Margaret Ann Frappier v. Minister of National Revenue, [1974] CTC 2167, 74 DTC 1128

The Assistant Chairman:—This is the appeal of Margaret Ann Frappier from an income tax assessment in respect of the 1969 taxation year.

The issue in this appeal is whether an amount of $49,029.03 which the appellant claimed in 1969 as an expense incurred for the purpose of earning income was rightly disallowed by the Minister of National Revenue.

The appellant is an investment dealer licensed by the Quebec Securities Commission and has been practising her profession for some 16 years. In 1968 she was a registered representative of Ord, Wallington & Co Ltd, a licensed brokerage firm, operating a branch in Montreal with it head office in Toronto.

In 1968, Ord, Wallington & Co Ltd filed a petition in bankruptcy and a number of the appellant’s clients were left in a credit position vis-a-vis the bankrupt company. By letter of June 10, 1968 the appellant wrote to each of her clients, creditors of Ord, Wallington & Co Ltd, whereby she undertook to reimburse them for any amount they might eventually lose as a result of the bankruptcy. Examples of the letters have been filed as Exhibit A-3. The appellant’s clients in 1968 and 1969 were reimbursed by the appellant with the understanding that, if the clients were to receive any moneys from the trustee in bankruptcy, they were to be returned to the appellant. The disbursement so made to her clients amounted to $49,029.03. Exhibit A-4 is a series of photostat copies of cheques totalling that amount made out to the appellant’s clients as listed in Exhibit A-2.

At the end of 1969 it became. obvious that assets of the bankrupt company were not sufficient to satisfy its ordinary creditors and that the reimbursement made to her clients would not be returned to her. She therefore claimed as a deductible expense the amount of $49,029.03 which was disallowed by the Minister of National Revenue.

In 1967 the firm of Frappier & Holland was incorporated by the appellant and her husband who also worked as an investment dealer for Ord, Wallington & Co Ltd, and operated a business similar to that of Ord, Wallington & Co Ltd.

In disallowing the deduction of $49,029.03 the respondent contends that the appellant derived her income from an office or employment and that no such deduction from employment income is allowed under the provisions of the Act. Alternatively, he holds that the amount of $49,029.03, if expended, was not spent to earn income from a business she was Carrying on but was spent to protect the future business of Frappier & Holland Inc with which she was connected or, again, the amount was spent to acquire for Frappier & Holland Inc the clients who, through her, formerly bought securities from Ord, Wallington & Co Ltd which in either case the respondent contends would be a nondeductible capital gain. ‘

Even though the appellant testified that she was on a strict commission basis with Ord, Wallington & Co Ltd, and that she received no directives from the company as to working hours or the manner of dealing with clients, I am of the opinion that the appellant was not an independent contractor but was an employee of Ord, Wallington & Co. Ltd, selling securities of the company, daily utilizing the company’s offices, its equipment and its reference library and that she was in contact with the company on a regular basis. There is no evidence that the appellant billed Ord, Wallington & Co Ltd for services rendered as an independent contractor. The T4 forms for the years 1968 and 1969, however, do indicate that the appellant’s salary was paid on a commission basis fixed by Ord, Wallington & Co Ltd who, in fact, considered the appellant to be an employee and did exercise some control over her activities including the power to dismiss her (Exhibit R-1).

The facts in this appeal are considerably different from those in the case of Daniel Di Francesco v MNR, 34 Tax ABC 380; 64 DTC. 106, cited by counsel for the appellant where Daniel Di Francesco’s relationship with the real estate company was on an ad hoc basis where the company had no control whatsoever over him and did not consider him to be an employee. In my view the facts in this appeal can also be distinguished from those of the other cases cited by the appellant based on the Daniel Di Francesco decision.

There is, of course, a difference to be taken into account in the working relationship of an ordinary fixed salary: employee and his employer and that between investment dealers and the brokerage houses which employ them. The company’s clients are also the dealer’s clients which have been brought to the company by the dealer’s solicitations and efforts, and their salaries are based exclusively on the vol- ume of securities sold. However, in my view, the difference in the type of work done or the form of remuneration received by the dealers does not alter the fundamental employer-employee relationship that exists between the commissioned investment dealers and the brokerage house any more than the commissioned automobile salesmen and the car dealers by whom they are employed. The ultimate control of Ord, Wallington & Co Ltd in fixing the percentage of commission paid to the appellant and the basic authority for criticizing and dismissing, if necessary, the appellant as an investment dealer is sufficient, in my view, to consider that the basic elements of a bona fide employeremployee relationship existed between Ord, Wallington & Co Ltd and the appellant and to conclude that the appellant was not operating a business of her own nor was she an independent contractor, but she was an employee of Ord, Wallington & Co Ltd as well as an employee of Frappier & Holland Inc.

The appellant testified that she was well aware that she was under no legal obligation to reimburse the amounts which Ord, Wallington & Co Ltd owed the clients, and which they stood to lose as a result of the bankruptcy of that company. The reason the appellant gave for making the disbursement was to protect her future income.

In analysing the nature of the payment of $49,029.03 made by the appellant to her clients, I find not only that there was no legal obligation on the part of the appellant to pay the amount to her clients, but there was no consideration whatsoever on the part of the clients for moneys so paid to them and no commitment that they would continue to invest through the appellant’s services (Exhibit A-3). The disbursement, moreover, cannot in my view be considered as a current expenditure because the money was not expended by the appellant in 1968 and 1969 to earn income from a business. When the disbursement was made, the appellant was not carrying on a business of her own but was an employee of Ord, Wallington & Co Ltd. The evidence is that the appellant in her own capacity made the reimbursement to her clients. There is no evidence that the moneys were so paid on behalf of Frappier & Holland Inc which was formed in 1967 by the appellant and her husband and of which she was also an employee. Paragraph 12(1)(a) of the Income Tax Act is not applicable to the facts of this appeal. The only conclusion to which the Board can come is that the appellant, without being obliged to do so, reimbursed her clients an amount of $49,029.03 in order to protect her reputation as a sound investment broker, to maintain the confidence and the goodwill of her clients, to retain the clients and no doubt to transfer their business to the newly formed Frappier & Holland Inc in order to protect in a most indefinite and vague way possible future income.

In my view the moneys so disbursed for the appellant’s reputation, for goodwill and for the protection of income some time in the future, are not current expenditures, but expenditures on capital account and non-deductible pursuant to paragraph 12(1)(b) of the Act.

The appeal must therefore be dismissed.

Appeal dismissed.