Blauer v. MNR, 71 DTC 5113, [1971] CTC 154 (F.C.T.A.), briefly aff'd 75 DTC 5076, [1975] CTC 112 (SCC)

WALSH, J.:—This case came on before me for hearing on the merits at the same time and using the same evidence as that used in the cases M.N.R. v. Robert P. Ouellette and M.N.R. v. John E. Brett ([1971] C.T.C. 121), and it was agreed that since the judgments in these latter two cases would be identical whereas the judgment in the present case might possibly involve some slight difference as an additional argument was raised with respect to the year for which the assessment was made, one judgment would be rendered to deal with the Brett and Ouellette cases and a separate Judgment rendered in the present case.

Having this day issued my reasons for judgment and judgment in those two cases, I will not repeat the reasons given therein at some length for reaching the conclusion that the payment of $75,000 plus $5,000 for legal fees made by Brett and Ouellette to Blauer in connection with an agreement entered into between the parties on November 28, 1961, settling outstanding issues between them and dissolving the partnership constituted a capital payment and was not deductible by them in their respective income tax returns for the year in question, 1962, in which the fiscal year of the partnership ended on June 30. Similarly, and for the same reasons, it would constitute a capital receipt for the appellant herein and as such would not be taxable as part of his income. While there may be some situations in which a capital payment made by one party may nevertheless constitute income in the hands of the recipient, there is nothing to indicate that this is the case here nor did counsel for any of the parties so contend. Moreover, by agreement between counsel for appellant and respondent dated October 18, 1970, filed as Exhibit I-1, it was admitted that the issue relating to attorneys’ fees ‘‘is no more part of the appeal and that, accordingly, no evidence is to be taken into account, and no argument will be made by the parties on the said issue,’’ the appeal being withdrawn to that extent. It is the amount of $75,000 and not $80,000 which is in issue, therefore, and since I have reached the conclusion that this was a capital payment made to appellant and not a distribution to him of income earned by him from the partnership, his appeal is therefore allowed. A secondary issue was raised in connection with his appeal, however, which, had I reached a different conclusion, would have become important, namely, that he should have been assessed for this $75,000 in the 1961 taxation year rather than the 1962 taxation year in which it was assessed by the Minister.

This issue arises from the fact that paragraph 6 of the dissolution agreement provided as follows :

6. That concurrently with the signing of these presents, the first two parties shall pay, by way of a post-dated cheque dated January 2, 1962, to the Third party, the sum of Seventy-five Thousand Dollars ($75,000.00), as compensation for loss of goodwill of the said Third party, the payment of which sum of money shall be guaranteed by any chartered bank of Canada, to the satisfaction of the Solicitor of the Third party.

This payment ‘was guaranteed. the following day, November 29, 1961, by a letter from the Royal Bank of Canada to appellant’s attorneys reading :

This is to certify that we are holding in a special account in the name of J. E. Brett and R. P. Ouellette “In Trust’’ the sum of $75,000. We hold an irrevocable undertaking from them to pay these funds over to Aaron Blauer, Professional Engineer, 11 - 5th Avenue, Dorval, Que. on January 2, 1962.

Counsel for appellant argued that by virtue of this guarantee, the cheque, although post-dated, could readily be discounted by him at any time and is equivalent to a cash settlement and if it were included in his income at all, which he denied, it should be for the 1961 and not for the 1962 taxation year. In support of this he referred to Section 24(1) of the Income Tax Act reading as follows :

24. (1) Where a person has received a security or other right or a certificate of indebtedness or other evidence of indebtedness wholly or partially as or in lieu of payment of or in satisfaction of an interest, dividend or other debt that was then payable and the amount of which would be included in computing his income if it had been paid, the value of the security, right or indebtedness or the applicable portion thereof shall, notwithstanding the form or legal effect of the transaction, be included in computing his income for the taxation year in which it was received; and a payment in redemption of the security, satisfaction of the right or discharge of the indebtedness shall not be included in computing the recipient’s income.

and the cases of Walter I. Sheper v. M.N.R., 12 Tax A.B.C. 30, Reginald E. Nourse v. M.N.R., 27 Tax A.B.C. 353, and Arthur II, Frankish v. M.N.R., 14 Tax A.B.C. 456. None of this jurisprudence is applicable, however, as all of those cases dealt with currently dated cheques received in a taxation year but not deposited until the following year, while the present case deals with a post-dated cheque. It would appear to me that this question would be settled in so far as the present case is concerned by the words in Section 24(1) ‘‘debt that was then payable’’. The dissolution agreement clearly made this amount payable on January 2, 1962 and I do not consider that the guarantee to provide that payment at that date which was made by the Royal Bank of Canada advances the date of payment to 1961 even if indirectly it would enable the appellant to discount the post-dated cheque in 1961. Had I reached the conclusion that this was an income receipt then an interesting question would have arisen as to whether Section 6(1) (c) of the Act, which reads as follows:

6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

(c) the taxpayer’s income from a partnership or syndicate for the year whether or not he has withdrawn it during the year;

would apply. In so far as he was concerned, the partnership would have ended as of November 28, 1961 when the agreement was signed and not at the time of the conclusion of the fiscal year of the partnership on June 30, 1962. This was discussed in some detail and dealt with in the case of M.N.R. v. Ian J. Wahn, [1969] S.C.R. 404; [1969] C.T.C. 61, and it was decided that respondent, being no longer a partner, was properly taxed on the payments, which were spread over four years, in the years in which they were received. Since, in view of the conclusion I have reached that that payment was not received as income. the question of whether the Wahn case would apply in the present circumstances, and 1962 would be the correct year in which to include it in appellant’s income is not one which I am called upon to decide.

Appellant’s appeal is therefore allowed with costs, including one-third of such costs as are attributable to the joint hearing of this action with the two actions M.N.R. v. Robert P. Ouellette and M.N.R. v. John E. Brett ([1971] C.T.C. 121).