Tax Court of Canada Judgments

Docket: 2003-3946(EI)

BETWEEN:

PAULA THOMPSON LASH,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent, and BEACON MARINE SECURITY LIMITED, Intervener.

____________________________________________________________________

Appeal heard on March 25, 2004 at Toronto, Ontario

Before: The Honourable N. Weisman, Deputy Judge
Appearances:
For the Appellant:	The Appellant herself
Counsel for the Respondent:	Donna Dorosh Bari Crackower
Agent for the Intervener:	Marion Lash

_______________________________________________________________

JUDGMENT

          The appeal is allowed and the decision of the Minister is vacated in accordance with the attached Reasons for Judgment.

Signed at Toronto, Ontario, this 23rd day of April 2004.

"N. Weisman"

Weisman, D.J.

Citation: 2004TCC291

Date: 20040423

Docket: 2003-3946(EI)

BETWEEN:

PAULA THOMPSON LASH,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent, and BEACON MARINE SECURITY LIMITED, Intervener.

REASONS FOR JUDGMENT

Weisman, D.J.

[1]      The Appellant, Paula Thompson Lash, is talented in the field of marketing and communications. She acted as Director of Marketing and Communications for Bell Expressvu, earning a salary of $100,000 per annum. She resigned that position for a similar one at the Art Vault Limited, an online retailer of fine art, at a salary of $120,000 per annum, plus stock options.

[2]      Her husband, David Lash, is also talented. His expertise lies in the field of marine electronics. He invented a wireless device designed to monitor ships at sea. To develop and market this product, Beacon Wireless Solutions Inc. ("Beacon") was incorporated. Beacon wholly owns and controls the Intervener company (the "payer"). All the issued and outstanding shares of Beacon are held by the Lash family.

[3]      In October of 2000, the Appellant was invited to join this new enterprise as Vice-President of Marketing and Communications. It was thought that her expertise was absolutely crucial to the proper development of the business. She was enthusiastic about this new opportunity to play an integral part in the development of an exciting new high technology product. She accepted the position at an annual salary of $75,000 plus 4 % of the equity in Beacon. This level of remuneration was all the payer could then afford.

[4]      Unfortunately, the technology sector and the company fell upon hard times in the spring of 2001. As a result of cash flow problems, the Appellant received only $24,519.00 for her services for the first four months of 2001, and nothing thereafter until August of 2002, a period of some fifteen months. The company received a tax credit in December of 2002 and paid her a lump sum of $12,000.00. From January 20 to March 5, 2000 she received $1,500.00 bi-weekly as salary.

[5]      In March of 2003, the Appellant was hospitalized because of an unusually difficult pregnancy which resulted in a hysterectomy and complete immobilization for three months. Thereafter she left the payer to stay home and raise her newborn baby. The company simply carried on as best it could without her services but has yet to prosper.

[6]      The Appellant applied for disability and maternity benefits, both of which were denied her because she was not dealing with her employer at arm's length within the meaning of the Employment Insurance Act (the "Act").[1]

[7]      In this regard the Act provides as follows:

5(2) Insurable employment does not include

...

(i)          employment if the employer and employee are not dealing with each other at arm's length.

5(3) For the purposes of paragraph (2)(i)

(a)         the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the Income Tax Act;

[8]      The Income Tax Act[2] provides as follows:

Section 251. Arm's length.

                        (1)         For the purposes of this Act,

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

...

            (2)          Definition of "related persons". For the purpose of this Act, "related persons", or persons related to each other, are

                        (a)         individuals connected by blood relationship, marriage or adoption;

(b)         a corporation and

            ...

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

            ...

(c)         any two corporations

            (i)          if they are controlled by the same person or group of persons,

...

[9]      Since the Appellant was related to her employer she was deemed not to be dealing with that employer at arm's length. This presumption is not rebuttable.[3]

[10]     In these circumstances she was left to rely on paragraph 5(3)(b) of the Act which provides as follows:

(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.

[11]     The Respondent declined to exercise his discretion in the Appellant's favour and she now appeals that determination.

[12]     The Act requires me to show some deference towards the Minister's initial assessment and does not permit me to simply substitute my own opinion for that of the Minister when there are no new facts and there is nothing to indicate that the known facts were misunderstood.[4] The Court must also 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, must decide whether the conclusion with which the Minister was "satisfied" still seems objectively reasonable.[5]

[13]     The Federal Court of Appeal also reminds us that excluded employment between related persons is based on the idea that it is difficult to rely on the statements of interested parties and that the possibility that jobs may be invented or established with unreal conditions of employment is too great between people who can so easily act together. Paragraph 5(3)(b) of the Act provides an exception to the penalty in cases in which the fear of abuse is no longer justified.[6]

[14]     In the matter before me there is clearly no fear of abuse. The Appellant was severely disabled and her expertise was absolutely crucial to the proper development of the business.

[15]     In Légaré, it was clearly explained and established that the shareholders had decided to reduce the salary normally due to them to provide for the financial support and development of the business. That is precisely what the Appellant, and indeed the entire Lash family, did in the matter before me.

[16]     Moreover, there is no evidence that the terms and conditions of the Appellant's employment were in any way more favourable than would be afforded to those dealing with the payer at arm's length.[7]

[17]     From this standpoint, the adverse determination of the Minister seems objectively unreasonable. In the context of the evidence before me, I conclude that the parties would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.

[18]     In the result, the Appellant having discharged the burden of proof upon her, the appeal will be allowed and the determination of the Minister vacated.

Signed at Toronto, Ontario, this 23rd day of April 2004.

"N. Weisman"

Weisman, D.J.

CITATION:

2004TCC291

COURT FILE NO.:

2003-3946(EI)

STYLE OF CAUSE:

Paula Thompson Lash and M.N.R. and Beacon Marine Security Limited

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

March 25, 2004

REASONS FOR JUDGMENT BY:

The Honourable N. Weisman, Deputy Judge

DATE OF JUDGMENT:

April 23, 2004

APPEARANCES:

For the Appellant:	The Appellant herself
Counsel for the Respondent:	Donna Dorosh and Bari Crackower
Agent for the Intervener:	Marion Lash

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

For the Intervener:

Name:

Firm:

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