Berrey v. R., [1997] 2 CTC 2253, 97 DTC 991

McArthur T.C.J.:

The issue in this appeal is whether the Appellant should have included the sum of $100,000.00 on account of income in completing his income tax returns for the 1991 taxation year and if so, is he liable to pay a penalty?

At the outset of trial the Appellant’s counsel conceded that the two matters dealing with a taxable benefit of a vehicle had been withdrawn. These portions of the appeal are therefore dismissed.

Facts

Prior to 1991, the 35 year old Appellant had worked for approximately 10 years for Keith B. Berrey Ltd. (the Company) which was entirely owned by his mother and father who were also the sole officers and directors. The Company owned and operated a petroleum sales and distribution business which it sold to Esso Petroleum Canada by agreement for sale dated November 30, 1990.

The agreement for sale described Esso Petroleum Canada as the Purchaser, Keith B. Berrey Ltd. as the Vendor and Keith B. Berrey, Claire Y. Berrey and Dale Berrey as the principals. The sum of $300,000.00 was allocated toward the goodwill of the business, the list of customers and the retail outlet agreements. The witness Keith B. Berrey testified that this amount for goodwill etc. was originally $200,000.00 but increased by an additional $100,000.00 by Esso in consideration for Esso obtaining Dale Berrey’s signature on the purchase agreement. This statement was not corroborated by anyone on behalf of the Purchaser, prompting Counsel for the Respondent to urge the Court to draw an adverse inference. Included further in the agreement for sale was a standard non-competition covenant for a period of two years. The agreement for sale makes no reference to any allocation of the purchase price to the Appellant. It does not indicate why he is a signatory to the contract although the preamble states in part:

WHEREAS the Principal, Keith B. Berrey, is now and has been in the year preceding acceptance of this agreement the sole and beneficial holder of all issued and outstanding shares in the capital of the Vendor and the Principals, Claire Y. Berrey and Dale Berrey have been intimately connected with the Business;

In 1991 the Appellant was paid $100,000.00 by the Company which amount was designated, by the Company’s chartered accountants, as a retiring allowance and deducted as a Company expense. The Appellant did not declare this amount in his 1991 income tax return.

Prior to his execution of the agreement for sale, the Appellant consulted his own chartered accountant in anticipation of his receiving a $100,000.00 payment. This accountant testified that based on the oral information provided, he advised that the payment should be reported on account of capital. He added, given the $100,000.00 capital gains exemption provisions in the Income Tax Act (the “Act'’), the payment would be tax-free.

In early 1992 the Appellant had his income tax return prepared by a tax service franchise that was not advised of the $100,000.00 payment in 1991. The Appellant stated that for economic reasons, he did not use a chartered accountant. He added that, believing the $100,000.00 to be tax-free, he did not declare it.

Position of the Appellant

Esso paid an additional sum of $100,000.00 to the Company in trust for the Appellant in consideration of the Appellant executing a non-competition covenant. The Company, as trustee, turned the $100,000.00 over to the Appellant and it was a capital receipt in his hands. The nature of the payment should be determined from the evidence of the Appellant and his father and not bound by the designation given it by the Company’s accountant. Counsel quoted Bonner T.C.J. in Caldwell Trust v. Minister of National Revenue, [1990] 1 C.T.C. 2310, 90 D.T.C. 1155 (T.C.C.), where he stated that a cow does not become an aircraft simply because an accountant described it as such.

Position of the Respondent

The Appellant and his father cannot speak for the Purchaser, Esso. To satisfy his burden of proving that the Purchaser paid the Vendor Company $100,000.00 as bare trustee for the Appellant, the Appellant must have direct evidence from the Purchaser. Having failed to do so, the Court must presume that such evidence would adversely affect the Appellant’s case. As authority for this counsel cited Levesque v. Comeau, 16 D.L.R. (3d) 425 (S.C.C.) at page 432:

... In my opinion, the rule to be applied in such circumstances is that a Court must presume that such evidence would adversely affect her case. The fact that those witnesses all live in Montreal does not make the rule any less applicable. Appellant Lola Levesque should, if necessary, have applied for a rogatory commission. Under the circumstances, her testimony and that of her husband respecting her good state of health before the accident could properly be considered insufficient evidence for the purpose of excluding the other possible causes of the deafness.

Counsel further quoted Linden J. A. in Friedberg v. Minister of National Revenue, [1992] 1 C.T.C. 1, 92 D.T.C. 6031 at page 3 (D.T.C. 6032), where he stated:

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil, 91 D.T.C. 5106, per Mahoney J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to “correct” documents which clearly point in a particular direction.

The question of penalties was not vigorously persued by the Respondent.

Analysis

The Appellant had the burden of proving that the payment was capital in nature. The Company’s accountant clearly designated the payment as a retirement allowance and as such it would be taxable on account of income. The Company deducted the payment as an expense in its 1991 financial statement. The Appellant ignored it in his 1991 income tax return.

In applying the much used legal doctrine of substance over form, the Appellant’s argument that the Court must look to all of the evidence to determine the true nature of the payment is well taken. It is not nomenclature that determines the essence of the payment.

The focus then becomes what was the $100,000.00 payment. The Appellant contends that it was paid by Esso to the Company, in trust for him, in consideration for his executing a two-year non-competition covenant. The self-serving evidence of the Appellant and his father is insufficient for the Court to arrive at such a conclusion.

The Purchase and Sale Contract is of little assistance to the Court in determining why the Appellant was a signatory to it. Esso was the Purchaser who advanced the money. Given the inconsistencies of the documentation, I am not prepared to determine the intention of the Payor, Esso, without its direct evidence. There is no need to comment on the question of adverse inference.

What is before the Court is that Esso paid the Company $300,000.00 for its list of customers, goodwill and retail outlet agreements. The documentation and submissions with respect to the accounting of the payment was contradictory. I will not attempt to review this part of the evidence. It appears that the Company and its accountants were prepared to designate the payment in any manner that best suited the situation at a given time. The Appellant wishes to disassociate himself from the Company’s documentation.

The Appellant executed the agreement without any written indication why he had done so. The Company’s accountants referred to the payment to the Appellant in various manners including:

1) the Company’s purchase of Appellants’ goodwill;

2) the Appellant’s payment to sign a non-competition clause with Imperial Oil (Esso);

3) a retiring allowance;

4) payment on account of capital instead of income.

The Appellant’s accountant appears to have been consistent in his position that the payment was on account of capital. Unfortunately the Appellant did not use the services of his accountant in the original drafting of the relevant documentation and the preparation of the relevant returns.

In view of all of the evidence, I cannot accept the able argument of the Appellant’s counsel that the payment was made indirectly to the Appellant in consideration of his non-competition covenant. That covenant included a sentence to the effect that the parties would execute a further and more extensive non-competition agreement to the same effect if required by Purchaser’s counsel after the completion of the sale. No such further agreement was presented. On the basis of the evidence before the Court, I cannot accept that Esso paid the Appellant $100,000.00 for his two year non-competition covenant by advancing this amount to the Company as a conduit to pay the Appellant.

I agree with the statement in Friedberg (supra) that a mere subjective intention is not by itself sufficient to alter the characterization of a transac- tion for tax purposes. One-sided statements of intent are not sufficient. A taxpayer must carefully document his transaction when he wishes to benefit from provisions of the Act. It is not sufficient to present the Court with oral statements of intent. The payment to the Appellant was originally designated by the Company as a retirement allowance. The Appellant had the burden of proving that this was not so. Without hesitation, I find that he failed to meet that burden.

While there may have been a degree of negligence by the Appellant in dealing with his tax return, there certainly was no gross negligence on his part that would attract penalties.

The appeal is dismissed with costs, but without the imposition of penalties.

Appeal dismissed.