Yvon a Alexander v. Minister of National Revenue, [1973] CTC 405, 73 DTC 5321

Sheppard, DJ:—The issue is whether the payment of $30,000 to the appellant in the taxation year 1966 was a retiring allowance within subparagraph 6(1)(a)(v), as defined in paragraph 139(1)(aj) as alleged by the respondent, or is a capital allowance as alleged by the appellant. The terms plaintiff and defendant are not used as the Record refers to appellant and respondent.

in 1939, the appellant joined the Battery & Electric Service Co, of Montreal, as an employee, of which company the chief shareholder was William J Little. That company ultimately became a holding company in which the subordinates were: The Automotive Jobber Sales Inc, The Battery & Electric Service (Drummondville) Ltd, The Battery & Electric Service (Three Rivers) Ltd, Sherbrooke Auto Electric Inc, and Automotive Jobber Sales Inc. In each of the companies, the appellant held one: share, excepting in The Automotive Jobber Sales Inc, in which he held two shares, and in each of the companies the appellant held an office.

On April 21, 1950 the appellant was appointed comptroller of all the companies (Exhibit A-5) and on November 14, 1950 the appellant was given a salary of $15,000 a year for one year (Exhibit A-6).

On December 11, 1958, William J. Little died, and by his Will, dated August 4, 1955, he appointed as three trustees: Alys Little, his widow, William R Little, his son, and the appellant, who was referred to as a dear friend, and any two of the trustees had the power of three.

Later, in 1959, William R Little, the son, left Montreal and returned in January 1960. Under date of December 31, 1961, an agreement was entered into between Battery & Electric Service Co and the appellant, which appointed him comptroller of the company for a term of five years, with an option to him to renew for an additional five years, all at a salary of $15,000 a year, payable weekly, which contract was signed on behalf of the company by Alys Little and purported to be authorized by a resolution of the directors passed on December 4, 1961, which appointed the appellant as comptroller (Exhibits A-4, a duplicate of the agreement is dated June 20, 1961, Ex. R-1).

The appellant contends that William R Little, the son, began in 1964-1965 to harass the appellant. In 1965 there was an assault charge laid by the appellant against the son, which charge was dismissed. In the summer of 1965, according to the appellant, William R Little, the son, began to put real pressure on the appellant as follows: the appellant’s office was taken away from him, the staff was told not to recognize him, and his telephone was taken away from him. Exhibit A-8 shows various memoranda by William R Little, issued from May 4, 1965 to June 3, 1965.

According to the Affidavit of Roland Leduc (Exhibit R-2), no meeting of the directors had been called for the directors’ resolution of December 4, 1961, relating to the appellant’s employment as comptroller, and William R Litüe, who was then director and vice-president, was not present at the meeting. At a meeting of the directors of July 9, 1965 (Exhibit R-6), the directors were notified of the lack of system and by their resolution, William R Little was appointed general manager. On September 14, 1965, the resolution of the directors (Exhibit R-8) stated that William R Little had demanded that the company commence action against the appellant to have the contract (probably Exhibits A-4 & R-1) declared null and void, that the company bring the action, and counsel be retained. This action was on the basis that there had been no notice of the meeting of the directors, and that William R Little, who was a director, had not been notified of the proposed meeting.

By letter of August 25, 1965 (Exhibit R-5) to William R Little from the holding company’s chartered accountants, the accountants complained of a lack of system internally, and recommended that a qualified accountant be employed.

The directors also adopted a system of reorganization, whereby all reported to the general manager (William R Little), and he reported only to the president, then Alys Little, his mother (William R Little, page 183).

There was some evidence that the appellant was drinking to excess at noons (Alys Little, p 85 and William R Little, pp 132 & 205), particularly during 1964 and 1966 (Alys Little, p 88). The appellant had to go (Alys Little, p 94), but nothing was said to the appellant (William R Little, p 161). Also that the appellant was going to see his lawyer about his claim against the company (William R Little, p 148). The appellant was advised to stay on the job and act according to the contract (p 48). The shares issued to the appellant were qualifying shares owned by another (Alys Little, p 77), and not beneficial shares of the appellant, who had paid nothing for the shares (William R Little, p 156).

In November 1965 an agreement was arrived at with the appellant, and under date of January 12, 1966 the agreement in question between the various companies and the appellant was entered into (Exhibit R-3) whereby the appellant agreed to resign as director, officer, and employee of the companies, that the resignation was to be effective as of December 31, 1965, and the appellant to be paid $30,000. That is the agreement in question in this action.

On January 12, 1966 there was a resolution of the holding company to reduce the directors from four to three, and which authorized the agreement. The Minister of National Revenue made an assessment for the year 1966 in which the sum of $30,000 was held to be income and a tax levied of $5,642.52. An appeal to the Tax Appeal Board holding that the assessability of the total payment of $30,000 was maintained, but the matter was referred back to the Minister of National Revenue for reconsideration and reassessment within the terms of paragraph 36(1 )(b) of the Act.

On this appeal the appellant contends:

1. That the sum of $30,000 was damages for breach of contract and therefore capital, and not income. The parties to the agreement of January 12, 1966 (Exhibit R-3) being persons, were resident in the city of Montreal, in the province of Quebec, or being companies, were controlled by residents of the province of Quebec, and the agreement was drawn by Quebec lawyers; therefore, the contract would be in the law of Quebec, and the following cases, although decided by common law, may be considered in determining what is income or capital under the Income Tax Act, in particular the meaning of subparagraph 6(1)(a) (v) and paragraph 139(1)(aj) of the Act. To recover for wrongful discharge there must be: (1) discharge from employment, (2) that the discharge was wrongful, and (3) that the discharge was from a valid contract, else the discharge would not be wrongful. Here there was no discharge, either wrongful or otherwise, of the appellant under the agreement (Exhibits A-4 & R-1):

(a) the appellant voluntarily resigned “as director, officer and employee” (Paragraphs 1 and 2 of Exhibit R-3);

(b) the agreement (Exhibit R-3) cancelled the previous agreement of December 31, 1961 (Exhibits A-4 & R-1), which earlier agreement is declared to have been objected to by the employer and declared to have been null and void (Exhibit R-3, clause 3); there is therefore no actionable discharge from that earlier agreement;

(c) the agreement (Exhibit R-3) provided for future services of the appellant, that is, he was to act as consultant from January 1, 1966 to September 30, 1966, at a salary of $1.00 per month; and

(d) there was a full and final release by the appellant (para 6).

There is therefore the absence of any discharge which would be wrongful so as to form an action, and there is no valid contract which would support an action for wrongful dismissal, as the agreement was agreed to be null and void.

These judgments cited by the appellant differ so as not to be applicable. In Henley v Murray, Inspector of Taxes, [1950] All ER 908, the contract of employment between the company and the plaintiff was abrogated and a claim for damages settled at 2000 pounds and that sum was held to be capital, not income.

Schedule “E” of the Income Tax Act (United Kingdom) provides for the tax to be charged “in respect of any office or employment on emoluments therefrom which fall within one or more of the following cases”; then follow rules regarding those resident or non-resident in the United Kingdom.

Sir Raymond Evershed, MR stated at page 909:

Though the right of one party to call on the other for performance of its terms may be modified, or, indeed, wholly given up, still the corresponding right to require payment either of the whole remuneration or of some lesser figure is preserved and is still payable under the contract.

There is another class of case where the bargain is of an essentially different character, viz, where the contract itself goes altogether and some sum becomes payable for the consideration of the total abandonment of all the contractual rights which the other party had under the contract . . .

In the circumstances of the present case also it is not open to the Crown to say that this sum of 2000 pounds odd constituted profits from the office or employment, since, on its true analysis, it constituted the consideration payable to the taxpayer for the total abrogation imposed on him of his contract of employment, so that from July 6, 1943, no contract existed under which that figure or any other sum could be paid.

This case at Bar differs in that there has been no abrogation “imposed on” the appellant by the employer.

Somervell, LJ stated at page 911:

If in the case of dismissal where the employee says: “I am wrongfully dismissed”, and sues for damages, he is admittedly outside sched. E and un- taxable, it seems to me to follow from that, if one goes by stages, that if one takes a case where equally the employer dismisses his employee and the damages are agreed without litigation, the fact that they are agreed instead of being awarded by a judge or jury cannot affect their legal position in regard to the income tax code. It seems to me on the evidence that that is what happened here. The employers said: “You must go’’. The appellant was forced into going at their request. The sum which he stipulated for must legally be in precisely the same position as would have been a sum for damages for wrongful dismissal.

In the case at Bar, there was neither action nor threat of action for wrongful dismissal of an employee by the employer.

Jenkins, LJ stated at page 911:

The only possible conclusion of law in the present case seems to me to be that the payment in question was not a payment of remuneration, but was one made in consideration of the taxpayer, at the request of the company, giving up his right to continue to be employed by the company down to March 31, 1944, and to earn and receive. his contractual remuneration down to that date.

Jenkins, LJ presumably would have reference to the facts of that case as applying to a wrongful dismissal by the employer, so that an action arises from wrongful dismissal. At the case at Bar, there has been no discharge of the appellant by any of the companies to the agreement (Exhibit R-3).

In Hafezi v MNR, 27 Tax ABC 18; 61 DTC 357, an action was brought for $2,500 for work done and for damages of $25,000, and it was settled at $6,100, and agreed that $2,000 was income, and after legal expenses there was in question $2,124. It was held that the sum of $2,124 was capital as this amount represented damages for the deprivation of an enduring right being destroyed, and no part was remuneration for past services. In the case at Bar there has been no action brought and no discharge, nor was there any deprivation of an enduring right of the appellant being destroyed.

In Hely-Hutchinson v Bray head Ltd and Another, [1967] QB 549, the action deals with ostensible or apparent authority of a director acting for the company, but that can have no application in respect to the agreement in this case (Exhibit A-4 or R-1) because the appellant was no stranger to the holding company, being a director of the holding company, and he knew that no directors meeting had been called.

2. The appellant also contends that the sum of $30,000 was paid as a consideration for the surrender of shares. Shares were not mentioned in the agreement (Exhibit R-3) and the values exchanged were the $30,000 to be paid by the company against the resignation of the appellant as director, officer, and employee of any of the said companies (Exhibit R-3), and perhaps the release (para 6, Exhibit R-3). Further the shares were qualifying shares; therefore, once the office held by the appellant had ceased, the shares were held in trust for another person, the real owner. Hence, the companies need not deal with such shares.

Evidence of Alys Little testifies that there were qualifying shares to be returned and that they did not belong to the appellant. The son, William R Little, testified that they were qualifying shares, and that the appellant paid nothing for them.

In any event, the cases cited by the appellant do not support his contention. In Harvard & Wilson Street Realty Co Ltd v MNR, 33 Tax ABC 199; 63 DTC 769, it was contended that the company had in fact received $220,000 for a parcel of land, and the price of $180,000 recited in the deed was alleged to be false, and a fraud on the income tax. There is no suggestion here that there was any such falsity in preparing the agreement in question (Exhibit R-3), and in any event the case cited held that the evidence did not establish the falsity of the price recited in the deed.

In Van Hummell v International Guarantee Company, [1913] 10 DLR 306, the case deals with a promoter rendering his services before the company was formed, and therefore it was held that the company was not liable. There is no suggestion that these companies mentioned as parties in the agreement (Exhibit R-3) were not in existence.

Sloan and Holt v Margolian, Sidler and Margolian’s (Truro) Ltd (1957), 8 DLR (2d) 115, was a shareholder’s class action to set aside a director’s resolution appointing a managing director and it was held that the company should be a party. This is a mere limitation of the equitable remedy for class actions, and has nothing to do with the present case.

The onus is on the appellant (Johnston v MNR, [1948] SCR 486: [1948] CTC 195; 48 DTC 1182; and Dezura v MNR, [1948] Ex CR 10; [1947] CTC 375; 48 DTC 1101). This appellant has not established any grounds of error by the Tax Appeal Board; therefore, the appeal is dismissed with costs payable by the appellant. As there is no counterclaim to change the judgment of the Tax Appeal Board, that judgment will stand.