Charles Guay v. Minister of National Revenue, [1972] CTC 2407, 72 DTC 1347

Maurice Boisvert:—This appeal is from assesments dated December 18, 1967, for the 1965 and 1966 taxation years.

The facts which gave rise to the assessments are clearly set forth in the Notice of Appeal which reads as follows:

(TRANSLATION)

1. On or about February 15, 1958, Mr Charles Guay and a group of four (4) other persons acquired all the shares issued and outstanding of the capital stock of LANROL MOTORS LTD.

2. In April, 1960, LANROL MOTORS LTD experienced certain financial difficulties and the CHRYSLER CORPORATION OF CANADA proposed the formation of a new company under the name of LANROL MOTORS (1960) LTD, in which it invested one hundred and fifty thousand dollars ($150,000) in the form of redeemable voting preferred shares and in which LANROL MOTORS LTD also invested fifty thousand dollars ($50,000) in the form of non-voting common shares.

3. At the same time, the LANROL MOTORS LTD shareholders, all active in the said company, authorized Mr Charles Guay to sign a BONUS AGREEMENT and a STOCK AGREEMENT with LANROL MOTORS (1960) LTD, the CHRYSLER CORPORATION OF CANADA wishing thereby to stimulate interest and to eventually hand back to LANROL MOTORS LTD all the shares it held in LANROL MOTORS (1960) LTD.

4. As a result of these agreements, seven thousand nine hundred and five dollars and twenty-six cents ($7,905.26) and seven thousand five hundred and one dollars and sixty cents ($7,501.60) were actually paid to the appellant in 1965 and 1966 for and on behalf of LANROL MOTORS LTD, and the Department of National Revenue included these amounts in the appellant’s taxable income.

GROUNDS

5. The bonuses paid to the appellant legally belong to LANROL MOTORS LTD and he has always acted for and on behalf of that company, as evidenced by an agreement concluded on April 30, 1960, between all the shareholders of LANROL MOTORS LTD and the appellant.

6. In fact, the bonuses were never drawn by the appellant out were paid by him to LANROL MOTORS LTD in accordance with the agreement mentioned in the foregoing paragraph.

7. In any event, LANROL MOTORS LTD has remained operational and the bonuses received were duly included in its taxable income for 1965 and 1966.

The bonuses were charged as being the appellant’s taxable income, whence the assessments, as the document hereunder shows:

The respondent acknowledged most of the above facts but took for granted in his Reply to the Notice of Appeal that:

(TRANSLATION)

4. In assessing the appellant for the 1965 and 1966 taxation years, the respondent took for granted the following facts:

(a) During the 1965 and 1966 taxation years the appellant held the offices of president and manager of Lanrol Motors (1960) Ltd, which offices he had held since 1960, the year in which the said company was incorporated;

(b) On April 19, 1960, the appellant signed an agreement with Lanrol Motors (1960) Ltd under which, in consideration of good services to be rendered by the appellant to the said company, the latter undertook to pay the appellant an annual bonus of 25 per cent of the company’s net profit before tax, over and above the salary paid to the appellant by reason of his employment, as evidenced by the said agreement concluded between the parties, a photocopy of which is attached hereto, to be equally authentic as though quoted /n extenso;

(c) During the 1965 and 1966 taxation years the appellant received under the said agreement $7,905.28 and $7,501.60 bonuses respectively;

Are the assessments justified? The respondent contends that they are and cites subsection 5(1) and section 25 of the Income Tax Act (RSC 1952, c 148) which read as follows:

5.(1) Income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year. . .

25. An amount received by one person from another,

(a) during a period while the payee was an officer of, or in the employment of, the payer, or

(b) on account or in lieu of payment of, or in satisfaction of, an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer,

shall de beemed, for the purpose of section 5, to be remuneration for the payee’s services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received

(i) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(ii) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(iii) in consideration or partial consideration for covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.

Can the same income be assessed twice, and against two different persons? If we consider the substance of the transactions concluded between Lanrol Motors (1960) Ltd, Lanrol Motors Ltd, Chrysler Corporation of Canada Limited and the shareholders of Lanrol Motors Ltd, there is no doubt that, according to the agreements and contracts signed between the parties, the bonuses were not to be and could not be, in so far as the appellant was concerned, “income from an office or employment” but rather amounts which were to go to Lanrol Motors Ltd, as evidenced by the following document dated April 30, 1960:

AGREEMENT BETWEEN LANROL MOTORS LIMITED AND CHARLES GUAY

Pursuant to the sale of certain assets of LANROL MOTORS LIMITED TO LANROL MOTORS (1960) LIMITED and pursuant to a bonus agreement signed by CHARLES GUAY and LANROL MOTORS (1960) LIMITED and a stock agreement signed between CHRYSLER CORPORATION OF CANADA LIMITED and CHARLES GUAY, it is understood that CHARLES GUAY is acting on behalf of LANROL MOTORS LIMITED and if there are any bonuses to be paid to CHARLES GUAY, it has to be turned over to LANROL MOTORS LIMITED.

The appellant, called as a witness, explained the agreement with Chrysler as follows:

(TRANSLATION)

Q. Lanrol Motors Limited was a Chrysler dealer here in Montreal? A. Yes, at 1640 St Catherine Street West. And then they came to us with a proposal that they would capitalize the deal at $200,000. With that $200,000, we, the partners, had to put up $50,000, but we did not have the $50,000. We made an arrangement with IAC so that they would lend us the money endorsed by all the Lanrol Motors partners because we had to put up the $50,000 and then all the stock we had. They wanted to sell that to get the money.

Q. When you speak of “stock”, do you mean the assets or the shares? A. I am speaking about used cars, things like that.

Q. You are speaking of tangible assets? A. Yes, exactly; then after that, we borrowed the money from IAC so that we could get our $50,000, endorsed by all the Lanrol Motors partners.

Q. And there were seven of you partners at that time? A. Yes, at that time there were seven, and we are still seven who work altogether.

Q. And for its part, Chrysler furnished how much, subscribed how much? A. They put in $150,000 and we put in $50,000 for a total of $200,000.

Q. For Chrysler, was it in the form of shares or was it a loan? A. It was in a form that—how do I say that?

Q. A line of credit? A. They put up $150,000 in cash and we had to put up $50,000.

G. in return did you give shares of the new company that was formed then? A. Yes, that’s correct.

Q. At that time, in addition to subscribing the money, did Chrysler ask you to incorporate a new company? A. Yes, because they had to go by the charter.

Q. And what was the company called? A. Lanrol Motors (1960) Limited.

Q. And you were shareholders in that company; you had invested $50,000 and Chrysler $150,000? A. Yes.

Q. What did Chrysler receive for its $150,000? A. Well, they had control.

Q. There was a distribution of shares, such as preferred stock? There was also common stock? A. We had the common and Chrysler had the preferred. They had $150,000 of preferred and we had $50,000 of common.

Q. Were the preferred shares held by Chrysler voting shares? A. Yes, the common shares were not voting shares.

Q. You signed an agreement with Chrysler Corporation? A. Yes.

Q. Briefly, what was the nature of that agreement? A. Well, I was the one, as they say, chosen to make the arrangement with Chrysler because Chrysler wanted in so far as possible to work with only one man because otherwise it gets a bit difficult to work with several persons. It’s their way of doing things and they. chose Charles Guay to head up, as they say, the group of make the deal with Chrysler.

Q. You signed that agreement which is filed as exhibit A-1, which granted you, I believe, if we refer to the agreement, what are called bonuses, which were based on the company’s profits? A. Yes.

Q. Now, had it been agreed with Chrysler at the time, to your knowledge when you dealt with Chrysler, that you were acting on your own behalf or on behalf of the company? A. On behalf of Lanrol Motors; they knew that I did not have enough money, I wasn’t able, my partners had to be with me, otherwise it would not have worked and the place would have had to be closed:

Q. Afterwards, did Chrysler Corporation actually pay the bonuses under the agreement that had been signed? A. No. Lanrol Motors (1960) paid the bonus.

Q. To whom did they pay the bonuses? A. The bonuses were given by Lanrol Motors (1960) to Charles Guay and then I endorsed the cheque and gave it to Lanrol Motors because the money wasn’t coming to me, it was going to Lanrol Motors.

Q. Then you never pocketed the money? A. No, not a cent.

Q. But what was the purpose of the bonus, why were you paid a bonus in addition to your salary? A. To buy Chrysler shares.

Q. Then, as the bonuses were received, Chrysler’s preferred shares were redeemed? A. Yes, they were changed from preferred to common shares.

Q. But the shares were still registered in your name? A. Yes, and Chrysler kept that in Windsor.

Q. And obviously you were president and general manager of the new company? A. Yes.

Q. One moment, Mr Guay. You said that when the company gave you a cheques for the bonus to which you were entitled . . . A. Yes?

Q. First, where did that cheque come from? A. From Lanrol Motors (1960) Limited.

Q. Controlled by Chrysler? A. Yes, controlled by Chrysler.

Q. And if I understood correctly, you said that you endorsed the cheque and handed it over to which company? A. Lanrol Motors Limited.

Q. The first company? A. Yes.

Q. And not the second? A. No, you see the bonus, the money was made by Lanrol Motors (1960) Limited and if my partners and I had a good year by working very hard, I got a bonus.

Q. And you handed over that bonus? A. Yes, to the old company.

Q. Yes, but why not to the second company? A. Because the bonus wasn’t for me. If I kept the bonus, it was a fraud it was crooked because I was working for my partners.

Q. You said that in order to get your money back for the advance made by Chrysler Corporation, $150,000, you had to hand over your bonus so as to discharge the debt, the capital invested by Chrysler? A. Yes.

Q. There must be some truth in that since there is mention of 20 per cent of the capitalization. Hence Chrysler had invested in the new company? A. Yes.

Q. Just as all of you had invested in the new company? A. Yes.

Q. How is it that you handed over your bonus to the first company? A. Because it belonged to the others. I was the one who was operating, not the others, I was dealing with Chrysler on the others’ behalf. That is why the money doesn’t come to me, it goes to the old company to pay its debts and the money that was borrowed from IAC, otherwise we would have had to close down. At no time did Chrysler know that we were closing down. lt was Lanrol Motors (1960) Limited, because alone I was not rich enough to go it alone.

Mr Guay’s testimony was corroborated by a chartered accountant. On this whole matter ! am of the opinion that in the circumstances adduced by the evidence, the appellant has successfully refuted the assumption that the assessment was justifiable and valid, all the more so since there has been no allegation of fraud nor can he be charged with it. It is a well recognized principle that funds received are taxable only when the person who receives an amount can enjoy it, that is, use it as his own asset and his own property.

In The Law of Income Tax, Surtax and Profits Tax, on page 1014, No 1-024, Wheatcroft refers to Eisner v Macomber (1919), 252 US 189. On pages 206 and 207, the Honourable Mr Justice Pitney said:

. . . a profit . . . received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal;

In Simon's Income Tax, Vol 1, 2nd ed, the author says on page 4, No 3:

The expression “income” is not used in a sense necessarily implying a receipt of money, but rather a profit of an income nature . . . .

To be chargeable, profits can be either money or money’s worth; but if money’s worth is incapable of being turned into money by the person who benefits from it, it is not as a rule regarded as income for purposes of income tax.

What is received for someone else cannot be the taxable income of the person who receives it and hands it over. Such receipt of money becomes the income of the one who will enjoy it and will put it to his own use. These persons should not be confounded. An individual is a person within the meaning of the Income Tax Act and the corporation of which he is a shareholder is another person separate from his personality.

In conclusion, according to the written and oral evidence, the bonuses assessed against the appellant do not qualify as taxable income, and the appeal must be allowed.

This ^appeal was heard at Montreal, Province of Quebec on October 22, 1971 under the old Income Tax Act, by the undersigned, the then Assistant Chairman of the Tax Appeal Board as it was then constituted.

Appeal allowed.