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Docket: 2003-2423(EI) |
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BETWEEN: |
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627576 SASKATCHEWAN LTD., |
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Appellant, |
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and |
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THE MINISTER OF NATIONAL REVENUE, |
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Respondent. |
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Appeal heard on March 24, 2004 at Prince Albert, Saskatchewan
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Before: The Honourable Justice Georgette Sheridan |
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Appearances: |
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Counsel for the Appellant: |
James Sanderson |
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Counsel for the Respondent: |
Lynn Hintz (Student-at-Law) Anne Jinnouchi |
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JUDGMENT
The appeal is allowed and the decision of the Minister is vacated in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 7th day of May, 2004.
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"G. Sheridan" |
Sheridan, J.
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Citation: 2004TCC316 |
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Date: 20040507 |
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Docket: 2003-2423(EI) |
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BETWEEN: |
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627576 SASKATCHEWAN LTD., |
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Appellant, |
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and |
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THE MINISTER OF NATIONAL REVENUE, |
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Respondent. |
REASONS FOR JUDGMENT
Sheridan, J.
[1] This is an appeal from the Minister's decision that, for the period May 1, 2001 to December 31, 2001, Mr. Timothy Longworth was engaged in insurable employment as an employee of 627576 Saskatchewan Ltd. known as Elstrom Insurance. The parties agreed that Elstrom Insurance and Tim Longworth were "related" pursuant to subparagraph 251(2)(b)(ii) of the Income Tax Act and were, therefore, not dealing with each other at arm's length. The only issue for determination is whether it was reasonable for the Minister to conclude that, pursuant to paragraph 5(3)(b) of the Employment Insurance Act, Elstrom Insurance and Tim Longworth would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.
[2] The relevant sections of the Employment Insurance Act are set out below:
5.(1) Types of insurable employment - Subject to subsection (2), insurable employment is
(a) employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise;
...
(2) Excluded employment - Insurable employment does not include
...
(i) employment if the employer and employee are not dealing with each other at arm's length.
(3) Arm's length dealing - For the purposes of paragraph (2)(i),
(b) if the employer is, within the meaning of [the Income Tax Act], related to the employee, they are deemed to deal with each other at arm's length if the Minister of National Revenue is satisfied that, 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, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.
[3] Mr. Timothy Longworth is the son of the late Mr. Valray Longworth, a well-known Prince Albert lawyer and businessman. For the sake of clarity, Mr. Timothy Longworth will be referred to as "Tim"; his father, as "Mr. Longworth". Between 1979 and 2000, Tim had been employed at various times and in various capacities in the insurance industry. Early in 2001, he became interested in buying Elstrom Insurance, a local insurance agency, and going into business for himself. He initiated negotiations with Elstrom Insurance while concurrently exploring partnership possibilities in this new business with Don Delorme, an experienced licensed insurance broker who was then working with another insurance company. In due course, Tim sought his father's advice regarding the proposed venture, including how best to finance the purchase.
[4] At the time Tim consulted him, Mr. Longworth had cancer and had just learned that, after a period of remission, the disease was again active and likely terminal. It was Tim's evidence that his father saw the Elstrom Insurance purchase as an opportunity to put his affairs in order, one objective of which was to help his son establish himself in his career. It was in this context that Mr. Longworth advised Tim to forgo any thoughts of seeking third party financing and to set up instead a corporate entity in which he, Tim and Don Delorme would invest equally. This proposal became reality and on May 1, 2001, Elstrom Insurance commenced operations. Pursuant to their agreement, Mr. Longworth, Tim, and Don each held 100 shares in the company, each paid one-third of the $200,000 down payment, and each was jointly and severally liable for the $500,000 owed to SGI to complete the transaction. Tim was responsible for administrative duties and Don, for insurance sales. Tim and Don each received an annual salary of $50,000. Mr. Longworth had no active role at Elstrom Insurance and received no salary. It was also agreed that after two years, the sale of Mr. Longworth's shares would be triggered requiring Tim and Don to buy out his interest in equal shares. Regrettably, Mr. Longworth passed away in February, 2002, less than a year after Elstrom Insurance opened its doors.
ANALYSIS
[5] Briefly stated, the Minister's position is that Tim was employed with Elstrom Insurance and that his employment for the period May 1, 2001 to December 31, 2001 was insurable. In reaching his decision, the Minister relied on the assumption that certain terms of Tim's contract of employment were identical to those in Don's: specifically, that both Tim and Don were paid $50,000 annually, both had signing authority on the business account and both had the option to buy Mr. Longworth's shares[1]. Don was an arm's length employee. From this, the Minister argued, it was reasonable to conclude that Tim and Elstrom Insurance would have entered into a "substantially similar" contract if they had been dealing with each other at arm's length, thus satisfying the test in paragraph 5(3)(b) of the Employment Insurance Act.
[6] This is fine as far as it goes. The assumptions upon which the Minister relied, however, are incomplete. While it is true that the terms listed above formed part of both Tim and Don's contracts, that is not the end of the story. The Minister exercised his discretion improperly by having failed to take into account all of the relevant circumstances, as expressly required by paragraph 5(3)(b)[2]. What the Minister failed to take into account were the essential differences surrounding their entering employment with Elstrom Insurance. Don was recruited by Tim and was part of the plan Tim originally proposed to his father. Don came to the new business as an experienced licensed level 4 insurance salesperson and qualified SGI operator recruited from a successful rival insurance agency. Tim, on the other hand, was not licensed to sell insurance and would not be until he had successfully completed the provincial licensing requirements. Nor was he a qualified SGI operator. In May, 2001, his technical qualifications were no better than the lowest-earning staff members in the new office, employees who were paid approximately $18,000 annually and who were limited to issuing motor vehicle licences. In spite of these disparities, Elstrom Insurance entered into a contract with Tim to pay him $50,000 per year, the same salary as the much more qualified and experienced Don. This amount was more than Tim had been making before purchasing Elstrom Insurance; for Don, it was significantly less than the $70,000 to $80,000 salary he had been earning as an employee of his former agency. On cross-examination when asked for his opinion as an experienced insurance professional, Don stated that someone with the limited qualifications Tim possessed in 2001 would not have been hired at that salary level.
[7] The only reason Tim found himself in such a favoured position had to do with the father-son relationship between him and the third investor, Mr. Longworth. Mr. Longworth was dying. With this in mind, he chose to invest in his son's future. By forgoing an active role or salary for himself and planning his own withdrawal from the company, Mr. Longworth put Tim on an equal footing with Don. But for his relationship with Mr. Longworth, the third shareholder in Elstrom Insurance, Tim would not have held the position he did for the period May 1, 2001 to December 31, 2001. 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, the Court is satisfied that it was not reasonable for the Minister to conclude that Elstrom Insurance and Tim would have entered into a substantially similar contract had they been at arm's length.
[8] The appeal is allowed and the decision of the Minister is vacated.
Signed at Ottawa, Canada, this 7th day of May 2004.
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"G. Sheridan" |
Sheridan, J.
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CITATION: |
2004TCC316 |
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COURT FILE NO.: |
2003-2423(EI) |
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STYLE OF CAUSE: |
627576 Saskatchewan Ltd. and M.N.R. |
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PLACE OF HEARING: |
Prince Albert, Saskatchewan |
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DATE OF HEARING: |
March 24, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice G. Sheridan |
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DATE OF JUDGMENT: |
May 7, 2004 |
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APPEARANCES: |
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Counsel for the Appellant: |
James Sanderson |
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Counsel for the Respondent: |
Lynn Hintz (Student-at-law) Anne Jinnouchi |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
James Sanderson |
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Firm: |
Sanderson Balicki Popescul Prince Albert, Saskatchewan |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |