Date: 20010704
Docket: 2001-99-EI
BETWEEN:
RANJU VERMA,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasonsfor Judgment
Hershfield, J.T.C.C.
[1] This is an appeal under the Employment Insurance Act (the "Act") from a determination by the Respondent that the Appellant was not employed in insurable employment by 1262828 Ontario Limited ("Ontario Limited") for the periods of May 11, 1998 to October 24, 1998 and May 14, 1999 to October 23, 1999 by virtue of the exclusion from insurable employment in paragraph 5(2)(i) of the Act of employment where the employer and employee are not dealing with each other at arm's length. The question of whether persons are dealing at arm's length is, pursuant to paragraph 5(3)(a) of the Act, determined in accordance with the Income Tax Act.
[2] There is no dispute that the Appellant and Ontario Limited were not dealing with each other at arm's length during the subject periods as determined in accordance with the Income Tax Act. As such, there is no need to set out the shareholdings of the company. However, for the record, I note that the Appellant owned 18% of the shares of the employer company as did her husband and that she was related to a controlling group of shareholders which consisted of herself, her husband and her husband's brother and sister. Within the meaning of the Income Tax Act, the Appellant was during the subject periods thereby related to her employer, Ontario Limited and thereby was not dealing at arm's length with her employer during the subject periods. I also note that the Appellant was neither an officer nor a director of the company and was not involved in its management. Her husband, Naresh, was the president of Ontario Limited and his sister, Santosh, was the secretary of the company.
[3] Given that the Appellant and Ontario Limited were not dealing with each other at arm's length during the subject periods, the Appellant's employment was not insurable subject to the application of paragraph 5(3)(b) of the Act which provides as follows:
5. (3) For the purposes of paragraph (2)(i),
...
(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.
[4] The Reply to the Notice of Appeal states that the Respondent exercised his discretion under the Act and decided that the Appellant's employment would not be deemed to be insurable employment. The issue in this appeal is whether the Minister properly exercised his discretion under the foregoing paragraph of the Act. That there was a contract of service during the subject periods has been admitted to by the Respondent.
[5] In making his decision, the Respondent relied on the following assumptions of fact (facts relating to the Appellant's related status are omitted):
(a) the Payer operates a 47-unit motel in Niagara Falls;
(b) during the period in question, the Payer operated under the name of "Cataract Motel";
(c) the Payer's business is seasonal from May to October;
(d) the Payer's business operates 24 hours a day, 7 days a week during the peak season;
(g) the Appellant's duties were as follows:
- checking customers in and out at the front desk
- taking reservations by phone or internet
- handling customer complaints
- ensuring rooms are suitable for guests
- marketing, dealing with travel agents and taking group
reservations
- housekeeping supplies management;
(h) the Appellant performed her duties at the Payer's place of business;
(i) during the peak period, the Appellant worked 7 days a week for a total of between 50 to 60 hours per week;
(j) during the low period, the Appellant worked on an "as-required basis" for a minimum of 40 hours a week;
(k) the Appellant's hours of work were determined by the Payer;
(l) the Appellant's hours of work were not recorded;
(m) the Appellant was not provided with any employee benefits;
(n) the Appellant was paid $550.00 per week regardless the amount of hours worked;
(o) the Appellant was paid by cheque on a bi-weekly basis;
(p) the Appellant's rate of pay was determined by the Payer;
(q) the Appellant was supervised by his (sic) spouse, Naresh Verma, and the other shareholders;
(r) the Appellant and one other person were on the Payer's payroll during the period in question;
(s) all the equipment was provided by the Payer at no cost to the Appellant;
(t) the Appellant and her spouse reside at the motel;
(u) while on lay off, the Appellant performed services for the Payer without remuneration;
(x) 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 not have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.
[6] The Appellant gave evidence, as did her husband. The Appellant's husband was excluded from the Court when the Appellant testified. Their testimonies confirmed the assumed facts set out above but with elaboration, particularly as to the nature and extent of the services referred to in assumption (u) above. A summary of their evidence is as follows.
[7] The 47-unit motel was operated throughout the year, primarily by the Appellant's husband, Naresh. The motel had three business cycles each year. The winter cycle was the off-season and ran from the end of October to early May.[1] During this time the motel had little business. Only five to six rooms, or less, were occupied each week. Two to three single night drop-ins per week and a similar number of weekly tenants, who were given no services, comprised the motel's business during the off-season. That is, during the off-season there was little work to do and Naresh was there seven days a week to attend to what little business there was. In May, traffic began to pick up and in September it began to slow down again. Peak business was July and August. During such peak season the motel was virtually full every night. The tourist season coincides with the motel's peak business cycle. During this peak period the Appellant worked 50 to 60 hours per week as stated in paragraph (i) of the assumptions. In May and most of June, September and October, which were slow periods, she worked approximately 40 hours per week as stated in paragraph (j) of the assumptions. She was not employed to perform services during the off-season.
[8] As set out in paragraph (g) of the assumptions, the Appellant's duties as an employee of Ontario Limited were largely guest service related. During the subject periods the motel was not linked to a reservation network and, accordingly, most business was comprised of road traffic and there was much less in the way of group reservations. Indeed, managing bookings was largely a manual job. What could be done on computer was being done. The Appellant had taken computer business courses and was comfortable operating e-mail, Wordperfect, Lotus and other programs. In her prior employment she worked in a shipping office of a computer sales business and worked on a computer, checking shipments. At that job, which she had for seven years in Toronto before the family acquired the motel in January 1998, she was earning $12.00 per hour at the time she left that employment.
[9] While the Appellant did the office work relating to guest services, Naresh did everything else from banking to housekeeping.[2] In the peak season Naresh's brother came in from the United States to help with the housekeeping demands although he was not on the payroll. The Appellant occasionally helped with housekeeping and occasionally chambermaids were hired but for the most part the motel was operated by the three family members during the peak season, and by Naresh alone in the off-season when he did maintenance and repairs as well as handle the infrequent guests. Before the family acquired the motel, while living in Toronto, Naresh ran his own renovation business and his van carried the logo from that business (with the Toronto area code) even after the business was abandoned and he moved to Niagara to operate the motel.
[10] Since the Appellant was not employed during the off-season, she was able to claim employment insurance benefits during that time provided her employment was insurable. To deny such benefits the Minister refused to exercise the discretion given him in paragraph 5(3)(b) of the Act. That is, having regard to this arrangement, the Minister determined that it was not one that would have been engaged in by an arm's length person.
[11] The critical assumption in so exercising his discretion is the assumption set out in paragraph (u) above. Respondent's counsel acknowledged that but for that assumption there would be no basis for the Respondent's exercise of discretion. That is, he agreed that an arm's length person would have entered into a substantially similar contract of employment during the subject periods as that entered into by the Appellant. However, that the Appellant provided further services outside of those periods without compensation is argued to have tainted this otherwise arm's length engagement.
[12] Although her wages were fixed on a weekly basis, the Appellant was earning roughly $12.00 per an hour over the six months of her engagement. The Appellant and her husband testified that such rate, or more particularly her weekly wage over such period, was standard in the industry in the area and in all respects the terms of engagement were as they would be if the person engaged were an arm's length person. Respondent's counsel did not dispute this but argued that the assumption referred to in paragraph (u) was relevant and that it distinguished the Appellant's engagement by incorporating into that engagement the off-season contribution that the Appellant made to the employer's business. Before examining the relevance of this distinction I will consider more of the evidence that bears to the off-season.
[13] The Appellant testified that during the off-season she did not provide assistance other than occasionally answering the motel phone or attending to a guest when her husband was not there. Their residence was attached to the motel office. There were two telephone lines, one for the motel and one for the residence. The motel telephone line did not have an extension in the residence but the motel phone was cordless and could be left in the residence to receive motel business calls in the residence. The Appellant acknowledged that if her husband was not around during the day in the off-season, the motel phone would be left in the residence and would be answered by her when she was at home. She testified that this only happened rarely. She testified that the residence had a separate entrance of its own as well as an entrance through the motel office. Regardless of the residence being attached to the motel she testified that she did not spend time in the motel office during the off-season simply because there was little business to attend to and what business there was, was being handled by her husband. While the office was generally closed when he was not around, the Appellant confirmed that there was a bell outside the motel office that rang in the residence and that she would attend to a guest during the off-season when her husband was not there. She testified that this only happened two or three times during a season. I am satisfied that this was not a question of what her responsibilities were. There was simply little traffic to attend to given the season and her husband's regular attendance to what little business there was. Her services, or that of any prospective arm's length worker, were not required. Business during the off-season did not justify the employment of a second person to serve what little business might have been gained.
[14] The Appellant's husband testified that he carried out all duties during the off-season. He locked the office door when he was not in the office and when he was on the premises, but not in the office, he carried the portable phone with him but there was little business to attend to during the off-season. The tourist business was dead at this time. He testified that he did maintenance and repairs around the motel during this time and that he was generally there to attend to what little business came by.
[15] The Respondent relied on the testimony of an investigator who gave evidence at the hearing. The investigator, from Human Resources Canada in Brampton, Ontario, testified that on January 28, 2000 at 12:55 p.m. he called the motel and that a female person answered and gave him the motel's fax number and the name "Ranju" as the person to whose attention a fax could be sent. That is the Appellant's name. On February 4, 2000 he attended the motel and she was at the office attending to the registration of a guest. Brochures in the office pictured her behind the registration desk. On February 24, 2000 he again visited the motel and Naresh was there putting in a new front desk. The investigator asked for Ranju and was told she was not there. The investigator, noting during this visit that there was a van advertising Verma Renovation Services parked outside the office, asked Naresh if he had another business that he operated. Naresh told him that he only did repairs around the motel.[3] The investigator acknowledged that the decal on the van had a 416 area code. The Minister wants to rely on this evidence to support its position that Naresh was not always around the motel in the off-season to attend to occasional business and that the Appellant was employed during the off-season, without pay, to provide her services in his absence. Taking all testimony into account, I am satisfied that Naresh was generally available at the motel during the off-season to attend to what little business there was during that time and that he did not operate a second business that would have detracted from that general availability. It is also clear that Naresh would not have been around the motel to attend to it at all times and that the Appellant, living at a residence forming part of the motel, would have been available to provide assistance on an occasional basis. This is not inconsistent with the Appellant's testimony and that of her husband although both the Appellant and her husband might well have downplayed the extent of the occasional assistance that the Appellant provided.
[16] On March 4, 2000 the investigator interviewed Ranju in St. Catharines. He confirmed that she received employment insurance benefits each year during the winter because business was very slow and because her husband ran the motel at that time. She told the investigator her role during the subject periods was to serve customers. Presumably the inference was that there was no job for her in the off-season since there were so few customers to serve at that time. While a signed statement made no mention of it, the investigator testified at the hearing that the Appellant acknowledged, at the interview, that she did help a little in the winter by answering the phone when her husband was not there and that she did not get paid for providing occasional assistance.
[17] Counsel for the Respondent argued that the Minister can reasonably draw the inference that the Appellant works year round as evidenced that on two of three random contacts, the investigator found the Appellant attending to office business during the off-season. Assuming such an inference is not unreasonable or that this Court does not have jurisdiction to make a finding on the merits as to whether it would come to the same conclusion as the Minister, there is then only one question to be decided. Namely, whether the Appellant's providing occasional services in the off-season, without pay, is a relevant factor in the Minister's exercise of discretion under paragraph 5(3)(b). If it is, the appeal must fail as the following analysis of the law demonstrates. On the other hand, if such factor is not relevant and it is the only factor relied upon by the Minister as admitted by the Minister's counsel, then the appeal must be allowed.
Analysis
[18] The role of this Court in appeals of the exercise of the Minister's discretion under paragraph 5(3)(b) is well established. Counsel for the Respondent and counsel for the Appellant provided a number of cases on this point. The most succinct statement of the law regarding such role is found in Légaré v. Canada.[4] The judgment of the Federal Court of Appeal was delivered in that case by Marceau J. Referring to this Court's role he observed as follows:
... The Court is not mandated to make the same kind of determination as the Minister and thus cannot purely and simply substitute its assessment for that of the Minister: that falls under the Minister's so-called discretionary power. However, the Court must verify whether the facts inferred or relied on by the Minister are real and were correctly assessed having regard to the context in which they occurred, and after doing so, it must decide whether the conclusion with which the Minister was ‘satisfied' still seems reasonable.
[19] Lest this seems like an over-simplification of the law on the point, consideration should also be given to the Federal Court of Appeal's findings in Canada v. Jencan Ltd. and in Bayside Drive-In Ltd. v. Canada.[5]
[20] These cases, drawing from the Federal Court of Appeal decision in Tignish Auto Parts Inc. v. M.N.R.,[6] confirm that the Tax Court of Canada is required to undertake a two-stage inquiry when hearing an appeal on a determination by the Minister under paragraph 5(3)(b). The first stage, in deference to the Minister's discretionary power, is to determine if his discretion was exercised in a judicial manner or, in other words, in a manner consistent with the law. A Tax Court judge 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 can only go on to the second stage of the inquiry - to review the merits of the Minister's determination - where it is established that the Minister exercised his discretion in a manner that was contrary to law which is to say 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)(ii); or
(iii) took into account an irrelevant factor.
[21] Based on the foregoing, this Court has no jurisdiction to review the merits of the Minister's determination in this case unless he took into account an irrelevant factor. That is to say, in the case at hand, there is no reason to suggest that the Minister acted in bad faith or for an improper purpose and, further, I am satisfied that the Minister had all relevant circumstances available to take into account when the decision was made. Counsel for the Respondent has acknowledged one and only one pivotal factor, so the question comes down to whether or not that pivotal factor is relevant.
[22] I fail to see how a circumstance that relates only to a period outside the employment period under appeal can be relevant as a circumstance of that employment during that period where every indicator is that the terms of that employment for that period are arm's length terms. If the contract were not reflective of an arm's length arrangement, it might be explained by reference to work related activities outside of the stipulated contract period. For example if the pay rate was too high for a specified period, work done for that employer outside of that period at lower than an arm's length rate would be relevant in assessing whether the terms of the contract for the specified period are arm's length or whether the specified term and rates were genuine. Another example would be where the seasonal aspect of a contract of employment was suspect on the basis that that particular employment would not typically be contracted for on a seasonal basis. In such case, work performed outside of the seasonal employment period would be relevant in assessing whether the terms of the contract for the specified period are arm's length or whether the specified term of the contract is genuine. In the case at bar, the seasonal nature of the work is admitted. The need for the Appellant's services and her ability to perform them during the approximate six month term of the employment each year are not questioned. The terms of the engagement during the employment period such as hours of work and compensation paid relative to duties performed are not substantially different than those that would have applied had an arm's length person been employed. Indeed such terms as applied to the Appellant's employment were standard in the area. The Respondent's counsel did not take issue with the evidence on these points. Further, I have found that the Appellant's services or those of an arm's length person were not required in the off-season. The business gained by the Appellant's occasional assistance did not justify retaining her or anyone else's services. The employer's business activity in the off-season would not justify hiring a replacement worker whether the Appellant helped out occasionally or not and the Minister knew this[7] . This underlines the irrelevance of the Minister's assumption in paragraph (u) of the Reply.
[23] Family members often provide occasional services without compensation to family businesses. The Appellant should not be punished for not refusing to answer an office phone or answering the office bell where doing so is as infrequent as the evidence in this case suggests. If an arm's length person were seasonally employed during the peak and slow periods and that person claimed employment insurance benefits during the off-season, the irrelevance of the Appellant's assistance during the off-season would be apparent. That its irrelevance is less apparent where she is the person employed does not make it more relevant in my view.
[24] In exercising his discretion under paragraph 5(3)(b) the Minister is to satisfy himself that it is reasonable that an arm's length party would have entered into a similar contract of employment, as did the Appellant in this case, and he is to have regard "to all the circumstances of the employment" (emphasis added). The contract of employment in this case is from May to October, not from November through April. In my view, in determining the exercise of his discretion in this case, the Minister considered as a pivotal factor a circumstance (the Appellant's occasional assistance during the off-season) that was not relevant to the exercise of his discretion. Based on these findings it is open for me to consider the question on the merits and on that basis I would allow the appeal. On the merits of this matter, it is reasonable to conclude that the Appellant and Ontario Limited would have entered into a substantially similar contract of employment if they had been dealing at arm's length.
[25] I add that I take some comfort in this conclusion from the case of Rita Harvey v. M.N.R.[8] In that case Associate Chief Judge Bowman considered facts that are similar to the facts of the case at bar. It was a case of a wife working for her husband on a grain farm paid at a fixed rate on a bi-weekly basis. There was no record of hours actually worked and no supervision. Hours worked were not regular. It was not a 9 to 5 job. The importance of the work to the employer was the same as if it had been done by an arm's length worker. There was no suggestion that the hourly rate was not an arm's length rate. While there was a part time contract of employment in the year under review, the appellant wife in that case had done similar work for her husband in a prior year without any wages. That she had worked free had no bearing on the assessment of the arm's length nature of the contract under consideration. The finding in that case was that the Minister failed to disclose any reasons that would suggest that they would not have entered into the same arrangement had they been dealing at arm's length. Associate Chief Judge Bowman's analysis in that case focuses on the total lack of relevant factors considered by the Minister in exercising his discretion. In that case as in the case at bar the terms of the specific contract were arms length terms. In such circumstances its arm's length nature should not be ignored on the premise that outside of the term of that contract family members can and occasionally do work for one another without remuneration. Such circumstance in and by itself is not a relevant factor in determining the nature of the contract under review.
[26] Accordingly, the appeal is allowed.
Signed at Ottawa, Canada, this 4th day of July 2001.
"J.E. Hershfield"
J.T.C.C.
COURT FILE NO.: 2001-99(EI)
STYLE OF CAUSE: Ranju Verma and The
Minister of National Revenue
PLACE OF HEARING: St. Catharines, Ontario
DATE OF HEARING: May 29, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge J.E. Hershfield
DATE OF JUDGMENT: July 4, 2001
APPEARANCES:
Counsel for the Appellant: Paul M. Bauerle
Counsel for the Respondent: Ernest Wheeler
COUNSEL OF RECORD:
For the Appellant:
Name: Paul M. Bauerle
Firm: Chown, Cairns
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-99(EI)
BETWEEN:
RANJU VERMA,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Appeal heard on May 29, 2001 at St. Catharines, Ontario, by
the Honourable Judge J.E. Hershfield
Appearances
Counsel for the Appellant: Paul M. Bauerle
Counsel for the Respondent: Ernest Wheeler
JUDGMENT
The appeal is allowed and the determination by the Minister that the Appellant was not engaged in insurable employment in the periods in question is varied in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 4th day of July 2001.
|
"J.E. Hershfield" |
J.T.C.C.
[1] This is consistent with assumption (c) of the Reply. However, the assumption in the Reply is to the effect that there is no business from October to May.
[2] The Appellant did not have signing authority at the bank. Santosh signed bi-weekly pay cheques and these were deposited by the Appellant in her own bank account. Payments were made on a regular basis in an arm's length fashion.
[3] The investigator's testimony was not clear on this point. At one point he said that Naresh told him that he occasionally did odd jobs for motels in the area, but at another point he said that Naresh told him that he only did odd jobs around the motel.
[4] [2000] 246 N.R. 176.
[5] [1997] 215 N.R. 352; [1998] 218 N.R. 150.
[6] [1994] 185 N.R. 73.
[7] I refer again to assumption (c) in the Reply. That assumption seems to admit my findings that a replacement worker was not required in the off-season.
[8] [1995] T.C.J. No. 916.