Date:20010119
Dockets: 1999-3282-EI,
1999-3283-CPP
TAX COURT OF CANADA
IN RE: the Employment Insurance Act
B E T W E E N:
DAVID LANGER,
Appellant,
- and -
THE MINISTER OF NATIONAL REVENUE,
Respondent.
- and -
DR. FRED LANGER and PEARL LANGER o/a LANGER PROPERTIES
Interveners
--- Held before His Honour Judge Weisman of The Tax Court of Canada, in Courtroom Number 3, 9th Floor, Merrill Lynch Canada Tower, 200 King Street West, Toronto, Ontario, on Friday, the 19th day of January, 2001.
Reasons for Judgment
(Delivered orally from the bench at Toronto, Ontario)
APPEARANCES:
D. Langer on his own behalf
M. Whelton for the Interveners
J. Espejo-Clarke for the Respondent
William O'Brien - Registrar
Per: Aziza Othman, C.S.R. (Reporter)
JUDGE WEISMAN: Orally)
This was an appeal against the determination by the Respondent that the Appellant was not in insurable and pensionable employment within the meaning of paragraph 3(1)(a) of the Unemployment Insurance Act, which is Revised Statutes of Canada (1985) chapter U-1, and paragraph 5(1)(a) of the Employment Insurance Act, which is Statutes of Canada (1996) chapter 23, and paragraph 6(1)(a) of the Canada Pension Plan, which is Revised Statutes of Canada (1985) chapter C-8.
The burden of proof herein is upon the Appellant on a balance of probabilities. Johnston v. The Minister of National Revenue [1948] SCR 486.
The Appellant was engaged by his parents, the Interveners, to manage several residential rental properties in the City of Toronto between the summer of 1991 and March 16 of 1997. The question before the Court is whether he was then an independent contractor under a contract for services or an employee under a contract of service, and if the latter, whether he was nevertheless disentitled to unemployment and pension benefits because the parties were not then dealing with each other at arm's length.
As to whether the Appellant was employed under a contract of service, the Court must examine the entire relationship between the parties using as a guideline the four in one test established by the Federal Court of Appeal in Wiebe Door Services Incorporated v. the Minister of National Revenue (1986), 87 DTC 5025.
In this regard, I find on the evidence as follows:
CONTROL.
The Interveners wanted to give their son freedom and autonomy in managing their properties to enhance his feelings of self worth. They accordingly exercised little supervision or control over his management activities and, in fact, had little knowledge of the state of affairs of the business. There was accordingly not the degree of subordination one would normally find in an employer/employee relationship. I find, however, that they still at all times retained the right to control not only what their son did but how he did it. This is Regina v. Walker (1858), 27 LJMC 207 and 208. One example involves the renovations to 66 Lowther Avenue. The Appellant wanted to do it one way, his father insisted that it be done a different way which turned out to be wrong, and the work had to be redone.
The jurisprudence indicates that the right to control is more important than the actual exercise of control. Hennick v. the Minister of National Revenue, [1995] FCJ #294 from the Federal Court of Appeal.
I note also that the Appellant was expected to perform his services personally, though he could hire trades to assist him as necessary. No one else would be trusted to handle rent cheques and make withdrawals from the business account. This has been held to be an indication when one is an employee, Ready Mixed Concrete v. Minister of Pensions, [1998] ALL ER 433, the Queens Bench Division.
TOOLS.
The Appellant was permitted to purchase tools out of the Langer Property bank account where the rental revenues were deposited and expenses were withdrawn from. The prior property manager, Mr. John Hutton, had a similar arrangement on an account set up by Dr. Langer called the "Hutland property account." It was contended that the tools purchased by the Appellant out of the Langer Property account were part of his remuneration and therefore the tools were his and therefore he was an independent contractor. In view of Mr. Hutton's parallel ability to purchase tools at the Interveners' expense, I find that the tools were the Interveners' tools and that this factor also indicates that the Appellant was an employee.
INTEGRATION.
The Appellant wholly integrated his function into the Interveners' business. He did not integrate the Interveners' needs into his business, and in fact he managed no other properties. This factor also indicates that he was an employee during the relevant period.
PROFIT AND LOSS.
Dr. Langer, one of the Interveners, was quite candid in testifying that the Appellant had no chance of profit as the manager of his rental properties. As all expenses of managing the properties were paid by the Interveners, the Appellant also bore no risk of loss. This includes the various credit cards and truck lease which the Appellant contracted for but for which the Interveners were ultimately responsible.
The Interveners testified that they transferred title to 37 Metcalf Street to the Appellant on the 20th day of December, 1995, because he wanted a business of his own from which he could profit. In my view, this caused some confusion to counsel. This transaction does not alter his chance of profit as a manager of his parent's properties. It makes him an owner of a rental property in his own right, where he has a chance of profit and risk of loss just like his parents.
The profit and loss factor, accordingly, also indicates that the Appellant was an employee.
Finally, I note that the Appellant was given an apartment on Lowther Avenue in which to reside as part of his remuneration. In my view, this is more consistent with his being an employee than an independent contractor.
Upon looking at the entire relationship between the parties and the whole scheme of operations, I find that the Appellant was an employee under a contract of service during the relevant period.
Under the aforementioned Acts, even though the Appellant was employed under a contract of service, he may not be in insurable and pensionable employment if he and his employer were not dealing with each other at arm's length during the relevant period. Under section 251 of the Income Tax Act, Revised Statutes of Canada (1985), 5th supplement, chapter 1, the parties being connected by blood relationship are deemed not to deal with each other at arm's length. This presumption is not rebuttable. Kushnir v. the Minister of National Revenue, (1985) 39 DTC 208 from the Tax Court of Canada, and Simard (ph.) v. the Minister of National Revenue [1994] TCJ #1202, also in the Tax Court of Canada, and Thivierge v. the Minister of National Revenue, [1994] TCJ #876, in the Tax Court of Canada.
In these circumstances, the Appellant is left to rely on the current section 5(3)(b) of the Employment Insurance Act, which provides as follows:
If the employer is, within the meaning of that Act (meaning the Income Tax 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, and 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".
The Minister declined to exercise his discretion under this section in the Appellant's favour as aforesaid. I am not permitted to simply substitute my view of this matter for that of the Minister unless I first find that the Minister exercised his discretion in an unlawful fashion in one of the following three ways:
First, he acted in bad faith or for an improper purpose and motive; (2), he took into account an irrelevant factor; (3), he failed to take into account all the relevant circumstances as required by section 5(3)(b). Tignish Auto Parts Inc. v. the Minister of National Revenue (1994), 185 NR 73, the Federal Court of Appeal, Canada v. Jencan Limited (1997), FCJ #876, also in the Federal Court of Appeal, and Bayside Drive-in Limited v. Canada (1997), FCJ #1019, in the Federal Court of Appeal.
First, bad faith. In this matter I have heard no evidence of bad faith or improper motive on the part of the Minister. This was a routine investigation and the various rulings for and against the Appellant reflected the information then before the officers making the rulings. In any event, it is clear that it is the evidence before the Court and not before the Minister that governs in these matters. Elia (ph.) v. Canada [1998] FCJ #316 in the Federal Court of Appeal. The Appellant alleged discrimination because the CPT-110 form referred to his wife's race. This merely reflected his own comments in his July 11th, 1998 questionnaire in support of his application for unemployment benefits.
(2), Irrelevant Factors. In my view, the assumptions in the Minister's Reply to Notice of Appeal are all relevant to the determination made by the Minister, except 7(g) Re 66 Lowther Avenue and the building permit: "to proceed with the renovations, it was necessary for a member of the owners' family to live there, and so the Appellant moved into the top floor unit of the 66 Lowther property in March or April of 1994".
I also note that the evidence at trial did not support allegation or assumption 7(c). Dr. Fred Langer and his wife Pearl Langer controlled the day-to-day operations and made the major business decisions with respect to the residential real estate business.
Nor did the evidence support assumption 7(h). "The free rental of his 66 Lowther unit was a completely separate arrangement with his parents and was not connected with the earlier arrangement for the Appellant to provide the payor with the property management services."
The Appellant expressed concerns about assumptions 7(i), (k), (o), (r) and (s), but these were reproduced verbatim from his own questionnaire and therefore give no cause for complaint.
He tried to disallow assumption 7(m). "The Appellant was to draw up to $30,000.00 annually from the business account to cover his management fee but could not always do so because the business account was chronically overdrawn." The $30,000.00 figure came from the income tax return which he signed and is accordingly responsible for.
I find that the assumptions, which were established by the evidence, are sufficient to support the exercise of the Minister's discretion.
(3), Irelevant Factors. Immediately prior to the Appellant becoming the manager of the Interveners' properties, that function was performed by John Hutton with whom the Interveners clearly had an arm's length relationship. There was a bank account established by the Interveners called "Hutland Properties" out of which Mr. Hutton was authorized to draw cheques for his remuneration and the necessary business expenses, such as for tools as previously mentioned. This arrangement was sufficiently unusual, in my view, and sufficiently similar to the Appellant's access to the Langer property account, and the duties performed by the Appellant and Mr. Hutton were sufficiently similar that, in my view, it was relevant for the Minister to inquire into (a) whether Mr. Hutton was an employee under a contract of service, and (b), if so, whether it was reasonable to conclude that his employment was substantially similar to that of the Appellant within the meaning of section 5(3)(b), earlier quoted.
Since the Minister did neither of these, I find that the exercise of his discretion was unlawful and that I must make this determination on the evidence that I have heard. The burden of proof is upon the Appellant as aforesaid. No evidence was adduced as to Mr. Hutton's chance of profit or risk of loss and the integration factor mentioned in Wiebe Door regarding Mr. Hutton's property management services. I am unable, accordingly, to conclude that he was employed by the Interveners.
However, taking the Appellant's case at its highest and assuming, without deciding, that Mr. Hutton was an employee, I find that in all the circumstances the Appellant's terms of employment and Mr. Hutton's terms of employment cannot be said to be substantially similar for the following seven reasons:
First, Mr. Hutton received a regular salary by cheque drawn on the Hutland Property account. The Appellant, on the other hand, received remuneration which was irregular and varied from year to year and was not by cheque but by the highly unusual method of credit card and automated banking machine withdrawals.
Second, the Appellant's remuneration included personal living expenses, such as income taxes, dentist, vacation, bagels, boots for Megan, Lloyd's Barber Shop and Nintendo 64. This is not usual when parties are dealing at arm's length and is not substantially similar to John Hutton's terms of remuneration.
Third, the Appellant admitted delaying taking his pay when there were cash flow problems in the Langer Property account, particularly at the beginning of the month when the mortgage payment was taken out. There is no evidence that John Hutton did the same. I note that the holding of pay to accommodate the payor's cash flow problems has been held to be a circumstance indicative of non-arm's length dealings. Kadziolka v. Canada [1999], FCJ #265, Federal Court of Appeal.
Fourth, the Appellant was given use of his sister's jeep for his property management duties. Mr. Hutton had to provide his own vehicle.
Fifth, the Appellant had free rental at 66 Lowther Avenue. Mr. Hutton was required to pay rent to the Interveners, albeit at a reduced rate.
Sixth, the Hutland property account that was controlled by Mr. Hutton was in no way similar to the Langer Property account controlled by the Appellant. The Hutland account had no revenues and overdrafts for necessary expenditures were limited to the amount of $5,000.00. The Langer Property account received all the rental revenues, the mortgage and realty tax payments came out of it, and overdrafts up to $150,000.00 were possible.
Seventh, Mr. Hutton was required to account monthly to the Interveners and many expenditures had to be supported by invoices matching cancelled cheques. The Appellant was trusted and left on his own, in this regard, from 1991 until problems arose in 1996.
In addition to the foregoing seven reasons, there is one other factor to be considered. The property municipally known as 37 Metcalf Street was transferred to the Appellant on December 20, 1995. No such property was ever transferred to Mr. Hutton. The Appellant repeatedly asserted that this transaction was not a benefit to him. If that were true, one would have thought he would simply give it back, but he has not done so. Of greater interest is whether this property transfer was part of the Appellant's contract of employment, or merely a transaction between parents and their son.
For example, if a parent gives his child a present on his birthday but not a similar gift to an arm's length employee, like Mr. Hutton, I would not think that birthday present should be used as evidence of a substantially similar contract of employment. This property transfer is clearly different. It was one of the very properties the Appellant was managing on his parent's behalf. But I am left with doubt as to whether or not this transaction can fairly be characterized as part of the contract of employment. I have accordingly not included it in my seven reasons for finding that the parties would not have entered into a substantially similar contract of employment. The seven reasons, in my view, are more than ample to support the conclusion that I have reached.
Generally, the evidence is overwhelming that the essential feature of the relationship between the Appellant and the Interveners is that it was of a parent/child relationship. They wanted their son to be independent and autonomous and to have enhanced feelings of self-worth and structured the business arrangement accordingly. They would not have entered into a substantially similar contract of employment if they had been dealing with the Appellant at arm's length. The two appeals are accordingly dismissed.
I thank you all for your assistance.
I HEREBY CERTIFY THE FOREGOING
to be a true and accurate
transcription of my shorthand notes
to the best of my skill and ability.
Aziza Othman, C.S.R.
Computer-Aided Transcription
1999-3282(EI)
BETWEEN:
DAVID LANGER,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
DR. FRED AND PEARL LANGER,
o/a LANGER PROPERTIES,
Intervenor.
Appeal heard together with the appeal of David Langer (1999-3283(CPP)) on
September 27 and 28, 2000 and January 15 to 19, 2001, at Toronto, Ontario, by
the Honourable Deputy Judge N. Weisman
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Jocelyn Espejo-Clarke
Counsel for the Intervenor: Robert Maxwell
Maureen Whelton
JUDGMENT
The appeal is dismissed and the decision of the Minister is confirmed.
Signed at Toronto, Ontario, this 30th day of January 2001.
"N. Weisman"
D.J.T.C.C.
1999-3283(CPP)
BETWEEN:
DAVID LANGER,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
DR. FRED AND PEARL LANGER,
o/a LANGER PROPERTIES,
Intervenor.
Appeal heard together with the appeal of David Langer (1999-3282(EI)) on
September 27 and 28, 2000 and January 15 to 19, 2001, at Toronto, Ontario, by
the Honourable Deputy Judge N. Weisman
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Jocelyn Espejo-Clarke
Counsel for the Intervenor: Robert Maxwell
Maureen Whelton
JUDGMENT
The appeal is dismissed and the decision of the Minister is confirmed.
Signed at Toronto, Ontario, this 30th day of January 2001.
"N. Weisman"
D.J.T.C.C.
COURT FILE NO.: 1999-3282(EI)
STYLE OF CAUSE: David Langer and M.N.R. and
Dr. Fred Langer and Pearl Langer o/a Langer Properties
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: January 15, 16, 17, 18 and 19, 2001
REASONS FOR JUDGMENT BY: The Honourable Deputy Judge N. Weisman
DATE OF JUDGMENT: January 30, 2001
APPEARANCES:
Counsel for the Appellant: The appellant himself
Counsel for the Respondent: Jocelyn Espejo-Clarke
Counsel for the Intervenor: Robert Maxwell
Maureen Whelton
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, CanadaCOURT FILE NO.: 1999-3283(CPP)
STYLE OF CAUSE: David Langer and M.N.R. and
Dr. Fred Langer and Pearl Langer o/a Langer Properties
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: January 15, 16, 17, 18 and 19, 2001
REASONS FOR JUDGMENT BY: The Honourable Deputy Judge N. Weisman
DATE OF JUDGMENT: January 30, 2001
APPEARANCES:
Counsel for the Appellant: The appellant himself
Counsel for the Respondent: Jocelyn Espejo-Clarke
Counsel for the Intervenor: Robert Maxwell
Maureen Whelton
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada