Ronald v Kirkby v. Minister of National Revenue, [1972] CTC 2101, 72 DTC 1109

A J Frost:—This is an appeal from income tax assessments for the appellant’s taxation years 1963, 1964, 1965 and 1966. Upon notices of objection, duly signed and filed, the Minister of National Revenue reconsidered the assessments and confirmed them on November 27, 1969 as having been made in accordance with the appropriate provisions of the Income Tax Act and the Income Tax Regulations. This appeal was heard at Vancouver on May 18, 1971 before the Tax Appeal Board as it was then constituted.

The appellant owned Pemberton insurance Corporation Limited (hereinafter referred to as “Pemberton”), which company carried on a general insurance agency business in the city of Vancouver for several years. By agreement dated August 1, 1959 Pemberton sold its general insurance business to Everne Holdings Limited (hereinafter referred to as “Everne”) for $277,000, and by a separate employment agreement of the same date Everne agreed to employ the appellant for a period of 10 years. Subsequently, Everne changed its name to Pemberton Labow Haynes Limited (hereinafter referred to as “PLH Ltd”).

By agreement dated March 15, 1963 PLH Ltd and the appellant cancelled the employment agreement dated August 1, 1959 for a consideration of $37,500 payable over a period of approximately 6V2 years from 1963 to 1969. In the taxation years 1963 to 1966, the following payments were made by PLH Ltd to the appellant:

In computing his income for the taxation year 1963, the appellant included the sum of $7,500 but in subsequent years did not report the other payments of $5,000 each. He contended that all the said payments related to capital, and that the first payment of $7,500 was included by him in error when reporting his income for 1963.

By notices of reassessment dated November 30, 1967 the Minister added $5,000 to the appellant’s declared income for each of the taxation years 1964 and 1965, it being designated as “Income from Pemberton, Labow & Haynes” for the 1964 taxation year, and “Income from Pemberton, Labow & Haynes Ltd deemed to be taxable income” for the 1965 taxation year; and by notice of reassessment dated January 18, 1968 the Minister added $5,000 to the appellant’s declared income for the 1966 taxation year designated as “Earnings received from Pemberton, Labow & Haynes Ltd deemed to be taxable income”.

Everne, under an agreement dated August 1, 1959, issued 3,750 class “A” shares as follows:

(i) 2,250 class “A” shares to Labow Haynes Company Inc and certain individuals known as the “Labow group”, being 60% of 3,750 shares issued;

(ii) 1,500 class “A” shares to the appellant, being 40% of 3,750 shares issued.

By agreement dated March 13, 1963, made between Labow Haynes Company Inc et al and Ronald Kirkby, the appellant agreed to sell his 1,500 class “A” shares of PLH Ltd (formerly Everne) in consideration of $1 and other good and valuable consideration.

On July 14, 1964 the appellant left Canada and did not return until January 2, 1966.

The questions before the Board are:

1. Is the $37,500, payable over a period of years by PLH Ltd to the appellant, consideration for the sale of 1,500 class “A” shares of PLH Ltd and as such a non-taxable receipt?

2. Was the appellant a non-resident of Canada for a portion of the 1964 taxation year and for the whole of the 1965 taxation year?

Counsel for the appellant argued that the amount of $37,500 paid to the appellant by PLH Ltd was not income taxable in his hands, being a capital receipt; and that, under section 29 of the Income Tax Act, the appellant was only a part-time resident of Canada in 1964 and a non-resident for the whole of 1965. He submitted that the sales agreement under which the appellant sold his 40% interest in PLH Ltd and the agreement amending his employment contract should be read as if comprising one document: that, in effect, the contract amending his employment was collateral to the sales agreement.

Evidence was adduced that the company was worth approximately $100,000 at the time of sale. On that valuation, the appellant indicated that he considered his 40% interest to be worth $40,000, and this was the formula that had been used in arriving at $37,500 as the amount of the settlement. Counsel further submitted that the solicitor for the purchaser in all probability wanted to gain a tax advantage for his client and, in putting the documents together, so arranged things that the payment of $37,500 would be treated as an expense item on the books of PLH Ltd. The appellant did have a solicitor and did read the documents but, according to counsel, apparently did not “twig” or was possibly ill-advised. In any event, he made a bargain which gave an important tax advantage to the majority shareholders of PLH Ltd.

Counsel for the respondent argued that there was a most important collateral consideration involved in the final settlement, in that an amount of $171,500 was still owing to the appellant and that he wanted a guarantee of this amount before assigning his 40% share interest to the holders of the 60% interest in PLH Ltd for the sum of $1. The fact that Seattle First National Bank issued an irrevocable letter of credit to the appellant in the amount of $171,500 procured by Labow Haynes Company Inc was an important factor. Counsel also contended that section 25 of the Act only referred to “an agreement”, and since more than one agreement was before the Board with respect to the issue, the language of the statute could not be interpreted as supporting the appellant’s position.

In my view the tax implications of the agreements between PLH Ltd and the appellant are clear. One party gained a tax advantage by arranging his affairs in such a way as to minimize taxation. The other party, with the advice of counsel, exposed himself to a higher degree of taxation than he may have been aware of as a direct consequence of his own failure to appreciate precisely what was involved in his actions. The appellant then asked that the two main documents be read as one in order to give him a tax advantage as well as the other party thereto. In my opinion, the Board would have no grounds for viewing one side of a coin as a question of form and the other side of the same coin as a matter of substance. Taxpayers may arrange their affairs to minimize taxation, but two taxpayers using the same vehicles for arranging their affairs can hardly expect different legal effects from the same documentation. The Board also recognizes that the appellant never received full payment for his general insurance business and wanted payment in settlement of his affairs. In my opinion, the settlement of the $171,500 indebtedness was a consideration for the surrender of the shares for $1. I am also in agreement with counsel for the respondent when he says that section 25 of the Act has no application in the circumstances.

Change of residency requires some evidence of the intention of the appellant to become permanently resident in another country. In the case at bar, the appellant never settled anywhere. He kept moving around for a year and a half visiting Mexico, Europe and various places in the United States, and then finally came back to Canada. He did not move his affairs from Canada, as he kept his office and securities in this country. In fact, I find it difficult to recognize any degree of permanency in anything he did from the time he left Canada in 1964 until he returned early in 1966. He was constantly in flight, so although he may have had in his mind the idea of establishing a permanent residence elsewhere, he did not in fact do so. Under the circumstances, the appellant must be regarded as a resident of Canada for 1964 and the whole of 1965 despite his physical absence.

Appeal dismissed.