Émile Mercier v. Minister of National Revenue, [1992] 2 CTC 2065, [1992] 2 CTC 2669

Rip, T.C.C.J.:—This is an appeal from an income tax assessment for the 1985 taxation year, in which the Minister of National Revenue, the respondent, added $7,500 to the income of Emile Mercier, the appellant, in accordance with subsection 14(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act"), taking into account the fact that $7,500 of the $15,000 received by the appellant from the sale of his sales territory was an eligible capital amount. In reply to the appellants notice of appeal, the respondent ceased to rely on subsection 14(1) of the Act, and stated the opinion that the project received by the appellant [The French text reads: “le projet tire par l'appelant'

— Translator] from the “sale” of his territory was deemed to be remuneration for services rendered by the appellant in the course of his employment, in accordance with subsections 5(1) and 6(3) of the Act. [1]

At the beginning of the trial counsel for the respondent explained to the Court that notwithstanding the fact that her client relied on subsection 6(3) of the Act and that the entire amount of $15,000 should be added to Mr. Mercier’s income for 1985, the respondent acknowledged that the assessment cannot be increased at this date. Thus if the Minister’s new position is correct, the assessment will not be revised.

Mr. Mercier was the only witness. In 1985, he was employed by RCR International (1983) Inc ("RCR") as a commissioned salesperson. He started working for RCR's predecessor in 1970. He was paid 100 per cent by commission and he was responsible for all his expenses.

RCR operates a business selling hardware products to hardware stores. Mr. Mercier sold the products directly to the hardware stores.

Mr. Mercier stated that during the years he was employed by RCR he had sold products and developed the market for his employer.

Mr. Mercier testified that RCR had reimbursed its representatives who were on fixed salaries for their expenses. Mr. Mercier himself incurred expenses, for example, for office supplies, stamps, telephone, parking, entertainment, promotion and samples; these expenses were supported by receipts and he deducted them in calculating his income for income tax purposes. He also deducted office expenses and depreciation in computing his income for income tax purposes. The Minister did not dispute these expenses.

Mr. Mercier stated that he had incurred other expenses as an RCR representative in performing his duties during his employment. He explained:

When I started with the company 1970, I did not have much experience in selling hardware by itself, and in a very short time I understood that we had to do what the other companies were doing, rent floor space to display the product. Because the product, by the way, RCR, it is first quality, it sells for 25 per cent to 30 per cent more than the competition.

I tried it with three or four attractive customers, to rent floor space, for which I paid myself, out of my pocket, and my sales went up tremendously.

On the other hand, it was impossible for me to ask for a receipt when I rented the floor space. In all the big renovation stores I was not dealing with the owner, I was dealing with the manager, and I have the impression he considered it somewhat as a tip. So a couple of times a year I gave him a sum of money.

At a certain point, when I saw how well I was doing, I expanded my field and came up with the following reasoning: if I was making $65,000 to $70,000 per year, even when l was handing out $5,000 left and right to get my products displayed, it was profitable.

Everything went well. In eighty-two, the company was sold. In eighty-five, I was called to the office and I was told that there had been a new reorganization in the sales department, I have to say, as an aside, that I was the only one who was paid that way, 100 per cent by commission.

So I was told: “There is going to be a meeting in a couple of weeks”, if my memory is correct, "but between now and then, we are offering you $15,000 to

amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received

(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(d) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(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.

compensate for part of the expenses you incurred in developing your territory. It is compensation.”

And so then I asked some questions: what were the new organizations? They said: "Hey! Wait, when we have a general meeting with all the staff.”

I accepted the $15,000 and when we had the final meeting I was on the same footing as everyone else. I should note in passing that I controlled 90 per cent of the sales of my products in my territory, in contrast to about 10 per cent when I started.

So they had taken away all my big customers, and told me that they were “house accounts”, and second, I went down from 7 per cent to 4 per cent. Two weeks later, I was losing more than 50 per cent, and I placed that right on the company's head.

And that about summarizes my organization.

[Translation.]

On October 12, 1985, after a period of unpaid leave from June 1 to October 11,1985, Mr. Mercier resigned as a salesperson, “in view of the restructuring plans proposed by RCR but, more particularly,” [translation] subject to the provisions of the buy-back agreement signed on October 12, 1985. Subject to the same proviso, Mr. Mercier gave RCR a full release on the usual terms.

The buy-back agreement read, in part, as follows:

WHEREAS Mercier has, at his own expense, developed, operated and managed a sales and distribution territory for RCR products, for the benefit of himself and of RCR;

WHEREAS RCR wishes to buy back the said territory and Mercier wishes to sell it, on the conditions hereinafter set out;

1. In view of the foregoing considerations, RCR agrees to buy back the said territory from Mercier for the sum of fifteen thousand dollars ($15,000) and undertakes to pay the said amount at the request of Mercier.

2. In consideration of the payment of the said amount, Mercier hereby undertakes not to carry on, in the entire distribution territory where RCR, its subsidiaries and affiliated companies, present and future (hereinafter referred to collectively as the "Company") operate or carry on business at present or may operate or carry on business in the future, any business similar or related to the business of RCR, be it as employee, director, officer, shareholder, partner, silent partner or otherwise, whether directly or indirectly, for a period of three years, beginning on October 12, 1985, subject to a penalty of damages assessed for the purposes hereof at the sum of two thousand dollars ($2,000) per day (liquidated damages) of violation of the provisions of this paragraph).

3. RCR and Mercier agree that this sum constitutes reimbursement of capital invested by Mercier.

[Translation.]

Mr. Mercier is of the view that he had “good contacts" [translation] and “that is why they offered me the $15,000 to defray a portion of the expenses I had paid for the company over 15 years" [translation]. They estimated that he had spent “from $5,000 to $7,000 per year" [translation] in the manner described above. [2]

Mercier's position is that in 1985 RCR reimbursed him the sum of $15,000 to compensate him for expenses incurred and not deducted from his income. RCR did not buy back Mr. Mercier's territory; RCR was the employer and it was the employer who was at all times the owner of the territory. Nonetheless, he acknowledged that by territory he meant customers. His counsel argued that the non-competition clause had no legal effect because the damages assessed were too harsh. Accordingly we must ignore sections 1 and 2 of the agreement, notwithstanding Article 1234 of the Civil Code of Lower Canada. [3]

The Minister stated that the $15,000 received by Mr. Mercier was not paid as reimbursement of expenses by RCR, but must be deemed to be remuneration for services rendered by the appellant in the course of his employment. He received the $15,000 in consideration or partial consideration of a covenant with reference to what Mr. Mercier was, or was not, to do after the termination of his employment. Counsel for the respondent submitted that Mr. Mercier had received the $15,000 from RCR on account or in lieu of payment of an obligation arising out of an agreement made between RCR and Mr. Mercier during or immediately after a period that Mr. Mercier was in the employment of RCR. Thus for the purposes of section 5, the $15,000 is deemed to be remuneration for services rendered by Mr. Mercier during his period of employment, in accordance with subsection 6(3).

At the end of the trial I asked counsel for written submissions, in order to determine whether I could set aside the buy-back agreement and accept the appellant's testimony alone, in view of Article 1234 of the Civil Code.

Counsel for the appellant acknowledged that a witness who is a party to a written instrument cannot, by his testimony, contradict or change the terms of a valid written instrument. However, he emphasized that by using the expression "valid", Article 1234 of the Civil Code implies that if the written instrument was not valid it would still be possible to contradict the instrument by testimony: Longpré v. Trottier, [1990] R.D.I. 790, and the following Quebec authors: Langelier, F., Cours de droit civil, volume 4, pages 240-242; Nadeau, A. and Ducharme, L., Traité de droit civil du Québec, volume 9, page 395; Jean- Louis Beaudoin, Q.C., Les obligations, 1983, page 188.

Mr. Mercier wrote that it was proved that the territory which was the subject of the agreement could not be given back by the appellant to RCR, because that territory already belonged to RCR. He concluded by saying "in these circumstances we submit that the written instrument was not valid and that testimony contradicting it can be admitted” [translation].

In my opinion, there was no contradiction or inconsistency between the agreement and Mr. Mercier's testimony. The facts indicate that Mr. Mercier had established a mutually beneficial business relationship between himself and the RCR customers for which he was responsible. This relationship was undoubtedly attributable to the payments Mr. Mercier says he gave to employees and managers in the hardware stores.

The agreement between RCR and Mr. Mercier recognizes the fact that the customers were very loyal to Mr. Mercier and that if he stopped doing his job for RCR and started working for one of RCR's competitors, RCR would lose customers in those stores. The agreement provides for a purchase of territory, a non-competition clause and an acknowledgement that Mr. Mercier had invested money in his employer. In fact, RCR wanted to be sure that its customers stayed with it after Mr. Mercier's employment with RCR terminated. For this reason, there was a non-competition clause in the agreement. RCR also acknowledged that Mr. Mercier had, at his own expense, operated and managed a product sales and distribution territory for RCR and for himself. We do not know how the figure of $15,000 was reached. No one from RCR testified. Probably part of the $15,000 represented the consideration for the non- competition clause and the other part represented compensation for expenses incurred by Mr. Mercier. Unfortunately, however, there is no precise figure for these expenses; there are only estimates of expenses he incurred over more than five years. I find it very difficult to give weight to Mr. Mercier's evidence concerning the sums of money that he listed during his employment. Mr. Mercier's answers during examination were frequently vague. He had a tendency to emphasize his importance in the RCR sales structure and to make comments that were not meaningful. His lawyer, his son, tried on several occasions to stop him. If Mr. Mercier had prepared notes of payments or had filed exhibits in evidence to support what he said, it would have been less difficult for me to accept his evidence.

With respect to the validity of the non-competition clause, which the appellant raised, I refer to the decision in Richstone v. M.N.R., [1972] F.C. 623; [1972] C.T.C. 265, 72 D.T.C. 6232, at page 635 (C.T.C. 273, D.T.C. 6238):

The covenant is a subsisting one: no one has yet challenged it and until that is done it is binding on the parties.

The appellant has not discharged the burden which rested on him of proving that no portion of the $15,000 should be included in his income. The appeal is dismissed.

Appeal dismissed.