Pepsi-Cola Canada Limited v. Her Majesty the Queen, [1978] CTC 801, 78 DTC 6546

Collier, J:—In the plaintiff’s taxation year for 1970 tit (‘‘Pepsi’’) was paid an amount of $100,000. The money was paid by Schweppes Powell Limited, formerly Schweppes (Canada) Limited (“Schweppes Canada”). Pepsi did not, in its income tax return for 1970, include, as taxable income, the $100,000. The Minister of National: Revenue, in his assessment and reassessment, did. Hence this appeal.

As always, the facts are key.

Pepsi’s parent company is in the United States. Pepsi has carried on business in Canada since 1934. It is a manufacturer and bottler of soft drink products. It has plants in several cities of Canada. In Montreal, during the relevant years, the plant there manufactured concentrates, sold or turned them into beverages, bottled the beverages and marketed them. There were approximately 400 employees.

In April 1954 the plaintiff was given an appointment by Schweppes (Overseas) Limited, an English company. Pepsi was granted the ex- elusive right to manufacture concentrates of certain Schweppes products in Canada, using essences supplied by Schweppes Canada. Pepsi was also given the exclusive right to bottle, sell and distribute Schweppes products in Canada. It was permitted to appoint subbottlers, after having first obtained the approval of the English company.

The agreement setting all this out (Exhibit 1) is not clear as to the consideration moving from Pepsi. But it seems obvious Pepsi paid Schweppes for the essences supplied.

Pepsi also agreed to promote the sale of Schweppes products in Canada. It was permitted to use the Schweppes trade marks to do so.

The English company had the right to cancel the agreement for specified causes. Pepsi, on the other hand, could terminate the appointment on two years notice.

A new appointment, or agreement, was entered into on August 5, 1959. It contained substantially the same provisions as the prior appointment. Again the English company had the right to cancel for specified causes. Pepsi again could terminate. on two years notice.

On March 1, 1962 Pepsi assigned its rights under the 1959 agreement to Schweppes Canada. That document also provided for the assignment, as well, of all sub-bottler appointments to Schweppes Canada.

From 1962 to 1969 inclusive, Schweppes Canada appointed Pepsi, pursuant to the 1959 agreement, merely as a sub-bottler. The agreements were for one year terms. Pepsi was given the right, within certain territories in Canada, to make Schweppes products, and to bottle, sell and distribute Schweppes beverages. The major differences between these appointments and the one going back to 1954 were these: Pepsi no longer had the right to manufacture concentrates; it merely made the beverages from syrups and bottled them; the appointments were for one year only.

The montreal area, from 1962 to 1969 inclusive, was covered by these yearly sub-bottler appointments. Exhibits 7, 8, and 9 are examples of the agreements. When Pepsi first marketed Schweppes products in 1954 the sales were. approximately 100 cases per year. By the end of 1969 they had increased to 400,000 cases. The Montreal area accounted for approximately 60% of Schweppes sales in Canada.

In 1968 Schweppes Canada decided to set up its own manufacturing and bottling plant in Montreal. That project would take some time. The sub-bottling appointment was, on August 1, 1969, extended for a further year to August 1, 1970. There was added, however, by agreement, a provision giving Schweppes Canada the right to terminate on 30 days notice. Both parties expected the Schweppes plant would be ready for operation during the life of this last one year appointment. That was the reason for inserting the 30. day cancellation notice.

Schweppes Canada, in 1968, made known to Pepsi its intention to set up its own plant. Negotiations then took place between Pepsi and Schweppes Canada. Those negotiations lead to the payment of the $100,000 earlier referred to. The negotiations were carried on between Mr W E Emerson, President of Pepsi, and Mr D C Fleming-Williams, President of Schweppes Canada.

An agreement for payment of that amount was reached, in November 1968, between those two gentlemen.

In the pleadings in this action, it was agreed by the parties the payment was for the termination of the bottling appointment. The plaintiff says the parties agreed the payment was for “good will”. The defendant disputes that allegation.

The plaintiff argues its contention is supported by the evidence. The volume of sales and number of customers, it is said, had increased substantially over the period of 14 years; Pepsi, on termination, gave Schweppes Canada extracts from their route books, disclosing the names of Schweppes customers whom Pepsi had cultivated and developed; Schweppes Canada received the benefit of that goodwill.

The plaintiff, in respect of its assertion of payment for “goodwill” relies, as well, on two letters.

The first one is dated November 29, 1968. It was written Mr Emerson, as President of Pepsi, to Mr Fleming-Williams as President of Schweppes Canada. I set out the contents in full:

Dear Bill:

Re: Goodwill—$100,000

I was rather taken aback by your telephone call yesterday. My letter of November 14 clearly stated our agreement as proposed by yourself over the telephone and your desire to change it surprised me.

As you will recall, I handed you the letter at luncheon at the Mount Stephen Club, you read it and put it in your pocket. Fourteen days later, you telephone me and change the agreement. You can surely understand my surprise.

At any rate, I am sympathetic to your anticipated cash flow difficulties in 1970 and we will co-operate. We are prepared to accept the $100,000 from Schweppes (Canada) Limited in two installments of $50,000 each. The first to be payable January 2, 1970 and the second on December 24, 1970 to ensure the concluding payment occurring during our fiscal year.

PepsiCo International has a valued relationship with the Schweppes organization around the world, so of course, do we in Canada. Therefore, I shall only draw your attention to the fact that by deferring the second payment six months, my Company loses $1500 in interest were we able to invest these funds in short term guaranteed securities.

Perhaps you will be good enough to send me a letter confirming the arrangements as outlined above.

Yours very truly,

WEE; jt

bc Messrs J W E Brown

D W Butcher

E Burns

P K Warren

A copy of the letter of November 14, 1968 cannot be found. There was no testimony as to the agreement earlier proposed by Mr Fleming- Williams over the telephone, or its details.

Mr Fleming-Williams’ reply is dated December 6, 1968. Again, I set out the contents in full:

Dear Bill,

re: Goodwill—$100,000.

This will confirm our agreement to the method of payment of the $100,000. by Schweppes (Canada) Limited to Pepsi-Cola Canada Ltd as set out in your letter of November 29.

I appreciate your agreeing to this arrangement.

Just for the record, I think I should restate that it was always my suggestion that the two payments should be separated by twelve months and therefore, I did not feel that your letter of November 14 correctly stated my previous telephone proposal. I pointed this out to you when I telephoned you subsequently.

I am sorry that there should have been a misunderstanding between us.

I conclude the change in the original telephone agreement, if there was a change as asserted by Mr Emerson, was only in respect of the time and method of payment.

Neither letter sets out the basis for the payment. The plaintiff relies on the heading in each case: “‘Re Goodwill—$100,000.’’ That heading, in my view, is inconclusive as to what the money was actually being paid for.

The only person who gave evidence at this trial was Mr D W Butcher. At the time of these negotiations he was Assistant Comptroller at Pepsi. He had no part in the agreement reached between Mr Emerson and Mr Fleming-Williams. His testimony only goes this far: He, and other senior persons in Pepsi, viewed the negotiations and payment as relating only to good will. Their understanding came, apparently, from Mr Emerson.

But Mr Butcher became personally involved in March 1970. At that time he was Chief Financial Officer. The first installment of $50,000 was payable on January 2, 1970. It was late. At that time no agreement had been reached on the price to be paid by Schweppes Canada for the Schweppes bottles owned by Pepsi. The bottling appointment had been terminated by Schweppes Canada, pursuant to the 30 day provision, effective March or April. Mr Butcher wrote a letter on March 19, 1970. It was directed to a Mr Powell, who was then the president of the company formerly known as Schweppes Canada. I set out the letter:

March 19, 1970

Mr C B Powell,

President

Cadbury Schweppes Powell Limited

1245 Sherbrooke Street West

MONTREAL, PQ

Dear Mr Powell:

As you are undoubtedly aware, arrangements were confirmed in December 1968 for the payment to us of $100,000 goodwill on our relinquishing the Montreal Schweppes Franchise. It was then agreed that this $100,000 would be payable in 2 instalments of $50,000 each, the first to be payable January 2, 1970 and the second on December 24, 1970.

•As arrangements are now being made for you to take over the distribution and manufacture of Schweppes products in the Montreal territory, the first instalment on account of goodwill of $50,000 is now due and payable. I would appreciate the cheque being sent to my attention.

I understand that your Mr Scott and our Mr Swindells are currently discussing the price at which you will purchase all Schweppes bottles presently owned by us. I am. sure they will shortly arrive at a mutually acceptable figure.

l look forward to meeting you personally in the very near future, and I hope that one day soon I may have the pleasure of visiting your new bottling facilities, of which I am sure you all must be very proud.

Sincerely,

DWB:oc

cc: Mr W E Emerson

In the latter part of March, Mr Butcher and Mr Powell agreed on a sum of $135,000 in respect of the bottles. They also agreed the other sum of $100,000 would be paid in one lump sum, rather than in two instalments. On April 1, 1970 Mr Butcher wrote Mr Powell confirming the arrangements:

April 1, 1970.

Mr C B Powell

President

Cadbury Schweppes Powell Limited

1245 Sherbrooke Street West

MONTREAL 109, PQ

Dear Mr Powell:

I thought it best to drop you a note confirming our agreement of this morning.

Goodwill re Montreal territory	$ 100,000
Payment for Returnable Glass in our Montreal Bottling Plant
and in the Montreal territory	$ 135,000

As part of our agreement, the payment for goodwill was to be made immediately rather than a portion deferred until December 1970 and you indicated your cheque in the full amount of $235,000 would be available in the next few days. Due to the poor mail situation, I would appreciate your informing me when the cheque is ready and we will pick it up by messenger.

I certainly enjoyed meeting with you this morning and will look forward to seeing you again in the near future.

Sincerely,

DWB: oc

cc: Messrs W E Emerson

G Burns

C A Misener

R F Swindells

Mr Butcher was, on April 8, 1970, advised the cheque was ready. He went to Mr Powell’s office to pick it up. He was given a document, headed “Receipt and Satisfaction” to sign (Exhibit 17). It had never been discussed beforehand with him. It was prepared by Schweppes Canada. It is as follows: . I

RECEIPT AND SATISFACTION

To: Schweppes Powell Limited,

1245 Sherbrooke Street West,

Montreal 109, Quebec.

This will acknowledge receipt of the sum of $100,000. as full payment and satisfaction for all costs, expenses, and loss of income incurred or to be incurred by us as a result of the termination of our Sub-Bottler Agreement with respect to the Montreal territory entered into with you.

Montreal, this 8th day of April 1970.

PEPSI-COLA CANADA LIMITED

BY

Vice President

secretary

Mr Butcher testified he, before signing Exhibit 17, to some extent, demurred. He told Mr Powell the payment was for goodwill. The latter said the matters referred to in the document were the same type of thing. There was no real discussion over the words ‘“. . costs, expenses and loss of income . . Mr Butcher nevertheless signed the document. He said, at trial, it was apparent to him that if he did not sign “we would not get our money;” the negotiations had taken place over a long time; the payment was overdue; he signed.

There is one further fact. In its financial statements for the fiscal year ending December 26, 1970, Pepsi recorded the $100,000 in its statement of income and retained earnings as follows:

Extraordinary items:

Sale of bottling franchise 100,000

It did not classify it as taxable income.

I agree with the plaintiff’s submission that one of the essential questions in this case is the character of this receipt. That character must be determined from the point of view of the recipient, not from the point of view of the payer. But the payer’s view, as to the basis for the payment, is, nevertheless, relevant. His motivations may not be. Authority for those propositions can be found in Chibbett (H M Inspector of Taxes) v Robinson and Sons (1924), 9 TC 48 at 60 where Rowlatt J said:

This case, like all cases of a similar nature, is very troublesome; because all these. cases ‘turn upon nice questions of fact, and at least I find very great difficulty in apprehending any permanent and clear line of division between the cases which are within and the cases which are without the scope of the Income Tax Acts. I think everybody is agreed, and has been agreed for a long time, that in cases of this kind the circumstance that the payment in question is a voluntary one does not‘matter. As Sir Richard Henn Collins said, you must not look at the point of view of the person who pays and see whether he is compellable to pay or not; you have to look at the point of view of the person who receives, to see whether he receives it in respect of his services, if it is a question of an office, and in respect of his trade, if it is a question of trade, and so on. You have to look at his point of view to see whether he receives it in respect of those considerations. That is perfectly true. But when you look at that question from what is described as the point of view of the recipient, that sends you back again, looking, for that purpose, to the point of view of the payer: not from the point of view of compellability or liability, but from the point of view of a person inquiring what is this payment for; and you have to see whether the maker of the payment makes it for the services and the receiver receives it for the services.

The plaintiff contends the words in Exhibit 17 should be disregarded; they do not represent the true nature of the transaction, which was a payment for goodwill only.

I cannot accept that submission.

There must be, in my view, reasonable evidence from which the court can conclude, in this case, the payment was otherwise than on account of income, as designated in Exhibit 17. The evidence before me is slim and, indeed, incomplete.

As earlier recounted, the basis for the agreement to pay was arrived at between Mr Emerson and Mr Fleming-Williams. On the documentary evidence before the court it would appear there was no legal liability on Schweppes Canada to make any payment at all. But I do not know what other agreements or considerations passed between the two presidents.

Mr Emerson could have enlightened me on that aspect. He could, presumably, have testified and explained why the payment was for goodwill and why the parties so agreed. And all that regardless of the signed document Exhibit 17. Mr Emerson was not called to give evidence. The plaintiff gave no explanation. Mr Butcher said Mr Emer- son, at some point, was “promoted” and went to the United States. I was not told he was no longer with the plaintiff or its parent or other subsidiaries, or was not under their control. Nor was I told he refused or was unable to attend at this trial.

I do not need to go so far as to draw an unfavorable inference from the failure of the plaintiff to call Mr Emerson in support of its submission as to the basis for the payment*. [1] But I am unable to accept, as sufficient or persuasive, the evidence on which the plaintiff relies.

As was pointed out by Spence J., speaking for the Supreme Court of Canada, in H A Roberts Ltd v MNR, [1969] SCR 719; [1969] CTC 369; 69 DTC 5249, cases of this kind are largely dependent on their own particular facts. Here, the few facts before me are, to my mind, against the taxpayer’s contention. Mr Butcher’s evidence and the letters of November 29 and December 6, 1968, are insufficient to warrant the conclusion or inference that the $100,000 was for goodwill, or, at least, not on account of income.

The plaintiff’s further contention the payment was an ex gratia one, and therefore not taxable, is not, on the pleadings, open to it.

The action is dismissed.

The defendant is entitled to costs.