Robert E Brennan v. Minister of National Revenue, [1977] CTC 2455, 77 DTC 312

Delmer E Taylor:—This is an appeal from an income tax reassessment for the year 1971 in which the Minister of National Revenue increased the taxable income of the appellant by an amount of $13,075 with the explanation, “Add: Proceeds from sale of customer list”. The respondent relied, inter alia, upon sections 3, 5 and 25 of the Income Tax Act, RSC 1952, c 148.

Facts

Up until July 1, 1968 the appellant had been an employee of J W Rollins Insurance Agency in Sarnia, Ontario (hereinafter referred to as “Rollins”). On that date, he entered into a written agreement with Central Insurance Agency Limited (hereinafter referred to as “Central”) and upon leaving Rollins, assumed certain responsibilities also in Sarnia with Central, which company, however, had its head office in Windsor. On or about June 1, 1971 the appellant and Central signed an agreement under which he terminated his association with Central and received, among other things, an amount of $13,000.

Contentions

The appellant contended that:

—he was dealing with Central at arm’s length;

—he was treated by Central as an independent contractor;

—he was the owner of the goodwill and business of the general insurance agency which was the subject of the agreement of June 1, 1971;

—the receipt was on account of capital, not on account of income.

The position of the respondent was:

—the appellant was an employee of Central:

—the property which the appellant purported to sell was the property of Central;

—the $13,000 received by the appellant from Central was on account of or in satisfaction of an obligation arising out of this agreement and can reasonably be regarded as having been received as remuneration or partial remuneration for service as an officer or under the contract of employment, or in consideration or partial consideration for a covenant with reference to what he was or was not to do after the termination of his employment.

Evidence

In support of his case, the appellant introduced and identified the following:

Exhibit A-1—A copy of the agreement dated July 1, 1968;

Exhibit A-2—Computer print-outs of certain accounts in the records

of Central;

Exhibit A-3—A copy of the agreement dated June 1, 1971.

The appellant further stated that during the period of his association with Central he paid his expenses, was responsible for his own bad debts, represented some 13 companies and placed the insurance where he considered appropriate. The main business of Central was as a life insurance agency and the desire of that company had been in 1968 to expand its very limited general insurance agency (fire, automobile, casualty, etc) by using the business connections and efforts of the appellant. He interested himself very little in the details of the life insurance business but recognized that under his agreement he received certain overriding commissions on both parts of the business. However, he did consider the general insurance business as belonging to him, and the part of commissions retained by Central was for his portion of the total office expenses, most of which had been paid and recorded from Central’s head office in Windsor. Under cross-examination by counsel for the respondent, the appellant agreed that personal contact with the client was an important aspect of the insurance business. For record purposes, both Exhibits A-1 and A-3 are reproduced in total:

Exhibit A-1

Further to our discussions, the following sets out the arrangements whereby you will become an associate of Central Insurance Agencies Limited in conjuncation (sic) with the life agency of the Prudential Insurance Company Limited.

Your association will be on the basis of being a Sarnia manager of Central Insurance Agencies Limited —

1) Responsible for the development of the general Insurance W.B. business in the Sarnia agency.

2) Business produced (W.B.) by you personally from your efforts and not directly or indirectly related to Prudential agents will be entered on the books of the company in your name.

3) You will receive commissions and remuneration on the following basis —tn the personal business referred to above, your rate of commission will be on the following schedule —

July 1968 to June 30th, 1969—65%—of the Gross Comm.

July 1969 to June 30th, 1970—62.5%

July 1970 to June 30th, 1971—60%

July 1971 to June 30th, 1972—55%

July 1972 to June 30th, 1973—50%

4) On business produced from life agents, the rate of commission will be 90%, business from any other sources or subject special situations will attract a commission to be negotiated.

5) Against the commission income you receive, a charge will be made for office staff used in Windsor to be worked out on an equitable basis and you will also be charged for office staff used in the Sarnia office.

6) For the twelve months commissions July 1968 to July 1969, business promotion allowance of $150.00 will be allowed. The normal agency expenses such as postage, telephone, printing etc. will be the responsibility of Central Insurance Agencies Limited.

This, I think, Bob, sets out in general the thinking of both of us in regard to our association. No doubt, from time to time there will be changes we may wish to make to the benefit of both parties which should be open to negotiation in the future.

Exhibit A-3

THIS AGREEMENT made in duplicate the 1st. day of JUNE, 1971.

BETWEEN:

ROBERT BRENNAN, of the City of Sarnia, in the County of Lambton and Province of Ontario,

hereinafter called the VENDOR

OF THE FIRST PART

—and—

CENTRAL INSURANCE AGENCIES LIMITED

a Company incorporated under the laws of the Province of Ontario, hereinafter called THE PURCHASER

OF THE SECOND PART

RECITALS

1. The Purchaser carries on a general insurance business both in the City of Windsor and in the City of Sarnia.

2. The Vendor has been the Sarnia Manager of the Purchaser and has also had clients of his own, the records of which are his own property.

3. The Vendor has agreed to sell the lists of his own clients to the Purchaser.

NOW THEREFORE the Parties hereto, their heirs, personal representatives, successors and assigns, in consideration of the mutual covenants and agreements herein contained, do hereby covenant and agree as follows:

1. The Vendor hereby sells and transfers to the Purchaser free from all liabilities and encumbrances, the lists of his clients of his general insurance business carried on by him.

2. PURCHASE PRICE

The purchase price is Thirteen Thousand ($13,000.00) Dollars and is payable by cash or certified cheque forthwith.

3. CLOSING

The Purchaser shall be entitled to the exclusive use of the customer lists from and after the 1st. day of June, 1971 which is to be the date of closing of this transaction.

4. DRAWING

The Vendor & Purchaser agree to waive any credit or debit balance in the Vendor’s drawing account as of the closing dated and the Purchaser agrees to retain the Vendor as an employee for three months after closing namely June, July and August at a salary of $750.00 per month payable at the end of each month.

5. TITLE

The Vendor covenants with the Purchaser that he now has in himself a good right to sell the said lists of his clients and that there is no lien or charge thereon and that the use of the lists of his clients may be enjoyed by the Purchaser free from any interruption or disturbance by the Vendor or any person or persons claiming from and under him.

6. ACCOUNTS

All the accounts receivable and accounts payable of the Vendor in respect to the insurance written by him and in respect to his position as Sarnia Manager of the Purchaser are to be the responsibility of the Purchaser.

7. NOTIFICATION OF CLIENTS

A joint letter and announcement from both of the Parties in such form as they shall agree upon shall be published and sent to all the clients of the vendor after closing date at the expense of the purchaser.

8. SECRECY

The Vendor covenants with the Purchaser that he will not retain any list of customers or suffer or permit any person to obtain or examine any list to the intent that the Purchaser shall have the sole and exclusive possession of all clients and policy information.

9. NON-COMPETITION

The Vendor covenants that he will not, for a period of Five (5) years from the date of closing, carry on in the City of Sarnia or in the County of Lambton or within Twenty-five (25) geographical miles thereof, directly or indirectly, as agent, partner or employee, shareholder, officer or otherwise, the business of a general insurance agent, except with the consent in writing of the Purchaser.

10. THIS AGREEMENT shall be binding upon and enure to the benefit of the Parties hereto, their respective heirs, executors, administrators, successors and assigns.

IN WITNESS WHEREOF the Party of the First Part has hereunto set his hand and seal and the Party of the Second Part has hereunto affixed its Corporate Seal by the hands of its proper officers on that behalf.

(Sgd.) J. Black	(Sgd.) Robert Brennan (Seal)
	CENTRAL INSURANCE AGENCIES LIMITED
	(Sgd.) Wm Benson

Argument

Counsel for the appellant took the position that, although in his view the appellant was an independent contractor, nothing in income tax law prevented even an employee from selling what he owned to his employer. Central had paid for goodwill even though that company probably could have carried on the business without even the files. The non-competition clause was not significant. The $13,000 had been a calculation based on approximately 1 /2-times the annual commissions of the appellant ($8,000) and nothing had been paid to him for any other reason. Cases cited by counsel for his client were: Charles A Latimer v MNR, [1977] CTC 2128; 77 DTC 84; Performing Right Society, Limited v Mitchell & Booker (Palais de Danse), Limited, [1924] 1 KB 762; Montreal v Montreal Locomotive Works Ltd et al, [1947] 1 DLR 161; Bainbridge Agency Limited v MNR, 1971 Tax ABC 878; 71 DTC 592; Cumberland Investments Limited v Her Majesty the Queen, [1973] CTC 821; 74 DTC 6001; affirmed [1975] CTC 439; 75 DTC 5309; Walter J Burian v Her Majesty the Queen, [1976] CTC 725; 76 DTC 6444.

Counsel for the respondent relied heavily on his interpretation of the terms of Exhibit A-1. Further, he pointed out that a client could not possibly have known he was dealing with “Brennan” rather than “Central”. The accumulation of any possible “goodwill” therefore should accrue to Central rather than to the appellant. The covenants in Exhibit A-3 were extremely important to the purchaser, particularly the non-competition clause. In effect, the list of clients (alleged to be the property in this appeal) were useless to the purchaser unless the appellant stayed out of the insurance business. Counsel was satisfied that the appellant’s situation was clearly covered under the provisions of section 25 of the Income Tax Act. Cases cited for the consideration of the Board were: Charles A Latimer v MNR (supra); Montreal v Montreal Locomotive Works Ltd et al (supra); Ready Mixed Concrete (South East), Ltd v Minister of Pensions and National Insurance; Minister of Social Security v Greenham Ready Mixed Concrete, Ltd and Another; Minister of Social Security v Ready Mixed Concrete (South East), Ltd and Another, [1968] 1 All ER 433; Market Investigations, Ltd v Minister of Social Security, [1968] 3 All ER 732; Dr William H Alexander v MNR, [1969] CTC 715; 70 DTC 6006; H Lionel Rosen v Her Majesty the Queen, [1976] CTC 462; 76 DTC 6274; Comet Realties Ltd v MNR, Canadian Employment Benefits and Pension Guide, p 6062; Donald B MacDonald v MNR, [1974] CTC 2204: 74 DTC 1161; Peter Moss v MNR, [1963] CTC 535; 63 DTC 1359; Harry Richstone v MNR, [1972] CTC 274; 72 DTC 6239; Louis Richstone v Her Majesty the Queen, [1974] CTC 155; 74 DTC 6129; James G Bridgewater v MNR, [1969] Tax ABC 1003; 69 DTC 690; Roddy Choquette v Her Majesty the Queen, [1974] CTC 742; 74 DTC 6563.

Findings

Before proceeding, it should be noted that although the amount indicated in the reassessment notice was $13,075, the documentation, exhibits, evidence and argument have dealt with an amount of $13,000. No reconciliation regarding the $75 difference was provided, and the Board accepts for purposes of this hearing that the amount in dispute is $13,000, and the decision rendered will relate to that amount.

Counsel for the respondent has called the Board’s attention specifically to the subparagraphs under section 25 of the Act to emphasize that if One would not cover the appellant’s situation, another definitely would do so. Section 25 deals with “Payments by employer to employee”. The distinctions to be made between the price of $13,000 cited in clause 2 of Exhibit A-3, and the obligations undertaken by the appellant under clauses 7, 8 and 9 of that agreement, are not as visible to the Board as they seem to appear to counsel for the appellant. My reading of the agreement leaves little doubt that the payment, regardless of the appellant’s status vis-à-vis Central (whether independent contractor or employee), was at least partly in consider- ation for these obligations undertaken. With respect to such status, the Board refers counsel not only to the Latimer decision (supra), particularly a quote from page 2138 [91], but also to D’Arcy J Marentette v MNR, [1977] CTC 2147 at 2150; 77 DTC 97 at 99.

Latimer v MNR, [1977] CTC 2128 at 2138; 77 DTC 84 at 91:

More importantly there is little outward indication such as a business office, business telephone, signs, professional notices, business contracts, etc, to show that while in Toronto the appellant was actively engaged in expanding his: business evert within these self-imposed constraints; and there is no evidence that after his move to London he did anything to let it be known that he was in the business of financial consulting. The appellant engaged himself full time in the interests of the Corporation and, except for retaining his professional qualifications and licences, he did not pursue a role that gave any indication that his services were available in any way to the public at large, nor did he give any indication he was prepared to do so, or that he was reluctant to restrict himself to one client. The lack of any and all normally accepted criteria of business operations would tend to confirm that he had accepted the role functionally assigned to him by Mr Jarmain on behalf of the Corporation.

Marentette v MNR, [1977] CTC 2147 at 2150; 77 DTC 97 at 99:

The appellant does not appear to retain great flexibility, responsibility or right of completely independent action. He was not in the commercial position to develop or control the business endeavour, his actual position being more comparable to that of a commission salesman than an independent contractor. The Board questions whether the business arrangements under the Agency Agreement would contribute materially to the development of any intangible assets such as goodwill, but to whatever degree it might have existed in Marentette, the residual benefit of such “goodwill” would flow ultimately to the Companies, even though the appellant considers that he would have made a substantial contribution to this goodwill. This claim by the appellant that even within the constraints of the agreement, by special, individual extra attention to the agency, he had built up just such a store of goodwill, identifiable with his own efforts, iS not supported. The Board does not question that indeed he was a conscientious and good agent, but there is no evidence that his insurance agency was of a character greatly different from the other agencies for the Companies in the general area. Further, if such personal “goodwill” existed, there is no evidence that it would have been transferable at a recognized value to a separate business structure outside the ambit of the insurance operations of the Companies.

I am unable to discern any major difference between the situation demonstrated in Marentette (supra) and the instant case other than the apparently accepted point that Brennan was dealing at arm’s length with Central. That is not sufficient to define his status as that of an independent contractor. Further, it appears to me that this appellant faces a serious obstacle not encountered by the appellant Marentette in that Brennan’s name or any form of it did not appear as part of the publicly recognized format for the operation of the business—it was called Central. The conclusion in the Marentette case was that any goodwill which might have existed would have been attributable to the insurance company involved, not to the appellant, and the facts here would appear to support even more decisively the same conclusion. In addition, the appellant agreed in evidence that the banking, billing and accounting records were maintained by Central at the head office in Windsor. Since these were computerized, a major portion if not all of the information contained in the appellant’s files in Sarnia was either readily available or could be reconstructed from such data.

The Board has not been presented with any evidence to support a conclusion that the appellant had a real alternative available to him other than an arrangement with Central regarding the continuation of the servicing of these files, even under the circumstances alleged that they were his property. Whatever were the reasons, sufficient to Central for the financial terms in the agreement (Exhibit A-3), such terms did not reflect the sale by the appellant of a proprietary interest in any goodwill and/or customer files. The appellant was not operating during the time material as an independent contractor in his relationship with Central as this is to be determined for purposes of the Income Tax Act, and accordingly he was in no position to develop such a proprietary interest.

Decision

The appeal is dismissed.

Appeal dismissed.