Edward Shell, Robert Horta v. Minister of National Revenue, [1982] CTC 2391, 82 DTC 1369

The Assistant Chairman:—Both Mr Shell and Mr Horta have appealed to this Board from assessments of income tax for their 1974 taxation years.

It was their opinion that each one of them received from their employer a retirement allowance when they retired from their employment with Sargent Construction (1964) Ltd (hereinafter referred to as “Sargent”). They effectively advised Sargent at a meeting on February 12, 1974, that they were going to retire at the end of the month, and they continued that some projects were still not completed and they agreed to provide the services to complete those contracts, but they agreed that they would accept no remuneration for it. In other words, the last money paid to them from a salary point of view would be on February 28, 1974. Purely as an aside, for the period March 1, 1974 to April 19, 1974, Sargent’s bookkeeper prepared cheques for each of them in a given amount. We are not sure of the quanrity, but there is no doubt that he prepared the cheques. However, the cheques were not cashed (they received no money) and the entry was reversed so that the fact that they were supposedly paid or possibly paid after February 28, 1974 is non-existent.

Now, accepting that there was some confusion as to what transpired from March 1, 1974 for the next few months, it appears that after that date Mr Shell, who had effectively been the office manager of Sargent, did no office work in connection with the contracts in existence as they were, to all intents and purposes, complete in that aspect.

Mr Horta, who was the field supervisor of Sargent while he was in its employ (and there was some confusion here), suggested that he completed his work through a limited company which he had incorporated, namely, Development Control & Planning Ltd (hereinafter referred to as “Development”). He stated that the usual services offered by that company to the public at large were basically the same as those rendered by him when he was working for Sargent, except tht Development did not provide all of the services which he as an individual had provided for Sargent when he was its employee. After asking him myself (he was confused and I was confused) I concluded that there was no new agreement with Sargent after he retired, and consequently, the services he provided were those which he had provided prior to February 28, 1974, but without any remuneration.

Each of these gentlemen received a retirement allowance from Sargent and each of these gentlemen bought an income averaging annuity with the major portion of the allowance which they received. Each of them received approximately $150,000 and each paid approximately $130,000 to buy the annuity. Details were given as to where the money came from to provide for this retirement allowance, but I cannot see where it has any relevance to the case and so I shall ignore it. The Royal Trust Company, from whom each bought the income averaging annuity, got their money and I think my figures are approximately correct as to the amount of the payment.

The Minister, after the retirement allowance was paid and after the income averaging annuity contracts were entered into and paid for, reassessed both appellants disallowing as a deduction the income averaging annuity purchased, on the basis that each had not retired and therefore what each received was not a retirement allowance.

The whole issue is whether or not Mr Horta and Mr Shell were retired as that word has been interpreted in the cases cited by counsel.

The Crown’s position in effect was that the gentlemen had not retired individually because they were still active (should I use the broad term) in the commercial world after the date of February 28, 1974. Besides referring to cases, counsel referred to the definition of the words “retire” and “retirement” in The Oxford English Dictionary as follows:

Retire: To withdraw from office or an official position; to give up one’s business or occupation in order to enjoy more leisure or freedom (esp. after after having made a competence or earned a pension).

Retirement: The act of withdrawing into seclusion or privacy; withdrawal from something; withdrawal from occupation or business activity.

In this respect counsel for the Crown pointed out, effectively in so far as Mr Shell was concerned, that he owned several companies and he had shareholding interests in several other companies in conjunction with Mr Horta. Mr Shell remained an unpaid officer and president of those companies, I don’t know for how long, but apparently for some years after February 1974. I don’t know whether those companies have been wound up to date. Likewise Mr Horta remained an unpaid officer and executive of those companies until approximately the same time. To all intents and purposes those companies had no activity with the exception of at least one company, and maybe one or two more. The only activity it or they had was the disposal of the assets owned on February 28, 1974. In one instance, there is no doubt about it, one company in which each had a shareholding, sold land, I believe in 1977, and the selling price was in the vicinity of $100,000. After that one sale in 1977, that company still had an inventory of land. This implicates both appellants.

Now, in so far as Mr Shell is concerned, there were two other companies of which he was, to all intents and purposes, the sole shareholder, both of which had been incorporated prior to the date of retirement, February 28, 1974. Apparently both companies were inactive until after the retirement and then, sometime in 1975, a warehouse was built on the property of one company, which warehouse was rented. Two years later a second warehouse was built on another part of the same property. Both were rented and both produced income. The second company of Mr Shell was effectively a management company which managed the property of the first company, and for such services the second compay received management fees. As an expense this second company paid management salaries. Mr Shell clearly admitted that he was the only shareholder of that company.

As previously mentioned, prior to the retirement date, Mr Horta caused a company to be incorporated, namely, Development. Later, that company had three or four employees including Mr Horta himself. They provided services available to the public at large which services were not exactly the same as the services provided by Sargent.

Sargent was a prime contractor. By that I mean, when tenders were asked for to erect a building according to certain specifications, a prime contractor which wanted to submit a tender would go out with copies of the plans to get the subcontractors to sub-tender to it for the various sub-trades. Having received all of those tenders, then the prime contractor would tender its offer for the entire job. Mr Shell said that undoubtedly many people or firms would submit tenders. The owner would then select one tender and award the contract and then that prime contractor would proceed to erect the building according to the specifications. On awarding the contract to a prime contractor, a contract would be entered into for a stated sum of money and with other specific terms. There was definitely a financial risk to the prime contractor. There was a worry that the prime contractor could run over the estimated costs or that one of the subcontractors could go bankrupt and the prime contractor would have to get another subcontractor. Regardless of any of that, the prime contractor had to live up to the contract and was responsible for it. In addition, a performance bond had to be given to the owner of the property to ensure that the owner of the property could get money to finish the job should it happen that the prime contractor could not complete it.

Mr Horta’s company, Development, was not a prime contractor. If a company can be an employee, then what it offered was effectively limited services. Exhibit R-7 was prepared and submitted to indicate the various activities of Development, and Mr Horta admitted that it provided estimates on the costs of a building for the purposes of the prime contractor. If those were the activities, then they would be the same as he stated he had performed for his former employer, except of course that he did not have the responsibilities in connection with the completion of the building or having to put up a performance bond for the satisfactory performance. I do not know the date on which Development commenced its business activities, but apparently they started shortly after Mr Horta had retired from Sargent. The first year-end was February 28, 1975, and in that period of time it received management income of some $133,000 and that company has continued until today.

Counsel for the appellants submitted that Mr Shell didn’t do anything after he retired from Sargent. Mr Shell retired from Sargent because of the worry in connection with the business and the discomfort he was suffering from a back fusion which he had had operated on in 1957 at the Mayo Clinic in Rochester. He apparently recovered well from the operation but stated that the fusion was deteriorating and that he was uncomfortable for long periods of time. Business pressures influenced him and so he decided that he would get out.

Mr Horta, who was also an officer of Sargent, felt that personally he could not continue to do both of the jobs, including the administration, as he did not have the experience to handle the office work which Mr Shell had been doing, and for that reason he retired.

As far as I am concerned, and without embellishment, those are the bare facts of the case, and I think it is essential to make a decision on whether or not, as counsel for the appellants put it, a person who has been accustomed to an active and demanding life is expected to vegetate and cannot do anything from then forward after retirement simply because he has received an allowance.

However, Mr Shell’s retirement had certain other elements; namely, what he did after his retirement. He continued to receive rent on two rental properties through his limited company and the management fees or salary received was really rent on his own building. At this time the suggestion was made as to what the answer would be if these properties had been owned by him personally and he had rented them periodically. Would that preclude him from being retired?

I think that Mr Horta’s position is this: he was not in the same line of work since he was not working for the same company or doing the same work as he did before, and consequently he felt that his situation was one of retirement and did not have the character of employment. Clearly, according to counsel for the appellants, Mr Horta retired from Sargent and what he did subsequently was not the same type of business or employment. He pointed out, and clearly there was no suggestion to the contrary, that the company with which Mr Horta worked was not affiliated with Sargent.

Counsel for the respondent pointed out the background and what the appellants did after February 28, 1974. He pointed out that Mr Shell took an active part with respect to the two companies and also that Mr Horta was active with respect to his company, Development.

Counsel for the respondent mentioned several cases and referred in particular to one which, as far as he was concerned, made a number of observations about retirement allowances. He quoted various comments as to retirement allowances by Collier, J from the case of Charles A Specht v The Queen, [1975] CTC 126; 75 DTC 5069, as follows:

In my view, the payment here was not made upon or after the plaintiff’s retirement. 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. I have obtained some assistance on this point, in endeavouring to ascertain the ordinary meaning of “retirement”, from dictionary definitions:

The Shorter Oxford English Dictionary (3rd ed rev): “withdrawal from occupation or business activity”.

The Living Webster (1st ed) “retire” “to withdraw from business or active life”.

Counsel for the appellants, in his summation, stressed the sentence of Collier, J: .. he did not withdraw from his employment because he had reached a mutually stipulated age, or generally withdraw from his occupation or business activity”.

Two other cases, both in the Federal Court — Trial Division, were referred to: The Queen v Robert B Atkins, [1975] CTC 377; 75 DTC 5263, a decision of Collier, J; and, Francis Lorenzen v The Queen, [1981] CTC 377; 81 DTC 5251, a decision of Mr Justice Grant.

In the circumstances of the Lorenzen case (supra), Mr Lorenzen had retired as a member of International Tax Services Ltd (he was the president and a director). One day they shut that company’s door and the next day,or shortly thereafter, there was a new name on the door, Lorenzen Associates Ltd. He got $20,000 on a retirement basis as payment from the first company. In his 1972 income tax return he included, in computing his income, the amount of $20,000 on the basis that it was a retiring allowance. In that case counsel for the taxpayer argued that the word “retirement” as used in subsection 248(1) must be read in a specific sense rather than a general sense. One may retire from one company and, even though he carries on the same occupation with another company, he still comes within the meaning of that section and is entitled to the benefit of paragraph 60(j) of the Income Tax Act.

In the words of Mr Justice Grant in the Lorenzen case (supra):

. . . leaving or parting with the first company is a retirement within the meaning of the section and that this interpretation is made clearer by the fact that it is referred to in the section as a retiring allowance as distinguished from a retirement allowance. If this interpretation of the two sections is adopted it follows that one could take advantage of section 60(j) on each occasion that he changed his employer.

He then continued:

It can not be said that such amount was paid to him for loss of office or employment as he arranged the change to Lorenzen Associates Ltd himself voluntarily and it can not be said to be a loss particularly by reason of the fact that he retained the same business in the same premises and he sustained no loss thereby. He also remained a director of International Tax Services Limited. Retirement implies a complete cessation of one’s profession or business. In reality the plaintiff continued to carry on the same business with the only change being the transfer of assets to a limited company bearing the same name as that under which he carried on such business to December 31, 1971.

He then dismissed the appeal.

That, I think, is the cornerstone here and, as counsel for the appellants pointed out, Grant, J was referring to:

. . . Carry on the same business with the only change being the transfer of assets to a limited company bearing the same name as that under which he carried on such business to December 31, 1971.

As I see it, Mr Lorenzen was an employee of those two companies and he retired as an employee from the first company, International Tax Services Ltd, and then he became an employee of Lorenzen Associates Ltd. I can only conclude that, for the appeal to be dismissed, Grant, J meant to say that the plaintiff, Mr Lorenzen, continued to carry on in the same type of business or employment and that the only change was for the new employer to take over the assets of the former employer. They continued the same business and in the same premises. He continued in the same employment and therefore had not retired within the meaning of the Act.

As I mentioned, the key here is the Lorenzen case and the decision of the Federal Court is binding on me. In applying the interpretation of “retirement” and the definitions of The Oxford English Dictionary, I find that I must do the same. I must follow the Lorenzen case and the decision of Mr Justice Grant.

In the result, I have no alternative, and basically no hesitation in issuing a judgment dismissing Mr Horta’s appeal. He really came nowhere near retirement in the broad sense of the word.

Mr Shell’s case gives me more concern. As I have said, effectively and by analogy, he is really clipping coupons, etc. Consequently, can he not still do that and, shall I say, still remain retired? Can he not change investments and still remain retired?

Counsel for the respondent stated that he was not suggesting that a person could not still remain retired although changing investments, etc. He did say, however, that we should look at the facts with respect to Mr Shell. What are those facts?

There were two buildings built by his company, and he was the only employee of that company; one in 1975 and the other in 1977. I do not know the amount of rents from those two buildings, but I do know that from a management fee point of view, in 1975 the management company received management fees of $10,000 and paid him a salary slightly in excess of $4,100. In 1976 that company (his management company) paid him management salary of just slightly less than $24,000. Now, as I say, I do not know the value of the buildings, or the cost of the buildings. I do not know the rental on the buildings or what the proportion of fees received by the management company was on the rent received. However, I do know from the evidence that, in both of the years 1975 and 1976, there was only the one building at the most for each of those fiscal years at the end of February.

In 1977 there was another building built. That would be in the 1977 fiscal year, which means it could have been built in September or October of 1976, but no revenue or expenses in connection with the management of the 1977 building would be shown on the 1976 financial statement ending February 29, 1976.

I can only conclude from those management fees that there must have been substantial expenditures to produce the one building in 1975. Naturally, I do not know what the expenditures were for the second building in 1977.

Mr Shell was the only employee, an officer, a director and president, and he would have had to make all of the decisions if the company asked for tenders (and I do not know that it did), tell the architect what he wanted and have him prepare the specifications and go over them with him; go over the tenders when they came in; and definitely keep an active interest during the erection of the building. How long it took, I haven’t the slightest idea.

Counsel for the respondent said: “I think on that fact, he was active and therefore he was not retired”. As I said, Mr Shell’s case gives me more trouble, but looking at it in that fashion, and considering the definition of the words “retirement” and “retire”, and considering the statements of Mr Jus- tice Grant in the Lorenzen case, I feel that I have no alternative but to come to the conclusion and say that Mr Shell was not retired.

Consequently, the assessments have been properly made and the appeals of both appellants are dismissed.

Appeals dismissed.