Citation: 2006TCC417
Date: 20061122
Docket: 2004-2146(IT)G
BETWEEN:
JEAN DESMARAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
(Delivered
orally from the bench on June 15, 2006
at Montréal, Quebec, and modified for more clarity and precision.)
Archambault J.
[1] The issue in the
appeal by Jean Desmarais
concerns the qualification of the sum of $350,000 that was paid to him
under an employment contract that he entered into on October 29, 2001, with
Valeurs mobilières Desjardins (VMD). Clause 4.6 of this contract
stipulates:
[TRANSLATION]
4.6 As well as the above-mentioned commissions,
the employer will pay the employee with regard to the clients already
represented by the employee (transfer) the lump sum of $350,000 at the pay of
November 15, 2001;
(Exhibit I‑1,
tab 13.)
[2] The Minister of National Revenue (the
Minister) applied section(s) 5 and/or 6 of the Income Tax Act (the
Act) to justify the assessment. It seems that when the assessment was made,
the auditor assumed that the $350,000 was a commission for the clients
that Mr. Desmarais brought to VMD. At the objection stage, the objections
officer rather considered this sum to be taxable under paragraph 6(3)(c)
of the Act. Subsection 6(3) provides as follows:
6(3) Payments by employer to employee -- 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, in lieu of payment
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 be
deemed, for the purposes 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
(c) as consideration or partial
consideration for accepting the office or entering into the contract of
employment,
(d) as remuneration or partial
remuneration for services as an officer or under the contract of employment, or
(e) in consideration or partial
consideration for a covenant with reference to what the officer or employee is,
or is not, to do before or after the termination of the employment.
[Emphasis added.]
[3] I tend to agree
with counsel for Mr. Desmarais that it was a new basis for the assessment and
that the Minister had the burden of proof as to the facts supporting this new
argument. However, the factual evidence that has been offered is more than sufficient to make
a decision on whether to apply paragraph
6(3)(c)
of the Act.
[4] Subsection 6(3) applies if the sum of
$350,000 was paid due to an obligation arising from an agreement between
VMD and Mr. Desmarais immediately before, during or immediately after Mr. Desmarais
was a salaried employee of VMD. The evidence clearly demonstrated that the
payment was made during the period when Mr. Desmarais was a salaried employee
of VMD and the obligation was created by the employment contract itself. The
first two conditions of subsection 6(3) have therefore been met.
[5] It now remains to
be decided whether the other conditions have also been met. The sum in question
is deemed to be remuneration for services that the payee provided as an
officer, unless it is established that, regardless of the date when the
agreement was entered into or the legal form or effects of this agreement, it
is not reasonable to consider this sum as having been received specifically as
consideration for accepting the office or entering into the employment
contract.
[6] In my opinion, it
is reasonable to consider that the $350,000 was paid to Mr. Desmarais as
an incentive to sign the employment contract. The reasons justifying this
conclusion are largely the same as those used by counsel for the Respondent.
First of all, the $350,000 did not represent the proceeds of the sale of
goodwill, contrary to what counsel for Mr. Desmarais submitted, with much
conviction, to justify his argument that the sum could be attributable to
something other than accepting the office.
[7] The events
surrounding the negotiation and the performance of the employment contract
include several peculiar aspects. The first of them is the rather vague wording
of clause 4.6 of the contract: [TRANSLATION] “. . . the employer shall pay the employee having regard to clients
already represented by the employee (transfer).” After signing this contract, Mr. Desmarais
attempted, unsuccessfully, to have VMD specify the extent of the offer that it
made him on October 4, 2001. He wanted VMD to recognize that “the payment of
the lump sum amount represents payment for the part of my clientele that it is
possible for me to transfer on the date hereof.” (Exhibit I‑1,
tab 17). VMD’s refusal reveals, in my opinion, the absence of any
intention on its part to acquire Mr. Desmarais’s client list. On the contrary,
it reveals an intention to pay an incentive. Not only did VMD refuse to agree
to Mr. Desmarais’s request for specification, it acted as an employer that
had paid an employment income. Indeed, it prepared a T4 slip on which the
$350,000 was described as a commission. It is true that this description is not
the one that best reflects the true nature of this sum, but what is the most
important, in my opinion, is the fact that VMD did not consider the sum of
$350,000 as the purchase price of goodwill.
[8] In addition to
these factors, which raise a serious doubt as to the existence of a purchase
price for the purchase of goodwill, there is the fact that the employment contract mentions the payment of
$350,000 under the heading “Remuneration”. This is another indication of the
true nature of the $350,000 paid by VMD. If there had truly been an acquisition
of goodwill, normally a separate contract should have been prepared, either a
purchase contract or a sales contract, or, at the very least the acquisition
should have been dealt with under a separate heading in the employment
contract.
[9] There are other
factors that support me in my conclusion that the true intention of VMD was not
to acquire goodwill. For example, there is no clause in the employment contract
that protects VMD against the solicitation of the clients addressed concerned
in clause 4.6, i.e. the “clients already represented by the employee” in the
case of the departure of Mr. Desmarais. However there is such a clause exists
in article 13 of the employment contract with regard to the clients that the
institutions of the Mouvement Desjardins could refer to Mr. Desmarais.
[10] I believe that VMD could not really hope to
acquire Mr. Desmarais’s goodwill because it is recognized in the field that
there is a close relationship of trust between an investment advisor and his or
her clients, especially if he or she has given them advice over several years.
In addition, it would be difficult to prevent a salaried employee from earning
a living after leaving the employer and serving the clients who wished to use
his or her services. In any case, clients are free to choose their advisor. The
retention rate for Mr. Desmarais’s clients would not be high if
Mr. Desmarais were to leave. The interest for VMD lies in the retention
rate of the employee that it hires. Indeed, article 5 of the employment
contract provides for total reimbursement of the $350,000 if Mr. Desmarais
leaves his employment during his first year of service. Thereafter, the
reimbursement is reduced gradually if Mr. Desmarais leaves his employment with
VMD over the following four years. If VMD’s true intention in paying the
$350,000 had been to purchase a goodwill, the clause would only have provided
for reimbursement inasmuch as VMD would have lost the clients as a result of
Mr. Desmarais’s departure.
[11] My analysis of all
of the evidence leads me to find that the $350,000 was paid as an incentive for
Mr. Desmarais to leave Nesbitt
Burns to join VMD and not to acquire Mr. Desmarais’s clientele.
[12] It is true that Mr. Desmarais, by
going to VMD and accepting the position of branch manager, ceased to be
involved with his clients on a daily basis. His role was limited to supervising
the many investment advisors joining his team. However, it cannot be said that
Mr. Desmarais lost all monetary interest in bringing his clientele with him. On
the contrary, during the negotiation of his employment contract with VMD, he
made sure that a colleague from Nesbitt Burns, Mr. Bernier, in whom he had
great confidence, would join VMD at the same time as him. In fact, it is rather
to Mr. Bernier – and not to VMD – that Mr. Desmarais transferred his clientele,
since Mr. Bernier inherited all of the clients who accepted to follow Mr.
Desmarais to VMD. In financial compensation for this transfer of clientele, Mr.
Bernier paid Mr. Desmarais part of the commissions he received from these
clients. This is how Mr. Desmarais described his arrangement with Mr. Bernier: [TRANSLATION] “Martin Guy Bernier, who is purchasing
my clientele, gives me a share of his commissions to purchase my clientele.” Mr. Bernier
even described these payments as dues. This is just another way of paying for
the acquisition of a clientele. It is important to add that Mr. Desmarais
did not have any other similar agreement with the 23 other investment advisors
working on his team.
[13] For these reasons,
Mr. Desmarais’s appeal is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this 22nd day of
November 2006.
“Pierre Archambault”
on this 24th day
of January 2008.
François Brunet, Revisor
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