Lieffertz v. M.N.R.

Lieffertz v. M.N.R. Court (s) Database Tax Court of Canada Judgments Date 2003-10-03 Neutral citation 2003 TCC 704 File numbers 2003-142(EI) Judges and Taxing Officers Dwayne W. Rowe Subjects Employment Insurance Act Decision Content Docket: 2003-142(EI) BETWEEN: CHRIS LIEFFERTZ, Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. ____________________________________________________________________ Appeal heard on July 23, 2003 at Nanaimo, British Columbia Before: The Honourable D.W. Rowe, Deputy Judge Appearances: For the Appellant: The Appellant himself Counsel for the Respondent: Raj Grewal ____________________________________________________________________ JUDGMENT The appeal is dismissed and the decision of the Minister is confirmed in accordance with the attached Reasons for Judgment. Signed at Sidney, British Columbia, this 3rd day of October 2003. "D.W. Rowe" Rowe, D.J. Citation: 2003TCC704 Date: 20031003 Docket: 2003-142(EI) BETWEEN: CHRIS LIEFFERTZ, Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. REASONS FOR JUDGMENT Rowe, D.J. [1] The appellant appeals from a decision of the Minister of National Revenue (the "Minister") dated October 17, 2002, wherein the Minister decided the employment of the appellant - Lieffertz - with G Q Enterprises Ltd. (payor or Enterprises) from May 14, 2001 to October 11, 2001 and from October 29, 2001 to May 3, 2002, was not insurable employment pursuant to the relevant provisions of the Employment Insurance Act (the "Act") because the appellant and the payor were related and the Minister was not satisfied the contract of employment would have been substantially similar if the payor and the appellant had been dealing with each other at arm's length. [2] Chris Lieffertz testified he resides in Duncan, British Columbia and is employed as a public accountant. He has a Bachelor of Commerce degree and carried on his own accounting practice between 1987 and 1996 at which point he became heavily involved in some real estate development and decided to transfer the accounting business to Enterprises, a corporation owned by his son Paul Lieffertz - with 61% of the shares - and Dan Graca - an unrelated person - holding the balance of 39%. The appellant stated he had intended that his son would assume the business and carry on servicing the clients of that accounting practice. The appellant stated the real estate venture encountered numerous difficulties and - later - led to his assignment into personal bankruptcy on January 29, 1998, culminating in a discharge on October 29, 1998. In 1997, the appellant began working as an accountant - for Enterprises - using approximately 400 square feet of office space in a building that he owned in Duncan. He worked from 9:00 a.m. to 5:00 p.m., Monday through Friday, and was paid $750 per week, a sum based on an hourly rate of $18.75. He was paid semi-monthly by cheques issued by Enterprises and signed by Paul Lieffertz. The appellant did not have signing authority on the Enterprises credit union account. Lieffertz stated Enterprises was in the fruit business and also sold retail oil and gasoline products but did not operate a restaurant as assumed by the Minister. The appellant stated his son - Paul Lieffertz - had done some bookkeeping work in the past but "was not all that keen about it". Apart from some filing cabinets and office supplies, the equipment used in the accounting practice consisted of a computer - with printer - which had been purchased by Enterprises on February 12, 1996 for the sum of $500 (See invoice filed as Exhibit A-1). Lieffertz stated the shareholders of Enterprises did not participate in any aspect of the bookkeeping/accounting services provided by himself to clients of the business who were - for the most part - his own former clients for whom he had done work during the 9 years he had carried on his own public accounting practice. However, the appellant stated the current practice provides service to only 8 former major clients from the 1996 client base and most of the current work is done for new persons and/or entities. Throughout the relevant period and today, the accounting business is carried on - by Enterprises - under the name Cowichan Accounting, as approved by the Directors in a resolution - Exhibit A-2 - dated February 1, 1996. Lieffertz stated he set the rates - ranging from $25 to $50 per hour - billed to clients depending on the nature of the work performed. He prepared invoices and submitted them to clients and otherwise managed the entire accounting business including collection of accounts receivable. Turning to the Reply to the Notice of Appeal (Reply), the appellant agreed the assumptions contained in subparagraphs 5(a) to 5(e), inclusive were correct. As mentioned earlier, he considered the nature of the client base was somewhat different than that assumed by the Minister at subparagraph 5(f) but accepted the subsequent assumptions set forth in subparagraphs 5(g) to 5(j), inclusive. At sub-paragraph 5(k), the Minister assumed the appellant's son - Paul Lieffertz - had operated a restaurant through G Q Enterprises. The appellant filed - as Exhibit A-3 - a Statement of Business Activities for a business operated by Paul Lieffertz - personally - under the name Café Rusticana. The appellant agreed he set his own hours of work which were standard and conformed with the local business community. He set priorities within the accounting practice and utilized the method of "first in, first out" when serving clients with the exception that payroll services took precedence over other work. Lieffertz disagreed with the assumption of the Minister - at subparagraph 5(o) of the Reply - that the clients of Cowichan Accounting were his own clients. In his view, they were always clients of Enterprises although he performed the work. All equipment necessary to carry out the work was the property of Enterprises except for a desk and chairs owned by the appellant. Lieffertz stated he was not entitled to any bonuses or profits through any sharing arrangement and denies that he was merely operating his own accounting business under the auspices of Enterprises. The Record of Employment (ROE) - Exhibit A-4 - dated May 6, 2002 - pertaining to the period from October 29, 2001 to May 3, 2002 - was signed by Paul Lieffertz on behalf of Enterprises and certified the appellant had worked 1,080 insurable hours with total insurable earnings in the sum of $20,250. The ROE - Exhibit A-5 - covered the earlier period from May 14, 2001 to October 11, 2001, during which the appellant had worked only 121 insurable hours and earned the sum of $2,268.25. During the May 14, 2001 to October 11, 2001 period, Lieffertz stated he continued to handle some payroll work and the office had an answering machine to record messages from callers. The appellant stated he worked about 4 hours per week during the slow period but - on occasion - had to perform work which occupied additional time. He stated he had not been laid off between October 11, 2001 and October 29, 2002 but had worked straight through until May 3, 2002. Between 1997 and 2000, the appellant received employment insurance (EI) benefits as follows: May 18/97 to November 22/97 May 24/98 to November 21/98 May 16/99 to October 27/99 May 14/00 to October 21/00 [3] The appellant stated that receipt of EI benefits had been delayed on one occasion for nearly 4 months while an auditor from Canada Customs and Revenue Agency (CCRA) examined details of the employer-employee relationship existing between Enterprises and himself. In 2001 and 2002, his application for EI benefits was rejected by the Minister and the appellant stated he is unable to determine the existence of any difference between the circumstances of his working relationship during those years and the previous ones which had entitled him to receive EI benefits during periods of unemployment. On August 9, 2002, he wrote a letter - Exhibit A-6 - to Mr. S. Ball - at CCRA - setting out his position with respect to his employment with Enterprises. He also obtained the Report on an appeal - Exhibit A-7 - containing the recommendation therein by B. Smith, Appeals Officer, in respect of his employment. The appellant filed - as Exhibit A-8 - a Benefit Statement issued by Human Resources Development Canada (HRDC) on September 27, 2000. The appellant stated he completed a Questionnaire - Exhibit A-9 - and Paul Lieffertz completed the Questionnaire - Exhibit A-10 - on behalf of Enterprises. The appellant stated there were no intertwined loans or common economic interest between himself and Enterprises even though the revenue earned by Cowichan Accounting - solely through his personal efforts - constituted the entire source of Enterprises corporate income during the relevant period. Lieffertz stated he did not regard this as being particularly unusual since his son operated the coffee shop business mainly by relying on employees. Referring to the Report on Appeal - Exhibit A -7 - Lieffertz stated he agreed with the conclusion drawn by the Appeals Officer under the separate headings of "Remuneration" and "Duration" - as set forth on page 10 of said report - wherein the Minister accepted the rate of pay was negotiated and paid on time at regular intervals as proven by an examination of cancelled cheques. With respect to the duration of the employment, it was accepted that the services of the appellant were determined by the needs of clients within the business community and it was reasonable to conclude that due to the nature of the services - mainly preparation of income tax returns to be filed at or near the end of April in each year - the employment was seasonal in nature. With respect to the category within the report - labelled "Terms and Conditions" - the appellant agreed he had no signing authority but disagreed with the conclusion of B. Smith that he had "total control" of everything within the scope of the operation of the accounting business in that he could not receive pay without having provided any services nor could he hire other employees or file corporate documents without instructions from the Directors of Enterprises. He disagreed with the observation by the Appeals Officer that "[H]is autonomy was extended to the point of deciding whether or not she should be laid off". Lieffertz agreed he kept his son advised of the state of business and reported to him when work had slowed down to the point where his full-time services were no longer required. In addition, the state of the Cowichan Accounting bank account was known to his son and to Graca. He agreed neither Paul nor Graca could control his work since they were not qualified in the field of accounting nor tax preparation. The appellant conceded that the profits flowing from Cowichan Accounting to Enterprises were - at best - minimal but pointed out that in 2002 the business could have produced a profit of $13,000 except it was offset by a reserve for bad debts. In 2001, gross revenue of Cowichan Accounting was $36,000 but that sum increased to more than $50,000 in 2002 and the appellant stated profits were expected to accrue to the benefit of Enterprises at the conclusion of the 2003 business year. Even after the end of tax season in April, 2003, the appellant has worked steadily throughout May and June - with the exception of a two-week period - but expects he will be laid off by the end of July as the work is dwindling to the point where his services will not be required until the beginning of October. A record of hours worked - Exhibit A-11 - was maintained and he was remunerated fully for his efforts. The appellant filed - as Exhibit A-12 - a document described as Arm's Length Screening Guidelines in which affirmative responses had been checked off - by someone, probably at CCRA or HRDC - in a box next to certain questions concerning the working relationship. The appellant pointed out that in each instance, the response supported his position that his employment with Enterprises had truly been at arm's length. Through his request for documents relative to his EI claim, the appellant obtained a memorandum - Exhibit A-13 - concerning the number of insurable hours required in his region before a worker could apply for benefits. The appellant referred to a letter - Exhibit A-14 - dated October 11, 2002 - from Paul Lieffertz to an official at CCRA - in which reference was made to Directors Fees - in the sum of $2,000 - having been paid to him in 1998, 1999, and 2000 as disclosed by copies of cancelled cheques. [4] In cross-examination, the appellant stated that prior to January 31, 1996, he had operated Cowichan Accounting through a corporation - Champion Games Inc. - that had been created in order to market games. Lieffertz stated he had been involved in a real estate development business and became so busy that he transferred the accounting business to Enterprises with the intent that his son - Paul - would continue to operate it and provide service to existing clients. However, this plan did not work out and the appellant agreed he continued - without any hiatus - to perform the necessary accounting work in the face of an obvious lack of interest on the part of his son despite efforts by the appellant to offer instruction in matters such as data entry and preparing a trial balance. Following the transfer of the accounting business to Enterprises, the appellant remained the only worker and continued to be the person with whom clients had contact. Lieffertz stated he was not in financial trouble on January 31, 1996, in that the 50-acre residential development was proceeding as planned and he also had an interest - through a corporation - in a 14-acre parcel of land in Duncan. Later, delays in obtaining planning approval and the resultant cost of servicing interim financing proved to be disastrous, eventually leading to his assignment in personal bankruptcy in January, 1998. [5] The appellant submitted the Minister failed to take into account significant, relevant facts and relied on some irrelevant material in arriving at the conclusion that he was not engaged in insurable employment with Enterprises. The appellant referred to those earlier determinations made by departmental officials - under identical circumstances - which had resulted in approval of his EI benefits during each layoff period between 1997 and 2000, inclusive. [6] Counsel for the respondent submitted the Minister had made the correct decision and the Report on Appeal - Exhibit A-7 - disclosed the Minister had considered all the appropriate circumstances and had weighed relevant facts prior to deciding the employment of the appellant was not insurable. [7] The relevant provision of the Act is paragraph 5(3)(b) which reads as follows: (3) For the purpose of paragraph (2)(i), ... (b) if the employer is, within the meaning of that 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. [8] In the case of Adolfo Elia v.Canada (Minister of National Revenue - M.N.R.), [1998] F.C.J. No. 316 - a decision of the Federal Court of Appeal dated March 3, 1998, at page 2 of the certified translation Pratte, J.A. stated: Contrary to what the judge thought, it is not necessary, in order for the judge to be able to exercise that power, for it to be established that the Minister's decision was unreasonable or made in bad faith having regard to the evidence before the Minister. What is necessary is that the evidence presented to the judge establish that the Minister acted in bad faith, or capriciously or unlawfully, or based his decision on irrelevant facts or did not have regard to relevant facts. The judge may then substitute his decision for that of the Minister. [9] In Légaré v. Canada (Minister of National Revenue - M.N.R.), [1999] F.C.J. No. 878 - another decision of the Federal Court of Appeal - Marceau, J.A. speaking for the Court stated at page 2 of the judgment: In this matter, the Court has before it two applications for judicial review against two judgments by a judge of the Tax Court of Canada in related cases heard on the basis of common evidence which raise yet again the problems of interpretation and application of the saving provision, subparagraph 3(2)(c)(ii). I say yet again because since its passage in 1990, several decisions of the Tax Court of Canada and several judgments of this Court have already considered what workable meaning could be given to subparagraph 3(2)(c)(ii). In reading the text, the problems it poses beyond its deficient wording are immediately obvious, problems which essentially involve the nature of the role conferred on the Minister, the scope of the Minister's determination and, by extension, the extent of the Tax Court of Canada's general power of review in the context of an appeal under section 70 et seq. of the Act. While the applicable principles for resolving these problems have frequently been discussed, judging by the number of disputes raised and opinions expressed, the statement of these principles has apparently not always been completely understood. For the purposes of the applications before us, we wish to restate the guidelines which can be drawn from this long line of authority, in terms which may perhaps make our findings more meaningful. The Act requires the Minister to make a determination based on his own conviction drawn from a review of the file. The wording used introduces a form of subjective element, and while this has been called a discretionary power of the Minister, this characterization should not obscure the fact that the exercise of this power must clearly be completely and exclusively based on an objective appreciation of known or inferred facts. And the Minister's determination is subject to review. In fact, the Act confers the power of review on the Tax Court of Canada on the basis of what is discovered in an inquiry carried out in the presence of all interested parties. The Court is not mandated to make the same kind of determination as the Minister and thus cannot purely and simply substitute its assessment for that of the Minister: that falls under the Minister's so-called discretionary power. However, the Court must verify whether the facts inferred or relied on by the Minister are real and were correctly assessed having regard to the context in which they occurred, and after doing so, it must decide whether the conclusion with which the Minister was "satisfied" still seems reasonable. [10] A perusal of the Appeals Officer's report - Exhibit A-7 - reveals the Officer accepted that the remuneration paid to the appellant was reasonable and that the duration of employment was consistent with the nature of the business activity within the particular community. However, the Appeals Officer concluded the appellant had total control of the business - except for signing authority - to the point where the Directors of Enterprises accepted his decision as to when his layoff would commence. Further, the Appeals Officer considered it unusual that an employer would exhibit such an absence of interest in the operations of a business. The Appeals Officer also noted - when considering the nature and importance of the work performed - that Enterprises was not an existing corporation carrying on other business but had been created specifically for the purpose of permitting the appellant to continue to carry on his own accounting practice even to the point of using the same name, Cowichan Accounting. In this regard, the conclusion of the Appeals Officer was that the employer and the appellant were not dealing with each other at arm's length . [11] Some of the assumptions of fact relied on by the Minister as set forth at paragraph 5 of the Reply are as follows: e) the Appellant is an accountant and has been providing services for G Q since 1996; f) many of G Q's clients were from the Appellant's previous accounting business; g) all G Q business was conducted from either Paul's home office or the Appellant's home office; h) the Appellant provided full accounting services and handled the day-to-day operations of G Q; i) Paul is not involved in the accounting services provided by G Q; j) Paul is not an accountant; k) Paul operates a restaurant through G Q; l) the Appellant set the rates charged for accounting services; m) the Appellant sets his own hours and days of work; n) the Appellant determined his own priorities; o) the Appellant solicits his own clients requiring accounting services; p) the Appellant supplied the majority of the tools and equipment; q) the Appellant was operating his own accounting business under G Q's name; [12] The only assumption which was rebutted by the appellant was 5(k) in that Paul Lieffertz did not operate a restaurant - or coffee shop - through the corporation, Enterprises. [13] Certainly, there are many businesses that employ related workers, as they are entitled to do, provided the circumstances of the employment satisfies the test imposed by paragraph 5(3)(b) of the Act. The language utilized in that provision recognizes that while persons may not be at arm's length, they are able to deal with each other in the course of their contract of employment as though they had been persons at arm's length. The match does not have to be perfect because the words, "substantially similar" are used to modify the nature of the contract of employment under analysis. One analytical device is to consider whether it is reasonable to conclude that strangers would have entered into a similar arrangement as the one - in the within appeal - between the appellant and his son, the majority shareholder in the payor corporation. The appellant is an experienced public accountant and had carried on his own practice under the name Cowichan Accounting for many years and had developed a solid client base. Paul Lieffertz - the appellant's son - had no aptitude or ability to handle the accounting/bookkeeping work nor did the minority shareholder, Graca. Enterprises had no other business and the appellant continued - seamlessly - to operate his previous accounting business without interruption and maintained contact with his clients, although he now purported that they were truly clients of Enterprises. His corporation - Champion Games Inc. - sold the existing working computer to Enterprises and he also had some of his own office equipment in the office space in a building that he owned. All decisions necessary to carry out the work and the entire conduct of the business were under the sole control of the appellant at all times. When the work ran out, he informed his son who then signed a completed ROE which the appellant required to apply for EI benefits. The accounting work was seasonal in nature and that was accepted by the Minister when weighing various relevant factors. The appellant presented a letter - Exhibit A-14 - that had been provided to an official at CCRA together with copies of cancelled cheques purporting to demonstrate that his son had received a benefit - albeit indirectly in the form of Director's Fees - through his participation in Enterprises, the owner of the accounting business. I do not find that to be conclusive of anything other than some funds were paid from the Enterprises credit union account to Paul Lieffertz without any proof as to the origin of the funds, particularly since the appellant testified that Cowichan Accounting - as a business entity - had not provided any profit to Enterprises since January 31, 1996, the date of the transfer of said business, although a profit was expected to be available to the corporation at the end of 2003. [14] The circumstances of the employment under examination in the within appeal are not similar to those in the case of Agnes Quinn-Hiscott v. M.N.R. - Docket 97-907(UI) - a decision of Judge Mogan, Tax Court of Canada, relied on by the appellant. In that case, the worker had been employed in a family business that supplied aluminum products mainly for domestic residences. Earlier, the company had also been in the installation business and the worker went to work for the company as an office administrator because her mother-in-law was ill and unable to handle the necessary office work. The nature of the business was seasonal and her employment ended when a previous bookkeeper returned to work. During the period relevant to that appeal, the payor employed 4 workers but at an earlier stage it had employed 10 workers including two installation crews. In the Quinn-Hiscott case, Judge Mogan held that the employment of the worker was genuine and in accordance with normal standards applicable to a contract of employment between non-related parties. [15] Returning to the within appeal, the question remains: Would a stranger - in return for no reasonable prospect of financial gain (even on a limited investment) and without possessing specialized skills necessary for the conduct of said business - enter into an arrangement whereby the former owner - now transformed into an employee - could - except for signing cheques - continue to exercise total control over the ongoing operations of that same business as though he were still the owner except that now he was entitled to a bi-monthly pay cheque? The ready answer in my opinion is: No. [16] In arriving at the above response, I assume there are no regulations or restrictions in place preventing a person or corporation from purchasing and operating such a public accounting business. However, the nature of the actual operation of Cowichan Accounting and the context in which Enterprises acquired that business is significant when comparing the employment circumstances to other scenarios not involving related parties. [17] One must regard all the relevant circumstances and in my view the Minister did not go off the rails and consider any erroneous material. The factors considered were weighed and credit was given to the appellant's position with respect to two of the indicia set forth in the relevant legislation. On balance, the decision of the Minister was that the employment of the appellant with Enterprises was not insurable. The fact that the appellant received his EI benefits on previous occasions with respect to the same circumstances of employment with the payor is of no legal consequence in terms of the validity of the decision of the Minister issued in the within appeal. There is nothing in the evidence that would justify me intervening in that exercise of discretion because the conclusion of the Minister is reasonable and the decision is confirmed. [18] As a consequence of the above findings, the appeal is hereby dismissed. Signed at Sidney, British Columbia, this 3rd day of October 2003. "D.W. Rowe" Rowe, D.J. CITATION: 2003TCC704 COURT FILE NO.: 2003-142(EI) STYLE OF CAUSE: Chris Lieffertz and M.N.R. PLACE OF HEARING: Nanaimo, British Columbia DATE OF HEARING: July 23, 2003 REASONS FOR JUDGMENT BY: The Honourable D.W. Rowe, Deputy Judge DATE OF JUDGMENT: October 3, 2003 APPEARANCES: For the Appellant: The Appellant himself Counsel for the Respondent: Raj Grewal COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada