Supreme Court of Canada
Curran
v. Minister of National Revenue, [1959] S.C.R. 850
Date: 1959-11-02
Robert B. Curran Appellant;
and
The Minister of National Revenue Respondent.
1959: May 14, 15; 1959: November 2.
Present: Kerwin C.J. and Taschereau, Locke, Martland and
Judson JJ.
ON APPEAL PROM THE EXCHEQUER COURT OF CANADA.
Taxation—Income—Lump sum paid under agreement to resign
from position and accept new employment—Loss of pension rights and opportunity
for promotion—Whether sum income or capital—The Income Tax Act, 1948(Can.), c.
52, ss. 2(1), S, 6, 24A.
In 1951, under an agreement between the appellant and B, a
substantial shareholder of Federated Petroleums which held a large number of
shares of Home Oil Company, the appellant, who had been employed by Imperial
Oil for many years, was paid 'by B $250,000 to resign his position and accept
employment with Federated Petroleums. Under a separate agreement, signed on the
same day, Federated Petroleums undertook to employ the appellant as its general
manager, subject to the condition that he should serve as manager of any other
company or companies in which Federated Petroleums had a financial interest.
The appellant, after resigning from Imperial Oil, became president and managing
director of Home Oil at the same salary that he was drawing before but with no
superannuation benefits. The Minister assessed the $250,000 as income. The
assessment was upheld by the Income Tax Appeal Board and by the Exchequer
Court.
Held (Taschereau J. dissenting) : The payment of $250,000
received by the appellant was income within s. 3 of the Income Tax Act. In view
of Cameron v. Prendergast, [1940] A.C. 549, the House of Lords' previous
decision in Hunter v. Dewhurst, 16 Tax Cas. 637, must be taken to have
been decided on its very special facte. Tilley v. Wales, [1943] A.C.
386, distinguished.
Per Kerwin C.J. and Locke, and Judson JJ. The true
nature of the payment made to the appellant was to be found in the terms of the
two agreements and the surrounding circumstances including the fact that it did
not come from the former employer. The payment was made for personal service
only and that conclusion really disposed of the matter as it was impossible to
divide the consideration. While, from the point of view of the respondent, no assistance
could be obtained from a consideration of s. 24A of the Act, the submission on
behalf of the appellant that the section established non-taxability in this
case, could not be agreed with.
Per Locke, Martland and Judson JJ.: Considering the two
agreements together, the circumstances in this case made it clear that the
payment constituted a payment for services to be rendered, and therefore, was
income. The argument based upon the proposition that the agreement with B was
to provide compensation for loss or relinquishment of a source of income, which
source was of itself a capital asset,
[Page 851]
could not be entertained. The essence of the matter was the
acquisition of services and the consideration was paid so that those services
would be made available. The contention, urged by the appellant, that, since
the payment was not made by Federated Petroleums or Home Oil, it could not be
regarded as income within s. 3 of the Act because so to hold would make s. 24A
meaningless in its application, could not be entertained.
Per Taschereau J, dissenting: A substantial part
of the payment was a capital receipt in this case and was not taxable as such.
The payment was divisible, and was made partly as a consideration of the loss
of the benefits attached to his former position, and partly for personal
services to his new employer. The matter should be referred back to the
Exchequer Court so that the apportionment could be made.
APPEAL from a judgment of Dumoulin J. of the Exchequer
Court of Canada, affirming a decision of the Income Tax
Appeal Board. Appeal dismissed, Taschereau J. dissenting.
H. H. Stikeman, Q.C., and P. N.
Thorsteinsson, for the appellant.
W. R. Jackett, Q.C., F. J.
Cross and G. W. Ainslie, for the respondent.
The judgment of Kerwin C.J. and of Locke and Judson JJ. was
delivered by
The Chief Justice:—This
is an appeal by Robert B. Curran against the judgment of the Exchequer Court
affirming the judgment of The Income Tax Appeal Board, which had dismissed his
appeal to it from a re-assessment made under the provisions of the Income
Tax Act of the appellant's income for the taxation year 1951. The
re-assessment thus confirmed was with reference to the sum of $250,000 received
by the appellant in that year.
The appellant, a geologist and highly regarded in his field,
was employed as manager of the producing department of Imperial Oil Limited. He
had been connected with the latter for some years and in 1951 was earning
$25,000 a year with the expectation that his salary would be increased, and had
he continued until the retirement age of sixty-five he would have been entitled
to a pension equal to approximately one-half the average of his salary for the
five years immediately preceding his retirement. He had been offered a
directorship in this company late in 1950 and
[Page 852]
early in 1951 but declined because he preferred to remain in
the position he then occupied and to live in Calgary. The salary attached to
the position of a director in Imperial Oil Limited is considerable.
In the spring of 1951 Robert A. Brown Jr. approached the
appellant with a view to inducing him to resign his position in Imperial Oil so
that he might accept employment with Brown or one of the companies in which the
latter was interested. Mr. Brown was a substantial shareholder of Federated
Petroleums Limited and president and general manager of that company. The
company itself held a large number of shares of Home Oil Company Limited. Calta
Assets Limited was a small holding company, the shares of which were wholly
owned by Mr. Brown and his brother and sister and it was a substantial
shareholder in both Federated and Home Oil. Mr. Brown did not hold any office
in Home Oil, of which Major Lowery was president and managing director and
exercised both share and management control. Mr. Brown had become dissatisfied
with the management of Home Oil and desired to secure the appellant's services
as manager of Federated and Home Oil with the expectation that Major Lowery
would then relinquish the active management of Home Oil. The negotiations
between Brown and the appellant culminated in a written agreement, dated August
15, 1951, between Brown, called therein the grantor, and the appellant,
referred to therein as the grantee. As the appellant emphasizes the terms of
that agreement, it is set out in full:
WHEREAS the grantee is presently, at the age of 42 years, in
charge of all Western Canadian Production for Imperial Oil Limited at a salary
of $25,000 per year, having arrived at that position after eighteen years of
service with the said Company or its affiliated companies (the said Company and
its affiliates under the direction of the Standard Oil Company of New Jersey
comprising together one of the largest groups of companies in the oil business
with world wide production refining and marketing facilities).
AND WHEREAS the grantee has acquired the right to a pension
on retirement from Imperial Oil Limited or any of its affiliates which if his
present salary scale remains the same until his retirement will yield to him
the sum of $12,500 per year, and the probabilties are that if he remains with
his present employers his salary will increase substantially over the years
with corresponding increases in the pension payable to him.
AND WHEREAS his pension rights will cease entirely if he
voluntarily severs his connection with the said Company and its affiliates.
[Page 853]
AND WHEREAS the grantee has been mentioned as a prospective
member of the Board of Directors of Imperial Oil Limited which if he were to be
so appointed would mean an immediate substantial increase in salary and would
in the ordinary course of events lead eventually to one of the senior positions
in the oil organization of which Imperial Oil Limited forms a part.
AND WHEREAS it is not the policy of Imperial Oil Limited and
its affiliates to re-employ in any part of such world wide organization anyone
who has voluntarily left the service of any of the companies in or affiliated
therewith.
AND WHEREAS FEDERATED PETROLEUMS LIMITED, a comparatively
small oil company operating only in Canada and having no connection with
Imperial Oil Limited or any of its affiliates, has recently intimated its
willingness to offer the grantee a position as Manager at a salary equivalent
to that which he draws from Imperial Oil Limited, which proposed offer the
grantee has intimated that he would refuse solely by reason of the fact that he
would be obliged to give up his chances of advancement with his present
employers and their affiliates, would lose the opportunity for re-employment
with them or any of them, thereby greatly limiting his field of possible future
employment, and would lose all accumulated and future rights to pension.
AND WHEREAS the grantor holds a substantial interest in
Federated Petroleums Limited, is of the opinion that the grantee's experience,
capabilities and connections would be valuable to that Company, and is very
desirous of persuading the grantee to resign from his present position in order
that he may then be free to accept an offer of employment from Federated Petroleums
Limited.
AND WHEREAS the grantor recognizes what the grantee is
obliged to give up in the way of chances for advancement, pension rights, and
opportunities for re-employment in the oil industry if he resigns from his
present position in order to be free to accept the offered employment and has
agreed to compensate him liberally therefor.
NOW THEREFORE THIS INDENTURE WITNESSETH
1. The grantor hereby agrees to pay to the grantee the sum
of $250,000 in consideration of the loss of pension rights, chances for
advancement, and opportunities for re-employment in the oil industry,
consequent upon the resignation of the grantee from his present position with
Imperial Oil Limited, the said sum to be paid forthwith upon the grantee
informing his present employers that he is leaving their employ and whether or
not employment has been offered to him by Federated Petroleums Limited or
accepted by him, prior to that time.
2. In consideration of the agreement of the grantor to pay
the said sum, the grantee hereby agrees to resign his position with Imperial
Oil Limited, such resignation to take effect not later than the 15th day of
September, A.D. 1951.
Mr. Brown paid the $250,000 to the appellant, but Calta
Assets Limited actually furnished the funds out of its own assets and from
money borrowed from a bank. On the same day, August 15, 1951, the appellant
entered into an agreement with Federated Petroleums to act as its general
[Page 854]
manager at a fixed salary of $25,000 per year and he was to
serve as the directors of that company might determine from time to time as
manager of any other company or companies in which Federated had a financial
interest either in addition to or in lieu of serving as manager of Federated ;
but any salary from such other company or companies was to the extent thereof
to be deemed satisfaction of the salary which under the terms of the agreement
Federated was obligated to pay. The appellant was also given the option, within
a limited time, to purchase twenty-five thousand shares of Home Oil Company at
a given price.
The appellant resigned his position with Imperial Oil
Limited shortly after August 15, 1951. He was never employed by Brown or
Federated Petroleums or Calta Assets but became president and managing director
of Home Oil at a salary of $25,000 per year with no superannuation benefits.
Due to a disagreement with Brown the appellant resigned his position with Home
Oil at the expiration of about one year.
Subsection (1)
of s. 2 and s. 3 of the Income Tax Act, 1948,
c. 52, provide:
2. (1) An income tax shall be paid as hereinafter required
upon the taxable income for each taxation year of every person resident in
Canada at any time in the year.
* * *
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year from all sources inside or
outside Canada and, without restricting the generality of the foregoing,
includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments
As has been pointed out in the recent judgment of this
Court in Bannerman v. Minister of National Revenue, there
is no extensive description of income such as appeared in the Income War Tax
Act. The word must receive its ordinary meaning bearing in mind the
distinction between capital and income and the ordinary concepts and usages of
mankind. Under the authorities it is undoubted that clear words are necessary
in order to tax the subject and
[Page 855]
that the taxpayer is entitled to arrange his affairs so
as to minimize the tax. However, he does not succeed in the attempt if the
transaction falls within the fair meaning of the words of the taxing enactment.
The decision of the House of Lords in Tilley v. Wales
was relied upon by the appellant. Prior thereto their Lordships had decided
Hunter v. Dewhurst and Cameron v. Prendergast.
In the latter case they regarded the Dewhurst case as having been decided
on its very special facts and in any event distinguished it on the ground that
the payment there was not a profit of the directorship but was a compromise of
a future contingent liability, i.e., to pay a lump sum upon Dewhurst's eventual
retirement from office. In Cameron v. Prendergast the continuance in
office was the essence of the bargain which contemplated that Cameron would not
resign for at least a reasonable time thereafter. The sum there involved was
very large but it was regarded as income since remuneration is still income
even though paid once and for all in a lump sum instead of by instalments over
a period of years.
When Tilley v. Wales came before the House of Lords,
Viscount Simon, with whom Lord Atkin and Lord Russell of Killowen
agreed, said, at p. 392, that the decision in Dewhurst was regarded and
described as arising in very special circumstances, but he thought that the ratio
decidendi was as he had described, i.e., that a certain sum of £10,000 was
not a profit from Dewhurst's employment as director and did not represent
salary but was a sum of money paid down by the company which had employed
Dewhurst to obtain a release from a contingent liability as distinguished from
being remuneration under the contract of employment. He pointed out that apart
from previous authority he should take the view that a lump sum paid to commute
a pension is in the nature of a capital payment, which is substituted for a
series of recurrent and periodic sums which partake of the nature of income. He
then continued:
But can the same view be taken of an arrangement made
between an employer and his servant under which, instead of the whole or part
of a periodic salary, a single amount is paid and received in respect
[Page 856]
of the employment? Generally speaking, I think not. An
"office or employment of profit"—to use the actual phrase in sch. E—necessarily involves service over a period of time during
which the office is held or the employment continues. The ordinary way of
remunerating the holder or the person employed is to make payments to him
periodically, but I cannot think that such payments can escape the quality of
income which is necessary to attract income tax because an arrangement is made
to reduce for the future the annual payments while paying a lump sum down to
represent the difference. My view seems to me to be supported by the decision
of this House in Cameron v. Prendergast.
In the present case the substance of the matter was the
engagement by the appellant to work for Mr. Brown or one of the companies in
which the latter was interested and the agreement by the appellant with
Federated Petroleums. It is true that in order to fulfil his obligations under
the contracts the appellant was obliged to resign his position with Imperial
Oil Limited and thereby gave up not only the annual salary, a like amount which
he was to receive, but also his pension rights and further prospects. However,
the payment of $250,000 was made for personal service only and that conclusion
really disposes of the matter as it is impossible to divide the consideration.
The mere fact that the first agreement of August 15, 1951, states that Brown
agreed to pay the appellant $250,000 in consideration of the loss of pension
rights, chances for advancement and opportunities for re-employment in the oil
industry cannot change the true character of the payment. Its true nature must
be found in the terms of the two agreements and the surrounding circumstances
including the fact that the $250,000 did not come from Imperial Oil Limited. I
have been unable to secure any assistance from the other cases referred to by
Mr. Stikeman including Van Den Berghs Ltd. v. Clark, a
decision of the House of Lords, and the judgment of Williams J. in the High
Court of Australia in Bennett v. Federal Commissioner of Taxation.
I should add that while, from the point of view of the respondent, I obtain
no assistance from a consideration of s. 24a
of the Act, I cannot agree with the submission on behalf of the
appellant that it establishes non-taxability of the appellant.
The appeal should be dismissed with costs.
[Page 857]
Taschereau J. (dissenting):—-All
the material facts of this case have been fully recited by the Chief Justice
and my brother Martland, and it is therefore unnecessary to deal with them once
more.
The learned trial judge has reached the conclusion that the
sum of $250,000 paid to the appellant in 1951, constituted income within the
meaning of the Act and was properly assessed as such.
I cannot escape the conclusion that a substantial part of
this amount paid to the appellant by Robert A. Brown Jr., was a capital receipt
in the circumstances of this case, and not taxable as such.
The appellant had been with the Imperial Oil Company since
1933, with one short interval, and in August, 1951, was manager of the
Producing Department. He enjoyed a very high reputation as a geologist, and was
a man of extensive knowledge. He earned a salary of $25,000 a year, and on two
occasions had been invited to become a director of the company. If the
appellant had remained in the employment of Imperial Oil Co. or an affiliated
company, he would have been entitled, when reaching the retirement age of 65,
to an annual pension of approximately $12,500, and as an employee of the
company, many other privileges were available to him, such as group insurance,
sick benefits, and a stock purchase privilege. There were also great
possibilities of salary increases.
It would indeed have been a very poor bargain for the
appellant to enter into, without insisting upon a fair compensation, as he did
in his written agreement with Brown, for foregoing such substantial actual and
eventual benefits. I do not think however that the total of this amount of
$250,000, which is in my view divisible, was paid to the appellant as
consideration of the loss of those benefits. I believe that a proportion was
for personal services to the new employer. As this division has not been made
by the trial judge, I would allow the appeal with costs, and refer the case
back to the Exchequer Court so that it may apportion the part of this sum of
$250,000 which is income, and therefore taxable, and the other part which is of
a capital nature.
[Page 858]
The judgment of Locke, Martland and Judson JJ. was delivered
by
Martland J.:—The
facts of this case are contained in the judgment of the Chief Justice,
including the contents of the agreement dated August 15, 1951, made between the
appellant and Mr. R. A. Brown Jr. I agree with counsel for the respondent that
this agreement must be considered in conjunction with the agreement of the same
date, between the appellant and Federated Petroleums Limited (hereinafter
referred to as "Federated"), which was executed immediately following
the execution of the first-mentioned agreement. The agreement with Mr. Brown
specifically recites that Brown, the holder of a substantial interest in
Federated, is very desirous of persuading the appellant to resign from his
position with Imperial Oil Limited in order to be free to accept an offer of
employment from Federated. The employment contract with Federated enabled it to
require the appellant to serve as manager of any other company or companies in
which Federated had a financial interest.
Mr. Brown's evidence made it quite clear that his purpose in
approaching the appellant and paying him the consideration of $250,000 was in
order that the appellant would be available to become associated with Federated
and that it was his wish, for the reasons which he gave, that, if possible, the
appellant should become President and Managing Director of Home Oil Company
Limited (hereinafter referred to as "Home"). At that time, though
both Brown and Federated held substantial interests in Home, they did not have
control of it and Brown was not then a director of Home. In due course,
subsequently, the appellant did become president and managing director of Home
and Brown became a director of that company.
These circumstances make it clear that the $250,000 payment
was made by Brown to the appellant and received by the appellant to induce him
to serve as manager of Federated or of Home and preferably, if possible, the
latter. This being so, it seems to me that it constituted a payment for
services to be rendered by the appellant.
[Page 859]
For the appellant it is contended that the payment
represented a capital receipt and not income. The argument is based upon the
proposition that the agreement made by him with Brown was to provide
compensation for loss or relinquishment of a source of income, which source was
of itself a capital asset of the appellant.
In support of this submission several English decisions and
an Australian case were cited. All of these were, however, cases in which an
employer purchased from its employee a surrender by the latter of rights which
he had previously held as against the employer. Thus, for example, in Hunter
v. Dewhurst (a case which has been regarded
in later decisions as arising in very special circumstances) the employee, for
a consideration, released the employing company from a contingent liability.
The payment was distinguished by the majority of the House of Lords from being
remuneration under the contract of employment.
Hose v. Warwick was a case in
which the employee, for a consideration, turned over to the employing company
his extensive personal connection in the insurance business, which he had
previously been entitled to retain for himself.
In Tilley v. Wales, the taxpayer
had been employed by a limited company as Managing Director at a fixed salary
of 6,000 pounds per annum and had a right to receive a pension of 4,000 pounds
per annum for a period of ten years after cessation of his employment. He
entered into an agreement with the company to release it from its obligation to
pay the pension and to reduce the salary to 2,000 pounds per annum in
consideration of 40,000 pounds paid to him by the company in two consecutive,
annual instalments of 20,000 pounds each.
The House of Lords held that so much of the payment as
represented consideration for a reduction in salary was income and subject to
tax, but that the consideration received by the taxpayer for commutation of his
pension rights was not income.
Duff v. Barlow is a case in which
the employee surrendered his right to remuneration for services being rendered
by him to a subsidiary of the employing company
[Page 860]
in consideration of a lump-sum payment. The parent company
had decided that it was in its interest to terminate the agreement under which
these services were being rendered and it was determined. It was held that, as
there was thereafter no obligation to perform services for the subsidiary, such
services could not be any part of the consideration for which the lump sum was
paid.
In Beak v. Robson, the money
consideration received by the employee was for his covenant not to compete for
five years within a certain radius if and when he terminated or caused to be
terminated his contract of employment.
The Australian case cited was that of Bennett v. Federal
Commissioner of Taxation. The payments in question there
were made to an employee for the cancellation of an employment agreement, which
was replaced by another contract under which the term of employment had been reduced
and the employee had been shorn of his previous absolute control of the
company.
All of these are cases in which the money payments to an
employee have been held not to constitute taxable income because they were not
made in respect of the performance of services by the employee, but rather in
order to acquire from him rights which he had previously held against the
employer.
On the other side of the line are cases such as Cameron
v. Prendergast, where the House of Lords
decided that a lump-sum payment made to a Director to induce him not to resign
his Directorship of a limited company was a profit from his Directorship and,
as such, was liable to tax. In that case it was held that the payment was made
so that the taxpayer would continue to perform services as a Director of the
company. The contention that the payment was made merely to persuade the
taxpayer not to exercise the right which he had to resign from office was
rejected.
In the present case it is clear that Mr. Brown was not
seeking to acquire any rights which the appellant had under his existing
employment contract with Imperial Oil Limited. The agreement made by Brown with
the appellant and Brown's evidence make it clear that he was seeking to
[Page 861]
acquire the skilled services of the appellant as a manager.
In order that those services might be available it was necessary that the
appellant should resign from his position with Imperial Oil Limited and such
resignation resulted in the forgoing by him of various advantages which his employment
with Imperial Oil Limited carried and which are referred to in the agreement.
However, the essence of the matter was the acquisition of services and the
consideration was paid so that those services would be. made available.
I, therefore, think that the payment made to the appellant
by Brown, under the agreement of August 15, 1951, was income to the appellant
within the meaning of s. 3 of the Income Tax Act, which provides:
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year from all sources inside or
outside Canada and, without restricting the generality of the foregoing,
includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and
employments.
Reference was made in argument to s. 24a of the Act, as it applied in the year in question,
which section refers to s. 5. The relevant portions of s. 5 and s. 24a provide as follows:
5. Income for a taxation year from an office or employment
is the salary, wages and other remuneration, including gratuities, received by
the taxpayer in the year plus …
* * *
24a. 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 or in lieu
of payment of, 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 purpose 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
(i) as consideration or partial
consideration for accepting the office or entering into the contract of
employment,
(ii) as remuneration or partial
remuneration for services as an officer or under the contract of employment, or
[Page 862]
(iii) in consideration or
partial consideration for covenant with reference to what the officer or
employee is, or is not, to do before or after the termination of the
employment.
Counsel for the respondent conceded that s. 24a was not applicable to the
circumstances of this case. Counsel for the appellant, however, urged that s. 24a was enacted in order to broaden the
scope of s. 5 so as to tax certain kinds of income not otherwise taxable under
s. 5. He pointed out that s. 24a might
have applied to the payment in question here if it had been made to the
appellant by Federated or by Home. Since it did not apply, because the payment
was not made by the appellant's employer, he contended that the payment could
not be regarded as income within s. 3, because so to hold would make s. 24a meaningless in its application.
It seems to me, however, that s. 24a was essentially a provision dealing with onus of proof
and deemed certain payments as therein defined to be payments within s. 5,
unless the recipient could establish affirmatively that a payment did not
reasonably fall within the provisions of paras, (i), (ii) or (iii) of s. 24a. I do not think that it follows
that payments which would fall within s. 24a,
except for the fact that they were made by someone other than the
employer, of necessity cannot be income within the provisions of s. 3.
In my opinion the appeal should be dismissed with costs.
Appeal dismissed with costs, Taschereau J. dissenting.
Solicitors for the appellant: Chambers, Might,
Saucier, Milvain, Peacock, Jones & Black, Calgary.
Solicitor for the respondent: A. A. McGrory,
Ottawa.
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