Wiffen Financial Services Inc. v. M.N.R.

Wiffen Financial Services Inc. v. M.N.R. Court (s) Database Tax Court of Canada Judgments Date 2003-11-16 Neutral citation 2003 TCC 780 File numbers 2002-4947(EI) Judges and Taxing Officers Michael J. Bonner Subjects Employment Insurance Act Decision Content Docket: 2002-4947(EI) BETWEEN: WIFFEN FINANCIAL SERVICES INC., Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. ____________________________________________________________________ Appeal heard on June 20, 2003 at Vancouver, British Columbia Before: The Honourable Justice Michael J. Bonner Appearances: Agent for the Appellant: Jordan Gagner Counsel for the Respondent: Michael Taylor ____________________________________________________________________ JUDGMENT The appeal is allowed and the decision under appeal is vacated. Signed at Toronto, Ontario, this 16th day of November 2003. "Michael J. Bonner" Bonner, J. Citation: 2003TCC780 Date: 20031116 Docket: 2002-4947(EI) BETWEEN: WIFFEN FINANCIAL SERVICES INC., Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. REASONS FOR JUDGMENT Bonner, J. [1] This is an appeal from a decision of the Minister of National Revenue (the "Minister") dated September 23, 2002 made on appeal from a ruling under s. 91 of the Employment Insurance Act (the "Act"). That decision was that Jay Brecknell (Brecknell) was employed by the Appellant in insurable employment during the period January 1 to June 14, 2002. [2] The central finding or assumption upon which the decision rested was that, at the relevant time, Brecknell was dealing with the Appellant at arm's length. The issue arises because, under s. 5(2)(i) of the Act insurable employment does not include "... employment if the employer and employee are not dealing with each other at arm's length". [3] Section 5(3) of the Act states: "(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." [4] It was common ground that Brecknell and the Appellant were not related persons under s. 251(2) of the Income Tax Act. [5] The issue in this appeal is whether, during the period, Brecknell and the Appellant were dealing with each other at arm's length in point of fact. The Appellant contended that by reason of the relationship between it on the one hand and its the shareholders on the other and the relationship among its shareholders, one of whom was Brecknell, a non-arm's length relationship existed. [6] At all material times the Appellant carried on the business of a financial planner. It sold insurance and mutual funds and furnished financial advice to its clients. [7] Prior to January 1, 2002 Jordan Gagner and Vince McKay each owned 50% of the shares of the Appellant. Brecknell, a friend of Gagner and McKay, operated a financial planning business as a sole proprietor. In carrying on that business Brecknell processed some of his financial transactions through the Appellant. [8] Late in 2001, Gagner and McKay approached Brecknell and suggested that he consider becoming a "third partner" of the Appellant. Brecknell agreed and the arrangement was implemented, save for share transfer, on January 1, 2002. Brecknell then became sales manager of the Appellant and assumed responsibility for training other agents who placed business through the Appellant. Effective February 12, 2002 Brecknell purchased one third of the outstanding shares of the Appellant. [9] At the hearing of the appeal evidence was given by Gagner and Brecknell. They were credible witnesses. [10] The arrangement proposed by Gagner and accepted by Brecknell was that Brecknell would transfer his client base to the Appellant and pay $34,000 to Gagner and McKay for their shares. A compensation agreement was negotiated which laid down rules for the division between each shareholder and the Appellant of the revenues earned by the shareholder. The process of arriving at the compensation agreement was described by Gagner as follows: "... Jays compensation agreement was -- was really the three of us owners getting together and discussing what's best for the firm. Jay doesn't have a compensation agreement that's any different than Vince or myself. We as managers got together and said, okay, how -- how do we -- how do we pay ourselves, but let's make sure that the lights and the rent and everything get paid first. ..." [11] Upon joining forces with the Appellant Brecknell became sales manager and assumed responsibility for training sales agents who placed their business through the Appellant. [12] In arriving at his decision the Minister made the following findings of fact (among others): (i) Brecknell was required to report to the Appellant daily and weekly; (j) Brecknell was subject to the direction and control of the Appellant; (k) Brecknell's remuneration was established by the Appellant; Although it was common ground that Brecknell was employed by the Appellant, the testimony which addressed the three quoted assumptions revealed that the Minister's grasp of the facts was weak. Brecknell was not obliged to report on a periodic basis or otherwise. In practice he was not subject to control or supervision. His remuneration was established by agreement among himself, McKay and Gagner and the results of that agreement were imposed on the Appellant. In evaluating the nature of the relationship between Brecknell and the Appellant, the spirit of cooperation which informed the actions of the three individuals is significant. It is clear that they regarded themselves as partners and that they conducted themselves in accordance with an oral agreement which called for decisions to be made by consensus and not by majority rule. [13] Three criteria or tests are commonly used to determine whether the parties to a transaction are dealing at arm's length.[1] 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. [14] The common mind test emerges from two cases. The Supreme Court of Canada dealt first with the matter in M.N.R. v. Sheldon's Engineering Ltd.[2] At pages 1113-14 Locke J., speaking for the Court, said the following: "Where corporations are controlled directly or indirectly by the same person, whether that person be an individual or a corporation, they are not by virtue of that section deemed to be dealing with each other at arm's length. Apart altogether from the provisions of that section, it could not, in my opinion, be fairly contended that, where depreciable assets were sold by a taxpayer to an entity wholly controlled by him or by a corporation controlled by the taxpayer to another corporation controlled by him, the taxpayer as the controlling shareholder dictating the terms of the bargain, the parties were dealing with each other at arm's length and that s. 20(2) was inapplicable." [15] The decision of Cattanach, J. in M.N.R. v. T R Merritt Estate[3] is also helpful. At pages 5165-66 he said: "In my view, the basic premise on which this analysis is based is that, where the "mind" by which the bargaining is directed on behalf of one party to a contract is the same "mind" that directs the bargaining on behalf of the other party, it cannot be said that the parties were dealing at arm's length. In other words where the evidence reveals that the same person was "dictating" the "terms of the bargain" on behalf of both parties, it cannot be said that the parties were dealing at arm's length." [16] The acting in concert test illustrates the importance of bargaining between separate parties, each seeking to protect his own independent interest. It is described in the decision of the Exchequer Court in Swiss Bank Corporation v. M.N.R.[4] At page 5241 Thurlow J. (as he then was) said: "To this I would add that where several parties -- whether natural persons or corporations or a combination of the two -- act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the "mind" that directs may be that of the combination as a whole acting in concert or that of any of them in carrying out particular parts or functions of what the common object involves. Moreover as I see it no distinction is to be made for this purpose between persons who act for themselves in exercising control over another and those who, however numerous, act through a representative. On the other hand if one of several parties involved in a transaction acts in or represents a different interest from the others the fact that the common purpose may be to so direct the acts of another as to achieve a particular result will not by itself serve to disqualify the transaction as one between parties dealing at arm's length. The Sheldon's Engineering case [supra], as I see it, is an instance of this." [17] Finally, it may be noted that the existence of an arm's length relationship is excluded when one of the parties to the transaction under review has de facto control of the other. In this regard reference may be made to the decision of the Federal Court of Appeal in Robson Leather Company Ltd. v. M.N.R., 77 DTC 5106. [18] The submission of counsel for the Respondent was that it is essential for purposes of s. 5(2)(i) of the Act to determine whether the arm's length relationship is present in dealings between Brecknell as employee and the Appellant. A distinction is to be drawn between such dealings and dealings between the two in which Brecknell is acting in a different capacity such as director or shareholder. Counsel submitted that Brecknell did not dictate the terms of his employment on behalf of both parties in his dealings with the Appellant. He said that Brecknell as employee obviously decided what was satisfactory to him in that capacity but Brecknell as shareholder and director of the Appellant was one voice out of three. He could not dictate to the other two directors and shareholders. [19] The language of s. 5(2) is clear. It addresses the relationship between an employer and an employee. If they are not dealing with each other at arm's length the employment is not insurable. The provision applies to except the employment from insurable status whether the terms of the employment contract have been affected by the non-arm's length relationship or not. In this case two individuals who owned a small private company decided to admit a third individual to a structure which they regarded as a "partnership". That structure took the form of a corporation which employed all three and which was controlled and operated by them on a consensual basis. In my view it is impossible to say that Brecknell dealt with the Appellant at arm's length. [20] The argument advanced by counsel for the Respondent must fail because the individuals acted in concert in accordance with the agreement among them. In so doing they did not stop to determine whether any decision made by them was made qua shareholder, qua director or qua employee. They viewed themselves as partners and did not concern themselves with the legal niceties of the capacity in which they acted from time to time. They simply decided what to do and, where involvement of the Appellant was required, they caused it to carry out their decision. No consideration appears to have been given to the "independent interests" of the Appellant. It would be unrealistic to suggest that the terms of the employment relationship between Brecknell and the Appellant resulted from bargaining in which the two sought to protect their respective interests. The appeal will be allowed and the decision under appeal will be vacated. Signed at Toronto, Ontario, this 16th day of November 2003. "Michael J. Bonner" Bonner, J. CITATION: 2003TCC780 COURT FILE NO.: 2002-4947(EI) STYLE OF CAUSE: Wiffen Financial Services Inc. and M.N.R. PLACE OF HEARING: Vancouver, British Columbia DATE OF HEARING: June 20, 2003 REASONS FOR JUDGMENT BY: The Honourable Justice Michael J. Bonner DATE OF JUDGMENT: November 16, 2003 APPEARANCES: Agent for the Appellant: Jordan Gagner Counsel for the Respondent: Michael Taylor COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] Peter Cundill and Associates Ltd. v. The Queen, [1991] 1 C.T.C. 197 (F.C.T.D.); aff'd [1991] 2 C.T.C. 221 (F.C.A.). [2] [1955] C.T.C. 174, 55 DTC 1110 [3] [1969] C.T.C. 207, 69 DTC 5159 [4] [1971] C.T.C. 427, 71 DTC 5235; aff'd [1972] C.T.C. 614, 72 DTC 6470