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.
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