Club de Golf Montcalm Inc. c. M.R.N.

Club de Golf Montcalm Inc. c. M.R.N. Court (s) Database Tax Court of Canada Judgments Date 2004-07-16 Neutral citation 2004 TCC 481 File numbers 2003-2588(EI) Judges and Taxing Officers Sylvio J. Savoie Subjects Canada Pension Plan Decision Content Docket: 2003-2588(EI) BETWEEN: CLUB DE GOLF MONTCALM INC., Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeal heard on March 25, 2004, at Montréal, Quebec Before: The Honourable Deputy Judge S.J. Savoie Appearances: Counsel for the Appellant: Serge Fournier Counsel for the Respondent: Antonia Paraherakis ____________________________________________________________________ JUDGMENT The appeal is allowed, and the decision rendered by the Minister is vacated, in accordance with the attached Reasons for Judgment. Signed at Grand-Barachois, New Brunswick, this 16th day of July 2004. "S.J. Savoie" Savoie D.J. Translation certified true on this 5th day of January 2005. Colette Dupuis-Beaulne, Translator Citation: 2004TCC481 Date: 20040716 Docket: 2003-2588(EI) BETWEEN: CLUB DE GOLF MONTCALM INC., Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT Savoie, D.J. [1] This appeal was heard at Montréal, Quebec, on March 25, 2004. [2] The Appellant is appealing from the decision of the Minister of National Revenue (the "Minister"), whereby the employment of Mr. Robert-André Gaudet, the worker, was not insurable. [3] On June 5, 2003, the Minister informed the Appellant of his decision in which this employment was not insurable owing to the existence of a non-arm's length relationship between the Appellant and the worker during the period at issue, specifically, beginning January 23, 2002, and ended January 4, 2003. [4] In rendering his decision, the Minister relied on the following assumptions of fact as set out in paragraph 5 of the Reply to the Notice of Appeal: (a) the Appellant operates a golf course which includes a restaurant and a reception hall; (admitted) (b) the Appellant started up his operations in 1977; (admitted) (c) the business operates from April to November; (admitted) (d) the Appellant's sales figures are approximately $2.8 million per year; (admitted) (e) Mr. Raymond Gaudet is the Chairman of the Board of Directors and the principal shareholder of the Appellant, with 98% of the shares; (admitted) (f) the other shareholders of the Appellant are the worker, Sylvain, Claude, and Ève Gaudet, and Ms. Évangeline Richard; (admitted) (g) Ms. Évangeline Richard is the spouse of Mr. Raymond Gaudet; (admitted) (h) the worker, Sylvain, Claude, and Ève Gaudet are the children of Mr. Raymond Gaudet and Ms. Évangeline Richard; (admitted) (i) Ms. Évangeline Richard administers the Appellant's activities; (admitted) (j) Mr. Sylvain Gaudet handles mainly the pro-shop; (admitted) (k) Mr. Claude Gaudet is the Appellant's superintendent and handles the golf course maintenance; (admitted) (l) the Appellant has approximately 95 employees; (admitted) (m) during the period at issue, the worker's duties consisted of maintaining the machinery, maintaining the greens, and performing various work in the restaurant; (denied) (n) the worker's remuneration was $680 per week for 40 hours of work; (denied) (o) the worker also received vacation pay equal to 6% of his yearly wages; (admitted) (p) the worker works for the Appellant from April to January every year; (admitted) (q) the worker and the other members of his family received bonuses of $5,000 in 2001 and $25,000 in 2002; (admitted) (r) no other employee of the Appellant received a bonus in 2001 and 2002. (admitted) [5] The Appellant admitted all of the Minister's assumptions of fact, except for those set out in paragraphs (m) and (n), which he denied. [6] Some minor details were filed in evidence with respect to paragraphs (m) and (n). The worker was assigned the additional duty of getting the machinery running. During the period at issue, his wages were $680 per week for 40 hours of work. His wages are now $720 per week. [7] It is the opinion of the Appeals Officer (Exhibit I-3) that the worker's employment involved nothing unusual, except with respect to wages, and, more specifically, the payment of a $25,000 bonus in 2002 by the Appellant. [8] In other words, the Minister did not question the insurability of this employment, except to claim its exclusion under paragraph 5(2)(i) of the Employment Insurance Act (the "Act"), because of the non-arm's length relationship. [9] In her arguments, counsel for the Minister stated that the Minister was not putting into issue the legitimacy of the worker's lay-off during a certain period of the year. Thus, the Minister did not put into issue the duration, nature, and importance of the worker's work within the context of paragraph 5(3)(b) of the Act. [10] In short, the Minister challenged solely the criterion of the "remuneration paid" as specified in paragraph 5(3)(b) of the Act. [11] In his appeal report (Exhibit I-3), the Appeals Officer pointed out that: 1. No one else in the industry who was dealing at arm's length received this bonus; 2. Even the Chairman of the Appellant did not receive a bonus; 3. The bonus paid to the worker in 2002 represents 85% of his wages; [12] However, at the appeal hearing, the Appeals Officer was unable to answer the question as to whether the worker was a key employee of the business. Moreover, he was unable to answer the question as to whether the worker was included in the group of people who ran the business or who played a management role, and compare the employees of the business who had the same responsibilities and differentiate them from the others. [13] The evidence shows that the Minister compared the worker's salary, namely, his bonus, with that of the Appellant's other employees, without taking into account the work they did for the company. [14] The Minister placed a great deal of importance on the fact that only the worker and the other members of his family had received a bonus. [15] The Appellant argues that the Minister is comparing apples to oranges, because the worker is a manager who has been working for the company since his youth, and he is paid according to the importance of his duties within the company. Furthermore, the Appellant considers him to be irreplaceable. A number of years ago, at the Appellant's request, the worker invested $10,000 in the company to effect an estate freeze. The Appellant argues that the worker received this bonus in recognition of the voluntary work he performed when he was a student and as a gift to celebrate the 25th anniversary of the business. [16] It seems odd to compare the worker's salary with that of the company President, Mr. Gaudet, given that, even though he owns 85% of the shares in the Appellant, Mr. Gaudet does not work in the business, since he operates his own dental practice. [17] The evidence showed that the other shareholders in the company are: Évangeline Richard, Sylvain, Claude, Ève, and Robert-André Gaudet, the worker. Évangeline Richard is trained as a chartered accountant and is primarily responsible for the administration of the golf club. She is paid $30.00 per hour, based on a 40-hour work week. [18] The company hires nearly 95 employees every year and pays them according to their respective skills and qualifications. The Appellant paid for the training of the worker and the other employees at the I.T.A. in Saint-Hyacinthe (crop production). [19] The worker and the other family members, namely, Évangeline Richard, Sylvain, Claude, and Ève Gaudet received a $5,000 bonus in 2001 and a $25,000 bonus in 2002. The Appellant explained that the bonuses were given in celebration of the company's 25th anniversary, to bring salaries in line with those paid at other golf clubs, and to encourage his children to stay with the company rather than work for another company that might offer higher wages. It was established that the worker was supervised by his uncle, Roger Gaudet, and that he worked for the company as did his brother Claude and the company's mechanic. It was also established that the worker attended the company's monthly meetings. [20] In his appeal report (Exhibit I-3), the Appeals Officer described the terms and conditions of employment for the company's other salaried employees as follows: • Josée Gaudet (at arm's length) - 40-hour work week - minimum wage plus tips ($13,565 in 2001 and $13,363 in 2002) - duties: server - period of employment: April to November - no bonus • Danielle Desrochers (at arm's length) - 40-hour work week - wages: $13.00 per hour ($14,513 in 2001 and $20,146 in 2002) - duties: preparing payroll - period of employment: April to November - no bonus • Nathalie Beaudoin (at arm's length) - 40-hour work week - wages: $15.00 per hour ($19,529 in 2001 and $22,152 in 2002) - duties: office work - period of employment: April to December - no bonus [21] The Appeals Officer also made the following comment in his report: COMMENT: Robert-André Gaudet earned wage income of $33,909 in 2001 and $54,584 in 2002 (including bonuses). Sylvain Gaudet earned wage income of $34,139 in 2001 and $56,015 in 2002 (including bonuses). Claude Gaudet earned income of $35,438 in 2001 and $56,413 in 2002. Évangeline Richard earned wage income of $35,151 in 2001 and $60,398 in 2002 (including bonuses). [22] Counsel for the Appellant criticized the Minister for comparing the worker's remuneration to that of other employees in the company who did not have the same job and pointed out that the Minister failed to make comparisons between the worker's remuneration and that of workers at other golf clubs, or in the industry, who perform similar tasks. The Appellant did so, and, in paying the bonuses, he wanted to bring his managers' salaries in line with the prevailing wages in the industry for similar employment. [23] The Appellant is asking this Court to reverse the decision of the Minister. [24] In making his decision, the Minister relied on paragraphs 5(1)(a) and 5(2)(i) and subsections 5(3) and 93(3) of the Act. [25] Subsection 5(1) of the Act reads in part as follows: 5. (1) 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; [...] [26] Subsections 5(2) and (3) of the Act are worded 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 purposes 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 (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. [27] The Minister maintains that the worker's employment was not insurable during the period at issue, because a non-arm's length relationship existed between himself and the Appellant, pursuant to paragraph 5(2)(i) of the Act and sections 251 and 252 of the Income Tax Act. [28] The Minister maintains that he exercised the discretionary powers conferred upon him under subsection 5(3) of the Act appropriately, and that the worker's terms and conditions of employment would not have been similar had a non-arm's length relationship existed between the Appellant and the worker. [29] The Federal Court of Appeal has set out the principles of application to resolve the issue presented to this Court in Légaré v. Canada (Minister of National Revenue-M.N.R.), [1999] F.C.J. No. 878. The following is an excerpt: 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. [30] In the case at bar, the evidence showed that the Appellant paid this bonus to the worker in celebration of the business's 25th anniversary, to match the wages paid to employees who perform the same duties in other businesses, and to keep the worker working for his business. It offered the same salary terms to the other employees in the worker's family who worked in management positions and who had more responsibilities than the other employees. [31] It was determined that, during his investigation, the Minister did not search for data that would enable him to make a comparison with employees in the same class, with the same level of skills, experience, and importance within similar businesses elsewhere. [32] He simply relied on a comparison of the worker's remuneration with that of the other employees, who had different responsibilities, in the same business. [33] In this context, counsel for the Appellant asked this Court to take note of the principle set out by Desjardins J. of the Federal Court of Appeal in Landry v. Canada (Minister of National Revenue - M.N.R.), [2001] F.C.J. No. 148, who wrote the following: [...] He [the judge] never asked himself whether there was a connection between the plaintiff's terms of employment and his non-arm's-length relationship with the payer. If he had taken the right approach the judge would have found that in the case at bar the evidence showed that so far as working conditions were concerned the plaintiff was treated in the same way as the payer's other employees. The conditions were admittedly unusual, but we are dealing here with seasonal employment in remote areas which can easily fall outside the ordinary rules. What s. 3(2)(c) of the Unemployment Insurance Act (later the Employment Insurance Act) seeks to prevent is not the existence of unusual working conditions as such: it is the existence of working conditions which can only be explained by a non-arm's-length relationship between the claimant and the payer. [34] The Appellant provided evidence that the bonus received by the worker was part of his wages for the purpose of matching the remuneration that prevails in the industry for comparable work. Not only did the Minister not disprove this evidence, but also, at the hearing, the Appeals Officer admitted that no attempt had been made to find data within the industry that could have been used in support of his conclusion. [35] In Légaré, supra, a similar case, Marceau J. of the Federal Court of Appeal wrote the following: But what then were the facts that made such a negative impression on the Minister? He listed five of them: 1- the applicants' salary was $10.00 per hour while the other employees only made the minimum wage of $6.00; 2- the applicants' salary was even higher than that of the shareholders themselves; 3- in 1994 and 1995, the applicants' salary was not paid to them regularly each week as had previously been and was subsequently the case, but was paid in two instalments at the end of the year; 4- in 1996, when the employees' salary was increased to $7.00, the minimum wage, the plaintiffs' salary remained at $10.00; and 5- the three young children of one of the applicants, who lived next to the greenhouses, would sometimes be in the greenhouses or the land around them.. I have just said that in our view, these facts by themselves do little to explain and support the response of the Minister or his representative. Under the Unemployment Insurance Act, excepted employment between related persons is clearly based on the idea that it is difficult to rely on the statements of interested parties and that the possibility that jobs may be invented or established with unreal conditions of employment is too great between people who can so easily act together. And the purpose of the 1990 exception was simply to reduce the impact of the presumption of fact by permitting an exception from the penalty (which is only just) in cases in which the fear of abuse is no longer justified. From this perspective, after identifying the true nature of the employment, the importance of the duties and the reasonableness of the compensation, it is difficult in our view to attach the importance the Minister did to the facts he relied on to exclude the application of the exception. It is the essential elements of the employment contract that must be examined to confirm that the fact the contracting parties were not dealing with each other at arm's length did not have undue influence on the determination of the terms and conditions of employment. From this standpoint, the relevance of the facts relied on, even without further detail, seems very questionable. And there is no need to go any further. While the facts relied on might legitimately leave sufficient doubt with respect to an objective basis for the conditions of the applicants' employment contract, placing these facts in the context of the evidence adduced before the Tax Court of Canada - evidence which was almost completely accepted by the Tax Court judge - only serves to highlight the unreasonableness of the Minister's initial conclusion. It was in fact clearly explained and established that the applicants' salary was higher than the minimum wage the other employees received because of the responsibility involved in the duties they performed and that that was the prevailing salary in the industry for similar jobs; it was clearly explained and established that the shareholders had decided to reduce the salary normally due to them to provide for the financial support and development of the business; it was clearly explained and proven that a tornado had destroyed a large number of the buildings of the business in 1994, which led to a period of confusion, and then reconstruction and financial difficulties; last, it was explained and proven that the presence of the children of one of the applicants on the land around the greenhouses was very unlikely to affect the performance of her duties and the provision of the services she agreed to provide.. [36] The preceding excerpt sheds some light on the case before this Court. Marceau J.'s reasoning in Légaré, supra, is useful in the case at bar and the application of the principle he set out is justified in this case. [37] After reviewing the evidence and hearing the arguments presented at the hearing, considering the applicable legislation and case law cited, it is the opinion of this Court that the Minister did not make a proper assessment of the facts in carrying out the exercise provided for at paragraph 5(3)(b) of the Act, and, consequently, his conclusion no longer appears to be reasonable. [38] Therefore, the worker's employment was insurable, because it was not subject to paragraph 5(2)(i) of the Act. The worker and the Appellant are deemed to have a non-arm's length relationship between them with respect to this employment, because this Court is satisfied that it is reasonable to conclude, given all of the circumstances, that they would have concluded a similar contract of employment between them had there been an arm's length relationship between them. [39] The appeal is allowed and the decision rendered by the Minister is vacated. Signed at Grand-Barachois, New Brunswick, this 16th day of July 2004. "S.J. Savoie" Savoie D.J. Translation certified true on this 5th day of January 2005. Colette Dupuis-Beaulne, Translator CITATION: 2004TCC481 COURT FILE No.: 2003-2588(EI) STYLE OF CAUSE: Club de Golf Montcalm Inc. and M.N.R. PLACE OF HEARING: Montréal, Quebec DATE OF HEARING: March 25, 2004 REASONS FOR JUDGMENT BY: The Honourable Deputy Judge S.J. Savoie DATE OF JUDGMENT: July 16, 2004 APPEARANCES: For the Appellant: Serge Fournier For the Respondent: Antonia Paraherakis COUNSEL OF RECORD: For the Appellant: Name: Serge Fournier Firm: Brouillette Charpentier Fortin Montréal, Quebec For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada