Tax Court of Canada Judgments

Docket: 98-758(UI)

BETWEEN:

TIBÉRIO MASSIGNANI,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent. [OFFICIAL ENGLISH TRANSLATION]

____________________________________________________________________

Appeal heard on common evidence with the appeal of Francine Provost

(98-763(UI)) on October 15, 16, and 17, 2003, and November 7, 2003,

at Montréal, Quebec

Before: The Honourable Judge Pierre Archambault
Appearances:
Counsel for the Appellant:	Charles A. Ashton
Counsel for the Respondent:	Anne Poirier

____________________________________________________________________

JUDGMENT

          The appeal is dismissed and the decision of the Minister of National Revenue is confirmed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 9^th day of March, 2004.

"Pierre Archambault"

Archambault J.

Translation certified true

on this 30^th day of March, 2005.

Colette Dupuis-Beaulne, Translator

Docket: 98-763(UI)

BETWEEN:

FRANCINE PROVOST,

Appellant

and

THE MINISTER OF NATIONAL REVENUE,

Respondent. [OFFICIAL ENGLISH TRANSLATION]

____________________________________________________________________

Appeal heard on common evidence with the appeal of Tibério Massignani (98-758(UI)) on October 15, 16, and 17, 2003,

and November 7, 2003, at Montréal, Quebec

Before: The Honourable Judge Pierre Archambault
Appearances:
Counsel for the Appellant:	Charles A. Ashton
Counsel for the Respondent:	Anne Poirier

____________________________________________________________________

JUDGMENT

          The appeal is dismissed and the decision of the Minister of National Revenue is confirmed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 9^th day of March, 2004.

"Pierre Archambault"

Archambault J.

Translation certified true

on this 30^th day of March 2005.

Colette Dupuis-Beaulne, Translator

Citation: 2004TCC75

Date: 20040309

Docket: 98-758(UI)

BETWEEN:

TIBÉRIO MASSIGNANI,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

AND

Docket: 98-763(UI)

BETWEEN:

FRANCINE PROVOST,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

[OFFICIAL ENGLISH TRANSLATION]

REASONS FOR JUDGMENT

Archambault J.

[1]      Mr. Tibério Massignani ("Tibério") and Ms. Francine Provost are appealing from the decisions rendered by the Minister of National Revenue (the "Minister") with respect to the insurability of their employment with Les Confections Tiva Inc. ("Tiva"). The periods of employment ("relevant periods") contemplated by the Minister's decisions are as follows for Tibério:

(i)	March 5, 1990, to August 31, 1990;
(ii)	November 11, 1991, to July 24, 1992;
(iii)	March 7, 1994, to July 29, 1994.

The relevant periods for Ms. Provost are as follows:

(i)	January 12, 1991, to February 20, 1992;
(ii)	August 1, 1994, to December 9, 1994;
(iii)	July 10, 1995, to July 14, 1995.

[2]      These appeals are being heard for a second time, further to a decision of the Federal Court of Appeal in Massignani v. Canada, 2003 FCA 172, [2003] F.C.J. No. 542 (Q.L.), in which an application for judicial review was made, and the Court ordered that the appeals be heard by a different judge. The reasons in support of the Minister's decision are the same for all of the relevant periods, namely, the Appellants did not hold genuine employment at Tiva, and, consequently, it was not an insurable employment. Furthermore, even if the Appellants held genuine employment, this employment is excluded from insurable employment, because a non-arm's length relationship existed between them and Tiva. Essentially, the Minister concluded that the Appellants had participated in a scheme to defraud the Government of Canada (Employment and Immigration Canada and Human Resources Development Canada ("HRDC")) of a sum exceeding $5,000, thus committing a criminal offence under section 380 of the Criminal Code. The scheme allowed employees of Tiva to work while receiving unemployment insurance benefits.

[3]      A warrant for the arrest of Tibério was signed by a justice of the peace on April 5, 1997, and Tibério pleaded guilty to the above-noted offence on June 30, 1998. The scheme was carried out during the period beginning January 1, 1991, and ended July 12, 1996. In the case of a similar action regarding the period beginning September 9, 1990, and ended March 4, 1995, involving employment insurance benefits that Tibério received while working for Tiva, a conditional stay was entered in Tibério's court record. Even though arrest warrants had been issued against Ms. Provost, charges were not filed against her.

Facts

[4]      Tiva is a corporation that was incorporated on January 20, 1982, to acquire a men's and women's clothing manufacturing business.[1]    It operated this business until March 1996.[2] During the relevant periods, this business was located on Richelieu Street in St-Hubert, Quebec. Until the time of her death in October 1995, Ms. Lina Massignani, Tibério's mother, held all of the common shares in Tiva. After that time, Tibério's brother, Vladimiro, became the sole shareholder of the common shares. Tibério, however, held some preferred shares in Tiva. According to Tibério, the funds raised by Tiva through the preferred shares were used to purchase a building. Ms. Massignani was originally from Italy, and she spoke very little French or English. She started working as a forewoman in a manufacturing business owned by Mr. Marcoux and his spouse. When the Marcoux couple started to experience financial difficulties, Ms. Massignani decided to buy the business. According to Ms. Diane H. ("Diane"), who joined the business shortly after Ms. Massignani acquired it, Ms. Massignani's sons, Tibério and Vladimiro, negotiated the purchase.

[5]      Firstly, it should be noted that Tiva is a family business. The two Massignani brothers negotiated its purchase, and, according to Diane, they also operated the business from the outset. The two brothers and their mother were authorized to sign cheques for Tiva; two signatures were required. Diane, who was employed as a secretary for Tiva from 1981 to March 1993, was Vladimiro's spouse until 1987. She remarried in 1988. Vladimiro became the common-law spouse of one of Tiva's forewomen who was hired in 1992 or 1993. Ms. Francine Provost has been the common-law spouse of Tibério since 1986. She started to work for Tiva doing finishing work, and she was later promoted to secretary.

Scheme

[6]      According to Diane, the scheme had existed for a number of years, at least since 1985, and it was still being used when she left Tiva in March 1993. According to her, Tibério would call each of the business's employees into his office, and, after explaining about the financial difficulties the business was experiencing, he would ask them to claim unemployment insurance benefits while they continued to work for Tiva. According to the testimony of Ms. Elizabeth B. ("Elizabeth"), Ms. Provost asked her to participate in the scheme.[3] According to Diane, most of the employees who agreed to file a claim for unemployment insurance benefits for some periods came back to work for Tiva on a full-time basis during these periods, but for a lower hourly wage. According to her, Tiva was saving approximately two or three dollars an hour in wages. However, during these periods, these employees were treated as self-employed workers, and their remuneration was paid either by Tiva, where the employee could provide another name or another social insurance number, or by a numbered corporation. Diane also stated that the T4A prepared to report the remuneration paid to the self-employed workers contained, in many cases, errors in the name, social insurance number, or address of the worker. The Appeals Officer corroborated this fact. She noted that 23 of the 60 T4As prepared for 1993 contained errors.

[7]      A number of witnesses confirmed that they participated in this scheme. Diane acknowledged that she participated in it as a result of the pressure Tibério placed on her, owing to Tiva's financial difficulties. She acknowledged that she received unemployment insurance benefits while she was working and that she was liable for repaying a sum of $12,300 to HRDC. At the time of her bankruptcy, she still owed $9,300. Elizabeth also acknowledged that she had participated in the scheme and that she received remuneration for her services under the name of Lise B. She claimed that she repaid the sum of $12,000 to HRDC. The Appeals Officer confirmed that the social insurance number appearing on the T4A issued to Lise B. was not valid. Ms. Ida H. ("Ida") acknowledged that she received remuneration paid by Tiva in this scheme through a numbered company and through Herman Sports Wear.

[8]      According to Diane, Tibério also participated in the scheme, and he used an assumed name, with the first name François, for payment of his remuneration. The Appeals Officer confirmed that the T4A issued to Tibério for 1993 contained an invalid social insurance number. According to Ms. Nicole M. ("Nicole") and Diane, Vladimiro also participated in the scheme. According to Diane, the name used by Ms. Provost in the scheme was Nancy, her daughter's name, or Lussier, her former spouse's name. During her testimony, Ms. Provost did not deny Diane's testimony. She even acknowledged that she used her former spouse's name at times. A T4 was issued in the name of Prévost for 1994, and the social insurance number entered was also invalid.

[9]      According to Diane, numbered corporations belonging to Tibério, Vladimiro, and Ms. Provost were used to make under-the-table payments. In general, these corporations did not make source deductions and did not issue T4s. Moreover, they did not file GST or QST returns. These corporations were used for a period of less than one year so that they would not draw the attention of the tax authorities to the fact that these returns had not been filed. According to the Appeals Officer's verifications, Vladimiro was the president of three of these numbered companies; these companies did not file any income tax returns (T2) and they did not have a number for source deductions ("SD"). Nicole acknowledged that she received her remuneration through one of these corporations and that she participated in the scheme from January to March 1994. The remuneration was paid in her spouse's name and the social insurance number indicated was not valid.   

[10]     During his testimony, Tibério stated that he did not own any numbered companies from 1990 to 1995 except for Gestion Massie, which he transferred to his brother. Ms. Provost acknowledged that she had been the owner of two numbered corporations. The first one, 2733-7278 Québec Inc. ("Company 2733"), was incorporated in January 1990, and it was only used until December 1990. She was the sole shareholder of this company. She explained that she had attempted to operate her own business and that Company 2733 had leased 1,200-square-metre premises and equipment from Tiva. She acknowledged that 75% of the workers she used were self-employed workers and that she had five or six employees. Company 2733 had only three or four clients. Ms. Provost stated that, at that time, she worked 25 hours per week for Company 2733. According to the Appeals Officer, this corporation did not have a SD number, but it did file two income tax returns. The other numbered corporation, 9033-9011 Québec Inc. ("Company 9033"), was incorporated in April 1996. This company filed an income tax return in 1997, and it had a SD number; however, it did not have a corporate identification number.

Tibério's work

[11]     Tibério's claim that he started working for Tiva in 1984 or 1985 was contradicted by Diane, who claimed that he started working for Tiva from the outset, in 1982. Tibério described his duties for Tiva from 1990 to 1996 as including three important duties. Forty percent of his time was spent maintaining, repairing, and preparing the equipment used by Tiva's operators and seamstresses. Thirty to forty percent of his time was spent controlling the productivity of these operators and seamstresses. The balance of his time was spent delivering garments to and picking up garments from the residences of the self-employed workers.

[12]     This description contains no mention of managerial duties; the duty that most resembles a managerial task is controlling productivity. This duty consisted of determining the amount of time that each of the workers spent carrying out their duties. It does not, obviously, correspond with the description provided by Diane and some of the former workers who testified at the hearing. Diane described Tibério's responsibilities as those of a production manager. Vladimiro dealt with the clients and handled the shipping of assembled pieces. Diane stated that Tibério was quick-tempered, making his relations with the business's clients difficult. However, Tibério and Vladimiro were the ones who met with the accountants and the bankers. Diane stated that Lina Massignani did not have an office in the administrative area of Tiva's workshop; she worked with the other workers as a forewoman. Elizabeth indicated that Tibério was always in the office. Tibério, Vladimiro, or Ms. Provost would announce lay-offs owing to work shortages. It should be noted that the description of duties given by Diane further corresponds with the titles that Tibério used to describe himself in his unemployment insurance benefit claims, in which he describes his position as that of [TRANSLATION] "manager of 'garment' production," or "person responsible for production," or "production manager."

[13]     During Tibério's testimony, in which he attempted to provide evidence of his relationship of subordination, he claimed that he received his instructions from his mother, who was, in his opinion, the person who made all of the important decisions. Tibério indicated that, when he was working in the workshop, he received his instructions from the forewomen.

[14]     With respect to the terms and conditions of Tibério's employment, he did not, according to him, benefit from preferential treatment as a result of his familial relationship with his mother. He claimed that she was strict with him, particularly when he worked in the workshop. When work shortages arose, Tibério was laid-off like the other employees. During his examination, he estimated that his weekly remuneration from 1990 to 1994 ranged from $550 to $650. During his cross-examination, he gave an estimation of $650 to $850. He was paid weekly for a minimum of 40 hours per week; however, the average was 45 hours per week. His unemployment insurance claims indicate that his income was in line with his second version of the facts. In his September 1990 claim, he indicated that his weekly wages were $744 for 40 to 50 hours of work per week. In the August 1992 claim, he entered wages of $850 for 55 to 60 hours per week. This same claim for benefits shows that he worked 50 hours in his last week. Finally, according to his August 1994 claim, his weekly remuneration was $750 for 40 of work hours per week.

[15]     Tibério indicated that his hourly wage was $14 to $18 and that this remuneration was comparable to the wages paid to workers in the field of human engineering, which ranged from $20 to $24 per hour. He also indicated that the forewomen earned between $10 and $12 per hour. He estimated that a mechanic earned between $15 and $20 per hour. However, there were no witnesses whatsoever to corroborate this data. A remuneration of $744 for an average week of 45 hours[4] represents an hourly rate of $16.53. A remuneration of $850 for an average of 55 hours per week pays an hourly rate of $15.45, and a remuneration of $750 for an average of 40 hours per week pays $18.75 per hour. A payroll record was not filed to corroborate these figures, specifically, the number of hours of work. It should also be noted that the only document filed in evidence by the Appellants in support of their assertions is a medical report relating to Ms. Provost. An allegation was made that the Royal Canadian Mounted Police ("RCMP") had seized documents and had not returned all of them, which explains why no other documents were filed.

Tibério's periods of unemployment

[16]     Tibério claimed that, between 1990 and 1995, his employment with Tiva and his unemployment insurance benefits were his only sources of income.[5] He did not work for other employers. His attempts to find another employment were unsuccessful because, according to him, certain economic conditions existed at the time. Consequently it appears that, during the periods that are not at issue in his appeal, Tibério was unemployed, and he received unemployment insurance benefits for at least a portion of these periods of unemployment. The period beginning August 31, 1990, and ended November 11, 1991, represents 14 and a half months, and the period beginning July 24, 1992, and ended March 7, 1994, represents 19 and a half months ("Tibério's periods of unemployment").

[17]     Tibério claimed that he did not provide any services to Tiva during these periods of unemployment, with or without remuneration. He acknowledges only that he ran short errands for his mother, namely, doing the bank deposits. During his cross-examination, when he was asked what measures Tiva took to ensure the maintenance and repairs of the machines during his periods of unemployment, Tibério stated that it had hired sub-contractors. It should be noted that, at that time, Tiva had approximately 25 machines and 35 employees and, according to Elizabeth's testimony, a machine would break down at least every two weeks. Tibério indicated that Nicole prepared the equipment to take into account the requirements of the various productions, yet during the 1990s, Nicole only worked from August 1993 to March 1994.

[18]     Tibério claimed that he had been laid-off from Tiva owing to a shortage of work. During his testimony, he gave a lengthy narrative describing the impact of the Free Trade Agreement on the textile industry. According to him, the number of workers in this industry fell from 100,000 in the 1980s to 60,000 or 65,000 in the 1990s. Prior to 1990, employees would work on a full-time basis, except for short periods during the change of seasons; during the 1990s, work stoppages lasted longer. He emphasized that this occurred mostly in the fall, but also in the spring. However, it was never during the same period. He claimed that it depended on the contracts and that the periods in which there was no work could range from two weeks to two months. The number of employees working for Tiva decreased from 40 or 50 in the 1980s to between 25 and 35 in the 1990s. Ms. Provost acknowledged that this figure might have been as high as 40 employees during these years.

[19]     Tibério's description was contradicted by Diane's version of the facts. According to her, there has always been work, and the lay-offs were part of the scheme. Most of the laid-off workers continued to work. According to Diane, Tibério has always continued to work for Tiva. I recall that Diane was employed by Tiva until March 1993. Ida, who was also employed by Tiva until December 11, 1992, confirmed that Tibério was present and that he was not absent for extended periods. Elizabeth, who started working for Tiva in early 1992 and continued until 1996, confirmed that Tibério was always in the office and that he was rarely in the workshop. She added that there was not one week during her time with Tiva in which she did not see him.

[20]     Nicole, who worked for a second period for Tiva between August 1993 and March 1994, confirmed that Tibério handled administration and repairs, and that he was present all of the time, except for a one-month period in August 1993 during which time he travelled to Europe.

Francine Provost's work

[21]     Ms. Provost claimed that she has been working since the age of 16 and that her specialty was operating "special" finishing machines, namely, machines used to sew on buttons, pockets, and collars. Her employment with Tiva began in 1984, and she has always been paid on an hourly basis. Her hourly wage was $9 in 1990, and $10.50 in 1994 while she was working as a secretary. She was required to clock in every day, just like all of the other employees at Tiva (except for the Massignanis), even when she was performing secretarial duties. She started working in the office gradually in 1986 or 1987. This period corresponds with the time at which she began living with Tibério. Her administrative duties included payroll, accounts payable, and accounts receivable. She claimed that Tiva purchased a computer in 1990, which increased productivity in administrative work greatly. What used to take three days to do could now be done in three hours. Consequently, the secretaries were required to work in the workshop also. She claimed that she performed secretarial work for two and a half days per week and that the balance of her time was spent in the workshop.

[22]     According to Diane, the computer was purchased in 1986 or 1987. However, because the scheme was implemented during this period, it was necessary to keep two sets of books. One set, used to track the under-the-table payments, was kept manually. As a result, there was enough work to keep two full-time secretaries busy. She stated that she spent 90% of her time performing secretarial work during the 1990s. According to Elizabeth,[6] Ms. Provost was always in the office. She stated that Ms. Provost would help out on special machines perhaps twice per month, when there was extra work. According to Nicole, when she was employed by Tiva, from August 1993 to March 1994, Ms. Provost was not working in the administrative section of the workshop; rather, she handled productivity control.

[23]     According to Ms. Provost, Nicole earned an hourly wage of $10.50 in 1994. Nicole, however, stated that her wages were only approximately $9 per hour. According to a decree setting out the terms and conditions for the remuneration of workers in the textile industry, specifically, in the field of ladies' clothing, the operator of a regular machine earned $8.95 per hour in 1990 and $9.63 per hour in 1993.

Ms. Provost's periods of unemployment

[24]     Two periods are not included in the relevant periods of employment for Ms. Provost; the first, beginning February 20, 1992, and ended August 1, 1994, represents 29 months, and the other, beginning December 9, 1994, and ended July 10, 1995, represents a period of seven months.[7] With respect to the 29-month period, Ms. Provost provided the following explanations. Firstly, she experienced a severe depression in late February 1992 requiring that she be hospitalized for a period of two months. During her interview with the Appeals Officer, she claimed that she was hospitalized for four months. Her medical file reveals that her hospital stay was 44 days long, beginning on March 4, 1992. Ms. Provost claimed that she convalesced for one year. However, her medical records indicate that, as of April 30, 1992, everything was going very well, and that by May 28, 1992, she was planning to open a new store. However, she had a relapse in October 1992, which led to a four-day hospital stay. She was diagnosed with another condition, and the appropriate medication was prescribed to her. Regular follow-ups took place throughout the fall.

[25]     In her testimony, Ms. Provost stated that she had returned to work gradually in March 1993 and that she worked on a full-time basis during July, August, and September 1993. She stated that she was able to assume all of her duties for a period of six months, which would have taken her to September. However, she claimed that she was unsure whether she had worked after July 1993.

[26]     Her medical report shows that, on March 11, 1993, she returned to work. A note dated July 15, 1993, indicates that she had returned to work on a full-time basis. In May 1995, according to the medical report, she again had to start taking the medication that she had stopped taking in July 1993, which gave rise to a relapse. Throughout the month of August, everything was going well and she was scheduled to leave on vacation for five weeks. It is interesting to note that this trip took place a number of weeks after she had worked her 20^th week-the week she needed in order to be entitled to unemployment insurance benefits-the week of July 10, 1995.

[27]     In their testimony, Diane, Elizabeth, and Nicole confirmed that Ms. Provost worked in the workshop at Tiva during the periods in which they were employed by the company. Diane and Elizabeth acknowledged that Ms. Provost had been absent owing to her health. Specifically, Elizabeth acknowledged that she had been absent for one month. Diane stated that this absence took place around September or October 1991, approximately one and a half years before she left. Nicole started to work at approximately the same time as Ms. Provost was returning to work on a full-time basis.

[28]     To explain her seven-month period of unemployment beginning December 1994 and ended July 1995, Ms. Provost stated that Tiva had experienced a work shortage. It was not, therefore, health-related. She indicated that she was not eligible to receive unemployment insurance benefits at that time, because she needed one more week to become eligible-a week that she worked in July 1995. She stated that she had not worked during this seven-month period of unemployment and that she rarely went to Tiva. Therefore, she rendered no services to Tiva during this period. Elizabeth, however, indicated that during this period, Ms. Provost was always at the office. Ms. Provost acknowledged that she had worked from January 1996 to May 1996,[8] the point at which the RCMP carried out its search.

[29]     In her testimony, the Appeals Officer indicated that, in addition to the Appellants' files, she had handled Vladimiro's file for the following periods: May 20, 1990, to October 19, 1990; September 7, 1992, to February 12, 1993; and, May 9, 1994, to December 12, 1994. Shortly before the appeal hearings of Tibério and Ms. Provost, Vladimiro informed the Court that he was withdrawing his appeal, which was to be heard at the same time as Tibério's and Ms. Provost's. The Appeals Officer pointed up the fact that neither Ms. Provost, nor Tibério, nor Vladimiro had been employed by Tiva at any time during 1993, except for the month of January and two weeks in February for Vladimiro. That year, Tiva posted $637,000 in sales. The sales figures were $1,013,000 for 1992, and $656,000 for 1994. According to the Appeals Officer, the Appellants' contracts of employment were not genuine contracts of employment owing to their participation in the scheme. When I asked her about the extent of her analysis of the terms and conditions of the Appellants' employment contracts under paragraph 3(2)(c) of the Employment Insurance Act (the "Act"), she simply reiterated that there was no genuine employment contract. She acknowledged that she had not analyzed these terms and conditions in detail, although this paragraph is mentioned in the decision itself.

Position of the parties

[30]     Counsel for the Appellants maintains that the independent witnesses heard at the hearing, and the Appeals Officer in this case, were unduly influenced by the scheme that was implemented by Tiva. Did these witnesses, who participated in the scheme, not perform services pursuant to a contract of service? He could not understand how a different conclusion could be drawn in the case of the Appellants. Regarding the terms and conditions of remuneration for the Appellants, he maintains that they were no different than those of the other employees or of people working under similar conditions in other businesses. Consequently, the terms and conditions of employment would have been the same, even if an arm's-length relationship had existed between the Appellants and Tiva. He acknowledged, however, that if I were to conclude that the Appellants had worked without remuneration or for a lesser remuneration during their period of unemployment, the conclusion would have to be that these were not the reasonable conditions to which a third party would agree.

[31]     Counsel maintains that Ms. Provost did not work without pay for Tiva during her periods of unemployment. He pointed out that she stopped working at the end of February 1992 for health reasons. Moreover, he claims that Ms. Provost worked for her own numbered company during the other periods, specifically from January 1994 to March 1994, even though Nicole testified that Ms. Provost was present the entire time that she worked for Tiva.

[32]     Counsel for the Respondent maintains that the employment contracts binding the Appellants to Tiva did not constitute genuine contracts of employment. She relied on a number of decisions in case law, specifically, the following excerpts from the decision of Tardif J. in Thibeault v. Canada, [1998] T.C.J. No. 690 (Q.L.):

20         To receive unemployment insurance, now called employment insurance, the work must be performed within the framework of a genuine contract of service. The following criteria have been identified in the case law as elements of a contract of employment: a relationship of subordination giving the payer a power of control over the work performed by the employee, the chance of profit and risk of loss, ownership of the tools and integration.

21         The application of these criteria to the facts available obviously facilitates the exercise of characterization. On the other hand, it is just as important that there be genuine employment, without which the exercise of applying the criteria is completely useless.

22         Genuine employment is employment remunerated according to market conditions, which contributes in a real and positive way to the advancement and development of the business paying the salary in consideration of work performed. These are basically economic factors that leave little, if any, room for generosity or compassion.

[...]

29         Of course, it is neither illegal nor reprehensible to organize one's affairs so as to profit from the social program that is the unemployment insurance scheme, subject to the express condition that nothing be misrepresented, disguised or contrived and that the payment of benefits occur as a result of events over which the beneficiary has no control. Where the size of the salary bears no relation to the economic value of the services rendered, where the beginning and end of word periods coincide with the end and the beginning of the payment period and where the length of the work period also coincides with the number of weeks required to requalify, very serious doubts arise as to the legitimacy of the employment contract.    Where the coincidences are numerous and improbable, there is a risk of giving rise to an inference that the parties agreed to an artificial arrangement to enable them to profit from the benefits.

30         In this case, not only are the coincidences great and very numerous, the size of the salary has never been justified in a proper and reasonable manner.

[33]     Counsel noted that this decision had been confirmed by the Federal Court of Appeal in Coopérative forestière de Girardville v. M.N.R., Docket A-587-98, on June 15, 2000. In a two-paragraph decision, Desjardins J. indicated that the judge had correctly examined the issue of whether a genuine employment existed between the claimant and the Coopérative. She concluded that the decision under judicial review presented nothing unreasonable. Consequently, the Federal Court of Appeal dismissed the applications for judicial review.

[34]     Finally, counsel for the Respondent cited the decision of my colleague, Dussault J., in Carpentier v. Canada, [1995] T.C.J. No. 279 (Q.L.), in which he referred to the approach taken by our colleague, Lamarre-Proulx J., in Gauthier v. Canada, [1993] T.C.J. No 109 (Q.L.).[9] I cite paragraph 9 of Dussault J.'s reasons:

Judge Lamarre Proulx of this Court stated in Gauthier, "The object of the Act is to insure true employment." On this point, it is appropriate to examine all of the circumstances, including the work performed and the remuneration agreed upon, in order to determine whether there was a true contract of service between the parties or whether the contract of employment submitted truly represented the relations they decided to have between them. I also hasten to point out that it is clearly established that the onus is on the appellant to show on a balance of probabilities that such a contract existed where it is disputed by the respondent.

[Emphasis mine.]

[35]     Finally, counsel maintains that one of the requisites to the validity of a contract of employment was not present, because there was an unlawful cause or consideration. She relied specifically on section 984 of the Civil Code of Lower Canada ("C.C.L.C."). Moreover, under section 990 of the C.C.L.C., the consideration is unlawful when it is prohibited by law, or is contrary to good morals or public order. In the new Civil Code of Québec ("C.c.Q.") (in effect since January 1, 1994), article 1411 states that a contract whose cause is prohibited by law or contrary to public order is null. Article 1417 of the C.c.Q. stipulates that a contract is absolutely null where the condition of formation sanctioned by its nullity is necessary for the protection of the general interest. Under article 1418 of the C.c.Q., "The absolute nullity of a contract may be invoked by any person having a present and actual interest in doing so; it is invoked by the court of its own motion. A contract that is absolutely null may not be confirmed."

[36]     In support of her position, counsel for the Respondent also relied on my decision of May 23, 1997, in Isidore v. Canada, [1997] T.C.J. No. 463 (Q.L.). This case involved a contract of employment between a Canadian business and two citizens of a foreign country. One of them had been denied refugee status by the Canadian authorities, and the other was awaiting a decision from Immigration in his case. I also concluded that, in the presence of an unlawful cause, these people had not rendered services pursuant to a valid contract. I concluded that working in Canada without employment authorization, as required by section 18 of the Immigration Regulations, 1978, made pursuant to the Immigration Act, was prohibited by law and contrary to public order. Consequently, the contracts at issue were null and void.

[37]     Counsel for the Respondent cited the decision of the Superior Court of Québec in Office de la construction du Québec v. Corporation municipale de Paspébiac, [1980] C.S. 70. To understand the decision, it is important to summarize briefly the most relevant facts:

[TRANSLATION]

Because the work had been suspended for a lack of funding, the Arena Committee devised a project whereby the numerous unemployed local construction workers would work for unemployment insurance stamps, to enable them to draw benefits at a later date.

This project was not officially sanctioned by the municipal council, but the mayor, the individual councillors, and the secretary of the municipality were aware of the arrangement.

A pay list was prepared in accordance with the required standards, including the regular deductions, except for provincial and federal taxes. Unemployment insurance stamps were affixed in the workers' booklets.

A cheque was issued to each of the employees for each week of work, and each employee would endorse it and give it back to the municipality.

[38]     I will now comment on this decision. I believe that the Superior Court rightly concluded that a genuine contract of employment did not exist; rather, a service had been provided on a volunteer basis. The Superior Court concluded that the volunteer work was not subject to the Quebec construction decree. In the alternative, the Court indicated that, where it was not volunteer work, the contract was completely null and had no legal existence. In the opinion of the judge, it was a contract based on an unlawful consideration contemplated in article 989 of the C.C.L.C. Under article 13 of the C.C.L.C., no one can, by private agreement, validly contravene the laws of public order and good morals. Given the conclusion that there was no remuneration paid under the agreement entered into by the workers and the municipality, the arrangement was in violation of the provisions of the Unemployment Insurance Act. At page 72, the judge wrote:

[TRANSLATION]

In fact, their employment is not an insurable employment within the meaning of section 25 of the Unemployment Insurance Act. A remuneration must be paid by the employer or another party for an employment to be insurable.

[39]     It is my opinion that, in that case, clearly, the parties had not entered into a contract of employment. It was not, at any time, a matter of paying a genuine remuneration. Consequently, the contract that was concluded was merely a mock document. Because there was no contract of employment, the decree on the construction industry in the province of Quebec was not applicable to this contract, which was not a contract of employment. The sole purpose of the mock document was to make the workers eligible for unemployment insurance benefits unlawfully.

Analysis

Existence of a contract of employment

[40]     According to well-established case law, the burden of demonstrating that the Appellants held an insurable employment during the relevant periods is on the Appellants. Paragraph 3(1)(a) of the Act stipulates that an insurable employment is employment under a contract of service ("contract of employment"). Because the Act does not define this type of contract, reference must be made to legislation in Quebec, the province in which the contract between the Appellants and Tiva was entered into. For the period beginning 1990 and ended 1993, reference must be made to the Civil Code of Lower Canada, specifically, paragraph 1665(a), which defines a contract of employment and a contract for services. We must, therefore, rely on doctrine and case law to distinguish between these two types of contracts.

[41]      In Droit du Travail,[10] Robert P. Gagnon puts forward this concept of the contract of employment:

                   [TRANSLATION]

A contract of employment is one through which a person (the employee) agrees to work for a certain period of time for another person (the employer), under this person's supervision, for remuneration. There is no prescribed form for this contract; it can be an oral agreement or an extensive written document, and it can include a detailed list of the reciprocal obligations of the parties or simply a signature on a hiring form.

[42]      It is not always easy to distinguish between a contract of employment and a contract for services; there are a number of similarities between the two. In both cases, a person may agree to provide a service in exchange for remuneration, for an indeterminate period. What is the fundamental difference between the two contracts? Rinfret J. of the Supreme Court of Canada provides the answer in Quebec Asbestos Corp. v. Couture:[11]

[TRANSLATION]

The contract we have to interpret does not reserve to Quebec Asbestos Corporation the right to give Couture orders and instructions as to the manner of carrying out the duties that he accepted. This right is the basis of the authority and subordination without which no one can really be an employer.

[Emphasis mine.]

[43]      Pigeon J. adopted the same approach in Hôpital Notre-Dame et Théoret v. Laurent.[12] In Gallant v. M.N.R.,[13] Pratte J. of the Federal Court of Appeal agrees, and adds an important detail:

[...]The distinguishing feature of a contract of service is not the control actually exercised by the employer over his employee but the power the employer has to control the way the employee performs his duties.

[Emphasis mine.]

[44]         For the relevant periods prior to December 31, 1993, reference must be made to the new Civil Code of Québec, which establishes the general system of law in matters of employment at articles 2085 to 2097. Article 2085 of the C.c.Q. provides the following definition of a contract of employment:

A contract of employment is a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer.

                                                          [Emphasis mine.]

[45]         As we can see, the conditions necessary to the existence of a contract of employment are identical to those recognized by doctrine and in case law, namely: (i) the provision of a service, (ii) payment of remuneration, and (iii) the existence of a relationship of subordination.

[46]      It is not because the parties have characterized their agreement as a contract of employment or because they have made source deductions that it must necessarily be concluded that this is a contract of employment. The determination of the true nature of a contractual relationship between the parties must be based on the facts as a whole.[14]

[47]      As is often the case in this type of appeal, the recipients of unemployment insurance have arranged their affairs in such a way as to be eligible for the benefits provided for by the Act. However, as recognized by the Federal Court of Appeal, this fact does not necessarily prevent the employments from being insurable; nevertheless, this Court has a duty to ensure that the conditions set out in the Act have been met. This is what Hugessen J. says in Canada (Attorney General) v. Rousselle, [1990] F.C.J. No. 990 (Q.L.), at page 2 of the judgment:

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; [...]

[Emphasis mine.]

[48]      Moreover, in Navennec v. Canada (M.N.R.), [1992] F.C.J. No. 1005 (Q.L.), Desjardins J., on behalf of the Federal Court of Appeal, said that the criteria established by the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, were applicable in matters involving unemployment insurance:

It is true that in Stubart the question was whether a company could, for the avowed purpose of reducing its tax, conclude an agreement by which its future profits were transferred to a subsidiary in order to take advantage of the latter's loss carry-forward; but the rules are still applicable to the case at bar when it must be determined whether the applicant has, in short, arranged his affairs so as to be able to collect unemployment insurance benefits [...]

[Emphasis mine.]

[49]      It should be noted that, in Stubart, at page 575, the Supreme Court rejected "the proposition that a transaction may be disregarded for tax purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose." Desjardins J. applied the criteria set out in Stubart to Navennec as follows:

The parties in the case at bar are related; but what matters is to establish whether by their agreements they did what they said they intended to do. Did the applicant in fact intend to make the company a family business or did he retain control of it? Did his wife and children in fact intend to pay off their promissory notes by the profits they received from the business or by other income? - or did they never intend to do so? Were these legal obligations clear and executory, or was it a façade?

[50]     I note, from these two Federal Court of Appeal decisions, that an employment that is not a façade and that meets all of the conditions set out in the Civil Code of Québec constitutes a genuine contract of employment for the purposes of the Act, even where the purpose of this contract was to make a person eligible for unemployment insurance benefits. However, this Court has a duty to carefully examine the agreement that exists between the parties-in this case, the Appellants and Tiva-to ensure that a genuine contract of employment exists. I add that the impact of the reasons given by my colleagues, Tardif and Dussault, must be interpreted in light of these principles.

[51]     The first issue to be resolved here is whether the contract that binds the Appellants and Tiva constitutes a genuine contract of employment. As mentioned above, the three conditions essential to the existence of a contract of employment are: the provision of a service, payment of remuneration, and the existence of a relationship of subordination. In this case, there was never any doubt that the Appellants, while working during the relevant periods, provided services to Tiva. It was not alleged that the Appellants were not receiving a remuneration for the services they provided. A number of witnesses confirmed that Tibério was the production manager at Tiva and that, in general, Ms. Provost worked as a secretary and, on occasion, provided services as a special equipment operator. The Respondent filed the Records of Employment and the unemployment insurance benefit claims, showing the amount of remuneration the Appellants received during the relevant periods. In her testimony, the Appeals Officer did not indicate that she did not believe that this remuneration had been paid to the Appellants.

[52]     Finally, given the duties performed by each of the Appellants and the circumstances in which these duties were performed, I do not hesitate to conclude that a relationship of subordination existed. I do not believe that Tibério received instructions from the forewomen for the work he performed in the workshop, as he claimed he did. Rather, I believe that Tiva, through Ms. Massignani, the holder of all of the common shares in Tiva and, in all likelihood, the director of this company, had the authority to exercise control over the activities of Tibério,[15] if she had wanted to do so. Even if it had been determined that Tibério acted as the president of Tiva and that he was the director, which is not the case, I would not hesitate to conclude that he could be both the director and an employee of the company. (Specifically, see the decision rendered by the House of Lords in Catherine Lee v. Lee's Air Farming Ltd., [1961] A.C. 12 (P.C.)). Also with respect to Ms. Provost, I have no doubt that the services she provided were provided under the direction and control of Tiva, through either Ms. Massignani or Tibério in his capacity as production manager.

[53]     In this case, the three conditions necessary to the existence of a contract of employment have been met: the Appellants provided services to Tiva; the services were provided under the direction of Tiva; and wages were paid to them by Tiva for their services.

[54]     It must now be determined whether the essential conditions applicable to all contracts have also been met, that is, it must be determined specifically whether the parties were legally capable of contracting, whether consent was given lawfully, whether the contract had a purpose, and whether a lawful cause or consideration existed. In this case, counsel for the Respondent maintains that only the last condition was not met, because an unlawful cause or consideration existed with respect to the Appellants' contracts of employment. In my view, there was no such consideration in these contracts of employment. Contrary to the belief of counsel for the Respondent, the cause or consideration of the contracts was not to unlawfully obtain employment insurance benefits. The consideration, in this case, was the provision of services for Tiva, and wages for the Appellants. The goal of the parties, namely, to operate a business and earn money to support themselves, was lawful.

[55]     To quote my colleague, Tardif J., in Thibeault, a genuine contract exists in this case because a contribution was made "in a real and positive way to the advancement and development of the business." In the case where wages had been paid to someone who had nothing to do for the business[16] or who was asked to perform work that had no benefit for the business, for the sole purpose of enabling him to receive unemployment insurance benefits, the conclusion would have to be that a genuine contract of employment did not exist. The fact of providing a service that benefits a business, without remuneration, as was the case in Municipalité de Paspébiac, prevents the creation of a genuine contract of employment, because one of the conditions essential to the existence of such a contract, namely, remuneration, has not been met. Volunteer work cannot be the subject of a contract of employment, because, by definition, a contract of employment requires that a remuneration be paid. In this case, I repeat, there was never any doubt that Tiva benefited from services that contributed to the development of its business or that the Appellants received wages for their services during the relevant periods.

[56]     It is true that Tiva was involved in an unlawful scheme in which it would be subsidized by unemployment insurance benefits for a portion of the remuneration it owed to its employees. As recalled by the Supreme Court of Canada in Canada (Canada Employment and Immigration Commission) v. Gagnon, [1988] 2 S.C.R. 29, at page 37, the primary and essential purpose of the Act is to provide persons who are involuntarily unemployed with a means of supporting themselves until they become reintegrated in the labour market. Consequently, it is clear that the purpose of the Act is not to provide a subsidy to cover a portion of the wages paid for services provided.

[57]     Tiva's goal was obviously unlawful, but it was neither the cause nor the consideration of the contract of employment that it entered into with the Appellants. If Tiva had robbed a bank to pay its employees, it would not have changed the fact that they were bound by a contract of employment. In my view, a court could not deny these employees the right to recover their wages if the employer had not paid them. Obviously, the situation would be completely different if the services provided by these employees had included their participation in the bank robbery. In this case, the work of Tiva's employees consisted of manufacturing clothing, not obtaining unemployment insurance benefits from HRDC unlawfully. All of the independent witnesses acknowledged that they had not remitted the funds they received from HRDC to Tiva. The scheme, therefore, is independent of the contractual rights of the contract of employment; it is an arrangement made independently of the contract of employment. Consequently, the contracts that exist between the Appellants and Tiva are genuine contracts of employment.

[58]     However, even though these are genuine contracts of employment, the employments are not necessarily insurable within the meaning of the Act. Subsection 3(2) of the Act sets out exclusions. Paragraph 3(2)(c) stipulates the following:

(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;

                                                                   [Emphasis mine.]

[59]     This is the second reason given by the Respondent in his Reply to the Notice of Appeal. As set out in paragraph 3(2)(c) of the Act, reference must be made to the Income Tax Act to determine whether an arm's length relationship existed between the Appellants and Tiva. Subsection 251(1) of the Income Tax Act is the relevant provision. It reads as follows:

           

251. (1) Arm's length-For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm's length;

[...]

(c) [...] it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length;

[Emphasis mine.]

[60]     To determine whether they are related persons, reference must be made to subsection 251(2) of the Income Tax Act, which reads as follows:

(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 common-law partnership or adoption;

(b) a corporation and

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

[...]

[Emphasis mine.]

[61]     Finally, it should be noted that, under subsection 252(4) of the Income Tax Act, as it read during the relevant periods after 1992, a common-law partner is the equivalent of a spouse. Subsection 252(4) provided as follows:[17]

252(4) In this Act:

(a)         words referring to a spouse at any time of a taxpayer include the person of the opposite sex who cohabits at that time with the taxpayer in a conjugal relationship and,

(i)      has so cohabited with the taxpayer throughout a 12-month period ending before that time, or

[...]

(b)         references to marriage shall be read as if a conjugal relationship between 2 individuals who are, because of paragraph (a), spouses of each other were a marriage

(c)         provisions that apply to a person who is married apply to a person who is, because of paragraph (a), a spouse of a taxpayer; and

(d)         provisions that apply to a person who is unmarried do not apply to a person who is, because of paragraph (a), a spouse of a taxpayer.

[Emphasis mine.]

[62]     Pursuant to the provisions of the Income Tax Act cited above, Tibério, the son of the person who controlled Tiva, was clearly related to Tiva and, consequently, a non-arm's length relationship existed between him and this company during his relevant periods. With respect to Ms. Provost, this conclusion is applicable only beginning on January 1, 1993, because, although she was Tibério's common-law spouse from 1986, that is the date on which she became a related person within the meaning of the Income Tax Act. For the period subsequent to 1993, she was not a related person, because she was not related to Tibério by marriage. With respect to this period, it is necessary to determine whether a de facto non-arm's length relationship existed between Ms. Provost and Tiva.

[63]     For the purposes of applying paragraph 3(2)(c) of the Act to Ms. Provost, a distinction must be made between the period prior to 1993 and the period subsequent to 1992. For the period subsequent to 1992, Ms. Provost was a person who was related to Tibério and to Ms. Massignani and, consequently, to Tiva. Like the employment of her common-law spouse for this period, Ms. Provost's employment is excluded owing to the non-arm's length relationship that existed between her and Tiva. In the case of persons who are related, as are the Appellants and Tiva, subparagraph 3(2)(c)(ii) gave the Minister the authority to deem their relationship to be at arm's length, where it was reasonable to conclude that, in consideration of all of the circumstances, namely, the wages paid, the terms and conditions of employment, the duration of the work, and the nature and importance of the work performed, they would have entered into a substantially similar contract of employment had they been dealing with each other at arm's length.

[64]     Nonetheless, it is the duty of this Court to ensure that the Minister's decision is the result of an appropriate exercise of his discretion. The Federal Court of Appeal has had the opportunity to specify this role on a number of occasions, namely, in Canada (Attorney General) v. Jencan Ltd., [1998] 1 F.C. 187, [1997] F.C.J. 876 (Q.L.). At paragraph 31, Isaac C.J. (as he then was) wrote the following:

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.

[Emphasis mine.]

[65]     Further in the decision, at paragraph 37, the same judge described the specific reasons that justify this Court's interference:

[...] 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.

[66]      In Légaré v. Canada (Minister of National Revenue-M.N.R.), [1999] F.C.J. No. 878 (Q.L.), the Federal Court of Appeal felt that it was important to restate its thoughts on the approach to be taken in the application of paragraph 3(2)(c):

3           While the applicable principles for resolving these problems have frequently been discussed, judging by the number of disputes raised and opinions expressed, the statement of these principles has apparently not always been completely understood.    For the purposes of the applications before us, we wish to restate the guidelines which can be drawn from this long line of authority, in terms which may perhaps make our findings more meaningful.

4           The Act requires the Minister to make a determination based on his own conviction drawn from a review of the file.    The wording used introduces a form of subjective element, and while this has been called a discretionary power of the Minister, this characterization should not obscure the fact that the exercise of this power must clearly be completely and exclusively based on an objective appreciation of known or inferred facts.    And the Minister's determination is subject to review.    In fact, the Act confers the power of review on the Tax Court of Canada on the basis of what is discovered in an inquiry carried out in the presence of all interested parties.    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.   

[Emphasis mine.]

[67]     According to the Appeals Officer's testimony-contrary to what is indicated in the Minister's decision-it is obvious that the Minister did not exercise the discretion granted to him by subparagraph 3(2)(c)(ii) of the Act. He was truly satisfied with the conclusion that a genuine contract of employment did not exist. Consequently, because he did not exercise his discretion appropriately, it is the Court's duty to determine whether the terms and conditions of employment would have been the same had there been an arm's-length relationship between the Appellants and Tiva.

[68]     It is appropriate, at this point, to comment on Tibério's and Ms. Provost's terms and conditions of remuneration. In general, the wages that Tibério received can be considered to be reasonable, because it is not unusual to remunerate a manager on a weekly basis, and an hourly rate of $14 to $18 does not appear disproportionate in the circumstances. There is no evidence to contradict the assertion that Tibério worked between 40 and 60 hours per week, when he was working. Even where Tibério's duties had included only those that he described, namely, maintaining and repairing the equipment, delivering materials and fabrics, and controlling productivity, I would not necessarily be inclined to come to the same conclusion. Rather, I would be inclined to believe that an employer would have remunerated these services according to the number of hours actually worked for the business, on an hourly basis. An employee with similar duties, dealing with Tiva at arm's length, would have had to clock in like all of Tiva's other paid employees. However, having concluded that Tibério's work consisted essentially of production management, and that it is normal to remunerate this type of work on a weekly, monthly, or yearly basis, I conclude that the terms and conditions of remuneration were reasonable, insofar, obviously, as during his periods of unemployment, Tibério did not work without remuneration or for lower remuneration.

[69]     As previously noted, his counsel agrees that, if I were to conclude that Tibério worked during his periods of unemployment without remuneration or for lower remuneration, it would have to be concluded that the conditions set out in subparagraph 3(2)(c)(ii) have not been met.

[70]     Before dealing with this issue, I would like to comment on Ms. Provost's remuneration. The evidence showed that Ms. Provost was remunerated on an hourly basis and, unlike her common-law spouse, she was required to substantiate her hours by clocking in upon arrival and clocking out at the end of the day, as did all of the other employees of Tiva, except for the Massignanis. Moreover, the hourly rate that she claimed she received does not appear to be disproportionate in comparison with the wages paid by the business to the other workers during the relevant period. Consequently, insofar as Ms. Provost did not work for Tiva without pay or for lesser pay during her periods of unemployment, I would conclude that the terms and conditions of her remuneration were similar to those of a person dealing at arm's length with the employer.

[71]     Essentially, the issue of the Appellants' appeals depends on determining whether they did, in fact, work without remuneration or for lower remuneration during their periods of unemployment.

Tibério's employment

[72]     Firstly, we will address Tibério's case. In my view, the Respondent's evidence as a whole clearly contradicts the evidence presented by Tibério at the hearing. Contrary to his claims that he did not work during his periods of unemployment, four independent witnesses confirmed that Tibério was always present, with no extended periods of absence, during the time they were employed by Tiva. Nicole acknowledged that Tibério had been absent for one month in 1993, but she said that he was there the rest of the time. The testimony of Diane, Ida, and Elizabeth supports this information.

[73]     Counsel for the Appellants tried to cast doubt on the probative value of Diane's testimony by having her acknowledge that she had taken part in the scheme and that she had unlawfully appropriated for herself sums of money that belonged to the employer for whom she worked after leaving Tiva in March 1993. However, I find that she responded frankly to all of the questions this counsel asked her. Moreover, the fact that a person has stolen from his employer does not necessarily mean that that person has lied as a witness. Obviously, the Court must exercise additional prudence in examining the testimony of such a person.

[74]     I have no reason to doubt the credibility of Diane's testimony about the scheme devised by Tiva and its senior managers. The existence of this scheme was confirmed by Tibério, who acknowledged that he pleaded guilty to participating in it with respect to the remuneration paid to Tiva's employees. Moreover, Diane's testimony was corroborated by that of three additional independent witnesses.

[75]     Also in support of my conclusion is the fact that Tibério was unemployed, according to him, for very long periods-the first period was 14 and a half months and the second was 19 and a half months-during which time he was absent from Tiva's premises, and he did not perform any work for Tiva. During these periods, Tiva posted respectable sales figures. It would be very surprising if Tibério, who convinced the other Tiva employees to participate in the scheme, did not participate in it himself. Tibério was the production manager for the business, which, at the time, employed between 25 and 40 employees. He claims that he was responsible for repairing the equipment used by the employees; according to Ida, these machines broke down at least every two weeks.

[76]     Tibério's version does not seem credible to me. On a number of occasions, it was contradicted by that of the other witnesses. This is the case with his claim that, during the '90s, the business experienced longer periods of work stoppage, especially in the fall, but also in the spring. How is it that Tibério was not employed by Tiva for periods of 14 and a half months and 19 and a half months, whereas, according to his own testimony, the business did not experience such extended work stoppages? The stoppages it did experience ranged from two weeks to two months. Regardless, Diane's testimony is clear in this respect: the employees who participated in the scheme (including Tibério) came back to work for the business and were paid under the table by Tiva or through a numbered company.

[77]     Moreover, Tibério's credibility was further undermined on a number of occasions during his testimony, specifically, where he described his duties by minimizing the administrative role he played in managing production. He presented his role as being limited to controlling productivity, yet he did much more. He also claimed that he attended classes at Collège Lasalle and at CÉGEP. Yet, when he completed his unemployment insurance claims, he indicated in one case (Exhibit I-4) that his education was limited to secondary school, and in another, (Exhibit I-5), that he had no uncompleted college or technical institute studies. Finally, he gave an unlikely explanation whereby he received his instructions from the forewomen with respect to his duties in the workshop!

[78]     Neither Tibério nor Vladimiro, Tiva's two most senior managers, were present during the periods from October 1990 to November 1991, and from February 1993 to March 1994. Therefore, I do not hesitate to conclude that, on the balance of probabilities, Tibério worked during his periods of unemployment, contrary to his statement, and that he did not receive any remuneration for his services or his remuneration was low. For example, in 1993, the year in which he was unemployed for the entire year and he received no remuneration, he reported $13,206 in unemployment insurance benefits, and in all likelihood, income from self-employment of $5,285, according to the T4A issued by Tiva.

[79]     A stranger working under a genuine contract of employment, who was not involved in any scheme to defraud the unemployment insurance system, would not have agreed to work on a volunteer basis (or for low wages) for a clothing manufacturing business like Tiva's. Consequently, Mr. Tibério Massignani's employment was excluded from insurable employment for each of the relevant periods.

Ms. Provost's employment

Employment prior to 1993

[80]     Prior to 1993, Ms. Provost was not related to Tiva and, consequently, there is no legal presumption of a non-arm's length relationship between her and Tiva, as is the case after 1992. Thus, it must be determined whether, in fact, such a non-arm's length relationship existed. The concept of a non-arm's length relationship has been addressed a number of times in case law. My colleague Bonner J. dealt with this concept in McNichol v. Canada, [1997] T.C.J. No. 5, par. 16 [97 DTC 111, at pages 117 and 118]:

16 Three criteria or tests are commonly used to determine whether the parties to a transaction are dealing at arm's length. They are:

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

           

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

(c)         "de facto" control.        

           

The common mind test emerges from two cases. The Supreme Court of Canada dealt first with the matter in M.N.R. v. Sheldon's Engineering Ltd. At pages 1113-14 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 s. 20(2) was inapplicable.     

           

The decision of Cattanach, J. in M.N.R. v. T R Merritt Estate is also helpful. At pages 5165-66 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.                     

The acting in concert test illustrates the importance of bargaining between separate parties, each seeking to protect his own independent interest. It is described in the decision of the Exchequer Court in Swiss Bank Corporation v. M.N.R. At page 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 be made for this purpose between persons who act for themselves in exercising control over another and those who, however numerous, act through a representative. On the other hand if one of 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 has de facto control of the other. In this regard reference may be made to the decision of the Federal Court of Appeal in Robson Leather Company Ltd. v. M.N.R., 77 D.T.C. 5106.

[Emphasis mine.]

[81]     To determine whether a non-arm's length relationship does exist, the courts analyze the facts as a whole. One indicator that a non-arm's length relationship exists is the fact that the terms and conditions under which property is acquired do not correspond with a regular business operation. In Petro-Canada v. The Queen, 2003 DTC 94, Bowie J. concluded as follows at paragraph 82:

[...] The evidence leaves me in no doubt that these transactions did not reflect ordinary commercial dealings between the vendors and the purchasers acting in their own interests and so were not at arm's length. [...]

[82]     At page 1453 of Freedman Holdings Inc. v. The Queen, 96 DTC 1447, Rip J. stated that the guidelines set out in Interpretation Bulletin IT-419R appeared to him to be a reasonable application of the case law. Paragraph 19 of these guidelines reads as follows:

19.        Failure to carry out a transaction at fair market value may be indicative of a non-arm's length transaction. However, such failure is not conclusive and, conversely, a transaction between unrelated persons at fair market value does not necessarily indicate an arm's length situation. The key factor is whether there are separate economic interests which reflect ordinary commercial dealing between parties acting in their separate interests.

[83]     In my view, this constitutes only one of the aspects that the courts must take into account to determine whether a non-arm's length relationship exists in situations that present indicators of a negotiated transaction, where in reality, one of the parties exercises influence over the other in such a way that this party is not free to participate in this transaction independently. Although Bonner J. (like many others) sets out three separate criteria to define the concept of a non-arm's length relationship, there is essentially one single criterion that can be summarized briefly as follows: is one party exercising control or influence over the other party? What the three criteria seek to determine is whether a relationship exists between individuals who are party to a transaction in which one of the parties exercises its influence over the other in such a way that the other party is no longer free to participate independently.

[84]     The factual elements that can be indicators of a non-arm's length relationship during the period prior to 1993 are the fact that Ms. Provost was the common-law spouse of the son of the person who controlled Tiva and the fact that the terms and conditions of her employment were less favourable than those a third party would have had for their services. As mentioned above, most of Ms. Provost's terms and conditions of remuneration during this period were substantially the same as those of other employees of the business. It must be determined whether Ms. Provost worked during her periods of unemployment for no pay or for an amount clearly lower than her usual remuneration. The answer to this question depends largely on the answer to the following question: did Ms. Provost, like the Massignani brothers and a number of Tiva's other workers, participate in the scheme whereby Tiva's workers received unemployment insurance benefits while working for Tiva for lower wages? In these circumstances, Ms. Provost would have received lower wages, something that a third party who was dealing at arm's length and who was not participating in any scheme would not have accepted in consideration for his or her services.

[85]     In this case, as in Tibério's case, I have two contradictory versions. Ms. Provost's case is more difficult to decide than her spouse's, because some important statements made by Ms. Provost were found to be fair, namely her explanation (sick leave) for her first period of unemployment. In fact, Ms. Provost was hospitalized for depression beginning on March 4, 1992, and not, as Diane believed, in 1990 or 1991. However, her hospital stay was not four months long, as she told the auditor, or two months, as she claimed initially in her testimony at the hearing, but 44 days. Moreover, I am prepared to admit that her recovery probably lasted nearly one year, even though her medical record shows that, on May 28, 1992, things were going well, and she was considering launching a new store.

[86]     However, Ms. Provost's credibility is undermined by her version of the facts for the period beginning July 1993 and ended August 1994. During cross-examination, she stated that she did not know whether she had worked after July 1993. However, on her Record of Employment dated December 16, 1994, she entered August 1, 1994, as her first day of work for the 52 weeks preceding the date of the Record. Therefore, she claims that she did not work for Tiva between December 16, 1993, and August 1, 1994. Nicole stated that Ms. Provost worked with her for this company between August 1993 and March 1994. Counsel for Ms. Provost tried to provide a plausible explanation to reconcile these two versions by stating that Ms. Provost had worked for her own numbered company. However, according to her own testimony, Ms. Provost operated Company 2733 for one year only, in 1990, and the other numbered company she owned was only incorporated in April 1996. Therefore, this explanation is without merit.

[87]     In my view, Nicole's testimony, whereby Ms. Provost worked between August 1993 and March 1994, is more credible than Ms. Provost's. In addition to Nicole's testimony, Elizabeth testified that Ms. Provost was always at the office, except for a one-month period during which time she was ill. Elizabeth was employed by Tiva from January 1992 to 1996.

[88]     Ms. Provost's version of the events regarding her work in 1990 for Company 2733 was not convincing. Even though Ms. Provost maintains that she worked for this company in order to genuinely operate her own business, this business did not have a SD number, 75% of its workers were self-employed workers, and it was operated for 12 months only. This way of doing things is the same as for the other numbered companies, Tibério's and Vladimiro's companies, which were used to pay the workers who participated in the scheme under the table. According to Diane, Ms. Provost took part in the scheme. She received her pay under the table in her daughter Nancy's name and in her former married name, Lussier. Given that Diane indicated that the scheme had been used since 1985, it is reasonable to believe that Ms. Provost took part in it in 1990.

[89]     Another aspect raises doubt as to Ms. Provost's version of the facts as they relate to her work for Company 2733. According to the Appeals Officer, a Tiva Record of Employment dated September 6, 1990, for Ms. Provost shows that the reason given for her lay-off was shortage of work. That information is difficult to reconcile with Ms. Provost's testimony in which she stated that she worked for Company 2733 from January 1990 to December 1990.

[90]     The following aspects also undermine Ms. Provost's credibility. Ms. Provost's version of the facts, in which she spent two and a half days per week performing secretarial duties and the balance of her time working in the workshop, was contradicted by Diane, Elizabeth, and Nicole. Moreover, Diane's explanation that the scheme required that two sets of books be kept, requiring the services of two full-time secretaries, seems more plausible to me than Ms. Provost's version of the facts.

[91]     Another indicator that Ms. Provost participated in the scheme is the fact that her Record of Employment of December 16, 1994, contains the name "Francine Provost" in the section provided for the name and address of the employee, and her former married name, "Ms. Lussier," in the section provided for the name of the resource person that HRDC could contact for information. The same is true of the Record of Employment of July 21, 1995. The name "Francine Provost" is typed in the section that identifies the employee, and the name "Ms. Lussier" is entered in the box reserved for the name of the resource person. Why would Ms. Provost use her former name, given that she had been divorced since 1983, particularly as she identified herself as "Francine Provost" in the section reserved for the name and address of the employee? Furthermore, she does not provide a first name with the mention of Lussier. When she completed the Records of Employment for Tibério, Ms. Provost used her own name, "Provost" rather than the name of her former spouse, "Lussier" (see Exhibits I-3 and I-5). Finally, why did she identify herself if she was no longer an employee of Tiva? This implies that she continued to work at Tiva's place of business. The facts on the whole lead me to believe that the Records of Employment were doctored in order to mislead HRDC and that they confirm Ms. Provost's participation in the scheme.

[92]     Consequently, I conclude that, on the balance of probabilities, Ms. Provost worked, as did the other Tiva employees, during her alleged periods of unemployment, except during her sick leave in 1992 and 1993, and she did so, at the very least, for a remuneration that was clearly lower than what she would normally receive. The terms and conditions of employment, for the period prior to 1993 and for the periods after 1992, are not the terms and conditions that a person dealing at arm's length with the employer would have agreed to. A de facto non-arm's length relationship existed for the period prior to 1993, and a legal non-arm's length relationship existed after 1992; her employment was excluded during all of the relevant periods.

[93]     For these reasons, the appeals of Mr. Tibério Massignani and Ms. Francine Provost are dismissed.

Signed at Ottawa, Canada, this 9^th day of March 2004.

"Pierre Archambault"

Archambault J.

Translation certified true

on this 30^th day of March 2005.

Colette Dupuis-Beaulne, Translator

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