Date: 19980921
Docket: 96-1691-UI
BETWEEN:
WILFRED OLDFORD,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Cuddihy, D.J.T.C.C.
[1] This appeal was heard, in Gander, Newfoundland, on August 26, 1998.
I- The appeal
[2] This is an appeal from a decision by the Minister of National Revenue (the "Minister") of June 17, 1996, where it was determined that the employment of the Appellant with Shady Pine Gardens Inc. (the "Payor"), from May 22 to November 11, 1995, was not insurable within the meaning of the Unemployment Insurance Act (the "old Act") now known as the Employment Insurance Act (the "new Act ") because, according to the Minister, the Appellant and the Payor were not dealing with each other at arm’s length within the meaning of subparagraph 3(2)(c)(ii) of the old Act and paragraph 5(2)(i) and subsection 5(3) of the new Act and thus the said employment was excepted. The Minister also decided that the employment was not insurable as the Appellant was not engaged by the Payor under a contract of service pursuant to paragraph 3(1)(a) of the old Act and paragraph 5(1)(a) of the new Act.
II- The facts
[3] In rendering his decision the Minister relied on the facts and reasons outlined in his Reply to the Notice of Appeal and particularly in paragraph 11 as follows:
"(a) the Payor was a corporation duly incorporated under the Laws of the Province of Newfoundland in April 1994;
(b) at all relevant times the Payor's issued shares were owned as follows:
the Appellant 25 %
Hazel Oldford (the Appellant's spouse) 75 %
(c) the Payor was involved in the business of farming vegetables;
(d) the Appellant performed various farm labour duties including field preparation, planting, crop care and harvesting;
(e) the Appellant's remuneration was based on a rate of $10.00 per hour for a 60-hour work week;
(f) the Appellant worked more than 60 hours each week and was not paid for the hours worked in excess of 60 hours each week;
(g) in May 1993 the Appellant entered into a Self-Employment Agreement (hereinafter "SEA") with Human Resources Development Canada which allowed him to continue to receive unemployment insurance benefits (hereinafter "UI benefits") while operating a vegetable farm;
(h) while working as a self-employed proprietor the Appellant operated the farm using 1 acre of land owned by himself and his spouse, Hazel Oldford;
(i) the Appellant also owned the equipment and invested his own money into the start up of his proprietorship under the SEA;
(j) the SEA was in effect from May 30, 1993 to May 28, 1994 and the Appellant received UI benefits for that period;
(k) neither the Appellant's hours of work nor his earnings were insurable for unemployment insurance purposes under the terms of the SEA during the period referred to in paragraph (j) above;
(l) in April 1994 the Appellant incorporated the Payor for the sole purpose of enabling himself to qualify for UI benefits;
(m) the Payor operated on the same land owned by the Appellant and his spouse without paying any form of rent for the use of the land;
(n) the Payor used the same equipment owned by the Appellant without paying any rent to the Appellant for the use of the equipment;
(o) the Appellant was the only worker on the Payor's payroll;
(p) the Appellant received only 15 insurable weeks during 26 weeks that made up the period in question and was the Payor's growing season;
(q) the Appellant was not supervised or controlled by the Payor;
(r) the Appellant's spouse, as the Payor's president, did not have the knowledge, experience or ability to control the Appellant in the performance of his duties;
(s) the Appellant used his own equipment to perform his services for the Payor;
(t) the Appellant performed his services on his own property;
(u) the Appellant was not compensated for the use of his property or equipment in the performance of his services for the Payor;
(v) the business operated by the Payor was substantially the same business as that operated by the Appellant prior to the incorporation of the Payor;
(w) the Appellant's employment was an artificial arrangement designed to enable the Appellant to qualify for UI benefits;
(x) the Appellant was related to the Payor within the meaning of the Income Tax Act;
(y) the Appellant was not dealing with the Payor at arm's length;
(z) 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 not reasonable to conclude that the Appellant and the Payor would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length."
[4] The Appellant, through his counsel, admitted the allegations in subparagraphs a) to e), g), j), k), o), p) and v). The allegations in subparagraphs f), i), n) and s) to u) were admitted with explanations to be given at the hearing. The allegations in subparagraphs h), l), m), q), r) and w) to z) were denied.
III- The Law and Analysis
[5] i) Definitions from the Employment Insurance Act
"employment" means the act of employing or the state of being employed;
"Insurable employment" has the meaning assigned by section 5;
Paragraph 5(1)(a) of the new Act reads as follows:
"5. (1) Subject to subsection (2), insurable employment 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;
..."
"Excluded employment"
Paragraph 5(2)(i) and subsection 5(3) of the new Act read as follows:
"(2) Insurable employment does not include
...
(i) employment if the employer and employee are not dealing with each other at arm’s length.
(3) For the purposes of paragraph (2)(i)
(a) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the Income Tax Act, and
(b) if the employer is, within the meaning of that Act, related to the employee, they are 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."
[6] 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) ..."
[7] The Appellant had the burden of proving his case. Each appeal however must be decided on the facts particularly established and on its own merits.
[8] The Court has a duty to scrutinize with care the conditions of the relations between a worker and a payor in every case.
Brief summary of documentary and testimonial evidence
[9] The Appellant was heard in support of the appeal. Exhibits A-1 to A-8 were filed in the Court record.
[10] The Appellant previously worked as a superintendent for a construction company.
[11] In May of 1993, as a result of high unemployment, the Appellant entered into a self-employment agreement (SEA) with Human Resources Development Canada. This agreement allowed the Appellant to begin and learn to operate a vegetable farm, which was in effect from May 30, 1993 to May 28, 1994. The Appellant received unemployment insurance benefits. The agreement also stipulated that the Appellant’s hours of work nor his earnings were insurable for unemployment insurance purposes for the twelve-month period that the agreement was in effect.
[12] In April 1994, as a result of medical problems of his spouse and the necessity of separating the business from the family affairs and on the advice from Human Resources Development Canada, the Appellant incorporated the Payor under the laws of the Province of Newfoundland with a share structure of 25% for himself and 75% for his spouse, Hazel Oldford. The incorporation of the farm was deemed necessary for accounting and business purposes.
[13] The Appellant and his wife were initially, in 1993, going to invest their life savings of $20,000.00 into the farm but as a result of cancer treatments required for his wife, which cost near $14,000.00, it was only possible to invest $7,000.00.
[14] The Payor operated on land owned by the Appellant and his spouse, on land owned by the Appellant’s brother and father-in-law and on 2 acres out of 5 acres of land leased from the Government (Exhibit A-3).
[15] The Appellant worked very hard, required little supervision and was monitored in his work by representatives of the Department of Agriculture of the Province. It was accepted that the Appellant and his spouse had little experience in this new adventure and relied heavily on advice from people of the Department above described (Exhibit A-6). Hazel Oldford (Appellant’s spouse), however, would be at home to take orders, deal with customers and instruct the Appellant as to when and where deliveries had to be made (Exhibit A-5). The Appellant’s spouse was incapable, due to her illness, of performing any physical work on the farm.
[16] Although it was not specifically mentioned, one must assume that the farm operated during the 1994 year. However, no statement of income and deficit was filed for that year. In 1995 the Appellant was hired in May and worked until December 28 (Exhibit A-1). The Appellant received only 15 insurable weeks during that period, which made up the work period under review and was the Payor’s growing season.
[17] The only money the Appellant received were his wages. He was the only worker on the Payor’s payroll. He was paid $600.00 a week for 15 weeks and lesser amounts for the remainder of his weeks of work as shown on the payroll sheet (Exhibit A-1). This salary was based on a rate of $10.00 per hour for 60 hours of work. It is accepted that the Appellant would have worked some hours for which he was not paid. This was not unusual for him (Exhibit A-2). The Appellant’s duties were operating farm equipment, applying insecticides and herbicides, sowing of seeds, weeding of farm, harvesting vegetables to local markets, plus all other related duties required during the farm operation. The Appellant owned a used tractor and loader which was eventually transferred to the Payor on December 5, 1995 (Exhibit A-4). Any profits were reinvested into the farm business.
Concluding analysis summary
[18] Did the Minister except the Appellant’s employment within the meaning of subparagraph 3(2)(c)(ii) of the old Act and paragraph 5(2)(i) and subsection 5(3) of the new Act?
[19] The Federal Court of appeal in Attorney General of Canada and Jencan Limited [1] has outlined the principles which must guide the Tax Court when dealing with an appeal under 3(2)(c)(ii) of the old 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 had 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...[2]
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.[3]
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.[4]
Lord Macmillan’s comments were quoted with approval by Abbott J. of the Supreme Court in Boulis v. Minister of Manpower and Immigration.[5] See also Friends of the Oldman River Society v. Canada (Minister of Transport)[6] and Canada v. Purcell.[7]
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.”
[20] The Tax Court in dealing with an appeal under subparagraph 3(2)(c)(ii) or paragraph 5(2)(i) and subsection 5(3) of the Acts must undertake a two-stage inquiry.
[21] The Tax Court is justified in interfering with the Minister’s decision 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 decision under subparagraph 3(2)(c)(ii) or paragraph 5(2)(i) and subsection 5(3) 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 subparagraph 3(2)(c)(ii) or paragraph 5(2)(i) and subsection 5(3); or (iii) took into account an irrelevant fact".
[22] The main facts relied upon by the Respondent for concluding that the employment was not insurable were that the Appellant was not supervised or controlled by the Payor, the Appellant’s spouse, as the Payor’s President, did not have the knowledge, experience or ability to control the Appellant in the performance of his duties. The Appellant used his own equipment. The services were performed on the Appellant’s own property. The Payor paid no form of rent for the use of the land or equipment. The Appellant was not compensated for the use of his property or equipment in the performance of his services. The business operated by the Payor was substantially the same business before and after incorporation. The Appellant invested his own money into the start-up of his proprietorship under the SEA agreement. The Appellant worked extra hours without pay. The Appellant received only 15 insurable weeks during 26 weeks that made up the period in question and was the Payor’s growing season. The incorporation of the Payor was an artificial arrangement for the sole purpose of enabling the Appellant to qualify for unemployment insurance benefits.
[23] The Appellant was the only witness heard at the hearing.
[24] The Appellant and his wife decided to invest their life savings into the farm. They had personal savings of close to $20,000.00. The Appellant’s wife became ill. After medical expenses of $14,000.00 only $7,000.00 was left to invest into the proprietorship when the Appellant entered into the self-employment agreement with the Department of Human Resources Canada in 1993. Part of that money belonged to his wife. The financial situation of the Appellant was such that on the advice of the Department of Human Resources Canada and other professionals, the Payor was incorporated as explained in the evidence. The Appellant established that it was financially necessary to incorporate the business and distinguish between the business and the personal affairs of the family. It was also apparent that the incorporation would allow the Payor to operate separately from the family and continue to sustain the efforts of the Appellant to remain in the work force in what appeared to be the only alternative for him, at the time.
[25] The Appellant thus demonstrated that after several years in the construction industry, he was willing, capable and industrious enough to go into vegetable farming by taking advantage of the self-employment government program.
[26] On May 28, 1994, the self-employment program ceased and although it was not mentioned the farm operated, after that, till the end of 1994. The Appellant was hired in May 1995. What was the period of employment of the Appellant from May 1994 up to his engagement on May 22, 1995? What was his income? Was there an income and deficit statement of the Payor for the year ending December 31, 1994? The evidence did not show this.
[27] However in 1995, the Appellant is hired and works from May 22 to December 28, 1995 (Exhibit A-1). This is a period of close to 31 weeks. The parties admitted that the Appellant received only 15 insurable weeks during 26 weeks, that made up the period in question. The Payor’s growing season was also 26 weeks. Why then did the Appellant only have 15 insurable weeks? This evidence shows that the Appellant worked more than 15 weeks and was paid $600.00 for 15 weeks and also paid less for other weeks that are shown on the payroll sheet. In addition, it was admitted that the Appellant was not paid for the hours worked in excess of the specific 60-hour work weeks.
[28] This evidence in my view, could lead the Minister to conclude that the employment of the Appellant on this farm, would certainly have been more than 15 weeks. It is accepted that the Appellant worked more hours certain weeks and less hours in other weeks but the Minister could certainly conclude that the Appellant worked more weeks than those indicated in the record of employment. In that sense the Minister could conclude that his employment was convenient for the purposes of being eligible for unemployment insurance benefits and that the Appellant and the Payor would not have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length.
[29] Most of the allegations of the Minister were not disproven and the Appellant has not demonstrated on a balance of probabilities that this Court could intervene.
IV- Decision
[30] The appeal is dismissed and the decision of the Minister is confirmed.
Signed at Dorval, Quebec, this 21st day of September 1998.
"S. Cuddihy"
D.J.T.C.C.