The Queen v. Heggie, 87 DTC 5400, [1987] 2 CTC 173 (FCTD), briefly aff'd 94 DTC 6132 (FCA)

Cullen, J.:— This is an appeal by way of statement of claim from a decision of the Tax Court of Canada delivered April 17,1985 allowing the defendant's appeal of a notice of reassessment issued by the Minister of National Revenue on Spetember 9, 1983 including the sum of $48,055.10 in the defendant's 1981 income for tax purposes.

Facts

Prior to February 28, 1981 the defendant had been president and chief executive officer of Swift Canadian Co. Limited (Swift) which was a wholly owned subsidiary of Swift Company of Chicago (Swift U.S.).

The defendant's evidence is that he knew Swift was for sale, and in fact put together investors and money with the hope of buying it. Sometime in October 1980, in a phone call from a senior vice-president of Swift U.S., the defendant was told that Pocklington Financial Corporation Limited (Pocklington) had been given a "window to look”. This was not the fact but rather Pocklington had a letter of intent duly signed for the sale of the assets of Swift (see Exhibit 1). The defendant got a copy of the letter of intent from the senior vice-president he had been talking to earlier. The actual purchaser was Gainers Inc. (Gainers), a wholly owned subsidiary of Pocklington. On or about January 14, 1981 Gainers acquired the assets of Swift and on February 28, 1981 the defendant ceased employment with Swift.

In Exhibit 1 clause 3(c) reads as follows:

That no separation pay, retirement or other employee benefit will be due by seller to employees of the businesses being transferred as a result of the transfer of assets from Swift Canadian Co., Limited, or the sale of stock since the Purchaser intends to employ present employees (other than those of the excluded businesses and except John Heggie, C.A. Fletcher and D. Somerville) of said Swift Canadian Co., Limited on substantially the same terms and conditions of employment. [Emphasis added.]

Thus it was quite clear that the defendant would not become an employee of Gainers.

After negotiations had commenced a senior vice-president visited the defendant in Toronto to advise him about the letter of intent, that he wanted to post a bulletin to inform the employees and told the defendant that Mr. Percy Gibson would be the new president and chief executive officer (C.E.O.).

The defendant reached an agreement with Swift U.S. to cover his loss of employment; it is set out in Exhibit 3 in the form of a letter from J.P. Sullivan and was accepted by the defendant.

Before the sale was actually completed, and because it was a public company and had to be kept operating, the defendant "agreed to stay and keep the company in good shape" and he was given additional compensation by Swift U.S. for doing so (Exhibit 4). Also, while there were on-going negotiations with the purchaser, the defendant was instructed by Swift U.S. to cooperate with Pocklington/Gainers and to get such information from the files as requested by the purchaser. On January 14, 1981 and following, the defendant was asked to introduce the new C.E.O. to the staff from coast to coast using Swift U.S. company aircraft; present were the senior vice- president of Swift U.S. and "my V.P. employee relations”.

When employment ceased with Swift U.S. the defendant had nothing to do. In a phone call he was advised by Mr. Sullivan that he would be on the payroll for two more weeks (until February 28, 1981) and that it was “not good to stay in office for me, Gibson or employees". When the defendant was asked the question, "can I go home?" he was told yes and to advise Mr. Gibson. Mr. Gibson also felt it was a good idea for the defendant to leave.

Crucial Meeting

In addition to the evidence of the defendant (also heard by the Tax Court of Canada), I had the opportunity of hearing the evidence of Mr. P. Gibson.

There is some conflict in the evidence, but both the defendant and Mr. Gibson agreed that Mr. Gibson, as C.E.O. would "put me on the payroll" (defendant); "leave you on the payroll" (Mr. Gibson but he later conceded he may have used the word "put").

From the defendant's standpoint Mr. Gibson initiated the discussion with questions about whether he was on the payroll, how much his base pay had been, and then said: “I’m C.E.O. I'll put you on the payroll and the pay would be same as base pay as long as I reasonably can or until you get a job.”

The defendant asked, "What can I do" and, according to the defendant, Mr. Gibson answered, "Nothing". "Can I help to phase in?” asked the defendant, and Gibson stated, "No".

The defendant then states that Mr. Gibson turned around and saw the car which the defendant told Mr. Gibson Mr. Sullivan had said he could use. Mr. Gibson allegedly replied: "It's not Sullivan’s to give but you can use it until I let you know." The defendant figured that Mr. Gibson was being very magnanimous. After February 28, 1981 the defendant alleges that he was looking for a job which was in itself a full-time job. Nothing was said or done by Mr. Gibson or anyone to hamper this effort, no conditions were imposed, and "I never did anything for Gainers". No arrangements written or oral were made with Gainers nor, to the best of the defendant's knowledge, was any arrangement made between Swift U.S. and Gainers regarding his employment.

On cross-examination the defendant was asked if he would have been prepared to help Gainers if asked, for example, consulting. The defendant's reply was, "I don't know." Later, when pressed with the fact that he was getting a cheque — “Would you have helped", he volunteered, "yes, provided it didn't detract from looking for work". The defendant admits to a couple of lunches with Mr. Gibson but they were mostly social and Mr. Gibson conveyed that he was having trouble with Edmonton and the cheques would soon have to be stopped. The defendant denies ever being on the business premises after February 28, 1981.

In cross-examination, the defendant was asked if he had asked to be kept on. His response — "that did not happen".

As I stated earlier, Mr. Gibson's evidence was somewhat different. They were not friends but did of course know each other by reputation because they were in the same business and members of the same organization. About the crucial meeting, Mr. Gibson had this to say, namely, that he, along with the controller, went to the defendant's office. This was after the purchase had been completed. Mr. Gibson says he asked the defendant what his plans were and he said he had no plans, and then, according to Mr. Gibson, asked, "Why not let me stay on as president and you be the chief executive officer”. Mr. Gibson states, "I felt sympathy for him but could not accede to this request”.

Mr. Gibson said he knew he would have to count on the defendant's good public relations, especially in light of the fact that the head office would be closed and jobs would be lost. "I was buying time". He told the defendant that he would leave him on the payroll for a period of time (he may have said "put" not "leave"). Mr. Gibson could not imagine saying to the defendant that he do "nothing" — "it was highly unlikely”. It was the defendant who raised the subject of the car. Mr. Gibson had no problem with the defendant using the car because that was his policy whenever senior executives were let go "because of us".

When they parted Mr. Gibson said, "Keep in touch". They met later on at least two occasions for lunch which Mr. Gibson characterized as social and work because he asked about personnel; it’s also stated by Mr. Gibson that the defendant was on the business premises on two or three occasions, in Mr. Gibson's office, and he said he could confirm this with the controller's evidence if necessary. The defendant came to the office on his own initiative and not in answer to a Call, invitation or request from Mr. Gibson. Mr. Gibson staunchly denied he ever asked the defendant what his base salary was as that was not his way and would be impolite.

As far as Mr. Gibson was concerned the payments were of a business nature — he was buying goodwill; the defendant was very close to the employees. He concedes he gave no specific instructions but told him to "keep in touch". Mr. Gibson felt that these words, in the context of when they were said, were an indication that he might be called — “I was buying goodwill and I needed time”. Mr. Gibson says this fact did “influence in a positive way". In Mr. Gibson’s view, the defendant knew he had to keep in touch. The defendant was not tied to Gainers, not obligated to do anything but, said Mr. Gibson, "I had access to him”. Mr. Gibson was the one who stopped the payments to the defendant.

Summary

It is quite clear that this issue revolves around the facts and the interpretation of them. As indicated earlier, I have had the additional evidence of Mr. Percy Gibson which was not available to the Tax Court of Canada. With the evidence of the defendant alone, one might be persuaded that the payment of moneys and use of a car were the result of a magnanimous gesture on the part of the new C.E.O. Mr. Gibson.

However, the “crucial meeting" was in fact a business meeting and no doubt an uncomfortable one for both parties. However, these were two very capable, very experienced and very knowledgeable businessmen. The taxpayer was dismissed by Swift U.S. as part and parcel of the terms of the sale, but Mr. Gibson, as a man of business, would know that the taxpayer had or at least would be able to secure a termination agreement from Swift U.S. He would also be aware that there was to be only one person filling the role of president and C.E.O. I believe the evidence of Mr. Gibson is more credible when he states that the taxpayer suggested he be retained as president and Mr. Gibson be the C.E.O. There is no suggestion that Mr. Gibson was lying and it's inconceivable that he would dream up such a scenario. I am firmly convinced that the taxpayer made that request and it was refused. Certainly the taxpayer knew he was not to be retained by Gainers because he had read the letter of intent (Exhibit 1) and particularly paragraph 3(c) therein. This information did not lessen the taxpayer's interest in Swift but rather motivated him to try and arrange for a purchase by himself. It is very much in keeping, therefore, with a request that he be kept on, and if anyone had the authority to do it or at the very least recommend it, it was Mr. Gibson.

Mr. Gibson turned down that request and then made enquiries about the taxpayer's future plans. He found out that the taxpayer was seeking and would continue to seek employment because he was unemployed at present. At this point Mr. Gibson stated he would “leave him on the payroll" or "put him on the payroll”. It matters very little which phrase was used. Mr. Gibson's evidence was that "I had sympathy for him” but also he would be good for public relations given that it was necessary to close the head office and lay off some employees. Mr. Gibson's gesture was not altruistic but a calculated business move and which move he later declared, “it did influence in a positive way".

This meeting was a business meeting, with a business atmosphere and involved a request to be kept on, a refusal, and a counter-offer, namely to leave the taxpayer on the payroll at his basic pay rate. It should also be pointed out that it was in this atmosphere that Mr. Gibson said, "keep in touch". Can one really imagine that being said if Mr. Gibson had said no to the defendant's request for a job, no to his use of the car, and didn't offer to keep him on the payroll? He might have used other expressions but not that one. Also, Mr. Gibson was satisfied that he had the right to call on the taxpayer, he was “buying time" because he knew the transition would still require tough decisions and wanted access to the taxpayer's expertise and his splendid relationship with the employees.

The defendant knew from the beginning that he had to give something in return. Right at the meeting he asked, "What can I do?" and "Do you need help to phase in?”. The evidence of the taxpayer is that Mr. Gibson answered "Nothing" to the first question and "No" to the second. Mr. Gibson says he cannot conceive that he simply said "Nothing" in response to the taxpayer, and after all, he did have a plan or idea how the taxpayer's talents might be used. I suspect that if a more precise question had been asked such as, "Maybe I can help you with the employees when the head office is closed”, a completely different response would have been forthcoming. As far as Mr. Gibson was concerned the taxpayer was his ace in the hole.

It is fair to say that the exact nature or reason for putting him on the payroll may not have been communicated but the moment the taxpayer agreed to take the money he knew it was not an altruistic move by the C.E.O., although it may very well have been a magnanimous one considering the amount of the money paid. The taxpayer is an experienced businessman who knew the new board of directors didn't want him, and the C.E.O. would hardly have paid this money as an ex gratia payment. There had to be a "quid pro quo" and for the moment all he really had to do was "keep in touch" which he did by being on the business premises on two or three occasions and had at least two lunches with the C.E.O. Mr. Gibson characterized the lunches as initiated by him and being social/business. (At the last lunch Mr. Gibson advised that Edmonton was concerned about the money being paid to the taxpayer and that it would soon have to stop. Stopping payment was the C.E.O.'s prerogative.)

And finally, the employer had no doubt about the employer/employee relationship or a retainer relationship because the necessary T-4 tax forms were forwarded to the taxpayer.

The continuing use of the car was appropriate in the business circumstance here. It was allowed/directed by the C.E.O. because it was one of the assets purchased and no longer belonged to the vendor Swifts U.S.

There was no need to feel sorry for the taxpayer. He had a generous termination agreement and his salary was continued until February 28, 1981, although the purchase was concluded on January 14, 1981. Mr. Gibson may not have known the terms of that agreement but he would know that, in light of the position held by the taxpayer, some form of agreement was necessary because Swift U.S. agreed that the taxpayer would not continue as an employee after the purchase.

The taxpayer, on cross-examination, said he was prepared to help Gainers if requested but it must not detract from his looking for work. Mr. Gibson conceded only a couple of conversations and "if reasons for more I would have called him. I had access to him.” This is true and I am satisfied that the taxpayer knew it — he had to "keep in touch".

The existence of the right to control is more important than its exercise (Marotta v. M.N.R., [1986] 1 C.T.C. 393; 86 D.T.C. 6192). Section 3 of the Income Tax Act provides a set of rules for calculating a taxpayer's income from various sources for a taxation year. Income from office, employment, business and property are included in the section but are by no means exhaustive. In the case of Curran v. M.N.R., [1957] C.T.C. 384; 57 D.T.C. 1270 (Ex. Ct.), Mr. Curran received a $210,000 payment from the principal shareholder of Home Oil Ltd., in consideration for giving up his employment with Imperial Oil Limited, after which he took up appointment as president and general manager of Home Oil Ltd. Since the payor was not his employer, the Court agreed that the amount did not constitute income from employment but nevertheless was taxable as income for the year from a source other than those itemized. The Supreme Court of Canada affirmed the result holding that the payment was for personal services and therefore taxable. (However, the plaintiff did not formulate an argument based strictly on section 3 of the Income Tax Act.)

Counsel for the taxpayer was correct in stating that this issue really turns on the facts and the interpretation of them. On the evidence, I am quite satisfied that there was a mutuality of understanding, maybe not on the specifics but certainly the taxpayer was on call and required to be available if needed. I am satisfied that the taxpayer went on the premises of his own volition, without being summoned, called or invited by Mr. Gibson, but the fact that he felt free to do so is a clear indication that he was not trespassing and that he had a right to be there — the board of directors did not want him to continue but the "deal" made with the C.E.O. permitted him to be on the premises.

Most of the law cited by both parties is distinguishable on the facts, e.g. The Queen v. Elizabeth Joan Savage, [1983] C.T.C. 393; 83 D.T.C. 5409. In this case Savage was already an employee who received a benefit. Also, there is ample jurisprudence to establish that a person can be an employee, though not working, and a voluntary payment is taxable. The Savage case (supra), while the facts are quite different, is solid authority for the wide-ranging scope of sections 5 and 6(1)(a) of the Income Tax Act. At page 399 (D.T.C. 5414) we find a clear enunciation of the extensive meaning of the words "in respect of”.

Clearly, in the case at hand, the payment and use of the company automobile fall within the broad scope of subsection 6(1) of the Act.

The appeal is allowed with costs payable to the plaintiff by the defendant.

Appeal dismissed.