Date: 20070111
Docket: A-263-06
Citation: 2007 FCA 16
CORAM: DÉCARY
J.A.
NOËL
J.A.
PELLETIER
J.A.
BETWEEN:
LOUIS
MORISSETTE
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1]
This is an
appeal from a decision rendered by the Madam Justice Lamarre Proulx of the Tax
Court of Canada (2006 TCC 284), upholding the assessment issued by the Minister
of National Revenue (the Minister) for taxation year 2002 in respect of the
appellant on the basis that the amount of $20,000 he received on termination of
his employment constituted severance pay taxable as employment income under
subsection 6(3) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
(ITA).
[2]
According
to the appellant, however, the payment in question constituted consideration
for the sale of clientele and gave rise to a capital gain in his hands.
Background
[3]
The
appellant worked for Laurentian Bank Securities (LBS) as an investment
advisor from January 2000 to October 2002, at which point LBS terminated their
relationship by reason of non‑performance. Lamarre Proulx J. found that
theirs was a employer-employee relationship, and that aspect of her decision is
not challenged in the appeal.
[4]
The
agreement that terminated the employment and pursuant to which the payment was
made (hereinafter the “termination agreement”) reads as follows:
[translation]
1. Your employment
shall cease as of October 16, 2002.
2.
We
shall pay you $20,000, minus all deductions that apply, as compensation, plus
an additional $5,000 in six (6) months, if LBS has retained at least 75% of
your managed assets.
3.
The
amounts owing to you as of the date of your termination shall be paid to you.
4.
This
offer shall expire on October 24, 2002.
5.
It
is understood and agreed that you shall keep the terms and conditions of this
agreement completely confidential and that you shall not subsequently disclose
information concerning the payments made or the terms and conditions of this
agreement to anyone, except to your family, legal counsel, accountants or
professional advisers, provided that they undertake to keep this information
confidential and not disclose it to anyone.
6.
It
is understood and agreed that you shall not solicit your clients, directly or
indirectly or in any way whatsoever, and you agree that such solicitation would
cause a serious prejudice to LBS if this commitment were not respected.
Therefore, we could, in such a case, not only claim damages from you, but also
take any other action, through the courts or otherwise, including by way of
injunction, to enforce compliance with the present agreement.
7.
Your acceptance of this agreement, confirmed by your
signature, is in total, full and final settlement of all claims or complaints
that you have or might have against Laurentian Bank Securities and its
mandataries, trustees or other representatives, regardless of the nature of
such claims or complaints, including any claims for damages, salary, vacation
pay, incentive pay, benefits, pay in lieu of notice, severance pay, or any
other benefit related to your employment with Laurentian Bank Securities, and
any legal recourse that you might have against them shall consequently be
barred.
8.
The
present agreement constitutes a transaction within the meaning of articles
articles 2631 et seq. of the Civil Code of Québec. [my emphasis]
[5]
The
amounts of $20,000 and $5,000 referred to in clause 2 of the termination
agreement were paid out in 2002 and 2003 respectively, and in each case, LBS
issued a T4A slip, making the appropriate deductions at source.
[6]
On the
appellant’s income tax returns filed for the two years in question, he reported
the payments as having been received in consideration for disposing of his
interest in the clientele that was under his management while employed with
LBS.
[7]
The
Minister, however, considered that the two payments were remuneration received
“in consideration or partial consideration” for a non-solicitation covenant
within the meaning of paragraph 6(3)(e) of the ITA:
|
(3) An amount
received by one person from another
(a)
during a period while the payee was an officer of, or in the employment of,
the payer, or
(b) on
account, in lieu of payment or in satisfaction of an obligation arising out
of an agreement made by the payer with the payee immediately prior to, during
or immediately after a period that the payee was an officer of, or in the
employment of, the payer,
shall be
deemed, for the purposes 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
(c) as
consideration or partial consideration for accepting the office or entering
into the contract of employment,
(d) as
remuneration or partial remuneration for services as an officer or under the
contract of employment, or
(e) in
consideration or partial consideration for a covenant with reference to what
the officer or employee is, or is not, to do before or after the termination
of the employment.
|
(3) La somme
qu'une personne a reçue d'une autre personne:
a) soit pendant une période où le
bénéficiaire était un cadre du payeur ou un employé de ce dernier;
b) soit au titre ou en paiement intégral
ou partiel d'une obligation découlant d'une convention intervenue entre le
payeur et le bénéficiaire immédiatement avant, pendant ou immédiatement après
une période où ce bénéficiaire était un cadre du payeur ou un employé de ce
dernier,
est
réputée être, pour l'application de l'article 5, une rémunération des
services que le bénéficiaire a rendus à titre de cadre ou pendant sa période
d'emploi, sauf s'il est établi que, indépendamment de la date où a été
conclue l'éventuelle convention en vertu de laquelle cette somme a été reçue
ou de la forme ou des effets juridiques de cette convention, il n'est pas
raisonnable de considérer cette somme comme ayant été reçue, selon le cas:
c) à titre de contrepartie totale ou
partielle de l'acceptation de la charge ou de la conclusion du contrat
d'emploi;
d) à titre de rémunération totale ou
partielle des services rendus comme cadre ou conformément au contrat
d'emploi;
e) à titre de contrepartie totale ou
partielle d'un engagement prévoyant ce que le cadre ou l'employé doit faire,
ou ne peut faire, avant ou après la cessation de l'emploi.
|
[my emphasis]
[8]
In response
to the appeal filed by the appellant before the Tax Court of Canada,
Lamarre Proulx J. ruled that the sum of $20,000 constituted severance
pay and that it was taxable as such. However, she ruled that the amount of
$5,000 was paid “in respect of a certain right of the appellant in his
clientele” and allowed the appeal for the 2003 taxation year.
[9]
The
appellant is appealing that part of the judgment which upheld the taxation of
the $20,000 he received during taxation year 2002. The Crown, while stating
that it disagrees with the decision rendered in respect of 2003, did not appeal
from it.
[10]
In support
of his appeal, the appellant argues that Lamarre Proulx J. made a palpable
error in her assessment of the evidence, which, according to him, unequivocally
demonstrate that he was not entitled to severance pay of $20,000 when he lost his employment and that the only possible explanation for the amount
that was paid to him is the value for LBS of the clientele that he agreed to
relinquish pursuant to the termination agreement.
[11]
In that
regard, the appellant refers to the testimony of the employer’s representative
and to his own testimony, which establish that the amounts totalling
$25,000 were calculated on the basis of the value of the assets under his
management ($8,103,829) and the commissions generated thereby. Thus, a value of
$3,000 was assigned to each million dollars of assets under his management, for
an approximate total of $25,000. That amount was paid to him in two
installments.
Analysis and Decision
[12]
Like the
appellant, I find it difficult to reconcile the evidence adduced before the Tax
Court of Canada with Lamarre Proulx J.’s finding that the $20,000 was
somehow received as severance pay. Indeed, the appellant was employed by LBS
for only a short time, and a severance allowance of that scale would not have
been warranted by the meagre revenue he generated.
[13]
Furthermore,
the evidence reveals unequivocally that the amounts received under the
termination agreement were arrived at by a calculation of the value of assets
that the appellant was managing and their future revenue potential. I must
therefore rule that Lamarre Proulx J.’s characterization of the
amount in question as “severance pay” is incorrect.
[14]
The
foregoing notwithstanding, the appeal cannot succeed.
[15]
Indeed,
the underlying presumption of the assessments issued in 2002 and 2003 is that
the amounts paid to the appellant constitute consideration or partial
consideration for his covenant not to solicit the clients that were under his
management (Reply to Notice of Appeal, para. 18(f)(i)). Under
paragraph 6(3)(e), such amounts are deemed to be employment income.
Accordingly, to succeed, the appellant needed to show that the amounts in
question could not reasonably be considered as having been received in
consideration or partial consideration for that covenant.
[16]
However,
that is not easy to show in the case at bar, notably because the
non-solicitation covenant is at the very heart of the termination agreement,
which makes no mention of any sale of assets. Moreover, the formula for
calculating the amounts paid to the appellant on an asset-value and
revenue-potential basis is wholly consistent with the analysis that had to be
done to determine the value of the non-solicitation covenant entered into by
the appellant.
[17]
The
appellant submits that, despite the wording of the agreement, the clear and
common intent of the parties was to carry out a sale of assets. That is far
from clear, especially from the perspective of the employer, which obtained
everything it was seeking through the non-solicitation clause without having to
purchase assets from the appellant.
[18]
There is
no doubt that by entering into the covenant as he did, the appellant was
relinquishing the clientele he considered as being “his”; but even assuming
that the clients were in fact “his” (the evidence does not reveal where their
loyalties actually lay), the legislation provides that such a covenant, when
exchanged for cash in the context of an employment termination, gives rise to employment
income.
[19]
I find
therefore that the evidence adduced in the Tax Court of Canada does not rebut
the Minister’s presumption that the amount in queston was paid out in
consideration or partial consideration for the non-solicitation covenant and,
as such, was taxable as employment income.
[20]
For these
reasons, I would dismiss the appeal, but without costs, as I make this
determination on the basis of reasoning that is different from—in fact,
contrary to—the reasoning used in first instance.
“Marc Noël”
“I
concur.
Robert Décary, J.A.”
“I
concur.
Denis
Pelletier, J.A.”
Certified
true translation
François
Brunet, LLB, BCL
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