Tax Court of Canada Judgments

Docket: 2004-476(EI)

BETWEEN:

603709 ALBERTA LIMITED c/o HUMPTY'S FAMILY RESTAURANT,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

____________________________________________________________________

Appeal heard on June 7, 2004 at Calgary, Alberta

Before: The Honourable Justice Gerald J. Rip
Appearances:
Agent for the Appellant:	Carol Sadler
Counsel for the Respondent:	Dawn Taylor

____________________________________________________________________

JUDGMENT

          The appeal pursuant to subsection 103(1) of the Employment Insurance Act is allowed and the decision of the Minister, made by him under section 91 is vacated.

Signed at Ottawa, Canada, this 13^th day of August 2004.

"Gerald J. Rip"

Rip J.

Citation: 2004TCC545

Date: 20040813

Docket: 2004-476(EI)

BETWEEN:

603709 ALBERTA LIMITED c/o HUMPTY'S FAMILY RESTAURANT,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

REASONS FOR JUDGMENT

Rip, J.

[1]      The issue in this appeal by 603709 Alberta Limited, carrying on business as Humpty's Family Restaurant, is whether during the year 2002, Christopher Turner ("Christopher"), the son of Donald and Elena Turner, persons owning 100 per cent of the voting shares of the corporation and not dealing at arm's length with the corporation, was engaged in insurable employment with the corporation within the meaning of paragraph 5(1)(a) of the Employment Insurance Act ("Act"). The parties agree Christopher was an employee of the corporation.

[2]      Christopher's employment is not insurable employment by virtue of paragraph 5(2)(i) of the Act since he and the corporation did not deal with each other at arm's length. However, the respondent, in exercising his discretion under paragraph 5(3)(b) of the Act, was satisfied, having regard to all the circumstances of the employment including remuneration paid, the duration, nature and importance of the work performed and the terms of the employment contract that it was reasonable to conclude that notwithstanding Christopher and the corporation did not deal at arm's length, the corporation and Christopher would have entered into a contract of employment substantially similar to their actual contract of employment in 2002 if they had been dealing with each other at arm's length. The appellant does not agree.

[3]      The appellant's position is that Christopher was not considered a regular employee and had duties that other employees did not have. Christopher was general manager of a restaurant owned by the corporation. The principal shareholders of the corporation, Christopher's parents, were not active in the restaurant in 2002. Donald Turner, Christopher's father, said he attended at the restaurant in 2002 perhaps a "bit more than one day a month". Donald Turner testified he works at the restaurant as a "back-up" when it is "very busy".

[4]      Donald Turner declared that Christopher has full responsibility for the operation of the restaurant. He "hires and fires" personnel, he orders and pays for food and other supplies, he maintains the building in which the restaurant is located, he prepares the menus, etc. An accountant prepares the payroll but Christopher signs the payroll cheques. Donald Turner said he was involved in the business in 2002 only in the "periphery". "We discuss what he [i.e. Christopher] is doing, ... if he wants to commit money to ... redecorate the restaurant [for example] ..." then Christopher "needs our O.K.". It is important for Donald Turner, he declared, that his son succeed.

[5]      The corporation's year-end is the last day of February. The corporation paid Christopher a bonus of $25,000 in 2002 and about $38,000 in 2003. The bonus was determined by the appellant's profits and Christopher's needs, Donald Turner recalled. If in the next year the business did well, the bonus would increase. In addition to this year-end bonus, Christopher, as general manager, was also entitled to two other monthly bonuses, one dependent on food sales and the other on labour costs. Christopher was also paid a monthly salary[1] which, during 2002, the Minister assumed was $3,700. The corporation also loaned money to Christopher to purchase a home, according to his mother's answers to a questionnaire sent to her by the respondent.

[6]      The appellant acquired the restaurant business in 1995. Donald Turner managed the business during the first two years. Christopher, studying in England at the time, was fully employed by the corporation in 1998 or 1999. In 2002, he was 26 years of age.

[7]      Donald Turner was replaced as manager by Paul Cleroux. Mr. Cleroux worked a forty-hour week as manager. He had the authority to hire and fire staff, was responsible for restaurant operations including ordering, purchasing and paying for food, scheduling staff and formulating records for the accountant. Food was - and is - paid on a "cash on delivery" basis and Mr. Cleroux was reimbursed for items for which he paid. Christopher is reimbursed in the same manner.

[8]      Mr. Cleroux was paid a salary of between $3,000 and $4000 per month and was entitled to monthly bonuses respecting food sales and labour costs. Donald Turner was still active in the restaurant when Mr. Cleroux was manager.

[9]      The restaurant is open 24 hours a day, every day of the year, except for Christmas Day. The restaurant employs about 40 people at any one time. During the hours between 11:00 p.m. and 6:00 a.m., there are only three people working, a cook, a dishwasher and a server; there is no night manager. During the day there are about eight people working at any one time, four in the kitchen and four in the dining room; during peak periods, such as weekends, there is additional staff. During the day, staff reports to Christopher or, if he is not available, to an assistant manager who works five days a week. Christopher is paid bi-weekly for 88 hours of work. However, unlike Mr. Cleroux, Christopher is on 24 hour call in the event of any emergency or other matter requiring his attention.

[10]     Christopher and his sister each own 50 non-voting shares in the corporation. His sister does not receive any bonus and there is no evidence that she works for the corporation. The shares were acquired for one dollar each. From time to time Christopher and his sister have received dividends from the corporation.

[11]     Among the facts assumed by the Minister in making his decision and agreed to by the appellant's agent were the following:

5.          In so assessing as the Minister did with respect to the Worker, the Minister relied on the following assumptions of fact:

...

(c)         the two directors of the Appellant were Donald Turner and Elena Turner;

...

(f)          the Worker and the Appellant are related to each other as defined in subsection 251(2) of the Income Tax Act, R.S.C. 1985 (5^th Supp.) c.1, as amended (the "Act");

(g)         the Worker's duties were to manage the restaurant and his duties included supervising staff, scheduling and hiring and firing staff;

...

(m)        the Worker's remuneration was similar to that of a person who dealt with the Appellant at arm's length;

(n)         the Worker's remuneration was reasonable;

...

(p)         the Worker worked flexible days and hours;

(q)         the Worker's hours of work were not recorded;

...

(u)         there were no pay periods during 2002 where the Worker did not receive his pay or when the pay was late;

...

(x)         the Worker did not deposit any part of his wages back to the Appellant's bank account;

(y)         the Worker was not paid for overtime that he worked;

(z)         the Worker's vacation time was flexible and was usually 2 to 3 weeks per year;

(aa)       the Worker's vacation time was reasonable;

(bb)       in the event of an emergency the Worker was free to attend to personal errands, but as a rule work had first priority;

...

(ee)       the Worker used his car to run errands for the Appellant;

(ff)         occasionally the Worker incurred expenses for the Appellant for which he was not reimbursed;

[12]     In Tignish Auto Parts Inc. v. Minister of National Revenue[2], Ferme Émile Richard et Fils Inc. v. M.N.R.[3] and Bayside Drive-in Ltd v. The Queen[4] the Federal Court of Appeal held that the Tax Court's role when hearing an appeal under the Act where the Minister has exercised his discretion is to perform a review function, to examine the facts proven to have been before the Minister when he reached his conclusion, and in performing that function the Tax Court judge must defer to the Minister's discretionary decision unless it was shown on a balance of probabilities that the Minister had exercised the discretion in a manner contrary to law. It is not for the Tax Court judge to weigh the evidence or to speculate as to the weight placed on the evidence by the Minister during the exercise of his discretion. Only if the facts relied on by the Minister are insufficient in law to support his conclusion and therefore his determination cannot stand, may the Court intervene.

[13]     In Légaré v. M.N.R.[5], the Court of Appeal had occasion to readdress this issue and arrived at a new test replacing the test described in Tignish, Ferme Émile Richard and Bayside Drive-in. In paragraph 4 Marceau J. explained that in his view:

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 Minster 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 Minster was "satisfied" still seems reasonable.

[14]     The Federal Court of Appeal again considered the issue in Pérusse v. M.N.R.[6], and at paragraph 14 Marceau J.A. referred to his comments in Légaré, supra.

[15]     He explained, 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.

[16]     In Staltari v. Canada (Attorney General)[7], Sharlow J.A., speaking for the Court set aside the decision of this Court and found that as in Valente v. M.N.R.[8], the Tax Court judge erred in law when he failed to consider the appellate court's directions in Légaré and Pérusse, supra.

[17]     However, in the case of Quigley Electric Ltd. v. M.N.R.[9], Linden, Sexton, and Malone J.J.A. considered an appeal from a decision of this Court which confirmed the Minister's ruling that the worker was employed in insurable employment under the deeming provisions of subsection 5(3) of the Act notwithstanding that she was related to the appellant. The Court of Appeal considered the argument an error of law when it was suggested that the trial judge failed to apply the legal test, a reasonableness test, outlined in Légaré, and Pérusse, supra. The panel of the Appeal Court in Quigley Electric agreed with the panel's approach in Canada (Attorney General) v. Jencan Ltd.[10], namely, that the Minister's excercise of discretion under paragraph 5(3)(b) can only be interfered with if she acted in bad faith, failed to take into account all relevant circumstances or took into account an irrelevant factor. This appears to be contrary to the decision in Staltari, supra.However, it should be noted that Staltari is dated November 25, 2003 and Quigley Electric is dated November 28, 2003. The Federal Court of Appeal panel in Quigley Electricmay have been unaware of the decision in Staltari.

[18]     Justice Bowie had the opportunity to consider the reasonableness test in Glacier Raft Co. v. Canada (M.N.R.).[11] At paragraph 2 he pointed out that Sharlow J.A., speaking for the Court in Valente, supra, described the reasonableness test as:

a departure from earlier decisions in defining the role of the Tax Court in considering appeals from ministerial determinations under paragraph 5(3)(b) of the ... Act.

He continued:

It is surprising that the Federal Court of Appeal would overrule its several earlier decisions [Tignish Auto Parts, ... Jencan Ltd, ... Bayside Drive-In Ltd.]... without specific reference to them, but that appears to be the result.

[19]     Justice Bowie dismissed the appeal but concluded, at paragraph 9, that:

this is certainly not the case of employment or convenience being created for the benefit of members of the family so that they could take unfair advantage of the employment insurance system. Nevertheless, the terms of the Act are reasonably clear, and when related parties enter into employment contracts they must be scrupulous to see that the terms do not differ from those on which the employer employs other workers, or on which the workers could find work with other employers, if they wish the employment to be insurable under the Act.

[20]     In Belanger v. Canada (Ministre de Revenu national)[12], the Federal Court of Appeal, Décary, Létourneau and Nadon JJ.A. held that the Trial Judge had not properly considered the new jurisprudence as set out in Pérusse, and Légaré, which were followed in Valente, andMassignani v. Canada (M.N.R.)[13].

[21]     The issue before me is whether, in determining that the corporation and Christopher are deemed to deal with each other at arm's length during 2002 pursuant to paragraph 5(3)(b) of the Act, the Minister properly exercised his discretion; If the Minister exercised his discretion in an manner contrary to law I may interfere with the Minister's determination: Canada v. Jencan Ltd.[14] In assessing the manner in which the Minister has exercised his statutory discretion, the Federal Court of Appeal stated that "I may have regard to the facts that have come to my attention during the hearing of the appeal". Notwithstanding that several of the assumptions of fact relied upon by the Minister may have been disproved at trial, I must consider whether or not the remaining facts proved at trial were sufficient in law to support the Minister's determination that the parties would have entered into a substantially similar contract of service if they had been "at arm's length". If the Minister's determination lacks a reasonable evidentiary foundation I may intervene. Or I may interfere if the Minister failed to take into account all relevant circumstances.[15]

[22]     The Minister's position in the appeal is that the circumstances of Christopher's employment were similar, if not identical, to that of Paul Cleroux. But, in arriving at this conclusion, the Minister ignored or did not give sufficient weight to at least two circumstances that are present in Christopher's employment and not in Paul Cleroux's. The first is that Christopher received an annual bonus that was dependent on the corporation's profit for the year and Christopher's personal needs. The latter, even more that the former, suggests that the annual bonus, was particular to Christopher as a child of the principal shareholders of the corporation.

[23]     The second circumstance of Christopher's employment is that he was on 24 hour call. Although Christopher was paid on the basis of a 44 hour week, his work responsibilities included time in excess of the 44 hours for which he was paid. In effect, the business carried on by the corporation was a family owned business and Christopher contributed his share of the work. A person dealing with the corporation at arm's length would not be interested in the working conditions undertaken by Christopher and the corporation would not be inclined to pay an annual bonus to a person with whom it dealt with at arm's length that was dependent not only on the business' profits but also, the needs of the party it was dealing with at arm's length.

[24]     Accordingly the appeal is allowed. The Minister's determination is vacated.

          Signed at Ottawa, Canada, this 13^th day of August 2004.

"Gerald J. Rip"

Rip J.

CITATION:

2004TCC545

COURT FILE NO.:

2004-476(EI)

STYLE OF CAUSE:

603709 Alberta Limited c/o Humpty's Family Restaurant v. Minister of National Revenue

PLACE OF HEARING:

Calgary, Alberta

DATE OF HEARING:

June 7, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice Gerald J. Rip

DATE OF JUDGMENT:

August 13, 2004

APPEARANCES:

Agent for the Appellant:

Carol Sadler

Counsel for the Respondent:

Dawn Taylor

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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