Citation: 2008 TCC
462
Dockets: 2005-4115(IT)G
2005-4116(IT)G
2005-638(IT)G
BETWEEN:
JACINTHE BOUCHARD,
DANIELLE BOUCHARD,
JACQUES BOUCHARD,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
These three appeals were
instituted by the Bouchard family of Saint-Lambert. They were heard on common
evidence. Danielle Bouchard is appealing from the notice of assessment dated
May 29, 2003, in respect of the 2002 taxation year. Jacques
Bouchard is appealing from the notice of reassessment dated
January 26, 2004, in respect of the 2002 taxation year. Their
daughter Jacinthe Bouchard is
appealing from the notice of reassessment made on February 26, 2004,
in respect of the 2002 taxation year, and from the notice of reassessment dated
January 6, 2005, in respect of the 2003 taxation year.
[2]
The dispute is about
the tax treatment of $1,000,000 that the Appellants received from National Bank
Financial (NBF) upon the Bouchard couple's retirement on September 1, 2002.
[3]
The Bouchard couple began
working in the securities brokerage field in 1969. From 1969 to 1973, they were
investment advisors with the firm of René T. Leclerc. From 1973 to
2002, they were investment advisors with the National Bank, the National
Bank of Canada and Lévesque Beaubien (now NBF). Jacinthe Bouchard worked in the
securities brokerage field for more than eight years with her parents, and, in
July 2002, she was an investment advisor with NBF as well.
[4]
On July 2, 2002, as
part of the retirement component of NBF's Relay Program, Danielle Bouchard
and Jacques Bouchard each signed a service agreement in which they agreed to
retire on September 1, 2002, and receive a retirement allowance
payable on that date. The amount of Danielle Bouchard's allowance was $450,000,
and the amount of Jacques Bouchard's allowance was $100,000. In addition, from
July 1 to September 1, 2002, NBF agreed to readjust the net commission rate to
55% of both Appellants' gross commissions. In consideration of these monetary
benefits, both Appellants agreed to take all measures necessary to ensure that
their respective clients transitioned smoothly to NBF-employed investment
advisors Jacques Angers and Glen Cooper; to refrain, for a term of five
years, from working in the securities field within a 200-kilometre radius of
the boundaries of the city in which their former branch was located; and not to
solicit their former clients or otherwise compete with NBF.
[5]
Danielle Bouchard's
$450,000 retirement allowance was paid by NBF in the form of a cheque dated
August 30, 2002; the net amount of the cheque was $249,501, which was
the amount left after a deduction of $44,799 eligible for transfer to a
registered retirement savings plan, plus federal and provincial taxes.
[6]
In her 2002 income tax
return, Danielle Bouchard reported $450,000 on account of proceeds of
disposition of goodwill. Based on an adjusted cost base of $1.00, the amount of
$224,999.50 was included as a taxable capital gain. On May 29, 2003,
the Minister of National Revenue ("the Minister") issued a
notice of assessment in which a $450,000 retiring allowance was included in
computing Danielle Bouchard's income for the 2002 taxation year. The
reported $224,999.50 capital gain was cancelled, and the deduction for RRSP
contributions was allowed based on a $34,000 eligible retiring allowance. In
issuing this notice of assessment, the Minister relied in part on the T4A form
issued by NBF, which showed a $34,000 eligible retiring allowance and a
$416,000 non‑eligible retiring allowance.
[7]
Jacques Bouchard's $100,000
retiring allowance was paid by NBF in the form of a cheque dated
August 30, 2002; the net amount of the cheque, after federal and
provincial tax, was $77,000.
[8]
In his 2002 income tax
return, Jacques Bouchard reported $100,000 on account of proceeds of
disposition of goodwill. Based on an adjusted cost base of $1.00, a taxable
capital gain of $49,999 was included. On January 26, 2004,
the Minister issued a notice of reassessment in which a $100,000 retiring
allowance was included in computing Mr. Bouchard's income for the 2002
taxation year. The reported $49,999 taxable capital gain was cancelled. In
issuing this notice of reassessment, the Minister relied in part on the T4A
form issued by NBF, which showed a $100,000 non-eligible retiring allowance.
Mr. Bouchard's 2002 taxation year was also the subject of notices of
reassessment issued August 9, 2004, and November 28, 2005.
[9]
On July 2, 2002, Jacinthe
Bouchard signed a service agreement under the NBF's Relay Program (career
reorientation) in which she agreed to take all necessary measures to ensure
that her clients transitioned smoothly to NBF‑employed investment
advisors Jacques Angers and Glen Cooper. In addition, Jacinthe Bouchard
agreed to refrain, for a term of five years, from assisting any other business
operating in the field of securities, life insurance, financial planning, tax shelters
or tax havens, within a 200-kilometre radius of the boundaries of the city or
municipality in which the branch where she worked was located, and, generally,
to refrain from soliciting her former clients on behalf of such a business,
causing such clients to terminate their business relationships with NBF, or
doing anything else that might constitute competition with NBF. In
consideration of these commitments, NBF agreed to readjust the net commission
rate to 55% of Jacinthe Bouchard's share of the gross commissions, and to grant
her a $450,000 bonus payable as follows:
-
$225,000 on September
1, 2002; and
-
$225,000 on September
1, 2003.
[10]
Jacinthe Bouchard did
indeed receive the two instalments of $225,000 on September 1, 2002, and
September 1, 2003, respectively. In her 2002 and 2003 income tax returns, she
reported $225,000 on account of proceeds of disposition of goodwill. Based on an
adjusted cost base of $1.00, a $112,499.50 taxable capital gain was included
for each of the years 2002 and 2003.
[11]
On February 26, 2004, the
Minister issued a notice of reassessment in order to include a retiring
allowance of $225,000 in computing Jacinthe Bouchard's income for the 2002
taxation year. The $224,999.50 capital gain and the $4,196 deferred capital
loss that she had claimed were cancelled. In issuing this notice of
reassessment, the Minister relied in part on the T4A slip issued by NBF,
which showed an eligible retiring allowance of $4,000 and a non-eligible
retiring allowance of $221,000.
[12]
On January 6, 2005, the
Minister issued a notice of reassessment in order to include a retiring
allowance of $225,000 in computing Jacinthe Bouchard's income for the 2003
taxation year. The $224,999.50 capital gain was cancelled. In issuing this
notice of reassessment, the Minister relied in part on the T4A slip issued
by NBF, which showed a non-eligible retiring allowance of $225,000.
[13]
On
February 18, 2004, NBF sent a letter confirming that Jacinthe
Bouchard was still an employee of NBF, and that the amounts of $225,000 that
she was paid in 2002 and 2003 were employment income that was erroneously
reported as a retiring allowance. Further to this letter, NBF cancelled
the T4 and T4A slips that had initially been issued for 2002 and 2003, and
replaced them with new T4 slips that included the employment income of $225,000
per year.
[14]
Although the agreements
that the Appellants signed in 2002 contemplated the smooth transition of their
clients to Jacques Angers and Glen Cooper, those advisors were not parties to
the agreements. However, as the new investment advisors, Mr. Angers and
Mr. Cooper signed an agreement with FBN, also dated
July 2, 2002, under which they agreed to submit a business plan in
connection with the management of the assets that the Appellants would transfer
to them, and under which they accepted a $1,000,000 reduction of their net
commissions, by means of 60 monthly payments of $16,666.67, plus interest
at NBF's prime rate less 0.5%, applicable to the balance of the advance,
effective September 1, 2002. In the event of a cessation of
employment, the balance of the money advanced by NBF was repayable within 20
days.
[15]
Effective
September 1, 2002, Jacinthe Bouchard continued to work for NBF as an
investment advisor on the Angers/Cooper team and to serve her clients and those
of her parents. According to Danielle Bouchard, it was very important that Jacinthe
be able to continue her investment advising work within the new investment
advisor team for at least two years in order to secure her future and thereby
facilitate the clients' transition. Danielle Bouchard also stated that, in
2002, the Bouchard team had 400-500 clients and roughly $150 million in assets
under management. The transition of clients from the Bouchard team to the Angers/Cooper
team was more difficult than expected and, as a result, Jacinthe Bouchard had
to extend her employment within the Angers/Cooper team until April 1, 2005, at
which time she replaced Jacques Angers within the team. In order to do so, she
entered into new agreements with NBF and assumed Jacques Angers' debt to NBF
and one-half of the lump-sum payment that NBF had allocated to Mr. Angers, that
is to say, $408,059.40 repayable in 60 equal consecutive monthly commission
reductions of $6,800.99.
The Appellants' position
[16]
The Appellants make the
following arguments in support of the taxation of the amounts received from NBF
as capital gains from the disposition of a capital asset:
(a)
The term "retiring
allowance" in the service agreement signed in connection with NBF's Relay
Program (retirement) is not consistent with the definition of the term in
section 248 of the Act.
(b)
The right to serve
clients and manage their assets constitutes "capital property"
within the meaning of section 54 of the Act and "property"
within the meaning of subsection 248(1) of the Act, the disposition of
which property resulted in a capital gain.
(c)
According to Gifford
v. Canada, [2004] 1 S.C.R. 411, the amounts paid to the Appellants are
capital in nature.
(d)
The amounts received by
the Appellants are actually from Messrs. Angers and Cooper, not NBF, because
NBF simply acted as financial intermediary (i.e. a no‑risk lender).
(e)
NBF structured the
acquisition of a capital property in such a manner that it could deduct the
amounts paid to the Appellants and recover them from a deduction from the
commissions earned by the new investment advisors.
(f)
According to Manrell
v. Canada, 2003 FCA 128, payments in exchange for non-competition clauses
do not constitute income.
Respondent's position
[17]
The Respondent makes
the following arguments in support of the taxation of the amounts that the
Appellants received from NBF as a retiring allowance in the Bouchard couple's
hands, and as employment income in Jacinthe Bouchard's hands.
(a) The amounts received constitute a
"retiring allowance" within the meaning of subsection 248(1) and
subparagraph 56(1)(a)(ii) of the Act because:
(i) The amounts of $450,000
and $100,000 were received in recognition of the Bouchard couple's long service
at the time that they retired from their employment with NBF.
(ii) Danielle Bouchard and
Jacques Bouchard each signed an agreement with NBF stating that they would
receive a retiring allowance on the date they retired.
(iii) If the Bouchard couple
and NBF had wanted the amounts paid by NBF to be in consideration of their
clientele, a clear provision to that effect would have been included in the
agreement.
(iv) The amounts were paid
by NBF in its capacity as Danielle Bouchard and Jacques Bouchard's employer.
(v) On the T4A slips, NBF
reported the amounts paid to the Bouchard couple as a retiring allowance.
(b) The amounts paid to the
Appellants were not in consideration of the disposition of eligible capital
property within the meaning of section 54 of the Act, because the
Appellants did not report business income in their 2002 tax returns; rather,
their income consisted almost exclusively of commissions paid by NBF as an
employer.
(c) Under the agreements
with the Appellants, they did not dispose of capital property as defined in
section 54 of the Act because
(i) there was no
agreement concerning the disposition of any property by the Appellants to Mr.
Angers and Mr. Cooper, and
(ii) Mr. Angers and Mr.
Cooper paid no amounts to the Appellants for the acquisition of clientele or a
client list; and
(d)
the amounts received by
the Appellants from NBF are not chiefly attributable to the signing of a
non-competition clause as they were in Manrell, supra, because
there are no contractual relations between the Appellants and the new investment
advisors.
[18]
The Respondent further
submits that if the amounts received by the Bouchard couple are not retiring allowances,
they are nonetheless taxable as employment income under sections 5 and 6
of the Act.
[19]
In Jacinthe Bouchard's
case, the Respondent submits that the $225,000 payments that she received constitute
employment income within the meaning of subsection 5(1) of the Act for the
following reasons:
(a) The agreement
with NBF specifically refers to a bonus payable as part of a career
reorientation within NBF.
(b) A bonus is
normally considered remuneration from employment, or a benefit received in the
course of, or by virtue of, an office or employment.
(c) The employer
issued T4 slips reporting the $225,000 payments as employment income.
(d) The amounts in
question were to assist with the transfer of the right to manage the clients
that she shared with her parents, and were therefore received on account of, in
the course of, or by virtue of her office or employment.
Analysis
[20]
The term "retiring
allowance" is defined as follows in subsection 248(1) of
the Act:
"retiring allowance" means an amount (other than a
superannuation or pension benefit, an amount received as a consequence of the
death of an employee or a benefit described in subparagraph 6(1)(a)(iv))
received
(a) on or after retirement of a taxpayer from an office or
employment in recognition of the taxpayer's long service, or
(b) in respect of a loss of an office or employment of a taxpayer,
whether or not received as, on account or in lieu of payment of, damages or
pursuant to an order or judgment of a competent tribunal
by the taxpayer or, after the taxpayer's death, by a dependant or a
relation of the taxpayer or by the legal representative of the taxpayer;
[21]
An amount that
qualifies as a retiring allowance must be included in the recipient's income
under subparagraph 56(1)(a)(ii) of the Act, which reads:
56. Amounts to be included in income for year
(1) Without
restricting the generality of section 3, there shall be included in computing
the income of a taxpayer for a taxation year,
Pension benefits, unemployment insurance benefits,
etc.
(a) any amount received by
the taxpayer in the year as, on account or in lieu of payment of, or in
satisfaction of,
. . .
(ii) a retiring
allowance, other than an amount received out of or under an employee benefit
plan, a retirement compensation arrangement or a salary deferral arrangement,
[22]
At this stage, it is
important to ascertain the exact legal nature of NBF's payments to the
Appellants. The aim of NBF's Relay retirement program is to facilitate the transition
of the clients who are served by advisors who wish to retire to the next
generation of advisors. Client retention is NBF's main objective. In fact,
the addition of the non-solicitation and non-compete clause to the service
agreements signed as part of the Relay retirement program clearly confirms that
client retention is NBF's priority. Under the terms of the service agreements
signed by the Bouchard couple, each of them agreed to take all measures necessary
to ensure that their respective clients would be able to make a smooth
transition to the Angers/Cooper team.
[23]
In practice, the
Bouchard couple's commitment was reflected in a letter dated
July 24, 2002, in which the Bouchard couple notified their clients and
friends that they would be retiring on August 31, 2002, and that
their daughter Jacinthe Bouchard and Jacques Angers and Glen Cooper
would be replacing them in a spirit of continuity of approach and philosophy.
The letter also referred to future contact with the recipients with a view to
ensuring a smooth and efficient transition.
[24]
The announcement of
future contact with the clients did indeed lead to meetings in which the
Bouchard couple met with important clients in the company of Mr. Angers and
Mr. Cooper.
[25]
Even though the service
agreements signed by the Bouchard couple describe the amounts payable to each
as retiring allowances, they contain no statements to the effect that the
payments were being made in consideration of the Bouchard couple's long service
or the loss of the Bouchards' respective employments with NBF.
[26]
The amounts payable
under the service agreements are not based on the number of years of service
with NBF; rather, they are calculated based on the efforts needed to ensure that
clients can make a smooth transition considering, inter alia, the
transition time, the amount of assets under management, the revenue potential
and the anticipated client retention rate (based on the testimony of Louis Bérard,
NBF's Relay Programs director since 2003).
[27]
The fact that the
Bouchard couple's daughter obtained $450,000 after just eight years of service,
while Danielle Bouchard obtained the same amount after 33 years of
service, aptly shows that the amounts payable under the service agreements were
not based on the length of the recipients' service.
[28]
The concept of retiring
allowance is obviously not applicable to Jacinthe Bouchard's case because
she continued to work for NBF after September 1, 2002. The payments
that she received were characterized as bonuses.
[29]
Counsel for the
Appellants alleged that the Appellants disposed of their clients, or their
right to serve their clients and manage their clients' assets, as part of a
transaction that was capital in nature. Moreover, he submitted that the amounts
received by the Appellants were from the new investment dealers, not NBF, since
the dealers are unconditionally liable to repay the amounts to NBF. In his
submission, NBF did not acquire anything under the agreements signed by the
Appellants, and did not pay anything either; the bank was merely a financial
intermediary that assumed no risk in the transaction. Consequently, he submits
that the amounts paid to the Appellants are not from their employer and cannot
be taxed as income from employment. In support of his submissions, counsel
referred to the following decisions:
·
Financière Banque
Nationale Inc. v. Jean,
EYB 2004‑80404 (QCCS);
·
Valeurs mobilières
Banque Laurentienne Inc. v. Lefrançois, 2004 CanLII 10447 (QCCQ);
·
Cumberland
Investments Ltd. v. The Queen,
75 D.T.C. 5309 (F.C.A.);
·
The Queen v. Farquhar
Bethune Insurance Limited,
82 D.T.C. 6239 (F.C.T.D.);
·
The Queen v. Baine Johnstone
& Company Limited, 77 D.T.C.
5394 (F.C.T.D.);
·
Manrell v. The Queen, [2003] 3 F.C. 727 (C.A.);
·
Gifford v. Canada, [2004] 1 S.C.R. 411;
·
Canada v. Gifford, 2002 FCA 301;
·
Desmarais v. The
Queen, 2006 TCC 417;
·
Morissette v. Canada, 2007 FCA 16
·
Linseman v. M.N.R., 2007 TCC 97; and
·
Schwartz v. Canada, [1996] 1 S.C.R. 254.
[30]
The service agreements
signed by the Appellants make no reference to any asset transfer, but some of
the other documents relevant to the transaction specifically do so. For
example, an item of correspondence dated June 19, 2002, from Marc Lauzier
to the parties involved in the transaction, concerning the sale of the Bouchards'
clients, contains such references. At that time, Mr. Lauzier was a
regional director of individual investor services at NBF and was responsible
for negotiating the amount of the agreement with the Bouchards.
The following excerpt from the document is also relevant:
[TRANSLATION]
This is to inform you that, following my hesitation about the dollar
amount of the clientele transfer agreement with the Bouchard family, I met with
Mr. Carrière to discuss whether the transaction would be suitable. In
light of recent experiences involving the price of transferring clients, it
appears that the amount of $1.2 million, representing 1.85 times the Bouchard
family's estimated income for the year, is well above what we usually finance
for our agreements. . . .
[31]
Another relevant
document is the service agreement with Mr. Angers and Mr. Cooper under the
Relay Program (retirement) dated July 2, 2002. In the agreement, Mr.
Angers and Mr. Cooper agreed to [TRANSLATION] "submit a business plan
concerning management of the assets that will be transferred to us by Danielle Bouchard,
Jacinthe Bouchard and Jacques Bouchard, investment advisors employed by National
Bank Financial."
[32]
I find it very
difficult to accept that the payments contemplated in the service agreements
entered into by the Bouchard family can be considered to have been received in
consideration of the disposition of the clientele that was under their
management as part of their employment with NBF, or in consideration of the
disposition of some right of management in respect of that clientele.
[33]
The agreements signed
by the Bouchard family make no reference to a sale of assets, and the
agreements are even described as service agreements, the services being the
measures necessary to ensure that their clients make a smooth transition to the
new investment advisors. Even though certain documents refer to the sale of
clientele or other types of assets, the evidence does not disclose that the
parties involved in the transaction had a clear and common intent to carry out
a sale of assets.
[34]
Since the agreements
involved contain covenants not to solicit clients under the Appellants'
management, as well as covenants not to compete with NBF, we must consider
whether the amounts paid to the Appellants constitute consideration or partial
consideration for those commitments, as opposed to consideration for a sale of
assets.
[35]
Another important
factor is that the purported transferees of the Appellants' clientele were not
parties to the agreements made with the Appellants, contrary to the situation
in Gifford, supra, where the two employees of the brokerage firm
had entered into an "Agreement to Purchase Client Base of Financial
Advisor" with each other. In the absence of a clear and
unambiguous contract between the investment advisors, the Appellants bear
the onus of proving that the new investment advisors were the true recipients
of the clientele and that NBF was a mandatary acting on behalf of and for the
benefit of those advisors when it financed the transaction. Unfortunately
for the Appellants, nothing in the evidence supports such a finding, and
if NBF had been such a mandatary, it would not have been able to issue the T4
and/or T4A slips. Moreover, it should be emphasized that the Appellants did not
contest the validity of the service agreements that they entered into with NBF;
the Appellants were content to state that the agreements did not reflect the
true nature of the transaction.
[36]
Contrary to the
submissions by counsel for the Appellants, I do not believe that the amounts
paid by NBF can be considered to have come from the new investment advisors. If
I understand the transaction correctly, NBF gets repaid from the portion of the
commissions that would otherwise be payable to the new investment advisors.
The new advisors incur no acquisition costs, for taxation purposes, in respect
of the clientele, because, in practice, they paid nothing to acquire the clientele,
assuming that they acquired it at all. My understanding of the way in which the
transaction is structured is that, in the event that the commission rate is
reduced, only such part of the commissions as is actually received by the new
investment brokers is to be included in their income. The portion of the
commissions left to NBF, in repayment of the amounts advanced to the Appellants,
is a non‑taxable shortfall than cannot be deducted by the new investment
advisors.
[37]
I would close my
remarks on this point by stating that I wonder how the Appellants can claim to
have disposed of their clientele when it is settled law that an investment
broker's or a professional's clients belong to no one, or, at best, to the
brokers and brokerage firm that employs him or her (see Financière Banque Nationale Inc. v. Jean,
supra; Gifford v. Canada, supra; and Desmarais v. The
Queen, supra). It seems clear to me that NBF did not have to make
any payment whatsoever to the Appellants in order to acquire their clientele.
[38]
Based on my analysis of
the evidence, I find that the payments received by the Appellants are in
consideration of services rendered as part of their employment with NBF and are
therefore taxable as employment income under subsections 5(1)
and 6(3) of the Act, which read as follows:
5. Income from office
or employment
(1) Subject to
this Part, a taxpayer's income for a taxation year from an office or employment
is the salary, wages and other remuneration, including gratuities, received by
the taxpayer in the year.
6(3) Payments by employer
to employee
An amount received by one person from another
(a) .
. .
(b) on account, in lieu of
payment or in satisfaction of an obligation arising out of an agreement made by
the payer with the payee immediately prior to, during or immediately after a
period that the payee was an officer of, or in the employment of, the payer,
shall be deemed, for the purposes of section 5, to be remuneration
for the payee's services rendered as an officer or during the period of
employment, unless it is established that, irrespective of when the agreement,
if any, under which the amount was received was made or the form or legal
effect thereof, it cannot reasonably be regarded as having been received
(c) . . .
(d) . . .
(e) in consideration or partial
consideration for a covenant with reference to what the officer or employee is,
or is not, to do before or after the termination of the employment.
[39]
In my opinion, the
service agreements entered into with the Appellants did indeed specify what the
Appellants were to do, i.e. take the measures necessary to ensure that their
clients made a smooth transition to the new investment advisors, and what they
were not to do, i.e. solicit their former clients or otherwise compete with NBF
either before or after the termination of employment.
[40]
In Morissette, supra,
the Federal Court of Appeal confirmed that a non‑solicitation covenant,
"when exchanged for cash in the context of an employment termination,
gives rise to employment income." It seems obvious to me that a positive covenant
to take measures necessary to ensure that the Appellants' clientele make a
smooth transition should be treated in the same manner.
[41]
In Jacinthe Bouchard's
case, the amounts received from NBF as part of the service agreement that she
entered into are taxable as employment income under subsection 5(1) of the
Act because they were not obtained on her retirement.
[42]
For these reasons, I would
dismiss the appeal, with costs.
Signed at Ottawa, Canada, this 27th day of August 2008.
"Réal Favreau"
Translation
certified true
on this 2nd day of
October 2008.
Brian McCordick,
Translator
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