T Murray McMillan v. Minister of National Revenue, [1982] CTC 2345, 82 DTC 1287

Guy Tremblay:—This case was heard in Toronto, Ontario, on December 4, 1981.

1. Point at Issue

The point at issue is whether the appellant, a former employee and manager of Cox and McMillan Limited which operated a general insurance agency, is correct in considering, a “windfall”, the amount of $5,000 received in 1978 from Marsh & McLennan Limited, an insurance broker. The latter, in 1976, became the new broker of The Canada Life Assurance Company. This company had been the client of Cox and McMillan Limited from 1931 to 1976.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumed facts on which the respondent based the assessment or reassessment are also deemed to be correct. In the present case the assumed facts are described in the Reply to the Notice of Appeal as follows:

6. In reassessing the Appellant as aforesaid, the Respondent relied upon the following findings or assumptions of fact:

(a) the facts hereinbefore admitted;

(b) in the 1978 taxation year, the Appellant received the amount of $5,000 from Marsh & McLennan Limited as remuneration pursuant to a verbal agreement whereby the Appellant assisted Marsh & McLennan to secure the account of Canada Life Insurance Agency.

3. The Facts

3.01 The facts admitted to which the respondent referred in paragraph 6 of his Reply to the Notice of Appeal quoted above are those alleged in paragraphs 1, 2, 3, 4, 8 and 9 by the appellant in his Notice of Appeal. Moreover, at the beginning of the trial counsel for the respondent admitted paragraph 6 and the first part of paragraph 7 of the said Notice of Appeal. The facts read as follows:

(1) Mr McMillan was an employee and manager of Cox & McMillan Ltd from 1931 to 1977 inclusive;

(2) the company is a general insurance agency (non-life);

(3) he operated, at the same time, his own agency through the facilities of the company;

(4) he has held a general insurance agent’s licence since 1923;

(5) one of the clients of the company from 1931 to 1976 was Canada Life;

(6) in April, 1976, Canada Life advised Cox & McMillan Limited, its insurance broker, (and Mr McMillan, as the company’s manager) that it was changing its broker arrangements to Marsh & McLennan Limited, forthwith; that the change was being made due to its inherent inevitability and because of Canada Life’s internal reorganization.

(7) Marsh & McLennan Limited, at the request of Canada Life, has paid $5,000 in each of 1976, 1977 and 1978 to Mr McMillan. There were no strings attached to the payments.

(8) Mr .McMillan sold his general insurance interests in January, 1978 and retired from active participation.

(9) Mr McMillan has been assessed income taxes on each of the $5,000 amounts as though it was ordinary income.

3.02 It was also admitted by the respondent that the appellant had been infirm for many years and that at the time of the trial he was recovering from a serious cancer operation and was unable to testify before the Board.

3.03 Mr Jack Moore, CA, testified that he had known the appellant for 12 years. He affirmed that the appellant was not a shareholder of Cox and McMillan Limited:

The company was owned by a Mr Wallace Cox, and while Mr McMillan was a nominee and was an officer he did not have an interest in Cox & McMillan Limited, an aside is that T Murray McMillan was a registered Insurance Agent, a general insurance agent and held a license, and operated an agency of his own under the name of T Murray McMillan. Through the structure of Cox & McMillan Limited thee were two insurance agencies operating through the limited company, one section for the benefit of the shareholders of the limited company, namely Wallace Cox, and another section for the benefit of T Murray McMillan as an individual, and insurance agent.

The business with Canada Life through the years was on behalf of Cox & McMillan Limited as opposed to the T Murray McMillan Agency or sub-agency of Cox & McMillan Limited. He managed the account on behalf of the limited company through those years. (SN p 6 and 7)

In cross-examination, Mr Moore said that he was familiar with an agreement (Exhibit R-1) dated January 17, 1973, pursuant to which the appellant and a Mr Harry D Irvine agreed that they had purchased from Mr Wallace D Cox all the issued shares of Cox and McMillan Limited. They said the shares since then were owned fifty-fifty by Mr Irvine and the appellant. The latter was the only broker employed by the firm.

3.04 Concerning the $5,000 received in 1978, Mr Moore received the following information from the appellant:

He said that at a meeting with lan Fraser, a Vice-President of Canada Life, that since he had served Canada Life as the contact between the company and the general insurance agency that he managed, namely Cox & McMillan Limited; since the early thirties (30’s) to at that time 1975 or 1976 Canada Life would like to see March & McLennan compensate Mr McMillan in some fashion or make some payment to him to recognize the service that he had made to the company through the years. (SN p 6)

3.05 Exhibit A-1, a letter dated April 1, 1976, was sent to the appellant from Mr D lan Fraser, vice-president of administration of Canada Life. It reads as follows:

As you are aware and we have discussed, Marsh & McLennan have made a complete survey of our insurance needs. In considering this study and our future insurance requirements, we have come to the conclusion that now is the time to make the inevitable change in broker arrangements, and we are authorizing Marsh & McLennan to act as our insurance broker from April 5, 1976.

This is no reflection on your past service; indeed, we have been well served by you over these many years, and we sincerely thank you for this excellent service. However, much as we regret having to make a change, I think you will agree that a change was inevitable sooner or later, and with our internal reorganization, our expanded requirements, etc., we feel that the time is now. You may wish to discuss this with ourselves and Marsh & McLennan, and this we are prepared to do.

3.06 Mr Moore telephoned Mr Fraser:

From that conversation two points came forward, one that there were other companies besides Marsh & McLennan contacted by Canada Life to examine their insurance needs and make a proposal to them, other than that the second point of importance was that Mr Fraser said to me that Mr McMillan was not involved in deciding who was going to be called, nor was he aware that they were being called until he was called down to Mr Fraser’s office and told that the business was being transferred to Marsh & McLennan, and that is reiterated in the letter of April 1 that is efore you.

I then questioned Mr McMillan on whether or not he had provided any information verbally in writing, files etcetera of any kind to Marsh & McLennan before, during or after the reporting to Canada Life for the purpose of obtaining the business, and he said to me that “no”, he had not had contact with them. (SN pp 8 and 9)

3.07 Mr Moore also spoke to Mr Boddy of Marsh & McLennan Limited:

In talking to Mr Boddy at — Mr Boddy is with Marsh & McLennan, I spoke to them to try to determine what service if any Mr McMillan had provided to them. He did not say yes there was a service, nor did he say no there was not a service, but rather that they had issued a T-4A to Mr McMillan for those amounts, and that was the position that they were going to take . . . (SN pp 9 and 10)

3.08 According to Mr Moore, two conditions were connected to the payments of the $5,000. One was that the taxpayer be alive and the second was that he continue to hold a valid insurance broker’s licence.

3.09 Mr Moore also stated that he was familiar with Exhibit R-2, a letter dated November 15, 1978, which was sent to the appellant by Mr John T Band, Vice-President of Marsh & McLennan Limited. It reads as follows:

Dear Murray:

Attached is a cheque payable to you in the amount of $5,000 for payment as agreed on the Canada Life account.

I am having this issued earlier than last year as it occurred to me that you might be going to southern sunshine earlier than last year.

Kind personal regards.

3.10 Exhibit R-3 is the T4A-1978 issued by Marsh & McLennan Limited to the appellant. In box (E) one can read, “Commissions — $5,000”.

3.11 Mr John T Band, retired, was the witness of the respondent. He said he was vice-president of March & McLennan Limited from 1960 to 1980 and that he had worked for Marsh & McLennan Limited for forty years. This company had been in the insurance brokerage business since 1901.

Concerning the payment made to the appellant, Mr Band testified as follows:

The business of — insurance business of Canada Life was handled by several insurance agencies of which the firm of Cox & McMillan had what we call the casualty portion of the business. Now the real estate department had spoken to us three (3) years before 1976 and continuing that they were not happy with the way their insurance was being conducted. So we did a preliminary study with, and with Mr Fraser it seemed sensible and good business to put it all in the hands of one broker. Now there were several others competing with it, and during this period the paternalistic Canada Life Insurance Company having done business with the firm of Cox & McMillan for forty (40) years of which Mr McMillan was the operative or operator of that business to our knowledge, they were wrestling with the fact that they were going to cut his income very substantially. So I said to Mr Fraser that I thought that we could make some agreement to pay him some money to make him partially whole at least for what he was losing by way of business. And as long as he was an insurance agent or had held an agency license we could pay him a sub-commission or treat him as a sub-agent. So Fraser was satisfied that we could work something out, so we were awarded the business and Mr McMillan and Mr Fraser and I had lunch together at the Canada Life on particular day, and discussed this thing and discussed the benefits, Mr McMillan was at that time getting on in years, I didn’t know if he might give up his insurance license, so I said, well supposing that we would agree to pay you five thousand dollars ($5,000) which is a figure picked right out of the air, it could have been two, three; but we didn't want to be chintzy about this thing, and we said five thousand dollars ($5,000) for a period of three (3) years providing you ae still in the insurance business as a licensed broker, licensed agent, and also that you are alive. And he said that that would be very satisfactory, we all shook hands and the lunch broke up and the first year I sent him five thousand dollars. (SN pp 24 and 25)

3.12 Mr Band also testified that Mr Cox of Cox and McMillan Limited was the grandson of Senator Cox who was the founder of Canada Life.

3.13 Exhibit R-4 was a memo dated April 13, 1976, from Mr Band to a Mr Amondson, an employee of Marsh & McLennan Limited. It reads as follows:

As you are aware, we are appointed Brokers for the above from April 3, 1976. As Mr Murray McMillan of Cox & McMillan has served them for 40 years and as this is quite a wrench to his income, we agree to pay him $5,000 each year for the next three years, 1976, 1977, 1978, providing he is still alive and holding a license.

1 I think we should pay him on an agreed date probably a major renewal and I would appreciate your advising me when, so I can inform Canada Life and Mr McMillan.

3.14 Another memo was filed as Exhibit R-5. It was dated November 9, 1978, and sent by Mr Band to Michael Stonehouse of Canada Life Assurance. It reads as follows:

I wonder if you would have a cheque issued in the amount of $5,000 for Mr Murray McMillan of Cox & McMillan Limited. I would like to get it to him within the next 10 days.

Our agreement was $5,000 for each year for 3 years, 1976-77 and 78, therefore, this will be the last payment.

I spoke to Mr McMillan and he still holds an insurance license.

3.15 Mr Band also gave more details concerning the condition that the appellant continue to hold a valid insurance broker’s license and the point that there was no written agreement. He said that the appellant had to hold a valid insurance broker’s license:

Because we — we felt that — we were treating it as a sub-agent. Somebody within the business. Now, the point has come up earlier that there was no agreement, but I can tell you sir that there are a number of agency, sub-agency intertwining dealing with Lloyds, paying two and a half per cent or five per cent or a percentage or an amount of money to a sub-agent is very usual in the business, and usually is conducted by a handshake or an agreement, it is very seldom that there is a formalization of an agreement drawn up. I have never seen one in the many years that I have been in the business. (SN p 29)

This type of arrangement is very usual according to Mr Band:

Finders fee you could call it, a way to get over a hump or something. He is in business he is blocking your ability to complete something, so you say okay, well let’s do this, (SN p 31)

3.16 According to Mr Band the $5,000 was not reimbursed by Canada Life

— “It came out of our pocket”. During the three years “it was roughly 10% of the commissions that Marsh & McLennan Limited received as commissions from Canada Life (SN p 30).

3.17 Mr Band said that Marsh & McLennan Limited would not have paid subcommission if the appellant had not held a valid insurance broker’s licence and if Marsh & McLennan Limited had not received commission (SN p 31).

4. Law — Cases at law — Analysis

4.01. Law

section 3 of the Income Tax Act is the section involved in the present case.

4.02. Cases at Law

1. -JE Cranswick v HMQ, [1980] CTC 93; 80 DTC 6057,

2. — Robert E Curran v MNR, [1959] CTC 416; 59 DTC 1247,

3. —HMQ v Fred E Poynton, [1972] CTC 411; 72 DTC 6329.

4.03 Analysis

4.03.1 On the one hand the outline of the facts is as follows:

1. The appellant was an insurance broker who operated his own agency through the facilities of Cox and McMillan Limited, an insurance broker company (para 3.01,(1) and (3)). The appellant was, in fact, the only broker working for the two agencies (para 3.03 in fine);

2. In 1973, the appellant was shareholder of 50% of the shares of Cox and McMillan Limited (Exhibit R-1, para 3.03, second part), despite Mr Moore’s affirmation to the contrary (para 3.03, first part);

3. The Canada Life Assurance Company, a client of Cox and McMillan Limited for 40 years, decided in 1976 to change its insurance broker to Marsh & McLennan Limited (para 3.01, (6));

4. After a meeting with the representative of Marsh & McLennan Limited (Mr Band), the representative of Canada Life (Mr Fraser) and Mr McMillan, it was decided that the appellant would be treated as a sub-agent to whom a subcommission would be given — $5,000 per year over three years. This was confirmed by a handshake agreement (para 3.11). This type of agreement is commonly used in this kind of business (para 3.15). The said subcommission of $5,000 over three years was roughly 10% of the commission of Marsh & McLennan Limited in tne Canada Life file (para 3.16).

5. The appellant would not have received the subcommission if he had not held a valid insurance broker’s licence and if Marsh & McLennan Limited itself would not have received commission (para 3.17).

4.03.2 However, on the other hand it is also true that Marsh & McLennan Limited was not obliged to pay the said subcommission to the appellant. However, because the decision of Canada Life to put its insurance business in the hands of only one insurance broker would substantially cut the Cox and McMillan income, “the paternalistic Canada Life Insurance Company” (Mr Band — para 3.11) wished to find a way to help the appellant personally. The suggestion of subcommission in a handshake agreement was made by Mr Band of Marsh & McLennan Limited (para 3.11).

4.03.3 In substance there was no relation between the new broker and the former broker Cox and McMillan Limited. Moreover, personally the appellant had not helped the new broker to obtain the file of Canada Life. It was not a finders fee. The former broker, Cox and McMillan Limited, was the loser. The amount paid personally to the appellant by the new broker was to satisfy Canada Life. The new broker considered this delicacy of “the paternalistic Canada Life” towards the appellant as a kind of obstacle to complete a transaction with Canada Life. It was a good suggestion from the new broker to treat the appellant “as a sub-agent” because, once again, this permitted him to complete this important transaction. However, the appellant was not, in fact, a sub-agent. The said “subcommission” was not actually a subcommission. No service was requested of or performed by the appellant to help the new broker to complete the transaction. No assistance was provided by him to Marsh & McLennan Limited either before or after the change of business. In fact, the only thing that the appellant did to help the new broker was to accept the $15,000. Moreover, as he had no right to this amount or to any other amount, if he had not accepted he would have received nothing.

4.03.4 In my opinion “sub-agent” and “subcommission” are only words to cover a gratuity payment for which the appellant had no legal expectation and this is a windfall. Even if the handshake agreement would have been a written agreement, this would not have changed the substance.

4.03.5 One could not say that the $15,000 is a payment indirectly made by Canada Life for long service. The payment indeed was not made, even indirectly, by Canada Life (para 3.16).

5. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reassessment in accordance with the above Reasons for Judgment.

Appeal allowed.