Date: 20000613
Docket: 98-911-UI
BETWEEN:
JEAN-GUY LAGACÉ,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Garon, C.J.T.C.C.
[1] This is an appeal under section 103 of the Employment Insurance Act from a decision of June 15, 1998, finding that the appellant did not hold insurable employment with Scierie Mobile Bois Plus Inc. ("the payer") from April 1 to November 21, 1997. In support of his decision, the Minister of National Revenue argued that the appellant controlled more than 40 percent of the payer's voting shares.
[2] The allegations of fact on which the Minister of National Revenue relied in finding that the appellant's employment during the period at issue was not insurable are set out in paragraph 5 of the Reply to the Notice of Appeal. That paragraph reads as follows:
[TRANSLATION]
(a) The payer, which was incorporated on or about March 21, 1997, operates a wood-sawing business using two mobile saws.
(b) The payer saws wood mainly for individuals but also for companies.
(c) The appellant and Gaston Dionne, who are half-brothers (same mother), had formed a partnership in May 1995 to run a wood-sawing business under the firm name "Scierie Mobile Bois + Enr."
(d) At that time, the partnership owned just one mobile saw and, since both partners worked for third parties, they hired a worker to saw wood.
(e) Before the payer was incorporated, the appellant and Mr. Dionne were equal partners.
(f) The appellant lost his job in early 1997 and decided with Mr. Dionne to purchase a second mobile saw and to incorporate their partnership.
(g) At the time of its application to the Ministère des Institutions financières (Department of Financial Institutions), the payer issued three voting common shares to the following individuals: Gaston Dionne, the appellant and Joseph-Marc Laforest.
(h) The only share certificates issued and listed in the payer's share ledger reflect the situation as described above.
(i) When the payer was incorporated, there was a rollover of the assets and holdings of the partnership of the appellant and Mr. Dionne.
(j) The rollover occurred according to the same proportion as that of each partner's holdings, that is, 50 percent each, whereas the payer's voting shares were allegedly allotted as follows:
Gaston Dionne, 59 percent;
the appellant, 40 percent;
Joseph-Marc Laforest, 1 percent.
(k) Mr. Laforest is a regional development adviser for the Government of Quebec; he did not invest in the payer's business and is not involved in operating it; he allegedly received his share in the payer free of charge as a symbolic gesture.
(l) For the 1997 season, the payer hired the appellant and his son, Jean-François Lagacé, to saw wood.
(m) The appellant operated one of the payer's two mobile saws and took care of adjustments and repairs to the payer's equipment.
(n) The appellant was allegedly paid a fixed amount of $600 gross per week for 40 hours of work, while his son was paid $15 an hour to saw wood.
(o) The appellant submitted a record of employment showing 1,120 hours of work, which represents 28 weeks at 40 hours a week, whereas the period at issue covers 34 weeks and the appellant worked every week but one during that period.
(p) The appellant and Mr. Dionne each had de facto control of 50 percent of the payer's voting shares.
[3] The appellant, through his counsel, admitted the allegations set out in subparagraphs (a), (b), (c), (d), (e), (g), (h), (l), (m) and (n) of paragraph 5 of the Reply to the Notice of Appeal. The allegations in subparagraphs (f), (i), (j), (k), (o) and (p) of the said paragraph 5 were denied.
[4] Testimony was given at the hearing by the appellant himself and Gaston Dionne at the appellant's request. Lyne Soucy, a Revenue Canada appeals officer, was the only person who testified for the respondent.
[5] In his testimony, Mr. Dionne, a forestry technician, said that he had been operating a wood-sawing business since May 1995 and that he used mobile saws in that business.
[6] Mr. Dionne stated that a partnership contract signed before a notary—a copy of which was filed at the hearing—had been entered into by him and the appellant on May 5, 1995. Article 1 of the contract states that the appellant and Mr. Dionne [TRANSLATION] "are forming a civil partnership to share the income and expenses resulting from the operation of a wood-processing business and everything related thereto". That agreement provides, inter alia, for the equal sharing of income between the two partners.
[7] Another contract between the same two individuals on the same date, this one under private writing, refers to the purchase of equipment for $30,000 on February 24, 1995, and to a $30,000 loan obtained by the two partners from the Caisse populaire de Rimouski for that purchase. The same agreement also states that Mr. Dionne had given the Caisse populaire de Rimouski a mortgage on his home as security for the loan; the mortgage document in favour of the Caisse populaire is dated March 17, 1995. The second contract dated May 5, 1995, also provides that, if the Caisse populaire de Rimouski enforced its security, the appellant would acknowledge Mr. Dionne's [TRANSLATION] "right to claim from him half of the balance remaining due at that time on the said loan of thirty thousand dollars ($30,000)".
[8] Two loan agreements, each involving a loan amount of $12,500, in which Scierie Mobile Bois Plus Enr. and Scierie Mobile Bois Plus Inc. (Co. to be formed) are designated as [TRANSLATION] "the Borrower" were signed on March 27, 1997. The wording [TRANSLATION] "Scierie Mobile Bois Plus Inc. (Co. to be formed)" is used to refer to the payer, which was created the same day. In one of the agreements, hereinafter referred to as "the first agreement", the Société d'aide au développement de Collectivités de la Neigette Inc. is described as [TRANSLATION] "the Lender". In the other, "the second agreement", the Société locale d'Investissement dans le développement de l'emploi (Solide) de la MRC de Rimouski-Neigette ("Solide") is the lender.[1] Articles 1.2 and 1.3 of the first agreement state that the capital stock of the corporation being formed was made up of 10,000 class A shares and that the appellant and Mr. Dionne owned 40 and 60 percent of the shares, respectively. In article 17 of the second loan agreement, Mr. Dionne and the appellant confirmed that they held 6,000 and 4,000 shares, respectively, of the capital stock of Scierie Mobile Bois Plus Inc. and [TRANSLATION] "that they have fully paid for the shares they hold in cash".
[9] According to the same witness, the business was incorporated because that type of operation offered greater possibilities for obtaining contracts. A second mobile saw was purchased for $20,000 in March 1997 using the $12,500 loan granted by Solide under the second loan agreement referred to in the preceding paragraph.
[10] One of Mr. Dionne's friends, Joseph-Marc Laforest, who has a bachelor's degree in administration, handled the necessary procedures for forming the corporation.
[11] According to the minutes of March 16, 1997 (Exhibit A-3), a [TRANSLATION] "first meeting of the shareholders" of the payer—as the meeting was referred to in the minutes—was held at which Mr. Dionne, the appellant and Mr. Laforest were present. According to Mr. Dionne, the shares were issued on March 16, 1997. He was adamant that 10,000 shares were not issued. He explained that it had been decided at the outset that the shares would be divided up on a 60/40 basis given that he was taking on certain risks with respect to a $15,000 debt.[2] In this regard, he added that the partnership agreement became invalid as soon as the payer was incorporated. He also said that he managed the payer's business without being paid for it. During that "first meeting of the shareholders", Mr. Laforest allegedly asked to be given one percent of the shares. A share certificate was not issued to Mr. Laforest until some unspecified later date. Mr. Laforest also acted as the business's adviser.
[12] On cross-examination, Mr. Dionne said that three common shares were issued and that three share certificates, each representing one share, were completed and delivered. During cross-examination, it was noted that the resolution of the payer's board of directors does not indicate the number of shares held by the appellant, Mr. Dionne and Mr. Laforest. The payer's balance sheet as at April 1, 1997, does not state that shares were issued and money was paid to purchase them. Mr. Dionne provided some explanation concerning the change in his and the appellant's percentages of ownership of the payer's capital stock in comparison with the percentage of their respective interests in the partnership they had formed on May 5, 1995.
[13] Mr. Dionne also said that shareholders' meetings were held in 1998 and 1999 at which he, the appellant and Mr. Laforest were present. He insisted that the allotment of shares is shown in the payer's books at the date of March 16, 1997.
[14] Mr. Dionne explained his role in the payer's operations. He was in charge of management and work planning. He supervised the work on a day-to-day basis. He took care of the corporation's equipment needs. He was involved in some aspects of the business's accounting. He also used the services of Dolores Desrosiers, who did some accounting work. Mr. Dionne was not paid by the payer for the services he provided to it.
[15] According to Mr. Dionne, the appellant's main duty was [TRANSLATION] "sawing on the sawmill". The appellant was not the only employee. There was another employee, the appellant's son. The appellant was paid $600.00 a week. The payer's employees, including the appellant, were paid $0.10 a kilometre for the use of their vehicles to get to customers' premises.
[16] I will now look at the evidence given by the appellant.
[17] During his testimony, the appellant described himself as a saw operator. He had previously worked as a civil-engineering technician for a firm of consulting engineers for about 11 years; that firm had to lay him off because it had not obtained enough contracts. He began working for the payer on April 1, 1997.
[18] In terms of his day-to-day work, he explained that Mr. Dionne contacted him by telephone the day before concerning the work he was to do the next day. He then went with his saw to do the work that had been determined. It could sometimes happen that he had to draw up invoices for the work he had performed and give them to customers. Some customers sent their cheques directly to Mr. Dionne. The appellant also handled the regular maintenance of the machine, did oil changes and made minor repairs to the machine on customers' premises or at home.
[19] Lyne Soucy, an appeals officer, testified briefly for the respondent. She provided some information about the investigation she had conducted. Her CPT-110 report was filed at the hearing.
[20] The documentary evidence, specifically the third page of a document (Exhibit A-3) entitled [TRANSLATION] "First meeting of the shareholders of Scierie Mobile Bois Plus Inc.", which was held on March 16, 1997, shows that it was [TRANSLATION] "agreed and voted that the company issue three (3) common shares, with each shareholder purchasing one share for $2.46".
[21] On the fifth page of the same document concerning the "first meeting" of March 16, 1997, the following is stated under the heading [TRANSLATION] "Share purchase proposal (Montréal)":
[TRANSLATION]
Subject: Allotment of shares: Gaston Dionne 59%, Jean-Guy Lagacé 40%, ADMI INC., a business represented by Joseph Marc Laforest, 1%.
Conclusions: The two majority shareholders see the role of ADMI (Administration de marque) Inc. as being that of an adviser to the business.
Action to be taken: Division vote was unanimous.
[22] Under the heading [TRANSLATION] "Resolutions of the board of directors" of the payer in a document dated April 16, 1997 (also in Exhibit A-3), I note the following:
[TRANSLATION]
SHARE SUBSCRIPTIONS AND ISSUES
It is resolved:
to accept the following subscription(s) and to issue the appropriate share certificates:
|
Name of subscriber/ shareholder |
Number and class of shares |
Price per share |
Certificate no. |
|
Gaston Dionne |
59% A |
2.46 |
|
|
Jean-Guy Lagacé |
40% A |
2.46 |
|
|
Marc Laforest (Admi) |
1% A |
2.46 |
The Company having received payment in full for the said shares, those shares are declared to be fully paid.
[23] Finally, another resolution of the payer dated April 16, 1997 (Exhibit I-2) reads as follows:
[TRANSLATION]
The company's shareholders unanimously issue 10,000 common shares. Two shares are distributed at the price of $2.46 based on the calculation done on March 16, 1997 (document placed in the company's book), with each shareholder purchasing and paying for one share.
The parties agree to roll over the property of the registered business into the incorporated business without, however, paying any GST or QST.
It is unanimously agreed that Gaston DIONNE shall act as an officer of the company, that is, as President. Jean-Guy LAGACÉ shall play no role in the day-to-day running of the business so that, as an employee, his role will be subordinate to that of the officers and managers.
Gaston Dionne
(Signature)
Jean-Guy Lagacé
(Signature)
J. Marc Laforest
(Signature)
Analysis
[24] After the close of the evidence, counsel for the respondent told the Court that the respondent was no longer disputing the fact that the appellant had a contract of service with the payer. The only issue therefore involves the application of paragraph 5(2)(b) of the Employment Insurance Act, which states that insurable employment does not include "the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation".
[25] It follows that the appellant's employment was insurable if, as he claims, he held only 40 percent of the payer's shares during the period at issue. The respondent's position is that the appellant and Mr. Dionne each held 50 percent of the shares of the payer's capital stock during the relevant period.
[26] It is not in dispute that the payer was incorporated on March 21, 1997, under Part IA of the Quebec Companies Act, as can be seen from the certificate of incorporation adduced in evidence. There is no doubt that the payer began to exist as a corporation from the date indicated on that certificate, namely March 21, 1997. This is spelled out in section 123.16 of the Quebec Companies Act, c. C-38, Revised Statutes of Quebec, which reads as follows:
From the date indicated in the certificate of incorporation, the company is a corporation within the meaning of the Civil Code of Lower Canada.
Note should also be taken of article 299 of the Civil Code of Québec, which provides as follows:
Legal persons are constituted in accordance with the juridical forms provided by law, and sometimes directly by law.
Legal persons exist from the coming into force of the Act or from the time prescribed therein if they are established in the public interest or if they are constituted directly by law or through the effect of law; otherwise, they exist from the time provided for in the Acts that are applicable to them.
[27] I agree with counsel for the respondent that the minutes of March 16, 1997, showing that the appellant, Mr. Dionne and Mr. Laforest each owned one share could not have any legal effect. The payer did not exist on March 16, 1997, and could not issue or distribute any shares. Nor could anyone be authorized to sign the share certificates for the payer, since it had not yet been incorporated. I am not forgetting about section 123.7 of the Companies Act, which provides that deeds performed in a company's interest may be ratified, provided that such ratification be carried out by the company within 90 days after its incorporation. I doubt that that provision could apply, for instance, to the issuing and allotment of shares. In any event, no evidence of ratification was adduced. The share certificates dated March 16, 1997 (Exhibit I-1)—that is, five days before the payer was incorporated—showing that the appellant, Mr. Dionne and Mr. Laforest each held one share in the payer are not valid.
[28] I attach no importance to the following statement in the two loan agreements dated March 27, 1997:
[TRANSLATION]
together they hold all the voting shares in the Borrower, which gives them control of all the decisions to be made by the Borrower's shareholders.
This statement does not specify, inter alia, the percentage of shares held by the appellant and Mr. Dionne.
[29] In his factum of July 1999, the appellant submits that the evidence shows that the parties clearly intended that he, Mr. Dionne and Mr. Laforest own 40, 59 and 1 percent, respectively, of the shares of the payer's capital stock.
[30] For the purposes of paragraph 5(2)(b) of the Employment Insurance Act, I consider it absolutely essential, first of all, that the payer have validly issued and allotted shares. It will then be possible to determine, for example, whether the appellant, in the present case, controlled more than 40 percent of the payer's voting shares. It is not just a matter of what the parties intended. See the decision rendered on June 18, 1994, by Judge Dussault in Abraham Weitz and Morton Cornblit v. The Minister of National Revenue, [1994] T.C.J. No. 20 (QL), which was affirmed by the Federal Court of Appeal, 95 DTC 5031. The payer would have had to take certain concrete actions. It is not even possible to determine the precise number of shares that Mr. Dionne, the appellant and Mr. Laforest held at the relevant time. How then can the percentage of shares that the appellant or Mr. Dionne had in the payer's capital stock be determined?
[31] As regards the issuing of shares, it is appropriate to recall the provisions of section 123.17 of the Companies Act (Q.C.A.), which reads as follows:
After the company is incorporated, the directors shall hold an organization meeting at which they must issue at least one share.
[32] The following comments by André Morisset and Jean Turgeon in Droit corporatif canadien et québécois, vol. 1 (Les publications CCH/FM Ltée), at pages 741-42, provide a good description of the legal situation resulting from a breach of the obligation to issue a share after the company is incorporated:
[TRANSLATION]
The directors' obligation to issue at least one share can be explained by the need to have at least one shareholder in the company so that that shareholder can elect the board of directors, hold shareholder meetings, receive the dividends paid by the company, share in the remainder of the company's assets when it is liquidated, and so on. In the case of a company with just one director, a delay in holding the organization meeting and the failure to issue at least one share may lead to an inextricable situation. Thus, if the director dies or resigns without having issued a share, it will be impossible to appoint another director (because there is no shareholder!), and the company's property, if any, will have to fall to the Crown because no one will have the shareholder status needed to receive the said property when the company is dissolved.
[33] The resolution of the payer's board of directors dated April 16, 1997, showing that the payer accepted the subscriptions of the appellant, Mr. Dionne and Mr. Laforest is not valid either, since it does not indicate the number of shares issued. It indicates only a percentage of shares. As noted by Martel in La compagnie au Québec, Volume 1 - Les aspects juridiques (looseleaf edition updated to October 1, 1999), at page 14-14:
[TRANSLATION]
The issuing and allotment of shares generally involve three operations: a resolution by the board of directors ordering the issue, entries in the company's share ledger confirming the issue and, finally, the delivery of share certificates, which are "portable proof" of the issue and which facilitate the "transferability" of the shares.
It must also be recalled that, according to the same author, fractions of shares cannot validly be issued under the Quebec Companies Act. The following is stated at page 14-19 of the above-mentioned publication:
[TRANSLATION]
The company's capital stock is divided into units, namely shares. Those units are not in themselves divisible, since they are basic units. Not only is the issuing of fractions of shares not authorized anywhere in the Act, but the rules of one vote per share, of liability being limited to the amount not paid on the share and of full payment of the par value of paid-up shares implicitly prohibit such issues.
[Footnotes omitted.]
[34] In paragraph 14 of her factum, counsel for the respondent suggests the following:
[TRANSLATION]
In the absence of any entry in the share ledger or of valid share certificates, the respondent submits that the appellant and Gaston Dionne are the only true shareholders and that they each hold 50 percent of the payer's shares, which were issued in consideration of their contribution of property resulting from the rollover of the partnership's assets into the company.
[35] I cannot see under which legal rule the respondent can infer that the appellant and Mr. Dionne each owned 50 percent of the shares of the payer's capital stock. The contribution of property to the payer by a shareholder or future shareholder does not automatically determine the percentage of shares. What is involved is not a partnership agreement but a contract to purchase shares. In the present case, shares were quite simply not issued or allotted. It is therefore impossible to determine the percentage of shares allocated to the appellant and Mr. Dionne.
[36] Moreover, in the instant case, having regard to all the circumstances, it is not at all implausible, based on the intentions of the appellant and Mr. Dionne, that the appellant was to own only 40 percent of the shares at a time to be specified. Mr. Dionne had assumed greater risks than the appellant by mortgaging his home to secure a loan taken out by the partnership that existed prior to the incorporation of the payer. In addition, he was not paid for his work as a manager and in particular as the person in charge of the payer's operations. Although I do not consider the comments I have just made in this paragraph to be necessary for the purpose of deciding the question at issue in this appeal, they do seem to me to be of some relevance in understanding the attitude of the appellant and Mr. Dionne as regards the percentage of the payer's capital stock to be allocated to each of them.
[37] I note that, in subparagraph 5(g) of the Reply to the Notice of Appeal, the respondent alleges that three common shares were issued by the payer "[a]t the time of its application to the Ministère des Institutions financières". That allegation was admitted by the appellant. The validity of that share issue was not then disputed by the respondent. In any event, even if the allegation is correct, it does not support the respondent's position.
[38] I therefore conclude that the payer did not validly issue and allot shares. Accordingly, I cannot conclude that the appellant held more than 40 percent of the payer's shares during the period at issue. Assuming that legal effect can be given to the resolutions of March 16 and April 16, 1997, the appellant could have held at most only 40 percent of the shares of the payer's capital stock.
[39] For these reasons, the appellant's employment was insurable during the period at issue.
Signed at Ottawa, Canada, this 13th day of June 2000.
"Alban Garon"
C.J.T.C.C.
Translation certified true on this 30th day of April 2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
98-911(UI)
BETWEEN:
JEAN-GUY LAGACÉ,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Appeal heard on June 7, 1999, at Rivière-du-Loup, Quebec, by
the Honourable Chief Judge Alban Garon
Appearances
Counsel for the Appellant: Daniel Longpré
Counsel for the Respondent: Suzanne Morin
JUDGMENT
It is ordered that the determination of the question be reversed. The appellant's employment for the period from April 1 to November 21, 1997, is insurable.
Signed at Ottawa, Canada, this 13th day of June 2000.
|
"Alban Garon" |
C.J.T.C.C.
Translation certified true
on this 30th day of April 2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
[1] Although the word [TRANSLATION] "draft" appears at the top of the first page of the second loan agreement, the agreement is signed by the parties concerned and was treated by them as an agreement and not a draft agreement.
[2] Mr. Dionne must have been referring to the unpaid amount on the $30,000 loan taken out on March 17, 1995.