Date: 20010131
Docket: 1999-5116-IT-I; 1999-5117-IT-I
BETWEEN:
JEROME WALLSTEN, LAKESIDE PROPERTIES LTD.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE
[1]
The issue is whether the sum of $11,958 included by Lakeside
Properties Ltd. ("Lakeside"), a company of which Jerome
Wallsten ("Wallsten") was a shareholder and director,
was properly so included by Lakeside in its 1997 taxation year or
whether it should, as reassessed, be included in Wallsten's
income for his 1996 taxation year.
FACTS
[2]
There is no dispute about the total commission amount paid to
Wallsten by the insurers, namely $63,852. A statement filed with
the Reply to the Notice of Appeal shows expenses claimed by
Lakeside in the sum of $51,894 resulting in net income of
$11,958. The Minister appears to have regarded all income and all
expenses as those of Wallsten. No evidence respecting this
peculiarity was adduced by the Respondent. The issue can,
therefore, be restated as to whether the Minister was correct in
including the $11,958 in Wallsten's income[1].
[3]
Wallsten was a shareholder, director and employee of Lakeside,
his wife and children owning the other issued and outstanding
shares.
[4]
Prior to 1996 Wallsten was an employee of Sun Life Assurance
Company of Canada ("Sun Life"). Wallsten entered into a
written contract with Sun Life effective January 1, 1996 under
which he agreed to sell products of that company while being free
to carry on his business activities by also representing other
insurance companies.
[5]
Paragraph XIII in the Independent Agent's Agreement entitled
NATURE OF THE RELATIONSHIP reads:
"The relationship between the parties shall be that of
independent contractors. None of the terms of this agreement will
be construed as creating an employer/employee relationship
between Sun Life and the Agent."
[6]
Another clause entitled ASSIGNMENT AS SECURITY reads as
follows:
"The Agent may not assign any right or benefit under this
agreement except the Agent's entitlement to commissions and
bonuses which may be assigned as security. Sun Life will register
any collateral assignment of the Agent's entitlement to
commissions and the bonuses."
[7] A
written agreement shown to have been made the 1st day
of January 1996 and described as TRUST DECLARATION provides, in
part:
"1.
The Agent agrees to receive proceeds and funds from Sun Life
and/or other corporations on behalf of the Company.
2.
The Agent acknowledges that the Agent is not entitled to receive
any proceeds or compensation except as per his personal
arrangement with the Company and all revenues, receipts and
incomes paid to the Agent in the capacity as a life underwriter
or in a related field such as a seller of mutual funds or other
securities shall be paid in advance to the credit of the Company
without deductions.
3.
The Agent authorizes this Company to endorse any cheques on
behalf of the Agent as it deposits same and grants such authority
absolutely and for valuable consideration."
[8]
Jerome Wallsten testified that one result of the new arrangement
was that he would no longer have disability and other types of
insurance benefits. He decided that he would have to become an
employee of Lakeside in order to obtain small business benefits.
He stated that Sun Life would not issue a licence in a limited
company name to an agent like him. He said that he wished to have
all insurance income in Lakeside and that he would receive a
salary such as would any other employee. He described this as
simplifying his lifestyle.
[9]
Wallsten stated that all cheques from Sun Life were payable to
him but were deposited in Lakeside's bank account.
[10] Wallsten
included in his 1996 taxation year income the sum of $49,729 as
salary from Lakeside. The Minister of National Revenue
("Minister"), by reassessment, added the sum of $11,958
to Wallsten's income for that year, this being an amount
received by Wallsten from Sun Life and deposited to
Lakeside's account. The Minister, in the words of the Reply
to the Notice of Appeal, "deleted" the amount of
$11,958 from Lakeside's income.
[11] Wallsten
testified that he had no equipment, office, vehicle, special
computer, fax, desks, et cetera for the conduct of business and
that all of these facilities were supplied by Lakeside. Wallsten
stated that Lakeside paid for advertising and office supplies and
that the only property owned by him and used in his business was
his clothes.
[12] On
cross-examination, when asked if Sun Life knew of his arrangement
with Lakeside, Wallsten said that the Sun Life branch manager and
group manager in Slave Lake were in his office on many occasions.
He said that there was no sign advertising Sun Life or mentioning
Sun Life's name on Lakeside's office.
SUBMISSIONS
[13] Counsel
for the Appellants stated that Wallsten knew from January 1, 1996
that the company would supply facilities and receive commissions
and that he would be in a position to receive benefits from
Lakeside, such benefits no longer being available from Sun Life.
He submitted that Wallsten could have received and retained the
commissions and Lakeside could have charged him a management fee
for an equal amount and the result would have been the same as
claimed by the Appellants. He referred to Her Majesty the
Queen v. Dr. H. Hoyle Campbell 80 DTC 6239, a decision
of the Supreme Court of Canada. Campbell incorporated a company
to operate a private hospital. He owned all the shares of the
company. It employed him and paid him a fixed salary and in
return he paid to the company all fees for medical services which
he received from the Provincial Health Insurance Plan. The
Minister assessed Campbell on that income. The Court decided that
the company was not practising medicine. It noted that the Crown
had made no allegation that the company was a sham. It further
decided that the fact that fees under the provincial health plan
were required to be paid directly to the doctor was not the
controlling element when there was a valid arrangement between
Campbell and the company regarding salary to Campbell and an
accounting of fees to the company as employer. It determined that
the income from the professional services provided by Campbell
was the income of the company.
[14]
Respondent's counsel emphasized the fact that Wallsten's
interest in the agreement with Sun Life was not assignable except
as security and that there was no evidence that this assignment
of commissions by Wallsten to Lakeside was made as security. He
referred to Linden Gardens Trust Ltd. (H.L.(E.)) [1994],
86 where at page 108 the following words were quoted by
Respondent's counsel:
"Therefore the existing authorities establish that an
attempted assignment of contractual rights in breach of a
contractual prohibition is ineffective to transfer such
contractual rights. I regard the law as being satisfactorily
settled in that sense. If the law were otherwise, it would defeat
the legitimate commercial reason for inserting the contractual
prohibition, viz., to ensure that the original parties to the
contract are not brought into direct contractual relations with
third parties."
[15] However,
the issue in this appeal has nothing to do with a contractual
dispute with a third party.
CONCLUSION
[16] I have
concluded that the appeals should succeed. The fact that the
agreement between them was in violation of Wallsten's
contract with Sun Life does not affect tax liability. My finding
is consistent with the reasoning of the Supreme Court of Canada
in Campbell above.
[17]
Accordingly, both appeals are allowed with costs.
Signed at Ottawa, Canada, this 31st day of January
2001.
"R.D. Bell"
J.T.C.C.
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