Beaubier
J.T.C.C.:-This
matter
was
heard
at
Ottawa,
Ontario
on
November
15,
1994
pursuant
to
the
rules
of
general
procedure
of
this
Court.
The
appellant
called
Peter
Doody,
an
Ottawa
lawyer
who
represented
the
appellant
in
civil
litigation
which
will
be
described.
The
Crown
called
Steve
Gordon,
the
president
of
the
’’Regional
Group
of
companies”.
The
appellant
has
appealed
a
reassessment
respecting
his
1989
taxation
year
concerning
the
amount
of
$100,000
which
he
received
from
Regional
Realty
Ltd.
(”RRL").
The
appellant
treated
the
sum
as
proceeds
received
from
the
sale
of
shares.
The
Crown
treated
all
except
$15,000
of
the
sum
as
a
retiring
allowance
within
the
meaning
of
subparagraph
56(1
)(a)(ii)
and
subsection
248(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the’’Act”).
The
appellant
is
a
chartered
accountant.
He
was
employed
by
RRL
as
its
vice-president
from
1983
until
he
was
dismissed
on
November
30,
1987.
The
evidence
is
that
throughout
his
employment,
the
appellant
was
the
controller
of
RRL
and
prepared
the
interim
financial
statements
and
the
annual
financial
statements
before
they
were
submitted
to
RRL’s
accountants,
Peat
Marwick.
The
appellant’s
contract
of
employment
called
for
a
salary
of
$50,000
per
annum,
and
an
annual
bonus
calculated
at
the
end
of
each
year
of
five
per
cent
of
the
profit
of
the
Regional
Group
of
companies.
The
letter
of
dismissal
(Exhibit
A-1,
Tab
1)
dated
November
30,
1987
alleges
dismissal
for
cause.
On
February
26,
1988
the
appellant
issued
a
statement
of
claim
against
RRL
for
$446,000
consisting
of
unpaid
salary
and
bonus
and
pay
in
lieu
of
notice
for
termination
of
his
employment
without
cause;
in
addition
he
claimed
the
sum
of
$150,000
for
the
value
of
50
shares
the
appellant
owned
in
Regional
Capital
Properties
Corporation
("RCPC")
(Exhibit
A-1,
Tab
2).
In
1984
the
appellant
purchased
50
common
shares
of
RCPC
for
$100.
This
consisted
of
five
per
cent
of
the
outstanding
common
shares
of
RCPC.
On
January
21,
1985,
all
of
the
shareholders
of
RCPC
and
RCPC
signed
a
shareholders’
agreement
(Exhibit
R-2).
Paragraph
4.03
provides
that,
in
the
event
of
cessation
of
employment,
RCPC
or
RRL
shall
have
the
option
to
purchase
the
appellant’s
shares
on
the
terms
provided
in
paragraph
4.04
by
delivery
of
written
notice
thereof
to
the
departing
party
within
30
days
of
the
date
that
employment
ceases.
Paragraph
4.04
of
Exhibit
R-2
was
discussed
extensively
by
both
counsel.
It
reads
as
follows:
Section
4.04
Purchase
price.
If
Regional
shall
elect
to
purchase
the
shares
of
the
departing
party,
the
purchase
price
shall
be
an
amount
equal
to
the
fair
market
value
thereof
as
of
the
effective
date,
as
certified
by
the
company’s
accountant
or
auditor,
applying
generally
accepted
accounting
principles
on
a
basis
consistent
with
those
applied
in
preparation
of
the
company’s
financial
statements
in
previous
years.
However,
if
as
of
the
effective
date
the
company
owns
or
has
a
beneficial
interest
in
real
property
which
has
not
been
either
acquired
or
appraised
within
two
years
prior
to
the
effective
date,
then
such
accountant
or
auditor
may,
if
he
deems
necessary,
obtain
and
rely
upon
an
appraisal
of
such
property
prepared
by
an
appraiser
chosen
by
Regional,
who
shall
be
a
member
of
the
Appraisal
Institute
of
Canada
or
any
successor
body.
The
cost
of
such
appraisal
shall
be
paid
by
the
company.
In
the
case
of
any
dispute
in
the
determination
of
the
purchase
price
arising
hereunder,
all
such
questions
shall
be
conclusively
determined
by
the
company’s
accountant
or
auditor.
The
statement
of
defence
is
dated
April
13,
1988
(Exhibit
A-1,
Tab
3);
it
contains
a
counterclaim
against
Mr.
Staltari
for
$2,051,500
damages
for
negligence
in
his
duties,
together
with
another
$106,335
for
debts
owed.
These
were
followed
by
a
demand
for
particulars,
a
reply
to
demand
for
particulars,
and
a
reply
and
defence
to
counterclaim
which
was
dated
August
23,
1988.
Extensive
proceedings
on
behalf
of
Mr.
Staltari
to
obtain
documents
from
RRL
followed.
Examination
for
discovery
by
the
appellant’s
counsel
of
RRL’s
representative
occurred
for
four
days
in
January
and
February
1989
without
dealing
with
the
question
of
cause
for
dismissal.
A
fifth
day
was
booked
for
continued
examinations.
There
was
no
examination
for
discovery
of
Mr.
Staltari.
On
March
3,
1989
the
appellant’s
counsel
wrote
the
solicitors
for
RRL
and
proposed
settlement
(Exhibit
A-1,
Tab
10)
on
the
basis
that
RRL
purchase
Mario
Staltari’s
shares
in
RCPC
for
$110,000,
and
pay
his
costs
of
$15,000.
Settlement
occurred
on
March
13,
1989.
RRL
forgave
debts
owed
by
the
appellant
to
it
consisting
of
a
car
loan
in
the
sum
of
$16,335
and
a
personal
loan
in
the
sum
of
$55,000.
In
addition,
documents
dated
March
13,
1989
consist
of
a
release
executed
by
the
appellant
and
his
service
corporation,
Listmar
Inc.,
in
favour
of
RRL
and
others
described
as
"the
Regional
Group"
in
consideration
of
$1
[at
Exhibit
A-2,
Tab
11]
In
Satisfaction
of
all
claims
for
damages
for
wrongful
dismissal,
unpaid
and
lost
bonus
and
profit
share
including
all
non-salary
benefits
ordinarily
provided
in
respect
of
the
employment;
vacation
pay;
any
and
all
expenses
whether
incurred
before,
on,
or
after
the
date
hereof
in
respect
of
the
employment.
and
a
second
agreement
between
RRL
and
others,
described
as
"the
Regional
Group",
and
the
appellant
and
Listmar
Inc.
Paragraph
1
of
the
agreement
reads
as
follows
[at
Exhibit
A-2,
Tab
11]:
Regional
Realty
Ltd.
shall
pay
to
Staltari
the
sum
of
$115,000
of
which
$100,000
shall
be
allocated
to
the
price
of
purchasing
from
Staltari
all
of
the
common
shares
of
Regional
Capital
Properties
Corporation
owned
by
Staltari
and
$1
shall
be
allocated
to
the
release
of
all
claims
for
damages
for
wrongful
dismissal,
unpaid
and
lost
bonus
and
profit
share
including
all
non-salary
benefits
ordinarily
provided
in
respect
of
employment,
vacation
pay,
any
and
all
expenses
whether
incurred
before,
on,
or
after
the
date
hereof
in
respect
of
the
employment.
The
remaining
sum
of
$14,999
represents
payment
of
Staltari’s
legal
costs
in
Supreme
Court
Action
no.
8862/88
and
shall
be
paid
as
directed
by
Staltari.
Subject
to
the
earlier
payment
provided
in
paragraph
3
herein,
the
sum
of
$115,000
shall
be
paid
to
Staltari
or
as
directed
by
him
on
the
following
dates
and
in
the
following
amounts:
March
10,
1989:
$35,000.00
June
30,
1989:
26,666.67
September
30,
1989:
26,666.67
December
31,
1989:
26,666.66
In
its
reply,
the
Crown
referred
to
RCPC
as
’’Regional
Properties”.
Assumptions
13(g)
through
13(j),
inclusive,
read
as
follows:
(g)
on
January
29,
1988,
Peat
Marwick,
on
behalf
of
Regional
Realty,
valued
the
appellant’s
shares
of
Regional
Properties
and
concluded
that
the
fair
market
value
thereof
as
at
the
date
his
employment
ceased
was
$12,375;
(h)
at
all
material
times,
the
fair
market
value
of
50
common
shares
of
Regional
Properties
did
not
exceed
the
amount
of
$15,000;
(i)
the
amount
of
$15,000
can
reasonably
be
regarded
as
being
the
appellant’s
proceeds
from
the
disposition
of
his
shares
in
Regional
Properties;
(j)
the
amount
of
$85,000
constituted
an
amount
received
by
the
appellant
in
respect
of
his
loss
of
employment
with
Regional
Realty;
Both
Mr.
Doody
and
Mr.
Gordon
stated
that
the
action
was
settled
because
it
was
obvious
the
litigation
would
be
prolonged
and
very
expensive.
Each
stated
that
the
principal
to
his
side
of
the
litigation
was
aware
of
the
tax
consequences
when
negotiating
the
settlement
arrived
at.
What
is
in
question
is
an
allocation
pursuant
to
section
68
of
the
Income
Tax
Act,
which
reads:
Where
an
amount
received
or
receivable
from
a
person
can
reasonably
be
regarded
as
being
in
part
the
consideration
for
the
disposition
of
a
particular
property
of
a
taxpayer
or
as
being
in
part
consideration
for
the
provision
of
particular
services
by
a
taxpayer,
(a)
the
part
of
the
amount
that
can
reasonably
be
regarded
as
being
the
consideration
for
the
disposition
shall
be
deemed
to
be
proceeds
of
disposition
of
the
particular
property
irrespective
of
the
form
or
legal
effect
of
the
contract
or
agreement,
and
the
person
to
whom
the
property
was
disposed
of
shall
be
deemed
to
have
acquired
it
for
an
amount
equal
to
that
part;
and
(b)
the
part
of
the
amount
that
can
reasonably
be
regarded
as
being
consideration
for
the
provision
of
particular
services
shall
be
deemed
to
be
an
amount
received
or
receivable
by
the
taxpayer
in
respect
of
those
services
irrespective
of
the
form
or
legal
effect
of
the
contract
or
agreement,
and
that
part
shall
be
deemed
to
be
an
amount
paid
or
payable
to
the
taxpayer
by
the
person
to
whom
the
services
were
rendered
in
respect
of
those
services.
Crown
counsel
quoted
from
Petersen
v.
M.N.R.,
[1988]
1
C.T.C.
2071,
88
D.T.C.
1040
(T.C.C.),
in
which
Rip
J.T.C.C.
stated
at
pages
2079
(D.T.C.
1045-46),
as
follows:
The
position
of
the
appellant
is
that
where
there
is
an
arm’s
length
sale
of
property
and
in
the
agreement
of
sale
the
vendor
and
purchaser
have
allocated
amounts
to
the
various
assets
transferred,
the
Court
should
regard
such
allocation
as
being
prima
facie
evidence
of
the
values
allocated.
This
is
of
course
subject
to
a
finding
that
the
allocation
is
not
a
mere
sham
or
subterfuge.
While
case
law
does
provide
some
support
for
the
appellant’s
position,
it
does
not
necessarily
support
its
application
in
the
present
circumstances.
In
the
case
of
Golden
v.
The
Queen,
[1986]
1
S.C.R.
209,
[1986]
1
C.T.C.
274,
86
D.T.C.
6138,
the
Supreme
Court
of
Canada
considered
the
application
of
section
68.
The
majority
of
the
Court
held
that
the
allocation
established
by
the
contract
between
the
parties
was
reasonable
for
the
reasons
given
by
Mr.
Justice
Heald
in
the
Federal
Court
of
Appeal
([1983]
C.T.C.
112,
83
D.T.C.
5138)
who
stated
at
pages
116-17
(D.T.C.
5142):
It
is
my
opinion
that
the
correct
approach
to
a
section
68
determination
would
be,
as
suggested
by
the
above
authorities,
to
consider
the
matter
from
the
viewpoint
of
both
the
vendor
and
the
purchaser
and
to
consider
all
of
the
relevant
circumstances
surrounding
the
transaction.
Where,
as
in
this
case,
as
found
by
the
trial
judge,
the
transaction
is
at
arm’s
length
and
is
not
a
mere
sham
or
subterfuge,
the
apportionment
made
by
the
parties
in
the
applicable
agreement
is
certainly
an
important
circumstance
and
one
which
is
entitled
to
considerable
weight.
Furthermore,
in
this
case,
the
trial
judge
made
a
specific
finding
of
fact
(AB
page
159)
that
the
figure
of
$5,100,000
which
the
parties
apportioned
to
land
in
the
agreement
was
not
an
unreasonable
price
for
the
purchaser
to
pay
for
the
land
alone
in
March
1973.
Accordingly,
based
on
that
specific
finding
and
on
the
other
circumstances
appearing
from
the
evidence
and
addressing
the
question
from
the
point
of
view
of
both
the
appellant
and
its
purchaser,
I
am
of
the
opinion
that
the
amount
that
can
reasonably
be
regarded
as
having
been
paid
and
received
for
the
land
apart
from
the
buildings,
etc.,
was
$5,100,000
and
for
the
buildings,
equipment,
roads,
sidewalk,
etc.,
was
$750,000.
Notwithstanding
that
Mr.
Justice
Heald
considered
the
finding
by
the
trial
judge
that
the
agreement
in
the
Golden
case
was
not
a
sham
or
subterfuge
his
decision
was
based
on
the
specific
finding
of
fact
that
the
amount
apportioned
by
the
parties
was
not
an
unreasonable
amount.
Where
an
agreement,
although
evidencing
neither
sham
nor
subterfuge,
stipulates
an
amount
which
is
clearly
unreasonable
in
the
circumstances,
it
is
still
very
much
open
to
the
Court
to
conclude
that
section
68
should
apply
to
reallocate
the
proceeds
in
a
reasonable
manner.
[Emphasis
added.]
In
order
for
the
appellant
to
succeed
he
must
satisfy
the
onus
of
establishing
that
the
Minister’s
reallocation
was
unrealistic,
and
he
must
prove
that
his
allocation
was
reasonable
in
the
circumstances.
Mr.
Doody
stated
that,
in
his
opinion,
the
value
of
$12,375
arrived
at
by
Peat
Marwick
as
the
’’fair
market
value"
was
subject
to
question,
and
ultimately
litigation,
because
it
was
based
upon
unaudited
financial
statements
for
the
previous
years;
it
was
based
on
the
first
six
months
of
1987
and
yet
was
to
be
effective
November
30,
1987;
some
real
property
assets
of
RCPC
were
not
properly
valued;
and
on
November
30,
1987
a
bonus
of
$400,000
was
paid
to
the
executive
officer
of
RCPC
and
yet
was
not
considered
for
the
purposes
of
the
Peat
Marwick
valuation.
The
settlement
of
litigation
was
at
arm’s
length
and
was
not
a
sham
or
subterfuge.
It
is
obvious
that
the
Minister
based
his
reallocation
on
the
value
arrived
at
by
Peat
Marwick,
the
firm’s
accountant.
It
was
agreed
that
Peat
Marwick
would
apply
generally
accepted
accounting
principles
in
evaluating
these
shares
and
in
arriving
at
a
fair
market
value
of
$12,375
and
there
is
no
evidence
that
they
did
not.
In
addition,
the
Minister
relied
on
the
testimony
of
Mr.
Gordon
that
in
about
1989
another
shareholder
of
RRL
accepted
a
payout
of
$12,375
for
five
per
cent
of
the
common
shares
in
RCPC
and
that
in
his
opinion
the
value
of
RCPC
had
dropped
somewhat
after
1987.
There
is
no
evidence
that
any
other
consideration
of
any
kind
was
paid
to
this
shareholder
who
was
a
signatory
to
the
same
shareholders
agreement
that
was
signed
by
the
appellant.
The
evidence
before
the
Court
does
not
disprove
the
assumption
of
the
Minister
of
National
Revenue
that
at
all
material
times
the
fair
market
value
of
50
common
shares
of
RCPC
did
not
exceed
the
amount
of
$15,000.
Based
upon
the
above
conclusion,
the
appeal
can
be
dismissed.
However
even
if
the
appellant
proved
that
the
fair
market
value
relied
on
by
the
Minister
was
unrealistic,
the
appellant
must
still
establish
that
the
appellant’s
own
allocation
was
reasonable
in
the
circumstances.
The
appellant’s
statement
of
claim
respecting
services
appears
to
have
been
overstated
with
respect
to
compensation
claimed
for
lack
of
notice
and
may
have
been
overstated
in
respect
to
the
claim
for
bonus.
Furthermore,
it
was
subject
to
the
counterclaim
by
RRL
alleging
negligence
and
debts
owed
by
the
appellant.
The
appellant’s
claim
for
compensation
for
services
was
not
only
defended
by
RRL,
but
was
the
subject
of
a
counterclaim
and
bitter
litigation
based
upon
RRL’s
position
that
the
services
of
the
appellant
were,
if
anything,
of
negative
value.
Mr.
Doody
testified
that
the
best
he
could
obtain
from
RRL
respecting
a
reference
for
the
appellant
was
paragraph
6
of
the
settlement
agreement
dated
March
13,
1989
which
reads
as
follows
[at
Exhibit
A-1,
Tab
11]:
6.
The
Regional
Group
agrees
that
all
queries
to
Steven
Gordon,
Leonard
Potechin,
Sid
Rothman
or
Jeff
Gould
regarding
Staltari’s
competence
or
ability
while
working
for
The
Regional
Group
shall,
if
answered,
be
answered
only
with
"No
Comment".
Mr.
Doody
testified
that
it
is
customary
in
such
a
settlement
that
a
person
in
the
appellant’s
position
would
receive
a
letter
of
recommendation.
To
the
foregoing
there
must
be
added
that
at
the
time
settlement
was
reached,
discovery
had
not
yet
proceeded
on
either
party
respecting
the
question
of
dismissal
for
cause.
All
of
this
could
indicate
that
reasonable
consideration
for
the
appellant’s
services
was
what
the
parties
agreed
upon,
namely
$1
at
best.
That
is
the
position
that
RRL
took
when
it
dismissed
the
appellant
for
cause.
It
could
also
be
interpreted
as
the
essence
of
the
position
the
appellant’s
counsel
took
when
he
offered
to
settle
without
his
client
being
examined
and
without
examining
RRL’s
officer
in
respect
to
the
cause
for
dismissal.
On
the
other
hand,
RRL
never
examined
the
appellant
for
discovery
before
it
signed
the
settlement
agreement
.
Both
Mr.
Doody
and
Mr.
Gordon
stated
that
the
fundamental
reason
for
the
settlement
was
each
party’s
estimate
of
the
cost
of
protracted
litigation.
In
contrast
to
the
decision
in
Golden,
supra,
there
was
no
determination
by
a
trial
judge
in
this
case.
Rather,
each
party
was
represented
by
competent
counsel
who
specifically
pleaded
very
strong
allegations
concerning
the
claim
for
compensation
for
services
or
why
they
should
not
be
paid.
After
extensive
procedural
wrangling
and
examinations
concerning
documents
and
testimony
as
to
the
value
of
the
property,
they
settled
without
examinations
for
discovery
respecting
the
value
of
the
services.
The
Court
concludes
that
the
documents
dated
March
13,
1989
(Exhibit
A-l,
Tab
11)
merely
evidence
a
decision
by
each
party
to
the
litigation
to
cut
the
losses
and
settle
the
matter.
A
deal
was
struck
by
the
parties
which
represents
the
best
each
could
get
out
of
the
other.
At
the
point
of
settlement,
neither
party
knew
what
the
outcome
would
have
been
if
the
claim
for
unpaid
salary,
bonus
and
pay
in
lieu
of
notice
of
termination
of
employment
had
proceeded
to
trial.
Although
there
was
a
counterclaim
for
negligence
and
a
defence
of
dismissal
with
cause,
there
is
no
evidence
to
show
that
the
appellant
had
no
chance
of
succeeding
in
his
wrongful
dismissal
claim
so
as
to
warrant
an
allocation
of
only
$1
in
the
settlement.
Such
a
deal
need
not
be
and
often
is
not
"reasonable",
that
is
say
rational.
It
does
not
represent
what
may
be
reasonably
regarded
as
the
consideration
for
either
the
services
or
the
disposition
of
property.
The
appeal
is
dismissed.
The
Crown
is
awarded
its
costs.
Appeal
dismissed.
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