Date: 000413
Docket: 1999-3485-EI
BETWEEN:
BROOKS COSMO HAIR STUDIO (1981) LTD.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] The appellant, Brooks Cosmo Hair Studio (1981) Ltd. ("Brooks"), appeals decisions of the Minister of National Revenue ("Minister") that Janice Hanson and Nancy Lyster were employed by Brooks under a contract of service during the period April 1, 1997 to December 31, 1997 ("period") and Stacey Lyster was also employed under a contract of service by Brooks during the period August 14, 1997 to December 31, 1997, and therefore were employees of Brooks. Accordingly, Revenue Canada considered the employment of each was insurable under the provisions of the Employment Insurance Act ("Act").
[2] With respect to Janice Hanson ("Hanson"), the Minister determined that she was dealing at arm's length with Brooks and therefore her employment was not excluded from insurable employment. With respect to Nancy Lyster ("Nancy") and Stacey Lyster ("Stacey"), the Minister acknowledged they were not dealing at arm's length with Brooks, but in accordance with paragraph 5(3)(b) of the Act the Minister was satisfied that it was reasonable to conclude that Nancy and Brooks and Stacey and Brooks would have entered into substantially similar respective contracts of employment if Nancy and Stacey had been dealing with Brooks at arm's length.
[3] The appellant states that Hanson, Nancy and Stacey (individually referred to as "worker" and together as "workers") did not deal at arm's length with Brooks and, therefore, pursuant to paragraph 5(2)(i) of the Act are excluded from insurable employment under the provisions of the Act.
[4] The share structure of Brooks was as follows:
(i) 351760 Alberta Ltd. owned 33 1/3% of the issued shares of Brooks;
(ii) 723741 Alberta Ltd. owned 33 1/3% of the issued shares of Brooks;
(iii) 732322 Alberta Ltd. owned 33 1/3% of the issued shares of Brooks.
[5] The shares of 351760 Alberta Ltd. were owned equally by Nancy and her husband Glen Lyster. (Mr. Lyster acted as agent in this appeal and was the only person to give evidence.) The shares of 723741 Alberta Ltd. were owned by Hanson as to 100%. From April 1, 1997 to August 13, 1997 the shares of 732322 Alberta Ltd. were owned by Shanda Smith. On August 14, 1997 Ms. Smith transferred all of her shares to Stacey.
[6] The three workers were the directors of the appellant during the relevant periods.
[7] Stacey is the daughter of Nancy.
[8] Brooks operates a hairdressing salon which provides beauty services and products and related services. Brooks normally employs about 12 people in addition to the workers. Hanson and Nancy acted as managers for the salon. Stacey was not a manager. As a matter of fact, according to Mr. Lyster, the other employees were not aware that Ms. Smith transferred her shares in 732322 Alberta Ltd. to Stacey.
[9] Mr. Lyster testified he was the administrator of Brooks. He determined the wages of the three workers. The workers' withdrawals of funds from Brooks were based on their investments in the business and not necessarily on their responsibilities. Each of Stacey, Hanson and Nancy were paid a commission of 75% on their hairdressing and aesthetician sales and 20% of their retail sales. However, the commissions were allocated as to salary and dividends.
[10] The appellant's other employees were paid a commission of 50% of their hairdressing and aesthetician sales and 5% to 20% on their retail sales. However their commission on retail sales was paid at year-end provided they were still employees of the appellant. Prior to Stacey purchasing Ms. Smith's shares she was paid on the same terms and conditions as the other employees.
[11] Nancy was the original investor in the appellant. Each of Janice and Stacey had borrowed $50,000.00 from the local Credit Union to invest in Brooks. Mr. Lyster described how these workers were paid. For example, Nancy's gross commission for May 1997 was $3,124.82. Of this amount, $600.00 was paid as a dividend and the balance as wages.
[12] Brooks paid each worker a dividend of $600.00 every two weeks. Also, throughout the year, bonuses would be paid to each of the three workers in different amounts, depending on individual circumstances. When Hanson was ill she received salary from Brooks. This was not a privilege available to employees who were not shareholders. Wages paid to the workers fluctuated on what Brooks could afford. Mr. Lyster, as stated earlier, was the arbiter as to the amounts that would be paid for wages and bonus.
[13] Staff were generally hired by consent of the three directors. Any two of the three directors had signing authority for cheques.
[14] The three workers worked approximately 40 hours per week, although any one could work longer hours if she wished. Each worker set up her own hours. The hours the other employees had to work was determined by the appellant.
[15] The appellant purchased blow dryers and curling irons for the three workers. The other employees were required to purchase their own blow dryers, curling irons and other equipment.
[16] From time to time, particularly when Brooks moved to a new location, the workers provided services to Brooks for no consideration.
[17] The appellant reimbursed the three workers for business related courses they took from time to time. Other employees were not reimbursed.
[18] In my view, during the whole of the relevant period, Nancy and Hanson were not dealing at arm's length with the corporation. Stacey was a regular employee of the appellant until August 13, 1997 and was engaged in insurable employment. This is not in dispute. After August 13, 1997 she was in the same position as her mother and Hanson and was not dealing with Brooks at arm's length.
[19] In his Reply to the Notice of Appeal the Minister stated that he properly exercised his discretion pursuant to paragraph 5(3)(b) of the Act in concluding that the appellant and Nancy and the appellant and Stacey would have entered into substantially similar contracts of employment if they had been dealing at arm's length. However, neither party presented any evidence to prove or disprove this allegation.
[20] Two of the facts the Minister assumed in concluding the three workers were employed pursuant to a contract of service were that they received a commission of 75% of their hairdressing and aesthetician sales and that all business expenses of the workers were reimbursed by the appellant. In deeming Nancy and Stacey "to deal at arm's length with" Brooks the Minister assumed, among other things, that (a) the three workers were managers, (b) Nancy said she made independent decisions "such as signing authority, hiring, firing and renovations of the salon", (c) Stacey said "she made independent decisions such as renovations of the salon ...", (d) the appellant's other employees were paid 50% of their hairdressing and aesthetician sales, and (e) the appellant reimbursed the workers for expenses incurred for business related causes, but not other employees. Based on the assumptions of fact that led the Minister to act as he did, he did not properly exercise his discretion pursuant to paragraph 5(3)(b) of the Act. The workers did not have the same relationship with Brooks as did the other employees. Brooks did not treat the workers as if it was at arm's length to the workers. If the Minister had properly exercised his discretion he would not have deemed Stacey and Brooks and Nancy and Brooks to be dealing at arm's length. A conclusion they would have entered into substantially similar contracts of employment is not reasonable. The facts assumed, properly considered, lead a conclusion opposite to that reached by the Minister.
[21] During the relevant periods the appellant and Nancy and the appellant and Stacey would not have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length. The relationship between the three workers as between themselves and the appellant and the pivotal position of Mr. Lyster in determining salary and method of payment of bonus and dividend could not lead one to reasonably conclude that any of the workers, including Hanson, was dealing with the appellant on an arm's length basis.
[22] The workers were not engaged in insurable employment within the meaning of the Act.
[23] The appeals are allowed and the decisions of the Minister of National Revenue are vacated.
Signed at Ottawa, Canada, this 13th day of April 2000.
"Gerald J. Rip"
J.T.C.C.