The Chairman (orally: December 11, 1974):
1 This is an appeal by John T Burnett against the reassessment of the Minister of National Revenue for the 1971 taxation year. The point at issue is the nature of a total sum of $10,000 which, it is alleged by the appellant, consisted of $7,000 received by him for his interests in a company known as Aegis Marketing International Limited and $3,000 for expenses incurred by him over the course of his association with the company.
2 The respondent on the other hand says that the $7,000 was a payment of salary and expenses for the period in which the appellant was associated with the company.
3 Two witnesses have been called, the appellant John Burnett and a Mr Roy MacMillan, who were really the persons who, if they did not conceive, certainly started Aegis Marketing International Limited. At the material time the appellant was the executive assistant to the Federal Minister of Energy, Mines and Resources, and had some experience in dealing in resource problems with the Japanese government and/or business corporations in Japan. Mr MacMillan at the material time was an employee, although I am not certain in what capacity, of the Department of Industry, Trade and Commerce and was also familiar with the potential that existed, at least in his mind and in the mind of Mr Burnett, to fill the need for a trading house venture which would sell Canadian expertise to developing countries and where the opportunity arose, would also sell capital items to the people of these countries. An example, and I don't think that it is necessary to go into any great detail, of what the company would do would be to take charge of the management and the supplying of services, say, for the construction of an airport in some distant country. In this project, there were apparently two groups involved, the appellant and Mr MacMillan, whom I have already referred to; a Mr Sanda, who was the president of Mitsui Canada Limited and was about to retire but who wished to remain in this country and find employment and who, the evidence indicates, had done a phenomenal job in increasing the sales volume of his company in this country; a Mr Paradis, who was an engineer with a firm in Montreal known as SNC Engineering, a Mr Saxby, an engineer from Calgary; a Mr Smith, who was a mining lawyer or was connected with mining interests in Toronto and elsewhere; and Shouldice Hospitals Limited.
4 Dr Shouldice is well-known, at least in Toronto and Ontario, as a medical practitioner who developed a specialty and ran a private clinic for many years with a substantial degree of success. He apparently had been a client of Wood Gundy and had indicated that he had (and, when I say “he”, I am referring to whatever the correct name of his corporate vehicle was) some $300,000 to invest. It seems that from April 1971 Mr Smith and the Shouldice group tried to, but never did, arrive at a final written agreement as to the degree of participation or the method of transfer of funds to Aegis.
5 Mr Burnett in his evidence has said that the problem arose as to how additional sums would be raised after the initial contribution of each had been used up. Mr Burnett and Mr MacMillan had agreed between themselves, and apparently with the concurrence of Mr Smith, that their salary for services to the company should be in the range of $25,000 to $30,000 and the figure that has been talked of most consistently is $30,000. There was never any written agreement between Aegis and these two individuals, nor do I have, before me any corporate records to indicate that such a salary figure was ever approved by the corporate entity. As a matter of fact, throughout the entire trial there has been a reference to this corporate entity, Aegis, and the share capital of it, but without any real evidence that shares were ever issued, or that the company was ever formally organized. However, I think, for the purpose of this hearing, I can assume from the evidence that I have heard that it was beyond doubt that this appellant was to have a 10% interest in the business, whether or not the shares were ever actually delivered to him, and it is conceded that he paid $100,000 for his, I think it was 9,996 shares, the other shares presumably being in the names of nominee holders for the various persons involved.
6 The problem then begins with the action of Mr Burnett, who, while still employed by the Minister of Energy, Mines and Resources, began setting up the company offices in Montreal. Because of these prolonged negotiations, the company was really without funds, and the appellant, through a company owned beneficially by himself and his wife and called Valleywood Limited, advanced money to Aegis for the purchase of furniture and an office in Westmount Square, I believe it has been called, and for other incidental expenses that the company was required to meet but for which it did not have the funds. This is evidenced by respondent's exhibit R-1, which shows that, when there were funds available in early August of 1971, Valleywood Limited was reimbursed for rent and legal fees, and although the issue before me today concerns some $10,000, the total sum that was involved between Aegis and this appellant amounted to approximately $15,500 the other $500, I take it, having been conceded to be expenses incurred by Burnett, either personally or through Valleywood Limited, to meet these incidental expenses that I have just referred to.
7 Things did not develop as well as had been expected, mainly because of financial problems and difficulties that arose between Paradis and MacMillan, which subsequently led to difficulties between Burnett and MacMillan and resulted in Burnett offering to buy out MacMillan. However, he was unable to raise the money to do so and MacMillan then reversed the procedure and agreed to buy out Burnett's interest in this company.
8 If we look at the respondent's exhibit R-2, which consists of the cheque stubs for August 30, 1971, of the Aegis Company, it shows both MacMillan and Burnett receiving salary advances of $2,000 each on that date. Subsequently, in October, we see payments to MacMillan and to Burnett, either personally or through this company, of some $4,000 and this was done simply by transferring the funds from the company account to the individual checking accounts of Burnett and MacMillan.
9 The issue then turns on what happened in October of 1971. Burnett, as I have said, was unable to raise the funds to buy out MacMillan, and it is clear that the two former friends had become incompatible in so far as the operation of this company was concerned, so that when Burnett was unable to buy out MacMillan, MacMillan then agreed to take over the interest of Burnett. To this point there is really no dispute, and there is no dispute that the interest of Burnett was taken out by the payment to him of a sum of $7,000 plus a further sum of $3,000 in expenses. It is alleged that it was $4,000 salary plus $3,000 for expenses but, in any event, there was paid on October 22, 1971, as evidenced by respondent's exhibit R-4, a cheque to Burnett in the amount of $7,000. I find it interesting to note that this stub does not describe the payment as a salary advance or a final salary. In fact, it is the only cheque stub that really contains no notation as to what the payment is for.
10 I have examined the exhibits that have been filed. Appellant's exhibit A- 1 is a release from Burnett to Aegis of any and all claims he might have against the Aegis company and/or Mr MacMillan, Mr Sanda, Mr Saxby or any one of them, and in consideration of the payment of the said sum, Burnett was to resign as a director and officer of Aegis and agreed to transfer any shares in the said company which “I presently have or to which I may be entitled now or in the future to the said A R MacMillan or to his nominee or nominees and to do all things necessary to effect such transfer.” It is a typical agreement for someone who is stepping out of a business or corporate entity. It embodies the usual releases back and forth, and there is no doubt whatsoever in my mind that at that time Burnett was removing himself from Aegis Marketing.
11 The question is, whether or not he was selling a capital asset for the $7,000, that is, his shares in the business, which learned counsel for the appellant keeps referring to as “worth a penny apiece.” However, I think it is common practice, rather than the exception, that when corporations such as this are incorporated, the shares are issued for a nominal sum, since they are “no par value” shares.
12 There has been mention of Brascan and Polymer Corporations as people interested in investing money in the Aegis company. Polymer was at one time, but I am not sure if it was in 1971, a Crown corporation, although it is no longer a Crown corporation, and Brascan is a well-known company carrying on business throughout the world. What happened was that Brascan advanced to Aegis the sum of $75,000 in October of 1971. It was from this $75,000 that the payments to Mr Burnett were made. The said funds were put into the company bank account and cheques were drawn on the Aegis account and made out to Burnett. I do not find it necessary to determine whether or not this was a correct corporate procedure or whether or not the company was in fact dealing in its own shares, because there is no doubt whatsoever in my mind that the purpose of the payment was to buy out the interest of Burnett.
13 Also I have observed both Mr Burnett and Mr MacMillan in the witness box. Learned counsel for the respondent would have me find that Mr MacMillan is an independent, voluntary witness with no axe to grind and therefore suggests that I should place considerable weight of evidence on his testimony. As I have said, I have observed both of these people in the witness box, I have considered the interest that the appellant has in the outcome of this case when assessing his evidence, and I have no hesitation in saying that, where the evidence of Burnett conflicts with the evidence of MacMillan, I accept and prefer the evidence of Burnett to that of MacMillan.
14 The one matter that has given me considerable difficulty, or did at one time, is whether or not the $3,000 in excess of the $7,000, which brings the total up to the $10,000 that was referred to in the pleadings, was a proper expense item. Mr Burnett in his evidence described a number of trips that he took, I think he mentioned some 25 air trips to Toronto, and some 15 odd nights, I think it was, in hotels. He said he made many trips between Ottawa and Montreal by car but he did not produce any vouchers to show that the expenses had been in curred. Nevertheless, I think, having said that I favour his evidence over Mr MacMillan's, that I am permitted to accept some or none of the evidence of MacMillan, and I do accept the evidence of MacMillan when he stated that a figure of $3,000 had been arrived at as being fair and reasonable compensation for the expenses incurred by the appellant on behalf of Aegis, and I am quite certain that the relationship between the two men was so strained at the time that the arrangement was made that it was not an excessively generous settlement and perhaps, if anything, I would tend to suspect it was more in favour of the company than of the appellant.
15 It is clear to me, and it is also the evidence of Mr MacMillan, that, following the purchase of Mr Burnett's interest, and in exchange for the $75,000 that Brascan advanced, Brascan would have control of the company and MacMillan expected to remain on as a $40,000 a year employee on a three year contract. The fact that it did not work out in the manner that MacMillan had hoped does not, in my view, change the motivating forces that were in operation in October of 1971. I cannot conceive of a company such as Brascan advancing the sum of $75,000 unless it knew that it was going to gain an equity position in Aegis of a substantial amount, and the evidence further indicates that only a short three or four months later it acquired all the shares of Aegis.
16 The $7,000 payment, in my view, was clearly a payment made to buy out the equity interest in Aegis held by Burnett. The said sum of $7,000 is therefore, in my view, a capital gain and should not be taxable. The expenses, as I have said, were incurred in the course of Mr Burnett's service to the company and, on all the evidence, I am satisfied of that, particularly in view of the documentary evidence filed, although I might say, in passing, that I pay little or no attention to the November 30 unaudited balance sheet which was drawn up after the appellant left the company, except in so far as it substantiates, to some degree, his position. The appeal will therefore be allowed and the assessment vacated.
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