The Queen v. Burns, 73 DTC 5219, [1973] CTC 264 (FCTD)

Sheppard, DJ:—The issue is whether the Minister should succeed in his assessment in adding $20,775.51 to the defendant’s income for the year 1967, under sections 5 and 23 of the income Tax Act.

By assessment of November 6, 1969 the Department of National Revenue added to the defendant’s income for the taxation year 1967 the amount of $20,775.51 and disallowed as an alleged promotional expense $2,135.26, that assessment confirmed on January 22, 1971.

An appeal was taken by the defendant, Gerald J Burns, to the Tax Appeal Board, on the grounds that the alleged income of $20,775.51 was the income of G J Burns Sales Ltd and that the alleged expenses of $2,135.26 were properly deductible from the income of the taxation year 1967.

On May 19, 1972 the Tax Appeal Board allowed the appeal of the defendant, Burns, in part, to the extent of holding that the income of $20,775.51 was earned by G J Burns Sales Ltd, but disallowed the expense of $2,135.26 as a living expense, and referred the assessment back to the Minister for reassessment. From that judgment the Crown has appealed but no appeal has been taken by Burns from the disallowance of the said expenses. Hence, the primary issue is whether the sum of $20,775.51 was in the taxation year 1967 the income of the defendant, Burns, under sections 5 and 23 of the income Tax Act, as the plaintiff contends, or of the G J Burns Sales Ltd, as the defendant contends. That issue depends on whether the defendant, Burns, or G J Burns Sales Ltd was the employee of Great Western Garment Co Ltd (later called GWG Co Ltd, and hereinafter called GWG).

The facts follow.

The question of who was the employee of GWG must depend upon who had privity of contract with GWG so as to permit action for the salary or commission, and so as to establish the relation of employee and employer.

As stated in Re Nevill ex parte White (1871), 6 Ch App 397 (CA), Sir W M James, LJ stated at page 399:

We have no written document shewing the relationship between the parties, or stating the terms on which the business was to be carried on between them; but we have a course of dealing extending over a number of years, and such a lengthened course of dealing is often the most satisfactory mode of shewing the intention of the parties, and what their relations were.

On July 1, 1953 Gerald J Burns, the defendant, was employed orally as salesman for Medicine Hat district by GWG at a commission of 572% of the gross on behalf of GWG within that territory.

In 1962 Burns'was moved to Calgary, and in 1963 to Edmonton as district salesman for GWG. Up to 1964 he had an office in the GWG Building at Edmonton, but in 1964 when requested to move he moved to the Revlon Building. He continued to receive commission of 5 /2% on sales by GWG in Edmonton, but he paid one girl and one salesman at the office, and the general expenses of the office.

In 1964-1966 the business grew rapidly, and the defendant, Burns, employed another salesman and another girl, to be paid by the defendant, Burns, out of his commission.

In 1964 Nattras, the sales manager of GWG, advised the defendant, Burns, to incorporate as a company for an advantage in the event of the sales dropping below average.

In 1965 Burns obtained Dante shirts at commission of 10%, Lancer belts at 10%, later Top Style belts at 10%, and Penman’s products at a commission of 7%.

On October 21, 1966 the defendant, Burns, incorporated G J Burns Sales Ltd, and of 200 shares issued 198 were held by Burns, one by his wife, and one by Neil Stewart. After incorporation there was no difference in the method of carrying on business between GWG and the defendant, Burns. After incorporation Burns set the salaries of all salesmen and girls employed in the Edmonton office, excepting one salesman which Burns kept secret from GWG; other salesmen and their salaries were reported to Nattras. GWG paid the salaries of the salesmen and charged Burns with the disbursement; that is, Burns got 572% commission on all goods sold by GWG in the Edmonton territory, and against that Burns had to pay the office expenses.

G J Burns Sales Ltd opened a bank account, and entered into a contract with the defendant, Burns, bearing date January 3, 1967 (Exhibit 3), under which G J Burns Sales Ltd was to pay $6,000 a year to the defendant, Burns. When a salesman was employed, Burns would notify GWG and GWG would deduct the amount of the salesman’s salary and report by monthly statements to Burns.

Salesmen employed at the Edmonton office of G J Burns Sales Ltd were included by GWG as its own employees, that is, by including them in the pension plan, unemployment insurance, Alberta Blue Cross and Medical Services.

Up to 1970 GWG was on the door of the premises occupied by Burns, and also after incorporation of the G J Burns Sales Ltd.

No line was sold by either Burns or the Burns Company which line competed with the GWG line of merchandise; on the contrary, all added lines were complementary; that is, they opened the door to introduce GWG goods.

At his lawyer’s office, Burns told Nattras of the incorporation. Nattras asked GWG to change the cheques issued to Burns. There was no change in the contract between Burns and GWG. Burns asked GWG to make the cheques payable in trust, but nothing came of it and he (Burns) forgot about the request, thinking it was not important.

McAnally, when appointed Comptroller, looked throughout the records for a contract with Burns or G J Burns Sales Ltd and found nothing, but found that the cheques were payable to Burns for his commission of 5 /2% on goods sold by GWG in the Edmonton territory after deducting payments to employees in Burns’s office and other expenses paid by GWG.

Burns could hire, with the approval of Nattras, salesmen for the Edmonton office, and these were paid by GWG and charged to Burns against his commission, and a cheque made payable to Burns was issued for the balance. Hence, all cheques for the balance of commission involved were issued by GWG to Burns, and by him endorsed to the G J Burns Sales Ltd.

In 1967 approximately two salesmen of GWG had incorporated companies. In 1967 a cheque or cheques for $20,775.51 was issued by GWG to Burns, who then endorsed it to G J Burns Sales Ltd.

The defendant, Burns, has cited the MNR v J A Cameron, [1972] CTC 380; 72 DTC 6325, and Sazio v MNR, [1969] 1 Ex CR 373; [1968] CTC 579; 68 DTC 5001, but these cases are distinguishable on the facts in that the company incorporated by the salesmen was assigned and had contracted with the employer so as to have the company recognize as employee by the employer. There is no evidence that J G Burns Sales Ltd had contracted with GWG, or that there was any privity of contract between them. In the case at bar, the privity of contract of employment was between the defendant, Burns, as employee and GWG as employer, and between them was the sole privity of contract.

Burns, rather than G J Burns Sales Ltd, had the cause of action for the salary or commission within Tweddel v Atkinson (1861), 1 B & S 393; 121 ER 762.

The control of all employees employed by either Burns or the company remained in the control of GWG in that there was no competing line in any of the added lines, and, had there been any competition with GWG, that line would not have been continued.

The employees of the Edmonton office, including Burns, were regarded by GWG as employees of that company, and were paid by GWG when necessary, although charged against Burns’s commission, and reported to Burns.

The moneys charged to Burns by the Minister for the 1967 taxation year were received herein by cheque or cheques payable to him and endorsed by him to the company. That money was received by Burns within section 5 of the Income Tax Act, which reads in part as follows:

5. Income for a taxation year from an office of employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year. . .

If Burns worked to enter into a contract with the G J Burns Sales Ltd, that is his concern, but section 5 of the Income Tax Act imposes the income tax on Burns in the amount concerned, by Burns as salary, wages or other remuneration. Also, the sum was transferred or assigned by Burns to G J Burns Sales Ltd, “a person with whom he was not dealing at arm’s length” as he, Burns, had control of that company and therefore the amount named, $20,775.51, must “be included in computing [his] income for the taxation year” 1967 under section 23 of the Income Tax Act.

The appeal of the plaintiff is therefore allowed with costs.