John Maxwell Henderson v. Minister of National Revenue, [1991] 2 CTC 2048

Beaubier, T.CJ.:—This matter was heard in Fredericton, New Brunswick, on April 12, 1991.

John Maxwell Henderson was born in 1932. Mr. Henderson graduated with his degrees and qualified as a pharmacist in 1959. He entered into employment with his father, E.M. Henderson, in his father's pharmacy in Campbellton, New Brunswick, after qualifying as a professional pharmacist and remained so employed until September 11, 1987, in Campbellton, New Brunswick.

E.M. Henderson died in June 1987, and the appellant inherited his shares in E.M. Henderson Drugs Ltd. and became the sole shareholder of that corporation.

The late E.M. Henderson had operated a drug store in Campbellton, New Brunswick, from approximately 1925 until 1971 when he incorporated E.M. Henderson Drugs Ltd. and transferred the drug store and its premises to the corporation at that time. Mr. E.M. Henderson became the majority shareholder of the new corporation and the appellant became a minority shareholder in the corporation.

Due to the illness of the appellant and the age of the late E.M. Henderson, they commenced trying to sell the business in 1986. By an agreement of August 21, 1987, E.M. Henderson Drugs Ltd. sold the goodwill, customer lists, scheduled equipment and inventory of the drug store to Koffler Stores (Eastern) Ltd. which is better known by its trade name Shoppers Drug Mart. The closing date was set at September 11, 1987, and the appellant entered into a personal covenant with the purchaser not to compete with the purchaser in the Campbellton area for three years from that date.

The employees of E.M. Henderson Drugs Ltd. went to work for the purchaser on September 11, 1987, and E.M. Henderson Drugs Ltd. ceased its operation as a drug store on that date.

E.M. Henderson Drugs Ltd. also entered into a net lease of the entire premises of the drug store operation with the purchaser. The lessee thereupon not only had the drug store premises, but also took over the responsibility as landlord for leases by doctors and others in the building premises. The lease with the purchaser was for approximately ten years (Schedule C, Exhibit A-1). The result was that after September 11, 1987, E.M. Henderson Drugs Ltd. merely paid its bills and collected its receivables on winding up its drug business and then received monthly rent cheques and reinvested moneys on hand quarterly in treasury bills.

After September 11, 1987, the appellant worked part-time as a pharmacist for the franchisees of Shoppers Drug Mart in the same premises as his old drug store had been located. He also worked part-time as a pharmacist for another Shoppers Drug Mart franchise in the area, all within the confines of his personal covenant. After September 11, 1987, he did not work as a pharmacist from the end of May until October 1. All of the part-time work he did was performed at an hourly rate of $25 per hour, averaging substantially fewer hours per week than he had been accustomed to in his previous employment.

The only task the appellant did for E.M. Henderson Drugs Ltd. after September 11, 1987, was to attend to pay the bills and to collect the receivables of the drug store, to file corporate resolutions and financial statements, and to sign reinvestment authorities at the bank for treasury bills on a quarterly basis. He was not paid for this.

In 1987, the appellant was paid a salary of $26,790 by E.M. Henderson Drugs Ltd. to September 11, 1987. In February 1988, Mr. Henderson met with his accountant and the corporation declared a management bonus for the 1987 fiscal period of the corporation to September 11, 1987 (for the fiscal year ended December 31, 1987) which was paid in 1988 prior to June 30, 1988, in the amount of $38,611.

The appellant was also paid a retiring allowance from E.M. Henderson Drugs Ltd. of $58,000 in 1987 and $43,500 in 1988. In each of 1987 and 1988 he filed his income tax return and claimed these payments as a transfer of eligible retiring allowance to a registered retirement savings plan. These claims were disallowed by the Minister of National Revenue and are the subject of this appeal. The appellant did not receive any other income after September 11, 1987, from E.M. Henderson Drugs Ltd. except by way of dividends.

As it applies to the appellant, retiring allowance is defined by subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") to mean:

... an amount. . . received

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his long service, or

(b) in respect of a loss of an office or employment of a taxpayer . . . by the taxpayer. . .

This is included in the taxpayer's income pursuant to subparagraph 56(1)(a)(ii) of the Income Tax Act and can be deducted pursuant to subsection 60(j.1) if the appellant retires.

In Specht v. The Queen, [1975] C.T.C. 126; 75 D.T.C. 5069, at 133 (D.T.C. 5073), Collier, J. dealt with the word "retirement" and subsection 31A(d) of the Canada-United States of America Tax Convention Act, 1943, which refers to the taxability of "a payment made by an employer to an employee or former employee upon or after retirement in respect of loss of office or employment”. He said:

The plaintiff did not retire or go into retirement from his occupation with MacMillan Bloedel within the ordinary meaning of "retire or retirement". That is, he did not withdraw from his employment because he had reached a mutually stipulated age, or generally withdraw from his occupation or business activity.

[Emphasis added.]

This was based in part upon the Shorter Oxford English Dictionary, 3rd ed. definition of retirement as “withdrawal from occupation or business activity". The Oxford English Dictionary, 2nd ed. currently defines "retire" as:

To withdraw from office or an official position; to give up one's business or occupation in order to enjoy more leisure or freedom.

In Lorenzen v. The Queen, [1981] C.T.C. 377; 81 D.T.C. 5251, Grant, D.J. stated at page 379 (D.T.C. 5253) that: “Retirement implies a complete cessation of one's profession or business." In that case, the taxpayer organized a second corporation and essentially carried on the same job in a new guise. He was found not to be retired.

In Shell v. M.N.R., [1982] C.T.C. 2391; 82 D.T.C. 1369, Mr. Shell was found not to be retired because he did not completely cease his earlier employment activities. In Doyle v. The Queen, [1983] C.T.C. 339; 83 D.T.C. 5383, Jerome, A.C.J. found against the appellant and said (at page 340 (D.T.C. 5384)) succinctly that in the case before him:

It was not the employment of this plaintiff, but the business of Buttress Investments that came to an end and what was left of it was transferred to another company . . . what happened is that the company in which the plaintiff occupied a certain office was, upon the decision of the plaintiff, wound up . . .

Here the appellant did not withdraw from his employment because he had reached a mutually stipulated age. The corporation's main business changed from drug sales to merely being a collector of rents and interest.

In Ashford v. M.N.R., [1986] 1 C.T.C. 2044; 86 D.T.C. 1079 at 2048 (D.T.C. 1082), Kempo, T.C.J., highlighted Collier, J.’s judgment in Specht v. The Queen, supra, when Collier, J. said at page 133 (D.T.C. 5073):

. . . "in respect of loss of office or employment" . . . it envisages a payment made for loss of a source of income. . . . after withdrawal by reason of the elimination or expiration of the particular office or employment.

Within the confines of the words describing a “retiring allowance” in subsection 248(1) the Minister of National Revenue disputes the following:

(1) The appellant was not genuinely retired from his office or employment with the corporation.

(2) The payments were not in recognition of the appellant's long service.

To dispose of (2) first, suffice it to say that the evidence is that the appellant served E.M. Henderson Drugs Ltd. for its entire life and its predecessor Mr. Henderson for a total of 28 years which is more than ‘2 of the average Canadian's working life. This is certainly by today's standards of job duration “long service". It was also all of the appellant's working life to September 11, 1987. Therefore the Court finds that the payments were quite properly made by the corporation in recognition of the appellant's long service.

The problem then reverts to (1), that is: Was Mr. Henderson retired? He performed rudimentary corporate functions for E.M. Henderson Drugs Ltd. for which he was not paid and he worked part-time as a licensed pharmacist for third parties in the same premises after September 11, 1987.

The appellant did not hold an "office" in the corporation as that term is defined in subsection 248(1) of the Income Tax Act, since he was not entitled to a "fixed or ascertainable stipend". Whether he was employed after September 11, 1987, requires an examination of the definition "employment" in subsection 248(1) which reads:

"employment" means the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign) and "servant" or "employee" means a person holding such a position.

To be "in the service of some other person" means that the employee has a duty to serve that other person who in turn has a right to those services pursuant to a contract of mutual rights and duties.

Here the only services the appellant performed for E.M. Henderson Drugs Ltd. after September 11, 1987, were gratuitous. He had no duty to that corporation and it had no contractual right to his services. Certainly the appellant ceased to have the corporation as a source of income for his labour since his employment had expired. Moreover, the retirement was genuine. After September 11, 1987, Mr. Henderson's duties in the drug store premises as a part- time pharmacist were directed by someone else who determined his hours of work, his daily tasks, and whether he was performing adequately. Thereafter he remained completely at leisure in June, July, August and September of each year.

This Court finds that Mr. Henderson was paid a retiring allowance of $58,000 in 1987 and $43,500 in 1988 by E.M. Henderson Drugs Ltd. after retirement from employment by reason of the elimination of his employment in the service of that corporation, or for his long service in the employ of that corporation.

The appeal is allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment.

Pursuant to the application of counsel representing the Minister of National Revenue, leave is granted to both parties to speak to costs. This may be done by correspondence to the Court with copies to the other solicitor and it is to be received by the Court within 30 days from the date of this judgment.

Appeal allowed.