Molinaro v. The Queen, docket 96-1523-IT-G

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.

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