McGeachie v. M.N.R.

McGeachie v. M.N.R. Court (s) Database Tax Court of Canada Judgments Date 2004-11-09 Neutral citation 2004 TCC 748 File numbers 2003-3005(EI) Judges and Taxing Officers Alexander A. Sarchuk Subjects Employment Insurance Act Decision Content Docket: 2003-3005(EI) BETWEEN: DEREK J. McGEACHIE, Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. ____________________________________________________________________ Appeal heard on June 7, 2004, at Toronto, Ontario, By: The Honourable Justice A.A. Sarchuk Appearances: For the Appellant: The Appellant himself Counsel for the Respondent: Maria Vujnovic ____________________________________________________________________ JUDGMENT The appeal pursuant to subsection 103(1) of the Employment Insurance Act is allowed and the decision of the Minister of National Revenue on the appeal made to him under section 91 of that Act is vacated on the basis that the Appellant was engaged in insurable employment with FBI Trade Lithoplate Corp. within the meaning of paragraph 5(1)(a) of the Act for the period January 31, 2001 to January 15, 2003. Signed at Ottawa, Canada, this 9th day of November, 2004. "A.A. Sarchuk" Sarchuk J. Citation: 2004TCC748 Date: 20041109 Docket: 2003-3005(EI) BETWEEN: DEREK J. McGEACHIE, Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. REASONS FOR JUDGMENT Sarchuk J. [1] This is an appeal by Derek J. McGeachie from a ruling by the Minister of National Revenue that he was not employed in insurable employment for the period January 31, 2001 to January 15, 2003. The basis for the ruling is that the Appellant and the Payer, FBI Trade Lithoplate Corp. (FBI) were not dealing with each other at arm's length pursuant to paragraph 5(2)(i) of the Employment Insurance Act (the Act). [2] In making his decision, the Minister relied on the following assumptions of fact: (a) the Payer operates a business of outputting and imaging (75%), digital printing (20%) and websites (5%); (b) the Payer's shareholders are as follows: Derek G. McGeachie (Appellant's father) 40% Derek J. McGeachie (Appellant) 35% Shirley Zerfas 25% (c) the Appellant is related to one of the Payer's shareholders as being Derek G. McGeachie's son; (d) the Appellant was hired as Manager; (e) the Appellant performed his duties at the Markham and Mississauga locations; (f) the Appellant was paid $6,000 per month plus bonuses; (g) the Appellant was paid by cheque, on a bi-weekly basis; (h) the Appellant and the Appellant's father had full signing authority on the Payer's bank account; (i) the Appellant was primarily responsible for all the aspects of the business operations; (j) the Payer's shareholder, Derek G. McGeachie, the Appellant's father, made a financial investment in the Payer's business but had no involvement in the day-to-day operation of the business; (k) based on a letter signed by the Appellant, dated January 27, 2003, the Appellant advised the staff that he was leaving the company and that he was taking the staff from the Mississauga division with him his new business venture called "M15 Digital Communications" with his partner, Jez Metcalfe, this situation is not common in an arm's length transaction; (l) the Appellant's ability to sell the company's assets without a co-signature of the other shareholders is not common in an arm's length transaction (agreement between the Appellant and Jez Metcalfe dated December 16, 2002); (m) the Appellant is related to the Payer's sole shareholder within the meaning of the Income Tax Act; (n) the Appellant is not dealing with the Payer at arm's length. [3] Before proceeding with a review of the evidence before the Court, I feel obliged to note that the Respondent tendered in evidence two separate questionnaires completed by the Appellant. The first is dated March 3, 2003 and was sent in response to a request by a CPP-EI rulings officer. The second is dated May 12, 2003 and is referred to as a "certification" of the answers therein. Although both documents deal with the same issues, the questions are phrased differently and often approach the same subject in a different fashion. In my view neither one, standing alone or for that matter both read together, provide a complete picture of the relevant events. I also note that there is nothing before the Court to indicate whether one or the other or both documents were relied upon by the Minister in making the determination in issue. Notwithstanding the absence of such information, I propose to deal with the matter on the basis that both documents are in play. I concede that, as counsel for the Respondent suggested, the Appellant could have provided the Minister, as he did in Court, with a much more complete history of his employment, including such things as salary arrangements, duties, bonus payments, etc. as well as a better description of his responsibilities. But his failure to do so does not preclude this Court from considering all of the evidence adduced during the course of this hearing. [4] The Appellant is the son of Derek G. McGeachie ("Derek G."), however, the relationship between father and son was short-lived. Derek G. left his family when the Appellant was a year and a half old, his mother remarried and he was raised by her and the stepfather. He observed that "I really didn't know him until I got into business with him at a much later date". The Appellant attended the Ivey Business School and earned an Honours Business Administration degree in 1995. During that period, he was employed by Proctor and Gamble in an internship and following graduation, worked for that company in a fulltime position for approximately two years. His duties were essentially those of an "assistant brand manager" with the duty to build and manage that brand in a marketing and sales sense. As well, in his second year of university, he and a colleague acquired a small trading company in Hong Kong which, when sold in early 1996 to Nestlé Canada, had six fulltime staff and a number of subcontracted commission-based agents selling products of Nestlé and Cadbury throughout southeast Asia. The Appellant was the general manager of that company. [5] The Appellant returned to Canada and in January 1997 joined FBI as the general manager in charge of "production operations". At that time it was owned 50% by Derek G. and 50% by Dave Hills. Over the course of 1997, 1998 and 1999, the Appellant bought shares from both of them and ultimately acquired 35% of the company at a cost of $165,000.[1] The Appellant's position as general manager was similar to that previously held by Hills and included sales, administration, production and purchasing, etc. However, notwithstanding his title and responsibilities, Derek G.'s approval was required in most instances and particularly so with respect to staff hiring and equipment acquisition. Initially, the Appellant was paid a salary of $45,000 plus a car and an expense allowance. He testified that in his first six months, the company performed well and continued to do so over the next few years and that concurrently his earnings increased and ultimately reached the $90,000-level plus bonus. He also observed that in addition to his management responsibilities, he had also taken on a sales role and in 1999, was the company's second largest salesman in terms of dollar volume and commissions earned. [6] At some point of time while Derek G. and Hills were still the owners of FBI, a separate company, Canadian Imaging Associates (CIA) had been incorporated by them.[2] FBI was intended to be the manufacturing company and CIA would perform a brokering function. The evidence is unclear but it appears that CIA was dormant for some period of time and according to the Appellant "about a year or two into my employment", the shareholders of FBI purchased CIA in the same proportions as their shareholdings in FBI and restarted the operation at the Mississauga location.[3] As before, CIA was intended to be the sales arm and FBI retained the manufacturing responsibilities. The Appellant worked for both companies and indicated that it was a good deal for him if, in his words, "I was able to make it profitable, which I did, and I earned a $30,000 bonus in the first year". The evidence of the Appellant is not entirely clear regarding the sequence of events which followed this acquisition. It appears that he was intent on continuing to work for both CIA and FBI and subsequently, this led to friction between Derek G. and the Appellant with the result that Derek G. ordered him to go "fully to Mississauga". A further disagreement erupted over the manner in which the Appellant's accounts were being handled in Markham after his departure and, as a result, he returned to Markham and insisted on splitting his time between the two operations. His request was not accepted by Derek G., the situation degenerated and ultimately led to a refusal by Derek G. to pay any commission cheques for the sales that the Appellant says he continued to bring into Markham. [7] The foregoing problems appear to have been exacerbated during the course of 2002 when FBI "began to perform very poorly, and effectively it lost quite a bit of money". According to the Appellant, Derek G. elected to "consolidate FBI and CIA into the main Markham operation which was our original one, the purpose being to essentially reduce costs and increase the manufacturing base of the main head office which had lost a lot of sales". The Appellant said he "had no real say in this since I didn't have control, but I wasn't opposed to it. It made sense". As a result, all of the operations were combined and, according to the Appellant, Derek G. put him in charge of "selling all the assets of the Mississauga operation which we didn't need, which I did". The Appellant further testified that he moved his office to Markham in the Fall of 2002 but from October of that year to January 2003, he received no remuneration or pay. Conclusion [8] The determination in issue was made by the Minister pursuant to the authority given to him by paragraph 5(2)(i) and subsection 5(3) of the Act which read as follows: 5(2) Insurable employment does not include (a) ... (i) employment if the employer and employee are not dealing with each other at arm's length. 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. [9] Guidelines with respect to the nature of the role conferred on the Minister, the scope of the Minister's determination and the extent of the Tax Court of Canada's general power of review of that determination were set out by Marceau J. in Légaré v. Canada, [1999] F.C.J. No. 878. More specifically, he 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 Marceau J. went on to say in Pérusse v. Canada, [2000] F.C.J. No. 310: 15 The function of an appellate judge is thus not simply to consider whether the Minister was right in concluding as he did based on the factual information which Commission inspectors were able to obtain and the interpretation he or his officers may have given to it. The judge's function is to investigate all the facts with the parties and witnesses called to testify under oath for the first time and to consider whether the Minister's conclusion, in this new light, still seems "reasonable" (the word used by Parliament). The Act requires the judge to show some deference towards the Minister's initial assessment and, as I was saying, directs him not simply to substitute his own opinion for that of the Minister when there are no new facts and there is nothing to indicate that the known facts were misunderstood. However, simply referring to the Minister's discretion is misleading. [10] With the foregoing principles in mind I have decided that the Minister's conclusion was not, in light of certain facts before me, reasonable. I make particular reference to the following assumptions made by the Minister: (a) the Appellant was primarily responsible for all the aspects of the business operations; (b) the Payer's shareholder, Derek G. McGeachie, the Appellant's father, made a financial investment in the Payer's business but had no involvement in the day-to-day operation of the business; The Appellant does not dispute that he was hired as general manager and that to the best of his abilities, he carried out that function as well as being heavily involved in sales. However, there is no evidence before me whatsoever to support the conclusion that Derek G. had no involvement in the day-to-day operation of FBI. Quite the contrary, it appears that he exercised substantial control over all of the activities and in several instances vetoed the Appellant's proposals. (c) based on a letter signed by the Appellant, dated January 27, 2003, the Appellant advised the staff that he was leaving the company and that he was taking the staff from the Mississauga division with him his new business venture called "M15 Digital Communications" with his partner, Jez Metcalfe, this situation is not common in an arm's length transaction; (d) the Appellant's ability to sell the company's assets without a co-signature of the other shareholders is not common in an arm's length transaction (agreement between the Appellant and Jez Metcalfe dated December 16, 2002); These assumptions ignore several factors, the primary one being that the Mississauga plant had been closed down, a portion of the sales force had transferred to the main office in Markham as was some of the equipment. According to the Appellant "Markham needed about half the equipment to make it all work and the other half was surplus". He maintains that at all relevant times, he had Derek G.'s instructions to and "100 percent" approval to sell the equipment and that "I found a couple of buying options, Jez had the highest amount that he was willing to pay. The only other option I found was that equipment reseller who was offering maybe 20,000 for the whole amount". [11] The foregoing events must be considered in light of the fact that there appears to have been considerable friction between Derek G. and the Appellant which led to the latter's apparent dismissal from his employment as general manager. The relationship ended, in the Appellant's words, with "an argument and a fight, and it wasn't pretty". An agreement to terminate the relationship led to a mediated settlement in which, according to the Appellant, "in return for me agreeing not to sue for severance or anything like that, keeping in mind I was employed as vice-president for six years. I agreed to accept $100,000 payment, which I have yet to receive actually". [12] This Court is required to verify whether the facts inferred or relied on by the Minister were real and were correctly assessed having regard to the context in which they occurred. The Appellant's training and experience in the field of marketing provides a sound basis for the conditions of his employment contract and the evidence as a whole confirms that although Derek G. and the Appellant were not dealing with each other at arm's length, this fact did not have undue influence on the determination of the terms and conditions of his employment. Accordingly, I have concluded that the Minister erred in finding that "Considering all the facts, he submits that it was reasonable for the Respondent to conclude that the Appellant and the Payer would not have entered into a substantially similar contract of employment, if they had been dealing with each other at arm's length". [13] The appeal is allowed and decision of the Minister is vacated on the basis that the Appellant was engaged in insurable employment with FBI during the period January 31, 2001 to January 15, 2003. Signed at Ottawa, Canada, this 9th day of November, 2004. "A.A. Sarchuk" Sarchuk J. CITATION: 2004TCC748 COURT FILE NO.: 2003-3005(EI) STYLE OF CAUSE: Derek J. McGeachie and The Minister of National Revenue PLACE OF HEARING: Toronto, Ontario DATE OF HEARING: June 7, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice A.A. Sarchuk DATE OF JUDGMENT: November 9, 2004 APPEARANCES: For the Appellant: The Appellant himself Counsel for the Respondent: Maria Vujnovic COUNSEL OF RECORD: For the Appellant: Name: N/A Firm: N/A For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] Of the remaining 65%, Derek G. initially owned 40% and his wife Shirley Zerfas held 25%. Her share was transferred to Derek G. in October 1999 (see Exhibit A-1). [2] The evidence, such as it is, suggests that this took place prior to, or in 1996. [3] It appears as though Hills at this stage had divested himself of all interest in FBI and CIA.