William G Mountjoy v. Minister of National Revenue, [1979] CTC 2232

M J Bonner:—The appellant was, at all relevant times, an employee of Edgar T Alberts Limited, which I will call “the Company” hereafter in these reasons.

In April of 1972 the appellant sold three hundred shares of the Company for $90,000 and repurchased them for $30,000. The issue is whether the $60,000 gain realized by the appellant on that occasion is, as contended by the respondent, income from office or employment or, as contended by the appellant, a gain on capital account.

It was the appellant’s position that the sale of his shares took place in fulfillment of a prior agreement between himself and Edgar T Alberts, the majority shareholder of the Company.

The agreement alleged by the appellant was that if Edgar T Alberts should sell his control block of shares he would, regardless of the price obtained, purchase the appellant’s block of three hundred shares for $300 a share.

A sale by Edgar T Alberts in 1972 of the control block triggered the disposition of the appellant’s three hundred shares at the agreed price—this being the appellant’s position. That disposition and the gain realized thereon was contended therefor to be on capital account.

I might observe at this point that virtually the only evidence of this agreement lay in the appellant’s statement that Mr Alberts had given him the undertaking alleged. The agreement was not reduced to writing.

There was no evidence that I can recall that the agreement was supported by any consideration. There was no evidence that the appellant had agreed that if the future event referred to did arise he would sell his shares to Mr Alberts.

The evidence as a whole of the course of conduct of Mr Alberts leads to the inference that if such agreement did exist Mr Alberts had no intention of honouring it, and that he ultimately purchased (if that is an accurate description of the transaction) the appellant’s minority block of shares in circumstances in which the quid pro quo provided by the appellant was the making by the appellant of a promise that he would continue in his employment by the Company.

Before 1952 the appellant and Mr Alberts were employees of the Insurance Company of North America. The appellant had been a protege of Mr Alberts. Mr Alberts left Insurance Company of North America to form his own firm and he caused the Company to be incorporated.

Mr Alberts asked the appellant to join him as a partner. However, because of the manner in which the Company was financed through the sale of preferred shares, which I gather carried with them the common shares, Mr Alberts found himself without any common shares and unable to make the appellant a shareholder. The appellant joined the Company as an employee.

Over the years the appellant and other key employees of the Company pressed Mr Alberts for shares. Mr Alberts was himself engaged in purchasing common shares and for a long period did not himself have control.

The appellant acquired one hundred common shares in 1953 or 1954, one hundred more in 1955, and a further one hundred in 1956 or 1957. After that time the appellant acquired no more shares despite constant entreaties made by him of Mr Alberts.

About 1966 or 1967 Mr Alberts was almost completely retired from active operation of the Company and the appellant became Managing Director.

In the fall of 1969 E A Whitehead Limited, a company in the insurance business, sought to either buy out the Company or arrange a merger. Initial negotiations took place between the Whitehead representative and the appellant.

Whitehead offered to purchase all of the ninety-seven hundred issued common shares for $100 a share. Whitehead was interested in purchasing on the basis that the key personnel remain following the change of control.

The appellant again approached Mr Alberts regarding what he called proper recognition of his position. Mr Alberts eventually suggested that a meeting of three of the key men—the appellant, Mr Saunders and Mr Foley—be arranged.

At that meeting the three discussed what they considered to be the participation of the key employees in the Company and what it would amount to at a price of $100 per share, being the price offered by the Whitehead proposal, and also the cost of funding a pension for each of them. They determined that they should control twenty-five percent of the Company based on commission income from key insurance accounts and based as well on who had introduced these accounts to the Company.

The appellant concluded that his fair share was 10% of the Company on the basis that he controlled 40% of the total premium income of the Company and had himself introduced 10% of the total premium income of the Company.

The appellant discussed this conclusion with Mr Alberts who was horrified and responded that the appellant—and I gather the others as well—would get only $100 per share for each of the shares held.

The appellant’s reply at this stage is instructive. It was: “If that’s your final word I have wasted eighteen years in trying to build an equity and I had better leave”.

Further discussion took place between the appellant and Mr Alberts. The appellant’s claim to 10% would have required the transfer to the appellant of a further six hundred shares, thus producing for the appellant a total of nine hundred shares which, at the rate per share offered by Whitehead, would be worth $90,000. Mr Alberts refused to transfer because he would be left with less than voting control of the Company.

To resolve matters the appellant alleged that Mr Alberts finally agreed that he would purchase the appellant’s three hundred shares at $300 a share in the event that Alberts later sold his control block of shares.

The appellant stated that his contention at the time was that the number of shares that he held did not truly represent his interest in the business. Mr Alberts would not sell six hundred shares because of the control situation and Alberts therefore agreed to purchase the appellant’s shares at an inflated price. I think the appellant’s own words “inflated price” are of some significance.

The Whitehead proposal fell through. Some notes, Exhibit A-3, made by Mr Alberts with respect to the Whitehead proposal support the appellant’s evidence to the extent that they indicate that Mr Alberts was negotiating sale of the shares of the Company with a view to obtaining $300 per share for the appellant’s shares, but they also indicate that Whitehead, not Alberts, was to be the purchaser.

Further notes, Exhibit A-4, made by Mr Alberts with respect to the distribution of consideration on another subsequent abortive attempt to sell likewise indicate a rate of approximately $300 per share for the appellant’s holdings, but again, according to those notes, that purchaser was to be the buyer of those shares and not Mr Alberts.

In December of 1971 a series of events commenced, culminating in the formation of an agreement, Exhibit R-2, between Mr Alberts and Carl F Burke for the sale by Alberts and purchase by Burke of Alberts’ block of shares.

There are two significant provisions in that agreement. I won’t read them. I think both counsel are familiar with them. They are paragraphs 2(d) and 4(1).

The evidence was that although the appellant was aware that negotiations were under way for a sale by Alberts, the latter did not inform the appellant of any details of the arrangement. The appellant did not press, so far as I can tell, or even enquire whether Alberts proposed to honour his alleged commitment to buy the appellant’s shares.

The relative bargaining positions of the appellant and Mr Alberts at this point should be considered.

As noted above, Alberts was virtually out of the business so far as active day-to-day participation was concerned. The appellant, on the other hand, controlled 40% of the premium income in a business where personal contact with customers is all important. The continued connection of the appellant with the business was therefore of very great importance, not only to a potential purchaser such as Burke who had no experience in the insurance business, but also to potential purchasers already in the business, such as Whitehead.

In this regard reference should be made to Exhibit A-2 and to the evidence of the appellant and to the evidence of Mr McAuley, who acted as Burke’s solicitor on the purchase.

Mr Flood, who was Mr Burke’s associate, testified that if Condition 4(1) was not satisfied there would have been no deal. The appellant admitted that without his continued presence the shares which Alberts agreed to sell to Burke would not have been worth the price offered by Burke under the agreement.

Accordingly, I infer that if the agreement alleged between the appellant and Alberts regarding the purchase of the appellant’s shares did exist it was subject to a proviso that the appellant agreed to remain with the Company following the sale of the control block of shares owned by Alberts.

The closing of the agreement was scheduled for January 28, 1972. The appellant attended the closing meeting. He refused, as Director, to approve the transfer of the shares. He asserted to the meeting that he had a prior arrangement with respect to the purchase by Alberts of his shares and that Alberts was not to leave him locked into the Company as a minority shareholder.

His evidence was that he and Alberts then met separately and that subsequently Alberts returned to the meeting and announced that he, Alberts, had agreed to fulfill his obligation to buy the appellant’s shares.

Mr Burke then asked the appellant what his intentions were with respect to his position in the Company and the appellant stated that he would stay if Burke wanted and could work out a satisfactory agreement.

Burke regarded the fulfillment of Clause 4(1) as Alberts’ problem. He was satisfied to continue with the closing of the share purchase once he was given the appellant’s assurance that he would remain, and Burke was not concerned with the question how that assurance was obtained.

However, following closing Alberts dragged his feet on fulfilling the bargain that he reached with the appellant. This is evident from the viva voce evidence and from Exhibits A-6 and A-7, letters sent by the appellant to Alberts pressing him to perform.

Alberts’ position, as shown by Exhibit A-8, was that his obligation was to pay the appellant $60,000. Exhibit A-10, it should be observed, contains a recital as follows:

AND WHEREAS on January 28, 1972, Alberts agreed to purchase the said 300 shares from Mountjoy at a price to be agreed upon;

I regard it as significant that, although the appellant asserted that in effect his discussions with Mr Alberts were confined to the share-sale agreement and his discussions as to continued employment were confined to Mr Burke, the appellant later had discussions with Mr Flood regarding Mr Alberts’ failure to honour the commitment he made to the appellant.

As a result of the conversations between the appellant and Mr Flood, Mr Burke summoned Alberts to a meeting in Florida and emphasized that the latter should meet his obligations to the appellant. It was Flood’s understanding that the meeting by Alberts of his obligations involved payment to the appellant of $60,000.

What happened was a sale by the appellant to Alberts of his three hundred shares in the Company for $90,000, a sale by Alberts of the three hundred shares to Mr Flood, and a sale of three hundred shares by Flood to the appellant for $30,000, all of which took place on one day.

Mr Flood wrote a letter to Alberts dated April 3, 1972, Exhibit R-3, stating that the appellant had agreed to remain with the Company. Mr Alberts had refused to pay the $60,000 without that letter.

The round robin of cheques and shares which I referred to above took place. The result was that the appellant afterward continued to hold three hundred shares of the Company and held as well the $60,000 in issue.

On all of the evidence it is impossible in my mind to regard the $60,000 as a capital gain on the sale of the shares. The character of the $60,000 must be determined from the point of view of the recipient. In that regard I refer to the decision to Mr Justice Collier in Pepsi-Cola Canada Limited v Her Majesty the Queen, [1978] CTC 801; 78 DTC 6546.

The appellant, who was the recipient, said that he regarded the $60,000 as part of the consideration for the sale of the shares and as a recognition of what he called his equity interest in Mr Alberts’ shares. The appellant’s viewpoint should, I believe, be objectively determined on all of the evidence and not solely on a patently incomplete description given by the appellant. I regard the $60,000 as having been received as consideration for the promise of the appellant to remain in the employment of the Company after the sale to Burke of Mr Alberts’ control block of shares.

I have examined the question whether, if that conclusion as to what the $60,000 was received for was wrong, the result would be any different.

I assume, without deciding, that Mr Alberts in 1970 had agreed to buy the appellant’s shares for $90,000. That figure was on the appellant’s own admission (and I have referred to the evidence above) an inflated price. That inflation was, as things turned out, clearly not less than $60,000, the amount included in income.

That $60,000 represented, as I see it, the value of the appellant’s services to the Company, being the basis on which the appellant’s claim against Mr Alberts was pressed at the time of the Whitehead dealings. It might, and I think probably did, assuming still that there was such an agreement, represent in addition consideration for a promise to remain in the employment of the Company following a sale of control.

Whether the $60,000 was consideration for one or the other or both, it was a payment in respect of the appellant’s services to the Company received by the appellant in 1972 and therefore properly included in computing his income for the year.

The appeal will therefore be dismissed.

Appeal dismissed.