Sidney H. Kirsh v. Minister of National Revenue, [1990] 1 CTC 2511, 90 DTC 1385

Taylor, T.C.J.: — These are appeals heard in Toronto, Ontario, on February 5, 1990, against income tax assessments in which the Minister of National Revenue treated amounts of $15,600 received in each of the two years 1981 and 1982, as on income rather than capital account. These amounts flowed from fulfilment of a document dated March 10, 1981 between Mr. Kirsh and other parties, which agreement detailed (a) a sale of company shares in "The Bun King Co. Ltd." (Bun King); (b) his resignation from that company; and (c) "consideration for past consulting services”. It was the contention of Mr. Kirsh that the amounts at issue represented compensation for the sale of his shares in Bun King—therefore capital, while the respondent asserted the amounts were remuneration for services—therefore income.

The fundamental position of counsel for the appellant was that the agreement of March 10, 1981 had to be read as part and parcel of a series of documents and events which commenced with the business association between Mr. Kirsh and a Mr. Angelo Rizzuti, during which time they were shareholders in Bun King, Mr. Kirsh with 30 per cent of the shares, Mr. Rizzuti with 70 per cent. On November 30, 1979, Kirsh and Rizzuti, with Rizzuti also signing for Bun King, signed an agreement by which Kirsh sold his shareholdings to Rizzuti, resigned from his position with the company, and agreed to accept compensation for his shares according to a formula, and remain as a “consultant” for a fee to be determined. According to Kirsh no payments came from this agreement, and legal action to force compliance and produce payments was commenced. The March 10, 1981 agreement noted above was the result.

I do not agree with counsel for the appellant that the Court can go back beyond the 1981 agreement to resolve this issue. Counsel took some comfort from the case of M.N.R. v. Beaupré ([1973] C.T.C. 316; D.T.C. 5255), but in my opinion it cannot be used to link together the first agreement, the documents dealing with the Court action, and the second agreement. The March 10, 1981 agreement specified as follows:

This agreement supercedes [sic] the agreement made between the parties dated November 30, 1979 (the “First Agreement"). The First Agreement is of no further force and effect, and no party thereto shall have any liability thereunder whatsoever to any other party thereto.

The clauses of the agreement requiring interpretation as they relate to the amounts at issue are:

WHEREAS on the 30th day of November, 1979, Kirsh transferred all his shares in the capital of Bun King to Rizzuti and resigned as a director and officer of Bun King.

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the transfer of shares and the resignations of Kirsh, the mutual covenants and agreements herein contained and other good and valuable consideration (the receipt and sufficiency whereof is hereby acknowledged by each party), the parties hereto do hereby covenant and agree, each with the other as follows:

1. The foregoing recital is trite and incontrovertible.

2. Kirsh confirms the sale of all of the hereinbefore recited shares in the capital of Bun King to Rizzuti for the sum of One Dollar ($1.00) upon the terms contained in this Agreement.

3. As consideration for past consulting services rendered by Kirsh to Bun King in connection with the establishment of the business, the operations of its premises, the formulation of merchandising techniques and systems and other promotional techniques, and the training of employees involved in the business, Bun King hereby covenants and agrees with Kirsh:

(a) to pay to Kirsh the sum of $1,300.00 on the first day of each and every month from January 1, 1981 and then on the first day of each and every month thereafter without termination during Kirsh's lifetime.

There were additional detailed clauses providing for continuing payments of the $1,300 per month to Kirsh's wife and daughter in the event of the death of Kirsh before December 1, 1991.

I do not wish to ascribe the following quotation to Mr. Kirsh's able counsel in Court, since it was filed earlier by his accountants in connection with efforts to resolve the matter at the objection stage but it is an interesting viewpoint:

. . . we submit that it is unrealistic to accept the agreement at face value and suggest that to characterize the payments as remuneration for past services from April to November is not in keeping with the economic reality of the situation.

I can certainly agree that the evidence presented in Court indicates in fact that Mr. Kirsh did very little as a real contribution of “past services” (see agreement) and it would be difficult indeed to imagine that any such contribution, which was very sporadic, and extended at best over only a few months, could warrant the prospect of several hundred thousand dollars of the compensation which could well be paid to Mr. Kirsh under the agreement. But I would say without hesitation that it is equally difficult, if not more so, to imagine that Mr. Kirsh's 30 per cent interest in the corporation had reached a similar value—for the sale of his shares—in the same short period. But that is not my problem —I am not required to choose between two almost equally implausible situations—that was determined between the parties when they signed the March 10, 1981 agreement, supra. In that agreement, the sale of the shares was for $1, and the amounts at issue in this appeal were for "past services".

It would not be unreasonable to refer to a comment made by the learned judge in Beaupré, supra, at page 322 (D.T.C. 5259), which might have relevance to this situation, although of no assistance to this taxpayer in my view:

. . . that the purpose of Phillips and his advisers was simply to circumvent the provisions of paragraphs 12(1)(a) and (b) of the Income Tax Act, and make the company pay part of the cost of purchasing Beaupré’s interests in the company.

As agreeable as it would be to the appellant, there is no basis in the evidence available to the Court upon which to conclude that the amounts at issue were for the sale of shares as opposed to compensation for services thereby setting aside the very agreement upon which the payments were made. The appeals are dismissed.

Appeals dismissed.