Grenier v. M.N.R.

Grenier v. M.N.R. Court (s) Database Tax Court of Canada Judgments Date 2006-01-30 Neutral citation 2006 TCC 27 File numbers 2005-2219(EI) Judges and Taxing Officers Sylvio J. Savoie Subjects Canada Pension Plan Decision Content Docket: 2005-2219(EI) BETWEEN: JUDITH GRENIER, Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeal heard on November 23, 2005, at Québec, Quebec Before: The Honourable S.J. Savoie, Deputy Judge Appearances: For the Appellant: The Appellant herself Counsel for the Respondent: Stéphanie Côté ________________________________________________________________ JUDGMENT The appeal is dismissed and the Minister's decision is affirmed in accordance with the attached Reasons for Judgment. Signed at Grand-Barachois, New Brunswick, this 30th day of January 2006. "S.J. Savoie" Savoie D.J. Translation certified true on this 31st day of March 2006 Aveta Graham, Translator Citation:2006TCC27 Date: 20060130 Docket: 2005-2219(EI) BETWEEN: JUDITH GRENIER, Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT Savoie D.J. [1] This appeal was heard at Québec, Quebec, on November 23, 2005. [2] This appeal deals with the insurability of the Appellant's employment while working for 9143-6238 Québec Inc., the Payor, from June 26 to December 19, 2004. [3] The Minister of National Revenue (the "Minister") informed the Appellant of his decision that she did not hold insurable employment. [4] In rendering his decision, the Minister relied on the following presumed facts: [translation] 5(a) the Payor was incorporated on June 11, 2004, under Part 1A of the Companies Act; (b) the Payor carried on business under the company name "Café-Bistrot le Central en folie"; (c) the Payor had rented a restaurant and its equipment on St-Paul street in Québec city; (d) the restaurant had a seating capacity of 28; (e) the restaurant was open from 11:00 a.m. to 10:00 p.m. from Monday to Friday and from 9:30 a.m. to 10:00 p.m. on Saturday and Sunday; (f) the Appellant is one of the three founders of the Payor; (g) the Appellant worked at the restaurant as a waitress and manager; (h) the Appellant and David Delavaud, another founder of the Payor, made all the decisions concerning the organization, operation and management of the restaurant, including establishing the hours of operation, hiring staff, developing the menu, taking care of the accounting, purchasing and payment of accounts; (i) in her application for unemployment benefits, the Appellant declared that she worked 100 hours per week for the Payor, namely 10 hours on Monday doing accounting, 70 hours from Sunday to Saturday as a waitress and 20 hours running errands from Sunday to Saturday; (j) the Appellant personally paid the costs of incorporating the Payor; (k) the Appellant was the only person among the founders to make an investment of $5,000 in start-up capital to finance the Payor; (l) the Appellant then invested around $3,000 to pay various expenses of the business; (m) there were no repayment terms or interest rate for the $8,000 invested by the Appellant and it is only noted in the restaurant's record of disbursements as [translation] "owing to Judith Grenier, $8,000"; (n) the Appellant personally assumed a risk of financial loss; (o) the Appellant had such influence over the Payer that there could not have been the independent relationship between herself and the Payor that is necessary to the creation of a true subordinate relationship; OTHER RELEVANT FACTS 6(a) according to the constituting act registered with the Enterprise Registrar on June 11, 2004, the Appellant described herself as the largest shareholder, David Delavaud as the second largest shareholder and Gérard Delavaud as the third largest shareholder; . . . (c) on May 17, 2005, the Appellant told a representative of the Respondent that the Payor did not have a company book or a securities register; (d) on May 17, 2005, the directors of the Payor had not held the organization meeting prescribed by the Act during which they must issue at least one share; (e) on May 17, 2005, none of the Payor's shares had been issued; 7. Also, the Minister determined that the Appellant did not hold insurable employment because she and the Payor, in the context of the employment at issue, had a de facto non-arm's length relationship. 8. In fact, the Minister relied on the following presumed facts: (a) the Appellant worked as a waitress and took care of the accounting and commissions; (b) the Appellant worked every day; (c) the Appellant worked from 65 to 100 hours per week for the business; (d) the number of hours and days worked demonstrate a non-arm's length relationship; (e) the Appellant earned a salary of $350 every two weeks in addition to tips of $50 to $100 per week; (f) the Appellant worked for the Payor at a rate of about $3.00 per hour; (g) the waitresses hired by the Payor were paid at the prescribed rate of $6.75 per hour according to the Commission des normes du travail; (h) the Appellant worked for the Payor at a reduced hourly rate; (i) the Appellant worked for the Payor without remuneration from December 19 to 23, 2004; (j) the Appellant's remuneration was unreasonable; (k) the Appellant's involvement, through the number of work hours and by accepting a reduced hourly rate, was such that the Appellant could not have been replaced by an unrelated worker in the same circumstances. [5] The Appellant admits to the Minister's presumed facts set out in subparagraphs 5(a) to 5(d), 5(f), 5(g), 5(k) to 5(m), 6(a), 8(a), 8(c), 8(e), 8(g) and 8(i); she denies those set out in subparagraphs 5(h), 5(j), 5(o), 6(c) to 6(e), 8(b), 8(d), 8(f), 8(h), 8(j) and 8(k); she wants to elaborate on those set out in subparagraphs 5(e), 5(i) and 5(n). [6] The Appellant specified that the restaurant's hours of operation were flexible, depending on how busy it was. The same was true with respect to how her weekly schedule was divided. Her availability to perform her accounting duties and errands could vary depending on the number of hours she worked as a waitress. [7] It was established that the shareholder Gérard Delavaud did not work at the business and did not participate in the decisions made at the restaurant. David Delavaud told the investigating officers that his father was a shareholder but that he did not want to get involved in the day-to-day operations of the restaurant because he was too involved in his own business, namely his restaurant. The investigators also learned from Gérard Delavaud that he was not aware of the Payor's operations, the menus, the business' finances, or the salaries paid to the two other shareholders who worked in the restaurant. He revealed that he did not know who had invested in the business but he said that he thought that all the suppliers had been paid. [8] I must note that all of the other facts presumed by the Minister that were denied by the Appellant have not been refuted by her. [9] The Appellant admitted to the appeals officer that she had paid, herself and in full, the incorporation costs of $300 to the financial institutions inspector when the Payor was incorporated. Furthermore, she confirmed that she was the only shareholder to have made an investment to start up the business. [10] The evidence shows that before the Payor was formed, the three shareholders agreed that only Judith Grenier would invest $5,000 to start up the business. The Appellant stated that David Delavaud was to have invested eventually, which did not happen. In addition, it was agreed that Gérard Delavaud would not invest any amount, he was to contribute in food, but that was not the case. [11] It has been established that the Appellant obtained $5,000 from her parents, the amount that she deposited in the Payor's bank account upon its opening on June 11, 2004, and she then invested around $3,000 to pay various expenses of the business. [12] The Appellant acknowledged that the $8,000 that she had invested was never the subject of minutes, nor an entry in the company book because that book did not exist and that amount was not recorded in any document; it only appeared in the restaurant's record of disbursements as [translation] "owing to Judith Grenier, $8,000." It was also confirmed that there were no repayment terms or interest rate for this $8,000 and the Appellant added that she will never be repaid this amount. [13] It was established that from June 11 to December 23, 2004, the two other shareholders, namely David and Gérard Delavaud, did not make any personal investment in the business. [14] It is true that in March 2005, David Delavaud personally borrowed $6,000 to finish paying the business' suppliers, but that happened more than three months after the closing of the business and the period at issue. [15] The Appellant revealed to the appeals officer that it was her and David Delavaud who made all the decisions concerning the organization, operation and management of the restaurant, as well as establishing the hours of operation, hiring staff, establishing the menu and paying the accounts. She added that the decision to close the restaurant was made by her and David Delavaud when the business was operating at a loss. [16] The Appellant worked as a waitress, took care of the accounting and commissions for a minimum of 65 hours per week. [17] The evidence shows that the two shareholders/workers themselves set the salaries that the Payor would pay them, namely $350 every two weeks, plus tips of $50 to $100 per week for the Appellant, paid by cheque every two weeks. The Appellant's record of employment establishes her total remuneration for the 26-week period at $6,435.66, namely $247.52 per week. [18] The decision of the insurability sector is that during the period from June 26 to December 19, 2004, the Appellant's employment was excluded from insurable employment because it was non-arm's length employment. [19] The issue is whether the Appellant held insurable employment for the purposes of the Employment Insurance Act (the "Act"). The relevant provision is paragraph 5(1)(a) of the Act, which states 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; [Emphasis added.] [20] It is also necessary, in the context of contracts in Quebec, to consider section 8.1 of the Interpretation Act, R.S.C. 1985, c-I-21, as amended, from its coming into force on June 1, 2001, when confronted with a dispute such as the one under review. Here is what Parliament declared in this provision: Property and Civil Rights 8.1 Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province's rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied. [Emphasis added.] [21] It is appropriate to reproduce the relevant provisions of the Civil Code of Québec, which will serve to determine whether an employment contract, as distinguished from a contract of enterprise, exists: Contract of employment 2085 A contract of employment is a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer. 2086 A contract of employment is for a fixed term or an indeterminate term. Contract of enterprise of for services 2098 A contract of enterprise or for services is a contract by which a person, the contractor or the provider of services, as the case may be, undertakes to carry out physical or intellectual work for another person, the client or to provide a service, for a price which the client binds himself to pay. 2099 The contractor or the provider of services is free to choose the means of performing the contract and no relationship of subordination exists between the contractor or the provider of services and the client in respect of such performance. [Emphasis added.] [22] The provisions of the Civil Code of Québec reproduced above establish three essential conditions for the existence of an employment contract: (1) the employee's prestation in the form of work; (2) remuneration by the employer for that work; and (3) a relationship of subordination. The significant distinction between a contract of service and a contract of employment is the existence of a relationship of subordination - the fact that the employer has a power of direction or control over the worker. [23] Legal scholars have reflected on the concept of "power of direction or control" and, from the reverse perspective, a relationship of subordination. Here is what Robert P. Gagnon wrote in Le droit du travail du Québec, 5th ed. (Cowansville: Yvon Blais, 2003): [translation] (c) Subordination 90 - A distinguishing factor - The most significant characteristic of an employment contract is the employee's subordination to the person for whom he or she works. This is the element that distinguishes a contract of employment from other onerous contracts in which work is performed for the benefit of another for a price, e.g. a contract of enterprise or for services governed by articles 2098 et seq. C.C.Q. Thus, while article 2099 C.C.Q provides that the contractor or provider of services remains "free to choose the means of performing the contract" and that "no relationship of subordination exists between the contractor or the provider of services and the client in respect of such performance," it is a characteristic of an employment contract, subject to its terms, that the employee personally perform the agreed upon work under the direction of the employer and within the framework established by the employer. . . . 92 - Concept - Historically, the civil law initially developed a "strict" or "classical" concept of legal subordination that was used for the purpose of applying the principle that a master is civilly liable for damage caused by his servant in the performance of his duties (article 1054 C.C.L.C. and article 1463 C.C.Q.). This classical legal subordination was characterized by the employer's direct control over the employee's performance of the work, in relation to the nature of the work and the way it was performed. This concept was gradually relaxed, giving rise to the concept of legal subordination in the broad sense. The reason for this is that the diversification and specialization of occupations and work methods often made it unrealistic for an employer to be able to dictate or even directly supervise the performance of the work. Consequently, subordination came to include the ability of the person who became recognized as the employer to determine the work to be performed, and to control and set the conditions of the performance. Viewed from the reverse perspective, an employee is a person who agrees to integrate into the operational structure of a business so that the business can benefit from the employee's work. In practice, one looks for a certain number of indicia of the ability to control(and these indicia can vary depending on the context): mandatory presence at a workplace; a somewhat regular assignment of work; the imposition of rules of conduct or behaviour; an obligation to provide activity reports; control over the quantity or quality of the services, etc. The fact that a person works at home does not mean that he or she cannot be integrated into a business in this way. [Emphasis added.] [24] It must be noted that what characterizes a contract of employment is not the fact that the employer actually exercised direction or control, but the fact that the employer had the power to do so. In Gallant v. M.N.R., [1986] F.C.J. No. 330 (Q.L.), Pratte J. of the Federal Court of Appeal stated: . . . The distinguishing feature of a contract of service is not the control actually exercised by the employer over his employee but the power the employer has to control the way the employee performs his duties. . . [25] It is the task of this Court, which is responsible for determining to which type of contract in Quebec the parties are bound, to consider and follow the approach adopted by Archambault J. of this Court in a publication entitled "Contrat de travail: Pourquoi Wiebe Door Services Ltd. ne s'applique pas au Québec et par quoi on doit le remplacer?" [Contract of employment: Why Wiebe Door Services Ltd. does not apply in Quebec and with what should it be replaced?], published during the fourth quarter of 2005 by the Association de planification fiscale et financière (APFF) and the Department of Justice in the Second Collection of Studies in Tax Law as part of a series called The Harmonization of Federal Legislation with Quebec Civil Law and Canadian Bijuralism and whose theme he referred to in Vaillancourt v. Canada (Minister of National Revenue - M.N.R.), [2004] T.C.J. No. 685, where he wrote as follows: In my opinion, the rules that govern employment contracts under Quebec law are not the same as the common law rules, and it is therefore inappropriate to apply common law decisions such as Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553 (C.A.) and 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983, 2001 SCC 59 [For a more thorough discussion of the reasons for this, see the aforementioned paper on Wiebe Door, supra.]. In Quebec, courts have no choice but to determine whether a relationship of subordination exists in order to decide whether a contract is one of employment or for services. [26] At the end of his analysis, the Minister determined that the Appellant worked for the Payor under an employment contract and that there was an employer-employee relationship between her and the Payor. [27] It is now a matter of determining whether the Appellant's employment was insurable or whether, as the Minister argues, the employment is excluded under paragraph 5(2)(i) of the Act because there exists a non-arm's length relationship under paragraph 251(1)(c) of the Income Tax Act. I have reproduced the relevant excerpts of those statutes below: 5(2) Insurable employment does not include (i) employment if the employer and employee are not dealing with each other at arm's length. Section 251: Arm's length. (1) For the purposes of this Act, (c) where paragraph (b) does not apply, it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length. [28] Paragraph 251(1)(c) of the Income Tax Act, supra, provides that persons not related to each other may be considered to not be dealing with each other at arm's length in certain circumstances if the facts surrounding the relationship support that conclusion. In that case, the employment is not insurable under paragraph 5(2)(i) of the Act, supra. [29] Archambault J. of this Court, when faced with a similar analysis in Gestion Yvan Drouin Inc. v. Canada, [2000] T.C.J. No. 872, wrote as follows: Having analyzed the legal context in which the arm's length concept is applied, we shall now examine its interpretation in the case law. My colleague Judge Bonner had to deal with the concept in McNichol v. Canada, [1997] T.C.J. No. 5, para. 16, 97 D.T.C. 111, at pages 117 and 118: Three criteria or tests are commonly used to determine whether the parties to a transaction are dealing at arm's length. They are: (a) the existence of a common mind which directs the bargaining for both parties to the transaction, (b) parties to a transaction acting in concert without separate interests, and (c) "de facto" control. . . . With respect to the second test - acting in concert without separate interests, which is the one relied on by the Minister in this case - one can say that it will be met where a person merely participates in a transaction, not for his own benefit but for someone else's or, even if he is acting for his own benefit, if he is also acting for someone else in a context of reciprocity. That person is acting without a separate interest and not independently in his own interest. [30] In Parrill v. Canada(Minister of National Revenue - M.N.R.), [1996] T.C.J. No. 1680, Cuddihy J. of this Court stated as follows: . . . parties are not dealing at arm's length when the predominant consideration or the overall interest or the method used amount to a process that is not typical of what might be expected of parties that are dealing with each other at arm's length. Parties will not be dealing with each other at arm's length if there is the existence of a common mind which directs the bargaining for both parties to a transaction or that the parties to a transaction are acting in concert without separate interests or that either party to a transaction did or had the power to influence or exert control over the other and that the dealings of the parties are not consistent with the object and spirit of the provisions of the law and they do not demonstrate a fair participation in the ordinary operation of the economic forces of the market place. [31] Where the parties are related within the meaning of this Act, the Minister conducts his analysis of the facts in light of the criteria set out in paragraph 5(3)(b) of the Act, which states as follows: 5(3) For the purposes 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. The circumstances surrounding the Appellant's employment Terms and conditions of the employment [32] The Appellant worked as a waitress during the period at issue and also took care of the accounting and commissions for the business. The restaurant was open seven days a week from 11:00 a.m. to 10:00 p.m. and from 9:30 a.m. to 10:00 p.m. on the weekends. The Appellant worked as a floor waitress from Monday to Friday from 11:00 a.m. to 2:00 p.m. and from Sunday to Saturday from 4:30 p.m. to 10:00 p.m. She took care of the accounting and commissions from 2:00 p.m. to 4:30 p.m. She therefore worked a minimum of 65 hours per week. [33] The hours actually worked by the Appellant contradict her record of employment which indicates 643 insurable hours during the 26 weeks at issue. [34] The number of days worked as well as the number of hours worked by the Appellant support the idea that she and the Payor were not dealing with each other at arm's length. Remuneration paid [35] The two workers, the Appellant and David Delavaud, had set their salary at $350 every two weeks. In addition to this, the Appellant made tips of $50 to $100 per week that she received every two weeks. [36] However, the record of employment issued to the Appellant, for the period at issue, sets her total earnings at $6,435.66 for 26 weeks, namely $247.52 per week. Considering that she worked a minimum of 65 hours per week, she was paid $3.80 per hour. Given that the assistant cook employed by the Payor was paid at a rate of $10 per hour and the waitresses at a rate of $6.75 per hour, the Appellant was not paid in accordance with the rate prescribed by the Commission des normes du travail. [37] Furthermore, it has been established that the Appellant continued her work for the Payor until the official date of the closing of the business, namely December 23, 2004, without pay, because the Payor's finances did not allow it to pay her salary or her fixed vacation pay upon the termination of employment. [38] It is doubtful that an employee dealing at arm's length would have agreed to work in such conditions. Duration of the employment [39] The Appellant stopped working on December 23, 2004, but she stopped being paid on December 19, 2004. The evidence shows that she did not file a complaint with the Commission des normes du travail to claim the unpaid salary and recover the vacation pay that was fixed but unpaid upon the termination of her employment. Nature and importance of the work [40] It has been established that the Appellant's work was essential to the Payor's business; her duties were integrated into the business' activities. The evidence revealed that the Appellant was very involved in the Payor's business and leads to the conclusion that an unrelated employee could have replaced her in the same circumstances. [41] The Appellant is asking the Court to reverse the Minister's decision. [42] This Court's mandate and authority is prescribed by the Federal Court of Appeal in Légaré v. Canada(Minister of National Revenue - M.N.R.), [1999] T.C.J. No. 878 where Marceau J. stated the following: 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. [43] After analyzing the file, this Court must conclude that the Minister exercised his discretionary power in the manner prescribed by the Act and this Court finds that its intervention is in no way justified. [44] Consequently, the appeal is dismissed and the Minister's decision is affirmed. Signed at Grand-Barachois, New Brunswick this 30th day of January 2006. "S.J. Savoie" Savoie D.J. Translation certified true on this 31st day of March 2006 Aveta Graham, Translator CITATION: 2005TCC27 COURT FILE NO.: 2005-2219(EI) STYLE OF CAUSE: Judith Grenier v. M.N.R. PLACE OF HEARING: Québec, Quebec DATE OF HEARING: November 23, 2005 REASONS FOR JUDGMENT BY: The Honourable S.J. Savoie, Deputy Judge DATE OF JUDGMENT: January 30, 2006 APPEARANCES: For the Appellant: The Appellant herself For the Respondent: Stéphanie Côté COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada