Collier, J:—At the conclusion of the hearing I said the plaintiff’s appeal would be allowed. Written reasons would be later given. Those reasons now follow.
The Minister of National Revenue included in the income of the plaintiff, for his 1974 taxation year, the sum of $250,000. The Minister relied on four documents all dated September 20, 1974, and all signed by the plaintiff (Exhibits 8, 9, 10 and 11).
I reproduce one of the documents (Exhibit 11):
RECEIPT
This will acknowledge receipt of the sum of $250.000 relating to the termination of my employment with International Recreation Corp, the execution of a covenant not to compete on behalf of Open Road Industries, Inc, and their subsidiaries and my agreement to render services to said companies as outlined in separate documents.
The purchase price is to be allocated as follows:
1. $125,000 as a bonus for past services rendered.
2. $25,000 for my agreeing to be available to render consulting services to International Recreation Corp, and its subsidiaries for a period of 1 year from the date hereof or aS more specifically set out in our separate agreements.
3. $100,000 for the execution of the covenant not to compete. DATED: September 20, 1974:
The plaintiff contends the documents he signed do not set out the actual transaction whereby, nor the basis on which, a payment of $250,000 was made to him.
The issue is fundamentally one of fact. The plaintiff and Mr Derril T Warren, his legal adviser, testified as to the facts. The effect of that testimony was to explain the real transaction and to endeavour to nullify the prima facie inference the payment was in the nature of income. Because of that, I considered very closely the evidence of the plaintiff and his legal adviser. I found them to be credible and trustworthy witnesses. I accept their testimony as to the matters that led to the receipt by the plaintiff of this large sum of money.
The plaintiff was the co-founder, in 1962, of a British Columbia company called Vanguard Trailers Ltd (hereafter Vanguard). The plaintiff was president and a director. It made and sold recreational vehicles. In 1970 it moved its operation to Kelowna, BC. It was a very successful business.
In 1969 the shares of Vanguard were sold to a United States company called International Recreational Corp (hereafter IRC). It oper- ated from Boise, Idaho. The plaintiff, in that transaction, received approximately 130,000 shares of IRC and $400,000 in cash. He remained as president and general manager of Vanguard. He became vice president and a director of IRC. In November 1971, he became president and chief executive officer of IRC.
In September of 1972, in the course of a corporate re-organization, the plaintiff entered into an employment agreement with IRC. It was for three years. He was to be paid a minimum of $5,000 a month. He was entitled to participate in any company bonus plans. The agreement provided he would not engage, during the life of the contract, in the recreational vehicle business in certain named states of the United States and certain named provinces of Canada.
In April 1973 the shares of IRC were sold to another United States company, called Open Road Industries, Inc (hereafter ORI). It was a public company. Its shares were listed on the American and Pacific Coast stock exchanges. The company’s headquarters was in Los Angeles. The plaintiff, at that time, held 109,882 shares of IRC. On the sale he received $4.50 a share. He was required, as a term of this take over, to purchase shares of ORI to the value of $175,000. He did so. The shares (15,600 in number) were to be held in escrow.
The plaintiff said he normally would not have entered into an arrangement of this kind. But ORI considered his services valuable; it wanted to tie him to the parent company. He was shown the ORI financial statements. They indicated a net worth, or financial surplus, of approximately $20,000,000. He felt, at that time, his compulsory share purchase was a good investment. A little later he voluntarily purchased 1400 additional shares at a cost of approximately $20,000. He continued as president and a director of both IRC and Vanguard. He divided his time between the two companies.
On the ORI take over he signed a new employment agreement with IRC. It was dated April 17, 1973. The terms were similar to those in the agreement of the previous year: The new contract was for 3 years. Again there was a “non-competition” clause, effective during the life of the agreement.
The plaintiff at no time was an employee, officer or director of ORI. He was merely a shareholder.
Things seemed to go reasonably well after the take over. But the industry generally had been affected by the gasoline shortage caused by the Arab-Israeli war of 1973.
In early 1974 the plaintiff came to the view ORI was not, from a business point of view, being run very well. He began encountering credit difficulties with Vanguard and IRC suppliers. He felt the difficulties, which had never existed before, were traceable back to ORI. He was asked by ORI management, to advance $400,000 to $500,000 to ORI on a thirty day basis. The advance was never repaid. That caused the plaintiff further alarm. There was also a change by ORI in its use of the IRC operation at Boise. All of these things caused the plaintiff concern as to his ability effectively to manage IRC and Vanguard. He felt ORI might bleed all the funds out of those two companies.
In August of 1974 the plaintiff was asked by one Alan Robin, chairman of the board of ORI, to become a director of ORI. The plaintiff went to Los Angeles. At that time the financial problems of the company were disclosed to him. The $20,000,000 surplus had almost disappeared. There had been an operating loss of $17,000,000 for the first quarter of 1974. Further large losses were expected in the future.
None of this had been disclosed to the public. The plaintiff was disturbed and alarmed. He declined to join the board of directors. He was asked to shift a seasonal surplus in Vanguard, of approximately $1,000,000, to the parent company ORI. He did not want to do that. He returned to Kelowna to assess his position, and that of Vanguard. He realized Vanguard could be forced, because of share control, to transfer its surplus. But the plaintiff wanted to fight, if he could. that transaction. Vanguard was still. to him, a close personal matter. It had really been his creation and development. He cared for its staff. Many were old friends. He decided to enlist Mr Warren for legal advice.
Mr Warren was a practising lawyer in Kelowna. He became solicitor for Vanguard in 1973. He had acted occasionally for the plaintiff in some personal matters. Mr Warren had little or no experience in the income tax field. The plaintiff, on personal and corporate tax matters, dealt with chartered accountants in Vancouver.
Mr Warren knew the plaintiff had been asked to join the board of directors of ORI. He knew also of some of his frustrations in respect of IRC and Vanguard, and the new management. The plaintiff met with Warren on Labour Day, September 1. He told him of the latest developments.
On September 2, Warren advised the plaintiff that if Vanguard made a $1,000.000 payment to an insolvent company there would likely be a violation of the Companies Act of British Columbia. He expressed concern whether there might also be problems arising under the British Columbia Securities Act and with United States security exchange laws. Further, there was some kind of financial arrangement with the Prudential Life Insurance Company and the ORI group. That contract forbade payments from Vanguard upstream to the other corporations.
After consideration of all these matters Warren advised the plaintiff he faced probable personal exposure, as an officer and director, if the Vanguard funds were moved. The plaintiff discussed resigning. He wanted to. preserve his business reputation. At the same time he wanted to preserve Vanguard, if that were possible.
Some pressure was being put on the plaintiff, from ORI management in Los Angeles, in respect of the transfer of the $1,000,000, and in’ persuading the plaintiff to join the ORI board. Warren and the plaintiff decided to go to Los Angeles.
Warren’s tentative instructions from the plaintiff, before going to Los Angeles, were to try and work out some compromise to resolve the executive problems in the corporations; to tender the plaintiff’s resignation from Vanguard if that seemed the best solution; to investigate the possibility of a suit by the plaintiff against ORI in respect of the decline in value of his ORI shares.
The plaintiff and Warren stopped in Vancouver, enroute on September 16, to discuss matters with the chartered accountants earlier referred to, and with a Portland attorney who had experience in United States security exchange matters.
On September 17, a Tuesday, they left for Los Angeles. Later that same day they. met a director and a house solicitor of ORI. Warren advised the director of the plaintiff’s intention to resign from Vanguard and IRC. But at that stage the plaintiff had not irrevocably committed himself to that course.
Warren and the plaintiff suggested a consulting contract between the plaintiff and the ORI group of companies. That was turned down. Some further discussions took place. Nothing came of them that day.
On September 18 the plaintiff and Warren met with Robin and others. The question of the $17,000,000 loss was discussed. Warren understood, because of ORI’s financial state, the Bank of America had been exerting some pressure. Certain documents, required to be filed with the appropriate Securities Exchange, had been overdue. Warren was told the documents were being sent. Warren, for various reasons which I need not. set out, began to distrust the people he was dealing with. The plaintiff, ever since his meeting in August, distrusted those guiding the destinies of ORI. On the evening of September 18 the plaintiff made a firm decision to resign. A letter of resignation, which had been prepared in Kelowna, was signed.
The plaintiff also instructed Warren to take proceedings to try and recover his share investment in ORI. He requested him, as well, to advise the appropriate Securities Exchange authorities in Washington of what he (the plaintiff) considered to be possible violations of security laws. He instructed Warren to request the proper body to investigate.
I shall digress somewhat. Trading in ORI shares had been, on August 8, 1974, suspended. At that time they had been quoted at $3.25 a share. The parties have agreed that as of September 20, 1974, (the date of the four documents signed by the plaintiff) the market value of the plaintiff's 17,000 shares was $8,500 or 50 cents a share.*
I return to the narrative of the actions and discussions in Los Angeles. On the morning of September 19, Warren asked for a meeting with ORI officials: He told them he was going to present the plaintiff’s resignation. He did so. Robin and others were at that meeting. Robin asked Warren if the plaintiff was going to sue. Warren replied affirmatively. Robin asked what the grounds would be. Warren answered: misrepresentation and fraud. He stated he had been instructed to go to the Securities Exchange Commission in Washington to request an investigation into ORI affairs.
Robin asked Warren to meet, later in the day, with the company’s attorneys. Before that, however, Robin came to the hotel at which the plaintiff and Warren were staying. He tried to have the plaintiff reconsider his resignation. The plaintiff refused.
Before the meeting with the ORI attorneys, Warren had telephoned a law firm in Los Angeles giving them preliminary instructions in respect of a possible lawsuit by the plaintiff against ORI and its officers. Warren then met with a Mr Gordon. He understood him to be a senior person in a firm of lawyers representing ORI. Warren reviewed the history of the plaintiff’s involvement with ORI. He told Gordon he was going to instruct United States counsel to start an action. Gordon asked what the heads of damages would be. Warren replied that damages would be claimed on the basis of the plaintiff's loss of his investment in ORI shares, plus damages for fraud. Gordon invited Warren to come up with a figure. Later in the day Warren put forward, to Robin, an amount of $500,000. The latter became upset.
On Friday, September 20, Warren telephoned Gordon. He told him of the $500,000 figure he had given to Robin. Various other amounts were exchanged between the two lawyers. Gordon first offered $30,000 to $50.000. In subsequent telephone conversations the amount rose to $150,000. At some point in those negotiations Gordon asked for an agreement from the plaintiff that he not compete in the recreational vehicle field for one year. At that time the plaintiff's earlier three year covenant not to compete had approximately 19 months to runy. Warren felt if the plaintiff were already bound by that earlier agreement, then there could be no harm in giving a covenant for one year.
The plaintiff had taken no part in the negotiations outlined above. He had remained in his hotel. After bringing the plaintiff up to date, and obtaining his instructions, Warren telephoned Gordon about four o’clock in the afternoon. He told him the plaintiff would take $250,000 in the form of a certified cheque from Vanguard. Vanguard was the only company with any cash. In return. the plaintiff would not take any legal proceedings against ORI, nor would he make any complaint to the Securities Exchange Commission.
Warren offered to write a new “face-saving” letter of resignation, to be signed by the plaintiff. Gordon wanted a covenant by the plaintiff not to compete for one year. Warren agreed.
ORI wanted all of the plaintiff’s shares. Warren agreed. A mutual release was to be signed.
The parties had made, orally, their agreement.
Warren drew up a “flowery” letter of resignation. He went to Gordon’s office around 4:30 p.m. He gave it to one of Gordon’s associates. Warren was in turn handed Exhibit 11, earlier set out. He told the ORI lawyers Exhibit 11 was not the arrangement which had been agreed to. An associate of Gordon, one Weinberg, said the documents were, for internal accounting requirements, in that form.
Warren then telephoned the attorney in Portland. The advice from there was that the documents, in the form drafted by ORI, would not, from a securities law point of view, pose any problems.
It was then approaching 9 p.m. Warren requested the plaintiff to come to Gordon’s office. He showed the documents to him. The plaintiff raised objections. He felt the documents did not reflect the nature of the agreement. Warren agreed that was true. He told the plaintiff the documents were a sham; they would not be binding on him. He advised the plaintiff to take his money and run.
Arrangements were then made by telephone for a certified cheque to be signed and delivered, that evening, by Vanguard in Kelowna.
Tax implications did not, at any time in Los Angeles, cross the minds of either the plaintiff or Warren.
I am satisfied the documents signed do not reflect the real agreement between the plaintiff and ORI.
Mr Hohmann, counsel for the defendant, candidly conceded in argument that the allocation of $125,000 for past services could not be supported as a real transaction. In respect of the allocation of $25,000 for consulting services, I am satisfied the plaintiff, in fact, never agreed to provide such services. I am further satisfied, on the evidence before me, that ORI never stipulated for, or expected to receive, any consulting services. ORI’s object, as I see it, was to settle and head off a potential lawsuit, and to acquire, as well, all of the plaintiff’s shares so he could not launch a minority shareholder’s action.
There remains the covenant not to compete for one year and the allocation of $100,000 to that aspect. On the facts which I have out- lined, and accept, there was no agreement to allocate any amount of money for the covenant not to compete. Both the plaintiff and his legal adviser felt there would be no harm or prejudice, in view of the pre-existing agreement, in giving such an undertaking.
The facts recited above, to my mind, clearly demonstrate the $250,000 payment was not related to, nor did it arise out of, the plaintiff’s employment contract with IRC, an ORI. affiliate. It was a compromise settlement of a threatened claim for damages by the plaintiff against ORI.
The plaintiff’s appeal (action) is allowed. The assessment of the Minister of National Revenue is varied by deleting the sum of $250,000 included in the plaintiff’s income for the 1974 taxation year.
The plaintiff is entitled to costs.