Date: 19990719
Docket: 97-840-UI
BETWEEN:
BOB WEATHERBY,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Porter, D.J.T.C.C.
[1] This appeal was heard at Edmonton, Alberta on April 22, 1998.
[2] The Appellant being hearing impaired, but well able to read, was assisted by an interpreter employing the process of real time captioning.
[3] The Appellant appeals the decision of the Minister of National Revenue (the "Minister") dated April 22, 1998 that his employment with Alberta Custom Golf and Repair Inc. (the "Company") for the periods April 1 to September 30, 1996 and from April 1 to September 30, 1997 was not insurable employment under the Unemployment Insurance Act (hereinafter referred to as the "U.I. Act”) and the Employment Insurance Act (the "E.I. Act”) respectively. The reason given for the determination was:
“...You were not dealing at arm’s length with Alberta Custom Golf and Repair Inc. Therefore, you were employed in excepted employment.”
[4] The decision was said to be issued pursuant to section 93 of the E.I. Act and was based on paragraphs 3(2)(c) of the U.I. Act and 5(3)(a) of the E.I. Act.
[5] The established facts reveal that at the material times the Appellant worked for the Company, of which he was a one third shareholder, at a golf driving range in the City of Edmonton, Alberta. His duties included sales and service as well as building golf clubs and their repair and fitting. The issue is whether or not the Appellant was dealing with the Company at arm’s length, which is a question of mixed fact and law to be decided in accordance with the provisions of the Income Tax Act, as they have been interpreted by the courts over time.
The Law
[6] In the scheme established under the Act, Parliament has made provision for certain employment to be insurable, leading to the payment of benefits upon termination, and other employment which is "excepted" and thus carrying no benefits upon termination. Employment arrangements made between persons, who are not dealing with each other at arm's length, are categorized as "excepted employment". Quite clearly the purpose of this legislation is to safeguard the system from having to pay out a multitude of benefits based on artificial or fictitious employment arrangements.
[7] Subsection 3(2) of the Unemployment Insurance Act reads in part as follows:
"3(2) Excepted employment is
...
c) subject to paragraph (d) [which refers to persons and related corporations has no applicability in this case] employment where the employer and employee are not dealing with each other at arm’s length and, for the purposes of this paragraph,
(i) the question of whether persons are not dealing with each other at arm’s length shall be determined in accordance with the provisions of the Income Tax Act;...”
[8] Paragraph 251(1)(b) of the Income Tax Act reads as follows:
"it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm’s length." (emphasis added)
[9] Although the Income Tax Act specifies that it is a question of fact whether persons were at a particular time dealing with each other at arm’s length, that factual question must be decided within the cradle of the law and in reality it is a mixed question of fact and law; see Bowman, T.C.J. in R.M.M. Canadian Enterprises et al. v. The Queen, 97 DTC 302.
[10] What is meant by the term "arm's length" has been the subject of much judicial discussion both here in Canada, in the United States, the United Kingdom and in other Commonwealth countries such as Australia where similar wording appears in their taxing statutes. To the extent that the term has been used in trust and estate matters, that jurisprudence has been discounted in Canada when it comes to the interpretation of taxation statutes; see Locke, J. in M.N.R. v. Sheldon’s Engineering Ltd., 55 DTC 1110.
[11] In considering the meaning of the term "arm's length" sight must not be lost of the words in the statute to which I gave emphasis above, "were at a particular time dealing with each other at arm's length". The case law in Canada as Bowman, T.C.J. points out in the R.M.M. case (above) has tended to dwell upon the nature of the relationship rather than upon the nature of the transactions. I am not sure that having regard to the inclusion of these words in the statute, that this approach is necessarily the only one to be taken, for to do so is to ignore these somewhat pertinent words, to which surely some meaning must be given. Perhaps this development has come about as a result of the factual situations in a number of the leading cases in Canada. These have tended to involve one person (either legal or natural) controlling the minds of both parties to the particular transaction. Thus even though the transaction might be similar to an ordinary commercial transaction made at arm's length that itself has not been enough to take the matter out of the "non arm's length" category; see for example Swiss Bank Corporation et al. v M.N.R., 72 D.T.C. 6470 (S.C.C.).
[12] In effect what these cases say is that if a person moves money from one of his pockets to the other, even if he does so consistently with a regular commercial transaction, he is still dealing with himself, and the nature of the transaction remains "non arm's length".
[13] However, simply because these leading cases involved such factual situations, does not mean that people who might ordinarily be in a non arm's length relationship cannot in fact "deal with each other at a particular time in an 'arm's length' manner", any more than it means that people who are ordinarily at arm's length might not from time to time deal with each other in a non arm's length manner. These cases are quite simply examples of what is not an arm's length relationship rather than amounting to a definition in positive terms as to what is an arm's length transaction. Thus at the end of the day all of the facts must be considered and all of the relevant criteria or tests enunciated in the case law must be applied.
[14] The expression "at arm's length" was considered by Bonner, T.C.J. in William J. McNichol et al. v. The Queen, 97 D.T.C. 111, where at pages 117 and 118 he discussed the concept as follows:
"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.
The decision of Cattanach, J. in M.N.R. v. T R Merritt Estate 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.
...
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 v M.N.R., 77 DTC 5106."
[15] This approach was also adopted by Cullen, J. in the case of Peter Cundill & Associates Ltd. v. The Queen, [1991] 1 C.T.C. 197, where at page 203 he says this:
"Whether the parties in this case were dealing at arm's length is a question to be examined on its own particular facts."
[16] Many of these cases, as I say, are premised on the relationship existing between the parties which was determined to be all conclusive. There is little direct guidance there, when consideration is being given to the nature of the transaction or dealing itself. This question has, however, been quite succinctly dealt with by the Federal Court of Australia in the case of The Trustee for the Estate of the late AW Furse No 5 Will Trust v. FC of T, 91 ATC 4007/21 ATR 1123. Hill, J. said when dealing with similar legislation in that country :
"There are two issues, relevant to the present problem, to be determined under s.102AG(3). The first is whether the parties to the relevant agreement were dealing with each other at arm's length in relation to that agreement. The second is whether the amount of the relevant assessable income is greater than the amount referred to in the subsection as the "arm's length amount".
The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection..." [emphasis added]
[17] Bowman, T.C.J. alluded to this type of situation in the R.M.M. case (above) when he said at page 311 :
"I do not think that in every case the mere fact that a relationship of principal and agent exists between persons means that they are not dealing at arm's length within the meaning of the Income Tax Act. Nor do I think that if one retains the services of someone to perform a particular task, and pays that person a fee for performing the service, it necessarily follows that in every case a non-arm's-length relationship is created. For example, a solicitor who represents a client in a transaction may well be that person's agent yet I should not have thought that it automatically followed that there was a non-arm's-length relationship between them.
The concept of non-arm's length has been evolving."
[18] In Scotland, in the case of Inland Revenue Commissioners v. Spencer-Nairn 1991 SLT 594 (ct. of Sessions) the Scottish Law Lords reviewed a case where the parties were in a non arm's length situation. They commented favourably on the approach taken by Whiteman on Capital Gains Tax (4th ed.), where it was suggested by the author that two matters that should be taken into account when considering the words 'arm's length'. These were whether or not there was separate or other professional representation open to each of the parties and secondly, perhaps with more relevance to the situation on hand, whether there was "a presence or absence of bona fide negotiation".
[19] In the United States the term "arm's length" was defined in the case of Campana Corporation v. Harrison (7 Circ; 1940) 114 F2d 400, 25 AFTR 648, as follows:
"A sale at arm's length connotes a sale between parties with adverse economic interests."
[20] I dealt with these cases in Campbell and M.N.R. (96-2467(UI) and (96-2468(UI)) and the principles for which they stand. I adopt all that I said in that case.
[21] At the end of the day it would seem to me that what is intended by the words "dealing at arm’s length" can best be described by way of an example. If one were to imagine two traders, strangers, in the market place negotiating with each other, the one for the best price he could get for his goods or services and the other for the most or best quality goods or service he could obtain, these persons one would say would be dealing with each other at arm's length. If however these same two persons, strangers, acted with an underlying interest to help one another, or in any manner in which he or she would not deal with a stranger, or if their interest were to put a transaction together which had form but not substance in order to jointly achieve a result, or obtain something from a third party, which could not otherwise be had in the open marketplace, then one would say that they were not dealing with each other at arm's length.
[22] If the relationship itself (and here it must again be remembered that the Act does not say "where they are in a non arm's length relationship" it says "where they are notdealing with each other at arm's length") is such that one party is in a substantial position of control, influence or power with respect to the other or they are in a relationship whereby they live or they conduct their business very closely, for instance if they were friends, relatives or business associates, without clear evidence to the contrary, the Court might well draw the inference that they were not dealing with each other at arm's length. That is not to say, however, that the parties may not rebut that inference. One must however, in my view, distinguish between the relationship and the dealing. Those who are in what might be termed a "non arm's length relationship" can surely deal with each other at arm's length in the appropriate circumstances just as those who are strangers, may in certain circumstances, collude the one with the other and thus not deal with each other at arm's length.
[23] Ultimately if there is any doubt as to the interpretation to be given to these words I can only rely on the words of Madam Justice Wilson who in the case of Abrahams v. A/G Canada [1983] 1 S.C.R.2, at p. 10 said this:
"Since the overall purpose of the Act is to make benefits available to the unemployed, I would favour a liberal interpretation of the re-entitlement provisions. I think any doubt arising from the difficulties of the language should be resolved in favour of the claimant."
[24] In the end it comes down to those traders, strangers, in the marketplace. The question that should be asked is whether the same kind of independence of thought and purpose, the same kind of adverse economic interest and same kind of bona fide negotiating has permeated the dealings in question, as might be expected to be found in that marketplace situation. If on the whole of the evidence that is the type of dealing or transaction that has taken place then the Court can conclude that the dealing was at arm's length. If any of that was missing then the converse would apply.
The Facts
[25] The assumption of fact upon which the Minister relied were not, except in some specific fundamental instances, greatly in dispute between the parties and are set out in the Reply to the Notice of Appeal as follows:
"(a) the Payor is in the business of operating a golf driving range, golf club repair and retail sales: (agreed)
(b) the business of the Payor is seasonal in nature, operating from about the beginning of April to about the first week of October each year, depending on the weather; (agreed)
(c) the Worker, Terry Forman and Joan Kucher are each 33 and 1/3 percent shareholder's of the Payor; (agreed)
(d) the Worker and Terry Foreman are the directors of the Payor; (agreed)
(e) the shareholders of the Payor are not related to one another; (agreed)
(f) the majority vote of the shareholders is required with respect to decisions relating to the operations of the business; (agreed)
(g) the job title of the Worker was club manager, sales person and service person, the duties of the which included club building, club repair, club fitting, club sales and public driving range sales and services; (agreed except that the Appellant says that he was not the manager)
(h) in addition to the Worker, the Payor employed between six and seven other employees; (agreed)
(i) the Worker's hours of work were Monday to Friday, from 8:00 a.m. to 5:00 p.m., and Saturday from 8:00 a.m. to 3:00 p.m.; (agreed)
(j) the Worker's duties were performed at the Payor's place of business; (agreed)
(k) the Worker did not incur any expenses in the performance of his duties; (agreed)
(l) the Worker was to be paid a salary of $2,500.00 per month payable monthly; (agreed)
(m) the Worker had input in determining his salary; (agreed to an extent but the Appellant says the salary was negotiated and decided by majority vote)
(n) the Worker was not always paid for services provided by him to the Payor; (disputed)
(o) the Worker was not always paid on a regular basis and, in respect of this, he often had to wait several months before payment of his salary was received; (disputed)
(p) the other employees of the Payor were paid regularly; (agreed)
(q) the Worker provided services to the Payor outside of the periods in question for no remuneration; (disputed – the Appellant says he was paid for all services)
(r) the Worker's hours were not recorded or monitored; (agreed – as the person responsible to supervise the other Workers was not required to record his hours)
(s) the hours of the other employees were recorded or monitored; (agreed)
(t) the Worker did not receive overtime since he was on salary; (agreed)
(u) the other employees of the Payor received overtime, if applicable; (agreed)
(v) when the Worker was away from work, other employees would handle sales and general duties involving the driving range, but the club repair and club making work was not handled by any other employees; (disputed – the Appellant says that other Workers did exactly the same job as he did)
(w) the Worker could not be fired; (disputed – he says that he was in fact fired from the position)
(x) the other employees of the Payor could be fired; (agreed)
(y) the Worker was not supervised in the performance of his duties; (disputed)
(z) the working relationship between the Payor and the Worker was not substantially similar to that of the Payor and the other employees; (disputed)
(aa) the Payor and the Worker were not dealing with each other at arm's length; (disputed)"
[26] Evidence was given by the Appellant, his wife Meryl Weatherby from whom he had been separated for a number of years and Ralph Schubert an Appeals Officer at Revenue Canada.
[27] The evidence revealed that the Appellant had taken specialized training in Ohio, and had been certified as a Class A club-maker, and was able to repair and service golf clubs. In this context he and two other equal shareholders were the owners of the common shares in the Company which operated the golf driving range in question. The Appellant was engaged by the Company to work at the driving range for a salary of $2,500.00 per month throughout the periods in question. The operation was a seasonal one, closing down in the fall and re-opening the following spring. He was paid his salary for the months during which the operation was open to the public and functioning and was laid off during the winter months.
[28] It is clear that none of the shareholders were related persons within the meaning of the Income Tax Act.
[29] Whilst there were three shareholders, there were only two directors of the Company, namely Terry Forman and the Appellant. There was some confusion here as certain of the minutes of meetings of directors indicated the presence and participation of the third shareholder, Joan Kucher.
[30] It is clear that the Appellant was paid his salary every month on a regular basis. Other employees except Terry Forman, were paid on an hourly basis. The salary of the Appellant was set first by a meeting of shareholders and then by a meeting of directors in the spring of each year. I am satisfied from the evidence that he did not simply set his own salary but had indeed to negotiate with not only Terry Forman but also with the third shareholder to have his salary set as it was. This was in my view clearly a negotiation with adverse economic interests at stake.
[31] The evidence of the Appellant was that in May 1998 he was fired. He stated he was fired by Terry Forman, who was not satisfied with his work. Whilst as a fellow director, that is one of two, it might be questioned whether one could fire the other, I gleaned from the evidence that Terry Forman, who seemed to be more the business manager, had considerably more say over how the operation was organized and to be run than did the Appellant. Whether that was as a result of a strange business relationship with the third shareholder or as a result of the physical impairment of the Appellant is unclear. Nevertheless, I was quite satisfied by the evidence that the Appellant was very much subservient to the business mandates of Terry Forman and that he was indeed fired by the latter. He quite definitely was unable to keep on working at the business in the same capacity without the agreement of Terry Forman and that agreement was withheld in May 1998.
[32] There was no evidence that the Appellant was not paid his salary regularly and on time or that he paid it back to the Company. The suggestions on behalf of the Minister to this effect, were in my view pure conjecture and had no foundation.
[33] There was confusion in the evidence as to whether the Appellant did work for the Company outside the regular season, for which he was not paid. Obviously as a director and shareholder he would have an interest in attending to business matters as they arose outside the season. There were wrap up things to do after the operation closed in the fall and preliminary set up things to do in the spring before it opened. His employment was however related to the operation during the season, attending to the needs of the public. I found no evidence of any such work done by him of this nature, that is dealing with the public, outside the months for which he was paid. His attendance at the premises were either for business reasons such as meetings of the directors, doing planning or in connection with teaching classes he conducted for a local college on his own initiative, which was nothing to do with the Company, except that he used the premises with the permission of Terry Forman.
[34] Additionally the question of his keeping hours was raised by the Minister. Quite frankly this in my view was a red herring. He was engaged to work in a supervisory capacity, he had a specialized training and knowledge and was to be a key person in the day-to-day operation of the business. If the Company chose to put him on a salary in this context, that would appear to be a perfectly normal thing to do. As he was not paid by the hour but rather to do the job, he did not need to keep hours.
[35] Finally much was made by the Minister about the forms completed by the Appellant in his claim for benefits. Originally, the Appellant did not think that he was entitled to claim for unemployment benefits as he was a shareholder in the Company and he thought that fact per se would preclude him from claiming. Later, he was informed otherwise. I have no doubt that, confusing as forms might be for anyone, they would be all the more so in his case. I saw nothing in all the evidence on this subject which detracted from the legitimacy of the situation of the Appellant or that in any way affected his credibility.
Conclusion
[36] I was absolutely satisfied after listening to all of the evidence that the Appellant was an honest and credible witness. He was supported in his evidence by his wife from whom he had been separated for some six years. She was also in my view a perfectly credible witness.
[37] I have no doubt in my mind that the Appellant had to negotiate his employment situation with the other shareholders who had adverse economic interests and in particular with his fellow director Terry Forman, who certainly monitored his work even if he did not directly supervise it, and ultimately fired him. The salary was regularly paid and not out of line for the work involved. He might have been paid more elsewhere but similarly with his impairment he may not have been able to find other similar employment, thus he settled for that salary. In doing so I have no doubt that he was dealing with the Company at arm’s length, as he did throughout his periods of employment there. Like the traders in the market place to which I referred above, he negotiated the best deal he could get in the circumstances. The interests of the Company were not the same as those of the Appellant and he certainly was unable to make the decision relating to his salary by himself. There were at least two operating minds at work.
[38] Finally if there was any doubt on any of this I would adopt the words of Madam Justice Wilson of the Supreme Court of Canada in the case of Abrahams v A/G Canada [1983] 1 S.C.R. 2 at page 10 where she said:
"...Since the overall purpose of the Act is to make benefits available to the unemployed, I would favour a liberal interpretation of the re-entitlement provisions. I think any doubt arising from the difficulties of the language should be resolved in favour of the claimant."
[39] Whilst those words were directed at a question of interpretation of the language, and of course the onus on the facts rests always upon the Appellant, it is a sentiment which has been quoted with some approval in the Federal Court of Appeal. In point of fact, I have no doubt as the Appellant has well satisfied me on the evidence that he was dealing with the Company at arm’s length. In my view his employment was insurable employment.
[40] Perhaps it was a case of his being misunderstood by the officials involved and I am not suggesting in any way that he should benefit from any special consideration on account of his impairment, but I do think that it is unfortunate that a person with an impairment such as he has, has had to go so far and for so long to obtain the benefits to which he is clearly entitled. It would perhaps behove the Minister well, to ensure that his officials in this type of situation go the extra mile to ensure that they have got a clear understanding of the situation before making a ruling of ineligibility to receive benefits. It is clearly that much more difficult for a person in his situation to pursue their ongoing remedies on appeal, and for that reason alone extra care needs to be taken at the outset.
[41] In the result the appeal is allowed and the decision of the Minister vacated.
Signed at Calgary, Alberta, this 19th day of July 1999.
"Michael H. Porter"
D.J.T.C.C.