Choquette v. The Queen, 74 DTC 6563, [1974] CTC 742 (FCTD)

Décary, J:—This is an appeal from a decision of the Tax Review Board, dated December 6, 1972, dismissing Mr Choquette’s appeal.

The purpose of the hearing is to determine, for the purposes of the Income Tax Act, RSC 1952, c 148, the nature of a sum of $25,000 received by the appellant from his employer, and in so doing to interpret the provisions of sections 3, 5, subparagraph 6(1 )(a)(v), sections 25, 36 and paragraph 139(1 )(aj) of the Act.

The evidence shows that the appellant was employed by Les Buandiers Nettoyeurs Inc and its subsidiaries from the beginning of November 1966 until the end of June 1969, a period of 32 months. At a meeting of the company’s board of directors on July 3, 1968 a decision was taken to confirm the appellant in his duties as comptroller and consultant until the end of 1972. It was stipulated that the terms of the appellant’s employment were irrevocable. The directors’ decision was approved and ratified by the shareholders on the same day.

A document, dated February 11, 1969 but signed on March 27 of that year—9 months, therefore, after the signing of the contract of July 3, 1968—is worded as follows:

Quebec City, February 11, 1969

Mr Roddy Choquette

600 Laurier Avenue

Quebec City

Dear Mr Choquette:

As majority shareholders and directors of Les Buandiers Nettoyeurs Inc and its subsidiaries, and on our own behalf, we submit to you the following proposal:

Our mother, Mrs Alphonse Turgeon, is prepared, on certain conditions, to lend each of us, on the security of a promissory note, the sum of $12,500, making a total of $25,000.

Upon receipt of the cheques from our mother, we are prepared to endorse each of these cheques payable to you and to hand them to you personally for deposit by you in return for the following considerations:

1. As shareholders and directors, we recognize that since the beginning of your employment, you have fulfilled your duties as comptroller and financial adviser to Les Buandiers Nettoyeurs Inc and its subsidiaries in such a way that the financial position of these companies has improved considerably, as is reflected in the annual financial statements audited since the beginning of your employment by our accountants;

2. In consideration of the payment of this capital indemnity, however, you will release Les Buandiers Nettoyeurs Inc and its subsidiaries from the unexpired portion of the contract, amounting to four years at an annual salary of $16,800, so that the companies may at any time terminate your employment as circumstances may require; if you accept these conditions, we for our part undertake to vote as shareholders for your release by the companies from your employment contract.

Until either party expresses a desire to act otherwise, however, we would like you to remain in the service of the companies as a consultant, with the same powers, but without the obligation to exercise them, and with an indemnity of $50 per week payable to you in fees and expenses. It is understood that as far as your obligation is concerned, it will be up to you to decide whether your health or other personal reasons will allow you to continue these services until the expiry of the employment contract.

It is in our real, personal interest that you accept these conditions, since your acceptance of this offer would permit our salaries to be raised by $6,000 each per year, without increasing operating expenses under this item. Your acceptance of these conditions would also enable the companies, in view of their improved liquidity situation, to bring up to date the payments due to our mother, Mrs Alphonse Turgeon (approximately $24,000) and make subsequent monthly payments to her of $833.33 instead of the current monthly payments of $400 due under certain contracts between her and ourselves, a liability assumed by Les Buandiers Nettoyeurs Inc.

This offer on our part is firm and valid for a period of three months from the date of its signature, and ‘your written acceptance, consisting of your signature on a duplicate of this letter, will constitute an irrevocable agreement for both parties.

Yours Sincerely

Réal Turgeon 27/3/69 Armand Turgeon

Roddy Choquette

Accepted this .. .

The circumstances surrounding this agreement showed during the hearing that the idea of the agreement, the legalistic manner, and the tone and style of the document were the work of the appellant. The Turgeon brothers were placed in a position which I would describe as quasi-adherence to a contract.

In comparing the testimony of the two Turgeon brothers with that of the appellant, I feel that the credibility of the Turgeons is greater than that of the appellant, and I am therefore relying on their testimony. The appellant, in fact, admits having given his instructions to a notary over the telephone, but this notary was not called as a witness. The Turgeons have a different version of the facts surrounding the content and the drawing-up of the agreement. One of the Turgeon brothers has stated categorically that it was drawn up by the appellant and that he did not discuss this draft contract with the appellant before February 11, 1969. The other brother also stated, equally categorically, that he had had no discussion with the appellant as to the content of the draft contract before February 11, 1969.

As the contract dated February 11 indicates, the appellant released Les Buandiers Nettoyeurs Inc and its subsidiaries from their obligations under the irrevocable employment contract in consideration of payment of $25,000. However, on March 3, 1972, three years after releasing the companies, the appellant threatened to sue Messrs Réal and Armand Turgeon for $26,200, this being the balance of the total of $51,800 he would have received if the employment contract had run its full course. The appellant had already received $25,000 plus $600 in consultant’s fees.

I believe that these facts reveal the gradual unfolding of Mr Choquette’s scheme to obtain as much as possible from his employer. It began in 1967 with a simple employment contract with full powers as general manager, and he was the one who wrote up the minutes of the parent company. Then in November 1968 he proposed a binding 4-year contract to the company, and he was the one who wrote up the minutes. A scant five months later he persuaded the company to pay him $25,000 and to retain his services as a consultant, and he was the one who signed the cheques issued by a subsidiary.

In my opinion, the only possible interpretation for ail these facts is that Mr Choquette wished to obtain the highest possible remuneration from his employer, and that he exploited the absolute confidence the Turgeon brothers had placed in him. The evidence shows that it was he who, as general manager, made all the decisions. In order to reach his goal, the appellant used all necessary means to obtain from his employer, first a binding contract for four years, and then only five months later terminated this contract, for which he received $25,000 compensation. It is difficult to ignore the fact that the appellant was an experienced businessman who since 1966 had carefully prepared his plan to obtain as much as possible from his employer.

lt must be pointed out that in the contract dated February 11, 1969 the parties described this payment of $25,000 as a capital indemnity.

Before turning to the authorities brought to the attention of the Court by learned counsel for the parties, and examining sections 3, 5, subparagraph 6(1)(a)(v), sections 25, 36 and paragraph 139(1)(aj) of the Act, I feel it is advisable to deal with a preliminary question, namely whether the fact that a payment is described as capital in fact makes it capital. In Simon's Income Tax (1964-65), Volume 1, page 59, we find this quotation from Viscount Simon in the case Inland Revenue Commissioners v Wesleyan and General Assurance Society, [1948] 1 All ER 555 at 557:

It may be well to repeat two propositions which are well established in the application of the law relating to income tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it.

This principle of the relationship of form and substance is, in my opinion, an elementary principle, not only of interpretation but of justice, which allows us to disregard legalism and formalism in determining the true nature of a contract.

The Minister of National Revenue regarded the sum of $25,000 as the appellant’s income, specifically as a retiring allowance for the 1969 taxation year, and a tax of $5,756.10 was levied on the appellant’s income for that year.

It is a well-established principle that an assessment is valid until it is proven that there has been an error in fact or in law on the part of the Minister. The appellant must therefore establish the evidence that the facts in this case do not permit the application of sections 3, 5, subparagraph 6(1)(a)(v), section 25, or paragraph 139(1)(aj) of the Act.

The authorities cited by learned counsel for the appellant are the following: Simon’s Income Tax, Volume 3, pages 108, 109, 110, 111, 112, 121 and 122; D E Jones v MNR, [1968] Tax ABC 1243; 69 DTC 4; Beaupré v MNR, [1968] Tax ABC 1185; 69 DTC 7; [1973] CTC 316;

73 DTC 5255 (FC); Y A Alexander v MNR, [1973] CTC 405: 73 DTC 5321 ; and Garneau v MNR, [1968] Tax ABC 91 ; 68 DTC 131.

These authorities are all to be distinguished from the case at bar in that they deal either with illegal breach of employment contracts or with payments for reasons other than termination of employment, neither of which are relevant here.

Counsel for Her Majesty was faced with an established fact: the Minister’s assessment was made under subparagraph 6(1)(a){v), paragraph 139(1)(aj) and section 36 of the Act. He was therefore restricted to citing authorities in which the object of the litigation was to determine whether or not the payment constituted a retiring allowance.

His authorities were as follows: Y A Alexander v MNR (supra); Winfield v MNR, [1970] Tax ABC 542; 70 DTC 1333; Cleet Estate v MNR, [1969] Tax ABC 144; 69 DTC 135; and Julien v MNR, 10 Tax ABC 105; 54 DTC 120.

At the hearing, the Court advised counsel to consider the cases of Curran v MNR, [1959] SCR 850; [1959] CTC 416; 59 DTC 1247; and Peter Moss v MNR, [1963] CTC 535; 63 DTC 1359 (Exch).

Section 3 of the Act reads as follows:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

In the case of Curran v MNR (supra) the Supreme Court had to decide on the nature of a payment received by Mr Curran from a shareholder of a company for accepting employment in another company. The payment was considered by the Court to be income under the provisions of section 3 of the Act.

It should be noted that in the Curran case the payment had not been made by the employer, whereas in this case it has been shown that the payment was made by the employer.

The following quotation from Martland, J in the same case deals with the applicability of section 24A—later 25—of the Act (page 862 [428, 1252-3]):

Counsel for the respondent conceded that Section 24A was not applicable to the circumstances of this case. Counsel for the appellant, however, urged that Section 24A was enacted in order to broaden the scope of Section 5 So as to tax certain kinds of income not otherwise taxable under Section

5. He pointed out that Section 24A might have applied to the payment in question here if it had been made to the appellant by Federated or by Home. Since it did not apply, because the payment was not made by the appellant’s employer, he contended that the payment could not be regarded as income within Section 3, because so to hold would make Section 24A meaningless in its application.

It seems to me, however, that Section 24A was essentially a provision dealing with onus of proof and deemed certain payments as therein defined to be payments within Section 5, unless the recipient could establish af- firmatively that a payment did not reasonably fall within the provisions of paragraph (i), (ii) or (iii) of Section 24A. I do not think that it follows that payments which would fall within Section 24A, except for the fact that they were made by someone other than the employer, of necessity cannot be income within the provisions of Section 3.

In my opinion, in the light of the decision in the Curran case, the sum of $25,000 received by the appellant constitutes income under the provisions of section 3 of the Income Tax Act, since it was received from a source which I regard as employment.

The money was received by the appellant when he was in the payer’s employ, since two cheques were made out by La Buanderie Lévis Limitée, a wholly-owned subsidiary of Les Buandiers Nettoyeurs Inc, each in the amount of $12,500, one payable to the appellant and Réal Turgeon and the other payable to the appellant and Armand Turgeon. The appellant was employed by these companies when he received the $25,000 and continued in their employ. Only his title was changed from that of comptroller to that of consultant. After the signing of the February 11, 1969 contract, the appellant clearly devoted much less time to the companies, but the income was nevertheless derived from the same employment.

I am nonetheless of the opinion that some useful purpose is served by discussion of section 25 of the Act, in view of the fact that in this case the appellant drew the amount from his employer or his employer’s agent, as the cheques show. Martland, J has commented on section 25, as quoted above, to the effect that its provisions deal with the burden of proof and that certain payments are considered to fall within its provisions unless the recipient can prove that the payment cannot reasonably be regarded as having been received under one of the circumstances cited. Section 25 reads as follows:

25. An amount received by one person from another,

(a) during the period while the payee was an officer of, or in the employment of, the payer, or

(b) on account or in lieu of payment of, or in satisfaction of, an obligation arising out of an agreement made by the payer with the payee immediately after a period that the payee was an officer of, or in the employment of, the payer,

shall be deemed, for the purpose of section 5, to be remuneration for the payee’s services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received

(i) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(ii) as remuneration or partial remuneration for services as an Officer or under the contract of employment, or

(iii) in consideration or partial consideration for covenant with reference to what the office or employee is, or is not, to do before or after the termination of the employment.

The conditions imposed by paragraphs (a) and (b) of section 25 of the Act establish an assumption of remuneration for services rendered which may, however, be refuted if the amount cannot reasonably be re- garded as having been received under one of the circumstances described in subparagraphs (i), (ii) and (iii) of the section.

In my opinion, applying the provisions of paragraph (a) and subparagraph (ii), the payment can reasonably be regarded as having been received in accordance with an employment contract. The appellant has therefore not refuted this assumption.

Section 25 of the Act was clearly analysed by Thorson, J, when he was presiding judge of the Exchequer Court, in Moss v MNR (supra) at pages 547-8 [1365-6]:

I now come to the contention advanced on behalf of the Minister that Section 25 of the Act is applicable to the facts of the case and that the amount of $34,600 received by the appellant from Prairie Cereals Ltd should be deemed for the purpose of Section 5 to be remuneration for the appellant’s services rendered as an officer or during the period of employment.

The first enquiry is whether the amount was received during a period while the appellant was an officer of, or in the employment of Prairie Cereals Ltd. I have already set out the evidence relating to the date when the amount Was received by the appellant and the conflicting evidence on when he left the employment of Prairie Cereals Ltd. It could, in my opinion, be reasonably found on the evidence that the amount was received by the appellant from Prairie Cereals Ltd during a period ‘while he was an officer of and in its employment within the meaning of paragraph (a) of Section 25. Certainly, the appellant has failed to establish that the amount was received by him after he had ceased to be an officer of or in the employment of Prairie Cereals Ltd.

But, in any event, the facts bring the case within the ambit of paragraph (b) of Section 25. The amount of $34,600 was in satisfaction of the obligation arising out of the agreement made by Prairie Cereals Ltd with the appellant, dated April 12, 1956, which implemented the offer made in the letter of March 24, 1956, and its acceptance. The agreement was, therefore, made during the period that the appellant was an officer of and In the employment of Prairie Cereals Ltd. Under the circumstances, the amount should be deemed, for the purpose of section 5, to be remuneration for the appellant’s services rendered as an officer or during the period of employment unless the conditions specified in subparagraphs (i), (Ii) or (iii) are established.

It is my opinion that there is no essential difference between the facts in the Moss case. (supra) and those in the case at bar, and that the precedent should therefore be followed.

The payment received by the appellant is thus deemed to be a remuneration within the meaning of paragraph (a) of section 25 of the Act, and consequently constitutes income under the provisions of section 5 of the Act, since the appellant has not discharged the burden of proof imposed in subparagraphs (i), (ii) and (iii) of section 25.

Counsel for the respondent indicated to the Court that the Minister of National Revenue had regarded. the payment received by the appellant as a retiring allowance, and thus as income within the meaning of subparagraph 6(1)(a)(v) of the Act. This section reads as follows:

-T 6. (1) Without restricting the generality of section 3, there shall be included

in computing the income of a taxpayer for a taxation year

(a) amounts received in the year as, on account or in lieu of payment of, or in satisfaction of

(v) retiring allowances, or

The term “retiring allowance” is defined as follows in paragraph 139(1)(aj):

(aj) “retiring allowance’ means an amount received upon or after retirement from an office or employment in recognition of long service or in respect of loss of office or employment (other than a superannuation or pension benefit), whether the recipient is the officer or employee or a dependant, relation or legal representative;

Retiring allowance as defined here implies long service or loss of employment. I cannot believe that an employment of 29 months can constitute long service. The appellant was employed by the companies only from November 8, 1966 onwards, whereas he received the amount of $25,000 on March 27, 1969. While I recognize that the meaning of an adjective such as “long” is relative, and that there is no absolute criterion by which one can determine what is long and what is not, I do not believe that a reasonable man could conclude that 29 months constituted long service. To claim otherwise would mean that over the course of a working life of, say, 40 years, a person would have fourteen periods of long service. A period of 29 months does not constitute long service in this case, since in my view the length of a period of service should be calculated on the basis of service with one specific employer and not with several employers.

We must also consider whether the amount received by the appellant consisted of compensation for loss of office or employment.

In my opinion, his employment did not end on March 27, 1969, when the appellant signed the agreement, but rather was modified, not in regard to its duties, but in regard to its intensity, and by reason of the fact that he was no longer obliged to work. All that was required of him was that he be available, for which he received a salary of $50 a week.

Since there was neither long service nor loss of employment, the amount cannot, in my view, be regarded as a retiring allowance for the purpose of the Act.

The method by which the Minister chose to proceed allowed him to apply the provisions of section 36 of the Act, which reduces the tax by allowing the taxpayer’s income to be assessed otherwise than as ordinary income. This reduction is made at the taxpayer’s option.

If the amount received by the appellant had been a retiring allowance, the Minister’s procedure would have been appropriate and in accordance with the Act. However, since there had been neither loss of employment nor long service, the Minister could not legally treat the amount received as a retiring allowance.

After a remark by the Court to the effect that all were equal before the law and that benefits such as the one in section 36 could be granted only to those who were entitled to them, counsel for the respondent referred the Court to the case of L J Harris v MNR, [1964] CTC 562 at 571; 64 DTC 5332 at 5337, in which my learned colleague Thurlow, J noted:

I do not think, however, that this is the correct way to deal with the matter. On a taxpayer’s appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. No appeal to this Court from the assessment is given by the statute to the Minister and since in the circumstances of this case the disallowance of the $775.02 while allowing $525 would result in an increase in the assessment the effect of referring the matter back to the Minister for that purpose would be to increase the assessment and thus in substance allow an appeal by him to this Court. The application for leave to amend is therefore refused.

I share my learned colleague’s opinion that the Court must decide, generally speaking, whether the assessment is too high and, I would add, whether or not an assessment should have been made in a case where it must be determined whether an amount constitutes capital or income. In the case at bar, the object of the litigation is to establish whether the amount received is taxable purely as income, or as income in the form of a retiring allowance. Since the amount is regarded by the Minister as a retiring allowance, the Court must determine whether the assessment is too low because of the preferential treatment for retiring allowances provided for under section 36 of the Act.

My learned colleague has said that under the Act the Minister may not appeal against his own assessment. I share this opinion.

This judgment by my learned colleague Thurlow, J was followed by that of my learned colleague Cattanach, J in Consolidated Building Corporation Limited v MNR, [1965] CTC 360 at 377; 65 DTC 5211 at 5220.

Section 177 of the Income Tax Act, RSC 1952, c 148, as amended by 1970-71-72, c 63, which defines the appeal jurisdiction of the Court, reads as follows:

177. The Federal Court may dispose of an appeal, other than an appeal to which section 180 applies, by

(a) dismissing it; or

(b) allowing it and

(i) vacating the assessment,

(ii) varying the assessment,

(iii) restoring the assessment, or

(iv) referring the assessment back to the Minister for reconsideration and reassessment.

When an appeal is dismissed, the Court’s competence is limited to a simple dismissal, even if, as in this case, the appellant should have been assessed at a higher rate.

it is my considered opinion that the amount of $25,000 received by the appellant constitutes income within the meaning of section 3, as Income from a source within Canada, as well as under section 5 of the Act, since it is deemed income from employment. The appeal is dismissed with costs.