Bélanger v. M.N.R.

Bélanger v. M.N.R.
Court (s) Database
Tax Court of Canada Judgments
Date
2005-01-11
Neutral citation
2005 TCC 36
File numbers
2001-640(EI)
Judges and Taxing Officers
Pierre Archambault
Subjects
Employment Insurance Act
Decision Content
Docket: 2001-640(EI)
BETWEEN:
LOUIS-PAUL BÉLANGER,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on June 1 and 3, 2004, at Quebec City, Quebec.
Before: The Honourable Justice Pierre Archambault
Appearances:
Counsel for the appellant:
Marc-André Gravel
Counsel for the respondent:
Agathe Cavanagh
JUDGMENT
The appeal is dismissed and the decision of the Minister of National Revenue is upheld in accordance with the attached reasons for judgment.
Signed at Toronto, Ontario, this 11th day of January 2005.
"Pierre Archambault"
Archambault J.
Citation: 2005TCC36
Date: 20050111
Docket: 2001-640(EI)
BETWEEN:
LOUIS-PAUL BÉLANGER,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] Louis-Paul Bélanger is appealing from a decision rendered by the Minister of National Revenue (Minister) pursuant to the Employment Insurance Act (Act). The Minister decided that Mr. Bélanger was not employed in insurable employment at Plancher Idéal L.P.B. Inc. (payer) during the periods from April 20, 1998, to October 9, 1998, and April 26, 1999, to October 9, 1999 (relevant periods). The Minister held that this employment was excluded because Mr. Bélanger and the payer would not have entered into a similar contract of employment if they had been dealing with each other at arm's length.
[2] This is a second hearing of the appeal for the parties, because the Federal Court of Appeal set aside the decision rendered by this Court. [1]
Facts
[3] At the start of the hearing, counsel for Mr. Bélanger admitted, with a few exceptions, the following facts, set out at paragraph 5 of the Reply to the Notice of Appeal:
(a) The payer was incorporated on July 26, 1983; (admitted)
(b) The appellant was a shareholder of the payer until December 20, 1994; (admitted)
(c) Since December 1994, the shareholders of the payer, who held voting shares, were:
Carl Bélanger
50% of the shares
Lucille Labbé
50% of the shares;
(admitted)
(d) The appellant was Carl Bélanger's father and Lucille Labbé's spouse [2] ; (admitted)
(e) The payer operated a flooring installation and sanding business; [3] (admitted)
(f) The appellant was hired as a floor sander; (admitted)
(g) The payer hired three employees: the appellant and the two shareholders; [4] (admitted)
(h) On October 10, 2000, the payer owed the appellant $7,287 on a $25,000 loan made in 1994; (admitted)
(i) The appellant was paid $500 a week in 1998 [5] and $520 a week in 1999 for a 40-hour work week, i.e., a $12.50 hourly rate for the first year and a $13.00 hourly rate for the second year; (admitted)
(j) Pursuant to the Construction Decree, a floor sander's wage was approximately $23.00 an hour; (denied)
(k) The appellant had accepted a remuneration lower than the amount stipulated in the Decree in order not to jeopardize the payer's financial situation; (denied)
(l) The appellant received a fixed salary regardless of the number of hours actually worked; (admitted)
(m) The appellant could work 65 hours per week but accepted only 40 hours of pay; (admitted)
(n) On October 23, 1998, the payer issued the appellant a record of employment for the period April 20, 1998, to October 9, 1998, that indicated 1,000 insurable hours and a total of $13,000.00 of insurable earnings; (admitted)
(o) On October 12, 1999, the payer issued the appellant a record of employment for the period April 26, 1999, to October 9, 1999, that indicated 960 insurable hours and insurable earnings of $520 per week; (admitted)
(p) The appellant provided services to the payer, without any reported remuneration, outside the periods indicated by the records of employment; (admitted)
(q) According to the payer's September 26, 2000, statement, the appellant provided services to the payer without pay before and after the periods indicated on his records of employment; (admitted)
(r) The periods allegedly worked by the appellant were not the same as the periods actually worked; (denied)
(s) The payer and the appellant entered into an arrangement to allow the appellant to qualify for employment insurance benefits while continuing to provide services to the payer; (denied)
[4] Also, the evidence adduced by the parties at the hearing also revealed that the statements in paragraphs 5(j) and (r) were proven facts. The evidence also highlighted the following additional facts.
[5] First of all, according to Jean-Yves Légaré, the peak period (peak season) for sandblasting companies normally starts in March or April and ends about in October [6] . Mr. Légaré, Mr. Bélanger's nephew, has been a hardwood sanding and varnishing contractor since 1976. In 2003, he acquired some assets of the payer's business, i.e., vehicles and machinery. According to him, the customers had followed him on their own. Mr. Légaré subsequently hired Mr. Bélanger at $16 an hour [7] when he was working outside the Construction Decree, i.e., when his work was not subject to the standards set out in the Decree. This hourly wage was the same as the wage that Mr. Légaré paid Roger Trépanier during the relevant periods and in 2003. Mr. Trépanier was a sandblaster with about 20 years of experience. Mr. Trépanier is also Mr. Légaré's brother-in-law. In Mr. Trépanier's case, this was the wage paid for work not performed pursuant to the Construction Decree. When his work was subject to the Decree, his hourly wage was $23 or $24.
[6] Benoît Carbonneau, information officer at the Commission de la construction du Québec, testified to confirm that under subsection 19(9) of the Act Respecting labour relations, vocational training and workforce management in the construction industry (Construction Act), the provisions of the Construction Decree do not apply to work carried out on an inhabited single-family dwelling. Therefore, work carried out on a new single-family dwelling and any multi-family dwelling is subject to the provisions of the Decree.
[7] Mr. Légaré said it was relatively easy to find good employees at $13 an hour. However, when I asked him why he did not hire other employees to meet the demand during the peak season, he said he could not find any during the peak season because everyone was busy. I concluded that it was during the low season that he could easily find people at $13 an hour. In fact, Mr. Légaré admitted that he could find people at an even lower hourly rate during the low season, but did not hire them because there was no work!
[8] Mr. Légaré also admitted that he did not pay his employees by the week. They were all paid by the hour. Both Mr. Légaré and Mr. Bélanger admitted that they did not know of any companies that dealt with their manual labourers at arm's length and paid them by the week.
[9] Mr. Légaré said none of his employees worked for his company without any remuneration, including Mr. Bélanger as of June 2003. He also said he did not pay his employees for their overtime. The employees banked their overtime and took time off the following week. Seventy-five percent of the work done by Mr. Légaré was not subject to the Decree. The rest of the work was subject to the Decree.
[10] During the relevant periods, Mr. Bélanger's only jobs for the payer involved manual labour. This situation had existed since 1994, when he sold his shares to his son Carl and his former spouse, Lucille Labbé. [8] Ms. Labbé said about 90 to 95% of the work performed by the payer was not subject to the Construction Decree. Ms. Labbé said she did finishing work for the payer during the same periods. She generally worked 40 hours a week and was paid $500 per week. She said she stopped working for the payer in 2002. According to Exhibit I-2, she received a salary for 28 weeks in 1998. In 1999, she received a single $5,656.53 wage payment made during the week of December 12, 1999. No salary was shown for 2000.
[11] Carl Bélanger was primarily responsible for managing the payer's business, including soliciting work and bidding on contracts. According to Exhibit I-2, Carl generally earned $500 a week from March 29, 1998, until October 10, 1998. [9] His salary for the week of November 1, 1998, was $924. There were only two other $528 pay cheques for the remainder of the year, for the period from December 6 to December 19, 1998. He worked about 30 weeks in all. In 1999, Carl received an intermittent salary ranging from $211 to $1,077. In 2000, he was paid between $403 (for seven weeks from January 2 to March 11) and $1,098 (for two weeks from July 30 to August 12, 2000), and he worked a total of 26 weeks that year. The only person who received stable remuneration during the period from 1998 to 2000 was Louis-Paul Bélanger. His $520 weekly earnings were paid to him regularly from 1998 to 2000, for 25 consecutive weeks in 1998, 24 in 1999 and 21 in 2000.
[12] While admitting that he did not count his hours, Mr. Bélanger said he worked approximately 40 hours a week. In 2004, he had 45 years of experience in the sanding industry. Mr. Bélanger said he accepted the equivalent of $13 an hour because the company was unable to pay more. [10]
[13] Regarding the issue of services rendered outside Louis-Paul Bélanger's official employment periods (unpaid periods), the evidence revealed the following. When the Human Resources Development Canada (HRDC) investigator interviewed him, Louis-Paul Bélanger said he did not work for the payer after October 9, 1998. The record of employment issued on October 23, 1998, indicated "lack of work" as the reason for the separation from employment. When the investigator showed him supplier invoices addressed to him, Louis-Paul Bélanger admitted that he had worked, but without pay. [11]
[14] In an affidavit dated January 27, 2000, Carl Bélanger indicated that [translation] "[m]y father has not worked for the company since October 10, 1999, because there are not enough contracts at the moment. I help my mother do finishing work." On April 14, 2000, Carl amended this statement (Exhibit I-9) as follows [12] :
[translation] I did not state that he had been working on contracts since October 10, 1999, because I did not want to cause him any employment insurance problems, and I wanted to avoid insurance problems as well, but I was not aware of the implications. I was vaguely aware that he could work a little while he was unemployed. Regarding my father's participation in the contracts, one part was 75% complete (helping with the sanding and applying the first coat of varnish). Another part was 50% complete, which means (doing a little sanding and/or delivering some materials). Out of all the contracts completed since October 10, 1999, there were eight that he did not work on. . . . His October 1998 claim for benefits involved the same issue: whether he worked on the contracts between October 1998 and April 25, 1999. He was not remunerated from October 10, 1999, to April 2, 2000, and from October 10, 1998, to April 25, 1999.
[Emphasis added.]
[15] Louis-Paul Bélanger indicated the following in his February 17, 2000, statement (Exhibit I-7):
[translation] Since I stopped working for this company on October 9, 1999, I have occasionally helped my son Carl perform unpaid contracts. I bring materials to the contract sites. I pick up materials from suppliers. I help with sanding and finishing work. However, I do not complete the whole contract, for example, when I am working during the peak summer season. . . . From now on, I intend to stop working on contracts with my son Carl. I will suggest that he work with an apprentice instead, because I do not want to have any employment insurance problems. . . . I proceeded the same way for my October 23, 1998, claim for benefits. I occasionally helped my son work on contracts without pay. I did not report that work because I was not paid for it, and I just did it to help him out.
[16] During his testimony, Louis-Paul Bélanger downplayed his contribution during unpaid periods. He said he did not work more than two or three hours a week. He said he worked this way because it was his son's company, and it had limited funds.
[17] When I asked the HRDC investigator, Pierre Nadeau [13] , to tell me how many contracts could have been performed during the unpaid period from October 1999 to January 2000, he replied that he had 31 invoices in his case file, but that he had not checked all of them. These invoices covered a period from October 11, 1999, to January 20, 2000. Invoices for 1998 and 1999 could not be obtained. He randomly selected four of the 31 invoices that he had, and called the customers to whom those invoices had been issued. These customers provided him with confirmation that Carl's mother and father helped him perform the work shown on the four invoices. Occasionally, a fourth person helped, Louis-Paul Bélanger's daughter. Because the first four customers who were called confirmed that Louis-Paul Bélanger had worked, Mr. Nadeau stopped his investigation. [14]
[18] Michel Gosselin, the appeals officer who ruled on the application of paragraph 5(2)(i) and subsection 5(3) of the Act, testified at the hearing. His report was filed as Exhibit I-1. After stating the facts, Mr. Gosselin provided this analysis of the application of paragraph 5(2)(i) of the Act:
(VI) SUMMARY
Louis-Paul Bélanger worked for Plancher Idéal L.B.P. inc. from April 20, 1998, to October 9, 1998, and from April 26, 1999, to October 9, 1999.
The payer has been incorporated since July 26, 1983.
It does flooring installation and sanding work.
Originally, the shareholders were the appellant and his spouse, Lucille Labbé. Each had 50% of the voting shares. In December 1994, the appellant sold his shares to his son Carl, but remained the payer's employee.
Every year, the payer hires the appellant as a floor sander.
These three people are the only employees who work for the payer.
The shareholders are responsible for all decisions and financial implications.
Pursuant to subparagraph 251(2)(b)(iii) of the Income Tax Act (ITA), the appellant and the payer are related persons. Related persons are deemed not to deal at arm's length with each other pursuant to paragraph 251(1)(a) of the ITA.
Let us examine the tests for the arm's length relationship.
Compensation
The appellant is paid $500 for a 40-hour week, or $12.50 an hour. The payer was supposed to remunerate the appellant at the rate listed in the Construction Decree, approximately $23.00 an hour. The appellant accepted this remuneration because the payer still owed him money on the $25,000 that he loaned the payer in 1994, and he did not want to "kill the goose that laid the golden egg." A stranger would not have agreed to this and would have demanded to be paid the rate set out in the Decree, especially considering the appellant's years of experience. The appellant intends to demand that the payer remunerate him for the coming year (2001) at the rate set out in the Construction Decree.
Conditions of employment
Carl Bélanger sets the schedule and determines the worksites.
All work tools belong to the payer.
The appellant is paid for a 40-hour work week. Both parties interviewed confirmed that the time worked can easily reach 60 hours during the summer period. However, the appellant is still paid for a 40-hour work week. We do not believe that a stranger would have agreed to such conditions of employment. Only the father not dealing at arm's length with his son creates this situation.
Moreover, the appellant told us that there was a written agreement between him and his son, according to which the payer undertook to rehire him every year, rather than a stranger, as long as the appellant was able to work. This exclusive service clause was made solely because of the non-arm's length relationship, and we believe that the payer would not have entered into such an arrangement with a complete stranger.
Duration of work
The payer and the appellant admitted that the appellant provided services outside the periods indicated on the records of employment. The appellant insisted on downplaying these tasks, which he estimated took a maximum of two hours a week to complete. The payer already admitted that pro bono services were rendered in approximately 50% to 75% of the contracts not listed on the records of employment.
The analysis of the payer's monthly turnover indicated that the payer's income for April 1998, March, April and November 1999 (periods not shown on the records of employment) are similar to other periods when the appellant was employed.
When the payer hired him for 40 hours a week, we can only wonder how he could do without the appellant's services and achieve a similar turnover. This confirms that the appellant was working more than two hours a week outside the periods shown on his record of employment.
Nature and importance of the work
The appellant is a professional floor sander. He does his job for a flooring company. The appellant's duties are related to the company's operations, and they are necessary.
Conclusion
Given the remuneration paid, the terms and conditions and the duration of the work performed, we are of the view that the appellant and the payer would not have entered into a substantially similar contract of employment, if they had been dealing with each other at arm's length. Therefore, this employment is excluded pursuant to paragraph 5(2)(i) of the Employment Insurance Act.
(VII) PRECEDENT, LEGAL OPINION, ETC.:
Montreal v. Montreal Locomotive Works Ltd. [1947], 1 D.L.R. 161
Wiebe Door Services Ltd. v. M.N.R. [1986] 3 FC 553 (FCA)).
Canada (Attorney General) v. Jencan Ltd. FCA A-599-96
Canada v. Bayside Drive-In Ltd., FCA A-626-96
René Beauchamps, NR-1182: the first statement is the most persuasive
(VIII) RECOMMENDATION:
We recommend that ministerial notifications be issued indicating that when Louis-Paul Bélanger was working for Plancher Idéal L.P.B. inc. from April 20, 1998, to October 9, 1998, and from April 26, 1999, to October 9, 1999, he was employed in employment that was excluded from insurable employment under paragraph 5(2)(i) of the Employment Insurance Act because the employer and employee were not dealing with each other at arm's length.
[19] It is also useful to reproduce the table in paragraph 65 of this report that lists the amount of the payer's monthly sales [15] :
Month
Sales ($)
Month
Sales ($)
Month
Sales ($)
1998
1999
2000
January
3,835
January
4,196
January
3,010
February
1,527
February
4,084
February
3,634
March
6,204
March
11,786
March
6,186
April
10,072
April
9,150
April
15,559
May
13,896
May
15,314
May
13,776
June
19,216
June
17,557
(n/a)
July
20,807
July
20,206
August
8,516
August
12,947
September
10,377
September
8,970
October
7,559
October
9,325
November
4,252
November
13,595
December
5,563
December
5,857
[20] In rebuttal, Mr. Bélanger provided testimony on the 31 invoices to which Mr. Nadeau referred. In fact, there were only 30 invoices, [16] dated October 11, 1999, to January 20, 2000, 25 of which were for sanding and finishing work. The other documents were either quotes or invoices relating to the sale of products or services that the payer did not provide himself, in particular outsourced floor installations. Louis-Paul Bélanger admitted that he helped perform the work described in six of these 25 invoices. He said that, generally, he only helped his son carry a heavy sander and could occasionally help him finish his work. On average, he did not spend more than two to three hours a week on these tasks. He denied performing any work on 10 of the invoices.
[21] Mr. Bélanger said he had participated in only one of these contracts with the four customers who were interviewed by the HRDC investigator. He admitted that he spent between an hour and an hour and a half transporting materials and helping to complete the work described in invoice 161 for $1,750 issued by the payer. He did not provide any of the services shown on invoices 179 and 159. He said that based on the value of these contracts, there was not enough work for four people. The labour cost on these invoices were $478, or $0.70 per square foot (sanding only) and $325. According to Mr. Bélanger, "it really doesn't make any sense" that four people would have worked on performing these contracts. [17] Nevertheless, it must be recognized that this answer contradicted the one provided by Mr. Bélanger when he commented on invoice 157. He admitted that, in that case, he had helped his son do some work and spent an hour working on this contract. However, the invoice was for $275.
[22] Regarding invoice 173, the last of the four invoices, Mr. Bélanger said he did not remember if he was involved in performing the work. In fact, he could not recall whether he was involved in the work shown on nine of the invoices.
[23] Another curious assertion in Mr. Bélanger's testimony is that he did not work in buildings listed as multi-unit buildings, [18] because in these cases, the contracts were subject to the standards of the Decree. However, the payer charged $1.05 per square foot for most of this work, while he charged a higher rate for almost all the other work. Note the work shown on invoices 156 ($2.25 per square foot), 160 ($2.75 per square foot) and 166 ($2.85 per square foot). It should be mentioned that other work was performed at less attractive rates, for example the jobs where he probably delivered materials, i.e. the jobs listed on invoice 151 ($1.75 per square foot). He also worked on the contracts covered by invoices 161, 167 and 278 where the quoted rates were $2.25 or $2.30 per square foot. However, there was no indication that this work was subject to the Decree. [19] How is it that the rates charged for work subject to the Decree on invoices 168, 169 and 170 were the lowest, while the invoices for almost all the work not subject to the Decree were higher. We would have expected the opposite!
Analysis
[24] As mentioned above, the Federal Court of Appeal set aside the decision of the deputy judge who first heard Louis-Paul Bélanger's appeal. In its five-paragraph decision, the Court of Appeal provided the following reasons at paragraphs 2 to 4, [2003] F.C.J. No. 1774 (QL):
2 The judge did not assume the role assigned to him by the Employment Insurance Act and redefined in the case law by our Court in Pérusse v. Canada (Minister of National Revenue – M.N.R.), [2002] 261 N.R. 150, application for leave to appeal to the Supreme Court of Canada [2000] C.S.C.R. No. 158, denied, and Légaré v. Canada (Minister of National Revenue – M.N.R.), [1999] 246 N.R. 176. These judgments were later followed in Valente v. Canada (Minister of National Revenue – M.N.R.), [2003] F.C.J. No. 418, [2003] FCA 132 and Massignani v. Canada (Minister of National Revenue – M.N.R.), [2003] F.C.J. No. 542, [2003] FCA 172.
3 As this Court stated in Massignani, supra, at paragraph 2, "This role does not allow the judge to substitute his discretion for that of the Minister, but it does encompass the duty to 'verify whether the facts inferred or relied on by the Minister are real and were correctly assessed having regard to the context in which they occurred, and after doing so, . . . decide whether the conclusion with which the Minister was "satisfied" still seems reasonable'".
4 At paragraph 20 of his decision, the judge recognized that he had the right to examine the facts that were before the Minister in order to "decide if these facts are proven to be correct". But he did not carry out this assessment. He merely stated that "[i]n view of all the circumstances, I am convinced that the appellant did not succeed in establishing, on a preponderance of the evidence, that the Minister acted in a wilful or arbitrary manner". Clearly, he relied on the case law before Pérusse and Légaré, earlier cases which he in fact cited: see paragraph 17 of the decision.
[25] Here is paragraph 17 of the deputy judge's decision, referred to in paragraph 4 of the Court of Appeal's decision:
In Ferme Émile Richard et Fils Inc. v. Canada (Department of National Revenue), [1994] F.C.J. No. A-172-94, December 1, 1994 (178 N.R. 361), a case dealing with subparagraph 3(2)(c)(ii) of the Unemployment Insurance Act (now paragraph 5(3)(b) of the Employment Insurance Act), Décary J.A. of the Federal Court of Appeal clearly indicated that the Court must ask itself if the Minister's decision "results from the proper exercise of his discretionary authority". The Appellant must "present evidence of wilful or arbitrary conduct by the Minister, evidence which is generally not easy to obtain".
[26] The deputy judge's reasons did not reveal that he substituted his discretion for that of the Minister. Because he held that the Minister had not acted in a wilful or arbitrary manner, I find that the Federal Court of Appeal's main criticism of the deputy judge's decision was that he did not provide sufficient reasons to show that he fulfilled his obligation to "verify whether the facts inferred or relied on by the Minister are real and were correctly assessed . . . and after doing so, ... decide whether the conclusion with which the Minister was 'satisfied' still seems reasonable", to use the words cited in Massignani.
[27] Before stating the principles that must guide me here in ruling on Mr. Bélanger's appeal, some preliminary observations are in order. There is some confusion in the Federal Court of Appeal's decisions regarding the role that this Court should play in appeals like Mr. Bélanger's. Some of my colleagues believe that the Federal Court of Appeal's decisions in Pérusse v. Canada (Minister of National Revenue – M.N.R.), [2000] F.C.J. No. 310 (QL), Légaré v. Canada (Minister of National Revenue – M.N.R.), [1999] F.C.J. No. 878 (QL), (1999), 246 N.R. 176, Valente v. Canada (Minister of National Revenue – M.N.R.), F.C.J. No. 418 (QL), 2003 FCA 132 (March 12, 2003) and Massignani v. Canada (Minister of National Revenue – M.N.R.), [2003] F.C.J. No. 542 (QL), 2003 FCA 172 (April 1, 2003), set aside earlier decisions of the same court, i.e., Tignish Auto Parts Inc. v. Canada (Minister of National Revenue – M.N.R.), [1994] F.C.J. 1130 (QL), Ferme Émile Richard et Fils Inc. v. Canada (Department of National Revenue), [1994] F.C.J. No. 1859 (QL) and Canada (Attorney General) v. Jencan Ltd., [1998] 1 F.C. 187, [1997] F.C.J No. 876). This is what my colleague Mr. Justice Bowie wrote in Glacier Raft Co. v. Canada (Minister of National Revenue – M.N.R.), [2003] T.C.J. No. 450 (QL). At paragraph 2 of his decision, he referred to the words of Madam Justice Sharlow who, in Valente, mentioned above, described recent case law (Légaré and Pérusse) as:
. . . a departure from earlier decisions in defining the role of the Tax Court in considering appeals from ministerial determinations under paragraph 5(3)(b) of the. . . Act.
[28] Further on in the same paragraph, Judge Bowie added:
It is surprising that the Federal Court of Appeal would overrule its several earlier decisions [See Tignish Auto Parts Inc. v. Canada 1994, 185 N.R. 73 (F.C.A.); Canada v. Jencan Ltd., [1998] 1 F.C. 187 (F.C.A.); Bayside Drive-In Ltd. v. Canada, [1997] F.C.J. 1019 (F.C.A.)] dealing with the nature of the review by this Court of the Minister's decision under paragraph 5(3)(b) without specific reference to them, but that appears to be the result.
[Emphasis added.]
[29] However, another group of colleagues to which I belong believe that the Court of Appeal did not set aside Tignish Auto Parts, Jencan and Bayside Drive-In Ltd. v. Canada (Minister of National Revenue – M.N.R.), [1997] F.C.J. No. 1019 (QL). Rather, the Court wanted to clarify the scope of these decisions. First, in support of this interpretation, there are Mr. Justice Marceau's comments at paragraphs 3 and 4 of Légaré (above):
[3] While the applicable principles for resolving these problems have frequently been discussed, judging by the number of disputes raised and opinions expressed, the statement of these principles has apparently not always been completely understood. For the purposes of the applications before us, we wish to restate the guidelines which can be drawn from this long line of authority, in terms which may perhaps make our findings more meaningful.
[4] The Act requires the Minister to make a determination based on his own conviction drawn from a review of the file. The wording used introduces a form of subjective element, and while this has been called a discretionary power of the Minister, this characterization should not obscure the fact that the exercise of this power must clearly be completely and exclusively based on an objective appreciation of known or inferred facts. And the Minister's determination is subject to review. In fact, the Act confers the power of review on the Tax Court of Canada on the basis of what is discovered in an inquiry carried out in the presence of all interested parties. The Court is not mandated to make the same kind of determination as the Minister and thus cannot purely and simply substitute its assessment for that of the Minister: that falls under the Minister's so-called discretionary power. However, the Court must verify whether the facts inferred or relied on by the Minister are real and were correctly assessed having regard to the context in which they occurred, and after doing so, it must decide whether the conclusion with which the Minister was "satisfied" still seems reasonable. [20]
[Emphasis added.]
[30] It appears that the Court of Appeal still considers that Jencan correctly described the role to be assumed by this Court in applying paragraph 5(2)(i) and subsection 5(3) of the Act, since, in a judgment subsequent to Légaré, Pérusse, Valente and Massignani, i.e., Quigley Electric Ltd. v. Canada (Minister of National Revenue – M.N.R.), [2003] F.C.J. No. 1789 (QL), 2003 FCA 461, delivered on November 28, 2003, Mr. Justice Malone stated the following at paragraphs 7 and 8 of his reasons:
[7] A legal error of law is also said to have been committed when the Judge failed to apply the legal test outlined by this Court in Légaré v. Canada (Minister of National Revenue) (1999) 246 N.R. 176 (F.C.A.) and Pérusse v. Canada (2000) 261 N.R. 150 (F.C.A.). That test is whether, considering all of the evidence, the Minister's decision was reasonable.
[8] Specifically, it is argued that the Judge circumscribed the scope of his review function when, after finding that the Minister clearly did not have all the facts before him he stated:
. . . That is not to say that on reviewing new information, I am then precluded from finding that the Minister did not have, after all, sufficient information to exercise his mandate as he did without my interference. This would simply mean that I have found that the new factors not considered were not relevant.
[Emphasis added.]
[31] This was Judge Malone's finding in this matter:
[10] In my analysis, the Judge correctly followed the approach advanced by this Court in Canada (A.G.) v. Jencan Ltd. [1998] 1 F.C. 187 (C.A.), namely, that the Minister's exercise of discretion under paragraph 5(3)(b) can only be interfered with if she acted in bad faith, failed to take into account all relevant circumstances or took into account an irrelevant factor.
[Emphasis added.]
[32] In my view, the following questions deserve an answer: does the Court of Appeal believe that the decisions that it rendered in Jencan, Ferme Émile Richard and Tignish Auto Parts have been set aside, and if so, what are the reasons? What principles established by these decisions does the Court of Appeal no longer accept? Or was it the Court's intention to clarify the scope of its previous decisions?
[33] In my opinion, there is no inconsistency between the position taken in Quigley Electric Ltd. and the position taken in Légaré, Pérusse, Valente and Massignani. First, we must return to the actual wording of the Act which stipulates the following at paragraph 5(2)(i) and subsection 5(3):
5(2) Insurable employment does not include:
(i) employment if the employer and employee are not dealing with each other at arm's length.
5(3) For the purposes of paragraph 2(i):
(a) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the Income Tax Act; and
(b) if the employer is, within the meaning of the Act, related to the employee, they are 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.
[Emphasis added.]
[34] Insurable employment does not include employment if the employer and employee are not dealing with each other at arm's length. Where an employer and an employee are related within the meaning of the Income Tax Act (ITA), they are deemed not to deal with each other at arm's length for the purposes of the Act, notwithstanding the provisions of the ITA, if the Minister is satisfied that, having regard to all the circumstances, 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. The Minister is therefore responsible for making this determination.
[35] The role assigned to this Court is to undertake a two-stage inquiry. It must first verify whether the Minister used his discretion appropriately. As was stated in Jencan, to which Judge Malone referred in Quigley Electric, a discretionary determination made by the Minister can only be changed if the Minister acted in bad faith, failed to take into account all of the relevant circumstances, or took into account an irrelevant factor. [21] If such a situation exists, the Court may decide that "the conclusion with which the Minister was 'satisfied' [no longer seems] reasonable" [22] and interfere by ruling on the application of subsection 5(3) of the Act. This is how the Federal Court of Appeal put it in Jencan:
31 The decision of this Court in Tignish, supra, requires that the Tax Court undertake a two-stage inquiry when hearing an appeal from a determination by the Minister under subparagraph 3(2)(c)(ii). At the first stage, the Tax Court must confine the analysis to a determination of the legality of the Minister's decision. If, and only if, the Tax Court finds that one of the grounds for interference are established can it then consider the merits of the Minister's decision. As will be more fully developed below, it is by restricting the threshold inquiry that the Minister is granted judicial deference by the Tax Court when his discretionary determinations under subparagraph 3(2)(c)(ii) are reviewed on appeal. Desjardins J.A., speaking for this Court in Tignish, supra, described the Tax Court's circumscribed jurisdiction at the first stage of the inquiry as follows:
Subsection 71(1) of the Act provides that the Tax Court has authority to decide questions of fact and law. The applicant, who is the party appealing the determination of the Minister, has the burden of proving its case and is entitled to bring new evidence to contradict the facts relied on by the Minister. The respondent submits, however, that since the present determination is a discretionary one, the jurisdiction of the Tax Court is strictly circumscribed. The Minister is the only one who can satisfy himself, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions and importance of the work performed, that the applicant and its employee are to be deemed to deal with each other at arm's length. Under the authority of Minister of National Revenue v. Wrights' Canadian Ropes Ltd., contends the respondent, unless the Minister has not had regard to all the circumstances of the employment (as required by subparagraph 3(2)(c)(ii) of the Act), has considered irrelevant factors, or has acted in contravention of some principle of law, the court may not interfere. Moreover, the court is entitled to examine the facts which are shown by evidence to have been before the Minister when he reached his conclusion so as to determine if these facts are proven. But if there is sufficient material to support the Minister's conclusion, the court is not at liberty to overrule it merely because it would have come to a different conclusion. If, however, those facts are, in the opinion of the court, insufficient in law to support the conclusion arrived at by the Minister, his determination cannot stand and the court is justified in intervening.
In my view, the respondent's position is correct in law . . . [Tignish, supra, note 10, at pp. 8-9].
32 In Ferme Émile Richard et Fils Inc. v. Canada (M.N.R.), this Court confirmed its position. In obiter dictum, Décary J.A. stated the following:
As this Court recently noted in Tignish Auto Parts Inc. v. Minister of National Revenue , July 25, 1994, A-555-93, F.C.A unreported, an appeal to the Tax Court of Canada in a case involving the application of s. 3(2)(c)(ii) is not an appeal in the strict sense of the word and more closely resembles an application for judicial review. In other words, the court does not have to consider whether the Minister's decision was correct: what it must consider is whether the Minister's decision resulted from the proper exercise of his discretionary authority. It is only where the court concludes that the Minister made an improper use of his discretion that the discussion before it is transformed into an appeal de novo and the court is empowered to decide whether, taking all the circumstances into account, such a contract of employment would have been concluded between the employer and employee if they had been dealing at arm's length [(1994), 178 N.R. 361 (F.C.A.), at pp. 362 and 363].
33 Section 70 provides a statutory right of appeal to the Tax Court from any determination made by the Minister under section 61, including a determination made under subparagraph 3(2)(c)(ii). 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. The words "if the Minister of National Revenue is satisfied" contained in subparagraph 3(2)(c)(ii) confer upon the Minister the authority to exercise an administrative discretion to make the type of decision contemplated by the subparagraph. Because it is a decision made pursuant to a discretionary power, as opposed to a quasi-judicial decision, it follows that the Tax Court must show judicial deference to the Minister's determination when he exercises that power. Thus, when Décary J.A. stated in Ferme Émile, supra, that such an appeal to the Tax Court "more closely resembles an application for judicial review", he merely intended, in my respectful view, to emphasize that judicial deference must be accorded to a determination by the Minister under this provision unless and until the Tax Court finds that the Minister has exercised his discretion in a manner contrary to law.
. . .
37 On the basis of the foregoing, the Deputy Tax Court Judge was justified in interfering with the Minister's determination under subparagraph 3(2)(c)(ii) only if it was established that the Minister exercised his discretion in a manner that was contrary to law. And, as I already sai