Arm’s Length Test For Employment Insurance

Saturday, January 26, 2013

Case Citation

Smagh v. Canada (National Revenue) (2013 TCC 9) [TCC] [CanLII]

Summary

To avoid abuse or fraud of the EI system, there are rules in places that deal with the situation where an employer hires a family member. In order to contribute and receive EI benefits, the employment contract must be a “substantially similar contract of employment would have been entered into if the parties had been dealing with each other at arm’s length.”

In this case, the employee-employer relationship was between a husband and wife and while the base relationship was considered normal for the industry, the appellants went offside with a loan to pay damages that resulted from a car accident. It’s unlikely the loan would have occurred between parties dealing at arm’s length.

Issue

[1] The appellant Kulwant Kaur Smagh (Kulwant Kaur) and the appellant Roop Singh Smagh (Roop Singh) each appealed from a decision – dated April 12, 2012 – by the Minister of National Revenue ( the “Minister”) in which the employment of Kulwant Kaur with Roop Singh for the period June 22, 2009 to September 11, 2009 was held not to constitute insurable employment because the Minister was not satisfied pursuant to paragraph 5(2)(i) of the Employment Insurance Act ( the “Act”) that a substantially similar contract of employment would have been entered into if the parties had been dealing with each other at arm’s length.

ITA / ETA

None.

Cases Cited

Bélanger v. Canada (Minister of National Revenue), 2003 FCA 455 (CanLII)
Birkland v. M.N.R., 2005 TCC 291 (CanLII)
Massignan v. Canada (Minister of National Revenue), 2003 FCA 172 (CanLII)
Porter v. M.N.R., 2005 TCC 364 (CanLII)

Analysis

[17]…The arrangement between Roop Singh and Kulwant Kaur does not fit within the pattern of the loans made - or advance wages paid - to non-related workers and other parties. That agreement was unique and would not have existed if the parties had not been related. Would a non-related worker have agreed that an employer could apply every cent of net wages - earned from 720 hours of work – to discharge a debt? To ask the question is to answer it.

[18] The appellants acted in good faith to resolve a thorny issue.

[19] Were I clothed with the jurisdiction to decide these appeals de novo, I may have been tempted to find in favour of the appellants in light of their longstanding employer/employee relationship and the otherwise normal nature of the employment during the relevant period in the context of the orchard industry. Because the within fact situation constituted a one-off, that alone could have fuelled such an inclination. However, these musings are simply speculative, of the sort indulged in by those armchair quarterbacks or wannabe skips who – from the comfort of their couches – would have targeted a different receiver in the dying seconds of the 4th quarter or called a different shot in the 10th end of a Brier final.

Decision

[21] Each decision of the Minister is confirmed and each appeal is dismissed.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.