The Queen v. de Loppinot, 78 DTC 6477, [1978] CTC 705 (FCTD)

Marceau, J [TRANSLATION]:—By order of the Court, the two actions whose titles are set out above have been joined for the purposes of the inquiry and hearing. They relate to the same facts, and ultimately raise the same questions of law. In the first, Her Majesty the Queen contests a decision of the Tax Review Board which granted defendant Mrs Hardy de Loppinot the right to deduct as an expense in calculating her income for the 1972 taxation year the sum of $390, paid by her to a Mr Péloquin in the circumstances hereinafter described. In the second, the said Mr Péloquin disputes the decision of the Board dismissing the appeal which, for his part, he had brought against the Minister’s assessment, by the terms of which this sum of $390 and others received in the same circumstances (for a total of $3,700) were taxable income in his hands. A summary of the facts will make the issues readily apparent.

Peloquin is a chartered accountant who, since 1943, when he qualified as an accountant, has always practised his profession alone, although under the name Péloquin and Hunter. In 1966, he explained, he was for the first time seriously considering preparing for his retirement. He had a sizable practice, made up of longstanding clients whom he served from his home. He then had advertisements published in professional journals giving notice of his desire “‘to meet a young CA, also practising alone, who would like more work, to eventually take over the practice”.* [1] A number of accountants informed him by letter of their interest, but he felt it would be preferable to put off the date for carrying out his plan. He returned to it in the spring of 1971: he was then in a better position to retire. On re-examining the replies he had received five years before, he selected three, and among the three one in particular drew his attention, from a Mr Lecourt. He then learned that this Lecourt had become a member of a leading firm of accountants in Montreal: Noiseux, Lyonnais, Gascon, Bédard, Lussier, Sénécal & Associés (hereinafter referred to as “the firm” or Noiseux, Lyonnais et al); he saw no problem, since this was a firm which he knew and which had a good reputation. He therefore met with Lecourt and “got on extremely well” with him from the first. Their exchanges, which took place on two occasions, were brief and friendly: he did not remember their content exactly, but in any event they quickly arrived at an agreement in principle. One week after going to meet briefly with the senior partner of the firm he went, on a date agreed upon, to “finalize” the agreement. He was presented with a draft agreement, which he examined and signed as it was, except for a minor modification. That was on May 19, 1971.

This agreement, to which there was attached a list of clients consisting of about forty-five names, should be reproduced here in its entirety, because it is the interpretation of the agreement which is in issue. The text of it follows.

PROVINCE OF QUEBEC

CITY OF MONTREAL

AGREEMENT concluded on the nineteenth day of May, 1971

between

JEAN G PELOQUIN, chartered accountant, married under the regime of separation of property, to Dame Madeleine Fournier, residing at 456 Fenton Avenue, in the City of Mount Royal, Province of Quebec,

Party of the first part

— and —

NOISEUX, LYONNAIS, GASCON, BEDARD, LUSSIER, SENEGAL & ASSOCIES, chartered accountants, a partnership duly constituted under a contract of partnership signed on August 1, 1968, and NLGBLS COMPAGNIES, a partnership duly constituted under a contract of partnership signed on September 11, 1969, the said partnerships having their business office at 215 St James St, in the city and district of Montreal, province of Quebec, and MARCEL LECOURT, chartered accountant, married under the regime of separation of property, to Dame Louise Patry, residing at 10,535 St- Firmin Street, in the city and district of Montreal, province of Quebec,

Party of the second part

The party of the first part transfers to the party of the second part the present and future clients of his chartered accountant practice, in consideration of a share equal to twenty per cent of the fees generated by these clients (list attached) and received over the 5 years following the date of this agreement for present clients, and over the five years following the date on which professional activity begins, for future clients.

FURTHERMORE, THE PARTIES AGREE AS FOLLOWS:

1. That the share of the party of the first part shall be paid to him monthly, that it shall be equal to twenty per cent of the fees collected during the preceding month, and that this remittance shall be accompanied by a summary of invoicing and collections for the month;

2. That the party of the first part shall have the right to check the account books relating to fees received by the party of the second part, so as to oversee his own interests;

3. That everything shall be done by the two parties to ensure that the transfer of clients takes place without inconvenience to the latter. In order to do this, the party of the second part undertakes to:

(a) serve the clients acquired under the company name of JEAN e PELOQUIN & CIE — NOISEUX, LYONNAIS, GASCON, BEDARD, LUSSIER, SENECAL & ASSOCIES;

(b) name the party of the first part consulting partner, with no rights and privileges other than those listed herein;

(c) assign to the party of the first part office space, which shall not necessarily be for his exclusive use, so that he can receive clients, if the need arises, or attend to certain professional duties connected with the clients involved herein;

(d) allow the party of the first part, generally and like every other partner, to make use of the services provided in the office:

4. That MARCEL LECOURT, chartered accountant, shall be responsible for serving clients transferred by the party of the first part;

5. That the party of the first part shall be entitled to terminate this contract during the two years following the date this agreement is signed, provided that 25% of the sum paid up to that time for the transfer of clients is repaid to the party of the second part;

6. That the party of the first part shall be paid by the party of the second part for all professional work done at the request of the party of the second part, and chargeable to the clients involved herein, at the rate of $25 per hour;

7. That the aforementioned professional work shall be that to be billed to the clients, and excludes all work connected with the transfer of clients and the administrative aspects thereof.

SIGNED:

L Bertrand	Jean G Péloquin
Witness	Jean G Péloquin, CA
	Noiseux, Lyonnais, Gascon, Bedard,
	Lussier, Sénécal et Associés, CA

L Bertrand	Per	Paul Noiseux
Witness	Per	Jean Lussier
L Bertrand		Marcel Lecourt
Witness		Marcel Lecourt, CA

As soon as the agreement was signed, continued Péloquin, the files from his practice were naturally transported from his home to the offices of the firm, and in the weeks that followed he visited his clients in order to introduce Lecourt to them, explaining to everyone that he had merged his practice with that of the accountants Noiseux, Lyonnais et al, and that from then on Lecourt would look after them in his absence. Later, in September, he sent to a number of persons likely to need accounting services a letter of solicitation, in which he announced his connection with the firm, offered his services and again introduced Lecourt as his “immediate partner”.* [2] He subsequently again had some other communications with Lecourt, one of which was specifically for the purpose of arranging the transfer of one of his files to a partner, Mrs Michèle Hardy de Loppinot. Apart from that, however, Noiseux, Lyonnais et al and he had no professional contact. The amounts which were owed to him under the contract, as well as the reports which were to be provided to him, were sent to him by mail, and Lecourt continued to deal with messages or letters which were sent to him, with the exception of one case in which a letter from one of his former clients was inadvertently referred to him. He stopped at the office a couple of times, but only in passing, and solely for the purpose of greeting people there. He had effectively and completely retired. Moreover, he quickly sold his house in Montreal, and went to live in a house located at Lac Marois, Quebec, while passing the winter months in Florida.

It may immediately be seen what conclusions Péloquin, the plaintiff in the second action, seeks to draw from these facts. In his view, the contract of May 19, 1971 was purely and simply a contract for the sale of his practice, and the $3,700 that he received in 1972 in performance of this contract, that is, twenty per cent of the fees received by the firm for work done for his former clients, was a partial payment of the price stipulated therein. Therefore, in his opinion, the Minister was wrong in treating the sum as income within the meaning of the Income Tax Act, SC 1970-71-72, c 63, as amended, by alleging that the payment represented his share of the income of the firm of which he had become a partner (sections 3 and 96). On the contrary, it was a capital gain resulting from the “disposition of property” within the meaning of subsection 9(3) of the Act.

What then is the position of defendant, Mrs Hardy de Loppinot? Some additional facts will make this clear. Mrs Hardy de Loppinot is also a chartered accountant, and in 1971 she was a member of the firm Noiseux, Lyonnais et al, in the same capacity as Lecourt, who had taken charge of Péloquin’s clients. With the formal consent of Péloquin, consent which was given some time after the agreement was signed, she assumed responsibility in Lecourt’s place for one of the files on the list. She thus earned for the firm fees of $1,950, of which 25%, or $390, was payable to Péloquin by virtue of the agreement. The internal organization of the firm and the accounting system which its members had adopted required that the payment to Péloquin be entered and debited on the statement of income and expenditure kept in his own name. The firm was made up of what it referred to as senior and junior partners. The seniors were independent, and directed a team composed of juniors; these—of which Mrs Hardy de Loppinot was one—were initially entitled to an hourly salary for their professional work; then to a further 25% of the fees received from their own clients. With respect to this former client of Péloquin for whom Mrs Hardy de Loppinot had taken responsibility, 25% of the fees received were entered to her credit, but the share to which Péloquin was entitled was immediately deducted. The $390 paid to the latter was thus for her an expense which she treated, in calculating her taxable income, as an allowable expense, and this the Minister disputed by his notice of assessment on July 25, 1975. In this case, the Minister took the opposite position from that which he took with respect to Péloquin: he maintained that the contract of May 19 was a contract for the sale of the goodwill, and that as a result the payments made under this agreement represented for the purchaser Capital expenditures not deductible in the calculation of income, by application of the provision of paragraph 18(1 )(b) of the Act.

The joining of the two actions led each of the two taxpayers to side with the Minister in the official position taken by the department with respect to the other. This is how it happens that several cases appear in the list submitted by each of the three parties, whether to point out the necessity of considering the substance of an agreement above its form, if a contract is to be given a valid interpretation (thus: Front & Simcoe Ltd v MNR, [1960] CTC 123; 60 DTC 1081, or MNR v R P Ouellette & J E Brett, [1971] CTC 121; 71 DTC 5094: to affirm that goodwill Or custom is capital property which can be subject of a sale (Schacter v MNR, [1962] CTC 437; 62 DTC 1271; Dominion Dairies Ltd v MNR, [1966] CTC 1; 66 DTC 5028; Southam Business Publications Ltd v MNR, [1966] CTC 265; 66 DTC 5215; Butler v MNR, [1967] CTC 7: 67 DTC 5019; Kay v MNR, [1971] Tax ABC 363; 71 DTC 285; Cumberland Investments Ltd v The Queen, [1975] CTC 439; 75 DTC 5309: McCray v The Queen, [1976] CTC 778; 76 DTC 6481); or to show that a partnership is a consensual contract the formation of which requires certain well-defined characteristics (Bourboin v Savard, (1926) 40 QB 68).

I should mention that counsel for the Crown tried vaguely to reconcile the Minister’s opposing contentions with respect to the two taxpayers, by arguing that the sums received by Péloquin under the agreement might very well be income with respect to him, without it necessarily following that the payment made by Mrs Hardy de Loppi- not must be treated as a deductible expense with respect to her, because she, Mrs Hardy de Loppinot, was not a party to the contract of May 19, and the rights to fees which she indirectly acquired, she acquired as capital property. I admit that I do not entirely grasp the subtleties of that argument, if indeed I have understood it and stated it correctly. Mrs Hardy de Loppinot assumed “responsibility” for the client, and was called on to pay the share of the fees to which Pélo- quin was entitled, in place of Lecourt, as a member of the firm and by virtue of the contract of May 19. I do not see how it can logically be said that Mrs Hardy de Loppinot paid a sum as the price of acquiring a part of Peloquin’s practice, when Péloquin himself received the sum not as the price of the sale of his practice but as a share in the income of the firm:

In my opinion, we need solve only one problem to decide both cases. If the agreement of May 19 must be interpreted as a sale of goodwill, Peloquin is correct in disputing the assessment made against him, and Mrs Hardy de Loppinot, for her part, could not claim the amount she paid as a deductible expense. If, on the other hand, the agreement must be interpreted as a type of partnership contract, the opposite conclusions must be drawn.

How then is the contract of May 19 to be interpreted, and what is its true nature?

My finding is contained, in the two following propositions. On the one hand, I do not believe that we have here a contract made to transact a sale of goodwill, pure and simple. A sale implies a transfer of property for a money consideration. It would be difficult to speak of a complete transfer in this case, when it is noted that Péloquin undertook to continue serving his clients, if asked, that he became at least nominally a member of the firm, that he specified that the services to his clients would be provided in his name, and especially that he reserved the right for two years to terminate the agreement at will and resume complete control of his practice, if he considered it advisable to do so. Nor is there any provision establishing a price, because a price is an amount of money that the purchaser undertakes to give in exchange for the thing of which he becomes the owner, and if the price is only an amount to be determined, it must be capable of being determined from reference factors which are independent of the will of one or other of the parties (cf Mazeaud, Leçons de droit civil, Vol 3 p 729, Nos 865 et seq): it cannot simply consist of participation in the uncertain benefits which may arise from the object transferred (cf Planiol and Ripert, Traité de droit civil, Vol III, No 1333 et seq). On the other hand, it seems to me that the agreement contains the characteristic features of a partnership contract. Each party makes a contribution, Péloquin’s being his name, reputation and present and future clients, not counting the actual services that he agrees to render (meeting present and future clients and soliciting future clients) and the services he may possibly be called on to provide (work on cases if asked). Each party intends to share in the profits that their partner- ship may produce, Péloquin’s share being established at 25% for five years of the fees received by the firm for services rendered to his present and future clients, as well as a salary if he is called on to work on the cases himself.

Péloquin stated that his intention was not to enter into partnership, but to retire for good. Such an intention does not correspond to the intention expressed in the offers that he made five years before, and is undoubtedly mitigated by the firm intention not to divest himself of his clients and to retain the means of ensuring that they receive the services to which they are entitled. However, in any case, the question is whether his initial intention is reflected in the agreement to which he finally subscribed. The firm’s intention was undoubtedly not as clear and simple: it undoubtedly rejected the idea of paying a fixed and final price, and sought to protect its interests as best it could. It seems clear that the firm approximated it own internal organization in drawing up an agreement giving Péloquin a status similar to that of its junior partners who, as we have seen, were entitled to an hourly salary for work actually done, and a share of the fees received from their own clients.

Also, in my opinion, the representations Péloquin made after the agreement was signed—not only to his clients and to persons whom he solicited, but also to the general public, since his name was added to those of the other partners—were not merely to “sweeten the pill” as he now says, but were purely and simply the truth. I do not believe that it is now possible, in order to serve his interests against taxation, to treat the agreement that he freely entered into as if it had been worded differently.

I am thus of the opinion that the monies received by Péloquin during the taxation year in issue, in performance of the agreement of May 19, were income from his profession, representing the share of the firm’s profits to which he was entitled. The Minister was therefore correct in issuing the notice of assessment of July 25, 1975, and the action brought against him is without basis.

I am also of the opinion that the amount of $390 paid to Péloquin out of the fees credited to Mrs Hardy de Loppinot during that same taxation year—an amount representing a part of the share of the partnership profits to which Péloquin was entitled, but which was debited to Mrs Hardy de Loppinot because of the internal organization of the firm and its accounting system—must be treated as a deductible expense that was used to produce a division of fees among partners. The assessment of July 25 issued against Mrs Hardy de Loppinot was therefore in error, and the action brought to defend it is without basis.

Judgment will be rendered in the two cases accordingly.