MNR v. Beaupré Estate, 73 DTC 5255, [1973] CTC 316 (FCTD)

The Associate Chief Justice:—This is an appeal from a decision of the Tax Appeal Board, delivered on November 22, 1963, allowing the appeal of Donat Beaupré from the assessment by the Minister of National Revenue dated June 21, 1967, in which a tax of $1,765.85 was levied on Beaupré’s income for the taxation year 1964.

In 1961 Donat Beaupré, now deceased, and one Phillips, who were partners in a private detective agency, decided to form a company under the name of Phillips Investigation Bureau Limited, hereinafter referred to as “the company”.

Beaupré, vice-president of the company, and Phillips, president until March 28, 1964, were the only stockholders in the company, each of them holding 50% of the common stock in its authorized capital.

Personal conflicts between Beaupré and Phillips created difficulties between the two, and resulted in the cessation of their business dealings. On March 24, 1964 two contracts were signed before a notary, the first between Beaupré and Phillips, and the second between Beaupré and the company. By the first contract Beaupré sold his common stock to Phillips for the sum of $12,000, of which he only received $11,700 ($12,000 less $1,700 owed by Beaupré to Phillips, plus $1,400, Beaupré’s share in Superior Protective Systems). By the second contract Beaupré was hired by the company as a consultant for $48,000, paid in monthly amounts over a period of six years commencing April 1, 1964 (that is, $1,000 monthly for two years, and $500 for four years), and in consideration of transfer of the ownership of an automobile— acknowledged value $3,315—which the company undertook to make in favour of Beaupré. During the taxation year 1964 Beaupré received from the company under this second contract a part of the payments it specified, namely $4,000 and a Chrysler automobile. On June 21, 1967 appellant reassessed Beaupré, including in his income the value of the automobile only, since Beaupré himself had at the time included the $4,000 just mentioned in his tax return. Beaupré appealed from this assessment for 1964, and from taxation of the $4,000, to the Tax Appeal Board, which on November 22, 1968 allowed the appeal.

In assessing Beaupré appellant relied on the following assumptions.

Beaupré remained vice-president of the company until March 28, 1964; by the second contract, on that date, the company undertook to employ him as a consultant for a period of six years commencing April 1, 1964; assuming that Beaupré was no longer employed by the company after March 28, 1964, the consultancy clause included in the second contract represented, inter alia, an undertaking by Beaupré not to compete with the company; the payment of $4,000 and transfer of ownership of the automobile to respondent were made by the company in partial payment of the consideration specified in the contract of March 28, 1964 between Beaupré and the company, and Beaupré received sums of money during or immediately after the period when he was employed by the company, and finally, the value of the automobile so received by Beaupré was $3,315 at the time ownership was transferred.

Appellant relies on section 5 and subparagraph 25(b)(iii) of the Income Tax Act, RSC 1952, c 148. Subparagraph 25(b)(iii) reads as follows:

25. An amount received by one person from another,

(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

(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.

The position taken by Beaupré is quite simple. It should first be noted that as Beaupré is deceased, a motion was made to substitute for him Madeleine Buchanan, in her capacity as executrix of Estate Donat Beaupré, and this was granted by my colleague Pratte, J on December 4, 1972. Respondent admitted that two contracts were signed dated March 28, 1964. These two contracts, she said, must however be read together, and as such they represent a simple sale of interests in Phillips Investigation Bureau Limited. She claimed that Beaupré included the sum of $4,000 received from the company in his income by mistake. According to respondent, when Beaupré was vice-president of Phillips Investigation Bureau Limited, he received his salary every fortnight like all the employees. The contract, however, provided for payments of $1,000 monthly. Respondent further argued that the word “consultant” was only a subterfuge, since Beaupré was at no time consulted either by Phillips or by the company, as moreover he had no qualifications to act in such a capacity. She added that Beaupré could not have been a consultant to Phillips Investigation, because he had been barred from the office by Phillips himself, who would not even speak to him, and he never received any salary as a consultant. According to respondent Beaupré was never asked to act as a consultant, and it was not customary to have consultants in that type of business. Respondent further alleged that when Beaupré received the first payment of $1,000 in April 1964, tax was deducted from it at source by the company, and Beaupré was obliged to approach the company’s accountant, Jean Brunet (as Phillips would not speak to him), to protest this withholding; Brunet told him that if he had any complaints, he should direct them to the company. Respondent stated that although the value of the automobile was included in the contract for the sale of stock, it certainly could not be treated as income. The automobile, she added, had not been given to Beaupré in payment for services rendered or to be rendered to the company, or, alternatively, in consideration of an undertaking not to compete with the company on giving up his employment. Finally, respondent stated, the amounts received from the company by Beaupré after his withdrawal were paid in discharge of the sale of his shares in the company.

In my view the evidence in this appeal, and the testimony by Beaupré given to the Tax Appeal Board, which counsel for the appellant, at the Court’s suggestion, agreed to lay before the Court, indicates that the contract concluded between Beaupré and the company cannot be interpreted as a contract for services. Before examining this contract, I feel I should mention that if appellant had not agreed to Beau- pré’s testimony before the Tax Appeal Board, and his cross-examination, being introduced in this appeal, I would have permitted them to be used at the request of respondent’s counsel. Indeed, it seemed to me at the time of the trial that when a party dies before his appeal can be heard, and he has been examined and cross-examined on the same facts in an earlier proceeding involving the same parties, his testimony should be accepted for purposes of the appeal in this Court. I am confirmed in this view by a recent decision of the United Kingdom Court of Appeal. The case in question was Regina v Hall, [1972] WLR 974, where in a criminal proceeding it was held that under common law the deposition of a witness who died before the trial is admissible, because it was taken down in shorthand in defendant’s presence, and the evidence was subject to cross-examination.

Looking at Beaupré’s testimony before the Tax Appeal Board, it is interesting to note, first of all, the circumstances under which he was induced to part with the shares he held in the company, and then his version of the way in which the two contracts were drawn up, particularly that concluded between Beaupré and the company.

It must be noted at once that in view of the existence of the two contracts, the first by which Beaupré sold his shares, and the second under which he was to receive monthly payments and undertook to act as a consultant to the company, Beaupré’s testimony on the matter may be heard without contravening Article 1234 of the Civil Code (which prohibits testimony to contradict the terms of a valid written instrument). In short, it is clear, first of all, that they must both be read together, and secondly that in view of the rather strange circumstances surrounding the preparation of the second contract, and its ambiguity, since it provides for payments to Beaupré to continue even after his death, it is not only permissible but necessary to try and interpret them. Such an interpretation is accordingly in no way contrary to Article 1234 C.C.

It is worth noting, first, the manner in which Beaupré was induced, One might almost say forced, to sell his shares (namely 50% of the shares issued) in the company.

Beaupré in fact stated, and Phillips did not deny it, that in March 1964 the latter called him into his office and told him:

Donat, I don’t want to see you again, I don’t want to speak to you, I want to have nothing more to do with you, you tried to stab me in the back with Daniel O’Hearn and start a detective agency . . . There was a bit of an argument, and I said “I never tried to do any such thing”. I said, “I’m well- off here, I’m earning $250 a week, and $200 a month for my expenses, the company gives me a car, I own 50 per cent of the shares in the company,” I said, “I have nothing to gain by starting another agency, when our business is going so well”.

Beaupré stated that the following week someone called him and told him the whole thing was a put-up job, and that Daniel O’Hearn (with whom Phillips alleged he was going to open an agency) was dining at the Canadian Club the same day with Phillips and the accountant Brunet. Beaupré went to the door of the club, where he actually saw Phillips, Brunet and O’Hearn going into the club together. Beaupré was then summoned to a stockholders’ meeting on March 18, 1964. He went, and Phillips was accompanied on this occasion by Me André Tessier and the accountant Brunet. Phillips summarized the facts and said he wanted to buy Beaupré’s interests in the company, or Beaupré would have to buy his. He also stated that he wished no further dealings with Beaupré, and he would not let him into his office. Beaupré allegedly then stated:

Phillips, listen, we worked night and day to build this agency, we worked until three, four in the morning, we both worked hard, I am not interested in selling my agency and I am not interested in buying you out. The only thing I will do is if you want, if I bother you in the office here, I will go to Quebec City. I will exile myself to Quebec City. (At the time the company had offices in Quebec City.) You won’t have to see me any longer.

Phillips is said to have replied:

I don’t want to see you again. You’re going to buy me out or I’ll buy you out.

Beaupré stated that he continued refusing to sell, but at a certain point, after Phillips, Brunet and Me Tessier consulted together, they decided to take a vote, Mrs Phillips voting with her husband and Mrs Beaupré with hers, since the two wives each held one share in the company. Phillips then used his casting vote and Beaupré stated that he was dismissed. Seeing he had no alternative, he then agreed to go to see the notary and sign the contracts referred to above.

Appellant contends that according to the written agreements Beaupré remained an employee, while the latter states that, despite the terms of the agreements, he concluded a sale of his shares for the sum of $60,000. According to the testimony of the accountant Brunet, who remained with the firm after the sale of Beaupré’s interests, his shares were only worth the sum of $12,000 which he was paid. This valuation may be questioned, however. Jean Brunet began by saying that though the value of the ordinary shares of Phillips Investigation Bureau at this time was $99.98 a share, which makes a total value of about $50,000, since there were 500 ordinary shares outstanding, he felt it advisable to value them at only $24,000, because, he said, there was “equity” of only $24,000 in the company, and of this amount he stated $12,000 was a fair and reasonable sum for Beaupré’s shares.

Brunet’s testimony in fact indicates that in fixing the value of the company’s shares, he based himself only on the value of the contracts outstanding, which however, he reduced because they can be cancelled on 24 hours’ notice, and on accounts receivable, but without any allowance for goodwill.

He further made no allowance for profits which could be realized in a business of this nature at a time when, as Phillips admitted at the hearing, because of a situation which then existed in Quebec, increasing use was being made of investigators and guards of the kind provided by the Phillips Bureau. Also, if we look at the company’s statements, we see that for the period in question it had made profits of $30,000 in six months.

The value fixed by Brunet was not, in my view, either the real value of the shares or even, it seems to me, their value as shown on the company’s books. Further, the shares had an added value to Beaupré since he was a detective. I feel therefore, that the sum of $60,000 was not an excessive price for Beaupré’s shares, and this was in fact the price offered if we rely on the two agreements mentioned above, Moreover, shortly after acquiring Beaupré’s shares Phillips sold his interests to an American group for $131,000.

I must therefore conclude that notwithstanding the aforementioned agreements, Beaupré sold all his interests in the Phillips Bureau for the sum of $60,000. There is, it is true, the hiring clause under which Beaupré undertook to act as a consultant to the Phillips Bureau, in return for monthly payments. It does not appear, however, that Beaupré was intended, or even able, to act in such a capacity in the company. The learned Member of the Board, Mr Boisvert, stated in his judgment that the hiring clause nevertheless represented only a procedure for payment of capital, and that it released Beaupré “from all ties between employer and employee” adding

He had been thrown out by Phillips, who replaced him with someone else, thereby proving that he did not intend to take him on again.

In my opinion the learned Member of the Board was fully justified in coming to this conclusion. Mr Phillips stated that he wrote to Beaupré on two occasions in order, he said, to give him work to do, but at most this could only have been an attempt to give some semblance of authenticity to the consultancy clause. Did he not tell Beaupré he never wanted to see him again?—and Beaupré in fact did not see him after the agreements were signed. Beaupré, on his part, felt he was released from any obligation to work for the company, and set up his own detective agency shortly after. Phillips then ceased the payments which were to have been made to Beaupré, and the latter was forced to bring an action in the Superior Court of Quebec, which moreover he won. In that case, though Beaupré’s counsel, in reliance on the agreement, claimed the payments as salary, the learned judge decided that the two agreements were in reality one, and the hiring contract was fictitious. Indeed he stated, at page 6 of his judgment:

The evidence produced at the hearing clearly indicates that insertion of the word “consultant” in Exhibit P-1 was a subterfuge more than anything else, from the viewpoint of a genuine hiring contract. This is the explanation given by plaintiff, who adds that there was no such position as “consultant” in agencies of the kind operated by defendant. The notary Gratton, who prepared the two deeds, did not know why the word “consultant” was inserted, and no explanation of its actual meaning in terms of duties was given either in the contract, P-1, or in the minutes of an extraordinary meeting of the shareholders of defendant, held on March 18, 1964 (Exhibit P-5). This also indicates that from the standpoint of any actual hiring as such, the description of consultant was only there as a subterfuge, that is to say plaintiff Beaupré never received any request to render service in this capacity, and received no request for consultation.

Where Mr Phillips stated that he needed plaintiff’s services, there were good reasons for doubting the sincerity of his statement on this point. Thus, after arranging for plaintiff to be appointed as consultant, he did not consult him even once during the four months following their separation. He claimed he indeed wished to retain plaintiff as a consultant, but thought at the time their agreements were drawn up that plaintiff wanted to buy a hotel or tavern. (Incidentally, plaintiff ended by buying a grocery.)

A statement by Mr Phillips during his testimony indicates that by insertion of the word “consultant”, he sought to attach plaintiff to his company, to keep him with them so that he did not become a competitor. On this point his story is more credible than that of plaintiff, who claimed that they simply wanted to find a title of some kind to give him, so that the company could pay him $48,000, that he was forced to be a consultant but did not accept, and added that he did not compete with defendant.

Rather lengthy evidence was introduced to establish that as a result of certain actions by plaintiff, or by one Arbour, defendant lost a client, Ivanhoe Corporation, which is a company belonging to the Steinberg interests. However, the evidence indicates rather that Ivanhoe Corporation was not satisfied with the services of Phillips, and defendant would have lost it as a client in any case.

We should add that after this judgment in the Superior Court a settlement was worked out between Beaupré and the Phillips Bureau, by which Beaupré agreed to settle his claim for $22,000, with no mention of his acting as a consultant for the company.

It is true that the learned judge of the Superior Court concluded that the insertion of the word “consultant” was a means of imposing on plaintiff a binding obligation not to operate a competing business for the duration of the payments which Phillips Investigation had to make, and in the territory where the company was then active, but it seems to me he came to this conclusion because the other reasons for introducing the word “consultant” into the agreement were not pointed oui to him. Furthermore, such a conclusion appears to be inconsistent with continuance of the payments ever after Beaupré’s death, as prescribed in the agreement.

The learned Member of the Tax Appeal Board, with his experience in fiscal matters, perceived quite a different reason, which I myself also recognized, namely that the purpose of Phillips and his advisers was simply to circumvent the provisions of paragraphs 12(1)(a) and

(b) of the Income Tax Act, and make the company pay part of the cost of purchasing Beaupré’s interests in the company. Mr Boisvert puts it well on page 17 of his decision:

Phillips and his advisers knew very well that a payment on account of capital could not be deducted from the income of the business (12(1)(b)), whereas a salary payment could be deducted (12(1 )(a)).

As the amount received by Beaupré cannot, in the circumstances, be regarded as income from an office or employment, section 5 of the Act is inapplicable, and as the amounts received by Beaupré, and the Chrysler automobile, were received for the sale of his interests in the company, and in no way to prevent competition by him (competition which moreover could not have affected the Phillips Bureau, since Phillips at all times maintained that Beaupré was an incompetent, and the bankruptcy of his short venture into the business of investigation shows that Phillips was right, and he had little to fear from this quarter), I do not feel that section 25 applies either.

The appeal is accordingly dismissed with costs.