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Docket: 2002-2759(EI) |
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BETWEEN: |
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SIMON DUBÉ, |
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Appellant, |
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and |
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THE MINISTER OF NATIONAL REVENUE, |
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Respondent. [OFFICIAL ENGLISH TRANSLATION] |
____________________________________________________________________
Appeal heard on common evidence with the appeal of
Patrick Dubé (2002-2760(EI)) on November 25, 2003, at Rivière-du-Loup, Quebec
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Before: The Honourable Justice François Angers |
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Appearances: |
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Counsel for the Appellant:
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Nancy Lajoie
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Counsel for the Respondent: |
Julie David |
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JUDGMENT
The appeal is allowed and the decision of the Minister of Revenue is vacated in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 18th day of February 2004.
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"François Angers" |
Angers J.
Translation certified true
on this 10th day of February 2005.
Jacques Deschênes, Translator
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Docket: 2002-2760(EI) |
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BETWEEN: |
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PATRICK DUBÉ, |
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Appellant, |
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and |
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THE MINISTER OF NATIONAL REVENUE, |
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Respondent. [OFFICIAL ENGLISH TRANSLATION] |
____________________________________________________________________
Appeal heard on common evidence with the appeal of
Patrick Dubé (2002-2759(EI)) on November 25, 2003, at Rivière-du-Loup, Quebec
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Before: The Honourable Justice François Angers |
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Appearances: |
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Counsel for the Appellant:
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Nancy Lajoie
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Counsel for the Respondent: |
Julie David |
____________________________________________________________________
JUDGMENT
The appeal is dismissed and the decision of the Minister of National Revenue is affirmed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 18th day of February 2004.
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"François Angers" |
Angers J.
Translation certified true
on this 10th day of February 2005.
Jacques Deschênes, Translator
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Citation: 2004TCC108 |
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Date: 20040218 |
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Docket: 2002-2759(EI) 2002-2760(EI) |
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BETWEEN: SIMON DUBÉ, |
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PATRICK DUBÉ, |
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Appellants, |
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and |
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THE MINISTER OF NATIONAL REVENUE, |
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Respondent. [OFFICIAL ENGLISH TRANSLATION] |
REASONS FOR JUDGMENT
Angers J.
[1] These are two appeals, heard on common evidence, from decisions rendered by the Minister of National Revenue ("the Minister") on June 26, 2002. In the matter of Simon Dubé, the Minister decided, after examining the terms and conditions of the employment with Excavation Dubé 2002 Inc. (the payor), that the employment during the period of May 14 to September 14, 2001, was not insurable, because a substantially similar contract of employment would not have been entered into if Simon Dubé and the payor had been dealing with each other at arm's length within the meaning of paragraph 5(2)(i) and subsection 5(3) of the Employment Insurance Act.
[2] In the matter of Patrick Dubé, the Minister informed Mr. Dubé that he did not hold insurable employment with the payor during the period of July 16 to October 12, 2001, because he controlled, de facto, more than 40% of the payor's voting shares.
[3] In rendering his decision with regard to Simon Dubé, the Minister relied on the following factual presumptions, which were admitted or denied as indicated below:
[TRANSLATION]
(a) the payor was incorporated on November 3, 2000, under the corporate name 9097-3313 Québec Inc.; [admitted]
(b) on May 12, 2001, the payor obtained from the Inspecteur général des institutions financières a change of name from 9097-3314 Québec Inc. to Excavation Dubé 2000 Inc.; [admitted]
(c) the payor's activities consisted of excavation and forest management work; [admitted]
(d) the payor owned a backhoe worth $185,000, a bulldozer worth $30,000, a trailer and tools worth $20,000 and a truck; [admitted]
(e) according to the share register, the payor's shareholders were purportedly
Steeve Dubé 100 voting shares
Jacqueline Dubé 100 voting shares
Patrick Dubé 100 voting shares [denied]
(f) the appellant is Jacqueline Dubé's husband and is the father of Steeve and Patrick Dubé; [admitted]
(g) the appellant, together with his son Steeve, managed the payor; [denied]
(h) the appellant went personally bankrupt on May 16, 2001, and could not be a director; [denied]
(i) the appellant's tasks consisted of seeking contracts for the payor, maintaining the machinery and managing the work sites; [denied]
(j) On September 17, 2001, the payor issued a record of employment (ROE) to the appellant for the period commencing May 14, 2001, and ending September 14, 2001, and the ROE recorded 623 insurable hours and $9,178 in total insurable earnings; [admitted]
(k) the ROE is not a true account of what actually happened during this period; [denied]
(l) both before and after the period in issue, the appellant rendered services for the payor without declared remuneration; [denied] and
(m) the period during which the appellant purports to have worked is not the period during which the appellant actually worked. [denied]
[4] The factual presumptions on which the Minister based his decision in the matter of Patrick Dubé are reproduced below, with the exception of paragraphs (a) through (e), which are identical to those in the matter of Simon Dubé. The presumptions were admitted or denied, as indicated:
[TRANSLATION]
(f) Jacqueline Dubé is the mother of the appellant and Steeve Dubé; [admitted]
(g) the appellant and Steeve Dubé each lent $4,000 to the payor after obtaining a government subsidy; [denied]
(h) the appellant and Steeve Dubé had non-voting preferred shares worth $7,500 each; [admitted]
(i) the appellant and Steeve Dubé gave personal sureties for various loans of the payor; [admitted]
(j) on December 10, 2001, Jacqueline Dubé declared to a representative of the respondent that she paid nothing for her shares and invested nothing in the payor; [denied]
(k) Jacqueline Dubé did not participate in the payor's decision-making; [denied]
(l) the distribution of the payor's shares is a sham; [denied] and
(m) the appellant and Patrick Dubé were the payor's only true shareholders. [denied]
[5] The appellant Simon Dubé is 50 years of age. Before going to work for the payor, he owned and operated a specialized excavation business. His company ceased operations in 1996 after losing the right to erect high-voltage towers. Simon Dubé declared personal bankruptcy in May 2001. After trying to sell the corporation's equipment, including a crawler tractor, the Caisse Populaire, which had provided the financing, took possession of it.
[6] In the fall of 2000, Simon Dubé was working as an employee for third parties when his two sons, Steeve and Patrick Dubé, spoke with him about incorporating an excavation company. They invited Simon Dubé to join them, but he was not interested in participating in or managing such a business. The two sons preferred to work in this field than in a factory. In November 2000, they incorporated the payor company for the purpose of carrying out excavation work and forest management.
[7] The payor's share capital was divided into three equal parts between Simon Dubé's two sons Steeve and Patrick and his wife Jacqueline. However, Jacqueline paid no money for her part of the share capital. She provided bookkeeping services and did unpaid office work in exchange for her shares.
[8] Thus, the payor company took on a financial structure that would enable it to carry out its activities. Shareholders Steeve and Patrick Dubé were granted $4,000 each because they were less than 35 years of age. They invested the money in the business. They were also eligible for the Youth Strategy program offered by the CFDC in their area. In addition, the payor company obtained financing of a more conventional nature. Here is a brief description of that financing:
- A $2,000 loan, obtained from Caisse Populaire Desjardins de la Pocatière on November 16, 2000, which the payor applied toward the rental of a pick-up truck. Steeve and Patrick Dubé signed the contract as representatives of the payor and the three shareholders guaranteed the loan. The resolution authorizing the loan is signed by Steeve Dubé.
- An $11,500 loan obtained from the Caisse Populaire Desjardins de la Pocatière on February 9, 2001, to purchase a crawler tractor. Steeve and Patrick Dubé signed the contract as representatives of the payor and the three shareholders guaranteed up to $2,875 of the loan. The resolution authorizing the loan is signed by Jacqueline Dubé.
- A $26,500 loan obtained from Caisse Populaire Desjardins de Rivière Ouelle on March 23, 2001, for the purchase of a crawler tractor and a hydraulic thumb for a power shovel. Steeve and Patrick Dubé signed the contract and guaranteed the loan as representatives of the payor. Jacqueline Dubé signed the resolution authorizing the loan and she was not needed as a guarantor.
- A $5,000 line of credit and a $11,000 term loan from Caisse Populaire Desjardins de la Pocatière dated February 9, 2001. The purpose of the term loan was to give the payor working capital. Steeve, Patrick and Jacqueline Dubé guaranteed repayment of up to $2,500 of the margin loan. Appellant Simon Dubé gave $2,500 of his savings as security. Michel Chamard guaranteed the term loan contract to a maximum of $7,000, and Steeve, Patrick, Jacqueline and Simon Dubé guaranteed the full amount. Jacqueline Dubé signed the resolutions authorizing the two loans.
- Another $5,000 line of credit obtained from Caisse Populaire Desjardins de Rivière Ouelle on March 23, 2001. The variable credit contract is signed and guaranteed by Steeve and Patrick Dubé. The movable hypothec contract is signed by Steeve and Patrick Dubé.
[9] A shareholders' agreement was signed on April 26, 2001. Despite the terms of the agreement, the shareholders did not determine the value of the shares.
[10] Steeve Dubé is the payor's president. He operates the machinery and seeks contracts. He uses the Internet to consult various calls for tender and verifies the contracts with a view to offering services as a subcontractor. The payor commenced operations on July 15, 2001.
[11] Appellant Simon Dubé was hired on May 14, 2001. His work consisted of fixing and preparing the machinery. His experience was a significant advantage for the payor. With the assistance of his son Steeve, he put the crawler tractor, which the company bought from the Caisse Populaire and which had belonged to Simon Dubé, in working condition. They replaced the tractor track. The other appellant, Patrick Dubé, had a job elsewhere and only began working for the payor on July 16, 2001.
[12] Simon Dubé worked 25 hours a week for the payor at a rate of $15.00 per hour. The payor's operations under its first contract began on July 15, 2001. The contract required the payor to groom ski trails at Petite-Rivière-St-François. Simon, Patrick and Steeve Dubé worked for the payor in connection with this contract. In view of his experience, Simon Dubé was responsible for allocating the tasks at the beginning of the work day based on an agreement between the payor and the Petite-Rivière-St-François representative.
[13] The contract ended on October 12, 2001, but Simon Dubé stopped working on September 14, 2001, because there was not enough work for the machine that he drove. The payor company then obtained other contracts in the Baie-Comeau area from December 2001 to late April 2002, and employed three workers.
[14] Steeve Dubé was the one who sought out contracts. He consulted his brother Patrick as well as his parents. Steeve Dubé consults Simon Dubé in order to draw on his experience, especially his knowledge of the companies with which the payor does business, and, in particular, the solvency of those companies and the prices to offer them in association with a bid. Steeve Dubé devotes roughly 20 hours a week to the seeking of contracts online. Simon Dubé was involved very little in this prospecting work.
[15] Jacqueline Dubé testified that Steeve and Patrick incorporated the company. She was interested in being involved, and offered her services in exchange for one-third of the share capital. In addition to doing the payor's office work, she held a 25-hour-per-week job as a cook for the Sisters of Charity. Just like Steeve, Ms. Dubé denies that the payor took on the $15,000 line of credit from Simon Dubé's old company. When questioned in 2001 on the subject, she stated that she knew nothing about it and added that Simon Dubé had worked from May to July 2001 because his son Steeve needed his services.
[16] The payor's financial statements show losses in the first two years of operations, including a $60,000 loss in the first ten months. However, the payor's revenues increased considerably in the second and third years of operations.
[17] Appellant Simon Dubé acknowledged during his testimony that the payor paid debts owed to certain creditors of his former company. These payments were made to gain the trust of suppliers common to the former company and the payor.
[18] Alain Landry, an employment insurance rulings officer, testified that he had a telephone conversation with Jacqueline Dubé in which she told him that the payor had taken responsibility (in her words) for a $15,000 loan taken out by her husband's former company because that company was having financial trouble. Report CPT110, tendered in evidence, sets out the results of the investigation conducted by appeals officer Denis Hamel and the facts that formed the basis of the Minister's recommendations in both cases at bar.
[19] In the matter of Simon Dubé, the burden was on him to establish, on a balance of probabilities, that the Minister exercised his discretion inappropriately in deciding, having regard to all the circumstances, that the payor and the appellant would not have entered into a substantially similar contract if they had been dealing with each other at arm's length. According to the Federal Court of Appeal in Canada (Attorney General) v. Jencan Ltd. [1997] F.C.J. No. 876, [1998] 1 F.C. 187, the appellant must show either that the Minister acted in bad faith or for an improper purpose of motive, or failed to take account of all the relevant circumstances, as expressly required by paragraph 5(3)(b) of the Act, or that he took an irrelevant factor into account.
[20] The Minister's role, and the role that the Court must exercise, were reviewed by the Federal Court of Appeal in Légaré v. Canada(Minister of National Revenue), [1999] F.C.A. No. 878 (QL). Marceau J.A. summarized both roles in the following words at paragraph 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.
[21] In fact, the Federal Court of Appeal reiterated its position in Pérusse v. Canada(Minister of National Revenue), [2000] F.C.A. No. 310 (QL). Marceau J.A., referring to the passage from Légaré cited above, added the following at paragraph 15:
The function of an appellate judge is thus not simply to consider whether the Minister was right in concluding as he did based on the factual information which Commission inspectors were able to obtain and the interpretation he or his officers may have given to it. The judge's function is to investigate all the facts with the parties and witnesses called to testify under oath for the first time and to consider whether the Minister's conclusion, in this new light, still seems "reasonable" (the word used by Parliament). The Act requires the judge to show some deference towards the Minister's initial assessment and, as I was saying, directs him not simply to substitute his 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. However, simply referring to the Minister's discretion is misleading.
[22] In the instant matter, I believe it is important to reproduce the factual analysis that enabled the Minister to exercise his discretion and to conclude, after examining the terms and conditions of employment, that the terms and conditions of the appellant Simon Dubé's employment would have been different at arm's length.
[23] Report CPT110, signed by appeals officer Denis Hamel, reads as follows:
[TRANSLATION]
Analysis of the non-arm's length dealings involving Simon Dubé's employment
Terms and conditions of employment
He helps seek out and negotiate contracts, mostly in conjunction with his son Steeve, based on the facts in the file. His work on seeking out contracts is unpaid.
His period of employment, which involved machine repair and maintenance, began in mid-May 2001. None of the shareholders were salaried employees until mid-July 2001 when there was a contract to perform at Petite-Rivière-St-François.
Thus, Simon Dubé was the corporation's only employee for two months when he maintained the machinery. The insurance rulings officer had doubts about whether a two-month period of employment could be associated with this task and we share his view.
We do not doubt that he did such maintenance work, but it is curious that it lasted two months. His son Steeve helped him during this period, but was not paid for this repair and maintenance work.
In the past, Simon Dubé operated a company that worked in the same field. Following a personal bankruptcy, he could not be a shareholder in the current corporation.
He directed much of the work from mid-July to mid-October 2001 when the contract was being performed at Petite-Rivière-St-François, and his two sons Steeve and Patrick worked there as well.
Curiously, his employment ended on September 14, 2001, roughly one month before his two sons' employment ended.
The current company reimbursed certain debts of Simon Dubé's former corporation. While Simon Dubé is not the directing mind of Excavation Dubé 2000 Inc. in the strict sense, he has expertise in the company's field of endeavour and directs the work on contracts.
Thus, it is difficult to invoke the concept of control in relation to his work and to claim that his two sons dictate how he must carry out his tasks.
Duration of employment
The duration of Simon Dubé's employment bears little relation to the company's operations. First of all, he is the only one to be paid for maintaining machinery during two months prior to the period of employment of his sons Steeve and Patrick.
Later, when the contract was being performed at Petite-Rivière-St-François, he finished his employment one month before his sons even though he was responsible in large measure for ensuring that the work is carried out properly.
Remuneration paid
Simon Dubé's rate of pay was $15 per hour. However, he provided contract prospecting services, unrelated to the performance of contracts, free of charge.
He was the only employee who has been paid for maintaining machinery during almost two months.
The accounting journals show low maintenance and repair costs during the period when he worked on maintaining machinery. Moreover, the company posted a loss of nearly $60,000 for the period ending August 31, 2001. One wonders whether an arm's-length stranger would have been paid a salary for maintaining machinery while the company was generating no revenue.
Nature and importance of work
Simon Dubé's work was indispensable to the proper functioning of the corporation. However, his pay periods were not representative of his work outputs.
[24] The evidence discloses that Simon Dubé was employed by other companies prior to the period of employment in issue. His former company had been experiencing problems since 1996, and, in my opinion, he was sincere when he said that he was not interested in managing a company and even less interested in embarking on a new business. His role in prospecting for contracts was minimal. As his son testified, he was more of a resource person. In fact, during the period in issue, the payor lost a contract and was only able to obtain the one at Petite-Rivière-St-François. There is no evidence that Simon Dubé negotiated contracts for the payor.
[25] Under the heading "terms and conditions of employment", the appeals officer does not question the assertion that Simon Dubé did machinery repair and maintenance work. Rather, he questions whether two months were devoted to the work. However, he does not explain the basis for his doubt. The payor purchased used equipment, and, in order for the business to start up properly, it was important that it be in good working condition. The evidence did not disclose the magnitude of the maintenance and repair work, but Simon Dubé worked only 25 hours per week on it.
[26] In carrying out his duties at Petite-Rivière-St-François, Simon Dubé did not direct most of the work from mid-July to mid-October. The evidence showed that, by reason of his experience, and with the approval of the Petite-Rivière-St-François representative, he was responsible for allocating the work in the morning. The evidence shows that he stopped providing this service when his employment ended on September 14, one week before the work ended. It is therefore incorrect to say that he directed the work for the entire duration of the contract. As a matter of fact, he stopped working because the equipment he drove was no longer needed.
[27] The payor did pay certain debts of Simon Dubé's former company. In my opinion, this was done to restore the family's reputation and to gain the trust of suppliers because the payor had to do business with those suppliers as well. This was a business issue related to the payor's reputation, not to the terms of Simon Dubé's employment. In my opinion, the payor would probably have done the same thing if Simon Dubé had not been hired.
[28] I find that the duration of Simon Dubé's employment is consistent with the contracts that the payor had. The readying of the equipment, and the first contract, coincided with his period of employment. His hourly rate of pay was similar to that of the payor's management. At the time that Simon Dubé performed the maintenance services, the payor had obtained the necessary financing and was able to pay someone to prepare equipment that was indispensable to the performance of the contracts that it was seeking to obtain during this period. In my opinion, even if the payor ran a $60,000 deficit in its first ten months of operations, the expenses paid to repair and ready the equipment were necessary for the business to function properly, and the payor would undoubtedly have called on someone of Simon Dubé's experience to get such work done. The payor's first fiscal year ended on August 31, 2001. During this period, its only source of income was a contract with Petite-Rivière-St-François, which began on July 15, 2001. The deficit that the payor ran during the first fiscal year is not a factor to consider, and neither is the fact that the payor generated no income. As I have stated, the payor had the necessary financing and the equipment needed to be readied.
[29] After analysing all the facts in Simon Dubé's file, I find that the Minister did not correctly assess the facts in this matter, and that his conclusion does not seem reasonable. I am therefore permitted to intervene. I do not intend to repeat my analysis of the evidence. Thus, and for the reasons set out above, I find that the terms of the employment, its duration, the remuneration paid and the nature and importance of the work would have been similar even if the parties had been dealing with each other at arm's length. Simon Dubé's limited participation in the management of the payor, and the few pieces of advice that he dispensed, do not alter the terms and conditions of his employment. Consequently, Simon Dubé's appeal is allowed.
[30] The issue in the matter of appellant Patrick Dubé is a different one: whether the appellant had de facto control of more than 40% of the payor's voting shares.
[31] Simon Dubé testified that his two sons had decided to start up a business rather than working at a factory. In his view, they are the ones who incorporated the payor company. His wife confirmed this. The facts also show that the two sons made efforts to obtain the financing needed to start up the business and that they were eligible for grants under the Youth Strategy program, which was offered by the CFDC in their area.
[32] As for Jacqueline Dubé, her participation in the payor company consisted of contributing time in exchange for a third of the payor's share capital. However, the evidence did not disclose any mechanism to determine the value of her contribution. How many hours of free services did she need to provide to the payor in exchange for those shares? Why did she not have any preferred shares on the same basis that her two sons held them?
[33] Ms. Dubé's participation in the company's decision-making was minimal. Her explanations did not convince me that she participated in the company on the same basis as her two sons or that she had enough influence to change anything at all. With regard to the guarantees required by the two credit unions, the Court was told that one of these credit unions required the signature of three shareholders as guarantors and did not require the signature of the other shareholder. Would equal participation not require equal commitment and equal responsibility?
[34] The evidence as a whole favours the respondent's position in the instant case. The distribution of the share capital is sham and the two sons, including the appellant Patrick Dubé, are the true shareholders of the payor company and are in de facto control of its affairs. The same is true of the shareholders' agreement. The sons decided to start the business and are its directing minds. I therefore find that the appellant has de facto control of more than 40% of the voting shares of the payor company and, for the above reasons, that his employment is not insurable under paragraph 5(2)(b) of the Act.
[35] The appeal of Patrick Dubé is therefore dismissed.
Signed at Ottawa, Canada, this 18th day of February 2004.
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"François Angers" |
Angers J.
Translation certified true
on this 10th day of February 2005
Jacques Deschênes, Translator