Heald,
DJ:—This
is
an
appeal
from
two
judgments
of
the
Trial
Division,
allowing
appeals
in
respect
of
income
tax
reassessments
for
the
years
1964
to
1967
inclusive,
(Appeal
A-68-81)
and
1969
to
1972
inclusive
(Appeal
A-67-
81).
The
two
matters
were
heard
together
in
the
Trial
Division
and
on
common
evidence.
The
learned
trial
judge
stated
the
issue
to
be
determined
as
follows:
There
is
one
issue
for
determination:
Were
the
amounts
of
monies
received
by
John
J
Daly
Enterprises
Limited
from
CKOY
Limited
income
within
the
meaning
of
the
Income
Tax
Act
of
John
J
Daly?
To
determine
this
issue,
it
is
necessary
to
ascertain
whether
John
J
Daly,
commencing
in
July
1964
and
continuing
during
the
material
taxation
years,
was
employed
by
CKOY
Limited,
or
was
employed
by
John
J
Daly
Enterprises
Limited.
That
issue
develops
from
the
following
factual
situation.
The
respondent
first
became
employed
by
radio
station
CKOY
in
Ottawa
in
1951
as
station
sports
director.
He
continued
to
be
employed
by
CKOY
in
various
capacities
until
1961
when
he
became
general
manager
and
the
chief
operating
officer
of
the
company,
in
charge
of
the
company’s
day-to-day
operations.
On
December
27,
1962,
the
appellant
entered
into
a
written
contract
with
CKOY
which
set
out
the
terms
and
conditions
of
his
employment
as
general
man-
ager
for
a
further
period
of
five
years,
expiring
on
December
31,
1967.
That
written
contract,
in
the
form
of
an
accepted
letter
agreement,
was
signed
by
the
late
Senator
Duncan
McTavish,
the
then
vice-president
of
CKOY,
on
behalf
of
CKOY
and
by
the
respondent
personally.
That
letter
agreement
reads
as
follows:
(A-68-81
—
Vol
Il,
Appeal
Book,
pp
207-209
incl).
December
27,
1962.
Jack
Daly
Esq,
General
manager,
CKOY
LIMITED,
PO
Box
3130,
Station
“C”,
Ottawa
3,
Ontario.
Dear
Mr
Daly:
Further
to
the
conversations
you
have
had
with
us
over
the
last
few
months
concerning
the
arrangements
for
your
continued
engagement
by
CKOY
with
a
view
to
providing
you
with
an
acceptable
basis
for
remuneration
and
participation
in
the
fortunes
of
the
company,
we
have
set
down
in
this
letter
certain
proposals
for
your
consideration.
If
the
terms
and
conditions
herein
set
out
are
satisfactory,
would
you
execute
the
original
and
counterpart
herewith
enclosed
in
the
lower
left
hand
corner
of
the
last
page
and
return
the
original.
In
this
way,
upon
execution
by
you,
this
letter
will
constitute
a
binding
agreement
between
the
company
and
yourself
concerning
your
employment.
You
will
recollect
that
we
consulted
Messrs
McDonald,
Currie
and
Company,
our
auditors,
and
they
made
certain
recommendations
in
their
letter
of
September
14,
1962,
a
copy
of
which
is
annexed
to
the
original
and
counterpart
of
this
letter.
Subsequent
to
this,
the
directors
of
the
company
held
discussions,
as
a
result
of
which
the
following
proposal
is
put
to
you.
We
believe
that
our
understanding
is
shared
by
you,
but
if
there
are
any
points
of
difference,
do
not
hesitate
to
get
in
touch
with
us
immediately.
(1)
This
agreement
between
CKOY
Limited
(hereinafter
called
CKOY)
and
Jack
Daly
(hereinafter
called
Daly)
is
restricted
to
Daly’s
term
of
employment
with
CKOY
and
his
remuneration
thereof.
The
other
conditions
of
Daly’s
employment
shall
remain
as
at
present
or
as
subsequently
agreed
by
the
parties
hereto.
(2)
CKOY
shall
continue
to
employ
and
Daly
shall
continue
to
work
for
the
company
as
general
manager
of
CKOY
fora
further
period
of
five
years
more
or
less,
that
is
to
say
until
December
31,
1967:
provided
that
either
party
may
terminate
this
arrangement
on
six
months
notice
to
the
other
or
in
the
case
of
termination
by
CKOY,
on
payment
of
six
months
salary
without
bonus
in
lieu
of
notice.
(3)
The
remuneration
of
Daly
as
general
manager
shall
be:
(a)
a
fixed
salary
at
the
rate
of
$25,000
per
year,
as
at
present
together
with
(b)
an
annual
bonus
where
the
annual
net
profit
from
the
broadcasting
operations
of
radio
station
CKOY
in
Ottawa
before
income
taxes
exceeds
$100,000
as
described
in
paragraph
4.
(4)
The
following
provisions
govern
the
bonus
referred
to
above:
(a)
the
annual
bonus
to
Daly
shall
be
12%
on
the
excess
of
net
profit
before
income
taxes
over
$100,000
from
broadcasting
operations
of
radio
station
CKOY
in
Ottawa.
Net
profit
for
this
purpose
shall
be
before
income
taxes
as
demonstrated
in
the
audited
financial
statement
after
taking
normal
allowance
for
depreciation
and
doubtful
accounts;
however,
no
account
will
be
taken
of
extraneous
and
non-recurring
income
and
expenses
that
do
not
arise
from
normal
broadcasing
operations
in
Ottawa,
such
as
bank
and
bond
interest
and
profit
and
loss
on
disposal
of
fixed
assets
and
investments.
(b)
the
bonus
will
normally
be
in
the
form
of
cash,
but
Daly
is
to
have
the
opportunity,
at
his
option,
to
take
a
portion
of
the
bonus
in
the
form
of
CKOY
common
shares.
Up
to
100
common
shares
in
any
calendar
year
shall
be
allotted
by
the
directors
to
Daly
if
he
wishes.
It
is
understood,
however,
that
Daly
must
make
application
in
writing
to
CKOY
to
receive
a
portion
of
his
bonus
in
shares
at
least
one
week
before
the
annual
meeting
of
the
company
in
order
that
the
directors
may
authorize
the
issue
and
allotment
of
the
shares
in
the
normal
way.
For
this
purpose
Daly
will
pay
to
CKOY
a
nominal
consideration
of
$1
per
share
for
the
number
of
shares
received.
The
difference
between
$1
and
the
value
of
the
shares
will
be
considered
as
bonus
and
will
be
deducted
from
the
cash
bonus
which
Daly
would
otherwise
have
received.
The
value
of
the
shares
for
the
purpose
of
this
calculation
will
be
the
mean
between
equity
(or
book)
value
per
share
as
shown
by
the
audited
financial
statements
for
the
most
recent
fiscal
year
and
the
earnings
value
(calculated
at
10
times
current
year
earnings
per
share
after
payment
of
income
tax).
(c)
it
is
agreed
by
both
parties
that
the
base
figure
of
$100,000
net
profit
from
broadcasting
operations
of
radio
station
CKOY
in
Ottawa
before
income
taxes
may
be
subject
to
change
on
account
of
substantial
changes
in
company
policy
or
in
the
broadcasting
industry
itself
during
the
term
of
this
agreement
and
therefore
it
might
become
necessary
in
certain
circumstances
for
CKOY
to
change
this
base.
(d)
in
the
event
of
the
termination
of
this
contract,
either
by
virtue
of
clause
(2)
or
through
death
or
incapacity,
Daly
agrees
and
covenants
for
himself
and
his
executors
and
administrators
that
CKOY
shall
have
the
right
to
repurchase
for
a
value
calculated
in
accordance
with
the
formula
set
out
in
4(b)
above
any
CKOY
shares
which
Daly
has
received
by
virtue
of
this
agreement.
(e)
in
the
event
of
the
termination
of
Daly’s
employment
in
the
middle
of
a
calendar
year
Daly
will
receive
in
cash
his
proportionate
share
of
the
bonus
to
which
he
would
be
entitled
at
year
end
based
on
what
the
directors
of
CKOY
at
that
time
estimate
will
be
net
profit
at
year
end.
Yours
truly,
CKOY
LIMITED
“Duncan
McTavish”
Vice-President.
On
June
10,
1964,
the
respondent
caused
to
be
incorporated
a
company
named
John
J
Daly
Enterprises
Limited
(hereinafter
referred
to
as
Enterprises)
and
became
the
owner
of
substantially
all
of
its
issued
shares.
The
respondent
said
that
he
“wanted
to
become
independent
and
have
a
more
stable
future”
and
this
was
the
reason
for
the
incorporation
of
Enterprises.
After
incorporation,
he
contacted
Irving
Cameron,
then
President
of
CKOY.
He
said
that
he
advised
Mr
Cameron
that
he
would
like
to
resign
his
position
at
CKOY,
that
he
had
formed
a
management
company
and
would
like
to
have
a
contract
with
the
management
company
and
CKOY
for
the
management
of
CKOY.
He
said
that
he
understood
Mr
Cameron
to
say
that
he
saw
nothing
wrong
with
this
proposal
but
that
he
would
“check
with
the
others
and
I
believe
by
the
others
he
meant
the
other
directors”
(Transcript
p.
48,
lines
20-23).
The
respondent
testified
further
that
he
was
later
advised
by
Mr
Cameron
that
the
arrangement
was
agreeable
to
CKOY
and
that
CKOY
would
engage
Enterprises
and
Enterprises
would
supply
John
Daly
to
perform
the
services.
The
only
evidence
at
trial
of
this
discussion
and
arrangement
was
the
evidence
of
the
respondent.
He
was
the
only
witness
who
had
first-hand
knowledge
of
this
matter.
Mr.
Gordon
F.
Henderson,
QC,
who
was
a
witness
at
trial
and
an
officer
of
CKOY
during
the
relevant
periods
did
not
know
about
this
arrangement
until
1968.
Commencing
with
the
July
15,
1964
pay
cheque,
all
subsequent
pay
cheques
were
issued
by
CKOY
to
Enterprises.
Prior
thereto
they
were
issued
in
favour
of
the
repondent
personally.
The
respondent
said
that
the
arrange-
ment
whereby
Enterprises
was
paid
for
the
respondent’s
services
as
general
manager
was
made
on
the
advice
of
either
his
solicitor,
Mr
Anka
or
Mr
Parrott
his
accountant
or
both.
He
also
said
that
Messrs.
Anka
and
Parrott
had
mentioned
to
him
that
there
might
be
potential
tax
benefits
under
this
arrangement.
Also,
commencing
in
July
1964,
CKOY
ceased
making
Canada
Pension
Plan
contributions
and
taking
other
“normal
deductions”
from
the
respondent.
Thereafter
Enterprises
made
those
deductions.
On
July
2,
1964,
the
respondent
and
Enterprises
executed
a
document
entitled
“Assignment
of
Contract”.
Although
the
document
appears
to
contemplate
execution
and
approval
of
the
assignment
by
CKOY,
this
in
fact
never
took
place.
The
assignment
reads
as
follows:
(A-68-81
—
Vol.
Il
Appeal
Book,
pp.
204
and
205)
THE
ASSIGNOR,
JOHN
JAMES
DALY,
assigns
all
his
rights,
title,
and
interests
in
Contract
between
CKOY
LIMITED,
and
JOHN
JAMES
DALY,
to
and
unto
the
ASSIGNEE,
JOHN
J.
DALY
ENTERPRISES
LIMITED,
in
respect
to
the
following
clauses
and
provisions
and
in
all
other
respects
the
Agreement
remains
the
same:
1.
CKOY
shall
continue
to
employ
and
Daly
shall
continue
to
be
employed
and
Daly
shall
continue
to
work
for
the
company
as
general
manager
of
CKOY
for
a
period
from
July
1,
1964,
to
December
31,
1967;
provided
that
either
party
may
terminate
this
arrangement
on
six
months
notice
to
the
other
or
in
the
case
of
termination
by
CKOY,
on
payment
of
six
months
salary
without
bonus
in
lieu
of
notice.
2.
The
remuneration
of
Daly
as
general
manager
shall
be:
(a)
a
fixed
salary
at
the
rate
of
$25,000
per
year,
as
at
present,
together
with
(b)
an
annual
bonus
where
the
annual
net
profit
from
the
broadcasting
operations
of
radio
station
CKOY
in
Ottawa
before
income
taxes
exceeds
$100,000
as
described
in
paragraph
3.
3.
The
following
provisions
govern
the
bonus
referred
to
above:
(a)
the
annual
bonus
to
Daly
shall
be
12%
on
the
excess
of
net
profit
before
income
taxes
over
$100,000
from
broadcasting
operations
of
radio
station
CKOY
in
Ottawa.
Net
profit
for
this
purpose
shall
be
before
income
taxes
as
demonstrated
in
the
audited
financial
statement
after
taking
a
normal
allowance
for
depreciation
and
doubtful
accounts;
however,
no
account
will
be
taken
of
extraneous
and
non-recurring
income
and
expenses
that
do
not
arise
from
normal
broadcasting
operations
in
Ottawa,
such
as
bank
and
bond
interest
and
profit
and
loss
on
disposal
of
fixed
assets
and
investments.
(b)
it
is
agreed
by
both
that
the
base
figure
of
$100,000
net
profit
from
broadcasting
operations
of
radio
station
CKOY
in
Ottawa
before
income
taxes
may
be
subject
to
change
on
account
of
substantial
changes
in
company
policy
or
in
the
broadcasting
industry
itself
during
the
term
of
this
agreement
and
therefore
it
might
become
necessary
in
certain
circumstances
for
CKOY
to
change
this
base.
On
November
18,
1967,
that
is,
approximately
six
weeks
before
the
contract
of
December
27,
1962
was
to
expire,
the
respondent
entered
into
a
new
contract
with
CKOY
for
his
continued
employment
as
station
manager
for
a
further
period
of
five
years
to
expire
December
31,
1972.
That
contract
was
also
in
the
form
of
an
accepted
letter
agreement
and
was
signed
by
Gordon
F.
Henderson
(who
was
now
president
of
CKOY)
on
behalf
of
CKOY
and
by
the
respondent
personally.
(A-68-81
—
Vol.
11
Appeal
Book,
pp
201
and
202)
That
letter
agreement
reads
as
follows:
Dear
Mr
Daly:
Further
to
the
conversations
you
have
had
with
us
over
the
last
few
months
concerning
the
arrangements
for
your
continued
engagement
by
CKOY
with
a
view
to
providing
you
with
an
acceptable
basis
for
remuneration
and
participation
in
the
fortunes
of
the
company,
we
have
set
down
in
this
letter
certain
proposals
for
your
consideration.
If
the
terms
and
conditions
herein
set
out
are
satisfactory,
would
you
execute
the
original
and
counterpart
herein
enclosed
in
the
lower
left
hand
corner
of
the
last
page
and
return
the
original.
In
this
way,
upon
execution
by
you,
this
letter
will
constitute
a
binding
agreement
between
the
company
and
yourself
concerning
your
employment.
You
will
recollect
that
we
consulted
Messrs
McDonald,
Currie
and
Company,
our
auditors,
and
they
made
certain
recommendations
in
their
letter
of
September
14,
1962,
a
copy
of
which
is
annexed
to
the
original
and
counterpart
of
this
letter.
Subsequent
to
this,
the
directors
of
the
company
held
discussions,
as
a
result
of
which
the
following
proposal
is
put
to
you.
We
believe
that
our
understanding
is
shared
by
you,
but
if
there
are
any
points
of
difference,
do
not
hesitate
to
get
in
touch
with
us
immediately.
(1)
This
agreement
between
CKOY
Limited
(hereinafter
called
CKOY)
and
Jack
Daly
(hereinafter
called
Daly)
is
restricted
to
Daly’s
term
of
employment
with
CKOY
and
his
remuneration
therefor.
The
other
conditions
of
Daly’s
employment
shall
remain
as
at
present
or
as
subsequently
agreed
by
the
parties
hereto.
(2)
CKOY
shall
continue
to
employ
and
Daly
shall
continue
to
work
for
the
company
as
general
manager
of
CKOY
fora
further
period
of
five
years
more
or
less,
that
is
to
say
until
December
31,
1982.
(3)
The
remuneration
of
Daly
as
general
manager
shall
be:
(a)
a
fixed
salary
at
the
rate
of
$25,000
per
year,
as
at
present,
together
with
(b)
an
annual
bonus
where
the
annual
net
profit
fro
the
broadcasting
operations
of
radio
station
CKOY
in
Ottawa
before
income
taxes
exceeds
$100,000
as
described
in
paragraph
4.
(4)
The
following
provisions
govern
the
bonus
referred
to
above:
(a)
the
annual
bonus
to
Daly
shall
be
12%
on
the
excess
of
net
profit
before
income
taxes
over
$100,000
from
broadcasting
operations
of
radio
station
CKOY
in
Ottawa.
Net
profit
for
this
purpose
shall
be
before
income
taxes
as
demonstrated
in
the
audited
financial
statement
after
taking
a
normal
allowance
for
depreciation
and
doubtful
accounts;
however,
no
account
will
be
taken
of
extraneous
and
non-recurring
income
expenses
that
do
not
arise
from
normal
broadcasting
operations
in
Ottawa,
such
as
bank
and
bond
interest
and
profit
and
loss
on
disposal
of
fixed
assets
and
investments.
(b)
the
bonus
will
normally
be
in
the
form
of
cash,
but
Daly
is
to
have
the
opportunity,
at
his
option,
to
take
a
portion
of
the
bonus
in
the
form
of
CKOY
common
shares.
Up
to
100
common
shares
in
any
calendar
year
shall
be
allotted
by
the
Directors
to
Daly
if
he
wishes.
It
is
understood,
however,
that
Daly
must
make
application
in
writing
to
CKOY
to
receive
a
portion
of
his
bonus
in
shares
at
least
one
week
before
the
annual
meeting
of
the
company
in
order
that
the
directors
may
authorize
the
issue
and
allotment
of
the
shares
in
the
normal
way.
For
this
purpose
Daly
will
pay
to
CKOY
a
nominal
consideration
of
$1
per
share
for
the
number
of
shares
received.
The
difference
between
$1
and
the
value
of
the
shares
will
be
considered
as
bonus
and
will
be
deducted
from
the
cash
bonus
which
Daly
would
otherwise
have
received.
The
value
of
the
shares
for
the
purpose
of
this
calculation
will
be
the
mean
between
equity
(or
book)
value
per
share
as
shown
by
the
audited
financial
statements
for
the
most
recent
fiscal
year
and
the
earnings
value
(calculated
at
10
times
current
year
earnings
per
share
after
payment
of
income
tax).
It
is
to
be
noted
that
this
contract
is
in
substantially
the
same
terms
as
the
contract
of
December
27,
1962
excepting
that
it
does
not
contain
either
any
provision
for
earlier
termination
of
the
contract
or
the
ancillary
provisions
of
the
1962
contract
relating
to
earlier
termination.
Mr
Henderson
testified
that
the
November
18,
1967
contract
accurately
reflected
the
arrangements
he
had
discussed
and
made
with
the
respondent
shortly
before
November
18,
1967.
The
respondent
confirmed
Mr
Hender-
son’s
testimony
in
his
evidence
(Transcript
—
p
49,
lines
15
to
28;
p
78,
line
25
to
p
79,
line
30).
Chronologically,
the
next
event
of
importance
was
a
review
by
the
Tax
Department
of
some
of
the
respondent’s
tax
returns
in
1968.
The
respondent
said
that
the
income
tax
assessor
“came
around”
and
thereafter
meetings
were
held
by
the
respondent
with
Mr
Parrott
his
accountant.
Mr
Parrott
advised
Mr
Anka,
the
respondent’s
solicitor,
of
the
problem.
As
a
result,
Mr
Anka
wrote
to
Mr
Henderson
under
date
of
December
16,
1968,
as
follows:
(No.
A-68-81
—
Vol
II,
Appeal
Book,
p
203)
Re:
John
J
Daly
Enterprises
Limited
—
Contract
Dear
Mr
Henderson:
As
Solicitor
for
the
above
Company,
it
has
recently
been
brought
to
my
attention
that
a
Contract
dated
November
18th,
1967
has
been
made
with
Mr
J
J
Daly
by
your
Company.
I
hasten
to
point
out
that
this
Contract
should
have
been
made
with
the
above
Company
which
has
been
carrying
out
the
provisions
of
the
previous
Contract
and
the
operation
of
the
Radio
Station
in
question.
You
will
note
from
your
records
that
all
cheques
have
been
issued,
without
deductions,
to
the
above
Company
and
not
Mr
Daly.
You
will
recall
that
the
original
Contract
made
in
1962
was
with
Mr
Daly
but
assigned
to
the
above
Company
upon
its
creation
in
1964.
At
that
time
it
was
intended
by
all
concerned
that
John
J
Daly
Enterprises
Limited
assume
the
existing
Contract
to
operate
Radio
Station
C.K.O.Y.
among
other
functions
and
activities
apart
from
the
said
Station
and
retain
Mr
Daly
to
perform
management
duties
in
view
of
his
past
experiences
and
the
confidence
existing
between
him
and
your
Company.
This
was
not
an
exclusive
relationship
between
Mr
Daly
and
the
above
Company,
in
that,
he
was
free
to
work
for
others
as
and
when
he
was
able
without
conflict
etc.
With
all
due
respect
and
in
anticipation
of
your
usual
kind
co-operation,
I
have
been
authorized
to
request
that
this
matter
be
placed
in
its
proper
order
so
that
all
past
circumstances
may
find
the
support
and
basis
intended
and
that
the
future
operations
may
proceed
accordingly.
I
have
been
in
consultation
with
Mr
Parrott,
the
Auditor
of
the
above
Company
who
also
has
recently
learned
of
this
situation
and
subscribes
to
the
above
representations
which
comply
with
the
records
he
retains
on
behalf
of
this
Company.
Your
early
attention
to
this
matter
will
be
sincerely
appreciated.
On
or
about
February
5,
1969,
notices
of
reassessment
were
mailed
to
the
respondent
in
respect
of
the
1964,
1965,
1966
and
1967
taxation
years,
including
in
his
personal
income
the
fees
paid
by
CKOY
to
Enterprises
for
his
services.
The
respondent
testified
that
Mr
Henderson
advised
him
to
seek
outside
counsel
as
a
result
of
which
Montreal
solicitors
were
retained
who
prepared
an
agreement
between
CKOY
and
Enterprises
which
was
executed
on
June
28,
1971.
That
agreement
reads
as
follows:
(A-68-81
—
Vol
II
Appeal
Book
pp
193-196
incl)
WHEREAS
CKOY
is
engaged
in
the
business
of
operating
a
radio
station
in
and
about
the
City
of
Ottawa
in
the
Province
of
Ontario.
AND
WHEREAS
CKOY
requires
assistance
and
direction
with
respect
to
its
broadcasing
operations
generally.
AND
WHEREAS
the
company
is
engaged
in
the
business
of
providing,
inter
alia,
management
services.
AND
WHEREAS
by
an
oral
agreement
made
in
the
month
of
July
1964
the
company
agreed
to
provide
management
services
to
CKOY
and
it
is
now
desired
by
the
parties
to
reduce
this
oral
agreement
into
writing.
NOW,
THEREFORE,
THIS
AGREEMENT
WITNESSETH:
1.
The
company
agrees
to
provide
to
CKOY
general
management
and
advisory
services
and
in
doing
so
to
well
and
faithfully
serve
CKOY
and
use
its
best
efforts
to
promote
the
interests
of
CKOY
during
the
term
of
this
agreement.
The
company
shall
provide
the
said
management
and
advisory
services
by
furnishing
to
CKOY
the
services
of
Mr
John
J
Daly
or
the
services
of
such
other
person
who
may
be
specifically
approved
in
writing
by
CKOY
(hereinafter
called
“Daly
or
his
substitute”).
Subject
to
paragraph
four
hereof
the
term
of
this
agreement
shall
expire
on
31
December
1972.
2.
CKOY
agrees
that
the
remuneration
to
be
paid
to
the
company
shall
be:
(a)
a
fixed
fee
at
the
rate
of
$25,000
per
year;
plus
(b)
where
the
annual
net
profit
from
the
broadcasting
operations
of
CKOY
before
income
taxes
exceeds
$100,000
an
“additional
amount”
as
described
in
paragraph
3.
3.
The
annual
“additional
amount”
payable
to
the
company
shall
be
12%
of
the
amount
by
which
net
profit
(before
income
taxes)
from
the
broadcasting
operations
of
radio
station
CKOY
in
Ottawa
exceeds
$100,000.
Net
profit
for
this
purpose
shall
be
before
income
taxes
as
demonstrated
in
the
audited
financial
statements
after
taking
a
normal
allowance
for
depreciation
and
doubtful
accounts;
however,
no
account
will
be
taken
of
extraneous
and
non-recurring
income
and
expenses
that
do
not
arise
from
normal
broadcasting
operations
in
Ottawa,
such
as
bank
and
bond
interest
and
profit
and
loss
on
disposal
of
fixed
assets
and
investments
in
any
calendar
year.
The
“additional
amount”
will
normally
be
in
the
form
of
cash,
but
the
company
is
to
have
the
opportunity,
at
its
option,
to
take
a
portion
of
the
“additional
amount”
in
the
form
of
common
shares
of
CKOY,
up
to
a
maximum
number
of
one
hundred
such
shares
in
any
calendar
year.
It
is
understood
that
the
company
must
make
application
in
writing
to
CKOY
to
receive
any
portion
of
the
“additional
amount”
in
shares
at
least
one
week
before
the
annual
meeting
of
CKOY
in
order
that
its
directors
may
authorize
the
issue
and
allotment
of
the
shares
in
the
normal
way.
It
is
also
understood
that
the
company
will
pay
to
CKOY
a
nominal
consideration
of
$1
per
share
and
the
difference
between
$1
and
the
value
of
the
shares
will
be
considered
as
the
“additional
amount”.
The
value
of
the
shares
for
the
purpose
of
this
calculation
will
be
the
mean
between
equity
(or
book)
value
per
share
as
shown
by
the
audited
financial
statements
for
the
most
recent
fiscal
year
and
the
earnings
value
(calculated
at
ten
times
current
year
earnings
per
share
after
payment
of
income
tax).
4.
Subject
to
the
provisions
of
paragraph
five,
it
is
further
agreed
that
this
agreement
shall,
at
the
end
of
the
stipulated
term,
continue
from
year
to
year
unless
and
until
ninety
days’
notice
of
termination
is
given
by
one
party
to
the
other.
Such
notice
is
to
be
given
by
registered
mail
to
the
party
concerned
at
its
last
known
address.
5.
If
Daly
or
his
substitute
should
die
during
the
currency
of
this
agreement
or
any
extension
or
renewal
thereof,
then
CKOY
shall
have
the
right
to
terminate
this
agreement
upon
five
days
written
notice
given
by
registered
mail
to
the
company
at
its
last
known
address.
In
the
event
of
termination
under
paragraph
four
or
paragraph
five,
the
fixed
fee
and
the
“additional
amount”
as
hereinafter
described
shall
be
pro
rated
for
the
calendar
year
of
termination
but
the
company
shall
be
paid
the
pro
rated
“additional
amount”
in
cash
and
shall
not
have
the
right
to
take
up
common
shares
in
respect
of
the
calendar
year
during
which
termination
occurs.
The
respondent
also
gave
uncontradicted
evidence
as
follows:
(a)
that
there
was
no
particular
business
problem
arising
out
of
his
relationship
with
CKOY
that
led
to
the
execution
of
the
said
1971
agreement.
Rather,
the
reason
for
the
agreement
was
the
move
by
National
Revenue
to
include
in
his
personal
income
the
management
fees
paid
by
CKOY.
(See
evidence
of
John
Daly,
Transcript
p
87,
line
20
to
p
88,
line
20.)
(b)
the
respondent
never
submitted
a
formal
written
resignation
from
his
position
as
general
manager
of
CKOY.
(c)
no
formal
step
was
ever
taken
by
the
respondent
to
revoke,
rescind
or
waive
whatever
rights
he
might
have
had
under
the
November
18,
1967
contract
with
CKOY.
(d)
after
incorporation
of
Enterprises,
the
respondent
continued
to
be
covered
by
CKOY
health
and
life
insurance
plans,
and
a
group
pension
plan
but
that
this
was
a
“courtesy”
extended
by
CKOY
to
him
as
well
as
to
at
least
two
other
individuals
who
were
not
employees
of
CKOY.
(e)
CKOY
continued
to
pay
the
respondent
a
small
expense
allowance
in
his
own
name;
(f)
after
incorporation
of
Enterprises,
the
respondent
continued
to
perform
all
the
normal
functions
of
manager
of
CKOY,
doing
the
same
job
as
before.
In
so
far
as
the
outside
public
was
concerned,
he
was
Carrying
on
as
General
Manager
of
CKOY;
(g)
the
head
office
of
Enterprises
was
located
in
the
respondent’s
home;
(h)
during
the
years
under
review,
Enterprises
did
not
have
its
own
phone
but
has
had
one
since
1973.
The
learned
trial
judge,
after
observing
that
the
documentary
evidence
adduced
in
support
of
the
alleged
oral
agreement
of
late
June
or
early
July
1964
was
unsatisfactory
and
“done
in
a
slipshod
manner”
then
reviewed
the
oral
evidence
of
the
respondent,
Mr
Henderson
and
Mr
Ross
(CKOY’s
auditor
during
the
relevant
period),
and
thereafter
concluded
(A-68-81
—
Vol
Il,
Appeal
Book,
pp
258
and
259)
As
a
consequence,
I
am
satisfied
on
the
evidence
of
Messrs.
Henderson,
Ross
and
Daly
that,
as
between
CKOY
Limited
and
John
J.
Daly
Enterprises
Limited,
there
is
proof
(which
apparently
there
was
not
before
the
Tax
Review
Board)
that
the
necessary
respective
corporate
acts
of
John
J.
Daly
Enterprises
and
CKOY
Limited
were
authorized
to
be
done
to
cause
the
said
contract
in
1964
to
be
entered
into
and
to
be
legally
binding
upon
these
parties
to
it;
that
this
contract
was
reduced
to
writing
in
1971
(see
Exhibit
1);
and
that
this
contract
was
in
full
force
and
effect
during
all
the
said
taxation
years
of
John
J.
Daly.
The
principal
thrust
of
the
appellant’s
submissions
before
us
was
that
the
proper
inferences
to
be
drawn
from
the
evidence,
both
oral
and
documentary,
and
the
findings
of
fact
and
law
flowing
therefrom
should
be
that
the
respondent
was
an
employee
of
CKOY
working
under
a
binding
contract
of
employment
at
all
relevant
times
and
that,
therefore,
the
fees
paid
by
CKOY
in
consideration
of
his
services
were
properly
included
in
his
income.
In
order
to
properly
evaluate
this
submission,
it
is
necessary,
in
my
view,
to
carefully
review
all
of
the
evidence,
oral
and
documentary.
The
learned
trial
judge
assessed
the
oral
evidence
and
drew
inferences
therefrom.
He
also
considered
and
found
unsatisfactory
the
documentary
evidence
adduced
in
support
of
the
alleged
oral
arrangement
of
June-July,
1964.
However,
he
does
not
refer
anywhere
in
his
reasons
to
the
two
letter-agreement
contracts
entered
into
between
the
respondent
and
CKOY
Limited.
These
two
agreements
are
clearly
arm’s
length
transactions
and
are
quite
clear
and
precise
in
their
terms.
Dealing
initially
with
the
contract
dated
December
27,
1962,
it
was
a
contract
of
employment
for
five
years,
expiring
on
December
31,
1967.
There
is
nothing
in
the
oral
testimony
of
the
three
witnesses
to
show
that
the
“oral
arrangement”
of
June-July
1964
was
intended
to
cancel
the
written
contract
of
December
27,
1962.
Nor
can
it
be
said
that
the
written
assignment
of
July
2,
1964
had
this
result
either.
That
assignment
purported
to
assign
to
Enterprises
only
those
provisions
of
the
agreement
which
relate
to
payment.
It
specifically
stated
in
referring
to
the
December
27,
1962
agreement
“.
.
.
and
in
all
other
respects
the
agreement
remains
the
same”.
It
is
significant,
in
my
view,
that
the
“employment”
clause
of
the
December
27,
1962
agreement
is
retained
in
the
assignment
for
the
balance
of
the
term,
ie,
from
July
1,
1964
to
December
31,
1967.
Then,
even
more
significant,
is
the
following
passage
from
the
examina-
tion-in-chief
of
the
respondent
at
trial.
(Transcript:
pp
53-54):
Q.
Were
there
ever
any
occasions
or
could
you
describe
any
occasions,
if
any,
when
stock
options
were
exercised
by
you,
John
Daly,
as
opposed
to
by
John
J
Daly
Enterprises?
A.
Yes.
From
the
time
of
the
agreement,
the
original
agreement,
I
exercised
the
option
personally.
Q.
Until
—
A.
’62,
’63,
I
think
right
up
until
1969.
Q.
Why
was
this?
A.
Well,
first
of
all,
it
was
because
it
was
there.
It
was
part
of
the
agreement
and
secondly
it
was
to
get
—
Q.
Part
of
what
agreement?
A.
The
original
agreement
in
1962
with
CKOY.
There
was
an
option
clause
for
shares
in
there.
Q.
When
did
you
start
exercising
pursuant
to
that?
A.
In
1962.
Q.
After
your
termination
of
employment
with
CKOY
in
1964,
who
exercised
the
option?
A.
Daly
Enterprises
allowed
John
Daly
to
exercise
the
option
personally
until
—
Q.
Why
would
you
exercise
it
personally?
Why
would
Enterprises
not
exercise
it
itself?
A.
Until
1967
Enterprises
didn't
have
any
shares
in
CKOY
and
it
was
a
way
to
build
my
personal
estate.
This
passage
makes
it
clear,
in
my
view,
that
the
respondent
and
Enterprises
treated
the
1962
and
1967
employment
agreements
as
valid
and
binding,
and
not
cancelled
or
revoked
by
the
so-called
1964
oral
agreement.
Turning
now
to
the
agreement
of
June
28,
1971,
between
CKOY
and
Enterprises,
I
agree
with
appellant’s
counsel
that,
significantly,
it
makes
no
mention
whatsoever
of
the
existing
contract
of
employment
between
CKOY
and
the
respondent
dated
November
18,
1967.
In
this
connection,
I
refer
once
again
to
the
respondent’s
evidence
at
trial
that
no
steps
were
taken
to
revoke,
rescind
or
waive
whatever
rights
he
had
under
the
1967
contract
nor
did
he
ever
submit
a
written
resignation.
The
learned
trial
judge
relied
on
the
case
of
MNR
v
J
A
Cameron
[1974]
SCR
1062;
[1974]
CTC
380;
72
DTC
6325
for
his
statement
concerning
the
effect
of
the
1971
agreement
between
CKOY
and
Enterprises
that:
the
legal
rights
and
obligations
which
this
contract
created
were
those
that
the
parties
intended.
(Vol.
II,
Appeal
Book,
p
259)
However,
in
my
view,
the
Cameron
case
is
clearly
distinguishable
on
its
facts
from
the
case
at
bar.
In
that
case
there
were
no
contracts
between
the
managers
and
the
company
which
they
managed.
Mr
Justice
Martland
makes
it
clear
at
page
1068
of
the
judgment
that
the
individuals
providing
the
services
could
not
legally
enforce
their
right
to
receive
payment
against
the
company
to
whom
they
provided
the
services
since
they
had
no
contract
or
agreement
with
that
company.
In
a
case
of
this
kind,
where
it
is
acknowledged
that
what
is
sought
by
a
certain
course
of
action
is
a
tax
advantage,
it
is
the
duty
of
the
Court
to
examine
all
of
the
evidence
relating
to
the
transaction
in
order
to
satisfy
itself
that
what
was
done
resulted
in
a
valid,
completed
transaction.
In
my
view,
the
proper
approach
for
the
Court
to
take
is
concisely
stated
by
Urie,
J
in
the
case
of
Atinco
Paper
Products
v
The
Queen
[1978]
CTC
566;
78
DTC
6387,
as
follows:
I
do
not
think
that
I
should
leave
this
appeal
without
expressing
my
views
on
the
general
question
of
transactions
undertaken
purportedly
for
the
purpose
of
estate
planning
and
tax
avoidance.
It
is
trite
law
to
say
that
every
taxpayer
is
entitled
to
so
arrange
his
affairs
as
to
minimize
his
tax
liability.
No
one
has
ever
suggested
that
this
is
contrary
to
public
policy.
It
is
equally
true
that
this
Court
is
not
the
watch-dog
of
the
Minister
of
National
Revenue,
Nonetheless,
it
is
the
duty
of
the
Court
to
carefully
scrutinize
everything
that
a
taxpayer
has
done
to
ensure
that
everything
which
appears
to
have
been
done,
in
fact,
has
been
done
in
accordance
with
applicable
law.
It
is
not
sufficient
to
employ
devices
to
achieve
a
desired
result
without
ensuring
that
those
devices
are
not
simply
cosmetically
correct,
that
is,
correct
in
form,
but,
in
fact,
are
in
all
respects
legally
correct,
real
transactions.
If
this
Court,
or
any
other
court,
were
to
fail
to
carry
out
its
elementary
duty
to
examine
with
care
all
aspects
of
the
transactions
in
issue,
it
would
not
only
be
derelict
in
carrying
out
its
judicial
duties,
but
in
its
duty
to
the
public
at
large.
It
Is
for
this
reason
that
I
cannot
accede
to
the
suggestion,
sometimes
expressed,
that
there
can
be
a
strict
or
liberal
view
taken
of
a
transaction,
or
series
of
transactions
which
it
is
hoped
by
the
taxpayer
will
result
in
minimization
of
tax.
The
only
course
for
the
Court
to
take
is
to
apply
the
law
as
the
Court
sees
it
to
the
facts
as
found
in
the
particular
transaction.
If
the
transaction
can
withstand
that
scrutiny,
then
it
will,
of
course,
be
supported.
If
it
cannot,
it
will
fall.
That
is
what
happened
here.
Applying
that
test
and
scrutinizing
everything
that
the
taxpayer
has
done
in
this
case,
it
is
my
view
that,
at
all
material
times,
a
valid
contract
of
employment
subsisted
between
the
respondent
and
CKOY
under
which
the
respondent
earned
the
fees
paid
for
his
services
and
thus
they
were
properly
included
in
his
income
by
the
income
tax
reassessments
here
in
issue.
It
is
my
opinion,
with
deference,
that
the
learned
trial
judge
did
not
scrutinize
everything
that
the
taxpayer
did
in
this
case.
I
refer
particularly
to
the
employment
contracts
of
1962
and
1967,
supra,
and
the
evidence
of
the
respondent
himself
referred
to
supra,
as
to
how
he
considered
and
dealt
with
those
contracts
after
the
oral
arrangements
of
June-July,
1964.
In
such
circumstances,
it
is
my
opinion
that
an
appellate
court
is
obliged
to
reverse
the
decision
of
a
trial
judge
where
a
fair
consideration
of
the
totality
of
the
evidence
produces
a
different
result.
For
these
reasons
I
would
allow
both
appeals
with
costs
both
here
and
in
the
Trial
Division.
Lalande,
DJ:—I
agree
with
the
judgment
and
reasons
proposed
by
Mr
Justice
Heald.
Pratte,
J
[dissenting
in
part]:
The
facts
which
gave
rise
to
this
appeal
are
stated
by
my
brother
Heald.
I
need
not
repeat
them.
There
are
two
grounds
of
appeal:
first,
that
the
respondent,
contrary
to
what
was
found
by
the
trial
judge,
never
ceased,
either
in
1964
or
in
1971,
to
be
an
employee
of
CKOY
Limited;
second,
that,
in
any
event,
the
contractual
arrangements
whereby
the
respondent
ceased
to
be
an
employee
of
CKOY
Limited
and
continued
to
provide
management
services
to
that
company
as
the
employee
of
John
J
Daly
Enterprises
Limited
should
be
disregarded
in
assessing
income
tax
since
those
arrangements
were
entered
into
for
the
sole
purpose
of
saving
tax
and
not
for
valid
business
reasons.
I
may
as
well
say
immediately
that
I
do
not
see
any
merit
in
that
second
ground
of
appeal.
While
it
may
be
important
for
many
purposes
in
applying
the
Income
Tax
Act
to
determine
whether
a
transaction
has
been
entered
into
for
valid
business
reasons,
I
know
of
no
law
which
would
authorize
the
courts
to
disregard,
in
assessing
income
tax,
a
real
transaction
that
has
the
effect
of
reducing
the
income
tax
payable
for
the
sole
reason
that
it
was
entered
into
for
the
purpose
of
saving
tax.
The
law,
and
the
Income
Tax
Act
is
no
exception,
must
be
applied
to
the
true
facts.
In
many
instances,
and
this
case
is
one
of
them,
it
is
difficult
to
find
out
what
the
facts
are;
this
is
particularly
so
when
a
taxpayer
has
resorted
to
simulation
to
disguise
the
reality.
However,
once
the
true
facts
have
been
ascertained,
they
certainly
cannot
be
disregarded
in
applying
the
law.
The
appellant’s
other
ground
of
appeal,
namely,
that
the
respondent
never
ceased
to
be
an
employee
of
CKOY
Limited,
raises
more
difficulties.
The
memorandum
of
agreement
of
July
1,
1971,
between
CKOY
Limited
and
John
J
Daly
Enterprises
Limited
is,
in
my
view,
clear
evidence
that,
at
least
as
of
that
date,
there
was
in
existence
between
the
two
companies
a
contract
whereby
John
J
Daly
Enterprises
Limited
was
to
supply
the
services
of
John
Daly
to
CKOY.
Counsel
for
the
appellant
argued
that,
in
spite
of
that
contract,
the
respondent
had
continued
to
work
as
an
employee
of
CKOY
Limited
because,
in
his
submission,
there
is
no
evidence
that
he
ever
took
any
steps
to
terminate
his
employment
with
that
company.
I
am
not
convinced
by
that
argument.
The
respondent’s
employment
with
CKOY
could
be
terminated
by
agreement
and
that
agreement
need
not
be
in
any
special
form
provided
that
it
be
proven.
CKOY
Limited
signed
the
memorandum
of
July
1,
1971;
in
my
view,
this
is
evidence
that
CKOY
did
not
intend
to
retain
the
respondent
as
its
employee.
The
respondent
himself
signed
the
memorandum
as
the
president
of
John
J
Daly
Enterprises
Limited;
this
shows
that
he
had
agreed
to
terminate
his
employment
with
CKOY.
I
am
therefore
of
the
opinion
that
at
least
from
July
1,
1971,
the
respondent
had
ceased
to
be
an
employee
of
CKOY
Limited
and
was
providing
management
services
to
that
company
as
the
employee
of
John
J
Daly
Enterprises
Limited.
A
more
important
question,
however,
is
whether
the
agreement
evidenced
by
the
memorandum
of
July
1,
1971,
was
really
made
verbally
in
July
1964
as
contended
by
the
respondent.
The
trial
judge
found
that
it
had.
He
made
that
finding
on
the
basis
of
the
evidence
given
by
the
respondent,
Mr
Henderson
and
Mr
Ross.
This
is
clearly
a
case
where
a
Court
of
Appeal
cannot
reverse
the
decision
of
the
trial
judge
unless
being
convinced
that
he
is
wrong.
I
have
that
conviction.
The
learned
trial
judge
obviously
misinterpreted
the
evidence
given
by
Mr
Henderson
and
by
Mr
Ross,
the
accountant
who
had
been
in
charge
of
the
audit
of
CKOY
Limited
in
1964.
The
learned
judge
says
that
Mr
Henderson
testified
that,
before
signing
the
July
1,
1971,
memorandum,
“he
first
satisfied
himself
by
discussing
with
the
persons
who
were
the
relevant
officers
and
agents
of
CKOY
Limited
at
the
material
times
that
in
fact
from
1964
and
during
these
relevant
years,
John
J
Daly
Enterprises
Limited
and
not
John
J
Daly
personally
did
render
management
services
to
CKOY
Limited
for
which
John
J
Daly
Enterprises
Limited
was
paid.’’
Mr
Henderson
did
not
say
that
in
his
evidence.
He
merely
testified,
without
giving
any
detail,
that
he
had
made
an
investigation
in
order
to
determine
the
date
on
which
the
alleged
verbal
agreement
between
CKOY
Limited
and
John
J
Daly
Enterprises
Limited
had
been
made.
As
to
the
evidence
given
by
the
accountant,
Mr
Ross,
the
learned
judge
summarized
it
in
the
following
terms:
.
.
.
he
personally,
from
time
to
time
and
during
all
material
times,
discussed
with
and
got
confirmation
from
the
relevant
officers
and
agents
of
CKOY
Limited
that
this
oral
contract
betwen
CKOY
Limited
and
John
J
Daly
Enterprises
Limited
had
been
entered
into
and
was
in
effect
during
the
relevant
taxation
years
of
John
J
Daly;
This
is
not
an
accurate
summary
of
that
evidence.
Mr
Ross,
who
obviously
did
not
recall
what
had
taken
place
in
1964,
merely
said
that
it
would
have
been
his
practice
to
verify
with
an
officer
of
CKOY
Limited
that
the
amounts
paid
to
John
J
Daly
Enterprises
Limited
were
really
management
fees.
Contrary
to
what
the
learned
Judge
thought,
therefore,
the
evidence
of
Mr
Henderson
and
of
Mr
Ross
does
not
lend
much
support
to
the
testimony
of
the
respondent.
In
those
circumstances,
it
is
necessary
to
re-evaluate
the
evidence
of
the
respondent
who
testified
that,
in
July
1964,
contractual
arrangements
were
made
whereby
he
ceased
to
be
an
employee
of
CKOY
and
whereby
his
company,
John
J
Daly
Enterprises
Limited,
undertook
to
furnish
management
services
to
CKOY
Limited.
The
only
contemporaneous
evidence
of
the
existence
of
those
arrangements
is
the
fact
that,
on
July
15,
1964,
CKOY
Limited
ceased
to
issue
salary
cheques
to
the
respondent
and
commenced,
instead,
to
issue
cheques
to
John
J
Daly
Enterprises
Limited.
However,
the
conduct
of
the
respondent
between
1964
and
1971
shows
that
he
did
not
consider,
at
that
time,
that
his
employment
with
CKOY
had
come
to
an
end.
On
July
2,
1964,
he
assigned
to
his
company
his
rights
under
his
employment
contract
reserving
for
himself
the
right
that
he
had
under
his
employment
contract
to
subscribe,
at
the
end
of
each
year,
at
very
favourable
conditions,
shares
in
the
capital
stock
of
CKOY
Limited.
That
contract
of
assignment
obviously
presupposed
that
the
respondent’s
employment
had
not
terminated.*
Moreover,
until
1969
or
1971,
the
respondent
exercised
every
year
the
right
that
he
had
under
his
employment
contract
to
subscribe
shares
of
CKOY
Limited.
Finally,
in
1967,
he
signed
a
letter
whereby
he
agreed
to
the
removal
for
a
further
period
of
5
years
of
his
personal
contract
of
employment.
In
those
circumstances,
it
is
impossible
to
say,
in
my
view,
that
the
respondent
has
proved
his
contention
that,
in
1964,
he
ceased
to
be
an
employee
of
CKOY
Limited.
For
these
reasons,
I
would
allow
the
appeal,
set
aside
the
decision
of
the
Trial
Division
and,
rendering
the
decision
that
the
Trial
Division
should
have
pronounced,
I
would
dismiss
the
respondent’s
appeal
in
so
far
as
it
is
directed
against
the
reassessments
for
the
years
prior
to
1971
and
I
would
allow
his
appeal
from
the
reassessments
for
the
years
1971
and
1972
and
refer
back
those
reassessments
to
the
Minister
for
reconsideration
and
further
reassessments
not
inconsistent
with
these
reasons.
As
to
costs,
the
appellant
shall
be
entitled
to
half
her
costs
of
the
appeal
while
the
respondent
shall
be
entitled
to
half
his
costs
of
the
action
in
the
Trial
Division.
Email this Content