Feader v. M.N.R.

Feader v. M.N.R. Court (s) Database Tax Court of Canada Judgments Date 2004-05-05 Neutral citation 2004 TCC 346 File numbers 2003-2079(EI) Judges and Taxing Officers Campbell J. Miller Subjects Employment Insurance Act Decision Content Docket: 2003-2079(EI) BETWEEN: COLLEEN FEADER, Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. ____________________________________________________________________ Appeal heard on April 16, 2004, at Edmonton, Alberta, By: The Honourable Justice Campbell J. Miller Appearances: Counsel for the Appellant: Frank P.K. Friesacher Counsel for the Respondent: John-Paul Hargrove ____________________________________________________________________ JUDGMENT The appeal pursuant to subsection 103(1) of the Employment Insurance Act is dismissed and the decision of the Minister of National Revenue, on the appeal made to him under section 91 of that Act, is confirmed. Signed at Ottawa, Canada, this 6th day of May, 2004. "Campbell J. Miller" Miller J. Citation: 2004TCC346 Date: 20040505 Docket: 2003-2079(EI) BETWEEN: COLLEEN FEADER, Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. REASONS FOR JUDGMENT Miller J. [1] On November 18, 2002, the Minister of National Revenue decided that Colleen Feader's employment from September 12, 2000 to June 16, 2002, was not insurable, as she was not dealing at arm's length with the employer, 893396 Alberta Ltd., operating as Big Al's Steak & Pizza. The Minister was also not satisfied the Appellant and the employer would have entered into a substantially similar contract of employment if they had been dealing at arm's length. Ms. Feader appeals the Minister's decision. [2] Prior to September 2000, Big Al's restaurant was owned and operated by Ms. Feader's fiancé's uncle. He wished to get out of the business. Mike Smilley, Ms. Feader's fiancé, was interested in taking over the restaurant, but could not afford to. He approached his fiancée's father, Ken Feader, who agreed to buy the restaurant. No written documents were presented at trial describing this deal, but it was clear from Ms. Feader's testimony that she and her fiancé, now husband, were eventually to pay back what she called the loan from her father, and assume ownership of the business. No payments have yet to be made on retiring this debt. [3] Ms. Feader had never worked in a restaurant before, but she started at Big Al's in September 2000 as a waitress and a cook. She also took care of certain paperwork, including the payment of bills, signing cheques (including her own salary cheques) and some limited bookkeeping. In the questionnaire that she completed for Canada Customs and Revenue Agency she described her position as co-manager with Mr. Smilley. She worked six days a week from 11:00 a.m. to 1:00 a.m. On Sunday she worked from 11:00 a.m. to 9:00 p.m. She took no vacation time during the relevant period, other than the odd weekend and some statutory holidays. [4] Ms. Feader received $1,875 twice a month, other than the very first cheque which was only $1,250. Appropriate employment insurance premiums, Canada Pension Plan contributions and federal tax source deductions were taken from these salary payments. The amount was not negotiated but was simply set by her father. [5] Ms. Feader denied in her questionnaire that the salary was based on what she and her fiancé needed to live on. She also denied that she received less if business of the restaurant was slow. She confirmed that the amount she received was a combined annual salary for her and her fiancé, except for a period in 2002 while he was ill. She did not refute this statement in her oral testimony, though had indicated she was unaware of the deal between her father and her fiancé regarding payment. [6] Ms. Feader produced printouts of copies of cheques indicating she received regular cheques, other than in December 2001 for which there was no payment, and in March 2001, when she received a payment of $1,608 instead of the $1,875. She testified that she cashed all the cheques, though occasionally held off for a week or more, if she did not need the money. In her questionnaire with CCRA she confirmed that she would hold off cashing the cheques, if the company's finances would not permit. Again she did not refute this earlier statement. Her reported income was $12,500 in 2000, $37,233 in 2001 and $12,540 in 2002. [7] Depending on the time of year, the restaurant could employ between five and ten employees, all of whom were on an hourly rate from $6.00 for servers to $9.00 for an experienced cook. Ms. Feader was not required to track her hours, as were these other employees. [8] In June 2002, there was a fire at the restaurant which required that it be shut down until September. Ms. Feader only helped out as needed after that, though did not draw any salary or wage for doing so. [9] Pursuant to subsection 5(3) of the Employment Insurance Act, insurable employment does not include employment if the employer and employee are not dealing with each other at arm's length. There is no question that Ms. Feader and the employer were not prima facie dealing with each other at arm's length. Subsection 5(3) however goes on to stipulate: 5(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. [10] The Federal Court of Appeal has clarified in recent years the approach to the analysis of paragraph 5(3)(b) of the Act. In Légaré v. M.N.R.[1] Justice Marceau stated: 4 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. [11] And in the recent decision of Quigley Electric Ltd. v. M.N.R.,[2] Justice Malone stated: 7 A legal error of law is also said to have been committed when the Judge failed to apply the legal test outlined by this Court in Légaré v. Canada (Minister of National Revenue) (1999) 246 N.R. 176 (F.C.A.) and Perusse v. Canada (2000) 261 N.R. 150 (F.C.A.). That test is whether, considering all of the evidence, the Minister's decision was reasonable ... 10 In my analysis, the Judge correctly followed the approach advanced by this Court in Canada (A.G.) v. Jencan Ltd. [1998] 1 F.C. 187 (C.A.), namely, that the Minister's exercise of discretion under paragraph 5(3)(b) can only be interfered with if she acted in bad faith, failed to take into account all relevant circumstances or took into account an irrelevant factor. Although Justice Marceau made no mention of Canada (A.G.) v. Jencan Ltd.,[3] Justice Malone, in his decision subsequent to Légaré, does confirm the applicability of the three-prong inquiry as to when the Minister's exercise of discretion can be interfered with. I distil from these cases the following role of this Court: to determine if the Minister acted in bad faith, failed to take into account all relevant circumstances or took into account an irrelevant factor, and, only if the Minister so acted, to then determine if the conclusion with which the Minister was satisfied still seems reasonable. [12] I wish to be clear that this is a case of an individual who, due to the non-arm's length relationship with her employer, falls outside the scheme of the Act and appeals to the Minister's discretion to let her in. This is not a case of the Government attempting to rely on paragraph 5(3)(b) to bring a related individual into the scheme of the Act. [13] There is no issue of Ministerial bad faith in this case. The Appellant does contend though that the Minister took into account an irrelevant factor, that is the ownership arrangement between the Appellant's father, the Appellant and her fiancé, which the Appellant's counsel referred to as speculative. The Appellant argues that because no payments have ever been made by the Appellant or her fiancé to the Appellant's father, towards the acquisition of the restaurant, the Appellant's deal to ultimately own the restaurant is irrelevant. I agree the ownership issue is irrelevant, though for different reasoning. Ms. Feader acknowledged that she and her fiancé basically ran the business as if it were their own. How else to explain her 14-hour days, six days a week plus 10 hours on Sunday? But it is the employment arrangement itself that is at issue, not the reason for the employment arrangement. Whether Ms. Feader owned and ran the restaurant, or ran the restaurant with a deal to ultimately own it, goes only to whether the relationship is arm's length or non-arm's length. In this case the non-arm's length nature of the relationship is clearly established.[4] In effect there are two steps for the Minister to address: first, is there a non-arm's length relationship determined in accordance with the Income Tax Act? and second, if there is, is the Minister satisfied, on an appeal from an employee seeking insurability, that it is reasonable to conclude the parties would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length. The circumstances the Minister must regard under the second inquiry are those listed in paragraph 5(3)(b) of the Act: remuneration, terms and conditions, duration and nature and importance of work performed. At the second stage, the Minister is not directed to regard circumstances relevant to the first stage of the inquiry which establishes the non-arm's relationship. [14] The Appellant also argues that the Minister improperly relied on a fact which has been proven to be incorrect. In the Reply the Minister made the following assumptions: (q) the actual salary that the Appellant received was based on the amount that the Payor could afford to pay her and on the amount she needed in order to live; (r) if the business could not afford it, the Appellant would either delay cashing her cheque or would not take her full salary; (s) the Appellant's remuneration was paid irregularly; The Appellant at trial testified that she was issued cheques of $1,875 twice a month. While she acknowledged she did not always cash the cheques immediately, she confirmed she always received the cheques. Even in the questionnaire completed for CCRA, she stated "no" in answer to the following two questions: 2. The worker's salary was based on what the worker and the fiancé needed to live on and what the business could afford. 4. In the past year, business was slow and the worker's pay was less depending on cash flow. This was also the worker's choice. Having found the Minister failed to take into account the relevant circumstances of the Appellant's regular paycheque, and in effect relied upon an inaccurate fact, and also that the Minister took into account the irrelevant fact of the ownership arrangement, it is left for me to determine if the Minister's conclusion in such circumstances still seems reasonable. I believe it does. [15] I cannot identify any other relevant facts the Minister failed to consider, nor irrelevant facts the Minister relied upon, so I will review the circumstances of the Appellant's employment simply disregarding the two misunderstandings of the Minister. [16] There is no issue that the duration and the nature and importance of the work done by Ms. Feader reflects that of a valued full-time employee, similar to an arm's length employment arrangement. To assess the reasonableness of the Minister's decision that Ms. Feader's employment arrangement was not substantially similar to one entered into between parties dealing at arm's length, requires a close examination of the factors of remuneration and terms and conditions. Dealing first with remuneration, and relying upon the income for the one full year of work in 2001 of $37,233, Ms. Feader was paid a commercially reasonable salary. It was not out of line with the other workers, if you break Ms. Feader's salary down into an hourly rate. She worked approximately 375 hours a month or 4,500 hours in the year and received $37,233 or just over $8.00 an hour. But, she acknowledged that the income, though received by her, was to cover the work of both her and her co-manager fiancé. In that light, the remuneration falls far short of what would be paid in an arm's length relationship for the hours worked. More significantly, what arm's length employee pays one employee the salary of two people? While she worked occasionally after the fire, she was not paid. Remuneration shifted from her hands to her fiancé's. There was no suggestion this was done to manipulate the employment insurance system. What it does illustrate, however, is the flexibility of the non-arm's length arrangement; a flexibility generally unavailable in an arm's length relationship. [17] Also, payments were not always immediately cashed, one of the reasons given was the financial strength of the employer. This would not be an expectation of an arm's length employee. Ms. Feader could control this, not just by not cashing a signed cheque but, because she had signing authority, by not signing the payroll cheques in the first place. Finally, from Ms. Feader's description of her duties, compared to her fiancé's, it was her fiancé who served more as a manager, while she did those duties normally paid by way of an hourly wage. She had no opportunity for overtime. I am satisfied based on the factor of remuneration alone, the Minister's conclusion that Ms. Feader's employment was not substantially similar to an arm's length employment agreement remains reasonable. [18] With respect to the terms and conditions, the one that overshadows any other is the exorbitant hours of work required of Ms. Feader. She also did not take any vacation time throughout the relevant period. These facts do not suggest a substantially similar arm's length contract. I find the Minister's conclusion again remains reasonable. [19] Removing the misunderstandings upon which the Minister relied, there remain sufficient factors for the Minister's conclusion to still be seen as reasonable. Based on that result, I cannot displace the Minister's finding that Ms. Feader was not engaged in insurable employment. The appeal is dismissed. Signed at Ottawa, Canada, this 6th day of May, 2004. "Campbell J. Miller" Miller J. CITATION: 2004TCC346 COURT FILE NO.: 2003-2079(EI) STYLE OF CAUSE: Colleen Feader and The Minister of National Revenue PLACE OF HEARING: Edmonton, Alberta DATE OF HEARING: April 16, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice Campbell J. Miller DATE OF JUDGMENT: May 6, 2004 APPEARANCES: Counsel for the Appellant: Frank P.K. Friesacher Counsel for the Respondent: John-Paul Hargrove COUNSEL OF RECORD: For the Appellant: Name: Frank P.K. Friesacher Firm: McCuaig Desrochers LLP For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] [1999] F.C.J. No. 878. [2] [2003] F.C.J. No. 1789. [3] [1998] 1 F.C. 187 [4] Query whether this would still be a non-arm's length relationship if the deal Ms. Feader had to acquire the restaurant was with a third party, not her father. She would still be operating the restaurant as if it was her own.