P.R. Dussault, T.C.C.J.:—These are appeals from reassessments for the 1985 and 1986 taxation years in which the respondent, the Minister of National Revenue (the"Minister"), allocated to the appellant income arising from two contracts with Télé-Métropole Inc. ("TM") to conceive the television series," L'Or du Temps". The appellant disputed this allocation and claimed that this income was that of the corporation, Les Entreprises Réal Giguére Inc. ("Entreprises R.G.”).
In assessing the appellant, the Minister took for granted, inter alia, the facts stated in subparagraphs 8(a) to (i) of the reply to the notice of appeal which read as follows:
(a) During the years 1985 and 1986, the appellant signed two contracts with Télé- Métropole Inc., the first dated July 12, 1985, the second dated May 7, 1986;
(b) Under these contracts, the appellant offered Télé-Métropole Inc. his services for the conception, research and writing of texts for the television series entitled, "L'Or du Temps";
(c) Under the contract of July 1985, Télé-Métropole Inc. agreed to pay the appellant the sum of $2,500 for each original 30-minute text completed and accepted ($2,600 under the contract of May 1986);
(d) In fact, and according to the contracts, Télé-Métropole Inc. retained the services of the appellant, not of "Les Entreprises Réal Giguère Inc.”;
(e) Clause 3 of the said contracts reads:
The parties hereto agree that the fees normally passing to the author (the appellant) under this agreement will be payable to the order of the intervener (Les Entreprises Réal Giguére Inc.);
[Translation.]
(f) It appears from the signed contracts that it was the appellant himself and not “Les Entreprises Réal Giguére Inc.” who guaranteed to Télé-Métropole Inc.:
. . . that, within the limits set out in the present agreement, no one other than himself may rightly claim to be the author of the texts, in whole or in part, accepted under clause 4 above and, consequently, agrees to be impleaded, if necessary, by TM (Télé-Métropole Inc.) in order to take up the defence against any third party that would file a claim to this effect with TM;
[Translation.]
(g) Furthermore, the following is provided in clause 8 of the same contract:
If the author suffers an incapacity or disability, it is then agreed that the author may not, on his authority alone, transmit or assign the rights and obligations hereunder to a third party. Failing a duly established agreement to this effect, the present agreement will be de facto cancelled, TM then having the option to continue the production-realization of the said television series as it wishes, having then to assume no obligation with respect to the author, except as regards residual payments for texts duly completed by him and produced as television programs by TM;
[Translation.]
(h) The income of the appellant as an author under these contracts was computed at $145,835 for the two years in issue, including $15,835 for 1985 and $130,000 for 1986;
(i) Once the expenses directly relating to his income as an author under the said contracts were deducted, the respondent computed the appellant’s business loss at $8,085 for 1985 and his net business income at $77,215 for 1986;
[Translation.]
The Court heard the evidence of the appellant, Mr. Réal Giguére, and Mr. Bernard Montigny, TM's solicitor at the relevant time.
Mr. Giguère's testimony, supported by numerous documents, was essentially to the effect that it was always the corporation, Entreprises R.G., and not himself personally, that had contracted with TM and with other organizations for the purposes of theatrical productions, television series and even advertisements. He contended that the fact that he had personally signed the two contracts at the centre of the present proceeding, the subject of which was the television series ” L'Or du Temps", was ultimately only the result of an error or an informality. In his testimony, Mr. Giguére emphasized the fact that it was the corporation Entreprises R.G. that had conceived and realized the texts for the television series, that it was a collective effort, that it was the corporation that had retained the services of researchers and script-writers and that had paid the fees to those persons since it alone had the human and financial resources to enter into such a project, and, lastly, that it was the corporation that received the payments from TM. Referring to Mr. Giguère's testimony, solicitor for the appellant argued, in fact, that the contracts must not be interpreted literally since they did not reflect the true intention of the parties. This position was also succinctly stated in paragraph 3.9 of the notice of appeal, in these terms:
Owing to unclear wording resulting from carelessness on the part of Télé- Métropole Inc. and Les Entreprises Réal Giguére Inc., this agreement appears to indicate that the production services are rendered not by Les Entreprises Réal Giguère Inc., but by Réal Giguére, which does not reflect the intention of the parties.
[Translation.]
Although rather vague concerning TM's position on copyright ownership and its consequences for the wording of the contracts, Mr. Montigny's testimony was nevertheless sufficiently clear on TM's position with regard to Réal Giguére and on the corporation Entreprises R.G. concerning the"L'Or du Temps" project. While he stated that TM wanted to contract with Entreprises R.G., he said that TM also wanted to protect itself and perhaps even to overprotect itself by contracting with Réal Giguére personally so as to guarantee follow-up in the writing of the texts. TM's concern appears to have been directly related to Mr. Giguére’s status with regard to Entreprises R.G., the evidence showing that he was at the time neither a shareholder nor a director, but simply the chief executive officer. This testimony of Mr. Montigny was very clear to the effect that a collegial decision had been taken to contract directly with Mr. Giguére rather than with Entreprises R.G., even though the people at TM were aware at the time that that could cause him certain problems. This way of proceeding was clearly imposed on Mr. Giguère by TM.
In support of his claim that the contracts should not here be analyzed literally, the appellant referred to Richer v. Mutuelle du Canada (La), Cie d'assurance sur la vie, [1987] R.J.Q. 1703 (C.A.). The main question submitted to the Court in this case concerned the admissibility of testimonial evidence, having regard for article 1234 of the Civil Code of Lower Canada, which provides that such evidence "cannot in any case, be received to contradict or vary the terms of a valid written instrument”. According to the Court of Appeal, however, the case raised “more a question of interpretation of the contracts than a question of application of the rules of evidence" [translation].
Thus, since the task was essentially to interpret a contract, Judge Monet, in delivering the decision for the Court, stated the following, at page 1705:
The fundamental rule of interpretation that is binding on the judge is that stated by article 1013 C.C., itself based on article 1156 of the French Code.
[Translation.] Article 1013 reads as follows:
When the meaning of the parties in a contract is doubtful, their common intention must be determined by interpretation rather than by an adherence to the literal meaning of the words of the contract.
Then, referring to French law, Judge Monet relied, in particular, on the following passage, taken from the work by Planiol et Ripert concerning the latitude granted the judge in such circumstances at page 481, paragraph 373:
However, in non-formalist legislation, the concern to make the real will, and at the same time justice, prevail leads one to reject the literal application of a clause, even clear and precise, which appears to be the result of an obvious error, and is in contradiction with their definite meaning.
[Translation; Emphasis added.]
Following this comment, however, Judge Monet hastened to add Mazeaud's warning concerning the attitude to adopt, and which is expressed in the following terms:
The courts must show wisdom in this regard and not abandon the search for intentions too quickly, but refrain from introducing into the contract a will foreign to the parties on the pretext of interpretation.
[Translation.] That said, it seems to me that the position of counsel for the appellant was not simply to ask the court to interpret a clause of a contract in accordance with what he claimed to be the parties" intention, but to reject in whole the application of two contracts to the appellant himself by substituting for him another party, Entreprises R.G., which in reality intervened in the contracts only for the purposes of payment indications, which appear in clause 3, in Exhibit I-11, in the following terms:
The parties hereto agree that the fees normally passing to the author under this agreement will be payable to the order of the intervener.
[Translation.] We are here in the presence of contracts in which the parties are clearly identified, and in which the rights and obligations of the parties are also expressed in terms which contain no ambiguity, particularly as regards those of the author, Réal Giguére.
What is more, it is clear, according to Mr. Bernard Montigny's testimony, that TM's decision was to sign a contract directly with Mr. Réal Giguére, this being the result of a difficult compromise as well as a desire on TM's part to "protect" itself with respect to the other contracting party. In my view, there is no clause in this matter which "appears to be the result of an obvious error, or is in contradiction with their common definite meaning” (see Plaiol et Ripert, above) [translation]. There is therefore no reason here to reject the literal interpretation of the contracts that are the subject matter of the dispute.
Counsel for the appellant also tried to base his position on Feinstein v. The Queen, [1979] C.T.C. 329, 79 D.T.C. 5236 (F.C.T.D.). In that case, one of the matters in dispute was whether all the income earned by the corporation Bernard Feinstein Inc. had to be included in Mr. Feinstein's personal income. Mr. Feinstein worked as a commission salesman on behalf of various clothing manufacturers. In 1965, he founded the corporation Bernard Feinstein Inc. because some clients and manufacturers preferred to deal with a corporation. According to Walsh J., it was important to note that all the commission income had been paid by the manufacturers to Bernard Feinstein Inc. and deposited in that corporation's account. The issue arose in particular because of an agent's contract with a manufacturer named Primrose Garment Company Ltd.. However, that agreement was contained in a letter which Mr. Feinstein had personally countersigned. The court found, however, that Mr. Feinstein was acting on behalf of the corporation when he signed that letter, as well as a second letter extending the agreement, letters which had been neither prepared nor approved by the lawyers of either party. Considering that there clearly had been confusion due to carelessness, Walsh J. found that that was not sufficient to allocate to Mr. Feinstein personally the income arising from those contracts and from all the other verbal agreements which had been reached between Mr. Feinstein and various manufacturers. Walsh, J. expressed himself in the following terms, at page 334 (D.T.C. 5241):
While it is true, as defendants counsel contended, that a person cannot by assigning revenue to which he is entitled to another person or company avoid taxation on it, I believe that to look at the true situation realistically it must be concluded that Mr. Feinstein was acting on behalf of the company when he made the agreement with Primrose Garment Co. although he was careless in not signing it Bernard Feinstein Inc. per Bernard Feinstein, president, and if Primrose required it adding his personal guarantee. The fact that Primrose chose to overlook the separate corporate existence of Bernard Feinstein Inc. in the manner in which the letter is drawn is not in my view sufficient to conclude that all of the company’s income, not only from this contract but from all other contracts entered into verbally with other manufacturers should be considered as income of Mr. Feinstein personally.
It cannot be said that the circumstances of the present case are similar to those of Feinstein, supra. First, it should be noted that the contracts were prepared not only by TM's solicitor, but also in full knowledge of the possible negative implications for the other party. Furthermore, no confusion was possible regarding the parties to the contracts, who were, as I have said, not only clearly identified from the outset, but whose signatures or those of their representatives cannot give rise to confusion. Thus, Réal Giguère signed not only as a contracting party as the author, but also a second time as representative of the corporation Entreprises R.G., designated as intervener in the contract.
Lastly, the income arising from the contracts in this case was paid by TM not to the author Réal Giguére, but to the intervener Entreprises R.G. That was not the result of chance or carelessness, but pursuant to the contracts and, more particularly, to clause 3 cited above.
Furthermore, an analysis of the case law to which solicitor for the respondent referred convinces me that the tax consequences of a transaction must be determined on the basis of what the parties have done, not on the basis of what they could or should have done. In Daly v. M.N.R., [1981] C.T.C. 132, 81 D.T.C. 5197 (F.C.A.), Mr. Daly had to include in his income payments received by a corporation for services which he had rendered to a radio station as long as there was a valid and binding contract between him and the radio station, despite the fact that the newly formed corporation was to replace him as contracting party for the purpose of rendering such services.
However, in Sazio v. M.N.R., [1969] 1 Ex. C.R. 373, [1968] C.T.C. 579, 69 D.T.C. 5001 (Ex. Ct.), the payments received for coaching services were included in the income of a corporation formed by Mr. Sazio because he had resigned his position and negotiated a new agreement under which the corporation was to provide the services. Furthermore, Mr. Sazio himself had signed an agreement with the newly formed corporation whereby he became its general manager.
Counsel for the respondent also referred to Cameron v. M.N.R., [1974] S.C.R. 1062, [1972] C.T.C. 380, 72 D.T.C. 6325. Mr. Cameron and two other employees of “Campbell Ltd.” had formed a corporation of which they were the three shareholders. The purpose of that corporation was to provide Campbell Ltd. with the services previously rendered by the appellant and the two other employees. The appellant and the two other employees thus became employees of the new corporation, and the latter signed an agreement with Campbell Ltd. The appellant and his colleagues resigned their positions as employees of Campbell Ltd. The Supreme Court of Canada found that the payments made to the new corporation had been correctly included in the corporation's income rather than in the appellant's personal income. On this point, Martland, J., writing the decision for the Court, stated at page 1069 (C.T.C. 384, D.T.C. 6329):
In the light of this finding, I am not prepared to find that the agreement between Campbell Ltd. and Independent was a sham. The legal rights and obligations which it created were exactly those which the parties intended. The incorporation of Independent, the making of the agreement, the resignations of the respondent, Steele and Symon were all a part of an arrangement worked out between J.K. Campbell, who controlled Campbell Ltd., and the three senior employees of that company. Mr. Campbell, who desired to deal with a company, and not with the three individuals, gave them the opportunity to provide management for his company, through a company, incorporated for that purpose, for a fee based, in part, on the net profits of Campbell Ltd. This was done, and, as the learned trial judge says, “If a saving in income tax resulted to anyone that was incidental to the overall plan.”
More recently, in the The Queen v. Friedberg, [1992] 1 C.T.C. 1, 92 D.T.C. 6031 (F.C.A.), Linden, J. ruled on the consequences that must normally arise from a transaction, even though one may infer that the intention could have been to proceed differently. He expressed himself in these terms, at pages 2-3 (D.T.C. 6032):
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil, [1991] 1 C.T.C. 350, 91 D.T.C. 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.
[Emphasis added.] In conclusion, I will take the liberty of referring to an excerpt from the judgment of Dickson, C.J. of the Supreme Court of Canada, as he then was, in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, reiterating the same principle in the following terms, at pages 54 and 55 (C.T.C. 129, D.T.C. 5067-68):
It was submitted — and the Crown generously conceded — that the Trust would have obtained an interest deduction if it had sold assets to make the capital allocation and borrowed to replace them. Accordingly, it is argued, the Trust ought not to be precluded from an interest deduction merely because it achieved the same effect without the formalities of a sale and repurchase of assets. /t would be a sufficient answer to this submission to point to the principle that the courts must deal with what the taxpayer actually did, and not what he might have done: Matheson v. The Queen, [1974] C.T.C. 186, 74 D.T.C. 6176 (F.C.T.D.), per Mahoney, J., at page 189 (D.T.C. 6179).
[Emphasis added.]
In the instant case, the contracts themselves and the testimony of Mr. Bernard Montigny concord: the appellant himself and not the Entreprises R.G. was to be and was the contracting party with TM. Consequently, the Minister correctly considered the income arising from the two contracts as that of Mr. Réal Giguére.
The appeals are dismissed.
Appeals dismissed.
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