between the Payor and the Appellants Joseph and Rina Genova. I would go as far as to say that there did not appear to the Court the existence of a real genuine contract of service between Joseph and Rina Genova and the Payor. No other records or minute books or other documentation was put forward to dispel such a conclusion. It also appeared on the whole of these relationships that all the Appellants were in some sort of a joint venture. Such a situation would be sufficient in my view to conclude that in fact there could not be an arm’s length relationship and the Minister did well to adopt the position he took.

IV- Decision

[56] The appeals are dismissed and the determinations of the Minister are confirmed.

Dorval, Quebec, this 23rd day of March 1998.

"S. Cuddihy"

D.J.T.C.C.

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