Date: 19980421

Docket: 97-490-UI

BETWEEN:

LILIANE FORTIN,

Appellant,

and

THE MINISTER OF NATIONAL REVENUE,

Respondent,

and

ROGER PROVENCHER,

Intervener.

Reasons for Judgment

PIERRE ARCHAMBAULT J.T.C.C.

[1] By a letter dated January 9, 1997 the Minister of National Revenue ("the Minister") advised Liliane Fortin of his determination that Ms. Fortin's employment with Roger Provencher, operating a business under the trade name "Débosselage des Pros enr.", for the period from January 2 to May 31, 1996 ("the relevant period") was not insurable under the Unemployment Insurance Act ("the Act"). According to the Minister, Mr. Provencher and Ms. Fortin were not dealing with each other at arm's length and Ms. Fortin's employment was accordingly not insurable employment under the definition of that phrase given in the Act.

[2] In making his determination the Minister relied inter alia on the following facts, as appears in paragraph 5 of the Reply to the Notice of Appeal:

[TRANSLATION]

(a) Since 1993 the payer has operated an automobile body and paint shop business;

(b) Roger Provencher has been the appellant's de facto spouse since 1985;

(c) the business operated year-round;

(d) the appellant, Roger Provencher and Mr. Provencher’s two sons worked in the business;

(e) from time to time the payer also had the services of another worker;

(f) the payer paid these workers by cheque;

(g) the cheques were issued weekly;

(h) the payer had a credit line of $15,000;

(i) the credit line was secured on the appellant's residence;

(j) from the inception of the business the appellant's duties were to do all the payer's accounting;

(k) this work was done by hand;

(l) during the period at issue, in addition to doing accounting work the appellant received customers, answered the telephone, calculated taxes, checked bills and prepared statements of account and sent them out to customers;

(m) the payer did not record the hours worked by the appellant;

(n) the appellant was not subject to the payer's control;

(o) the appellant and the payer agreed on gross pay of $200 a week;

(p) the appellant in fact delayed cashing her pay so the other cheques issued by the payer could be honoured;

(q) on May 28, 1996 the payer sold his business;

(r) before and after the period at issue the appellant performed services for the payer without pay;

(s) the appellant and the payer were not dealing with each other at arm's length within the meaning of the Income Tax Act;

(t) the payer would never have hired an unrelated person on terms substantially similar to those offered the appellant, let alone for such a period.

[3] At the start of the hearing of her appeal Ms. Fortin admitted all these paragraphs except for paragraphs (j), (n), (r), (s) and (t). In addition to the facts already admitted, the evidence disclosed the following. From 1993 to late 1995 Ms. Fortin helped her de facto spouse to do his accounting without receiving any pay. In her testimony she was unable to estimate the time she might have spent on this activity. However, when she met with the investigator from the Department of Human Resources Development she allegedly said that it accounted for 75 percent of the time she spent when she was performing services for Mr. Provencher for pay during the relevant period. This accounting work was limited to entering data in the ledger and preparing and filing reports for tax authorities, including information slips regarding source deductions and GST returns. She also handled the payroll.

[4] She said she wanted to give up this work at the end of 1995 because she did not like it. However, Mr. Provencher, who had had a thrombosis, a pulmonary embolism and phlebitis, was having difficulty looking after the running of his business. He apparently at this time offered Ms. Fortin a salary of $200 for a 35-hour week, which represented an hourly rate of $5.71.

[5] Ms. Fortin said she thought it was quite natural for her residence to be used to secure a $15,000 credit line for Mr. Provencher, since he had lent her $21,000 to buy a rental property in 1988.

[6] At her meeting with the Human Resources Development investigator Ms. Fortin told her that she had delayed cashing her paycheques so the other cheques issued by Mr. Provencher could be honoured. She altered this version of the facts during her testimony in this Court, stating that the other cheques could have been honoured even if she had not delayed cashing her cheques. She emphasized instead that she preferred to accumulate her cheques and cash them at the same time.

[7] Ms. Fortin's testimony did not seem to me to be very credible. The copies of cheques issued to Ms. Fortin, which were filed at the hearing, showed that paycheques for three weeks in January 1996 were cashed one in mid-February (a month later) and the other two in March 1996, in two separate weeks, that is nearly two months after the date indicated on the cheques. There was also some two months' delay in cashing the paycheques for February and March 1996. The cheque for the week of March 29, 1996 was cashed on April 22, while those for March 8 and 15 were cashed on May 6 and 29, 1996 respectively.

[8] The first cheque for April was cashed on May 31, 1996, the second on June 3, 1996 and the other two simultaneously on June 10, 1996. The first cheque for May was cashed on June 10, 1996 and the other three were cashed together on June 13, 1996.

[9] Strangely, three cheques issued on May 31, 1996 were not cashed at the same time: one was cashed on June 13 and the other two on June 26, 1996. Ms. Fortin confirmed that she was paid for the work period ending May 31, a few days after the sale of Mr. Provencher's business. She completed the bookkeeping at that time and so was paid for this service.

[10] When I questioned Ms. Fortin about cashing the rent cheques for apartments she rented to students, she confirmed that she generally cashed most of the rent cheques within a week after receiving them.

[11] Ms. Sauvageau, the Human Resources Development investigator, confirmed in her testimony that the minimum wage for the period from October 1, 1995 to September 1996 was $6.45 an hour.

Analysis

[12] The Minister argued that Ms. Fortin's employment was excepted from insurable employment pursuant to s. 3(2)(c) of the Act, which reads as follows:

3. (2) Excepted employment is

. . .

(c) subject to paragraph (d), 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, and

(ii) where the employer is, within the meaning of that Act, related to the employee, they shall be deemed to deal with each other at arm's length if the Minister of National Revenue is satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length;

. . .

[13] The first point to be resolved is whether Ms. Fortin and Mr. Provencher were dealing with each other at arm's length. Ms. Fortin admitted that Mr. Provencher had been her de facto spouse since 1985 and that they lived together at her home. Under s. 252(4) of the Income Tax Act the conjugal relationship between Ms. Fortin and Mr. Provencher is treated as a marriage for the purposes of that Act. As a result, Ms. Fortin and Mr. Provencher were "related persons" within the meaning of s. 242(2) of that Act. Section 252(2) and (4) provides:

(2) In this Act, words referring to

(a) a parent of a taxpayer include a person

(i) whose child the taxpayer is,

(ii) whose child the taxpayer had previously been within the meaning of paragraph (1)(b), or

(iii) who is a parent of the taxpayer's spouse;

(b) a brother of a taxpayer include a person who is

(i) the brother of the taxpayer's spouse; or

(ii) the spouse of the taxpayer's sister;

(c) a sister of a taxpayer include a person who is

(i) the sister of the taxpayer's spouse, or

(ii) the spouse of the taxpayer's brother;

(d) a grandparent of a taxpayer include a person who is

(i) the grandfather or grandmother of the taxpayer's spouse, or

(ii) the spouse of the taxpayer's grandfather or grandmother;

(e) an aunt or great-aunt of a taxpayer include the spouse of the taxpayer's uncle or great-uncle, as the case may be;

(f) an uncle or great-uncle of a taxpayer include the spouse of the taxpayer's aunt or great-aunt, as the case may be; and

(g) a niece or nephew of a taxpayer include the niece or nephew, as the case may be, of the taxpayer's spouse.

. . .

(4) In this Act,

(a) words referring to a spouse at any time of a taxpayer include the person of the opposite sex who cohabits at that time with the taxpayer in a conjugal relationship and

(i) has so cohabited with the taxpayer throughout a 12-month period ending before that time, or

(ii) is a parent of a child of whom the taxpayer is a parent (otherwise than the cause of the application of subparagraph (2)(a)(iii))

and, for the purposes of this paragraph, where at any time the taxpayer and the person cohabit in a conjugal relationship, they shall, at any particular time after that time, be deemed to be cohabiting in a conjugal relationship unless they were not cohabiting at the particular time for a period of at least 90 days that includes the particular time because of the breakdown of their conjugal relationship;

(b) references to marriage shall be read as if a conjugal relationship between two individuals who are, because of paragraph (a), spouses of each other were a marriage;

(c) provisions that apply to a person who is married apply to a person who is, because of paragraph (a), a spouse of a taxpayer; and

(d) provisions that apply to a person who is unmarried do not apply to a person who is, because of paragraph (a), a spouse of a taxpayer.

[My emphasis.]

[14] Under s. 251(1)(a) of the Tax Act, related persons are deemed not to deal with each other "at arm's length". That paragraph states the following:

(1) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm's length; . . .

[15] Accordingly, as Ms. Fortin and Mr. Provencher were not dealing with each other at arm's length, her employment with Mr. Provencher was excepted employment unless the Minister was satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it was reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.

[16] As Isaac C.J. of the Federal Court of Appeal wrote in Attorney General of Canada v. Jencan Ltd.,[1] it is the Minister who must take this decision:

The jurisdiction of the Tax Court to review a determination by the Minister under subparagraph 3(2)(c)(ii) is circumscribed because Parliament, by the language of this provision, clearly intended to confer upon the Minister a discretionary power to make these determinations . . . it follows that the Tax Court must show judicial deference to the Minister's determination when he exercises that power.

This Court can only justifiably intervene in a decision by the Minister under s. 3(2)(c)(ii) of the Act if it is shown that the Minister exercised his discretionary authority in a manner contrary to the Act. Such a situation exists when the Minister has (i) acted in bad faith or for an improper purpose or motive; (ii) failed to have regard to all of the relevant circumstances, as expressly required by s. 3(2)(c)(ii) of the Act; and (iii) had regard to an irrelevant factor.

[17] According to the case law, this Court must try the question before it in two stages. First, it must determine the legality of the Minister's decision. It is only where the Minister has exercised his discretion in a manner contrary to the Act that this Court can go on to the second stage and determine, on a balance of probabilities, whether the terms and conditions of employment would have been substantially the same if the parties had been dealing with each other at arm's length.

[18] The first stage thus entails determining whether the facts established at the hearing were sufficient in law to justify the Minister's conclusion that the parties would not have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.

[19] In the instant case I was not persuaded that the Minister exercised his discretion in a manner contrary to the Act. The main facts which in my view can justify the Minister's decision are those set out in subparagraphs (p) and (r) of paragraph 5 of the Reply to the Notice of Appeal. On the first point, I was not persuaded by Ms. Fortin's testimony that she did not delay cashing her paycheques to allow other cheques issued by Mr. Provencher to be honoured. Her explanation, that she preferred to wait and accumulate a number of cheques and then cash them later, was not persuasive. As I mentioned above, the first cheques for the first three months were cashed one to two months after the date of the cheque. These cheques were cashed at different times and not together, as Ms. Fortin suggested. Only certain cheques for May and April were cashed simultaneously. Strangely, certain cheques issued on the same day were not even cashed simultaneously. I am therefore inclined to attach more credibility to the reply given by Ms. Fortin in the investigation than to the one she gave at the hearing.

[20] At the same time, the evidence showed that Ms. Fortin had not performed services without pay after the relevant period. Counsel for the Minister tried to present evidence that this was a fact the Minister knew about when he determined whether Ms. Fortin’s employment was insurable. I do not think she succeeded in this attempt. Ms. Sauvageau was not the appeals officer who did the analysis for the Minister. She was employed by the Department of Human Resources Development and had nothing to do with the Minister's decision. If counsel for the Minister wanted to present evidence that the Minister knew that Ms. Fortin had performed services for pay after the period at issue, and that there was a mistake by the person who prepared the Reply to the Notice of Appeal, she should have called the appeals officer who analysed the file on the Minister's behalf, or at least filed her written report.

[21] However, the fact that one of the assumptions of fact on which the Minister relied in making his determination was refuted at the trial does not mean that the Minister's determination was made in a manner contrary to the Act. This Court must consider whether the other assumptions of fact were sufficient to justify the Minister's decision. In Jencan, supra, the Federal Court of Appeal concluded that the Deputy Judge of this Court had made an error of law in finding that he automatically had the right to review the validity of the Minister's determination because some of the assumptions of fact on which the Minister relied had been refuted. The following is what Isaac C.J. said on this point, at p. 205, para. 50:

... If there is sufficient material to support the Minister's determination, the Deputy Tax Court judge is not at liberty to overrule the Minister merely because one or more of the Minister's assumptions were disproved at trial and the judge would have come to a different conclusion on the balance of probabilities. . . . An assumption of fact that is disproved at trial may, but does not necessarily, constitute a defect which renders a determination by the Minister contrary to law. It will depend on the strength or weakness of the remaining evidence. The Tax Court must, therefore, go one step further and ask itself whether, without the assumptions of fact which have been disproved, there is sufficient evidence remaining to support the determination made by the Minister. If that question is answered in the affirmative, the inquiry ends. But, if answered in the negative, the determination is contrary to law, and only then is the Tax Court justified in engaging in its own assessment of the balance of probabilities.

[22] In the instant case, the fact that Ms. Fortin delayed cashing her paycheques so that Mr. Provencher could honour his other cheques and the fact that she worked before the relevant period without pay could have justified the Minister's determination.[2]

[23] As the Minister's determination was not made in a manner contrary to the Act, this Court cannot go on to the second stage and consider whether it would have found as the Minister did.

[24] For all these reasons, Ms. Fortin's appeal is dismissed.

Signed at Ottawa, Canada, April 21, 1998.

“Pierre Archambault”

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 14th day of December 1998.

Kathryn Barnard, Revisor

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