McClain Industries of Canada Inc. v. The Queen, 78 DTC 6356, [1978] CTC 511 (FCTD)

Cattanach, J:—These are three appeals from assessments to income tax by the Minister of National Revenue, two of which are by the plaintiff named in the first style of cause above and the third is from an assessment to income tax by the Minister of National Revenue of the defendant named in the second style cf cause above.

For the purpose of convenience the plaintiff, McClain Industries of Canada, Inc, named in the first style of cause will be referred to as “Maple Leaf’’ herein.

The first of the two appeals by Maple Leaf is from its assessment to income tax for its 1972 taxation year and the second is from its assessment to income tax for its 1973 taxation year.

The defendant named in the second style of cause, Norman Roy J LePain, was assessed to income tax by the Minister for his 1972 taxation year.

That assessment was appealed by Mr LePain to the Tax Review Board.

By decision dated December 12, 1974 the appeal by LePain to the Board was allowed and referred back to the Minister for reassessment accordingly.

The Minister has appealed the decision of the Board and that is the cause before this Court in the second style above.

Immediately following the decision of the Board dated December 12, 1974 in the LePain appeal to the Tax Review Board, which was adverse to the position of the Minister, the Minister promptly assessed Maple Leaf, the plaintiff in the first style of cause above, to income tax for its 1972 and 1973 taxation years.

The Minister appealed the decision of the Tax Review Board adverse to him and Maple Leaf appealed the Minister’s assessments of it to income tax resulting in the three appeals mentioned above.

It is the same transaction and the facts with respect thereto which give rise to al! three appeals.

On consent of counsel for the parties the Associate Chief. Justice directed by order dated May 31, 1978 that the three appeals, that is the two by Maple Leaf from its assessments to income tax for its 1972 and 1973 taxation years and the appeal by Her Majesty from the decision of the Tax Review Board in the LePain appeal before the Board, should be heard together on common evidence.

It was conceded by counsel for the parties, (with which concession I am in agreement) that if Maple Leaf were successful in its appeals it would not be liable to tax on the monies involved in the transaction between it and the former shareholders of Maple Leaf of whom Mr LePain was one of three but that Mr LePain would be liable to tax. If Maple Leaf should not be successful in its appeals then it would be liable to tax and Mr LePain would not.

Similarly if Her Majesty should be successful in Her appeal from the decision of the Tax Review Board then Mr LePain would be liable to tax and Maple Leaf would not and conversely if Her Majesty is not successful Mr LePain would not be liable to tax but Maple Leaf would be liable.

Simply put if Maple Leaf wins, LePain loses. If LePain wins Maple Leaf loses. But the Minister is in an enviable position. He cannot lose subject only to a possible differential in the tax rate and a possible difference in the amount of the tax exigible. He will be entitled to collect tax from whomever of Maple Leaf or LePain is unsuccessful.

Thus counsel for Her Majesty is in what my brother Walsh has categorized as a “neutral” position but, in my view, this cannot be.

There is no lis between Maple Leaf and LePain. There is a lis between Maple Leaf and Her Majesty in two appeals and a lis between Her Majesty and LePain in the third appeal. Counsel for Her Majesty was cognizant of his position and his obligation thereunder which he discharged by making most helpful submissions as to the law applicable.

Realistically however the dispute in all three appeals is between a purchaser of the shares of Maple Leaf and LePain as to what was the precise transaction between them. There is no dispute as to the tax consequences which flowed from the transaction once the true nature of the transaction is resolved.

Therefore a consideration of the facts is expedient to resolve the transaction and its tax consequences.

Maple Leaf Metal Products Limited, the former corporate name of the plaintiff in the first style of cause, was incorporated pursuant to the laws of the province of Ontario dated as of a date approximate to 1950. The exact date of incorporation is not material. It had an authorized capital of $50,000 divided into 500 common shares of the par value of $100 each.

Of the authorized share capital 108 shares were issued and outstanding as fully paid. Mr LePain was the owner of 27 shares. Mr Winston Groombridge owned 27 shares and Mr Leo Lucier owned 27 shares. A further 27 shares were owned by three persons resident in Buffalo, New York but arrangements were made to purchase these shares from the holders thereof by Messrs LePain and Groombridge in early June, 1972 or prior thereto and that sale was consummated about mid-June. Mr Lucier was afforded the opportunity to participate in this purchase but did not do so.

The company was described as a small business. It had its ups and downs over the years: It paid no dividends over the years to the shareholders which accounts for the Buffalo shareholders’ ready willingness to sell their shares and get their money back. In fact such a sale had been broached by those shareholders a few years prior to 1972 and was in the nature of a standing offer to sell at a price of $25,000 for the 27 shares or about $900 per share. That was the price paid for those shares by LePain and Groombridge.

Despite its struggles over the 20 odd years of its existence under this ownership the company did provide a modest income for its shareholders, LePain. Groombridge and Lucier. These three were the actual operators of the company as well as its actual directors and they were the three management employees of the company in the capacities that their respective skills dictated.

Their remuneration came by way of a system of accrued management commissions established by a general resolution of the directors passed in 1950.

Mr David Lesonski, a chartered accountant and auditor of the company from 1962 to 1972 testified that this system of accrued management commissions was in accordance with sound business and accountancy principles and explained the manner in which the system operated.

After the conclusion of a fiscal year an amount would be set up in the books of the company, the amount being determined by the success of the company in that year.

The management would receive their remuneration in the next fiscal year by drawing against the amount so set up in the prior year. This system provided a flexibility dictated by the earnings of the company. A casual review of the minute book indicates that the amount so set up varied between $45,000 to $50,000 in the early years to be shared amongst four management personnel. This I take to have been done annually pursuant to the directors’ resolution of 1950 and the only other resolutions I have seen are two where the amount set up at the end of the prior fiscal year had been reduced in the subsequent fiscal year.

Each of the management personnel for whom this fund was set up would draw against it and their drawings were recorded in a loan or drawing account to be offset against their respective shares of the fund at the year end. Naturally the amounts of the drawings and the fund coincided. The process would then be repeated for the next ensuing year.

At the end of the 1971 fiscal year an amount of $60,000 was set aside to be drawn against by Messrs LePain, Groombridge and Lucier, each to the extent. of $20,000 in the 1972 fiscal year. Whatever the correct concept of the system might be Mr LePain testified that he looked upon it as salary from which his weekly cheque of approximately $400 came to him.

This system is given statutory countenance by subsection 78(3) of the Income Tax Act. I am not certain if the accepted accounting practice mentioned by Mr Lesonski is predicated upon subsection 78(3) of the Income Tax Act or the section is predicated upon the practice but that is not material:

In the company’s balance sheet as at March 31, 1972 an amount of $60,000 is included under the title “liabilities and shareholder’s equity” as “owing to the shareholders” as “accrued management commissions”.

In the statement of operations for the year ending March 31, 1972 the gross profit is given as $130,457 from which was deducted expenses totalling $30,712 leaving a profit of $99,745 before management commissions of $60,000 which amount of $60,000 is then deducted giving a profit of $39,745 for the year before income tax estimated at $10,111:

Certainly in the financial statement as at March 31, 1972 the amount of $60,000 for accrued management commissions is treated as a liability.

Between the period from April 1, 1972 and June 29, 1972, the significance of what latter date will become apparent, the three management personnel drew or were paid the following amounts:

That left a balance of the accrued management commissions as at June 29, 1972 in the amount of $41,535.95. That is the significant amount in the Maple Leaf appeals.

With respect to Mr LePain of which $20,000 of the $60,000 accrued management commissions was ascribed to him, he drew $6,350.11 as at June 29, 1972 leaving a balance of $13,649.89 unpaid or undrawn. This is the amount at issue in the LePain matter.

Messrs LePain, Groombridge and Lucier, were no longer young. Mr LePain had reached his 75th anniversary and wished to retire to a more leisurely life style. Mr Groombridge and Mr Lucier likely had the same desire.

They were quite willing to sell their business and had been willing to do so since 1970. They had listed the business as available for purchase with the Industrial Commission of Windsor, a municipal agency devoted to attracting industry to that city.

Through this agency Kenneth McClain of Utica, Michigan, one of the states of the United States of America, a prospective purchaser, was put in touch with Mr Groombridge. In a telephone conversation with Mr McClain Mr Groombridge made it abundantly clear that the business was for sale at a price of $225,000 in cash payable forthwith and if Mr McClain could not meet those basic terms he might as well stay home and not waste their time.

Mr McClain was apparently willing to meet those terms. He inspected the company’s plant. He obtained a copy of its financial statements which he subjected to study by his accountancy advisers, Mr Jaworski, who was to be the auditor of the company after its acquisition and Mr Baditoi.

A meeting was arranged at the offices of the company in Windsor on June 6, 1972 at which Mr K McClain his son R McClain, Mr Jaworski to act as witness to any agreement to be signed and Mr Baditoi were present as representatives of the purchaser and Mr LePain, Mr Groombridge and Mr Lucier attended as the vendors.

Mr LePain was not exactly a babe in the commercial woods because he was adamant, along with his two fellow vendors, that the sale of the business should be by way of the purchase of the shares in the capital stock of the company and not by way of the sale of its assets thus avoiding a possible recapture of capital cost allowances on depreciable property.

In short it was the vendors attitude and intention that the business would be so sold for $225,000 as it stood and from that time forward they would be free and clear from the business and be relieved of all responsibilities and obligations whatsoever which would be assumed by the purchaser from the date of closing forward.

As to what transpired at this meeting in connection with the liability or potential liability of the company for $60,000 accrued management commissions disclosed in the financial statement, or more correctly the balance of $41,535.95 since $18,464.05 had been paid out, on closing is the subject of conflicting testimony.

Mr Jaworski and Mr Baditoi testified that the liability was discussed and it was understood that in effect the purchase price of the shares would be reduced from the amount of $225,000 to approximately $185,000 by reason of that liability being assumed by the company. This presupposes a payment of that liability to the vendors as salary or wages. It was never paid.

On the other hand the three vendors categorically swore, that the matter was never discussed at the June 6, 1972 meeting.

If this subject was not discussed and the disposition of that amount had not been concluded the failure to do so is susceptible of the interpretation that the company would be liable to its former three shareholders for the balance of approximately $40,000 or put yet another way that it would be tantamount to the purchase price of the shares being increased from $225,000 by approximately $40,000 to $265,000.

If it were incumbent upon me to do so I would accept Mr LePain’s version that no discussion took place at the meeting on this subject, and there are valid reasons for doing so.

Mr LePain testified that what the vendors of the shares sought was the sale of the company for $225,000 and that was what they were to receive, nothing more and nothing less. It was Mr LePain’s attitude and that of Mr Groombridge and Mr Lucier, that nothing was owing to them on the accrued management commissions because they had done nothing to earn any of the remaining balance of some $40,000. This is confirmed by their subsequent action on signing a document dated September 22, 1970 entitled “assignment” and the reason they gave for signing it was that no accrued management commissions were owing. On receipt of the $225,000 purchase price they considered that they were free and clear of the company and that what happened from then on was the sole responsibility of the purchaser. The company could do what it wished with the $41,535.95 because that belonged to the company and the vendors had no intention of claiming payment thereof to them.

What evolved from the meeting of June 6, 1972 was an unprofessional document dated June 6, 1972 entitled “offer to purchase” which is more significant for its omissions than for what was included.

Mr Baditoi, who is not a solicitor authorized by the Law Society of Upper Canada to practice as such in Ontario, acknowledged authorship of the document. It is a conglomerate of stock phrases thrown together without due consideration to their meeting. In exculpation of Baditoi it was hurriedly drawn in contemplation of the meeting of June 6, 1972 and not as a consequence of that meeting.

The significant terms are that the three shareholders sold 108 shares in the capital stock of Maple Leaf, some of which they were the registered owners and some of which they were the beneficial owners and subsequently became registered owners, for $225,000.

Those shares were to be purchased at that price by Kenneth McClain as agent for an undisclosed principal. Perhaps Mr McClain had some valid reason for keeping the identity of the principal anony- mous but for the purposes of these appeals that cloak of secrecy is melodramatic nonsense.

The principal was McClain Industries Inc, incorporated pursuant to the laws of the states of the United States of America. That company became the sole shareholder on the transfer of the 108 issued and fully paid shares of Maple Leaf and Maple Leaf became the wholly owned subsidiary of McClain Industries Inc.

The terms of payment were $5,000 on execution, $100,000 on closing, which took place on June 29, 1972 and $120,000 within 120 days of closing.

The only possible veiled reference to the liability for taxes on the balance of accrued management commissions remaining unpaid appearing in the offer for purchase and by whom tax would be paid is a clause entitled “indemnity” whereby the vendors guarantee payment of and will save the purchaser free from taxes, including income taxes, by reason of any liability therefor existing against Maple Leaf as at June 6, 1972 except to the extent that they have been set forth in a balance sheet of Maple Leaf “which shall be hereinafter presented to the purchaser by the chartered accountants representing Maple Leaf and the Sellers herein”. The only document which was adduced in evidence and which answers that description is the financial statements as at March 31, 1972 wherein accrued management commissions in the amount of $60,000 are disclosed as a liability owing to the shareholders.

Obviously there is no liability for income tax on the unpaid balance of $41.535.95 of accrued management commissions until an income tax return has been submitted to the taxing authorities and the taxes payable have been assessed. All there is is a potential tax liability thereon and by whom it is payable depended on events subsequent. If it was paid to the three management personnel they would be individually liable on the amounts each received. If that amount was retained in Maple Leaf and became income to Maple Leaf, as it would if not paid out to management personnel, then Maple Leaf would be liable therefor.

Nothing happened until August 1972 when Messrs LePain, Groombridge and Lucier received income tax forms T4A from the new management of Maple Leaf, no doubt prepared by the reputable chartered accountants engaged by Maple Leaf, indicating income to them in the amounts of $20,000 as at March 31, 1972 respectively.

Naturally the three were provoked by the receipt of such forms since none of them had received salary in the amounts shown nor did they expect to. Obviously Maple Leaf considered these amounts as its liability to those three persons.

On receipt of such forms Mr LePain tried unsuccessfully to get in touch with Mr McClain who was successful in avoiding Mr LePain’s urgent telephone calls to him. The information conveyed to Mr LePain by Mr McClain’s barrier was that he was away or too busy to talk to him.

Mr LePain eventually reached Mr McClain by resort to a subterfuge. Mr LePain’s wife called him. She did not identify herself as Mrs LePain but by some other feminine name. The call was put through to Mr McClain who was no doubt surprised to learn that the caller to whom he spoke was Mr LePain.

Mr LePain explained the problem of the T4A forms to Mr McClain who professed total ignorance of them. This was most likely true.

Accordingly a meeting was arranged between Mr Baditoi on behalf of McClain and Mr Lesonski on behalf of LePain, Groombridge and Lucier.

What evolved from that meeting was two possible courses of action:

(1) Maple Leaf, now McClain Industries of Canada Inc, should pay the total sum of $41,535.95 to LePain, Groombridge and Lucier in the respective amounts of $13,649.89, $13,777.10 and $14,108.96, they would pay income tax on those amounts and Maple Leaf would reimburse them for the amounts so paid; or

(2) Maple Leaf, by appropriate bookkeeping entries, would take the amount of $41,535.95 into its income and pay the tax thereon.

A third possible course that Maple Leaf would do nothing does not appear to have been discussed.

Mr Baditoi was to get back to Mr Lesonski to inform him which of the two alternatives discussed was acceptable to McClain because he stated that he had no authority to bind McClain.

Baditoi never did get back to Lesonski and the matter was left In limbo although Mr LePain is still convinced that there was agreement that Maple Leaf would pay the income tax by one or other of the alternate means discussed and by his recollection of the basic agreement reached with McClain on June 6, 1972.

However Mr Baditoi did get back to Mr LePain on another aspect of the matter. He came from Detroit, Michigan to Windsor, Ontario to the offices of Maple Leaf in Windsor on September 22, 1972 when he had ascertained that LePain, Groombridge and Lucier would be there, they having agreed to remain as employees of Maple Leaf a few days each week in an advisory capacity pending the completion of the take-over by the new owner.

Baditoi came armed with the document entitled “Assignment” which is reproduced in full.

ASSIGNMENT

THIS ASSIGNMENT, made this 22nd day of September, 1972, by the undersigned to McClain Industries, Inc., by and in consideration of the following:

On June 6, 1972, Norman J LePain and Winston E Groombridge of Windsor, Ontario, Canada, on behalf of themselves and others, entered into agreement with Kenneth McClain of Utica, Michigan, as agent for an undisclosed proposal, whereby said parties were to sell all of their capital stock and capital stock owned by others, in the amount of 108 shares of common stock of Maple Leaf Metal Products, Ltd to the agent by and in consideration of the sum of $225,000 Of said sum, $125,000 was paid on June 29, 1972, and the balance of $100,000 is due 120 days after June 29, 1972.

The parties acknowledge that as part of the consideration of said sale, the undersigned agreed to assign their accounts in the amounts as set opposite their names to the purchaser of the common stock of Maple Leaf Metal Products, Ltd.

Norman J LePain	$13,649.89
Winston E Groombridge	$13,777.10
L Lucier	$14,108.96
Witnesses:
George Baditoi	Norman J LePain
George Baditol	Winston E Groombridge
George Baditoi	Leo B Lucier

He gave Mr LePain some song and dance about it being urgent and essential that this document must be signed immediately in order to permit McClain Industries Inc, of which Maple Leaf was then the subsidiary or about to become the subsidiary, to comply with the requirements of some foreign jurisdiction, probably the State of Michigan, in order that McClain Industries Inc might “go public’’. By this I assume that McClain Industries Inc would seek an infusion of capital by the sale of some form of securities to be created by it to the public, most likely its shares.

Mr LePain’s version of the interview was that Baditoi almost begged him and Groombridge and Lucier to sign the document and that he was asking them to do so as a favour.

Mr LePain on examination for discovery testified that he read the document and that he understood it. In effect what the document seeks to accomplish is an assignment of their accounts to Maple Leaf.

The document is most ineptly drawn. It purports to supplement the offer to purchase by exacting from the vendors an acknowledgement that an assignment of their interest in the unpaid accrued management commissions was part and parcel of the consideration for the vendors’ shares which were the subject of the sale to the purchaser of the Shares. That would be McClain Industries Inc, the undisclosed principal now identified at the outset of the document.

Lucier was not named as a party to the offer to purchase shares, unless conceivably he was represented by LePain and Groombridge as also the Buffalo owners of shares may have been.

However space was provided for Lucier’s signature on the acknowledgement and assignment and he signed it.

The signators had no hesitancy in signing this document. They did so because they considered that they had no right to the. unpaid accrued management commissions and that to do so conformed with their concept of the transaction which was simply that the sale price for 108 shares of Maple Leaf was $225,000 and Maple Leaf could do what it liked with the unpaid accrued management commissions since they belonged to it. They meant to and did assign these commissions to Maple Leaf.

While the Signatories did realize that. they were assigning, their commissions or unpaid and unearned wages set aside for them from earnings of the company in the previous year they did not realize what tax consequences flowed from their signing the assignment and certainly no explanation of the tax consequences which flowed from doing so was forthcoming from Baditoi if he knew or was under an obligation to do so both of which I doubt. He was seeking relief from Maple Leaf’s liability therefor.

On December 12, 1972 following the signature of the document dated September 22, 1972 the bookkeeper or the auditor of Maple Leaf made the appropriate journal entries in the records of Maple Leaf reducing the management commissions from $60,000 to $41,535.95 and transferring that amount to McClain Industries Inc, that is to a nonresident shareholder and Maple Leaf did not deduct the. withholding tax.

The Minister in assessing Norman Roy J LePain. as he did for Mr LePain’s 1972 taxation year did so on the assumptions that of the $41,535.95 assigned by LePain, Groombridge and Lucier, LePain’s share of that amount being $13,649.89, to Maple Leaf and Maple Leaf assigned that amount, inclusive of LePain’s share, to McClain Industries Inc.

The Minister therefore alleged that the amount of $13,649.89 was received either directly or indirectly by LePain during 1972 as income either as:

(1) salary, wages or other remuneration within the meaning of subsection 5(1) of the Income Tax Act, or

(2) 2) a payment or transfer of property to another pursuant to the direction of LePain, or with his concurrence, for his benefit or for the benefit he desired to confer on that Other purpose within the meaning of subsection 56(2) of the Income Tax Act.

When. the Tax Review Board rejected those contentions by the Minister in its decision dated December 12, 1974 the Minister appealed that decision but for super-abundance of caution the Minister also assessed Maple Leaf for income tax on the amount of $41,535.95 in its 1972 taxation year on the basis that it paid the amount of $41,535.95 on which tax was payable to a non-resident person, that is to McClain Industries Inc, and did not deduct or withhold therefrom thé -amount of the tax payable as it was obliged to do by subsection 215(1) of the Income Tax Act.

With respect to Maple Leaf’s 1973 taxation year the Minister assessed Maple Leaf to income tax on the basis that it owed the amount of $41,535.95 declared in 1972 which was unpaid at the end of 1972 and accordingly was to be included in Maple Leaf’s income in its 1973 taxation year in accordance with subsection 78(3) of the Income Tax Act.

Each of the three appeals falls to be decided upon the validity and the effect to be ascribed to the assignment dated September 22, 1972. if that document was an effective assignment of the accrued management commissions which were unpaid from LePain, Groombridge and Lucier to Maple Leaf then LePain is liable to tax and the appeal by the Minister must succeed. LePain would be liable to tax and Maple Leaf would not be and the appeals by Maple Leaf from its assessments must succeed.

The effectiveness of the assignment is the crux of the appeals and this is concurred in by counsel for the parties.

In his reasons for judgment allowing the appeal by LePain the learned member of the Tax Review Board stated that Baditoi was not. called as a witness before him to explain how he obtained the document entitled “assignment” dated September 22, 1972 or the circumstances under which it was drawn up.

Therefore he stated:

So for this reason "l have not considered this exhibit, and I put it aside.

He then went on to accept the evidence of the three shareholders and concluded that they had not received any portion of the $41,535.95 of unpaid accrued management commissions and not having received that salary could not be taxed thereon in accordance with subsection 5(1) of the Income Tax Act.

I arn in complete agreement with the conclusion in this respect but I am not in agreement with his complete disregard of the document entitled “Assignment” dated September 22. 1972 for it is that document and its effectiveness which brings into operation the provisions of subsection 56(2) of the Income Tax Act upon which the Minister’s assessment was also predicated and which was relied upon and argued before the Board. The learned member so stated on page 4 of his reasons for judgment.

This document which was produced before me on consent of the parties to these appeals purports to be two things:

(1) an acknowledgement by the parties (which must mean the parties to the offer to purchase dated June 6, 1972) that the amount of the unpaid accrued management commissions being $41,535.95 was part of the consideration of $225,000 for which the 108 shares in the capital stock of Maple Leaf were. purchased. The purchaser or its agent did not so acknowledge by signing the document but the vendors did;

(2) an assignment by LePain, Groombridge and Lucier of the amounts of accrued management commission unpaid to them to McClain Industries Inc, the purchaser of the shares.

The offer to purchase was a reduction to writing of the agreement reached between the parties. The subject of the sale was 108 shares at a price of $225,000. No mention whatsoever was made in the written agreement signed by the parties that the unpaid accrued management commission was to be part of the $225,000 purchase price and that there should be an assignment thereof.

When an agreement has been reduced to writing it is reasonable to presume that the written document is the true agreement between the parties and includes every material term and circumstance.

Therefore the rule is that evidence is not allowed to add to, subtract from or to vary or qualify the written contract.

However there is no impediment to the parties agreeing between themselves to subsequently vary the terms of a prior written contract and the parol evidence rule does not operate to exclude evidence of such later oral or written contracts.

Mr LePain testified that he read the document and understood it to be an assignment. He signed it because he considered that the unpaid commission was not rightly his and should revert to Maple Leaf.

In The Queen v Ken & Ray’s Collins Bay Supermarket Limited, [1975] CTC 504; 75 DTC 5346, Kerr, J decided that a somewhat similar management bonuses arrangement was contingent on the necessary funds being available.

It was his appreciation of the evidence before him that the decision to grant the bonus was gratuituous and that the company, although it really intended to pay the bonus in an undetermined amount within a specified range if funds were available, did not contract and legally obligate itself to pay them.

In my view the facts and circumstances in the present appeals differ radically from those in the Collins Bay Supermarket case.

Ever since the inception of Maple Leaf, with the exception of the year of its inception, to 1972 this was the method of putting remuneration into the hands of management employees for their services and this went on for 22 years without exception.

Consistent with this practice at the end of the 1971 fiscal year the directors, after considering the income generated in that year set up the fund of $60,000 to be paid in equal shares to the three management employees throughout the 1972 fiscal year. That fund was shown in the financial statement as at March 31, 1972 as a debt owing to those employees. That entry is of itself evidence of a liability existing.

Furthermore that fund was paid out weekly to the employees. The employees treated the amounts received by them over a period of 22 years as salary or wages and I think rightly so because that was their only source of remuneration for their services to their employer. It is simply axiomatic that when services are performed by an employee for an employer that the employer must pay the employee for those. services. In my opinion it matters not that the fund set up to meet that obligation was from funds generated to the employer in the previous year.

In the circumstances of these present appeals the fund so set up is a liability.

It was determined to be such for services performed by the management personnel in the preceding year to be paid in the year the fund was set up after careful consideration being given by the directors whether the business operations and returns of the prior year justified a fund in the amount determined to be paid in the next ensuing year. In reality it was a delayed payment for services previously performed.

Mr Lesonski testified that this system was eminently suitable and widely employed in small businesses.

I would assume that a small business would include a joint stock company where the shareholders, the directors and the management employees were the same persons acting in three separate capacities.

This is not necessarily universal criterion but it was the case in Maple Leaf up to June 29, 1972.

The only contingency, if it is properly termed a contingency in the present appeals, was that the directors might, if they considered business conditions demanded, reduce or even cancel the fund so set up. In the absence of any contractual liability forbidding them from doing so, which does not prevail in the present instance or if it did it was readily susceptible of being waived by the contracting parties, there is no impediment to the directors doing so. As viewed by Maple Leaf’s side it was the cancellation of a debt which by reason of the system the management employees agreed to being done and from the viewpoint of the management employees it was the forgiveness of a debt.

As pointed out, over the course of some 22 years it only happened twice that the amount of the fund set up in a previous year had been reduced in the following year.

Therefore it is most understandable that Mr LePain and his two fellow management employees would look upon the weekly cheques they received as payment for that week’s work and lose sight of the fact that those weekly cheques were payment for services already performed in the past year being paid in the current year.

Therefore, as they testified, they had no reluctance to assign the unpaid portion of the accrued management commissions for the simple reason that they felt it was morally right for them to do so because in their view, based on the years of practice in Maple Leaf, they had not earned those commissions after June 29, in the 1972 fiscal year when they had ceased to be management employees and in doing so completely overlooking that: these commissions were payment for work performed by them in 1971 and were due and payable. The entire unpaid balance could have been drawn by them on June 28, 1972.

The new ownership of Maple Leaf had no illusion that the unpaid balance of the management commissions was a liability by Maple Leaf to the management employees.

It was because that new ownership and its accountancy advisers recognized this that they sought to reduce the purchase price of the business through the purchase of the shares by the amount of that liability being $41,535.95 and accordingly the value of the business purchased would be reduced by that amount.

The new board of directors could readily have passed a resolution reducing the management commissions by $41,535.95. There would have been no opposition to that being done from Mr LePain and his two. fellow employees. To have done so would have been consistent with their view of the transaction. All they wanted and expected was $225,000 for their shares in the business.

The new ownership did not adopt this course no doubt because it did not seek and obtain competent professional legal advice.

Rather Mr Baditoi who had negotiated and reduced the terms of the transaction to writing sought to vary the terms of that transaction by the weird document which he drafted.

In my view this document is not a subsequent written agreement mutually agreed to be a variation of the terms of the prior written agreement.

As pointed out before there was a conflict of testimony as to whether there had been an omission of a material term from the written offer to purchase.

LePain and Groombridge testified that there was no discussion at the meeting of June 6, 1972 concerning the unpaid management commissions and no consideration was given to including this amount in the sum of $225,000 to be paid for the shares being sold.

Jaworski and Baditoi testified to the exact contrary.

I assess the evidence of LePain and Groombridge as being the more creditable and accept that evidence.

There are sound reasons for doing so.

This was the sale of a business created by LePain, Groombridge and Lucier over the span of their working lives. They knew that they wanted $225,000 for the business payable in cash forthwith.

They would not deviate from these terms and this was made abundantly clear to McClain by Groombridge in their telephone conversation prior to the meeting. These were the unequivocal terms laid down.

Those terms were known by all parties in advance and the offer of purchase dated June 6, 1972 accurately reflects those terms. There was no mention whatsoever of the unpaid management commissions. There were amendments to the pre-prepared offer to purchase at the meeting at the instigation of McClain but none with respect to the management commissions. That there was no amendment in this respect is consistent with the testimony that the matter of the unpaid management commissions was not discussed and was not considered to have been a material term of the contract.

There is no question that the vendors were content that the unpaid portion of the commissions should revert to Maple Leaf to be taken into its income and that was made clear by them. All that they asked for was $225.000 for their 108 shares and from that time on everything passed to and became Maple Leaf’s and Maple Leaf’s responsibility including the unpaid accrued management commissions. That is implicit in the offer to purchase signed June 6, 1972 and the purchasing party had considered the financial statement of Maple Leaf as at March 31, 1972.

Mr LePain testified that when Mr Baditoi requested him to sign the document dated September 22, 1972 entitled. “assignment” he was induced to do so by representations that the document was to be used for a purpose unrelated to the offer to purchase and as a consequence of those representations,he was led to the belief that the purpose of the document was not to vary the contract but for a purpose ulterior thereto.

Accordingly there was no consensus ad idem and no amendment to the contract resulted.

The offer to purchase was intended by the parties to be the embodiment of the transaction and since no subsequent variation was effected thereto it remains so.

The price for the shares remains unchanged at $225,000.

However in addition to being an acknowledgment of a variation in the purchase price set forth in the offer to purchase the document is also an assignment. That is the title of the document which stands out in bold type. The material words are “THIS ASSIGNMENT, made this 22nd day of September, 1972 by the undersigned to McClain Industries Inc.’’ The operative portion reads “the undersigned agreed to assign their accounts in the amounts set out opposite their names to the purchaser of the common stock of Maple Leaf Metal Products, Ltd.’’

For the reasons repeatedly set forth above Mr LePain had no compunctions about signing the document presented to him for signature.

He read the document and testified that he understood it. It did not affect the purchase price of $225,000 the vendors would receive for their shares despite the acknowledgement that that price included $41,535.95 because he understood that the three vendors were assigning that amount to Maple Leaf and would so offset any diminution in the cash received. They would still receive ‘in cash the total amount of $225,000 to be divided equally among them. They did not want and did not claim the $41,535.95 and were quite prepared to assign that amount as they did.

No special form is required for a valid equitable assignment so long as there are words from which an intention to pass a beneficial interest is to be inferred.

The document dated September 22, 1972 does that. Nor is there any doubt in my mind that in signing this document Mr LePain understood that he was assigning his portion of the unpaid accrued management commissions to the purchaser of his shares in Maple Leaf and that IS precisely what he intended to do.

While he fully appreciated that he was assigning his shares he did not appreciate the tax consequences which flowed from the assignment but that is a far different thing.

The one thing that emerges from this transaction is confirmation of the fact that it is false economy to enter into a transaction, and it was a transaction of great magnitude to the vendors representing as it did the sale of their lifetime work, without engaging independent professional legal advice to safeguard their interests. rather than accepting and signing documents prepared by advisors to the other contracting party who were without legal qualifications. to do so. If both parties had engaged qualified legal advice the terms of the agreement reached between them could have reduced to writing: truly embodying the agreement so reached but as Mr LePain testified hindsight is no substitute for foresight.

Because I have found that there was valid and effective assignment by Mr LePain of the unpaid portion of the accrued management commissions due to him from Maple Leaf there has been a transfer of property to another pursuant to his direction and with his concurrence for his own benefit or as a benefit he desired to have conferred on that other person within the meaning of subsection 56(2) of the Income Tax Act.

For the foregoing reasons the appeal by Her Majesty from the decision of the Tax Review Board must be allowed with costs to Her Majesty.

It follows from the allowance of that appeal that the appeals by McClain Industries of Canada Inc. (formerly Maple Leaf Metal Products Limited) from its assessments to income tax for its 1972 and 1973 taxation years must be allowed but each party shall bear its own costs.