2001-2146(EI)
BETWEEN:
EDWARD BERGEN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Appeal heard on common evidence with the appeal of Allan Bergen (2001-2147(EI)) on October 1, 2001 at Saskatoon, Saskatchewan, by
the Honourable Deputy Judge Michael H. Porter
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Elaine Lee
Raj Sharma (Student-at-Law)
JUDGMENT
The appeal is allowed and the decision of the Minister is vacated in accordance with the attached Reasons for Judgment.
Signed at Calgary, Alberta, this 5th day of February 2002.
|
"Michael H. Porter" |
D.J.T.C.C.
2001-2147(EI)
BETWEEN:
ALLAN BERGEN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Appeal heard on common evidence with the appeal of Edward Bergen (2001-2146(EI)) on October 1, 2001 at Saskatoon, Saskatchewan, by
the Honourable Deputy Judge Michael H. Porter
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Elaine Lee
Raj Sharma (Student-at-Law)
JUDGMENT
The appeal is allowed and the decision of the Minister is vacated in accordance with the attached Reasons for Judgment.
Signed at Calgary, Alberta, this 5th day of February 2002.
|
"Michael H. Porter" |
D.J.T.C.C.
Date: 20020205
Docket: 2001-2146(EI)
BETWEEN:
EDWARD BERGEN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
AND
Docket: 2001-2147(EI)
ALLAN BERGEN,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
PORTER, D.J.T.C.C.
[1] These appeals were heard on common evidence by consent of the parties on October 1, 2001 at Saskatoon, Saskatchewan.
[2] Both Appellants have appealed from the decisions of the Minister of National Revenue (the "Minister") dated May 2, 2001, that their respective employment with Peter Bergen Industries Inc. (the "Corporation") for the period of January 1, 1999 to November 16, 2000, was insurable under the Employment Insurance Act (the "EI Act") for the following reasons, which are the same in each case, namely:
You were engaged under a contract of service. Furthermore, the Minister is satisfied that a substantially similar contract of employment would have been entered into if you had been dealing with each other at arm's length. Therefore, you were engaged in insurable employment.
By implication, the Minister accepted that as related persons, the two Appellants were not considered under section 251 of the Income Tax Act to be dealing with each other at arm's length and then exercised his discretion under paragraph 5(3)(b) of the EI Act.
[3] The decisions were said to be issued pursuant to section 93 of the EI Act and were based on paragraphs 5(1)(a), 5(2)(i), and 5(3)(b) thereof.
[4] The material facts reveal that the Appellants, between them, controlled 44% of the issued shares in the Corporation through their own separate corporations, and that the remaining 56% of the shares were held by other family members through their respective corporations. The Corporation carried on a farm equipment manufacturing business. Thus, under the combined effect of section 251 of the Income Tax Act and paragraphs 5(2)(i) and 6(3)(a) of the EI Act, their employment, Edward as General Manager, and Allan as Director of Operations, was automatically excluded by law from insurable employment, subject to the exception contained in paragraph 5(3)(b) of the EI Act, whereby they are deemed to deal with each other at arm's length if the Minister is satisfied of the various criteria set out in that section and exercises his discretion to allow them through the gate, so to speak. This the Minister has purported to do and it is those decisions which are now in issue in these appeals.
[5] I made reference to the nature of the situation, arising in this matter in my decision in Crawford & Company Ltd. and M.N.R. (98-407(UI), 98-537(UI) and 98-538(UI)). I adopt what I said in that case as this is also an instance of the Minister purportedly exercising his discretion to include employment situations in the fold of the employment insurance scheme, when the law would otherwise, in the natural course of events, have excluded them.
[6] Usually, the Minister is being asked to open the door to persons claiming benefits on the basis that the exception should be applied. Appeals constantly come to the Court after the Minister has refused to exercise his discretion in their favour. In this case, however, as in the Crawford case (above), the Minister is proactively exercising his discretion to bring people into the fold of the employment insurance scheme, who would not otherwise by operation of the law, be there. Thus, as a result of the exercise of his discretion, they are being assessed for premiums. I am of the view that the law enables him to do that in the appropriate circumstances, but that such is hardly consistent with the intent of the amendments made to the Unemployment Insurance Act in 1990 when this discretion was first introduced. In the House of Commons André Plourde, MP speaking on behalf of the government of the day, at the time the amendments to the Unemployment Insurance Act were introduced, said that Bill C-21 had provisions to eliminate unfair restrictions on eligibility of benefits and:
All the changes proposed in Bill C-21 have essentially been designed to make that system more efficient and equitable and to meet the needs of workers. (see Hansard June 7, 1989 House of Commons Debates page 2722)
[7] Nonetheless, as a matter of strict interpretation of the law, I am satisfied that the legal capacity for the Minister to do this exists. It is not for the Court to get involved in policy matters, but I do point out the differences between the developing practice, as evidenced by these cases, and the apparent intention of Parliament with respect to this section, at the time it was introduced, namely to alleviate the hardship and inequity that would be faced by related people in genuine virtual arm's length relationships, who would otherwise be unable to participate in the scheme. There was never any suggestion that it was designed to provide a large net to the Minister to go fishing and haul in those he could catch by exercising his discretion, proactively.
[8] Furthermore, this interpretation of the section by the Minister seems inherently unfair, in that if these brothers were not related to the majority shareholders and the Minister had decided as a matter of fact that they were dealing with the Corporation at arm's length, they would have the right to appeal to this Court on a de novo basis. As it is, because they are related to the majority shareholders, although the basic law says that they are out of the scheme, due to the exercise of the discretion by the Minister they are brought into it against their wishes and have only a limited right of appeal; that is, their right to appeal is curtailed by the deference the Court must give to the Minister in the exercise of his discretion, in these circumstances.
[9] While that deference and the limited appeal rights seem perfectly logical and fair when people who are basically excluded by the law are trying to bring themselves within the terms of an exception, and the Minister is charged with the responsibility by Parliament to exercise his discretion, the same cannot be said when the Minister by the exercise of that discretion, proactively reaches out to bring people into the scheme in order to collect premiums, when they have no wish to be there.
The Law relating to a Review of the Minister's Decision
[10] In the scheme established under the EI Act, Parliament has made provision for certain employment to be insurable, leading to the payment of benefits upon termination, and other employment which is "not included" and thus carrying no benefits upon termination. Employment arrangements made between persons, who are not dealing with each other at arm's length, are categorized as not included. Brothers and corporations controlled by persons related to them are deemed not to be dealing with each other at arm's length pursuant to subsection 251(1) of the Income Tax Act, which governs the situation. Quite clearly the original purpose of this legislation was to safeguard the system from having to pay out a multitude of benefits based on artificial or fictitious employment arrangements; see the comments of the Federal Court of Appeal in Paul v The Minister of national Revenue, #A-223-86 unreported, where Hugessen J. said:
We are all prepared to assume, as invited by appellant"s counsel, that paragraph 3(2)(c) of the Unemployment Insurance Act, 1971, ... and subsection 14(a) of the Unemployment Insurance Regulations, ... have for at least one of their purposes the prevention of abuse of the Unemployment Insurance Fund through the creation of socalled "employer-employee" relationships between persons whose relationship is, in fact, quite different. That purpose finds obvious relevance and rational justification in the case of spouses who are living together in a marital relationship. But even if, as appellant would have us do, we must look only at spouses who are legally separated and may be dealing at arm's length with one another, the nature of their relationship as spouses is such as, in our view, to justify excluding from the scheme of the Act the employment of one by the other.
...
We do not exclude the possibility that the provisions may have other purposes, such as a social policy decision to remove all employment within the family unit from the operation of the Unemployment Insurance Act, 1971, as was suggested by respondent's counsel. (emphasis mine)
[11] The harshness of this situation has however been tempered by paragraph 5(3)(b) of the EI Act, which provides for such employment between related persons deemed to be at arm's length and thus in turn to be treated as insurable employment, if it meets all the other provisions, where the Minister is satisfied having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, that it is reasonable to conclude that they would have entered into a substantially similar contract if they had (in fact) been dealing with each other at arm's length.
[12] It may be helpful to reframe my understanding of this section. For people related to each other the gate is closed by the statute to any claim for employment benefits unless the Minister can be satisfied that in effect the employment arrangement is the same as that which unrelated persons, that is persons who are clearly at arm's length, would have made. If it is a substantially similar contract of employment, Parliament has deemed it to be only fair that it should be included in the scheme. However, the Minister is the gatekeeper. Unless he is so satisfied the gate remains closed, the employment remains excepted and the employee is not eligible for benefits.
[13] Subsection 93(3) of the EI Act deals with appeals to and the determination of questions by the Minister. It requires that:
The Minister shall decide the appeal within a reasonable time after receiving it and shall notify the affected persons of the decision.
[14] Thus, the Minister has no discretion whether or not to decide the question. He is required by law to do so. If he is not satisfied, the gate remains closed and the employee is not eligible. If however, he is satisfied, without more ado or any action on the part of the Minister (other than notification of the decision) the employee becomes eligible for benefits, provided he is otherwise qualified. It is not a discretionary power in the sense that if the Minister is satisfied he may then deem the employment to be insurable. He must "determine the question" and depending on that determination the law deems the employment to be either at arm's length or not at arm's length. In this sense the Minister has no discretion to exercise in the true sense of the word, for in making his decision he must act quasi-judicially and is not free to choose as he pleases. The various decisions of the Federal Court of Appeal on this issue reveal that the same test applies as to a myriad of other officials making quasi-judicial decisions in many different fields. (See Tignish Auto Parts Inc. v. M.N.R., 185 N.R. 73, Ferme Émile Richard et Fils Inc. v. M.N.R., 178 N.R. 361, Attorney General of Canada and Jencan Ltd., (1997) 215 N.R. 352 and Her Majesty the Queen and Bayside Drive-in Ltd., (1997) 218 N.R. 150.)
[15] The function of this Court then, upon appeal, is to review the decision of the Minister and decide whether it was arrived at lawfully that is in accordance with the Act and with the principles of natural justice. In the case Her Majesty the Queen v Bayside et al., supra, the Federal Court of Appeal laid out certain matters which should be considered by this Court when hearing these appeals. These were:
(i) the Minister acted in bad faith or for an improper purpose or motive;
(ii) the Minister failed to take into account all of the relevant circumstances as expressly required by paragraph 3(2)(c) of the Employment Insurance Act now subsection 5(3) of the EI Act; or
(iii) the Minister took into account an irrelevant factor.
[16] The Court went on to say:
It is only if the Minister made one or more of these reviewable errors that it can be said that his discretion was exercised in a manner contrary to law, and ... the Tax Court Judge would be justified in conducting his own assessment of the balance of probabilities as to whether the respondents would have entered into substantially similar contracts of service, if they had been at arm's length.
[17] I remind myself, when reviewing this case, that it is not for the Court to substitute its opinion of the evidence for that of the Minister. However, if his or her manner of arriving at the decision was unlawful in the context of the judgments set out above, those affected parts of the stated facts may be disregarded and I must then consider whether that which is left affords justifiable grounds for the decision. If those grounds, standing alone, are sufficient for the Minister to form a decision, albeit that the Court may not agree with it, the decision must stand. If on the other hand there is no basis left upon which the Minister might lawfully make such a decision, from an objective and reasonable point of view, then such decision may be struck down and the Court can consider the evidence before it on appeal and make its own decision.
[18] In summary then, if there are sufficient facts before the Minister for his decision, it is his or her determination to make and if he or she is "not satisfied" it is not for this Court to substitute its view of those facts and say he or she should have been satisfied. Similarly, if he or she was satisfied it is not for this Court to substitute its view that he or she should not have been satisfied (an unlikely scenario in any event). Only if the decision is reached in an improper manner and it is unreasonable, from an objective point of view, on the basis of the facts which were properly before the Minister, may the Court interfere.
[19] I am fortified in this approach by a number of decisions of various Courts of Appeal across the country and the Supreme Court of Canada in related decisions concerning the issue of various processes under the Criminal Code, which subsequently came to be reviewed by the Courts and are in my view analogous to the present situation. The standard of review of the validity of a search warrant was set out by Cory, J.A. (as he then was) in Times Square Book Store, Re (1985) 21 C.C.C. (3d) 503 (C.A.), where he said that it was not the role of the reviewing judge to look at or consider the authorization of a search warrant de novo and it was not open to the reviewing judge to substitute his or her own opinion for that of the issuing judge. Rather, on review, the first issue to be decided was whether or not there was evidence upon which a justice of the peace, acting judicially, could determine that a search warrant should be issued.
[20] The Ontario Court of Appeal reiterated and expanded upon this point of view in R. v. Church of Scientology of Toronto and Zaharia (1987) 31 C.C.C. (3d) 449 C.A. leave to appeal refused. In suggesting that the reviewing Court look at the "totality of the circumstances" the Court said at 492:
Obviously if there is not such evidence to provide a basis for such a belief (that a criminal offence had been committed) it cannot be said that in those circumstances the justice should be satisfied. There will, however, be cases where such evidence (showing reasonable grounds) does exist and the justice could be satisfied but where he or she is not satisfied and does not exercise his or her discretion in favour of issuing a search warrant. In these circumstances, the reviewing judge must not say that the justice should have been satisfied and should have issued the warrant. Similarly, if the justice in such circumstances says that he or she is satisfied and issues the warrant, the reviewing judge must not say that the justice should not have been so satisfied.
[21] The Supreme Court of Canada endorsed this approach in R. v. Garofoli (1990) 2 S.C.R. 1421. The late Mr. Justice Sopinka, when dealing with the review of the issue of an authorization to wiretap, then said:
While a judge exercising this relatively new power need not comply with the Wilson criteria, he should not review the authorization de novo. The correct approach is set out in the reasons of Martin J.A. in this appeal. He states ...
If the trial judge concludes that, on the material before the authorizing judge, there was no basis upon which he could be satisfied that the pre-conditions for the granting of the authorization exist, then, it seems to me that the trial judge is required to find that the search or seizure contravened s. 8 of the Charter.
The reviewing judge does not substitute his or her view for that of the authorizing judge. If, based on the record which was before the authorizing judge as amplified on the review, the reviewing judge concludes that the authorizing judge could have granted the authorization, then he or she should not interfere. In this process, the existence of fraud, non-disclosure, misleading evidence and new evidence are all relevant, but, rather than being a prerequisite to review, their sole impact is to determine whether there continues to be any basis for the decision of the authorizing judge.
[22] This approach appears to have been adopted by almost every appellate court in the country. (See R. v. Jackson (1983) 9 C.C.C. (3d) 125 (B.C. C.A.); R v. Conrad et al. (1989) 99 A.R. 197; 79 Alta. L.R.; (2d) 307; 51 C.C.C. (3d) 311 (C.A.); Hudon v. R. (1989) 74 Sask. R. 204 (C.A.); and R. v. Turcotte (1988) 60 Sask. R. 289; 39 C.C.C. (3d) 193 (C.A.); R. v. Borowski (1990) 66 Man. R. (2d) 49; 57 C.C.C. (3d) 87 (C.A.); Bâtiments Fafard Inc. et autres c. Canada et autres (1991) 41 Q.A.C. 254 (C.A.); Société Radio-Canada v. Nouveau-Brunswick (Procureur général) et autres (1991) 104 N.B.R. (2d) 1; 261 A.P.R. 1; 55 C.C.C. (3d) 133 (C.A.); R. v. Carroll and Barker (1989) 88 N.S.R. (2d) 165; 225 A.P.R. 165; 47 C.C.C. (3d) 263 (C.A.); R. v. MacFarlane (K.R.) (1993) 100 Nfld. & P.E.I.R. 302; 318 A.P.R. 302; 76 C.C.C. (3d) 54 (P.E.I. C.A.). It seems to me most relevant to a review of the Minister's determination, which is itself a quasi judicial decision.
The Law Relating to Arm's Length
[23] In the scheme established under the E.I. Act, Parliament has made provision for certain employment to be insurable, leading to the payment of benefits upon termination, and other employment which is not included and thus carries no benefits upon termination. Employment arrangements made between persons, who are not dealing with each other at arm's length, are excluded. Quite clearly the purpose of this legislation is to safeguard the system from having to pay out a multitude of benefits based on artificial or fictitious employment arrangements.
[24] Subsections 5(2) and 5(3) of the Employment Insurance Act read in part as follows:
(2) Insurable employment does not include:
...
(i) employment if the employer and employee are not dealing with each other at arm's length.
(3) For the purpose of paragraph (2)(i),
(a) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the Income Tax Act; and
...
[25] Paragraph 251(1)(b) of the Income Tax Act reads as follows:
it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length. (emphasis added)
[26] Although the Income Tax Act specifies that it is a question of fact whether persons were at a particular time dealing with each other at arm's length, that factual question must be decided within the cradle of the law and in reality it is a mixed question of fact and law; see Bowman, T.C.J. (as he then was) in R.M.M. Canadian Enterprises et al. v. The Queen, 97 DTC 302.
[27] What is meant by the term "arm's length" has been the subject of much judicial discussion both here in Canada, in the United States, the United Kingdom and in other Commonwealth countries such as Australia where similar wording appears in their taxing statutes. To the extent that the term has been used in trust and estate matters, that jurisprudence has been discounted in Canada when it comes to the interpretation of taxation statutes; see Locke, J. in M.N.R. v. Sheldon's Engineering Ltd., 55 DTC 1110.
[28] In considering the meaning of the term "arm's length" sight must not be lost of the words in the statute to which I gave emphasis above, "were at a particular time dealing with each other at arm's length". The case law in Canada as Bowman, T.C.J. points out in the R.M.M. case (above) has tended to dwell upon the nature of the relationship rather than upon the nature of the transactions. I am not sure that having regard to the inclusion of these words in the statute, that this approach is necessarily the only one to be taken, for to do so is to ignore these somewhat pertinent words, to which surely some meaning must be given. Perhaps this development has come about as a result of the factual situations in a number of the leading cases in Canada. These have tended to involve one person (either legal or natural) controlling the minds of both parties to the particular transaction. Thus even though the transaction might be similar to an ordinary commercial transaction made at arm's length that itself has not been enough to take the matter out of the non arm's length" category; see for example Swiss Bank Corporation et al. v M.N.R., 72 D.T.C. 6470 (S.C.C.).
[29] In effect what these cases say is that if a person moves money from one of his pockets to the other, even if he does so consistently with a regular commercial transaction, he is still dealing with himself, and the nature of the transaction remains "non arm's length".
[30] However, simply because these leading cases involved such factual situations, does not mean that people who might ordinarily be in a non arm's length relationship cannot in fact "deal with each other at a particular time in an 'arm's length' manner", any more than it means that people who are ordinarily at arm's length might not from time to time deal with each other in a non arm's length manner. These cases are quite simply examples of what is not an arm's length relationship rather than amounting to a definition in positive terms as to what is an arm's length transaction. Thus at the end of the day all of the facts must be considered and all of the relevant criteria or tests enunciated in the case law must be applied.
[31] The expression "at arm's length" was considered by Bonner, T.C.J. in William J. McNichol et al. v. The Queen, 97 D. T. C. 111, where at pages 117 and 118 he discussed the concept as follows:
Three criteria or tests are commonly used to determine whether the parties to a transaction are dealing at arm's length.
They are:
(a) the existence of a common mind which directs the bargaining for both parties to the transaction,
(b) parties to a transaction acting in concert without separate interests, and
(c) "de facto" control.
...
The decision of Cattanach, J. in M.N.R. v. T R Merrit Estate is also helpful. At pages 5165-66 he said:
In my view, the basic premise on which this analysis is based is that, where the "mind" by which the bargaining is directed on behalf of one party to a contract is the same "mind" that directs the bargaining on behalf of the other party, it cannot be said that the parties were dealing at arm's length. In other words where the evidence reveals that the same person was "dictating" the "terms of the bargain" on behalf of both parties, it cannot be said that the parties were dealing at arm's length.
Finally, it may be noted that the existence of an arm's length relationship is excluded when one of the parties to the transaction under review has de facto control of the other. In this regard deference may be made to the decision of the Federal Court of appeal in Robson Leather Company v M.N.R., 77 DTC 5106.
[32] This approach was also adopted by Cullen, J. in the case of Peter Cundill & Associates Ltd. v. The Queen, [1991] 1 C.T.C. 197, where at page 203 he says this:
Whether the parties in this case were dealing at arm's length is a question to be examined on its own particular facts. ...
[33] Many of these cases, as I say, are premised on the relationship existing between the parties which was determined to be all conclusive. There is little direct guidance there, when consideration is being given to the nature of the transaction or dealing itself. This question has, however, been quite succinctly dealt with by the Federal Court of Australia in the case of The Trustee for the Estate of the late AW Furse No 5 Will Trust v. FC of T, 91 ATC 4007/21 ATR 1123. Hill, J. said when dealing with similar legislation in that country :
There are two issues, relevant to the present problem, to be determined under s. 102AG(3). The first is whether the parties to the relevant agreement were dealing with each other at arm's length in relation to that agreement. The second is whether the amount of the relevant assessable income is greater than the amount referred to in the subsection as the "arm's length amount".
The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The basis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection... [emphasis added]
[34] Bowman, T.C.J. alluded to this type of situation in the R.M.M. case (above) when he said at page 311 :
I do not think that in every case the mere fact that a relationship of principal and agent exists between persons means that they are not dealing at arm's length within the meaning of the Income Tax Act. Nor do I think that if one retains the services of someone to perform a particular task, and pays that person a fee for performing the service, it necessarily follows that in every case a non-arm's-length relationship is created. For example, a solicitor who represents a client in a transaction may well be that person's agent yet I should not have thought that it automatically followed that there was a non-arm's-length relationship between them.
The concept of non-arm's length has been evolving.
[35] In Scotland, in the case of Inland Revenue Commissioners v. Spencer-Nairn 1991 SLT 594 (Ct. of Sessions) the Scottish Law Lords reviewed a case where the parties were in a non arm's length situation. They commented favourably on the approach taken by Whiteman on Capital Gains Tax (4th ed.), where it was suggested by the author that two matters that should be taken into account when considering the words 'arm's length'. These were whether or not there was separate or other professional representation open to each of the parties and secondly, perhaps with more relevance to the situation on hand, whether there was "a presence or absence of bona fide negotiation".
[36] In the United States the term "arm's length" was defined in the case of Campana Corporation v. Harrison (7 Circ; 1940) 114 F2d 400, 25 AFTR 648, as follows:
A sale at arm's length connotes a sale between parties with adverse economic interests.
[37] I dealt with these cases in Campbell and M.N.R. (96-2467(UI) and (96-2468(Ul)) and the principles for which they stand. I adopt all that I said in that case.
[38] At the end of the day it would seem to me that what is intended by the words "dealing at arm's length" can best be described by way of an example. If one were to imagine two traders, strangers, in the market place negotiating with each other, the one for the best price he could get for his goods or services and the other for the most or best quality goods or service he could obtain, these persons, one would say, would be dealing with each other at arm's length. If however these same two persons, strangers, acted with an underlying interest to help one another, or in any manner in which he or she would not deal with a stranger, or if their interest were to put a transaction together which had form but not substance in order to jointly achieve a result, or obtain something from a third party, which could not otherwise be had in the open marketplace, then one would say that they were not dealing with each other at arm's length.
[39] If the relationship itself (and here it must again be remembered that the EI Act does not say "where they are in a non arm's length relationship" it says "where they are not dealing with each other at arm's length") is such that one party is in a substantial position of control, influence or power with respect to the other or they are in a relationship whereby they live or they conduct their business very closely, for instance if they were friends, relatives or business associates, without clear evidence to the contrary, the Court might well draw the inference that they were not dealing with each other at arm's length. That is not to say, however, that the parties may not rebut that inference. One must however, in my view, distinguish between the relationship and the dealing. Those who are in what might be termed a "non arm's length relationship" can surely deal with each other at arm's length in the appropriate circumstances just as those who are strangers, may in certain circumstances, collude the one with the other and thus not deal with each other at arm's length.
[40] Ultimately if there is any doubt as to the interpretation to be given to these words I can only rely on the words of Madam Justice Wilson who in the case of Abrahams v. A/G Canada, [1983] 1 S.C.R. 2, at p. 10 said this:
Since the overall purpose of the Act is to make benefits available to the unemployed, I would favour a liberal interpretation of the re-entitlement provisions. I think any doubt arising from the difficulties of the language should be resolved in favour of the claimant.
[41] In the end it comes down to those traders, strangers, in the marketplace. The question that should be asked is whether the same kind of independence of thought and purpose, the same kind of adverse economic interest and same kind of bona fide negotiating has permeated the dealings in question, as might be expected to be found in that marketplace situation. If on the whole of the evidence that is the type of dealing or transaction that has taken place then the Court can conclude that the dealing was at arm's length. If any of that was missing then the converse would apply.
Contract of/for Service
[42] I have absolutely no hesitation whatsoever in concluding that the Workers were employees of the company working under contracts of service. Without considering all the aspects of the four part test generally referred to in these cases, it is perfectly clear from the evidence that they were fully integrated into the business of the Appellant and this is really a non-issue in this case.
[43] The greater issue is the decision of the Minister bringing the Workers into the fold of the EI Act as related persons.
Stage I - Review of the Decision of the Minister
[44] The Minister, in coming to his decisions, is said to have relied upon the following assumptions of fact, which are the same in each case, except where shown in parenthesis:
(a) the facts as admitted above;
(b) the Payer's business is farm equipment manufacturing;
(c) the Payer's business is not seasonal;
(d) the Appellant is one of the shareholders of the Payer;
(e) the shareholders of the Payer are as follows:
Edward Bergen Holdings Ltd. 24%
Allan Bergen Holdings Ltd. 20%
Vic Bergen Holdings Ltd. 20%
A P B Holdings Ltd. 16%
Karen Katz Holdings Ltd. 20%
(f) the Appellant and Allan Bergen are brothers;
(g) Vic Bergen and Karen Katz are the brother and sister of the Appellant and Allan Bergen;
(h) Vic Bergen and Karen Katz are not involved in the day-to-day operations of the Payer;
(i) the Appellant has worked for the Payer for over 10 years;
(j) the Appellant [Edward] is the General Manager of the Payer; [Allan is the Director of the Payer
(k) the Appellant performs his duties in the Payer's office, at his home office and in the field;
(l) the Appellant does not have a written contract with the Payer;
(m) the Appellant worked from 7:00 a.m. to 6:00 p.m. Monday through Saturday;
(n) the Appellant worked other additional hours as required;
(o) the Appellant's hours and days of work were not recorded;
(p) the Appellant was not required to prepare any reports in respect of his hours;
(q) the Appellant was one of the managers of the Payer's operation;
(r) the Appellant was paid monthly;
(s) the Appellant was paid by cheque;
(t) the amount of remuneration received by the Appellant was an agreed amount;
(u) other workers for the Payer were paid on an hourly basis;
(v) the Appellant was free to chose his hours and days of work;
(w) the Appellant could hire a helper;
(x) the Payer would pay any helper hired by the Appellant;
(y) the Payer provided the Appellant with training;
(z) the Appellant is required to perform his duties personally;
(aa) the Appellant [Edward] and Allan Bergen are the only two workers providing the services they provide;
(bb) the Appellant has signing authority for the Payer's bank account;
(cc) the Payer provides the Appellant with medical, life and disability insurance;
(dd) the Payer provided all the tools and equipment required;
(ee) the Appellant did not incur any expenses in the performance of his duties;
(ff) the Appellant is permitted to attend to personal matters during the work day;
(gg) the Payer has the right to control the Appellant through the legal requirements applying to directors and officers of a corporation;
(hh) the services provided by the Appellant are a necessary and important part of the Payer's operation and would have to be performed;
(ii) the Appellant received dividends, in his capacity as a shareholder, from the Payer based on the profits of the Payer;
(jj) the Payer's shareholders meet at a yearly annual meeting;
(kk) the Payer issued a T4 to the Appellant for the 1999 and 2000 years as follows:
1999 2000
Gross Earnings $69,887.00 $63,240.00
CPP 1,186.50 1,329.90
EI 994.50 936.00
Tax Deducted 27,321.68 17,465.21
[Edward]
1999 2000
Gross Earnings $70,240.00 $63,240.00
CPP 1,186.50 1,329.90
EI 994.50 936.00
Tax Deducted 23,524.68 17,465.21
(ll) the Appellant was employed under a contract of service by the Payer.
[45] Evidence was given on behalf of the two Appellants by Edward Bergen. He agreed with all of the assumptions of fact, except items 13(z) and (cc) and of course the conclusions drawn by the Minister in items 13(mm), (nn) and (oo).
[46] Specifically, the witness denied that he and his brother worked from 7:00 a.m. to 6:00 p.m. 6 days per week. What he did say was that in the small town in which they lived and operated their business, it was often difficult to hire the kind of trained help that they needed. Thus, he and his brother ended up having to form several different trades at all kinds of different times. He described how sometimes they would have to go into their shop at 7:00 a.m. on a Saturday because the job had to be done, and there were no employees willing or able to do it. Sometimes they would have to paint, sometimes do 'prep' work, sometimes weld and sometimes do the fabrication work. Thus, although their prime role was to manage the business, they had to do whatever it took whenever there was work to be done. Thus, neither of them worked regular hours. They worked in this way because they felt they were the owners of the corporation, as opposed to being regular employees. In assuming the Appellants worked regular hours, the Minister was incorrect. They worked flexible but often long hours.
[47] The witness took issue with item (z) that he was required to perform his duties personally. Whilst this has more to do with the question whether he was an employee or and independent contractor, he felt he could hire anybody he wanted to to take on his duties at any time.
[48] With regard to item (cc), the witness denied that his disability insurance was paid by the company. What he did say was that if either he or his brother were to become ill or die, the other one would simply carry on with the business. If both of them died or were unavailable, the business would fold.
[49] With regard to item (gg), this again is more related to the issue of employee/independent contractor status. However, the witness denied strenuously that his brother Vic, sister Karen or his father, took any part whatsoever in the management of the company. Clearly, however, in law, they would have had the right to appoint new officers of the company, if they had chosen to do so.
[50] With respect to item (ii), the witness said that no dividends had been declared by the company for at least 5 years and maybe 7; certainly not in the years under review. It seems to be something of a misunderstanding on the part of the Minister in this respect as in paragraph 6(c) of the Reply, he was said to deny that the Appellants could pay themselves a bonus at any time and stated:
... that the shareholders, as a group, control the decision of when and how much of a bonus is paid by the Payer.
This is incorrect and shows confusion in the mind of the Minister between bonuses paid to employees and dividends paid to all shareholders. The Appellants were solely in charge of how much they were paid and as we shall see, their economic interests and expectations were very much intertwined with those of the Corporation. If the Corporation did well, they paid themselves bonuses to catch up on their irregular and somewhat low draws on account of their salaries. The other shareholders knew nothing of this and had no say in it although it would no doubt appear in the accounts at the end of the year. If the Corporation did not do well, the Appellants did not issue themselves bonuses. This had nothing to do with the profits of the company after payment of its expenses, including all salaries and payment of regular employees and the Appellants. Those profits might have been available for distribution as dividends between all the shareholders. In fact, in the last several years including the years under review, that did not happen. The point is that bonuses could and were awarded by the Appellants to just themselves as employees. Dividends are something different and could have been declared to all shareholders, but in fact were not.
[51] With respect to the matter of the pay, the witness pointed out that he and his brother Allan were paid exactly the same, regardless of how much time or effort either one of them put in, in relation to the other, over a period of a month. They paid themselves nothing extra for extra time worked such as Saturdays or holidays. They accumulated no vacation pay or statutory holiday time. They had been paid hourly as employees by their father until he retired in 1989 when they bought shares in the newly formed Corporation. From that time on, the Appellants ran the company in the fullest sense of that word, as if it is was their own business. In law, of course, it was owned by the Corporation. However, they treated it as their own. If times went well, they paid themselves bonuses. If times became rough, they were prepared to reduce their salaries, although there is no evidence of that ever, in fact, having happened.
[52] Another significant aspect of their salary arrangement, which seems to have been overlooked by the Minister, concerns how they set up their base salary and decided upon amounts of their bonuses. Their monthly pay draws were based on the previous year's profitability of the Corporation. What they took was well below the amount which would have been paid to an outside person doing their work. They took $3,000.00 each per month and the witness said that he could not have hired somebody from the outside to do the job for $72,000.00 per year, which would be twice as much. He felt the only way anybody would work that much for such a low salary was if they had a significant stake in the ownership of the Corporation.
[53] Over and above the matter of the monthly draw, the witness described how they established payment of any bonus. First was the question of the available money in the Corporation to pay a bonus. Secondly, they would always make sure that there was enough left in the Corporation to finance future acquisitions of equipment. Thirdly, they worked the bonuses around the principle of keeping the company in the lowest possible tax rate. Thus, what they were paid often had little to do with the work they actually put in and depended as much upon the corporate needs as their own. This integration of their economic interests with those of the Corporation appears not to have been taken into account by the Minister. It is, of course, highly relevant.
[54] One further significant factor, not taken into account by the Minister, was the economic insecurity which each Appellant faced. Not only did the two Appellants personally guarantee the corporate line of credit at its bank, but they also had no written contracts with the Corporation themselves. All other employees had written contracts. They had none. They had no assurance that they would ever receive, anything more than half their hoped-for remuneration, even if that. Whilst an arm's length employee working as a general manager could expect to be assured of certain benefits, including pay and profitability bonuses, they had no such assurance. Their economic fate was totally cast in with that of the Corporation.
[55] On top of that, there were an endless number of differences between their status and regular arm's length employees. They are typically matters which the Minister cites, in reported cases across the whole of Canada, as being examples of not being in a relationship substantially similar to one that would be entered into by people dealing with each other at arm's length. In this case, the Minister seems to be treating them in a different way. They include such things as the Appellants bringing their own children into the premises when they worked on Saturdays and let them use corporate equipment, something forbidden to regular employees; being able to use their corporate equipment at any time without reference to anybody else; not being paid overtime or for statutory holidays; being prepared to reduce their pay in bad times; being able to take time off anytime either of them chose, without reference to the corporate schedule of two weeks vacation taken at the same time every summer; and no reduction in their pay if they took time off.
[56] The witness also dealt with other matters, raised in the original ruling, where it was said that their employer, the Corporation, established their clientele and their deadlines and priorities. This had, I am sure, more to do with the issue of employee/independent contractor, but nevertheless the witness went to great lengths to explain that the other shareholders, members of his family, did not have the remotest clue what was going on in the Corporation, who their clientele was or what their priorities were. He and his brother dealt with all of those things between themselves without reference to the other family members. Similarly with the statement in the original ruling of exposure to risk of loss, the witness felt that they were exposed as they signed written guarantees, something arm's length employees would not be expected to do for their employer.
[57] That was really a summary of the evidence of the witness. I found him to be an honest, straightforward and hardworking person and I have no reason not to accept his evidence on these matters as he stated it.
[58] Evidence was also given by Janice Affleck, a CPP/EI Rulings Officers with the Canada Customs and Revenue Agency. She had made the original ruling and was called on behalf of the Minister to explain her reasons for that ruling. She said she was aware of the duties and responsibilities of general managers in businesses operating in small towns. She had found nothing unusual in the terms of the employment of the Appellants. That was strange because, with respect, there are a number of unusual aspects, to which I have already referred. She went on to use a curious term. She said that she did not find anything "unreasonable" about the employment "which would exclude it from insurable employment". With respect, the issue here has nothing to do with what is reasonable or unreasonable. Furthermore, the cart seems to be in front of the horse, so to speak in her mind when she approaches it from the point of view of nothing excluding the employment. Rather, when the employment is excluded by law already, the question at this time is what is there that would bring that employment into the fold of the insurable employment under the EI Act.
[59] Finally, Ms. Affleck conceded in cross-examination that she did not know that the Appellants were not guaranteed any salary and agreed she would not work for somebody as an employee if she was not guaranteed a salary.
[60] I am not sure how much of what Ms. Affleck had to say, should be imputed to the Minister, but her evidence definitely did seem to confirm that there were some extremely relevant factors around the terms of employment of the Appellants, particularly the terms of their remuneration, which were not taken into account by the Minister.
[61] When I consider these factors which were not considered by the Minister and which were highly relevant to the decision he was required to make, I cannot but come to the conclusion that if he had had them before him for consideration, he could not, from an objective point of view, have reasonably and lawfully arrived at the decision that he did. It is thus not sustainable in law and I must now advance to the second stage of the appeal process and decide whether on all the evidence, the parties had they been at arm's length, would have entered into substantially similar contracts of employment taking into account all of the circumstances, including specifically those set out in paragraph 5(3)(b) of the EI Act.
Stage II: Review of the Evidence
[62] At the outset, I cannot help remarking, upon the irony of the fact, that in this case, many of the factors said to have been relied upon by the Minister are precisely the same types of factors upon which he has been said to rely upon so often in appeals where he has declined to exercise his discretion, e.g. setting own hours of work, setting own salaries, not keeping records of hours worked, taking time off without having to seek permission, holding pay cheques when the company was short of funds, to name but a few. I cannot help but think that if the Minister had been looking through the other end of the telescope in a situation whereby one of the brothers had been claiming employment benefits in these circumstances he would have quickly come to a contrary conclusion. I am not suggesting any bad faith here, but there does seem to be something of a double standard being established.
[63] I do not intend to set out all of the evidence again. I have already referred to the significant facts. It is clear in my mind, that the two brothers were the company. Their economic interests were inexorably bound up with those of the company. Although perhaps they signed the guarantees in their capacities as shareholders or directors, the fact that they did so shows an inextricably inter-woven relationship between the company and the brothers. Their economic interests were tied to the company and those of the company were tied to theirs, to such an extent that it could not be said that there was an independent or adverse economic interest existing between them. They were the operating mind of the company; they themselves were related and had a common family economic interest, which was indivisible from that of the Company. This is exactly the situation contemplated by Parliament in setting up the employment insurance scheme, to exclude persons, who are operating or controlling their own businesses, in an entrepreneurial fashion, from participating in that scheme and being able to claim benefits if their employment fails.
[64] That is not to say that people in management positions running a company, could never be said to be dealing with that company at arm's length, even if they are also shareholders. If for example, their contract arrangements were clearly set out in a formal written contract, and there was a clear division between their own interests and those of the Corporation, so that each might profit separately and independently from the other, that could very well be viewed as a relationship substantially similar to one which parties, dealing with each other at arm's length, might make. Where, however, such as here, the workers virtually are the Company and treat it as their own affair, to such an extent, for example, they are willing to forego their salaries if the company is short of funds, it is a strong indication of entrepreneurial ownership and of parties not dealing with each other at arm's length.
Conclusion
[65] Taking into account all of the circumstances, including in particular the extensive hours and days put in by the brothers, their opportunity to just take leave without permission from anyone and still get paid, their willingness to reduce their paycheques if the company was short of funds, their signing of guarantees for the company, I am of the firm view that there was no independence of thought or purpose prevailing between the company and the brothers, there was no adverse economic interest, their stakes were inextricably woven together and there was not the bona fide type of separate negotiation permeating their relationship that one would expect to find existing between those traders in the marketplace to whom I referred at some length. Accordingly, I hold that neither of them were employed in insurable employment.
[66] In the event, the appeals are allowed and the decisions of the Minister are vacated.
Signed at Calgary, Alberta, this 5th day of February 2002.
|
"Michael H. Porter" |
D.J.T.C.C.
COURT FILE NO.: 2001-2146(EI)
STYLE OF CAUSE: Edward Bergen and M.N.R.
PLACE OF HEARING: Saskatoon, Saskatchewan
DATE OF HEARING: October 1, 2001
REASONS FOR JUDGMENT BY: the Honourable Deputy Michael H. Porter
DATE OF JUDGMENT: February 5, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Elaine Lee
Raj Sharma (Student-at-Law)
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
COURT FILE NO.: 2001-2147(EI)
STYLE OF CAUSE: Allan Bergen and M.N.R.
PLACE OF HEARING: Saskatoon, Saskatchewan
DATE OF HEARING: October 1, 2001
REASONS FOR JUDGMENT BY: the Honourable Deputy Michael H. Porter
DATE OF JUDGMENT: February 5, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Elaine Lee
Raj Sharma (Student-at-Law)
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada