Date: 19980609
Dockets: 97-192-UI; 97-193-UI
BETWEEN:
CLAUDINE HUDON,
COMMUNICATIONS MULTIMÉDIA LOGICOM LTÉE,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
GUY TREMBLAY, J.T.C.C.
Point at issue
[1] The question is whether the appellant Claudine Hudon held insurable employment within the meaning of the Unemployment Insurance Act ("the Act") with Communications Multimédia Logicom Ltée, hereinafter referred to as "the payer", which is also appealing, during the period from June 14 to November 24, 1995.
[2] The appellant is the spouse of René Forest, who owns 33 shares in the payer. Daniel Lepage and Daniel Beaudry own 33 and 34 shares respectively.
[3] It is alleged that only René Forest made an investment, of $20,000, in June 1995. The payer's activities involve developing software and selling computer equipment. The appellant allegedly signed a contract of employment with the payer for a position as comptroller for five years at $36,000 a year. She allegedly did the payer's accounting, administration, purchasing and so on. She is an architectural technician. During the period at issue she was pregnant with a fourth child.
[4] In the respondent's submission an arrangement existed between the appellant and the payer to qualify the appellant to receive unemployment insurance benefits when she left on maternity leave. Accordingly, in his submission there was no true contract of service between the appellant and the payer within the meaning of s. 3(1)(a) of the Act.
Burden of proof
[5] The appellant has the burden of showing that the respondent's assessments are incorrect. This burden of proof derives from a number of judicial decisions, including that of the Supreme Court of Canada in Johnston v. Minister of National Revenue.[1]
[6] In Johnston the Supreme Court held that the facts assumed by the respondent in support of assessments or reassessments are also presumed to be true until the contrary is shown. In the instant case the facts assumed by the respondent are set out in subparagraphs (a) to (s) of paragraph 5 of the Reply to the Notice of Appeal. Paragraph 5 reads as follows:
[TRANSLATION]
5. In arriving at his decision the respondent Minister of National Revenue relied inter alia on the following facts:
(a) the payer was incorporated on November 4, 1994; [admitted]
(b) the payer's activities involve developing software and selling computer equipment; [admitted]
(c) on August 18, 1995 the payer's shares were distributed as follows: René Forest held 33 Class A shares and 30,000 Class F shares, Daniel Beaudry held 34 Class A shares and Danny Lepage held 33 Class A shares; [admitted]
(d) Daniel Beaudry and Danny Lepage did not spend anything to acquire the shares in the payer; [admitted]
(e) on June 14, 1995 René Forest deposited $20,000 in seed capital in the payer's account; [admitted]
(f) the appellant is René Forest's spouse; [admitted]
(g) the appellant alleges that on June 14, 1995 she signed a contract of employment with the payer for an anticipated period of five years with an annual salary of $36,000 for the first year and increases of $1,000 in subsequent years; [admitted]
(h) on June 14, 1995 the appellant received an alleged first paycheque from the payer; [admitted]
(i) the appellant alleges that her duties involved doing the payer's accounting, performing administrative duties, purchasing stationery, going to pick up equipment from suppliers and doing part of the installation; [admitted]
(j) the appellant is an architectural technician; [admitted]
(k) Daniel Beaudry and Danny Lepage began their employment with the payer in July 1995; [admitted subject to amplification]
(l) René Forest alleges that despite his investment, he was not paid by the payer during the period at issue and spent about 20 hours a week running the payer's business; [admitted with an explanation]
(m) the appellant alleges that René Forest cared for her three young children during her working hours; [denied as drafted]
(n) during the period at issue the payer allegedly reimbursed the appellant for $4,099 in entertainment expenses and a total of $32,000 for equipment purchases; [admitted with an explanation]
(o) during the period at issue the appellant's working hours were not supervised by the payer; [denied]
(p) on June 14, 1995 René Forest was unemployed and he alleges that he cared for the appellant's three young children during the period at issue; [admitted]
(q) during the period at issue the appellant was pregnant with a fourth child; [admitted]
(r) an arrangement existed between the appellant and the payer to qualify the appellant to receive unemployment insurance benefits when she left on maternity leave; [denied]
(s) no true contract of service existed between the appellant and the payer during the period at issue. [denied]
[7] Further to the foregoing admissions the evidence also consisted of the testimony of Daniel Beaudry, a computer specialist, Guy Van Melle, a businessman, the appellant Claudine Hudon, and René Forest, a salesman.
[8] Although the payer was incorporated on November 4, 1994 ([6] 5(a)), the evidence shows that the plan to form a company for the purpose of developing software and selling computer equipment was initiated in the summer of 1994.
[9] According to Mr. Forest the $30,000 (subparagraph 5(e) of the Reply to the Notice of Appeal mentions $20,000) he invested at the time of incorporation in order to get the company going was insufficient, especially to pay qualified employees. Following Mr. Forest's meeting with Daniel Beaudry and Danny Lepage, both of whom worked in the same line, it was agreed that he would give them 34 and 33 Class A shares respectively and that they would devote their time to the company for a salary less than the usual salary for their skills. The incentive was that if the company prospered the value of their shares would increase accordingly. Effect was given to this by means of a resolution dated August 18, 1995 (Exhibit A-1). Sales in the first year totalled $800,000 and in 1998 they will total $1,500,000.
[10] Daniel Beaudry studied computer science and electronic engineering at the University of Sherbrooke. In the company he is vice-president, technology division, and his duties and responsibilities and his projected salary are set out as follows (Exhibit A-2):
[TRANSLATION]
Duties and responsibilities:
· Managing the development team
· Supervising analysts and programmers
· Analysing new products
· Planning software development
· Conducting technical analyses of proposed solutions
· Managing the development budget
· Drafting technical proposals
· Providing technical support
· Programming software
· Providing sales support
Pay line:
Annual salary:
First year: $42,000
Second year: $44,000
Third year: $46,000
Fourth year: $50,000
Fifth year: $55,000
[11] Mr. Beaudry participated with Mr. Forest and Mr. Lepage in the decision to hire the appellant. After meeting with the appellant and obtaining a statement of her qualifications, they asked her to leave them alone. In the witness's submission, they decided on the work to be done and the salary in a completely objective manner. According to the witness the appellant began in late spring: she prepared the office plan and set up the office, or in other words, she prepared the accommodations. Since the witness was responsible for the office, the appellant reported to him. The appellant had to [TRANSLATION] "set up the computerized accounting system and the bookkeeping, and be responsible for delivery". If the appellant had not been hired it would have been necessary to hire someone else. When the appellant left she was replaced by Guy Daniel, Maxime Bertrand and Mariette Forest.
[12] Mariette Forest's contract, which was signed on February 8, 1996 (Exhibit A-3), reads as follows:
[TRANSLATION]
Contract of employment
Mariette Forest
Position title:
Vice-President Administration
Duties and responsibilities:
· Supply manager
· Administrative support
· Bookkeeping
· Writing letters
· General secretarial work
· Sales support
· Responsible for test and audit procedures
Pay line:
Annual salary: $36,000
Participation in profits:
The employee will participate in a profit-sharing program to be created by the company's management.
Vacation:
Two weeks a year for the first three years. Three weeks thereafter.
Working hours:
Thirty-seven and a half hours a week, must be present between 9:30 a.m. and 4:00 p.m. Monday to Friday, excluding statutory holidays and leave. Full-time work.
Fringe benefits:
Creation of an insurance plan in Ms. Forest's name when the company has a sufficient number of employees.
Work environment:
So far as possible objectives will be clear and measurable and will be explained before the various duties are performed. The working environment will promote, stimulate and encourage teamwork and a multidisciplinary approach. Work methods must be structured and will be the responsibility of your supervisor. It is agreed that the workplace will be smoke free for company employees. Visitors will be asked to observe the smoking ban, though they will not be obliged to do so.
Other:
The employer will ensure that present and future labour standards are observed. The employee will be required to perform any other duties requested by the supervisor.
Signature of contract
Contract signed at Varennes on February 8, 1996
Employee: Employer:
(s) Mariette Forest (s) René Forest
Mariette Forest René Forest for
Communications
MULTIMÉDIA
[13] In cross-examination the witness Daniel Beaudry maintained that initially, from April to July, he was not paid. This unpaid work was part payment for the shares he had received in the payer. He did not start being paid until July 1995. The witness recognized the following exhibits, which were filed:
Exhibit I-1 Commercial lease agreement between the Caisse populaire Verchères and the payer, as the lessee of premises of 1,186 square feet:
the lessee was required to do renovation work (flooring) either by itself or with the help of someone from the construction trades;
Exhibit I-2 Payer's general journal from day 1, namely June 14, 1995, to day 1,544, namely May 31, 1996:
it shows the appellant's $1,440 salary, along with all cash disbursements and receipts. Exhibit I-2 is the result of the appellant Claudine Hudon's work.
Exhibit I-3 The appellant's record of employment, signed by the witness Beaudry on April 12, 1996: it should be noted that vacation pay was later sent on April 12, 1996 (Exhibit I-2: day 1230); the appellant received $581.48 (unused vacation pay).
She left the payer on November 24, 1995 to go and work for Enter-Net, a company that was a customer of the payer. Enter-Net did not have the payer's administrative organization. It asked the payer whether the appellant, who had set up the payer's computerized accounting system, would come and do the same for it, and the payer agreed. Until she had her baby on January 10, 1996, she was still working for Enter-Net.
[14] The respondent questioned Mr. Beaudry about an expenditure of $4,099.78 on day 35 (August 28, 1995), which was identified as entertainment expenses of the appellant. According to him she bought a part with a cheque on her own bank account. When she got to the office with the part she requested the amount in order to deposit it into her account so the cheque would be honoured. This was allegedly also done with the amount of $32,000 ([6] 5(n)).
[15] Guy Van Melle, the second witness, was one of Enter-Net's directors. He said he knows the appellant well. He first met her when delivering hardware to Communications Multimédia Logicom Ltée. In his submission, hiring the appellant to set up Enter-Net's accounting system cost less than hiring a specialized firm. The appellant's salary was paid by Communications Multimédia Logicom Ltée but Enter-Net repaid the salary paid to her plus 20 percent.
[16] The appellant testified that her pregnancy was not planned. Her spouse had had a vasectomy in October 1994. Initially she thought it was a false pregnancy. In April 1995 the doctor told her that it was in fact a real pregnancy. According to the appellant the plan to create Communications Multimédia Logicom Ltée had been under way since the summer of 1994. In fact, it was because of this plan and his intention to involve the appellant in it that Mr. Forest had had his vasectomy. The appellant said that in 1994, [TRANSLATION] "at the time we were talking about forming the company, it was to create jobs for ourselves, and I was not pregnant" (transcript, p. 5).
[17] The series of cheques for $913.96 (Exhibit I-4) made out to the appellant clearly shows that she was always paid by Communications Multimédia.
[18] As her work, the appellant testified that she made plans of the premises, chose colours, bought "gyproc", did the accounting and secretarial duties, looked after the filing cabinets and handled grant applications and stationery.
[19] René Forest, the president of Communications Multimédia Logicom Ltée, summarized what happened when operations began. It was essentially a repetition of his statutory declaration (Exhibit I-7) signed on March 20, 1996:
[TRANSLATION]
On June 12, 1995 I bought my brother's shelf company, "9011-4133 Québec Inc.", and changed the name to "Communications Multimédia Logicom Inc.". I immediately hired people to make leasehold improvements to Suite 201, 2100 Boul. René-Gaultier, in Varennes. There was only one employee on the payroll, Claudine Hudon, my wife, who supervised the work.
The company began operations in early August 1995. A second employee, Daniel Beaudry, V.P. Development, started on August 7, 1995. The following Monday, August 14, two other employees, Danny Lepage and Luc Allard, started. My sister, Mariette Forest, worked there three days a week but was not paid until February 12, when she started full time and was paid.
[20] With respect to allegations 5(k) and (p) in the Reply to the Notice of Appeal, Mr. Forest filed as Exhibit A-4 the decision of the board of referees dated February 25, 1997. In response to an objection by the respondent, the Court originally admitted this document without prejudice but now admits it as evidence.
There were two points at issue. The first was whether the claimant was unemployed as of June 12, 1995. The second was whether the claimant knowingly made 19 false or misleading statements.
After a detailed analysis, the conclusion on both points was as follows: in the circumstances, the board of referees unanimously allowed the claimant's appeal and reversed the Commission's decision.
[21] As Exhibit I-8 the respondent filed a [TRANSLATION] "business plan" for Communications Multimédia Logicom Ltée prepared in September 1995. This document was prepared for the purpose of obtaining a loan. It states the following regarding Mr. Forest (pp. 16-17) and the appellant Claudine Hudon (p. 23):
[TRANSLATION]
3 - Administrator
René Forest
President
Education
Bachelor of Business Administration (B.B.A.)
Major in Marketing
Experience:
Coming from a family in which finance, regionalization and the business world formed part of everyday conversation, René Forest became interested in business at a very early age.
While at university, where he took a B.B.A. and majored in marketing, his abilities in this field were recognized through two prestigious awards: he received the [TRANSLATION] "Excellence Award" scholarship awarded to the top marketing student. He also received the "Bourse Télésag", awarded by a private business to recognize both his academic performance and his involvement in his home region.
Mr. Forest started at the Royal Bank of Canada in 1987, working in personnel, finance, customer service and loan supervision.
He moved to Montréal, where he held the position of sales and marketing director for the Centre d'Excellences en Télécommunications intégrées, a position which introduced him to the world of telematics.
In 1990 Mr. Forest participated in the launching of the National Vidéotex Network. Through an agreement with the U.S. giant AT & T, this network markets a range of interactive services available in the 52 American states.
At Imatex Communications Mr. Forest helped position the firm as a leading supplier to the Canadian telematics industry, especially to suppliers of Bell Canada's Alex network.
More recently, as Vice-President, Marketing, he designed and implemented business development strategies which enabled Imatex to gain entry to foreign markets. Based on strategic alliances with international partners, his approach enabled Imatex to profit from the positioning of its partners in their respective markets and so extend its activities into those markets.
Duties and responsibilities:
Mr. Forest will be responsible for co-ordinating sales and marketing activities. Through his many business contacts in Quebec, Canada, the U.S., Europe and Asia Mr. Forest will promote the business's products and services. He will also be responsible for recruiting and maintaining excellent relations with Communications MULTIMÉDIA's distributors/partners.
He will be responsible for the applications development team. He will supervise the programmers directly. He will be responsible for analysing new products and drafting technical proposals.
Planning software development
Supervision and support for the development team
Managing the development budget
Sales support
He will also be responsible for the general administration of the company.
. . .
Testing, supply and administrative support manager (1)
Claudine Hudon
Education:
Architectural technician
Computer training in DOS 1, 2 and 3
Experience:
Claudine Hudon has six years' experience in the computer-assisted design of plans. Among other things, she has set up, operated and supervised a computer system for an independent business. Ms. Hudon has co-ordinated the installation of software, supervised the training of employees on the system and designed a data bank to speed up employees' work.
Ms. Hudon has shown great adaptability and a desire to take on new challenges.
Duties and responsibilities:
Ms. Hudon's primary responsibilities will be bookkeeping, supply, setting up test and audit procedures and secretarial work in general.
Pay line: $24,000 a year
[22] Mr. Forest noted that as he wanted to improve the payer's chances of obtaining a loan, he had put the appellant's salary down as only $24,000, not $36,000. The document was to be used by lenders.
[23] The Court was referred to a number of precedents, including:
1 - Tignish Auto Parts Inc. v. Minister of National Revenue, A-555-93, 25/07/94 (F.C.A.);
2 - Ferme Émile Richard et Fils Inc. v. Minister of National Revenue and Deputy Attorney General of Canada, A-172-94, 01/12/94 (F.C.A.);
3 - Lyne Plamondon v. Minister of National Revenue, 92-858(UI), a decision dated 20/07/94 by Judge Archambault (T.C.C.);
4 - Attorney General of Canada v. Jencan Ltd., A-599-96, 24/06/97 (F.C.A.).
[24] The Federal Court of Appeal has delivered several key judgments on the application of s. 3(2)(c) of the Unemployment Insurance Act. In Tignish Auto Parts Inc. (para. [23] 1), the Court cited counsel for the respondent in whose opinion it concurred:
Under the authority of Minister of National Revenue v. Wrights' Canadian Ropes Ltd., contends the respondent, unless the Minister has not had regard to all the circumstances of the employment (as required by subparagraph 3(2)(c)(ii) of the Act), has considered irrelevant factors, or has acted in contravention of some principle of law, the Court may not interfere. Moreover, the Court is entitled to examine the facts which are shown by evidence to have been before the Minister when he reached his conclusion so as to determine if these facts are proven. But if there is sufficient material to support the Minister's conclusion, the Court is not at liberty to overrule it merely because it would have come to a different conclusion. If, however, those facts are, in the opinion of the Court, insufficient in law to support the conclusion arrived at by the Minister, his determination cannot stand and the Court is justified in intervening.
[25] There are thus four tests which the Tax Court of Canada can apply to decide whether it is entitled to intervene:
the Minister
(1) did not have regard to all the circumstances of the employment;
(2) considered irrelevant factors;
(3) acted in contravention of a principle of law; or
(4) based his decision on insufficient facts.
[26] The Court went on as follows:
In my view, the respondent's position is correct in law except that it does not indicate what powers the Court enjoys once an intervention is deemed to be justified.
[27] After making further observations, the Court added:
It is therefore appropriate, in the case at bar, to analyze the provisions of the Unemployment Insurance Act under which the jurisdiction of the Tax Court is exercised in order to determine the type of decision it may render.
The Tax Court, not being a superior court of record, has no inherent jurisdiction to refer the matter back to the Minister. It does, however, enjoy implied powers and could, perhaps, on this basis, as claimed by the respondent, refer the matter back to the Minister. But the difficulty here is that the power of the Tax Court to refer back has already been legislated upon. Subsection 70(2) of the Act, which I have reproduced earlier, reads thus:
70. (2) On an appeal under this section, the Tax Court of Canada may reverse, affirm or vary the determination, may vacate, confirm or vary the assessment or may refer the matter back to the Minister for reconsideration and reassessment, and shall thereupon in writing notify the parties to the appeal of its decision and the reasons therefor.
[28] In Ferme Émile Richard et Fils Inc. (para. [23] 2), the Federal Court of Appeal summarized Tignish Auto Parts Inc. as follows:
As this Court recently noted in Tignish Auto Parts Inc. v. Minister of National Revenue, July 25, 1994, A-555-93, F.C.A., not reported, an appeal to the Tax Court of Canada in a case involving the application of s. 3(2)(c)(ii) is not an appeal in the strict sense of the word and more closely resembles an application for judicial review. In other words, the Court does not have to consider whether the Minister's decision was correct: what it must consider is whether the Minister's decision resulted from the proper exercise of his discretionary authority. It is only where the Court concludes that the Minister made an improper use of his discretion that the discussion before it is transformed into an appeal de novo and the Court is empowered to decide whether, taking all the circumstances into account, such a contract of employment would have been concluded between the employer and employee if they had been dealing at arm's length.
[29] In Jencan Ltd. (para. [23] 4), after reviewing the evidence the Federal Court of Appeal made the following comments at pp. 24-26 of the original judgment:
The Deputy Tax Court Judge, however, erred in law in concluding that, because some of the assumptions of fact relied upon by the Minister had been disproved at trial, he was automatically entitled to review the merits of the determination made by the Minister. Having found that certain assumptions relied upon by the Minister were disproved at trial, the Deputy Tax Court Judge should have then asked whether the remaining facts which were proved at trial were sufficient in law to support the Minister's determination that the parties would not have entered into a substantially similar contract of service if they had been at arm's length. If there is sufficient material to support the Minister's determination, the Deputy Tax Court Judge is not at liberty to overrule the Minister merely because one or more of the Minister's assumptions were disproved at trial and the judge would have come to a different conclusion on the balance of probabilities. In other words, it is only where the Minister's determination lacks a reasonable evidentiary foundation that the Tax Court's intervention is warranted.[2] An assumption of fact that is disproved at trial may, but does not necessarily, constitute a defect which renders a determination by the Minister contrary to law. It will depend on the strength or weakness of the remaining evidence. The Tax Court must, therefore, go one step further and ask itself whether, without the assumptions of fact which have been disproved, there is sufficient evidence remaining to support the determination made by the Minister. If that question is answered in the affirmative, the inquiry ends. But, if answered in the negative, the determination is contrary to law, and only then is the Tax Court justified in engaging in its own assessment of the balance of probabilities. Hugessen J.A. made this point most recently in Jolyn Sports, supra. At page 4 of his reasons for judgment, he stated:
In every appeal under section 70 the Minister's findings of fact, or "assumptions", will be set out in detail in the reply to the Notice of Appeal. If the Tax Court judge, who, unlike the Minister, is in a privileged position to assess the credibility of the witnesses she has seen and heard, comes to the conclusion that some or all of those assumptions of fact were wrong, she will then be required to determine whether the Minister could legally have concluded as he did on the facts that have been proven. That is clearly what happened here and we are quite unable to say that either the judge's findings of fact or the conclusion that the Minister's determination was not supportable, were wrong.
[Emphasis added]
The Deputy Tax Court Judge erred in law in failing to determine whether the Minister could have legally concluded as he did on the facts as proved before him. Consequently, he was not in a position at law to come to his own conclusion on the balance of probabilities. In short, by reviewing the merits of the determination without first concluding that the Minister exercised his discretion in a manner that was contrary to law, the Deputy Tax Court Judge failed to exhibit the degree of judicial deference required when reviewing ministerial determinations under subparagraph 3(2)(c)(ii).
[30] It must now be asked whether in the instant case the Minister's decision resulted from a proper exercise of his discretionary authority.
[31] The first thing that can be seen from the evidence as a whole is that the appellant did important work for the payer, including the general journal. If she had not been hired it would have been necessary to hire someone else. When she left, the appellant was replaced by three people ([11], [13]). She also did important work while working for Enter-Net, which reimbursed the payer for the appellant's salary plus 20 percent ([15]). Her $36,000 salary was not excessive. It was also the salary of Mariette Forest, who replaced the appellant along with two other people. Enter-Net did not find the salary high ([15]).
[32] The appellant's work was supervised by Daniel Beaudry. The equipment used was owned by the payer.
[33] In light of these facts, the Court considers that the respondent based his decision on insufficient facts.
[34] This is quite understandable in view of the fact that the respondent's appeals officer conducted his investigation by telephone only and did not have the opportunity of seeing the individuals or visiting the premises. While the Court understands the excessive cost in time and travel that would be involved, an investigation conducted by telephone also has its disadvantages, including that of not seeing or obtaining all the relevant facts. The respondent called no witnesses.
[35] The evidence as a whole persuades the Court that the respondent's claim that an arrangement existed between the appellant and the payer to qualify the appellant to receive unemployment insurance benefits while on maternity leave is groundless. Everything, including the appellant's competence and her support for her husband since the summer of 1994 in forming the business for the purpose of creating employment, suggests that she would have been involved in the work of the business even if she had not been pregnant. In this regard Mr. Forest's vasectomy was an unsuccessful test.
Conclusion
[36] The appeal is allowed.
Signed at Québec, Quebec, June 9, 1998.
"Guy Tremblay"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 28th day of October 1998.
Stephen Balogh, Revisor