A-700-85
Attorney General of Canada (Appellant)
v.
Denys Cloutier (Respondent)
INDEXED AS: CLOUTIER V. M.N.R.
Court of Appeal, Pratte, Marceau and Lacombe
JJ.—Québec, October 24; Ottawa, December 2,
1986.
Unemployment insurance — Excepted employment —
Interpretation of "control" as used in s. 14(a) of Regulations
— Respondent not controlling 40% of voting shares of corpo
ration — Federal Court Act, R.S.C. 1970 (2nd Supp.), c. 10, s.
28 — Unemployment Insurance Act, 1971, S.C. 1970-71-72, c.
48, s. 3(1) — Unemployment Insurance Regulations, C.R.C., c.
1576, s. 14(a).
Construction of statutes — Social legislation not interpreted
like fiscal legislation — Unemployment Insurance Act, 1971,
S.C. 1970-71-72, c. 48 — Unemployment Insurance Regula
tions, C.R.C., c. 1576.
The respondent and one Beaurivage agreed to jointly pur
chase a hotel. The corporation created for that purpose issued
1000 ordinary voting shares, 499 of which were to be held by
each associate. Cloutier was not able to put up his share of the
money. He, therefore, deposited 150 shares in trust to guaran
tee repayment of the amount which Beaurivage spent to cover
the unpaid part of Cloutier's share. So long as the money was
not repaid the voting rights attached to these 150 shares were
not to be exercised. Cloutier, who was employed by the corpo
ration as a manager, eventually left the organization. At that
time no repayment had been made.
For purposes of unemployment insurance, the Minister of
National Revenue ruled that the respondent's employment was
excepted employment in accordance with paragraph 14(a) of
the Regulations. The Tax Court of Canada invalidated that
ruling. This section 28 application is against the Tax Court's
decision. The issue is whether the respondent controlled 40% of
the voting shares.
Held, the application is dismissed.
It is not appropriate in interpreting social legislation such as
the Unemployment Insurance Act to adopt an approach similar
to that required for an understanding of fiscal legislation.
The wording of paragraph 14(a) does not refer to corporate
control, as seen in tax matters, but to "share control". The use
of such an unusual expression rather than words like "holder"
or "registered owner" should not be ignored and treated as
inconsequential.
The control in question is not only de jure control but also,
and more importantly, effective control. Cloutier did not have
effective control over the 150 shares deposited in trust.
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Minister of National Revenue v. Dworkin Furs (Pem-
broke) Ltd. et al., [1967] S.C.R. 223; Donald Applica
tors Ltd et al v. Minister of National Revenue, [1969) 2
Ex.C.R. 43; [1969] C.T.C. 98; Oakfield Developments
(Toronto) Ltd. v. Minister of National Revenue, [1971]
S.C.R. 1032; R. v. Imperial General Properties Lid.,
[1985] 2 S.C.R. 288.
COUNSEL:
Jacques Loiacono for appellant.
Louis-Oscar Racine for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Bouchard & Racine, Québec, for respondent.
The following is the English version of the
reasons for judgment rendered by
MARCEAU J.: This application to review and set
aside pursuant to section 28 of the Federal Court
Act [R.S.C. 1970 (2nd Supp.), c. 10] is against a
decision of the Tax Court of Canada which vacat
ed a ruling by the Minister of National Revenue
made pursuant to the Unemployment Insurance
Act, 1971 [S.C. 1970-71-72, c. 48]. The subject
decision invalidated the Minister's ruling that the
employment of the respondent with the Manoir
St-Castin (1977) Ltée during the period from
April 30, 1981 to April 25, 1982 was excepted
employment as mentioned in the preamble to sub
section 3(1) of the Act, in accordance with para
graph 14(a) of the Regulations [C.R.C., c. 1576],
which reads as follows:
14. The following employments are excepted from insurable
employment:
(a) employment of a person by a corporation if he or his
spouse, individually or in combination, controls more than 40
per cent of the voting shares of that corporation.
Put as simply and as succinctly as possible, the
question raised by the case, which was answered
differently by the Minister and the Tax Court of
Canada, is as to what is meant by "control" in the
context of this provision of the Regulations. The
matter can readily be understood by looking at the
facts, which present no difficulty.
During 1977 the respondent Cloutier and one
Beaurivage agreed to jointly purchase the hotel
operated under the name "Manoir St-Castin" at
Lac Beauport near Québec. Though Cloutier was
not able to put up half the money required, he
nevertheless insisted on retaining the option of
eventually becoming the owner of an equal share
with his partner. They accordingly thought of the
following device. The newly created corporation
which was to become owner of the hotel would
issue 1000 ordinary voting shares, 499 of which
were to be in Beaurivage's name and 499 in Clou -
tier's name. A hundred and fifty of Cloutier's 499
shares would be represented by a separate certifi
cate, which Cloutier would endorse and deposit in
trust with Beaurivage's accountants. This deposit
in trust would guarantee repayment of the amount
which Beaurivage would be obliged to spend in
addition to his share to cover a part of Cloutier's
share, and so long as the money was not repaid the
voting rights attached to these 150 shares would
not be exercised. And this is in fact what actually
took place: the issuing of the shares is recorded in
the company's books and the written contract con
firming all aspects of the agreement is in the
record. What happened, of course, is that after a
time Cloutier, who until then had been employed
by the company as a manager, decided (or was
forced) to leave. The record did not disclose the
terms of the separation, but it was established that
at the time Cloutier left no repayment had yet
been made, and the evidence was clear that while
he was with the company Cloutier never thought
he could exercise any voting rights by virtue of the
150 shares deposited in trust: in fact, it appears he
was never even asked to participate in the compa-
ny's corporate decisions.
It may of course be thought that this method of
proceeding by the two partners was not a very
good one. The legal problems which it raised are
obvious, first as to the nature of the operations
carried out but also as to the determination and
perhaps even validity of the legal effects that
might result from those operations. However, I do
not think it is necessary to consider and resolve all
of them to dispose of the question as to whether, in
the circumstances, Cloutier's employment as
manager of the hotel fell under the exception
defined in paragraph 14(a) of the Regulations.
The Minister's position, defended by the Attor
ney General, was naturally based on the funda
mentals of corporate law. It was argued that the
voting right attached to a share cannot be abol
ished by a private agreement and that so far as the
company was concerned the right could at all
times be exercised by the registered holder of the
share. The argument was based on strict legal
control, and undoubtedly drawn from decisions in
tax matters such as Minister of National Revenue
v. Dworkin Furs (Pembroke) Ltd. et al., [1967]
S.C.R. 223; Donald Applicators Ltd et al v. Min
ister of National Revenue, [1969] 2 Ex.C.R. 43;
[1969] C.T.C. 98; Oakfield Developments
(Toronto) Ltd. v. Minister of National Revenue,
[1971] S.C.R. 1032 and R. v. Imperial General
Properties Ltd., [1985] 2 S.C.R. 238. With
respect, I would differ with this approach. To
begin with, I do not think it is appropriate in
interpreting social legislation like the Unemploy
ment Insurance Act to adopt an approach similar
to that required to give effect to fiscal legislation,
the reason being that the same considerations do
not apply in giving effect to these two types of
legislation. Then, I note that the wording here does
not refer to corporate control, as was the case in
the decisions on the tax matters, but to share
control, and that the use of such an unusual
expression rather than such current and unambig
uous words as holder or registered owner should
not be ignored and treated as inconsequential.
Finally, and most importantly, I consider that the
reason for the exception—based on the notion that
a person who exercises a controlling influence in a
corporation is not dealing with that corporation
"at arm's length", as there is to some extent a
dependent relationship between the two only
applies if the control in question is not in any way
contradicted by the facts.
The Pension Appeals Board, in Jacqueline Pilon
(NR 718), and the Umpires in Thomas Higginson
(NR 172), Ernest Bogaert (NR 564) and Thomas
Mignault (NR 761) have held that for purposes of
paragraph 14(a) (formerly 55(a)), a de facto con
trol would suffice to cause employment to be
excepted. I do not think that it is possible to
reverse such a proposition without qualification
and to say that the absence of "de facto control"
results from application of the provision: the legis
lator could not have intended to cover all factual
situations that might arise in the particular cir
cumstances in which individuals find themselves,
and certainly there could be no question of cover
ing the whims, indifference or simple refusal of the
holder of a share to exercise his right. However, I
think that in order to respect the letter and the
spirit of the provision as well as the requirements
of fairness, control has to be interpreted as being
not only de jure control but also, and most impor
tantly, effective control, which means control that
can be freely exercised and is not impeded by
circumstances independent of the person having
control. Cloutier certainly did not have "effective
control" over the 150 shares deposited in trust.
The Attorney General, however, had an alterna
tive argument. Even if these 150 shares deposited
in trust have to be eliminated and the voting rights
for them regarded, at least in the minds of the
parties concerned, as non-existent, he submitted,
Cloutier still held 349 of the 850 remaining voting
shares, which is over 40%. At first sight the argu
ment may appear to carry some weight, but in my
opinion there is an insurmountable obstacle to it in
the fact that it has no support in the legal provi
sion itself. The relationship is in fact between the
"issued shares" and the "controlled shares", and it
should be borne in mind that the issuing of a share
is an indisputable fact which is established once
and for all at the outset: only its control is a
debatable fact which may vary with time. Here,
the 150 shares deposited in trust had unquestion
ably been issued even if, during the employment,
they were not under the "control" of Cloutier or of
any one.
Accordingly, I see no basis for the Attorney
General's position as neither his principal argu
ment nor his alternative argument appears to be
valid. In my view, the conclusion arrived at by the
Tax Court of Canada is correct. I would therefore
dismiss this application.
PRATTE J.: I concur.
LACOMBE J.: I concur.
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