Edward G. Lyness v. Her Majesty the Queen, [1994] 1 CTC 2416, 94 DTC 1242

Sobier, J.T.C.C.:—The appellant appeals from the assessment by the Minister of National Revenue (the "Minister"), for his 1988 and 1989 taxation years, whereby the Minister included in his income for 1988, the amount of $72,917, and for 1989, the amount of $27,083, for a total of $100,000.

In October 1979, after being laid off by the Montreal Star, the appellant, together with a friend, used his severance pay to purchase a Hi-Fi Express franchise in Kitchener, Ontario. The franchise involved the retail sale of stereo equipment and other electronics.

The appellant became acquainted with Mr. David Fuss, who apparently controlled Hi-Fi Express.

Although they were stated to be franchisees, all receipts of the business were remitted to the franchisor and the appellant and his partner were paid salaries based on their needs.

In addition to operating his own store with his partner, the appellant also acted as a trouble shooter for Hi-Fi Express, whereby he would attempt to put right some troubled franchises located in other cities.

In about January 1981, the appellant left Ontario and opened two company owned stores for Hi-Fi Express in Calgary. Another store was opened in Edmonton by one Ira Bond. After Mr. Bond left Edmonton, Mr. Lyness was responsible for all three Alberta stores.

In March 1982, Hi-Fi Express, in Ontario, went bankrupt with the result that, although the Alberta corporation operating the three stores did not go bankrupt, the three stores did in fact close. Except as a franchisee, Mr. Lyness had no financial or other interest in Hi-Fi Express either in Ontario or Alberta. As a result of the bankruptcy, the Kitchener store was also closed and Mr. Lyness lost his investment.

During this period, from October 1979, the appellant stated that he and Mr. Fuss had become close friends and he further stated that he dealt with Mr. Fuss on a basis of trust.

After his return to Ontario from Alberta in 1982, there were discussions with Mr. Fuss concerning opening a new business to be called Electronic Depot. The appellant claims that Mr. Fuss offered him a 15 per cent interest in Electronic Depot, although no written agreement was entered into and no shares were ever issued to Mr. Lyness. As well, Mr. Lyness would not be required to pay for his 15 per cent interest. During the entire time with Electronic Depot, Mr. Lyness was paid a salary and acknowledges that he was an employee. Mr. Lyness became president of Electronic Depot approximately six months before its bankruptcy in April 1985.

After the bankruptcy of Electronic Depot, the appellant stated that in June or July 1985, Mr. Fuss offered to pay him $75,000 if he wished to leave, or in the alternative, the opportunity to join Mr. Fuss in another business venture. Mr. Lyness chose the latter and Mr. Fuss, his family, and the appellant opened Beverly Hills Motor Car Co. Ltd. ('"Beverly Hills"), an automobile rental and leasing business.

Mr. Lyness states that he again was offered a 15 per cent interest in Beverly Hills and, that just as in Electronic Depot, he would not be required to pay for the interest and again as in the Electronic Depot venture, there was no written agreement and no shares were ever issued.

Mr. Lyness' initial duty at Beverly Hills was to supervise a mechanic and car washers. Later, he was engaged in the rental side of the business, and then, when the car rental locations were closed, he returned to the office, where he supervised the maintenance of the automobiles. The appellant stated that, although he was paid at the rate of $53,000 per year, he was in his words "maybe a glorified car jockey". In December 1987, Mr. Fuss and the appellant had a discussion where Mr. Lyness was told by Mr. Fuss that "we're going to have to get rid of you". Mr. Lyness left Beverly Hills in April 1988. In January 1988, Mr. Fuss offered Mr. Lyness $75,000, which Mr. Lyness stated was to terminate “their business relationship". Mr. Lyness demanded $100,000 tax free.

An agreement was prepared by the company's solicitor, which agreement was admitted by all to be a sham. This agreement purported to provide for the purchase, from Mrs. Lyness, by Mr. Fuss of shares of a numbered company. The purchase price being $100,000, and was payable over the 1988 and 1989 taxation years. It was Mr. Lyness' evidence that he was told by Mr. Fuss that if he wanted the $100,000, he and Mrs. Lyness had to sign the agreement. According to Mr. Lyness, the agreement was presented to him for signature, and he and Mrs. Lyness executed the agreement and the payments were made.

Although the agreement for the purchase of the shares was a sham and did not reflect the true picture, some portions coincided with the reality of the situation. The recital shows that the numbered company was carrying on business as “Beverly Hills Motors", and that Mr. Lyness was one of its employees. The fact was that Mr. Lyness was the employee of Beverly Hills and not the numbered company. Despite this, the agreement set out that Mr. Lyness’ employment was to terminate as of April 30, 1988, that the house Mr. and Mrs. Lyness occupied was to be vacated by them, and that a company owned automobile was to be returned, all of which was done.

While the agreement called for Mr. Fuss to buy the shares, the cheques issued were issued by Beverly Hills. The agreement stated that "Fuss shall cause to be paid the sum of $100,000 to E. Lyness [Mr. Lyness] and G. Lyness [Mrs. Lyness] as follows’’. There then is set out the instalments to be paid.

In paragraph 7 of the agreement Mr. Lyness assigned his rights “in the said sum" to his wife and authorized Mr. Fuss to make all payments to his wife. The set up and provisions of this agreement add more confusion than clarification to the situation.

The issue to be determined is, how is this $100,000 payment, which all admit was to be made to Mr. Lyness, to be characterized. The appellant maintains that it was "payment from a grateful business associate to compensate the appellant for his interest in various business enterprises controlled by him" (page 86 of the transcript of the proceedings.)

There was mention of the amount being non-taxable damages, however, the evidence does not bear out this contention. On the contrary, Mr. Lyness never threatened action against anyone.

The respondent maintains that it was a retiring allowance as defined in section 248 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), which reads as follows:

“retiring allowance” means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1 )(a)(iv)) 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 dependant or a relation of the taxpayer or by the legal representative of the taxpayer. . . .

The appellant’s counsel argued that by whatever yardstick the matter is measured, whether by way of award of damages for wrongful dismissal, severance legislation, etc., the payment of $100,000 was too large, and therefore it must be for some other purpose. The facts disclosed that, except for one instance where the appellant held a franchise in Hi Fi Express, he was an employee. He was an employee of Hi-Fi Express in Alberta, and employee of Electronic Depot and an employee of Beverly Hills.

Where was the business relationship? Mr. Lyness was not a partner with Mr. Fuss in any of the ventures, he had no money invested in any of them. He was not a creditor. He was to have been a shareholder in Electronic Depot and Beverly Hills, but this never materialized. He received no bonus or participation in the profits of any of the businesses. Any scrutiny of the relationship reveals that Mr. Lyness followed Mr. Fuss wherever ne went, and did Mr. Fuss’ bidding as a loyal friend and employee.

There was no long standing business relationship, unless that term can be taken to include an employer-employee relationship, which I find cannot be so taken. The true relationship between them was as an employer-employee, through the vehicles of the various corporations controlled by Mr. Fuss and his family. In his own words, he was "a glorified car jockey", albeit a highly paid one, at Beverly Hills.

As to the argument that the $100,000 was too large a sum to be paid as a retiring allowance, the argument could also be easily made that it was too large an amount to sever a tenuous business relationship, especially in respect of two companies which were bankrupt and had no value.

The amount, whether large or small, is irrelevant. It is the purpose for which the payment was made that is paramount. The appellant was told that he would have to leave Beverly Hills. He and Mr. Fuss then negotiated the amount which was to be paid to Mr. Lyness. I find as a fact that the payment was made to the appellant as a result of his employment being terminated and it follows that the payment was made in respect of a loss of an office or employment.

I have examined a case of Specht v. The Queen, [1975] C.T.C. 126, 75 D.T.C., 5069 (F.C.T.D.). There it was found that there was no "retirement" in the ordinary sense and the payments were not made “in respect of loss of office or employment". Here there was elimination of Mr. Lyness' job. "The payment was made for the loss of a source of income, on or after withdrawal from usual business activity or employment, or after withdrawal by reason of the elimination or expiration of the particular office or employment" (Specht, supra, page 134 (D.T.C. 5074)).

Even without invoking the reasons in Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C., 5041 which instructs us to interpret the words "in respect of" in the widest possible manner, I must conclude that the payment of $100,000 over the two taxation years in question, represented the payment to the appellant of retiring allowance, and therefore to be included in his income.

The appeals are dismissed with costs.

Appeals dismissed.