Date: 19980316
Docket: 96-1523-IT-G
BETWEEN:
GUERINO MOLINARO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, J.T.C.C.
[1]
These appeals are from assessments for the 1988, 1989 and 1990
taxation years. Although the amended notice of appeal refers as
well to 1987 it appears that no notice of objection was filed for
that year. The assessment for 1987 is therefore not before me.
Counsel have informed the court however that a waiver has been
filed for 1987 and presumably the Minister will deal with 1987 in
a manner that is consistent with the disposition of the appeals
for the 1988, 1989 and 1990 taxation years.
[2]
The issue is whether the sum of $1,500,000 paid as salary by
Catelli Inc. to the appellant over a 36 month period is to be
included in income as salary, as assessed by the Minister of
National Revenue, or is a capital receipt representing the
proceeds from the sale of shares.
[3]
Mr. Molinaro is a very successful manufacturer of pasta. He owns
all of the shares of Bluevest Holdings Limited which in turn
owned all of the shares of Canadian Pizza Crust Company Limited.
Catelli Inc., which manufactures pasta and other types of Italian
food, was a wholly owned subsidiary of the brewer, John Labatt
Limited. Mr. Molinaro, through other corporations, had other
operations in the United States and the United Kingdom.
[4]
Catelli wanted to buy the shares of Canadian Pizza from Bluevest
and a price of $10,000,000 was negotiated. A letter of intent was
signed on August 6, 1997 on behalf of Catelli by Mr. England,
Chairman and CEO and on behalf of Canadian Pizza by Mr. Molinaro
on August 7, 1997. The schedule to the letter contained a number
of provisions. The most material ones are the following:
Seller: Gino Molinaro
Buyer: Catelli Inc., or an affiliated
company thereof.
The Purchase Agreement: The transaction will be made
pursuant to a definitive agreement initially drafted by counsel
to Buyer and reflecting the provisions set forth herein and such
other provisions agreeable to the parties.
Securities of Company
to be Acquired: Buyer will purchase all of
Seller's common shares representing the real and personal
property of Canadian Pizza Crust Company Limited (Company)
including Company's corporate name, trade names,
trademarks, formulas, trade secrets, rights under licenses,
contract rights, books and records, equipment and real property
leases, accounts receivable, inventories, and all other assets of
Company used in connection with its business.
Assumption of
Liabilities:
Buyer will assume all obligations of Company. Notwithstanding
such assumption, Seller shall be liable to Buyer for all
undisclosed liabilities of the Company in accordance with the
Set-off and Indemnity provisions hereof.
Effective Date: Beginning July
1, 1987 the business shall be deemed to be operated for the
benefit of Buyer, however the actual transfer date shall be the
closing date.
...
Conditions to Closing:
...
(3)
Employment Agreement with G. Molinaro Buyer will retain
Mr. Molinaro as an employee for a period of at least three years
after the closing. The employment agreement will call for
full-time services during the term of the agreement. The services
will be oriented toward the line management of the existing
business and toward the development of a European-based pizza
business. Mr. Molinaro will be the President of the Company and,
as such, would tend to operate with general guidance from Catelli
and not day-to-day supervision.
Under the agreement, Mr. Molinaro will participate in any
benefit programs continuing in force or implemented after the
closing by Buyer. Mr. Molinaro's present employment
agreement (if any) with Seller shall be terminated as of the
closing date.**
(4)
Noncompetition Agreement: Mr. Molinaro shall have executed
in favour of Buyer an appropriate noncompetition agreement.
** Mr. Molinaro shall, in addition to the salary referred to
in sub-paragraph (4) under the heading "Purchase
Price", receive a yearly salary of $100,000.00 payable in
equal monthly instalments, plus a management bonus of up to
$50,000.00 per annum.
[5]
In Schedule A ("Base Information") the following
appears:
5.
Mr. Molinaro is interested in remaining as President for the next
three years at least. It was agreed that this job would continue
to have the senior responsibility and would operate with general
guidance and not day-to-day supervision.
[6]
The Share Purchase Agreement followed the letter of intent. It
was signed by Bluevest, as vendor, Catelli as purchaser and Mr.
Molinaro.
[7]
Clauses 2.02 and 2.03 read as follows (the company referred to
therein was Canadian Pizza):
2.02 Closing.
The Closing shall take place on the Closing Date at the office of
Messrs. Goodman & Goodman at Suite 3000, 20 Queen St.
West, Toronto, at the Time of Closing. Provided that all
conditions set forth in Article 6 hereof have been either
fulfilled or waived, at the Closing:
(a)
The Purchaser shall lend the Company the sum of $1,329,945 and
the Company shall apply such amount of $1,329,945 to the
repayment of all of the demand non-interest bearing promissory
notes aggregating $1,329,945.
(b)
The Purchaser shall purchase the Purchased Shares from the Vendor
and the Vendor shall sell the Purchased Shares to the Purchaser
for a purchase price equal to $6,305,055.
(c)
The purchase price shall be paid as follows:
(i)
$4,305,055 payable in accordance with the direction of the Vendor
attached as Schedule 2.02 hereto, the redirection of V & F
Leasing Ltd. and G & A Driver Services Inc. contained in
Schedule 2.02 hereto and the redirection of the Company contained
in Schedule 2.02 hereto. The parties agree that payment of the
funds in accordance with the direction and redirections as shown
in Schedule 2.02 will effect the following:
(A)
repayment to the Company by V & F Leasing Ltd. of the
$862,350 owed to the Company by V & F Leasing Ltd. (the
"V & F Receivable") as shown on the Closing
Balance Sheet;
(B)
repayment to the Company by G & A Driver Services Inc. of
$756,324 which is the amount estimated by the Covenantors to be
owing by G & A Driver Services Inc. to the Company as of the
Closing (the "G & A Receivable"); and
(C)
repayment to the Vendor by the Company of the $1,170,055 owed by
the Company to the Vendor as shown on the Closing Balance Sheet;
and
(ii)
the Purchaser shall pay $2,000,000 to the Escrow Agent, such
payment to be made at Closing by certified cheque or bank draft
and to be applied by the Escrow Agent as provided in the Escrow
Agreement.
2.03 Post
Closing Matters. The Purchaser shall cause the Company to execute
each of the Employment Agreement and Non-Compete Agreement which
shall have been previously executed by each of the Covenantor and
the Purchaser and to deliver a fully executed copy of each of
same to each of the Covenantor and the Purchaser, together with a
certified copy of a resolution of the Company authorizing
execution of the said agreements.
[8]
In reviewing the agreement, I mention clauses 8.01 and 8.02
without reproducing them. Those clauses limit the right of
indemnity of the purchaser to $9,100,000. Counsel for the
appellant contends that this amount must necessarily include the
$1,500,000 to be paid as salary by Catelli to Mr. Molinaro.
[9]
In addition, an Employment Agreement was entered into dated as of
October 20, 1987. The parties were Canadian Pizza, Catelli and
Mr. Molinaro. In it Catelli is described as
"Catelli", Canadian Pizza as "the
Company" and Mr. Molinaro as "the
Executive".
[10] The terms
of that agreement that are material to this appeal are the
following:
WHEREAS:
(i)
Pursuant to an Agreement (the "Share Purchase
Agreement") dated the 20th day of October, 1987 among
Catelli, the Executive and Bluevest Holdings Limited (a
corporation all of the shares of which are owned by the
Executive), Bluevest Holdings Limited agreed to sell and Catelli
agreed to purchase all of the issued and outstanding shares in
the capital of the Company;
(ii)
It is a condition to the closing of the share purchase
transaction that Catelli and the Executive shall have executed
this Employment Agreement which sets out the terms of the
employment by Catelli of the Executive as the President of the
Company, and Catelli has agreed that it will, following closing,
cause the Company to execute this Agreement;
Now therefore this Employment Agreement witnesses that, in
consideration of the premises, the mutual covenants and
agreements herein contained and other good and valuable
consideration (receipt whereof by each of the parties hereto is
hereby acknowledged), the parties agree as follows:
1.
TERM
Catelli shall employ the Executive, and the Executive shall be
employed by Catelli, for three (3) years commencing on the date
of execution of this Employment Agreement and terminating on the
third anniversary of such date (the "Initial Term"),
unless terminated earlier pursuant to the provisions of paragraph
6 hereof or unless paragraph 7 applies, and such employment shall
be conclusively deemed to be a continuation of the
Executive's present employment with the Company as its
President.
2.
SERVICES TO BE RENDERED
The Executive shall serve the Company and Catelli, and Catelli
shall employ the Executive, as the President of the Company. As
such, the Executive shall have senior responsibility for the
business of the Company and shall be responsible for the
day-to-day affairs of the Company under the general guidance of
the Chief Executive Officer of Catelli or the person designated
by the Chief Executive Officer of Catelli, as provided in the
next sentence. The Executive shall report to and shall be
entitled to rely on the directions of the Chief Executive Officer
of Catelli or such other executive of Catelli or of an affiliate
of Catelli, as the Chief Executive Officer of Catelli may in
writing designate as representing the direction of the board of
directors of the Company. Without limiting the generality of the
foregoing, the parties acknowledge that it is their intent that
the Executive shall initially focus his attention on management
of the existing business of the Company and on the development of
business opportunities in Europe in the fresh, frozen and
component pizza markets and in related market segments and
products.
3.
EXCLUSIVITY OF SERVICE
(a)
During the term of this Employment Agreement, the Executive shall
devote essentially his full working time, attention and ability
to the business and affairs of the Company and Catelli and to his
duties hereunder, except as expressly permitted by sub-paragraph
3(b), and shall well and faithfully serve and promote the
interests of the Company and of Catelli.
(b)
The Executive represents, and the Company and Catelli
acknowledge, that the Executive owns, through a holding company
or holding companies, shares representing and approximately 78%
interest in Canadian Pizza Crust Company (UK) Limited (the
"U.K. Company"), which carries on the business of
manufacture in the United Kingdom and sale in the United Kingdom
and elsewhere (excluding North America) of pizza crusts, and that
the Executive participates in the management of the U.K. Company.
The Executive may, during the term of this Employment Agreement,
continue to participate in the management of the U.K. Company
provided that at no time will he allow this to interfere or
conflict with his duty to devote essentially his full working
time, attention and ability to the business and affairs of the
Company and Catelli.
(c)
The Executive acknowledges and agrees that, notwithstanding the
permission granted above, his experience and expertise in the
European and United Kingdom markets are to be employed for the
benefit of the Company, Catelli and their Related Affiliates (as
hereinafter defined) during the term of this Employment
Agreement. Any business opportunities which become known to the
Executive during the term of this Employment Agreement must be
offered to the Company and Catelli by the Executive, and the
Executive agrees not to take or omit to take any action if the
result would be to divert from the Company, Catelli or any
Related Affiliate any opportunity which is within the scope of
its or their present or future business as known to the Executive
from time to time. "Affiliate" when used in this
Agreement has the meaning given to it in the Canada Business
Corporations Act, and "Related Affiliate" means
an affiliate of Catelli which is involved in the same or a
similar segment of the prepared or packaged foods business as
Catelli or the Company.
4.
COMPENSATION AND BENEFITS
(a)
Catelli shall pay to the Executive for his services under this
Employment Agreement a salary at the rate of $600,000 per annum
for each of the three (3) years of this Agreement. Such annual
salary shall be payable in monthly instalments in arrears
commencing one month from the date of execution of this
Employment Agreement. Such salary shall be paid to the Executive
without set off, counterclaim, deduction or reduction of any
nature or kind whatsoever and howsoever arising, whether in
equity or in law, and whether under this Agreement or otherwise,
except only as required by law, or as directed by the Executive,
for taxes, health benefits, pension plan and unemployment
insurance. Catelli and the Company hereby waive and release any
and all defences of any nature or kind whatsoever and howsoever
arising, whether under this Agreement or otherwise, and whether
in equity or in law, and whether arising before or after the date
of this Employment Agreement, in respect of the payment of such
salary.
(b)
In addition to the compensation provided for in subparagraph (a),
the Executive shall be eligible to receive a management bonus in
an amount (up to a maximum of $50,000 per year for each of the
three (3) years of the Initial Term) to be determined by the
Chief Executive Officer of Catelli, based on achievement by the
Company of its profit and other goals as established by the Chief
Executive Officer of Catelli.
(c)
The Executive shall be entitled to continue to participate in any
benefit programmes of the Company now in force or implemented by
the Company during the term of this Employment Agreement,
provided that his entitlement to benefits shall be calculated as
if the Company paid the Executive a salary of $100,000 per annum.
The Executive shall also be entitled to vacation amounting to
four (4) weeks for each year of this Employment Agreement, to be
taken at such time or times as may be provided for under
Catelli's policies in that regard. During such vacation
periods, the Executive shall continue to receive from Catelli the
salary referred to in subparagraph 4(a).
5.
TRAVEL EXPENSES
Catelli shall reimburse the Executive for all reasonable travel,
hotel, meal and other usual expenses including car allowance
which are actually and properly incurred by him in the
performance of his duties hereunder and are evidenced by
invoices, receipts, vouchers or such other supporting documents
as the Company may require.
6.
TERMINATION
(a)
Catelli may terminate the Executive's employment hereunder
at any time effective on two months written notice thereof
delivered by Catelli to the Executive.
(b)
The Executive's employment hereunder shall terminate in the
event of his death or such physical or mental disability as, in
the opinion of a qualified medical practitioner, renders the
Executive substantially unable to perform his obligations
hereunder for a period of 90 days or more. Termination for
disability shall be effective upon the date of written notice of
such termination given by Catelli to the Executive.
(c)
The Executive may at his option terminate his employment at any
time during the Initial Term for "good reason". Such
termination shall be effective on two months written notice
thereof to Catelli, unless otherwise hereinafter indicated. In
this Agreement, "good reason" shall mean:
(i)
the assignment to the Executive of duties inconsistent with his
position, authority, responsibilities and status with the Company
as contemplated in this Agreement and as enjoyed and exercised by
him immediately prior to the execution of this Employment
Agreement; or
(ii)
Catelli requires the Executive to be based anywhere other than in
the Metropolitan Toronto area, except for such travel as may
reasonably be required on the Company's business; or
(iii)
any breach by Catelli or the Company of any of the provisions of
this Agreement; or
(iv)
change in "control" of either the Company or Catelli,
except by reason of internal reorganization, where
"control" means the right to elect a majority of its
directors; or
(v)
the departure from Catelli of its chief executive officer and a
majority of the seven top ranked officers of Catelli occurring
within any three month period; or
(vi) the
announcement by press release or by internal memoranda, whether
confidential or otherwise, of any arrangement or agreement which
will result in any change contemplated in subparagraphs 6(c)(iv)
or 6(c)(v), provided that in this event the Executive shall give
three months notice of termination of his employment; or
(vii) such
physical or mental disability, or other event beyond the control
of the Executive, as renders the Executive unable to perform his
obligations hereunder for more than 30 days in any six month
period, provided that in this event the Executive shall not be
required to give notice of termination of his employment.
(d)
If the Executive's employment is terminated prior to the
expiration of the Initial Term by Catelli whether pursuant to
subparagraph 6(a) or by reason of the disability of the Executive
pursuant to subparagraph 6(b), or by reason of the death of the
Executive, or by the Executive as permitted by subparagraph 6(c),
then the Executive (or, in the event of the Executive's
death, his estate) shall be entitled to receive the sum of
$41,666.67 at the end of every month from and after the
termination of his employment, for the remainder of the Initial
Term without any procedural formalities on the part of the
Executive. Catelli and the Company acknowledge that the payment
of such sums for the said remainder of the Initial Term is
reasonable in the circumstances of such termination and agree
that the Executive shall not be obliged to mitigate in respect of
damages that may result in respect of any such termination. Such
sums payable during the remainder of the Initial Term as
aforesaid shall be paid without set off, counterclaim, deduction
or reduction of any nature or kind whatsoever and howsoever
arising, whether under this Agreement or otherwise, and whether
in equity or in law, except as may be required by law for taxes.
Catelli and the Company hereby waive and release any and all
defences of any nature and kind whatsoever and howsoever arising,
whether under this Agreement or otherwise, whether in equity or
in law, and whether arising before or after the date of this
Employment Agreement in respect of the payment of such sums.
[11] Clause 10
contained a non-competition agreement.
[12] Paragraph
(a) of clause 12 reads:
(a)
This Employment Agreement constitutes the entire agreement
between the Executive, the Company and Catelli pertaining to the
subject matter hereof, and may only be amended by a written
Agreement signed by all parties hereto. Any and all previous
agreements, arrangements and understandings, written or oral,
between the parties hereto or on their behalf relating to the
employment of the Executive by Catelli or the Company are hereby
terminated, cancelled and superseded, and the Executive releases
the Company from all actions, causes of action, claims and
demands whatsoever under or in respect of any and all such
previous agreements.
[13] I have
quoted at length from the agreement to illustrate that the
documentation was formal, carefully drafted and represented a
real legal relationship.
[14]
Throughout the negotiations and the closing, Mr. Molinaro and
Bluevest were represented by experienced chartered accountants
and lawyers, specifically, Mr. Peter Szewczyk, a chartered
accountant, and Mr. James Rossiter, an experienced tax
lawyer.
[15] The deal
closed. The Statement of Income and Retained Earnings of Bluevest
for the year ended December 31, 1987 recorded the transaction as
follows:
REVENUE
Sale Proceeds - Shares of Canadian Pizza Crust Company
Limited
$9,135,000
COSTS OF DISPOSITION 126,632
COST OF SHARES SOLD 109,794
236,426
GAIN ON SALE OF
SHARES 8,898,574
ADD - Interest
Income
113,204
9,011,778
EXPENSES
Management
Salaries
4,551,000
Professional Fees 5,729
Capital Taxes
4,998
4,561,727
NET
INCOME
4,450,051
RETAINED EARNINGS - Beginning of Year
1,264,158
LESS - Capital Dividend
Paid
5,714,209
3,500,000
RETAINED EARNINGS - End of
Year
$2,214,209
[16] Catelli
paid the appellant $1,629,574 over a 36 month period from 1987 to
1990 and issued to him T-4 slips for this full amount. The
appellant's position is that of that total only $129,574
represented salary and the rest represented proceeds of
disposition of shares. Paragraphs 12, 13 and 14 of the amended
notice of appeal set out the appellant's position:
12.
The transaction was completed on October 20, 1987. Between
October, 1987 and September, 1990, the Appellant received the
following payments which are the subject of this appeal:
|
Total on T-4
Slip
|
Amounts
Representing
Proceeds
|
Amounts
Representing
Salary
|
|
|
|
|
1987
(2 months)
|
$100,000
|
$83,333
|
$16,667
|
1988
(12 months)
|
600,000
|
500,000
|
100,000
|
1989
(12 months)
|
512,907
|
500,000
|
12,907
|
1990
(10 months)
|
416,667
|
416,667
|
---
|
|
|
|
|
Totals
|
$1,629,574
|
$1,500,000
|
$129,574
|
13.
The Appellant actually provided services to Catelli in the years
in question in accordance with the amounts particularized in the
foregoing table under the heading "Amounts Representing
Salary". The Appellant terminated his actual employment
with Catelli in 1989 which is why the Amounts Representing Salary
end in 1989.
14.
The amount particularized under the heading "Amounts
Representing Proceeds" in the above-noted schedule,
represents the balance of the purchase price payable to him over
time pursuant to the employment agreement for his shares of
Canadian Pizza. As such, the Appellant states that the Amounts
Representing Proceeds are capital receipts to Bluevest.
[17] What
emerges from this and from the viva voce evidence is the
following:
(a)
Bluevest took the entire $9,135,000 into the computation of its
proceeds of disposition of the Canadian Pizza shares. This
included the $1,500,000 payable by Catelli to Mr. Molinaro under
the employment contract.
(b)
It expensed as management salaries $4,551,000 of which $4,000,000
was treated as payable to Mr. Molinaro.
(c)
Mr. Molinaro included the $4,000,000 in his income for 1988.
(d)
He did not include in income as salary the total of $1,500,000
paid to him by Catelli in 1987, 1988, 1989 and 1990.
(e)
The $4,000,000 management salary to Mr. Molinaro, although
expensed in 1987, was not all paid to him in that year. In
particular it was shown in an account described as
"shareholder advances". As Catelli paid the salary to
Mr. Molinaro over the four years Bluevest reduced the
shareholder's loan account in its books of account by the
amount paid and also reduced the amount shown as owing to it by
Catelli in respect of the purchase price of the shares.
(f)
In addition, it paid a capital dividend of $3,500,000 presumably
to Mr. Molinaro and filed an election under subsection 83(2)
of the Income Tax Act.
[18] What was
not raised in the amended notice of appeal was that the
$4,000,000 salary shown as payable to Mr. Molinaro from Bluevest
in some strange way included the $1,500,000 salary from
Catelli.
[19] Indeed,
on discovery Mr. Molinaro was asked to provide information as to
how the $1,500,000 was accounted for. The answer to the
undertaking was as follows:
"Based on Mr. Molinaro's accountant's
understanding of the transaction, the $1.5 million was properly
accounted for. Mr. Molinaro did not reflect any of the $1.5
million in his own tax return, as this money represented proceeds
received by Bluevest."
[20] I should
have thought that if Mr. Molinaro already paid tax on the
$1,500,000 in 1988 as part of the $4,000,000 this would have been
brought to the attention of the Department of National Revenue or
counsel for the respondent, and the matter would never have come
to court. Ms. Philpott was caught completely by surprise.
[21] I
adjourned the case so that the parties could consider any
amendments that might be necessary and any further examinations
for discovery.
[22] When the
case resumed in January, Ms. Philpott stated that she was
satisfied that Mr. Molinaro had been taxed twice on the same
amount of $1,500,000 - once in 1988 as part of the $4,000,000 and
once as salary from Catelli. She stated that the respondent was
prepared to delete $1,500,000 from Mr. Molinaro's
income for 1988 but that she was maintaining her position that
the amounts received from Catelli by Mr. Molinaro were salary and
properly taxable in his hands in the years in question.
[23] I should
have thought that would resolve the matter but the appellant
continues to maintain that the $1,500,000 should not be taxed in
his hands but rather represented proceeds of disposition to
Bluevest. Even on the appellant's theory the $1,500,000
nonetheless represented amounts that one way or another found
themselves into Mr. Molinaro's hands and would be taxable
in his hands, whatever their origin may have been. They are
certainly not proceeds of disposition to him as alleged in
paragraph 14 of the amended notice of appeal. Perhaps there is a
subtlety here that I have missed, but a point that sticks out
like a sore thumb is that it was not his shares that were sold
but Bluevest's.
[24] Mr. Shaw
points to some peculiarities in the employment agreement upon
which he contends that I should as a matter of substance over
form conclude that the $1,500,000 received under the employment
agreement was in substance proceeds of disposition of
Bluevest's shares. He points to the fact that Bluevest
included it in its proceeds of disposition and calculated its
capital gain on the larger figure of $9,135,000, which included
the $1,500,000. He emphasizes the fact that under the agreement
Mr. Molinaro's employee benefits are to be calculated only
on the additional $100,000 salary. He draws particular attention
to the fact that whether Mr. Molinaro quits, is fired or dies,
the $500,000 per year salary is to continue. He contends that I
should apply the reasoning in Farm Business Consultants Inc.
v. The Queen, 95 DTC 200, (aff'd 96 DTC 6085 (F.C.A.))
where it was said at pages 203-204:
There is no need to repeat the jurisprudence on substance over
form. That has been done in other cases. The essential nature of
a transaction cannot be altered for income tax purposes by
calling it by a different name. It is the true legal
relationship, not its nomenclature, that governs. The idea of
dressing up the payments for the customer list in the garb of
consulting fees was the idea of Mr. Ibbotson, the president of
the appellant, because he wanted to turn the payments for
goodwill into currently deductible expenses. Evidently the Whalls
were prepared to go along with this suggestion but their
acquiescence, and the fact that they were prepared to include the
payments in income, does not assist the appellant, nor indeed
does the fact that the Minister did not question the
Whalls' inclusion of the payments in income. After all, why
would he?
[25] The
witnesses called by the respondent testified that they regarded
the salary arrangement with Mr. Molinaro reasonable and essential
and I can see why. He struck me as a dynamic and forceful person
essential to the success of the enterprise.
[26] Quite
apart from that fact it strikes me as most anomalous that where a
person enters into a binding agreement with an arm's length
party who relies upon the maintenance of a legal relationship as
set out in the formal documentation and that person is advised of
the legal and fiscal consequences of what he or she is signing
that person should be entitled to repudiate the agreement not
only as against the Minister of National Revenue but as against
the other party. I suppose that in theory one might be able to
make a case that a party to an agreement can invoke the substance
over form doctrine but it seems to run counter to all principles
of commercial morality and indeed of commonsense that one can,
after solemnly and formally entering into carefully drafted legal
documents upon which the other party relies, simply snap his
fingers and say "That legal relationship isn't to my
liking. It doesn't suit my fiscal objectives. Therefore I
shall clothe it in a different nomenclature that I like
better." I cannot believe that Mr. Molinaro's
advisors would have told him to go ahead and sign the agreements
because it was necessary to get the deal through, but it was not
the real deal and he could ignore it and conjure up another deal
that was more attractive to him and, perhaps more importantly, to
Bluevest.
[27] I do not
need to resurrect the ancient doctrine of estoppel by deed,
although it might apply (the employment contract was in fact
under seal, an essential prerequisite to invoking this venerable
rule). Rather I prefer to place my reasoning upon an even more
ancient principle that if one makes one's bed in a
particular way one should - particularly if one has had help from
professional accountants and lawyers in making the bed - be
prepared to lie in it. In Collins v. The Queen, 96 DTC
1034 at page 1039 this court quoted from Savoie v. The
Queen, 93 DTC 552 as follows:
The situation here differs from that of spouses who, with a full
appreciation of the legal consequences of what they are doing,
choose that property be held jointly, or solely by one spouse or
in any other of the variety of ways in which property can be
owned. Such deliberate choices must be respected because the
legal form is consistent with the economic reality and the
informed intentions of the parties.
[28] The court
then went on to say:
While Mr. Collins described the complex legal structure that his
advisors developed for the holding of the business as "a
bunch of mumbo-jumbo", both he and his wife are too
intelligent to be oblivious to the fact that each owned different
portions of the corporate empire and that they did so for good
reasons. Whatever notion of "share and share alike"
they may have had, their real intent was that reflected in the
legal structure that they knowingly adopted on the advice of
their lawyers and accountants. That intent is borne
out as well in the manner in which dividends and salary were paid
by the various corporate entities. The income from the various
corporations was treated as the income of the spouse to whom it
was paid. Similarly the corporate minutes reflect the carefully
structured ownership. If one knowingly and intentionally adopts
one legal structure to achieve a particular fiscal or commercial
result it would take far more cogent evidence than I have seen
here to permit a taxpayer to discard one portion of that
structure when that portion turns out to be fiscally
inconvenient.
[29] In
Bell v. M.N.R., 62 DTC 1155, Thorson J. said at
page 1161:
Moreover, the terms of the agreement are clear and it is free
from ambiguity. Consequently, it is not permissible to adduce
evidence with a view to varying or contradicting its terms or
showing that it was different from what is purported to be.
[30] Although
that passage may be taken more as a statement of the parol
evidence rule rather than the substance over form doctrine the
facts bear a strong resemblance to this case.
[31] I
respectfully adopt the reasoning of Christie A.C.J. in Pallan
et al. v. M.N.R., 90 DTC 1102 at page 1107:
To my mind where, as here, appellants seek to challenge
reassessments of their liability to tax by, in effect,
repudiating what they and others have said in an agreement
reduced to writing and things done in consequence of that
agreement that are evidenced by documents such as the resolutions
whereby Holdings and the amalgamated company each offered to
purchase its shares from its shareholders; the acceptance of
those offers in writing by the appellants; the issuance of
promissory notes regarding the shares bought and sold and the
assignments of debts arising out of those transactions, they must
adduce evidence establishing a high degree of probability that
their attacks on the reassessments are valid. Only that would
constitute proof commensurate with the gravity of the allegations
being made. In my opinion not only are the appellants impugning
their own conduct, but also that of the other parties and that of
the professional advisers who obviously played a significant role
in what was said and done. They are alleging that what was done
to realize a final settlement among the members of the family was
morally blameworthy in that in large part it was a sham. Further
to say that it was never intended that Holdings and the
amalgamated company would purchase shares from their shareholders
must adversely reflect on the integrity of the lawyers and
accountants involved because if that was intended the wording of
the agreement and what was done under it contradicts that and
could not have occurred by mere oversight. Further it is my view
that the appellants cannot discharge the burden resting on them
by their oral testimony alone and that is what they are relying
on.
[32] To the
same effect, see Privitera v. M.N.R., 92 DTC 1122 and
Inshore Investments Ltd. v. The Queen, 92 DTC 6162.
[33] It is
true that there appear, superficially, to be two competing and
possibly contradictory principles at play here. The first is that
enunciated in Dale et al. v. The Queen, 94 DTC 1100
(T.C.C.), 97 DTC 5252 at page 5255 (F.C.A.) that the Minister of
National Revenue must take the legal relations between parties as
he finds them. He cannot, for example, say that a legal
relationship is binding between the parties but it does not bind
him. The other principle is that the Minister can invoke the
doctrine of substance over form, as he did in the Farm
Consultants case. I do not find the two doctrines
inconsistent. They simply do not move on the same track. Here I
think that the substance of the transaction is accurately
reflected in the legal relations created.
[34] I find
therefore that the Minister correctly included in the
appellant's income the salary received from Catelli. Since
it is admitted that this amount was also included in his income
for 1988 as part of the $4,000,000 treated as salary by Bluevest,
the sum of $1,500,000 should be deleted from his income for 1988
as agreed by the respondent. I have seen no convincing reason for
deleting only $750,000 as counsel for the appellant argues[1]. This may have a
ripple effect on Bluevest. Bluevest is not before me and of
course I cannot tell the Minister what to do about that company
although I understand the years may be open by means of waivers.
It would seem however that the sum of $1,500,000 should be
deleted from Bluevest's proceeds of disposition. This will
affect the size of its capital gain and taxable capital gain as
well as its capital dividend account. It may also affect the size
of the capital dividend it was entitled to declare and pay. Also,
the sum of $1,500,000 should be removed from the amount
deductible by Bluevest as management salaries. I may be wrong on
this and there may be other adjustments. I would not wish to be
taken as expressing any binding conclusion on these points but
that is the way it appears to me. One thing that strikes me is
that the real intended beneficiary of the appellant's
attempted recharacterization of the transaction is Bluevest and
not Mr. Molinaro.
[35] The
appeals for 1989 and 1990 are dismissed. The appeal for 1988 is
allowed and the assessment is referred back to the Minister of
National Revenue for reconsideration and reassessment to delete
from the appellant's income the sum of $1,500,000.
[36] The
respondent is entitled to her costs.
Signed at Ottawa, Canada, this 16th day of March 1998.
"D.G.H. Bowman"
J.T.C.C.