[OFFICIAL ENGLISH TRANSLATION]
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Docket: 2003-2882(EI) |
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BETWEEN: |
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LES GRAPHIQUES BUSCOM INC., |
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Appellant, |
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And |
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THE MINISTER OF NATIONAL REVENUE, |
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Respondent. |
____________________________________________________________________
Appeal heard on March 26, 2004, at Montreal, Quebec.
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Before: The Honourable S.J. Savoie, Deputy Judge |
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Appearances: |
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For the Appellant: |
Jean-Marc Fillion |
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Counsel for the Respondent: |
Me Agathe Cavanagh |
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JUDGMENT
The appeal is allowed and the Minister's decision is vacated in accordance with the attached Reasons for Judgment.
Signed at Grand-Barachois, New Brunswick, the 16th day of July 2004.
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"S.J. Savoie" |
Savoie, D. J.
Certified true translation
Colette Beaulne
[OFFICIAL ENGLISH TRANSLATION]
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Citation: 2004TCC482 |
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Date: 20040716 |
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Docket: 2003-2882(EI) |
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BETWEEN: |
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LES GRAPHIQUES BUSCOM INC., |
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Appellant, |
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And |
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THE MINISTER OF NATIONAL REVENUE, |
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Respondent. |
REASONS FOR JUDGMENT
Deputy Judge Savoie
[1] This appeal was heard at Montreal, Quebec, on March 26, 2004.
[2] The appeal concerns the insurability of the employment held by Mr. Denis Fillion and Mr. Alexandre Laporte, the Workers, when they were employed by the Appellant from January 1, 2002, to May 22, 2003. The Minister of National Revenue (the "Minister") informed the Appellant on August 1, 2003, that the Workers' employment was insurable employment. The Minister based the decision on the following presumed facts:
a) the Appellant runs a computer and software sales business (accepted);
b) the main product the Appellant sells is AUTOCAD, a software package (accepted);
c) The Appellant tailors the software to the customer's needs, provides training to software users and ensures it is integrated (accepted);
d) The Appellant's main customers are manufacturing or engineering firms (accepted);
e) The Appellant's offices are open Monday to Friday from 8:30 a.m. to 5:00 p.m. (accepted);
f) the Workers sit on the Appellant's board of directors (denied);
g) Mr. Denis Fillion is Vice-President, Operations and Technology (accepted);
h) Mr. Alexandre Laporte is Vice-President, Sales and Marketing (accepted);
i) The board of directors meets every Monday (accepted);
j) As directors, the Workers are called upon to make decisions involving the Appellant's operations (accepted);
k) Mr. Denis Fillion's main duties involve the firm's infrastructure, choosing product lines, assessing products, technological orientation and technical resources, and hiring staff in his division (accepted);
l) Mr. Alexandre Laporte looks after everything outside the firm, that is, he looks after product marketing, advertising and sales, supplier relations and hiring staff in his division (accepted);
m) the Workers work at the Appellant's place of business (accepted);
n) They generally work during the Appellant's business hours (denied);
o) The Appellant provides the Workers with the necessary equipment (accepted);
p) They do not incur any expenses as part of their normal duties; the Appellant covers all of their expenses (accepted);
q) like the Appellant's other employees, the Workers have health insurance and wage-loss insurance coverage (denied);
r) as directors on the Appellant's board of directors, they also have disability insurance and life insurance coverage (denied);
s) the Workers are entitled to three weeks of vacation a year, which is standard in the firm (accepted);
t) each of the Workers is entitled to an extra week of holidays at Christmastime (accepted);
u) The Workers, like all of the Appellant's other employees, are entitled to six days of paid sick leave a year (denied);
v) In 2002, Mr. Denis Fillion's annual salary was $98,353 and
Mr. Alexandre Laporte's was $107,824 (accepted);
w) Each of the Workers' salaries was based on comparable salaries in the industry (accepted);
x) The Appellant had the authority to monitor the Workers' work (denied);
y) the Workers' duties are integrated into the Appellant's activities (accepted).
[3] The Appellant accepted all the Minister's presumed facts, except those in paragraphs (f), (n), (q), (r), (u) and (x).
[4] The Appellant responded to the Minister's Reply to the Notice of Appeal in a document provided at the hearing and entered into evidence as Exhibit A-1.
[5] This evidence provided by the Appellant at the hearing is reproduced almost entirely as follows:
[...]
3- We accept allegation 5, except for subparagraphs f, n, p, r, u and x;
We add the following to the subparagraphs indicated:
f) the Workers are also shareholders in the corporation and are subject to a unanimous shareholder agreement.
This situation occurred in 1993 further to an estate freeze the purpose of which was to:
a) plan corporate management succession;
b) enable them to benefit from their individual contributions to the corporation's success;
c) allow them to inherit an operational corporation that they had a hand in building.
n) They often and regularly work longer than the corporation's hours of business. They are usually the first to arrive and the last to leave. They often work evenings and weekends. When they travel or vacation, they remain in contact with the office via their cellular telephones and their laptop computers. They ensure that at least one of them is present in the office to ensure that management is present. They are not paid extra or given additional leave for this. In this way, they act like any business owner.
q, r) These two allegations must be considered together and confirm their special status. As a result of paragraph (r) in particular, the requirements of the unanimous shareholder agreement are met.
u) These are the basic conditions for everyone. The board of directors, however, has no doubt that this condition would be applied differently for directors.
x) Work methods are not monitored. The work must meet standards, which comply with legislation and good corporate governance practices.
The President does not have the technical knowledge required to check work methods.
[...]
5- We reject allegation 7. Denis Fillion and Alexandre Laporte were made responsible for the management and orientation of the firm based on confidence, bonding, a common vision, and their demonstrated skill. Denis Fillion and Alexandre Laporte are also subject to a shareholder agreement that is much more stringent than the usual agreement with other employees. Denis Fillion is also an engineer and was originally brought into the company to eventually take over the reins.
[...]
8- Together, Denis Fillion and Alexandre Laporte have effective control over the firm. They do not have the usual contract of employment signed by other employees. They are shareholders because they have a non-arm's-length relationship with the firm. We will explain later how the current situation came into being.
[...]
CONTROL:
The Payer can control their work through the fact that they are present on the work premises. In their respective departments, they are the only ones who can decide how and why decisions are made. They have technological and commercial knowledge of the products and services with which customers are provided.
The fact that they are subject to a shareholder agreement which requires key decisions to be unanimous does not change their effective control. Mr. Jean-Marc Fillion, the shareholder who has legal control, is subject to the same rules. However, the absolute control they have in their respective area means that there is no possibility for the controlling shareholder to act.
Further, they have a very strict penalty clause concerning competition. This clause is not found in the other contracts.
It seems that these non-competition clauses for shareholders are much more strictly applied in the jurisprudence.
OWNERSHIP OF TOOLS:
The computers and office equipment is the property of BusCom of which they are shareholders. However, the real work tools, such as technological knowledge and business contacts, are clearly under their effective control. This was made possible through their non-arm's length relationships. No other employee has this level of control.
RISK OF FINANCIAL LOSS/CHANCE OF FINANCIAL PROFIT:
Their labour compensation is only part of the financial compensation. Their interest in the firm's capital stock means that profit can increase or decrease greatly depending on whether the firm earns profits or incurs losses.
Further, the unanimous shareholder agreement forces them to invest additional amounts if necessary, and endorse lines of credit or loans when required.
Since the firm has a $250,000 line of credit, their losses could be quite sizeable.
INTEGRATION
Their work is completely integrated into BusCom's activities. The effective control they have over their work stems from the fact that they are shareholders.
[6] Further, the Appellant maintains that in his recommendation to the Minister, the Appeals Officer failed to take the following facts into account:
In 1993, shareholders JM Fillion, Monique Choquette and Denis Fillion implemented estate freeze techniques.
The following are the three goals of this estate freeze in order of importance:
1- Ensuring the firm's management succession. All new shareholders had to carve out a place for themselves in the hierarchy and the performance of work.
This was part of their management training to ensure a replacement for the President and Founder JM Fillion when he retires.
More than 10 years have passed and D Fillion and A Laporte have developed leadership and knowledge recognized by all. It can now be said that the authority has been transferred successfully. The current President does not make any decisions in the normal course of operations. He acts primarily as a mentor and carries out routine administrative duties on a part-time basis.
2- Ensuring participation in the firm's profits. The value of the firm was set at $800,000 when the estate freeze occurred.
This amount was paid over the years to the existing shareholders when the estate freeze occurred: JM Fillion, Monique Choquette and D. Fillion.
The firm had 1,887,000 in shareholder equity as at December 31, 2002. This is not of any value unless the firm remains operational or is sold to a buyer who runs the firm.
The shareholders' interest is therefore:
JM Fillion $622,000
D Fillion $434,000
A Laporte $340,000
H Fillion $245,000
P Fillion $245,000
Since the controlling shareholder JM Fillion no longer manages the firm on a day-to-day basis and everything is based on D Fillion's and Alexandre Laporte's decisions, we can immediately see their financial losses if they decided to leave the firm.
Since JM Fillion would be unable to resume effective control, the firm would undoubtedly be wound up for a lower value.
[7] The Appellant also added that:
Graphiques BusCom Inc. is a family SME in the true meaning of the term. Each of the shareholders plays a key role in the firm through their non-arm's length relationship. If a member of management left, the impact would be too great to continue.
The current controlling shareholder, JM Fillion, no longer wants to return to full-time work or to start training the succession again. The de facto heirs of the firm are in control and their future is in their hands.
[8] The Minister concluded that the Workers' employment was insurable because the employment met the requirements of a contract of employment. The circumstances surrounding this employment were examined to determine whether the criteria in Wiebe Door Services Ltd. v. M.N.R, [1986] 3 F.C. 553, that is, control, ownership of tools, chance of profit and risk of loss, and integration had been met in the case at hand.
[9] The Minister further concluded that Denis Fillion, a Worker, and the Appellant, were related persons within the meaning of the Income Tax Act pursuant to the grounds set out in paragraph 6 of the Reply to the Notice of Appeal.
[10] However, the Minister deemed, after analyzing paragraph 5(3)(b) of the Employment Insurance Act, that they were dealing with each other at arm's length because the Minister was satisfied that, having regard to all the circumstances of the employment, it was reasonable to conclude that Denis Fillion, the Worker, and the Appellant would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.
[11] In 2679965 Canada Inc. (d.b.a. Produits de Piscine Vogue) v. Canada (Minister of National Revenue - M.N.R.), [2003] T.C.J. No 476, this Court had to rule on a dispute involving facts substantially similar to those in the case at hand. The following is a summary of the presumptions of fact set out in paragraph 5 of the Reply to the Notice of Appeal in that decision:
a) the Appellant was incorporated on January 7, 1991;
b) the Appellant did business as Produits de Piscines Vogue;
c) the Appellant manufactured and distributed pools and accessories;
d) Gestion Lebuis et Associés Inc. was the Appellant's sole shareholder;
e) the shareholders of Gestion Lebuis et Associés Inc. were:
Guy Lebuis 60% of voting shares
Gilles Lebuis 20% of voting shares
Paul Guay 20% of voting shares
f) Guy Lebuis is the father of Gilles Lebuis;
g) Paul Guay is not related to Gilles or Guy Lebuis;
h) the Appellant has approximately $28 million in annual sales and employs between 75 and 130 employees, depending on the season;
i) the Appellant's President, Guy Lebuis, was present in the Appellant's offices every day;
j) the Appellant's board of directors met regularly and made important decisions;
k) Gilles Lebuis, a Worker, was the Appellant's Vice-President of Marketing;
l) Worker Lebuis's duties involved R & D, marketing and sales;
m) Worker Paul Guay was the Appellant's Vice-President of Finance;
n) Worker Paul Guy's duties involved human resources, operations, accounting, finances and the Appellant's legal concerns;
o) the Workers worked Monday to Friday, Gilles Lebuis from 8:00 a.m. to 5:00 p.m., and Paul Guay from 8:00 a.m. to 8:00 p.m.;
p) the Workers worked for the Payer year-round;
q) the Workers' fixed annual salary was $90,000;
r) the Appellant provided the Workers with an automobile;
s) the Workers had group insurance coverage like all the employees;
t) the Appellant covered all the Workers' work-related expenses;
u) the Workers had no risk of loss or chance of profit other than their salary;
v) the Workers worked on the Appellant's premises;
w) all the equipment the Workers used belonged to the Appellant;
x) the services rendered by the Workers were an integral part of the Appellant's activities.
[12] This Court has retained and would like to reproduce the following relevant facts from that decision:
[TRANSLATION]
Paragraph 5(e) was denied because 2 percent of the shares held were voting shares and 18 percent, participating shares. In connection with the statement in paragraph 5(i) to the effect that the Appellant's president reported to work at the Appellant's offices every day, Mr. Gilles Lebuis explained that in 2001, his father was 68 years old. He was in the office for a few hours only and he was no longer involved in the day-to-day management of the firm. He was no longer the firm's guiding force.
Mr. Gilles Lebuis explained that in 2001, he and Paul Guay made the decisions. They acted as partners and equals.
[...]
In connection with paragraphs 5(o) and 5(v), the Workers worked on the Appellant's premises, but also at home in the evening. They kept in touch when on vacation.
With regard to the group insurance coverage similar to that for all the Workers mentioned in paragraph 5(s), their life insurance coverage was different. Further, each of the partners had taken out a $2-million life insurance policy on the life of the other partner. If they were traveling at the same time, they did not travel together.
[...]
In 2001, Mr. Lebuis was the Vice-President of marketing, R & D and public relations. He stated that he arrived at the office at about 8 a.m. and left at about 6:30 p.m. He has the irregular hours of an independent contractor. He chooses his hours. He is the first to arrive and the last to leave.
He and Mr. Guay had decided on the $90,000 salary, which dated back to 1996 and was based on the firm's ability to pay or performance and the financial requirements of the two partners.
[...]
Mr. Paul Guay is a chartered accountant and Vice-President of finance. He says that he rarely leaves the office before 8 p.m. He does not report to anyone. He and Mr. Gilles Lebuis work together. In September 2002, both decided to pay themselves a $150,000 salary.
Mr. Jean-Pierre Houle, appeals officer, testified that in the case as hand, there was one person dealing with the Payer at non-arm's length and another at arm's length. He therefore felt that the conditions of employment of Mr. Lebuis were similar to those of another employee dealing with the Appellant at arm's length. These were the conditions of Mr. Guay, who, according to the witness, dealt with the Payer at arm's length. He found nothing surprising in the fact that the two Workers had set their own salary and conditions of employment because these same two people set the salaries and determined the conditions of employment of employees in general. In his report, he described as a fact that the Appellant was jointly managed by both people.
Analysis and conclusion
The appeals officer's decision was based on the fact that one of the Workers had an arm's-length relationship which enabled him to establish a comparable. It was therefore easy for him to decide that the conditions of employment of the other Worker were similar to those of a person dealing at arm's length.
[...]
In Fournier v. M.N.R., [1991] T.C.J. No. 7, Justice Dussault ruled that when the parties to a transaction act in concert, when they have similar economic interests or they act with a common intent, it is generally admitted that they are not dealing at arm's length.
In the case at hand, the two Workers involved are also two of the Appellant's decision-makers. The evidence clearly showed that they act in conjunction with the Appellant and they are the people who run it. It seems clear that there is a non-arm's length relationship between the Appellant and the Worker-officer, Mr. Guay.
The issue in the case at hand is therefore not determining whether there is a subordinate relationship between the Appellant and the two Worker officers, as required under paragraph 5(1)(a) of the Act, but to determine whether these employments are excepted employment pursuant to paragraphs 5(2)(i) and 5(3)(b) of the Act.
The Minister's decision was based on the premise that the Appellant and Mr. Guay were dealing at arm's length. This premise is incorrect. I am therefore allowed to review this decision. Let us look at the salary. A salary that remains unchanged from 1996 to 2001, and then is increased by $60,000 a year in 2002, is not a salary that follows the usual rules in the labour market. The hours of work, involvement and autonomy of the Workers are also not those of employees dealing at arm's length with the employer.
I conclude, based on the remuneration, the duration, and the nature and importance of the work performed that the Workers and the Appellant would not have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.
[13] Since there are such similarities between the afore-mentioned 2679965 Canada Inc. (d.b.a. Produits de Piscine Vogue) decision and the case at hand, I can apply the principle therein.
[14] However, to continue the Minister's analysis, that is, pursuant to paragraph 5(1)(a) of the Employment Insurance Act, bear in mind that the courts have determined the insurability of employments based on the criteria established in the afore-mentioned Wiebe Door Services Ltd. v. M.N.R. decision.
[15] Further to the analysis, in concluding as the Minister did, the Minister deemed that the Appellant had the authority to control the Workers' work by being present on the firm's premises, attending various monthly and annual meetings, and being involved in the return obtained by the Worker at the end of the year. Provision is also made in the shareholders agreement that key decisions must be unanimous.
[16] The Minister also concluded that the Appellant had provided the tools, that since the Workers were paid a fixed salary, they had no chance of profit or risk of loss in their normal duties.
[17] Finally, the Minister concluded that the Workers' respective duties were fully integrated into the Appellant's activities.
[18] However, in the Reply to the Notice of Appeal, which was reproduced above, the Appellant provides another perspective on the analysis of employments using the criteria provided. In the opinion of this Court, the analysis of employments provided by the Appellant using the control of the ownership of tools, chance of profit and risk of loss criteria is very convincing.
[19] Consideration should be given to certain passages in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983 where the Supreme Court of Canada examined the relative importance of these criteria in an analysis such as that before the Court. In paragraphs 46 and 47 of this decision, Justice Major wrote:
In my opinion, there is no one conclusive test which can be universally applied to determine whether a person is an employee or an independent contractor. Lord Denning stated in Stevenson Jordan, supra, that it may be impossible to give a precise definition of the distinction (p. 111) and, similarly, Fleming observed that "no single test seems to yield an invariably clear and acceptable answer to the many variables of ever changing employment relations . . ." (p. 416). Further, I agree with MacGuigan J.A. in Wiebe Door, at p. 563, citing Atiyah, supra, at p. 38, that what must always occur is a search for the total relationship of the parties:
The most that can profitably be done is to examine all the possible factors which have been referred to in these cases as bearing on the nature of the relationship between the parties concerned. Clearly not all of these factors will be relevant in all cases, or have the same weight in all cases. [...]
[20] With respect to the foregoing, this Court is of the opinion that using the criteria in the aforementioned Wiebe Door Services Ltd. to analyze the Workers' employment does not lead to the conclusion that contracts of employment are involved because the only criterion that leads to this conclusion is the integration criterion.
[21] This Court is of the opinion that this conclusion is justified because of the unrefuted evidence the Appellant provided in Exhibit A-1. This conclusion is also supported by the afore-mentioned 2679965 Canada Inc. (d.b.a. Produits de Piscine Vogue) and 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. decisions.
[22] Therefore, this Court must conclude that the Workers did not occupy insurable employment during the period at issue because the employment was not governed by a contract of employment within the meaning of paragraph 5(1)(a) of the Employment Insurance Act.
[23] Consequently, the appeal is allowed and the Minister's decision is vacated.
Signed at Grand-Barachois, New Brunswick, the 16th day of July 2004.
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"S.J. Savoie |
Savoie, D.J.
Certified true translation
Colette Beaulne
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CITATION: |
2004TCC482 |
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COURT DOCKET NO: |
2003-2882(EI) |
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STYLE OF CAUSE: |
Les Graphiques BusCom Inc. and M.N.R. |
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PLACE OF HEARING: |
Montreal, Quebec |
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DATE OF HEARING: |
March 26, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable S.J. Savoie, Deputy Judge |
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DATE OF JUDGMENT: |
July 16, 2004 |
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APPEARANCES: |
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For the Appellant: |
Jean-Marc Fillion (Agent) |
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For the Respondent: |
Me Agathe Cavanagh |
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SOLICITOR OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |