Cormier v. MNR, 90 DTC 1167, [1990] 1 CTC 2295 (TCC)

Mogan, T.C.J.: — The issue in this appeal is whether an amount of $36,950 received by the appellant in 1981 in connection with the sale of a business in 1978 is a “retiring allowance” within the meaning of subparagraph 56(1)(a)(ii) of the Income Tax Act. At all relevant times, the appellant owned a substantial majority of the issued shares of Gray's Velvet Cheese and Butter Company Ltd. ("the Cheese Company”) which carried on business at Campbellton, New Brunswick. The Cheese Company was the beneficial owner of all 148 issued common shares of Gray's Velvet Ice Cream Co. Ltd. ("the Ice Cream Company"). The appellant was manager of the Ice Cream Company from 1963 to April 1, 1978.

In 1977, the appellant commenced negotiations for the sale of the Ice Cream Company. In a 15 page letter dated January 20, 1978, La Crémerie Belzile Limitée ("the purchaser") offered to buy all 148 shares of the Ice Cream Company for $925,000. In the oral negotiations which had preceded the written offer, the Cheese Company was asking $1,100,000 and the purchaser's initial offer was $800,000. After further negotiations, the written offer was accepted on January 24 or 26, 1978 when certain documents were exchanged including the following letter (Exhibit A-6) which, because of its importance to the issue herein, I shall set out in full:

Rimouski, January 26, 1978

Mr. Mathieu Cormier,

Campbellton, N.B.

Dear Sir,

This is in reference to the offer we submitted on January 20, 1978 to purchase all of the common shares of Gray's Velvet Ice Cream Co. Ltd, which was accepted on January 24, 1978.

In addition to the particular commitments set forth in paragraphs 27, 28 and 29, La Crèmerie Limitée promises that Gray's will grant you, in consideration of your long and valuable service to the Company during more than twenty years, a retirement allowance for an amount equal to the total of the following:

(a) one hundred thousand dollars ($100,000.00), plus

(b) an amount equal to the net value of Gray's litigious claim against the City of Campbellton for damages caused by water in 1976-77, after deduction of an amount of fifty thousand dollars ($50,000.00). The words "net value of the claim” as employed in this sub-paragraph mean the amount received for the claim, after deduction of expenses and legal and extra-legal fees;

La Crémerie Belzile Limitée also promises that Gray's will pay you the retirement allowance described in the above paragraph in the following manner:

(a) one hundred thousand dollars ($100,000.00) will be payable on April first, 1978 or the retirement date, whichever is the later;

(b) the surplus over fifty thousand dollars ($50,000.00) described in paragraph (b) above, if applicable, will be payable on the day Gray's will receive the net value of its litigious claim against the City of Campbellton;

Sincerely yours,

La Crémerie Belzile Limitée

Pursuant to part (b) of the above letter, the appellant received $36,950 in 1981 and it is the character of that amount which is in dispute in this appeal. In 1977, the Ice Cream Company had commenced a lawsuit against the City of Campbellton and others for damages resulting from flooding caused by a blocked drain. When the Ice Cream Company was sold in early 1978, the lawsuit against the City of Campbellton had not been heard in Court but the appellant was confident of his chances of success. The purchaser was not interested in pursuing the lawsuit but was willing to let the appellant continue it in the name of the Ice Cream Company on the following conditions: (a) the appellant would be responsible for all costs connected with the lawsuit; and (b) if any damages were recovered, the first $50,000 after payment of all costs referred to in (a) was to be paid to the Ice Cream Company and the balance was to be paid to the appellant.

The appellant accepted the above conditions and the lawsuit continued after the sale of the Ice Cream Company. Apparently, the only document describing this arrangement was Exhibit A-6 set out above; there was no written indemnity from the appellant to the Ice Cream Company with respect to the lawsuit and there was no written authority from the Ice Cream Company to the appellant to continue the lawsuit. The Ice Cream Company was successful against the defendants both at trial and in the New Brunswick Court of Appeal. The amount recovered and its disposition in October 1981 is set out in the table below:

The sale of the shares of the Ice Cream Company to the purchaser was completed on or about February 20, 1978. The appellant continued as manager of the Ice Cream Company until April 1, 1978 when he retired. At that time, the Ice Cream Company paid to the appellant the $100,000 referred to in Exhibit A-6 set out above. Later, the Ice Cream Company issued to the appellant a Revenue Canada Taxation form T4A for 1978 identifying the $100,000 as a "retirement allowance”. The appellant included the $100,000 in the computation of his 1978 income and then deducted the same amount as having been "rolled" into an RRSP. When the damages plus interest ($128,081) were allocated and distrib- uted in October 1981, the appellant received his $36,950 but he was not issued any form by the Ice Cream Company identifying that amount as a retiring allowance or otherwise. When filing his 1981 income tax return, the appellant included the amount of $36,950 as a capital gain.

Exhibit A-6 is clearly detrimental to the appellant's case because it states that he is granted a retirement allowance having two components comprising $100,000 to be paid on April 1, 1978 and the balance of the lawsuit damages (if any) to be paid when such damages are received by the plaintiff (the Ice Cream Company) from the defendants. Subparagraph 56(1)(a)(ii) of the Act requires a "retiring allowance” to be included in the computation of income and section 248 of the Act defines retiring allowance as follows:

“retiring allowance” means an amount (other than a superannuation or pension benefit or an amount received as a consequence of the death of an employee) received

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his long service, or

(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal

by the taxpayer or, after his death, by a dependent or a relation of the taxpayer or by the legal representative of the taxpayer;

Counsel for the appellant argued that the words "retirement" or “retiring” allowance in Exhibit A-6 referred only to the $100,000 amount; and he relied on the decision in Salter v. M.N.R., [1946] Ex. C.R. 634; [1947] C.T.C. 29; 2 D.T.C. 918 as authority for the proposition that the appellant could introduce oral evidence to explain the terms in Exhibit A-6. The Salter case was followed in M.N.R. v. Ouellette and Brett, [1971] C.T.C. 121; 71 D.T.C. 5094 when Walsh J. held at page 5103 that oral evidence introduced to interpret a written agreement was admissible. Applying these decisions, I find that the appellant's description of the lawsuit against the City of Campbellton and his explanation of the terms for continuing that lawsuit after the sale of the Ice Cream Company are admissible to interpret clause (b) in Exhibit A-6. Accordingly, I find that the amount of $36,950 was not a retiring allowance within the meaning of the Income Tax Act.

Apart from the specific words "retirement allowance” in Exhibit A-6 which are an accurate description of the $100,000 amount, there is nothing in the surrounding circumstances which makes the $36,950 amount a retiring allowance. Firstly, it was contingent. An employer would not ordinarily attempt to recognize the long service of any employee by granting a retiring allowance which was based on some event that might not occur. And secondly, the condition for payment had nothing to do with long service or the actual date of retirement. Payment of the amount which turned out to be $36,950 was dependent only on the success of the lawsuit against the City of Campbellton and on the damages exceeding costs plus $50,000.

The commercial basis of the arrangement between the appellant and the purchaser concerning the lawsuit appears to be that the shares of the Ice Cream Company would have had a higher value in January 1978 (the date of sale) if the flooding had not occurred; and the appellant was given an opportunity to obtain a portion of that higher value by underwriting the costs of the lawsuit. In effect, the appellant acquired an interest in the lawsuit and he was correct in reporting the £36,950 amount as a Capital gain in 1981 resulting from the disposition of his interest in the lawsuit. In my view, the $36,950 amount is not proceeds of disposition for the shares of the Ice Cream Company because

(i) the payor is not the purchaser but is the Ice Cream Company itself as the successful plaintiff; and (ii) the payee is not the Cheese Company as vendor of the shares but is the appellant as underwriter of the lawsuit.

The appeal is allowed with costs and the assessment under appeal is referred back to the respondent for reassessment on the basis that the $36,950 amount was a Capital gain.

Appeal allowed.