Date: 19980128
Dockets: 97-1016-UI; 97-1017-UI
BETWEEN:
BRUCE G. McKICHAN, JOHN ARNOLD,
Appellants,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
__________________________________________________________
For the Appellants: Bruce G. McKichan
Counsel for the Respondent: Nicole Levasseur
__________________________________________________________
Reasons for Judgment
(Delivered orally from the bench at London, Ontario on November 18, 1997)
Mogan, J.T.C.C.
[1] This is an appeal under the provisions of the Unemployment Insurance Act, more recently named the Employment Insurance Act. The Appellants are shareholders in Brohn Developments Inc. (the company), a small corporation which is engaged in the business of construction and excavation. The three shareholders of that company are the two Appellants, Bruce McKichan and John Arnold, and a third person, Doug Hodgins. The company is engaged in underground excavation and construction of sewers and watermains.
[2] The business began in 1989 by the two Appellants and Norman Hodgins, the father of Doug Hodgins. At that time, they raised capital and became shareholders in proportion to the capital they had raised or guaranteed, as follows:
Norman Hodgins - 40%
Bruce McKichan - 35%
John Arnold - 25%
The shareholdings have remained the same except that Norman Hodgins transferred his 40% ownership to his son, Doug Hodgins. There is a line of credit at the bank and each shareholder guarantees the line of credit up to the maximum limit of his percentage as a shareholder. The third party shareholder is not an Appellant in these proceedings. Doug Hodgins is not actively involved in the operation of the company while, in contrast, the two Appellants are actively involved.
[3] Mr. McKichan is the bookkeeper and job superintendent and Mr. Arnold is also involved in the actual operations of the company. They work on a weekly basis as long as there is work available. In the summer, the company might have as many as 10 to 15 employees. In the winter, and especially in January and February when work is slack, there could be weeks when the two Appellants would be the only persons employed by the company. In those slack times, the Appellants repair equipment and keep themselves busy making the company ready to perform when there is adequate work. The name of the company itself is a combination of the Appellants’ first names, Bruce and John, resulting in the word “Brohn”.
[4] The Appellants are paid a weekly salary in the range of $700 to $800. They are both managers and also hard workers in the company’s endeavours. They are paid at the end of each week and there are the usual source deductions for income tax and Canada Pension Plan contributions. They perform services for the company commensurate with their responsibilities and salaries paid.
[5] The Respondent takes the position that the two Appellants are employed in insurable employment because, pursuant to paragraph 3(1)(a) of the Unemployment Insurance Act, they are employed under an express or implied contract of service. In other words, the Minister of National Revenue says there is a contract of service between the company and each Appellant. The Appellants render services to the company and perform work for a fixed and pre-determined remuneration, paid on a weekly basis. There is much jurisprudence to the effect that an individual can be employed by a company in which he is a shareholder and, indeed, an individual can be employed by a company in which he is the only shareholder.
[6] The Appellants argue that they ought not to be regarded as employees because they are the owners of the company. They consider the enterprise as a proprietorship, of which they own 60%, and they are actively involved in the business. Therefore, they do not consider themselves employees; they do not expect to receive unemployment insurance benefits; nor do they believe they should be eligible for them. Also, they do not feel they should contribute to the unemployment insurance plan. The Appellants’ argument is a forceful one, but the fact is that there are Court cases which indicate that there can be a contract of service with a major shareholder of a company whether that person owns 20% or 40% of the shares of a closely-held company with only three or four shareholders.
[7] I am satisfied on the evidence in these appeals that there is a contract of service. The Appellants described in a very forthright manner what they did. It is evident that they are paid like any other employee with a fixed salary on a weekly basis. They have identifed duties which they perform in the interest of the company’s business and they are paid for those duties. Indeed, the contrast is quite interesting between the two Appellants who are working shareholders and who freely acknowledged in evidence that they are paid a weekly salary, and the third shareholder who is a non-operating shareholder. He does not perform regular services and so he is not paid by the company on a regular basis. He has no fixed contract with the company and no pre-determined salary.
[8] The third shareholder is engaged in a farming operation and owns heavy equipment for that farming operation. According to the evidence of Mr. McKichan, when the company needs a float to move heavy equipment or materials, it hires the tractor and float from Doug Hodgins. Mr. Hodgins is paid for his equipment on an hourly basis at the prevailing rate in the construction industry for the hiring of similar equipment and, therefore, he gets no advantage for being a 40% shareholder. It is interesting to me, however, that the largest shareholder does not get paid any amount, weekly or monthly, because he is not engaged in the operation of the company and providing personal services for it. The two Appellants who manage the company and provide services every day of the week are paid on a regular basis.
[9] I find that there is insurable employment in these appeals and, therefore, unemployment insurance premiums are payable by both the company as to its employer portion of the premium, and by the two Appellants as to their employee portions of the premium.
[10] The Appellants raised the interesting argument that if they applied for unemployment insurance benefits, they believe they might be denied on the basis that there is a non-arm’s length relationship between them and the company. Pursuant to the provisions of section 251 of the Income Tax Act, I am inclined to the view that there is an arm’s length relationship between Mr. McKichan and the company because he owns only 35% of the shares and he is not related to the other two shareholders. Similarly, there is an arm’s length relationship between Mr. Arnold and the company because he owns only 25% of the shares and he is not related to the other two shareholders of the company. Therefore, at first blush, under section 251 of the Income Tax Act, I would say that each Appellant is at arm’s length with the company. It could possibly be argued that there is a non-arm’s length relationship under the terms of paragraph 251(1)(b) which raises the question of fact whether persons not related to each other were at a particular time dealing with each other at arm’s length.
[11] Having listened to the Appellants, I would be very reluctant to find that as a matter of fact they are not at arm’s length with the company. I regard the two Appellants to be very much at arm’s length, admittedly though, they cooperate in a friendly manner to achieve the successful operation of the company that employs them. I would like to think that the doubt raised by the Appellants in argument that they might be denied benefits under paragraph 3(2)(c) of the Unemployment Insurance Act would be such a remote possibility so as to not be a material factor in anyone’s consideration.
[12] On the basis of what I have heard, I have to dismiss the appeals and hold that the Appellants were engaged in insurable employment by Brohn Developments Inc. during the relevant period from January 1, 1993 to December 6, 1996.
Signed at Ottawa, Canada, this 28th day of January, 1998.
"M.A. Mogan"
J.T.C.C.