Tax Court of Canada Judgments

Date: 19980105

Docket: 96-1649-UI

BETWEEN:

LINDA FARRAH,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent.

Reasons for Judgment

P.R. Dussault, J.T.C.C.

[1] The appellant is contesting the respondent’s determination that her employment with the payer, Maison J. Farrah Inc., from September 4, 1993, to September 3, 1994, and from November 7, 1994, to September 9, 1995, was not insurable.

[2] The respondent based his determination on paragraph 3(1)(a) of the Unemployment Insurance Act (“the Act”) and argued that there was no contract of service between the appellant and the payer during the periods at issue.

[3] The determination was based on the facts set out in subparagraphs (a) to (p) of paragraph 5 of the Reply to the Notice of Appeal. They read as follows:

[TRANSLATION]

(a) Hilda Boudreau-Farrah is the payer’s sole shareholder;

(b) she inherited her shares on May 31, 1990, when her husband died;

(c) she is the appellant’s mother;

(d) until September 1994, the payer operated a department store that sold clothing for the entire family, jewellery and other accessories;

(e) in November 1994, the payer moved its business into the appellant’s basement and began specializing in selling plus-size women’s clothing;

(f) Hilda Boudreau-Farrah has never worked for or was involved in the payer’s business;

(g) she has never looked at the accounting figures for the payer’s business;

(h) the appellant made all the decisions pertaining to the payer’s business;

(i) the appellant was free to do as she pleased: she organized her own work and schedule and set her own salary;

(j) the appellant guaranteed the payer’s $15,000 variable credit contract;

(k) the appellant personally obtained three loans ($15,000, $20,000 and $10,000) from the Caisse Populaire de Lavernière to pay the payer’s debts;

(l) the appellant was not paid from September 10 to November 6, 1994, while she moved the payer’s business;

(m) the appellant worked for the payer without pay from October 1995 to February 1996;

(n) the appellant signed the payer’s cheques;

(o) the appellant was not subordinate to the payer;

(p) during the periods at issue, there was no employer-employee relationship between the appellant and the payer.

[4] Given that the appellant and the payer are related persons under paragraph 251(2)(a) and subparagraphs 251(2)(b)(i) and (iii) of the Income Tax Act, after hearing the appeal I asked counsel for the appellant and the agent for the respondent to make submissions on the application of subparagraph 3(2)(c)(ii) of the Act, since in this case the respondent did not exercise the discretion conferred on him by that provision. I also offered them an opportunity to submit additional evidence, if necessary, which they declined to do since they preferred to confine themselves to written representations. I will come back to this point below.

[5] In her testimony, the appellant stated that she began working for the payer as a salesperson in 1980 and did so until her grandfather died in 1986. She then started managing the business, since her father, who had inherited the company’s shares, was already ill. He died in 1990. The appellant’s mother then became the sole shareholder, and the appellant said that she continued to manage the business until it was closed in February 1996. According to the appellant, who said that she had acquired a great deal of experience in this small family business, she did all the work normally involved in managing a business, including the administrative work and the work related to purchasing and selling.

[6] It is difficult to know exactly what role was played by the appellant’s mother, Hilda Boudreau Farrah (“Hilda Farrah”), aside from the fact that during the periods at issue she was the sole shareholder and director of the payer and the only person authorized to conduct the payer’s banking transactions, at least with the National Bank of Canada.[1]

[7] In a statutory declaration dated October 20, 1995, the appellant twice stated that her mother was never involved in the business.

[8] According to Danielle Chouinard, an officer involved in determinations who testified for the respondent, Hilda Farrah was unable to provide her with any specific information about the business and said that she was not involved in it; she simply referred Ms. Chouinard to the appellant. For instance, Hilda Farrah was unaware of the sales or income of the business. Nor did she know the number of employees, the appellant’s salary or the point at which the appellant stopped working. According to her, the appellant determined her own work schedule. She also said that the business had always operated at the same place — she was unaware that it had moved in 1994 — and that it had operated out of the basement of the home she owned, in which the appellant lived, only in February 1996. As far as the financial situation was concerned, Hilda Farrah said that she knew the business was not doing well. However, she was not familiar with the line of credit, although she said that she was acquainted with the financial institution. She also said that she had gone to see a notary to hypothecate the house, but she did not provide any details as to the date when that had occurred. Finally, Hilda Farrah said that she did not examine the figures and that the appellant did not have to report to her.

[9] In spite of all this, the appellant testified that it was her mother, whom she saw three or four times a day, who made all the important decisions about such things as loans, laying off another employee and, finally, closing the business. According to her, her mother had a good head for business even though she had little education. The appellant also said that her mother did not know the technical details, never worked for the business and never looked at the figures. The appellant further stated that she gave reports to and discussed product purchases with her mother, although she set the sale prices of the products herself.

[10] The appellant said that she always had a fixed work schedule, from 9:00 a.m. to 5:00 p.m. She also said that her salary did not change for several years.

[11] The appellant said that she had no other interest in the business, since her mother was the sole shareholder. Yet she signed a $15,000 variable credit contract[2] with the Caisse populaire de Lavernière on the corporation’s behalf on February 25, 1994, stating that she had been duly authorized by a resolution of the corporation’s board of directors dated February 24, 1994. According to the contract, the appellant provided a general guarantee for the amounts owed by the corporation under the contract.

[12] No resolution authorizing the appellant to represent the corporation was adduced in evidence. According to the appellant, the business was not working out and her mother had decided to borrow money. The appellant said that she had simply made the necessary arrangements with the Caisse populaire, which her cousin managed.

[13] On September 2, 1994, two days before she was apparently laid off for the first time from September 4 to November 6, 1994, the appellant obtained a $15,000 personal loan from the same Caisse populaire.[3] She said, however, that although she had obtained that loan and the others that will be discussed below in her own name, they were for the corporation and the corporation was the one that repaid them. She said that the reason she had not asked her mother to sign was “to take some pressure off her”.

[14] According to the appellant, the period from September 4 to November 6, 1994, was when the business was closed and the move occurred. The appellant admitted that she had handled the move but had not been paid for it. Moreover, Exhibit I-5 contains nine bank deposit slips, filed jointly, that were signed by the appellant during that period and that total more than $11,500, which shows that there was nonetheless some activity at a time when she said the business was closed.

[15] The appellant said that her second employment period began on November 7, 1994, and ended on September 9, 1995. She said that she worked only every other week. Another employee worked as a salesperson during that period. Exhibit I-5 indicates that the appellant continued to make bank deposits regularly during that time. She said that she was not paid for making deposits, which took very little of her time. Exhibit I-7 seems to indicate that the bookkeeping was also done regularly. However, there is nothing to indicate that the appellant did not continue to be involved in the business on a daily basis.

[16] On March 20, 1995, the appellant obtained another personal loan for $20,000.

[17] The appellant obtained a third personal loan on September 29, 1995, nearly three weeks after the end of the second period at issue. The appellant admitted that after that employment period, she worked for the payer until February 1996 and was paid for some weeks. Exhibit I-6 contains three cheques made out to her that she signed for the payer. The cheques are dated September 23, October 6 and October 21, 1995. She said that she reported those earnings. The appellant said that starting in November or December 1995, there was almost no more work and only one customer a week. Yet Exhibit I-7 shows that sales for those two months amounted to more than $4,000.

[18] During her testimony, the appellant also said that the reason she had worked without pay some of the time was that the cost of the building in which the business operated before it moved had to be paid first, the implication being that the cost was so high that there was no income left to pay her salary.

[19] The appellant had the burden of proving on a balance of probabilities that there was a contract of service between her and the payer during the periods at issue.

[20] Based on an analysis of the evidence adduced, I am not satisfied that there was a genuine employer-employee relationship between the payer and the appellant during those periods. The courts have clearly established that such a relationship must involve a relationship of subordination, which cannot exist if there are a number of indications to suggest that the appellant actually acquired full control of the business that was officially being operated by the payer. An analysis of all the evidence adduced shows that it is highly doubtful, to say the least, that Hilda Farrah made or was even interested in making any decisions at all as the sole shareholder and director of the payer, other than giving the appellant complete freedom to operate the business at her discretion as if she were its real owner.[4] The appellant no doubt worked as a salesperson and then as the manager when her grandfather and father ran the business. However, according to the evidence adduced, especially with regard to the years from 1993 to 1995, it really seems that once the appellant’s mother became the sole shareholder and director, she played no role in managing the business and showed only a slight interest, if that, in what was going on in it. The appellant’s statutory declaration dated October 20, 1995, and what Danielle Chouinard verified with Hilda Farrah are quite persuasive in this regard. When the appellant testified at the hearing, she certainly tried to attribute a key role to her mother, contrary to what she had stated previously. I find that her explanation of what she did was not very credible, especially with respect to her alleged layoff from September to November 1994 and the personal financial commitments she made in both 1994 and 1995. To begin with, there is nothing to show that Hilda Farrah had anything to do with the fact that the appellant decided more than once to stop drawing a paycheque while continuing to run the business without pay, claiming that this amounted to a termination of her employment. The appellant was the only person responsible for that decision, which tends to show that there was no relationship of subordination. In addition, the financial commitments made by the appellant, given the risks they involved and the fact that they were, the evidence suggests, more or less unknown to the person who was supposed to be running the alleged employer, are also inconsistent with the status of an employee who had no interest in the business. The conclusion strongly suggested by this situation is that the appellant acted as if she were the real owner of the business.

[21] In the case at bar, it seems to me that these are the most important and most relevant factors in terms of the need to prove the existence of a contract of service within the meaning of paragraph 3(1)(a) of the Act. Precisely because these factors are present, I cannot conclude that the appellant has proved on a balance of probabilities that there was such a contract between her and the payer.

[22] Finally, this conclusion means that I do not have to deal with the application of paragraph 3(2)(c) of the Act, with respect to which submissions were made by counsel for the appellant and the agent for the respondent. Although it is not necessary for me to analyse that issue here, I will simply state in closing that I do not think the appeal could have succeeded under that provision if I had been satisfied that there was a genuine contract of service between the appellant and the payer during the periods at issue. It does not seem to me that it can be concluded from all of the circumstances I have referred to concerning the appellant’s performance of her work that the appellant and the payer would have entered into a substantially similar contract if they had been dealing with each other at arm’s length.

[23] For these reasons, the appeal is dismissed.

Signed at Ottawa, Canada, this 5th day of January 1998.

“P.R. Dussault”

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 16th day of November 1998.

Kathryn Barnard, Revisor

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