Beaubier, T.C.C.J.:—This matter was heard in Saskatoon, Saskatchewan, on October 5, 1992. It is an appeal pursuant to the General Procedure of this Court.
The appellant was the only witness.
The issue before the Court is whether the payment of $367,000 by Col. Sanders Kentucky Fried Chicken Ltd. (KFC) to the appellant following an agreement dated December 21, 1987 constituted capital or income to the appellant.
In the early 1950s, the appellant was operating a drive-in restaurant on 8th Street in Saskatoon. While discussing business with another drive-in restaurant owner in Calgary, Alberta, he learned of Colonel Harland Sanders. Colonel Sanders and the appellant made a deal by word of mouth and the appellants Saskatoon drive-in restaurant became the second franchised Kentucky Fried Chicken outlet in Canada. Colonel Sanders was then 60 years old and he asked the appellant to sell franchises for him in Canada for a fee of one half of the royalties paid by each franchisee. This second oral deal lasted for about five years and the appellant sold franchises, helped franchisees, trained them at his Saskatoon operation and did follow-up and further training of the franchisees at their operations.
In January of 1962, Colonel Sanders visited Saskatoon and the two men discussed their oral deal. The Colonel mentioned his age and his two daughters and suggested that they put their agreement in writing. They had Percy Maguire, Q.C., a Saskatoon lawyer, draw up a written agreement evidencing their oral deal respecting the franchising sales operation of the appellant. This was signed and sealed by the two men and the Colonel's corporations on January 15, 1962. It is filed as Exhibit A-1.
By this time the appellant's drive-in restaurant business had been incorporated. However, the appellant kept the franchise sales operation in his individual name. The appellant was at this time in charge of all Kentucky Fried Chicken franchise operations in Canada.
Some time later Colonel Sanders moved the head office of the Kentucky Fried Chicken operation in Canada to Toronto from Saskatoon. When this happened the appellant's part in the franchise operation diminished because he and his family chose to stay in Saskatoon. The appellant did help to set up franchise operations in Ontario, however, including Scott's restaurants operation which eventually had more than 200 Kentucky Fried Chicken sales outlets. At about this time the appellant had trouble collecting his royalties. The appellant and Colonel Sanders and all of the parties and their lawyers met in Toronto. In the course of their meeting the appellant and Colonel Sanders decided to meet alone. Mr. Young testified that Colonel Sanders had tears in his eyes and Mr. Young also came close to tears during that meeting. The Court believes this. The two men struck a deal which is drawn up and signed by them at that meeting in Toronto on April 25, 1972. It was filed as Exhibit A-2. It reads as follows:
1. Col. Sanders Kentucky Fried Chicken Ltd. (hereafter referred to as the "Company") shall pay to Joseph Young commencing as of January 1, 1972 the sum of $40,000 per annum as long as he shall live. Joseph Young shall serve as a consultant and shall perform such dignified duties in the promotion of the business of the company as shall be mutually agreed upon with the board of directors of the company.
2. (a) Upon the death of Joseph Young, the company shall pay to his widow, Madeline Young, or to his estate, if she is deceased, the sum of $40,000 per annum until his youngest surviving child (who was in being on January 1, 1972) shall attain the age of 21 years.
(b) Upon the death of Joseph Young and after his youngest surviving child (who was in being on January 1, 1972) shall have attained the age of 21 years, the company shall pay to his widow, Madeline Young, the sum of $20,000 per annum as long as she shall live.
(c) While Madeline Young is receiving compensation from the company, she shall serve as a consultant and shall perform such dignified duties in the promotion of the business of the company as shall be mutually agreed upon with the board of directors of the company.
3. This agreement in principle shall supersede any and all understandings or agreements (written or oral) between the company and/or Colonel Harland Sanders, on the one hand, and Joseph Young and/or Madeline Young, on the other hand. Any such prior understanding or agreements shall be of no further force and effect and there shall be no liability whatsoever nor any claim made thereunder by any party thereto. Any sums paid to Joseph Young by the company since January 1, 1972 shall be credited to the sum due under this agreement. 4. In the event of the insolvency or bankruptcy of the company, this Agreement shall cease to have any effect.
Joseph Young
Col. Sanders Kentucky Fried Chicken Ltd.
By:
Exhibit A-2 was formalized in a larger document drawn by the lawyers and backdated to January 1, 1972 which was filed as Exhibit A-3. Paragraphs 1 to 6 inclusive of Exhibit A-3 read as follows:
1. (a) The company shall pay the sum of $40,000 per annum until the death of Young, or until his youngest surviving child shall attain the age of 21 years, whichever date shall be the later, to Young or, following his death, to his widow Madeline Young or to his estate if she is deceased; it being understood and agreed that such youngest surviving child shall be that last one of his surviving children (who was in being on January 1,1972) to have attained the age of 21 years; and (b) the company shall pay the sum of $20,000 per annum, after the later of the said elates referred to in (a) above, to his widow Madeline Young if she survives such later date, as long as she shall live thereafter.
2. (a) Young shall serve as a consultant to the company and shall perform such dignified duties in the promotion of the business and affairs of the company as shall be mutually agreed upon with the board of directors of the company, for so long as he shall receive compensation from the company under paragraph 1 (a) above.
(b) Madeline Young shall serve as a consultant to the company and shall perform such dignified duties in the promotion of the business and affairs of the company as shall be mutually agreed upon with the board of directors of the company, while she is receiving compensation from the company under paragraphs 1(a) or 1(b) above.
3. The sums provided for under paragraph 1 above shall be paid yearly on the first day of January, the first of such payments to commence as of January 1, 1972. Any amounts already paid to Young by the company under the said agreement since January 1, 1972 shall be credited against the sum payable as of January 1,1972 under this agreement.
4. (a) It is expressly understood and agreed that, having regard to the purpose of the said agreement including the payment thereunder to Young by the company of a portion of the service charges received or to be received by the company from certain” Kentucky Fried Chicken" outlets, the obligations of the company to make payments provided for under this agreement are a reasonable and acceptable continuation of the obligations of the company under the said agreement.
(b) This agreement shall supersede the said agreement, and any and all understandings and agreements (written or oral) between the company and/or Col. Harland Sanders on the one hand and Young and/or Madeline Young on the other hand, and the said agreement and such understandings and agreements are hereby cancelled and shall be of no further force and effect and there shall be no liability whatsoever nor any claim or demand made thereunder or in respect thereof by any of the parties hereto, save as expressly provided hereunder.
5. Young and Madeline Young hereby covenant and agree with the company to continue to promote the business and affairs of the company as provided for hereunder and that neither of them shall knowingly prejudice or cause injury to the business and affairs of the company and shall not directly or indirectly carry on any business activity in competition with the business of the company or of any of the company's authorized franchisees.
6. Upon default by any of the parties hereto in any obligations under this agreement, which default shall not have been rectified within 60 days following written notice thereof to such party by another party hereunder, such other party shall have the right to terminate this agreement upon written notice to the other parties; provided, however, that in the event of termination because of default by the company in making any payment hereunder which is not rectified as aforesaid, the company shall thereupon become liable to pay to Young, Madeline Young and/ or his estate, as the case may be, an amount equal to the present value, as at the date of such default, of the total of the sums which the company would otherwise have been liable to pay hereunder for the period, actuarially calculated as of the date of such default, ending with the later of the expiration of the then life expectancy of Young, the expiration of the then life expectancy of Madeline Young, and the date when the then youngest of the living children of Young who is less than 21 years of age, and who was in being on January 1, 1972, would attain the age of 21 years. Provided, however, that Young, and/or his estate or Madeline Young as the case may be shall have the right and option to elect as between the remedies provided for herein in the immediately preceding sentence of this paragraph, and taking such action as they see fit to enforce the terms of this agreement or both, as the circumstances permit and as Young and/or his estate or Madeline Young may be advised.
On the instructions of the appellant, payors withheld the tax on the $40,000 per annum which they were to pay to the appellant pursuant to Exhibits A-2 and A-3.
After Exhibits A-2 and A-3 were signed the appellant never sold or serviced any franchises. He was never asked to, however the appellant did continue as a director of the Canadian franchise corporation and he did continue to operate his incorporated Kentucky Fried Chicken franchise in Saskatoon.
In 1985 or 1986 Pepsico purchased KFC, the Canadian franchise corporation. Pepsico wanted to clean up all agreements such as the appellants. Therefore KFC contracted with the appellant and the appellant and his wife signed the agreement which is at issue in this appeal. That agreement was filed as Exhibit A-4. It reads as follows:
AMENDMENT TO
AGREEMENT IN PRINCIPLE
This Amendment to an agreement in Principle is made this 21st day of December, 1987.
BETWEEN:
COL. SANDERS KENTUCKY FRIED CHICKEN LTD. (hereinafter referred to as "KFC")
and
JOSEPH YOUNG, of the City of Saskatoon in the Province of Saskatchewan (hereinafter referred to as "Mr. Young")
and
MADELINE YOUNG, of the City of Saskatoon in the Province of Saskatchewan (hereinafter referred to as "Mrs. Young")
WHEREAS, KFC and Mr. Young entered into a certain agreement in Principle dated April 24, 1972, a copy of which is attached hereto as Schedule "A" (hereinafter the "1972 agreement”);
AND WHEREAS the 1972 agreement provides for certain periodic payments, to be made by KFC to Mr. Young or, upon the happening of certain events, to Mrs. Young or the estate of Mr. Young;
AND WHEREAS the parties to the 1972 agreement and Mrs. Young wish to amend the 1972 agreement to provide for payment by KFC of the amount of Can. $367,000, in lieu of all periodic payments provided for in the 1972 agreement;
NOW, THEREFORE, in consideration of the premises and of the covenants hereinafter made, the parties hereto agree with each other as follows:
1. KFC shall pay to Mr. Young and Mrs. Young the aggregate amount of Can $367,000 which shall be payable as follows:
(a) by delivery of a cheque in the amount of Can. $67,000 made payable to Mr. Young, to Mr. Young on or before December 25,1987; and
(b) by delivery of a cheque in the amount of Can. $300,000 made payable to Mr. Young, to Mr. Young on or before January 31, 1988.
2. Mr. Young shall acknowledge receipt of the cheques referred to in paragraph 1, by signing the acknowledgement at the bottom of the covering letters, which shall accompany each cheque, and returning them to KFC.
3. In consideration of the aforesaid payment, Mr. Young and Mrs. Young, do hereby each agree to act as a consultant to KFC and to perform such dignified duties in the promotion of the business of KFC as shall be mutually agreed upon by Mr. Young or Mrs. Young, as the case may be, and the board of directors of KFC.
4. The 1972 agreement is hereby deemed to be terminated and of no further force or effect as of the date hereof. Moreover Mr. Young and Mrs. Young do, jointly and severally, hereby release, remise and forever discharge KFC (which term shall include KFC and its related and affiliated companies and its and each of their respective officers, directors, agents and employees) of and from all manner of action, causes of action, claims and demands whatsoever which against KFC Mr. Young or Mrs. Young or any of their respective heirs, executors, administrators, successors or assigns had, now have or may have by reason of any matter or thing existing up to the date hereof including any actions, causes of action, suits, debts, demands or claims arising out of the 1972 agreement.
5. This Amendment shall be binding on the parties hereto, the heirs and executors and administrators of each of Mr. Young and Mrs. Young and the successors and assigns of KFC.
IN WITNESS WHEREOF, KFC by the hand of its duly authorized officer and Mr. Young and Mrs. Young have executed this document as of the date first above written.
COL. SANDERS KENTUCKY FRIED CHICKEN LTD.
| By: |
Signed in the presence of | |
Witness | Joseph Young |
Signed in the presence of | |
Witness | Madeline Young |
The ultimate legal question before the Court is whether the $367,000 payment constituted :
(a) a sale of the right to payment or payment for a termination of that right or in the words of paragraph 54(c)(ii)(B) in satisfaction of a settlement or cancellation of a right to payment,
Or was:
(b) a surrogatum for the profit surrendered that the appellant had been receiving.
At the time Exhibit A-4 was executed, the appellant resigned his directorship in KFC and all personal relationships between the Youngs and KFC ended.
Exhibit A-4 describes the $367,000 as payment “in lieu of" all periodic payments due pursuant to Exhibit A-2 which is attached to Exhibit A-4 as schedule A. This implies it is instead of or in place of the periodic payments described in Exhibit A-2. (It should be noted that no mention is made of Exhibit A-3 in Exhibit A-4)
In reading paragraph 2 of Exhibit A-4 it should be noted that KFC did not pay the $67,000 and $300,000 sums as agreed under seal. Rather, without notice, KFC withheld a sum from each payment that it regarded as “taxes” and remitted those sums to Revenue Canada. This withholding was not agreed to or acceptable to the appellant. It is indicative of the good faith of KFC. This is recorded because the appellant testified hearsay to the effect that KFC stated to him it offered the sum of $367,000 on the basis that it had actuaries calculate the value of the moneys the appellant was entitled to until age 75. The appellant also knew someone else in Ontario aged 75 who had received $1,000,000 pursuant to a similar contract with KFC. The appellant was asking for considerably more but decided to take the $367,000.
Paragraph 3 provides that the Youngs shall perform "such . . . duties . . . as shall be mutually agreed upon..... " This would give the Youngs a veto upon the performance of any duties. Paragraph 4 also provides that Exhibit A-2 is "deemed to be terminated" and the Youngs discharge KFC from any “ claims and demands . . . arising out. . .” of Exhibit A-2.
It should be noted that the only reference to a concept of "present value” calculation is contained in paragraph 6 of Exhibit A-3 which is not referred to at all in Exhibit A-4. There is no evidence that any party to Exhibit A-3 has raised that agreement since the execution of Exhibit A-4. The evidence is that the appellant is not receiving any further payment under Exhibit A-2 or under Exhibit A-3 and that after Exhibit A-4 was signed, all such payments terminated.
It is apparent from Mr. Young's testimony that upon the execution of Exhibit A-4 he ceased any activities whatsoever on behalf of KFC. Exhibit A-4 constituted a termination of all relationships between the Youngs and KFC. Neither the appellant nor the respondent to this action raised the possibility that any obligation might remain between the Youngs and KFC pursuant to Exhibit A-3 despite the fact that this is not referred to in Exhibit A-4.
There is no doubt in the Court's mind that there was a strong and longstanding business relationship between Colonel Sanders and Mr. Young which continued and endured in a manner that surmounted written agreements and contracts and constituted a business relationship of service and consideration for one another and their respective families and corporations which terminated upon Pepsico taking over KFC and the signing of Exhibit A-4.
The evidence is that the appellant gave up his rights under any contracts or agreements with KFC in return for a final payment of $367,000 and that the payment was for the termination of any contracts or relationships which then existed between the parties and has been so treated by the appellant. This appears to be so even though it is possible that the appellant may have retained some residual rights against KFC. In essence he has treated the payment as for termination of any claim which he might have against KFC under its various contracts and such claim has thus been destroyed. By ceasing any payments under Exhibit A-3, it is evident to the Court that KFC similarly regarded the payment of $367,000 as a payment for termination.
The circumstances surrounding Exhibit A-4 and the actions of the parties in relation to the payment of the sum of $367,000 indicate that the payment of $367,000 terminated all rights and duties between the parties. (See: Pe Ben Industries Co. v. The Queen, [1988] 2 C.T.C. 120, 88 D.T.C. 6347.)
The appeal is allowed and the matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
The appellant is awarded his party and party costs.
Appeal allowed.