Tax Court of Canada Judgments

Date: 19981029

Docket: 96-2155-UI

BETWEEN:

2993678 CANADA INC.,

O/A CHELSEA FRESHMART,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

DEAN PRONOVOST,

Intervener.

Reasons for Judgment

Rip, J.T.C.C.

[1]            The appellant, 2993678 Canada Inc., which operates a grocery business under the firm name Chelsea Freshmart ("Chelsea Freshmart"), is objecting to assessments made by the Minister of National Revenue ("Minister") on October 24, 1995, in respect of unemployment insurance premiums for the period from March 2 to May 29, 1994. The Minister determined that Dean Pronovost's employment with Chelsea Freshmart during the relevant period was insurable employment pursuant to paragraph 3(1)(a) of the Unemployment Insurance Act ("Act"); in other words, Mr. Pronovost worked for Chelsea Freshmart under a contract of service. The appellant denies that allegation.

[2]            John Jauvin, the appellant's majority shareholder and a businessman with over 20 years' experience, testified on behalf of the appellant. He is involved mainly in financing young entrepreneurs, helping them start businesses and advising them on their affairs. He explained that his practice is to obtain small business loans for the entrepreneurs who come to him and then to provide them with financing for the rest of what they need. These entrepreneurs generally incorporate a company through which they engage in their business activities. Mr. Jauvin's financing activities are carried on by a numbered company, 102118 Canada Inc., operating under the firm name Laurier Financing.[1] That company also owns a shopping centre, Chelsea Plaza ("Plaza"), in Aylmer, Quebec, in which the premises of the appellant, Chelsea Freshmart, are located.

[3]            A Mr. Chartrand used to operate a grocery store in the Plaza. Mr. Jauvin had loaned him money to start the business. Mr. Chartrand went bankrupt and abandoned the grocery store. Mr. Jauvin, or Laurier Financing, purchased all the property, including equipment located on the premises, left behind by Mr. Chartrand.

[4]            Mr. Jauvin also testified that he had no experience in the grocery business and that he purchased all the grocery store's equipment so that he could sublet the premises to someone else. He then put the grocery store premises up for rent. The equipment was to be included in the rent. Dean Pronovost expressed an interest in renting the premises and opening a grocery store. He had acquired experience as a grocer at Loeb and Métro. Mr. Jauvin decided to help him by financing the grocery store.

[5]            Mr. Pronovost incorporated the appellant. He was the president and the first director of the corporation. Mr. Pronovost admitted that he initially held 100 percent of the appellant's shares.

[6]            Mr. Pronovost and Mr. Jauvin had agreed that Mr. Pronovost would set up a corporation to operate the grocery store while Mr. Jauvin would try to obtain a small business loan from the government. However, Mr. Pronovost was unable to obtain the loan. Mr. Jauvin therefore obtained a small business loan for Chelsea Freshmart from a bank. He secured the loan himself. According to Mr. Pronovost, Mr. Jauvin asked him to say that he was the owner of the grocery store because it was good for the store's image. Mr. Pronovost said moreover that he intended to purchase the store if it was profitable.

[7]            There are four businesses in the Chelsea Plaza: a bank, a restaurant, a hardware store and a grocery store. Mr. Jauvin explained that the restaurant was also financed on terms similar to those for the grocery store. Mr. Jauvin provided all the equipment and inventory. The restaurant was to belong to the lessee once the loan was repaid to Mr. Jauvin. The same financing agreement was entered into with the hardware store. However, Mr. Jauvin stated that he does not hold any shares in the corporations that operate the hardware store and the restaurant.

[8]            For the purposes of the loan, Mr. Jauvin became the majority shareholder in Chelsea Freshmart with 95 percent of its shares. He explained that the reason he held these shares was that the terms of the loan required him to be the corporation's majority shareholder. At the hearing, Mr. Jauvin said that he held 95 percent of Chelsea Freshmart's shares, but he testified that he was holding them in trust for Mr. Pronovost. In a loan agreement dated February 1, 1994, between Laurier Financing, the lender, Chelsea Freshmart, the borrower, and Mr. Pronovost, the surety, the borrower and the surety acknowledged that the lender was loaning the borrower $230,000. On the same date, Mr. and Mrs. Pronovost signed a note in favour of Laurier Financing for a $220,000 loan. To secure repayment of the loan, all the surety's shares in Chelsea Freshmart were pledged to the lender in trust until the loan had been repaid in full. If the borrower defaulted on the payment of interest or on any other obligation, the shares would be transferred to the lender.

[9]            When the small business loan was approved, Laurier Financing was repaid. At that time, Chelsea Freshmart owed the bank $200,000 on the small business loan. Mr. Jauvin continued to hold shares in Chelsea Freshmart. Mr. Pronovost began working at the grocery store.

[12]          The grocery store's equipment still belongs to the Plaza and has not been transferred to Chelsea Freshmart. That equipment remains the property of Laurier Financing.

[10]          The appellant filed an agreement dated February 16, 1994, in which the parties — Laurier Financing and Chelsea Freshmart — stated that Laurier Financing was leasing all the equipment in the grocery store to Chelsea Freshmart. The parties also stated that Mr. Jauvin was transferring to Mr. Pronovost all his right, title and interest in Chelsea Freshmart in respect of the business of the same name. The agreement referred to a copy of the lease appended thereto. However, no lease was appended to the copy of the agreement filed in Court. Unfortunately, the agreement was signed only by Laurier Financing and Mr. Jauvin in his personal capacity. Neither Chelsea Freshmart nor Mr. Pronovost signed it.

[11]          According to Mr. Jauvin, Mr. Pronovost never signed the agreement because it was prepared so that a liquor permit could be obtained quickly from the Régie des alcools du Québec. Mr. Jauvin therefore signed the agreement and sent it to Mr. Pronovost to be signed by him. The application for the liquor permit (Exhibit A-4) stated that the person in charge of running the business was Mr. Pronovost. It was likewise stated that Mr. Pronovost was the sole shareholder, with 100 percent of Chelsea Freshmart's shares.

[13]          The application for the liquor permit was prepared by Mrs. Pronovost, Mr. Pronovost's wife, who was responsible for the grocery store's accounting. She had called the Régie des alcools du Québec, which had told her that the application had to be made by the person holding 100 percent of the shares. She thereupon called Mr. Jauvin, who told her to put down Mr. Pronovost as the sole shareholder and to go and see a notary. He said that he would take care of the rest.

[14]          Moreover, Mr. Pronovost testified that he had no knowledge of the loan agreement between Chelsea Freshmart and Laurier Financing or of the agreement recording the transfer of Mr. Jauvin's shares to him. Mr. Pronovost said that it was quite natural for him not to recognize the exhibits in question, since he had confidence in Mr. Jauvin and trusted his word.

[15]          An accountant's report on Chelsea Freshmart's income was also sent to Mr. Jauvin monthly. According to Mr. Jauvin, Mr. Pronovost did not take his advice and lost $20,000 a month as a result. As well, Mr. Jauvin had to pay additional money to make up for the losses each month.

[16]          Mr. Jauvin spent several months of the winter in Florida. When he got back, he decided that Mr. Pronovost would have to work with two other employees of the grocery store and that the three of them would be equal owners of the store. Mr. Pronovost refused and left the business. Since Mr. Jauvin was holding Chelsea Freshmart's shares as security, he took over the business. He found two other young entrepreneurs to run the grocery store, which he financed for them also.

[17]          Mr. Pronovost listed the duties he performed at Chelsea Freshmart and the other grocery stores where he had worked as an employee manager. Basically, he said that his work at Chelsea Freshmart was the same as it had been at Loeb and Métro. He did not have a fixed schedule.

[18]          According to Mr. Jauvin, Mr. Pronovost and his wife set their own salaries. He had suggested to them that these were too high. Likewise, in the monthly report on Chelsea Freshmart's operations (Exhibit I-2), Mr. Jauvin wrote Mr. Pronovost a note saying that Mr. Pronovost had no choice but to reduce expenses if the business was to break even. In this regard, Mr. Jauvin explained that it was his duty to keep an eye on and advise the Pronovosts.

[19]          Mr. Jauvin testified that Mr. Pronovost did not invest anything in the business during the entire period at issue. However, he did say that if the business had been profitable, the profits would have been Mr. Pronovost's. According to Mr. Jauvin, all that mattered was that Mr. Pronovost repay him the loan. In that connection, Mr. Pronovost admitted that he had not invested anything in the grocery store, but he said that he would not have been entitled to the profits if the store had generated any.

[20]          Decisions on expenses were always made by Mr. Jauvin. Mr. Pronovost added that he had to ask Mr. Jauvin for permission to take holidays. Mr. Jauvin further claimed that he never signed any documents, cheques or orders for the grocery store and did not know about the employees' payroll deductions or the taxes remitted.

[21]          Renovations to the store were paid for by Chelsea Freshmart. Since he had no money, Mr. Pronovost always informed Mr. Jauvin of any intention he had to make changes to the store.

[22]          Mr. Jauvin did not go to the store often, since he was in Florida the first six months it was open. However, he called Mr. Pronovost frequently and came to the store regularly once he got back from Florida. Mr. Jauvin said that the only reason he called from Florida was to find out the monthly figures for the store.

[23]          Mr. Jauvin insisted that his interest in the business was based on the fact that he was the one financing it. However, he said that he would not have become involved if the payments had been made and the business had been profitable. On the other hand, Mrs. Pronovost testified that Mr. Jauvin was at the grocery store fairly often. At first, it was almost every day. When Mr. Jauvin left for Florida, he called regularly, sometimes twice a day. She also said that she had pointed out to Mr. Jauvin several times that she and Mr. Pronovost were just employees.

[24]          A newspaper article dated July 3, 1995, sought to correct a mistake in an earlier newspaper article that had described Mr. Pronovost as the owner of Chelsea Freshmart. It stated that the owner had always been Mr. Jauvin. According to Mr. Jauvin, the Pronovosts were the ones who spoke to the newspapers to make sure they could be eligible for unemployment insurance. Mrs. Pronovost said the opposite when she testified, namely that it was Mr. Jauvin who had demanded the correction. She added that the newspaper publisher had told her that the correction had been requested by Mr. Jauvin.

[25]          Finally, counsel for the respondent filed a letter dated May 25, 1995, from Mr. Jauvin to a Mr. Whelan of National Grocers. In the letter, Mr. Jauvin offered to sell all his shares in Chelsea Freshmart to National Grocers and referred to Mr. Pronovost as the manager. However, there was a discrepancy in the letter: it stated that the Chelsea Freshmart grocery store was owned by 2957159 Canada Inc. and not by 2993678 Canada Inc., as alleged at trial and in the pleadings. The identity of 2957159 was not disclosed during the examination. Nevertheless, in his testimony, Mr. Jauvin explained that it was Mr. Pronovost who had approached Mr. Whelan. He (Mr. Jauvin) wrote the letter because he was the one who held Chelsea Freshmart's shares. In short, he insisted that Mr. Pronovost was always the true owner.

[26]          Ms. Faucher is the appellant Chelsea Freshmart's accountant. She reported to Mrs. Pronovost and was paid by Mr. Pronovost. According to her, Mr. Pronovost owned Chelsea Freshmart in 1994. She did not meet Mr. Jauvin until June 1994. It was the Pronovosts who hired staff. She received no instructions from Mr. Jauvin. Mrs. Pronovost was also the one who told her that Mr. Pronovost did not have to pay unemployment insurance premiums because he was the owner. It was not until February 1995 that she noticed that Mr. Pronovost's take-home pay had changed. She asked Mrs. Pronovost about it, and Mrs. Pronovost told her that Mr. Pronovost had started paying unemployment insurance premiums in case things went bad. Mrs. Pronovost was already making unemployment insurance contributions.

[27]          According to Mr. Pronovost, Mr. Jauvin had told him that he did not have to make unemployment insurance contributions because he owned five percent of the company's shares. It was not until the end of the year that he approached his accountant, who told him that, with only five percent of the shares, he had to make unemployment insurance contributions. It would seem that his accountant told him that a bill would be sent to him by the government for the earlier premiums he had not paid. Mr. Pronovost did not consider it important to inform Mr. Jauvin of this problem. He admitted that things were not going well and that the payment of premiums was merely a security blanket. Likewise, he said that his salary was not dependent on the profitability of the grocery store.

[28]          Nicole Perrier, the head cashier at Chelsea Freshmart, testified that she continued working for the new owners when Mr. Pronovost left the grocery store. They told her that they were going to purchase the store. Even when Chelsea Freshmart changed owners, Mr. Jauvin still came to the store quite often.

[29]          The issue in the case at bar is as follows: did Mr. Pronovost hold insurable employment within the meaning of paragraph 3(1)(a) of the Act?[2]

[30]          The two main witnesses, Mr. Jauvin and Mr. Pronovost, gave their versions of the situation as it stood during the relevant period. Unfortunately, in this case, they gave very different accounts. My decision is therefore based essentially on the testimony that seems the most credible, or perhaps the least lacking in credibility.

[31]          In Wiebe Door Services v. M.N.R., [1986] 3 F.C. 553, 87 DTC 5025, the Federal Court of Appeal set out the tests that apply in determining whether an employer-employee relationship exists. In fact, it adopted in principle the test laid down by Lord Wright in Montreal v. Montreal Locomotive Works Ltd. et al., [1947] 1 D.L.R. 161. Lord Wright stated the following at p. 169:

In earlier cases a single test, such as the presence or absence of control, was often relied on to determine whether the case was one of master and servant, mostly in order to decide issues of tortious liability on the part of the master or superior. In the more complex conditions of modern industry, more complicated tests have often to be applied. It has been suggested that a fourfold test would in some cases be more appropriate, a complex involving (1) control; (2) ownership of the tools; (3) chance of profit; (4) risk of loss.

[32]          MacGuigan J. interpreted Lord Wright's test not as a fourfold test but rather as a four-in-one test, with emphasis always retained on what Lord Wright called "[t]he combined force of the whole scheme of operations", even while the usefulness of the four subordinate criteria is acknowledged.

[33]          MacGuigan J. ended his ratio by referring, at p. 5030, to what he considered the best synthesis, namely that of Cooke J. in Market Investigations, Ltd. v. Minister of Social Security:[3]

The observations of Lord Wright, of Denning, L.J., and of the judges of the Supreme Court in the U.S.A. suggest that the fundamental test to be applied is this: "Is the person who has engaged himself to perform these services performing them as a person in business on his own account?". If the answer to that question is "yes", then the contract is a contract for services. If the answer is "no" then the contract is a contract of service. No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors, which may be of importance, are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task. The application of the general test may be easier in a case where the person who engages himself to perform the services does so in the course of an already established business of his own; but this factor is not decisive, and a person who engages himself to perform services for another may well be an independent contractor even though he has not entered into the contract in the course of an existing business carried on by him.

[34]          Thus, it is well settled that "the whole of the various elements which constitute the relationship between the parties"[4] must be examined.

[35]          In the case at bar, counsel for the appellant referred to the Federal Court of Appeal's decision in Roland Navennec v. M.N.R., [1992] F.C.J. 1005, in support of her argument. In that case, the appellant was the owner of a lodge business. He set up a corporation to carry on his activities. His son was the president of the corporation and the appellant was the vice-president. The appellant also sold shares of his to the other members of his family so as to hold only 20 percent of the company's shares and thereby meet unemployment insurance requirements. The Minister therefore argued that there was no genuine contract of employment between the appellant and the corporation. The Federal Court of Appeal, per Desjardins J.A., stated the following at p. 11:

It is true that in Stubart the question was whether a company could, for the avowed purpose of reducing its tax, conclude an agreement by which its future profits were transferred to a subsidiary in order to take advantage of the latter's loss carry-forward; but the rules are still applicable to the case at bar when it must be determined whether the applicant has, in short, arranged his affairs so as to be able to collect unemployment insurance benefits; and whether despite appearances he nevertheless remains the true owner of all his property, despite its sale to the company, and the sole holder of the shares despite their sale to his wife and sons.

[36]          Finally, at p. 12 of the judgment, Desjardins J.A. set out what she viewed as the real questions to be asked:

. . . but what matters is to establish whether by their agreements they did what they said they intended to do. Did the applicant in fact intend to make the company a family business or did he retain control of it? Did his wife and children in fact intend to pay off their promissory notes by the profits they received from the business or by other income? - or did they never intend to do so? Were these legal obligations clear and executory, or was it a façade?

[37]          In the instant case, the appellant tried to refute the Minister's allegations, made through Mr. Jauvin's testimony, that Mr. Pronovost was the real owner. However, I do not find the testimony of Mr. Jauvin and Mr. Pronovost very credible. It must accordingly be borne in mind that the burden of proof is always on the appellant. The appellant must prove that the Minister's allegations are false. In the case at bar, the appellant bears that burden in relying on Navennec, supra, and in arguing the existence of a façade. However, in view of the documents filed as evidence, the appellant has not discharged the burden in this case. In my opinion, the appellant has not been able to show that what was recorded in the documents did not reflect reality.

[38]          It is certainly true that a few of the documents filed by the appellant — including the loan agreement between Mr. Pronovost and Laurier Financing and the certificate of incorporation — seem to indicate that Mr. Pronovost was the owner of Chelsea Freshmart. Likewise, Mr. Pronovost even testified that his initial intention was in fact to become the owner of Chelsea Freshmart. However, an intention to become the owner is not conclusive in determining whether there is a contract of service.

[39]          The testimony of Mr. Jauvin and Mr. Pronovost shows that that initial intention changed. Despite his willingness, Mr. Pronovost did not have the financial means to start the business. He incorporated a company in his name. In his testimony, he explained that he tried to obtain a loan but failed, which meant that the grocery store would not open as planned. That was when Mr. Jauvin decided to open the store and employ Mr. Pronovost as its manager. Moreover, Mr. Pronovost transferred his shares to Mr. Jauvin. The explanation provided by Mr. Jauvin as to the necessity of his owning the majority of the shares is commendable, but was it necessary to transfer 95 percent of the shares and to leave Mr. Pronovost with just 5 percent? A reasonable man would never have accepted such a difference in their respective interests in the business.

[40]          The existence and validity of the loan agreement between Laurier Financing and Chelsea Freshmart are not in dispute. However, the circumstances surrounding the agreement must be examined. Mr. Jauvin testified that the loan in question was repaid in full by Chelsea Freshmart after the approval of the small business loan to it. The only loan remaining is that from the bank to Chelsea Freshmart, whose principal shareholder is Mr. Jauvin, who also stood surety for the loan.

[41]          All that remains, therefore, is to apply the four parts of the four-in-one test. As regards the first part, ownership of the tools, Mr. Pronovost had no rights in the grocery store's equipment. It is clear from Mr. Jauvin's testimony that the equipment belonged to Chelsea Plaza, which he also owns. Moreover, the renovations to the store were paid for by Mr. Jauvin.

[42]          The second part, the chance of profit, is somewhat relevant in this case, since the appellant never made a profit. Mr. Jauvin argued that the profits would have belonged to Mr. Pronovost if he had made the necessary loan payments. I cannot accept that argument, since no payments or attempts to pay were made. It seems to me that the usual and standard practice is for the company to make the payments to the creditor even if it is losing money. This would translate into a loss on the balance sheet. Another alternative is for the owner to pay the creditor out of his or her own money, even if it means receiving no salary. However, in the case at bar, Mr. Pronovost continued to receive his salary, and the payments alleged by Mr. Jauvin are not shown in the grocery store's balance sheet. Moreover, it would have been absurd for Mr. Pronovost to receive the profits if he never invested anything in the company.

[43]          As regards the third part, the risk of loss, Mr. Pronovost assumed no such risk. He did not spend a penny. When the grocery store incurred losses, Mr. Jauvin was the one who injected money into it. If the grocery store had closed, Mr. Jauvin would also have been liable for the loan made by the bank. In short, he assumed a substantial risk of loss, but that risk did not affect Mr. Pronovost at all.

[44]          Lastly, there is the question of control. In Gallant v. M.N.R., [1986] F.C.J. No. 330, Pratte J. stated the following for the Federal Court of Appeal:

In the Court's view, the first ground is based on the mistaken idea that there cannot be a contract of service unless the employer actually exercises close control over the way the employee does his work. The distinguishing feature of a contract of service is not the control actually exercised by the employer over his employee but the power the employer has to control the way the employee performs his duties. If this rule is applied to the circumstances of the case at bar, it is quite clear that the applicant was an employee and not a contractor. [Emphasis added.]

[45]          In the case at bar, the fact that Mr. Jauvin was on vacation in Florida during a large part of the period at issue and the fact that he was not at the store every day are of no help to the appellant's case. As Pratte J. so aptly put it, the control contemplated by the test set out in Montreal Locomotive Works, supra, refers not to close control but rather to the power an employer has over an employee. In short, I am satisfied that Mr. Jauvin exercised such power in the case at bar. Moreover, it is not in dispute that Mr. Jauvin went to the store and required Mr. Pronovost to manage it along with two other managers. The correspondence between Mr. Jauvin and Mr. Pronovost shows that Mr. Jauvin had control, since he oversaw the operation of the grocery store. As well, Mr. Pronovost had to ask Mr. Jauvin for permission to take holidays. Undoubtedly, Mr. Jauvin had control and Mr. Pronovost was merely a manager.

[46]          I do not give much weight to the testimony of Ms. Faucher and Ms. Perrier. They were employees of the appellant. Most of their testimony was hearsay. Mr. Pronovost was the manager of the grocery store, and I believe that that was why Ms. Faucher received her wages directly from him. Finally, Ms. Perrier was not in a position to be aware of the arrangements between Mr. Jauvin and the "new owners", so her testimony is of little relevance.

[47]          It is my opinion that Mr. Pronovost held insurable employment. There was a genuine contract of service, since there was a relationship of subordination, work was performed and remuneration was paid.[5]

[48]          Accordingly, the appeal is dismissed.

Signed at Ottawa, Canada, this 29th day of October 1998.

"Gerald J. Rip"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 11th day of May 2000.

Erich Klein, Revisor

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