BETWEEN:
and
THE MINISTER OF NATIONAL REVENUE,
and
NESTOR KELEBAY,
Intervener.
____________________________________________________________________
Appeal heard on June 13, 2005 at Winnipeg, Manitoba
Before: The Honourable D.W. Rowe, Deputy Judge
Appearances:
|
Agent for the Appellant: |
Nestor Kelebay
|
|
Counsel for the Respondent: |
Tracey Telford |
|
For the Intervener: |
The Intervener himself |
____________________________________________________________________
AMENDED JUDGMENT
Whereas this Court issued a judgment in the appeal of McMillan Properties Inc. dated October 19, 2005;
And whereas it was brought to the Court's attention that the name of the Appellant was misspelled in the style of cause;
This Court amends the style of cause in the formal judgment, reasons for judgment and back page accordingly;
The appeal from the assessments made under the Canada Pension Plan for the years 200, 2001 and 2002 is allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Sidney, British Columbia, this 4th day of November 2005.
BETWEEN:
MCMILLAN PROPERTIES INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent,
and
NESTOR KELEBAY,
Intervener.
AMENDED REASONS FOR JUDGMENT
Rowe, D.J.
[1] The appellant corporation, McMillan Properties Inc. (MPI) appeals from a decision of the Minister of National Revenue (the "Minister") dated October 6, 2004 wherein the Minister confirmed assessments in respect of Canada Pension Plan contributions (CPP contributions) payable in relation to an employee Nestor Kelebay (Kelebay) - the intervener in these proceedings - for the years 2000, 2001 and 2002. The Minister decided Kelebay was engaged under a contract of service with MPI and - therefore - was an employee whose earnings were subject to the relevant provisions of the Canada Pension Plan (the "Plan") requiring contributions to be made by the employer.
[2] Nestor Kelebay testified he resides in Winnipeg and during the years under appeal was the Property Manager of a 21-suite apartment owned by MPI, a corporation of which he is the sole shareholder. He managed the rental property and his duties included cutting grass, removing snow, painting, undertaking repairs, renting out suites, dealing with tenants, handling the banking and paperwork related to the business. Kelebay stated his parents also performed various duties related to the management of the apartment block but had not been remunerated for their efforts until March, 2003. Kelebay stated he received money from MPI at the end of each fiscal year but the amount varied because it was dependent on the profit earned by the corporation and the entire amount thereof was paid to him as a "management bonus". The Minister - at subparagraph 7(e) of the Reply to the Notice of Appeal (Reply) assumed Kelebay had received the following remuneration from the appellant: $74,122 in 2000; $44,708 in 2001; $91,709 in 2002. Kelebay stated that assumption is incorrect because he had transferred corporate funds into his personal account in order to obtain a higher interest rate and a certain portion of those funds did not represent payment to him for services rendered but were subject - at all times - to a trust in favour of MPI. He stated the proper amounts paid to him for his services were as follows: $31,262 in 2000; $31,952 in 2001; $31,712 in 2002. He stated these sums were based on the actual profit of MPI in those years and that any other funds transferred to him were in pursuance of his plan to earn a better interest rate in his personal account rather than by purchasing a Term Deposit or other investment in the name of MPI that would tie up corporate funds for as long as 5 years in order to match the rate offered by his own financial institution. Kelebay stated the suites in the apartment were rented at rates ranging from $350 to $575 per month and - as Property Manager - he lived in one but did not pay rent. He agreed with the Minister's position that he used no less than 10% of said suite for his personal use. He also accepted the assumptions of the Minister that he set his own schedule, was responsible for renting out suites to tenants and - at all times material - was corporate officer and director of the appellant. He confirmed he had signing authority of the appellant's bank account and stated that while MPI had purchased some tools and equipment, he owned a substantial collection of tools which he used in connection with his work. In the event any additional workers were required from time to time, MPI paid for their services. Kelebay reiterated that corporation profits flowed to him in the form of a management bonus and that MPI paid all operating expenses associated with the apartment block including Kelebay's vehicle expenses. Kelebay stated he considered his service to MPI to extend beyond the normal range expected from a typical manager of that type of rental property. In his view, he never had any intention to create any legal obligation between himself - personally - and MPI. As the sole shareholder of MPI - he chose to make a payment - to himself - and to label it as a management bonus rather than as director's fees or shareholder's dividend in order to transfer the annual MPI profit to himself. In each of the years under appeal, when completing his personal income tax return, he identified the amounts paid to him by MPI as "rental income". The corporation filed income tax returns for those taxation years in which it declared nil income. When filing his tax returns, Kelebay did not include any CPP contributions. Kelebay stated MPI had been incorporated - about 1980 - by his father. At that time, Kelebay had been working towards his Master degree in engineering, having graduated from the University of Manitoba in 1978. After working as an engineer for 8 years, he decided to leave the profession, took over full-time management of the apartment block and thereafter devoted full time to managing that rental property. Later, he became the sole shareholder of MPI and continued to follow the same method utilized by his father for many years which was to take money out of the corporation - each year - by way of a management bonus equal to the net profit of the corporation in order to reduce corporate income to nil.
[3] In cross-examination by counsel for the respondent, Kelebay identified the appellant's 2001 and 2002 corporate tax returns, filed as Exhibits R-1 and R-2, respectively, which used February 28 as the year end. He also identified his personal tax returns for the 2000, 2001 and 2002 taxation years, filed as Exhibits R-3, R-4, and R-5, respectively. Kelebay agreed he reported rental income in his personal tax returns as though he had received revenue in his capacity as a sole proprietor owing rental property. Counsel referred Kelebay to a line on the Non-farming Income statement information sheet forming part of the appellant's 2001 tax return - Exhibit R-1 - and to the entry stating the sum of $31,952 had been paid out in the form of "salaries and wages". The entry under the same category - in the sum of $31,713 - appeared on the corresponding statement in the appellant's 2002 corporate return. Again, this exact sum was reported by Kelebay as rental income on his personal tax return. Kelebay agreed that if MPI had paid a salary to his parents for work performed by them during the years under appeal it would have reduced the amount of profit which - following the year end - was paid out to him in its entirety by way of the management bonus.
[4] Kelebay submitted both on his own behalf and as sole officer of the appellant that there was never any intention there would be a contract of service between himself and MPI. The method chosen to remunerate him for his services was based on the fact the corporation was not entitled to a small business deduction and declaring dividends to him as sole shareholder did not otherwise confer any tax advantage. He submitted that as an officer of MPI he was not entitled to receive any fixed amount of remuneration and - further - that it was not ascertainable until the financial statement had been prepared following the end of a particular fiscal year. Only then, was the amount of the net profit known which was subsequently transformed into a payment - in that exact amount - to him as a management bonus. In his view, as sole director of MPI, this was an efficient vehicle to compensate him for his efforts.
[5] Counsel for the respondent submitted that when dealing with these issues the form of a transaction does matter and in choosing to categorize payments to Kelebay as "salaries and wages", MPI placed itself in the category of an employer and Kelebay - as recipient of those payments - was an employee. Counsel conceded that the amounts paid to Kelebay in the years under appeal were as stated by Kelebay in his testimony and that any revised assessments should be based on those sums, rather than on the amounts stated in the Reply.
[6] Both parties requested an opportunity to provide the Court with written submissions with respect to several issues arising in relation to the definition of employee and the relationship of an officer and/or director to a corporation.
[7] I will deal first with the written submissions of counsel for the respondent since the procedure followed was to permit Kelebay to receive those submissions initially and to respond thereto within a specific time period.
[8] Counsel for the respondent took the position that the definition of "employee" includes an "officer" and relied on subsection 2(1) of the Plan which reads:
"office" and "officer" means the position of an individual entitling him to a fixed or ascertainable stipend or remuneration and includes a judicial office, the office of a minister of the Crown, the office of a lieutenant governor, the office of a member of the Senate or House of Commons, a member of a legislative assembly or a member of a legislative or executive council and any other office the incumbent of which is elected by popular vote or is elected or appointed in a representative capacity, and also includes the position of a corporation director, and "officer" means a person holding such an office;
[9] Counsel referred to section 6 of the Plan in which pensionable employment is defined as employment in Canada that is not excepted employment as defined in subsection 6(2). None of the exceptions set forth therein apply to the within appeal.
[10] Counsel submitted the definitions of employee, employer and office do not differ materially from those in the Income Tax Act (the "ITA")and that the relevant jurisprudence stems from that provision.
[11] In relation to the issue whether a director of a company is necessarily an employee of that company, counsel included the decision of the Federal Court Trial Division in The Queen v. Kuhl et al., 74 DTC 6024 in which Walsh J. held that two taxpayers who were officers and directors of a farming corporation were not employees and had not been entitled to any fixed or ascertainable stipend or remuneration. The issue had arisen from the decision of the Minister to disallow income averaging on the basis that the appellants' chief source of income was not farming income but was employment income received from the corporation. Counsel pointed out the decision in Kuhl had been followed in Moauro v. M.N.R., 92 DTC 1071, a decision of the Tax Court of Canada but referred to several other decisions in which that approach had not been adopted.
[12] In written submissions, counsel for the respondent conceded there appeared to be an inconsistency between the reasoning in Kuhl and subsequent cases and offered a possible explanation in that the definition of "office" in section 2 of the Plan continues to a point where it includes the position of a corporation director. However, that position - in counsel's view - may not require that a fixed or ascertainable stipend or remuneration be attached to that office as is required for the positions set forth in the preceding portion of the overall definition.
[13] Counsel submitted that, in any event, the remuneration of Kelebay was ascertainable since it was calculated by reference to a particular factor and the provision does not require that the remuneration be ascertainable at any particular time. Counsel submitted a line of authorities to support the proposition that Kelebay's remuneration was ascertainable because it was based - simply - on the appellant's profit at the end of the year. While the exact sum was not known until the final calculations had been performed, there was certainty inherent in the method of calculation which permitted the precise amount of remuneration to be ascertained.
[14] On behalf of the appellant and in his capacity as intervener in the within appeal, Kelebay submitted the Court should follow the reasoning in Kuhl and in Moauro, supra. He pointed out that in those cases, the taxpayers were judged to be independent farming contractors and their income to have been derived from farming rather than from employment despite the taxpayers' own characterization of said income as employment income when filing their tax returns. Kelebay contended the appellant had no intention - in the circumstances of the within appeal - to create any employer/employee relationship and that a person who becomes a director of a corporation by mere fact he or she is the sole or principal shareholder of said corporation cannot be regarded - reasonably - as an employee of that company unless the relationship with the corporation has been structured to create that status. Kelebay submitted that a sole shareholder/director is responsible only to himself and cannot be fired in the same manner as an ordinary employee. Further, he contended he was never elected or appointed or hired to be the director of the appellant corporation but assumed said office through default and that his position could not be terminated except with his consent. As a result, Kelebay maintained he had a fundamentally different relationship with MPI than those directors of corporations who are elected or appointed by shareholders to manage their investment.
[15] Kelebay submitted the phrase "and also includes the position of a corporation director" in the penultimate phrase of the definition of "office" and "officer" in subsection 2(1) of the Plan, should be interpreted exactly the same as the preceding portion of the provision as it pertains to certain offices and positions named therein. By following that approach, a corporation director would be considered an employee only if the person holding that position was entitled to a fixed or ascertainable stipend or remuneration by virtue of the fact he or she occupied that position. Kelebay submitted the intent of the wording of the Plan is to include only those officers who are remunerated in a way similar to an employee and it must be considered to exclude those persons who become directors of a corporation only because they are the sole shareholder, particularly when the mere holding of that office does not entitle the person to any fixed or ascertainable remuneration. He suggested a reasonable interpretation of the overall purpose of the Plan is to consider it was intended to provide for employees and their families in the event of lost income due to retirement, disability or death and not to have any application to a situation - as in the within appeal - where revenue was derived from rental income and the earnings were passive in the same sense as money gained from interest or dividend payments.
[16] Kelebay submitted that his remuneration varied from year to year and was not ascertainable until all the relevant information was known subsequent to undertaking the requisite calculations following the year end of the corporation. In his view, the position of the respondent that the word "ascertainable" had no temporal requirement and that unknown things are ascertainable if they become known in the future would lead to the conclusion that the numbers on the lottery ticket printed at point of purchase are - in fact - ascertainable without the holder having to wait for the official draw.
[17] The first issue to be decided is whether Kelebay was employed under a contract of service by MPI. In the case of Kuhl, supra, Walsh J. held that the two taxpayers were sufficiently engaged in the business of farming on their own behalf to exclude them from the category of employees in relation to the corporation of which they were both directors and for which they received no remuneration. The taxpayers had rented out a portion of their land to the corporation but continued to carry on other farming activities as individuals even while devoting time and effort to the land rented by the corporation. At p. 6032 of his judgment, Walsh J. stated:
If the defendants had devoted their full time to working for the company, which was not the case, instead of at the same time carrying on independent farming operations, it might have been more difficult to conclude that they were independent contractors and not in 'an office or employment under a person engaged in the business of farming' but since they carried on farming on their own and devoted the majority of their time to it, they were clearly engaged in the business of farming even if I had reached the conclusion that for the part of the time they devoted to the company's business they were in 'an office or employment under a person engaged in the business of farming'.
[18] In the case of Moauro, supra, Hamlyn T.C.J. considered the case of a taxpayer who operated a vegetable farm and had been involved in horse racing for 25 years. He operated through a corporation and did not receive any fees for serving as director. The issue was whether the taxpayer's chief source of income was farming and it was necessary to decide whether he was an employee of the corporation or an independent farmer contractor. Judge Hamlyn referred to the decision in Kuhl and after reviewing the evidence, came to the following conclusion at p. 1074 of his judgment:
In relation to the companies the Appellant supplies his service without a fixed wage. There is no evidence of an employment contract. His income is geared to the financial results of the company and he takes from the company only that which he needs. He controls how and when he provides service to the company. The service he provides is that of a farmer and he operates daily as a farmer running his own farm operation. This Appellant is not an employee in the traditional sense. He does not receive his income in his capacity as an officer or director of the farm operations. The Appellant conducts himself in relation to the company not as a servant in a master/servant relationship but as one who provides service to the corporation as an independent contractor. He controls his activities. He took the risks of the success or failure of his farm activities and his business activities are clearly related to the success or failure of the farm corporation.
[19] In the case of Grohne v. The Queen, 89 DTC 5220, a decision of the Federal Court Trial Division, Strayer J. dealt with a situation where the taxpayer received shares from a company in which he was a director but received no remuneration from the company. The Minister took the position that the shares received by the taxpayer constituted income on the basis he received them by virtue of his employment with the company. With respect to the issue whether the director/taxpayer was an employee, at p. 5223 of his judgment Strayer J. stated:
I accept that in accordance with the definitions in the Income Tax Act the plaintiff, as a director of Ohio, was "an employee" of that company. By section 248 it is provided that "employee" includes "officer". That section defines "office" to include the position of a corporation director and provides that the term "officer" means a person holding such an office. Therefore for certain purposes a director of a corporation is an "employee" of the corporation even though he may not receive remuneration nor perform services in ways typical of ordinary employment.
[20] With respect to another issue, Strayer J. went on to observe that not every benefit flowing to a director has to be attributed to that employment as the facts may support another characterization of a benefit.
[21] In Taylor v. Canada (Minister of National Revenue - M.N.R), [1998] T.C.J. No. 732, one of the issues before Rip, T.C.J. was whether the taxpayer who was a director of two corporations was also an employee and therefore required to include employee stock option benefits in his income for the year. At p. 5, Rip J. stated:
Mr. Justice Walsh found that the Kuhls were carrying on a business at the same time as they were performing services for a corporation and the corporation did not pay them in their capacities as officers and directors. Mr. Justice Muldoon in N.V. Beaumont v. The Queen, ..., stated an unremunerated officer may be an employee for the purposes of section 248. While there is a definite connection between employment and remuneration in that there is a general presumption that employees are entitled to remuneration, the absence of remuneration is not determinative of the nature of the relationship and an individual can be an employee despite the fact that he is not being paid ... . For the purposes of subsection 7(1) a director is an employee.
[22] In Scott v. The Queen, 94 DTC 6193, the Federal Court of Appeal considered the case of a taxpayer who received options while a director of a company. The submission was that he had not been an employee. Heald J. - speaking for the Court - at p. 6196 referred to the definition of "employee" and "office" as found in subsection 248(1) of the ITA, and commented as follows:
...Pursuant to subsection 248(1) of the Act, an officer of a corporation is an employee of that corporation and necessarily has an employment relationship with the corporation [see Taylor]. There was evidence before the Trial Judge establishing that, at all relevant times, the appellant was a director and officer of Night Hawk Canada. ...
[23] In Hollingsworth v. Canada, 2003 TCC 134, the issue before Bowie, T.C.J. involved a taxpayer's entitlement to a Goods and Services Tax (GST) rebate on the basis she was an employee of a corporation even though she had received no remuneration. The Minister denied the rebate because she had not been paid for her services even though it was accepted that the expenses were related to the business.
[24] At paragraph 7 of his judgment, Bowie J. stated:
I shall deal with the latter point first. The words "employee", "office" and "officer" are defined in section 248 of the Act in the following way:
248(1) In this Act,
"employee" includes officer.
"office" means the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration and includes a judicial office, the office of a minister of the Crown, the office of a member of the Senate or House of Commons of Canada, a member of a legislative assembly or a member of a legislative or executive council and any other office, the incumbent of which is elected by popular vote or is elected or appointed in a representative capacity and also includes the position of a corporation director, and "officer" means a person holding such an office;
It is clear from these definitions that Ms. Hollingsworth, who was undoubtedly an officer of the corporation at all material times, must at the same time have been an employee for purposes of the Act: see Scott v. Canada. The respondent's position is without any merit.
[25] The alternative positions that must be canvassed are whether the words "fixed or ascertainable" apply to the position of a director of a company and/or whether the remuneration paid to Kelebay in the within appeal was - in any event - capable of meeting that definition.
[26] Counsel for the respondent in the course of written submissions referred to two cases in which opposing views were expressed. In Merchant v. The Queen, 84 DTC 6215, Reed J. of the Federal Court of Canada - Trial Division - considered the meaning of the word, "ascertainable" and at p. 6217 - stated:
I am not convinced that at the time of taking office the taxpayer must know how much he will receive. It seems to me a per diem rate, or a specified amount per sitting renders the income sufficiently ascertainable to meet the definition in section 248(1)...
[27] However, in a more recent decision - Payette v. Canada (Minister of National Revenue - M.N.R), [2002] T.C.J. No. 386, Dussault J. of the Tax Court of Canada, heard the appeal of 9 appellants who were members of the Review Committee established under Legal Aid legislation. The position of the Minister was that they were engaged in insurable employment. Commencing at paragraph 24 of his judgment, Dussault J. stated:
24 However, in commenting on the decision in Guérin ..., Reed J. appears to assume that in that case the remuneration was not ascertainable mainly because of the expenses the appellant was obliged to incur. The Court does not agree with that position. The words "stipend" and "remuneration" mean gross income, not income net of expenses. This is clear from the wording of subsection 5(1) of the Income Tax Act. As well, the Court considers that the descriptor "ascertainable" must refer to something that can be ascertained a priori; otherwise it would have no meaning since everything can be ascertained a posteriori. Thus if the "stipend" or "remuneration" is not fixed, it must still be ascertainable in advance with at least some degree of accuracy by using some formula or by referring to certain set factors. The Court considers that this is the meaning of the decisions in Guérin and MacKeen ...
25 In the present case, subsection 22(k) of Quebec's Legal Aid Act provides that the Commission des services juridiques shall form a review committee responsible for conducting the reviews provided for in sections 74 and 75 of that legislation. As well, section 74 of that legislation provides that an application for review shall be decided by a review committee made up of three members, at least one of whom shall be an advocate. According to paragraph 8 of the Notice of Appeal, the members of the review committee are all advocates, and the Commission appoints them for a one-year, renewable term of office. According to paragraph 12 of the Notice of Appeal, the members are paid on a fee basis, that is, only when they sit to hear applications for review or deliberate and write their decisions. According to paragraph 13 of the Notice of Appeal, their remuneration is set at $50 per hour. According to paragraph 15 of the Notice of Appeal, each year the review committee makes 1,000 decisions during 41 sittings. By agreement, the respondent has admitted the truth of all these facts.
26 It is not very difficult for the Court to find that the appellants, the members of the review committee, hold an office. The review committee is a permanent entity of the Commission des services juridiques. Being appointed as a member for a one-year term of office and having other professional occupations elsewhere in no way suggests that one cannot occupy a position for a set term on a part-time basis. One can at the same time practice law and be a director of one or more share corporations. The Court does not see any incompatibility in that situation. It cannot be said that a person does not occupy a position because that person's main professional activity is exercised elsewhere than with the Commission. That said, it is not enough to occupy a position: the position must entitle the person to a "fixed or ascertainable stipend or remuneration", according to the definition set out in subsection 2(1) of the Canada Pension Plan. In the present case, it is clear that the position does not entitle a person to a fixed remuneration or stipend. The Court also considers it impossible to conclude that the remuneration is ascertainable since in this regard the facts set out in the Notice of Appeal, the truth of which the respondent has admitted, are insufficient. It is not known how many times each member is called upon to sit on the review committee or how many days or hours are spent in this activity in a given year. The information about the number of review committee sittings held and the number of review applications heard each year does not provide a reliable factor for individual members. The Court has no idea of the "stipend" or the "remuneration" that the members of the review committee were likely to receive for rendering their services; nor has any such information been adduced, except that the members are paid on a fee basis at a rate of $50 per hour. The Court considers that merely indicating the hourly rate set by the Commission des services juridiques is insufficient to establish that the position itself makes a member eligible for a "fixed or ascertainable stipend or remuneration". The Court therefore considers that the respondent, who simply admitted the truth of the facts set out in the Notice of Appeal, has in no way discharged the burden on him of establishing that the appellants, the members of the review committee of the Commission des services juridiques, held an office as defined in subsection 2(1) of the Canada Pension Plan. Thus subparagraph 6(f)(iii) of the Regulations cannot be applied to this case to include the position occupied by the appellants in insurable employment.
[28] I have set forth the various arguments even though they are - to some degree - relevant to alternative positions because there is an overlapping effect. However, the primary issue still remains whether, on the facts, Kelebay was an employee of MPI as a result of providing services pursuant to a contract of service.
[29] The position taken by Kelebay on behalf of the appellant was that it should not be bound by the manner of reporting his remuneration, namely as salaries and wages, in the corporate returns. He pointed out that the Minister did not choose to accept his categorization - as rental income - in respect of the money received from the appellant. Concerning that matter, it is obvious those funds could not have been rental income in his hands because he did not own the property that produced the rental revenue. The apartment block had been owned by MPI since 1980. As for the income received by Kelebay from MPI, those sums were paid to him for services rendered in connection with various duties required to manage a 21-suite apartment block. Kelebay lived rent-free in one of the suites and carried out specific duties for the efficient operation of the property. He was reimbursed for work-related expenses including those pertaining to the operation of his vehicle. In the event outside workers or tradespeople were required, MPI paid for their services. Although Kelebay had his own substantial supply of tools, there were certain items that were purchased by the appellant. Kelebay was not operating his own rental agency business and invoicing MPI for his services nor was he a co-venturer or partner with MPI. Instead, he was the sole shareholder and director of MPI which owned the apartment block and operated a rental business in respect thereof. Of course, it is always a walk on the metaphysical wild side when one begins to speak of a corporation wholly owned by an individual as having a separate and distinct personality in everyday terms rather than as a matter of law. However, Kelebay understood the difference between his position as director of MPI and his persona as recognized by his financial institution because as an individual with an account therein, he could produce more interest revenue for MPI than if the account had been in the name of his wholly-owned corporation. Kelebay - the person - was providing services normally associated with management of an apartment rental property and the nature of the relationship was not uncommon within that industry. The only aspect that was different pertained to his remuneration which was not based on a monthly salary or an hourly wage but depended on the amount of annual net profit of MPI as determined in accordance with usual accounting practices at year end.
[30] In the case of Meredith v. Canada, [2002] F.C.J. No. 1007, the Federal Court of Appeal considered a matter of an overseas employment tax credit and whether the Tax Court was correct in deciding the corporation in question was not an entity separate and apart from the taxpayer as an individual. In the course of the decision of the Federal Court of Appeal, Malone J.A. - speaking for the Court - at paragraph 12 stated:
Lifting the corporate veil is contrary to long-established principles of corporate law. Absent an allegation that the corporation constitutes a "sham" or a vehicle for wrongdoing on the part of putative shareholders, or statutory authorization to do so, a court must respect the legal relationships created by a taxpayer (See Salomoon v. Salomon & Co., [1987] 1 S.C.R. 2). A court cannot re-characterize the bona fide relationships on the basis of what it deems to be the economic realities underlying those relationships (see Continental Bank Leasing Corp. v. The Queen, [1998] 2 S.C.R. 298; Shell Canada Ltd. v. The Queen, [1999] 3 S.C.R. 622; Ludco Enterprises Limited v. The Queen, [2001] S.C.J. No. 58, 2001 SCC 62 at para. 51). It follows, therefore, that the Judge erred in law by inquiring into the economic realities of the relationship as between Stem and Meredith, when he was not authorized by statute or common law to do so.
[31] The Minister's primary position is that Kelebay received funds from the appellant as an employee and was engaged in pensionable employment as a result. I accept that argument. The facts in my view do not permit any other conclusion to be drawn. MPI adopted a method of remuneration that had been in effect for many years and after Kelebay became the sole shareholder that business policy continued. There is no evidence Kelebay intended to receive funds from the corporation in return for his services via another means. As Kelebay pointed out in his testimony and in his submissions, he had the right - as sole director - to retain the services of a rental agency and MPI could have paid a 5%-7% commission and other related labour costs - directly - without requiring his personal services. However, in that scenario, his income from the corporation would not have had the indicia of employment even though he would not have been entitled to the entire net profit in his position as sole shareholder.
[32] In the event I am wrong in concluding that Kelebay was an employee of MPI pursuant to a contract of service and - therefore - engaged in pensionable employment, I find that even if his income flowed to him in his capacity as director, it was ascertainable within the meaning of the definition of "office" and "officer" within section 2 of the Plan. The method chosen by MPI to remunerate Kelebay for his services as apartment block manager was dependent on one determinative factor that was capable of providing an unequivocal amount even though that sum might vary from year to year. Kelebay's annual remuneration was an amount equal to the net profit of MPI from its operation of the apartment block in any given year; no more, no less. In that sense, it does not fall into the same category as the members of the legal aid committee in the Payette, supra, case where Dussualt J. concluded it was impossible on the facts to find the remuneration was ascertainable even though an hourly stipend of $50 had been established because that factor alone was insufficient in view of the circumstances overall.
[33] There may be many situations in which the mere fact of being a director does not entitle one to receive anything. Other times, there may be a set fee for serving in that position that is established at the outset or there may be a schedule of fees and a list of meetings that must be attended in order for the stipend to be earned by the holder of that office. For the purposes of deciding the within appeal, it is not necessary that I arrive at any conclusion with respect to the issue whether a director who receives no remuneration is automatically an employee of that corporation for the purposes of the Plan.
[34] Kelebay raised interesting points particularly with respect to the legislative intent behind the Plan. I agree it is probable that the attention of Parliament was not directed toward a fact situation such as in the within appeal. However, it has not been demonstrated to me on the evidence that the decision of the Minister is incorrect insofar as Kelebay was found to have been engaged in insurable employment with MPI during the years under appeal. However, the amount of his earnings in each year under appeal- as conceded by counsel for the respondent - is less than those assumed by the Minister.
[35] The jurisdiction of this Court is set forth in subsection 28(2) of the Plan as follows:
Decision of court - On an appeal under this section, the Tax Court of Canada may vacate, confirm or vary a decision on an appeal under section 27 or an assessment that is the subject of an appeal under section 27.1 or, in the case of an appeal under section 27.1, may refer the matter back to the Minister for reconsideration and reassessment, and shall without delay
(a) notify the parties to the appeal in writing of its decision; and
(b) give reasons for its decision, but, except where the Court deems it advisable in a particular case to give reasons in writing, the reasons given by it need not be in writing.
[36] The appeal is hereby allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that:
Nestor Kelebay was engaged under a contract of service with McMillan Properties Inc. for the years 2000, 2001 and 2002 and that his remuneration was $31,262 in 2000, $31,952 in 2001 and $31,712 in 2002.
Signed at Sidney, British Columbia, this 4th day of November 2005.
Rowe, D.J.
COURT FILE NO.: 2004-4571(CPP)
STYLE OF CAUSE: McMillan Properties Inc. and M.N.R. and Nestor Kelebay
PLACE OF HEARING: Winnipeg, Manitoba
DATE OF HEARING: June 13, 2005
AMENDED REASONS FOR
JUDGEMENT BY: The Honourable D.W. Rowe, Deputy Judge
DATE OF AMENDED
APPEARANCES:
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Agent for the Appellant: |
Nestor Kelebay
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Counsel for the Respondent: |
Tracey Telford |
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For the Intervener: |
The Intervener himself |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario
For the Intervener: