A W Prociuk (orally):—The appellant, presently of Cranbrook, British Columbia and formerly of Regina, Saskatchewan, appeals from the respondent’s assessment dated December 6, 1971, for the taxation years 1968, 1969 and 1970 and, more specifically, because the respondent added to the appellant’s income the following sums: $20,000 in the year 1968, $29,500 in the year 1969, and $15,000 in the year 1970, and taxed accordingly.
The appellant was also assessed a penalty under subsection 56(2) in respect of the said sums as well as a penalty under section 19 of the British Columbia Income Tax Act, SBC 1960, c 27, in so far as same related to the provincial tax payable on the increased assessments for the year in question.
Briefly, the facts as I find them are as follows: The appellant entered into a contract dated July 1, 1967 with Motor Dealers Acceptance Company Ltd, of Regina, Saskatchewan (hereinafter referred to as “MD”), whereby he accepted the position of general manager for a period of 10 years at an annual salary of $11,400, plus other benefits as are more specifically set forth in the said agreement filed as Exhibit A-1. This agreement reads as follows:
1. The company hereby appoints the manager to be and the manager hereby accepts the office of General Manager of the company, upon the terms and conditions following.
2. The appointment, subject to the terms hereinafter contained, shall be for a term of ten (10) years from the 1st day of July, A.D. 1967.
3. The manager shall be paid an annual salary of Eleven Thousand, Four Hundred Dollars ($11,400.00) payable in equal monthly instalments on the last day of each calendar month, the first of such. instalments to be payable on the 1st day of July, A.D. 1967.
4. The manager shall be paid at the end of each fiscal year a bonus equal to Two Per Cent (2%) before taxes of the net. profits of the company as certified by the auditors of the company. Net profits shall mean the gross earnings of the company less all items normally deductible in computing net profits, including, without restricting the generality of the foregoing:
a) Administrative expenses;
b) Operating expenses;
c) All taxes and rates other than income tax;
d) Interest on loans, including loans from shareholders of the company;
e) Insurance;
f) Repairs, maintenance and renewals of assets of the company;
g) Reserves for bad and doubtful debts;
h) Any other proper reserves;
l) Legal and accounting expenses;
j) All outgoings payable with respect to the business;
k) All wages and salaries, including the annual salary of the Manager, provided for in paragraph 3 of this agreement;
l) Office expenses.
The following shall not be deducted in computing net profits:
(i) The additional bonus payable to the manager under this paragraph;
(ii) Depreciation;
(iii) Capital cost allowance;
(iv) Reserves for obsolescence or replacement of capital assets;
(v) Reserves for the purchase of new capital assets.
The auditors of the company, within sixty (60) days of the completion of the fiscal year of the company or within sixty (60) days of the date of termination of the engagement of the manager other than at the expiration of this contract, shall certify the amount of the net profits and the amount, if any, payable to the manager as aforesaid, or that no amount is payable. The amount, if any, shown to be payable shall be paid within thirty-five (35) days of the making of such certificate. The determination of the auditors of the company of the amount of said profits and their decision in respect to all matters necessary to enable them to certify and fix such remuneration, shall be conclusive and binding on the parties, except for manifest error discovered within thirty (30) days after the making thereof. The making of such certificate shall be a condition precedent to the right of the manager to such additional remuneration. For the purpose of this paragraph the auditors of the company shall mean a firm of independent chartered accountants practising their profession in the City of Regina, in the Province of Saskatchewan. If the company shall fail to employ auditors within the meaning of this definition then the manager may employ, at the expense of the company, any firm of independent chartered accountants practising their profession in Regina to audit and certify the amount of the profits and the amount to which he is entitled.
5. The manager shall obey the express directions and order given to him from time to time by the company in writing but subject thereto shall have full power and authority at his discretion to engage and dismiss servants and to pay them such remuneration, either by salary, wages, commission or otherwise as he shall see fit.
6. It shall be the duty of the manager during the said term:
a) To attend personally during the usual hours of business and to supervise and control the business in such a manner as may be necessary and to be accessible to customers, clerks, assistants and servants of the business.
b) To keep the usual books of account and to have the same punctually posted up so as to be a complete record of all moneys received and paid on behalf of the said company.
c) To duly account for all moneys received by him in the course of the conduct of the said business and to pay over the same to the company, its agent or banker, at such time and in such manner as the company shall direct, retaining only in hand such sums as he may be authorized by the company to retain for the immediate use of the business.
d) Not to do, permit, or suffer any act or thing whereby the said company or any of the assets thereof or any property belonging to the company may become liable to be seized in execution, charged or affected or whereby the interest of the company herein may be prejudicially affected.
e) Not to hold himself out or allow himself to be held out as a partner with the company in the business.
f) Not to make any alterations in the said premises without the previous consent in writing of the company.
7. The manager shall well and faithfully serve the company and use his best efforts to promote the interests thereof, and shall not disclose the private affairs of the company or any secrets of the company to any person other than the directors of the company or for the company’s purposes, except with the consent or on the directions of the board of directors or as otherwise required by law.
8. The manager shall be reimbursed for all travelling and other expenses actually and properly incurred by him in connection with his duties hereunder.
9. If at any time during his employment by the company the manager shall be guilty of any misconduct or shall fail to keep such accounts as the directors shall from time to time reasonably require, or shall disobey or neglect any lawful and reasonable order or direction of the directors, or shall be incompetent, then in any such case the directors of the company may determine the manager’s employment forthwith without any notice or payment in lieu of notice. Upon such termination the manager shall be paid a proportionate amount of his annual salary to the date of termination after deducting prior payments made thereon, and a proportionate amount of the bonus payable to him in accordance with the provisions of paragraph 4 hereof.
10. If the manager shall at any time be prevented by illness or accident from performing his duties as manager he shall, if required, furnish the directors of the company with evidence satisfactory to them of such incapacity and the cause thereof and if such incapacity will not in the aggregate exceed three (3) months the manager shall be entitled to be paid in full compensation herein provided for, but the company shall be entitled to hire someone else. to do the manager’s work, the cost of such person to be deducted from the moneys otherwise payable to the manager. If the manager shall be incapacitated for a longer period than three (3) months, or if he shall be incapacitated at different times aggregating more than three (3) months, then in either such case the employment of the manager shall at the option of the directors of the company forthwith determine and the manager shall be paid in the same manner as provided for in paragraph 9 hereof, less any expenses incurred by the company in hiring any other person to do the work of the manager. In case the manager shall die during the currency of this agreement and the employment of the manager has not been terminated, the manager shall be paid in the same manner as if the contract had terminated for illness, at the date of death.
11. If after the termination of this agreement by the effluxion of time the manager shall continue to be employed by the company the provisions of this agreement shall mutatis mutandis apply except that, subject to the right of the. company to terminate for cause as hereinbefore provided, either party may terminate this agreement on six (6) months’ notice, in which event the manager shall be paid his proportionate amount of the annual salary to the date of termination less payments made thereon, and in addition the proportionate amount of the bonus in accordance with the provisions of paragraph 4 hereof.
By letter dated April 1, 1968 the company increased the appellant’s salary to $12,600 per annum. This company, late in 1967 or early 1968, began to consider the possibility of converting from finance to investment business, and it appears that the appellant was aware of these considerations. Apprehensive of his continuing position as a general manager in the event of actual conversion, the appellant consulted his solicitor, Joseph Kanuka, Esq, a well-known Regina barrister and solicitor, on or about May 4, 1968.
On May 10, 1968 he—the appellant—received a letter from his company authorizing and instructing him to assist in the sale of the com- pany’s business as a going concern and to seek out prospective purchasers. The above-mentioned letter, which was filed as Exhibit A-3, reads as follows:
Please consider this letter your full permission to conduct such negotiations and discussions as you in your discretion think necessary with such interested parties as you feel desirable leading towards the sale of Motor Dealers Acceptance Company Ltd. as a going business, or of any of the assets thereof. Please feel free also to enter into such discussions or negotiations as you think wise or desirable which might lead up to a beneficial arrangement for Motor Dealers Acceptance Company Ltd. with any other company.
It is realized that your contract of employment with Motor Dealers Acceptance Company Ltd. might restrict such outside activities on your part; however, you are hereby released from any such restrictions insofar as any past or present negotiations may lead to a sale or other arrangement which could be beneficial to us.
You, of course, realize that any arrangements or negotiations made by you will ultimately need the approval of the Board of Directors and/or the Shareholders before they could be considered binding upon the Company.’
The appellant’s solicitor, on being consulted again by the appellant, wrote to the company on May 16, 1968, pointing out that if the appellant proceeds as instructed and authorized he will in effect be taking steps to cause the loss of his own employment. This letter, filed as Exhibit A-12, further requests that the company confirm that the appellant’s contract will be honoured.
J Kanuka, Esq, aforesaid, appeared before the Board as a witness, and stated that there then followed a series of telephone conferences and conversations between him and J R Davidson, Esq, the president of the Company. Mr Davidson then, on May 24, 1968, replied to Mr Kanuka by letter filed as Exhibit A-13, which reads as follows:
Messrs. Pierce, Hleck, Kanuka, Mitchell
& Thuringer,
Barristers and Solicitors,
201 Gordon Building,
2180 — 12th Avenue,
REGINA, Saskatchewan.
Attention: Mr. J. W. Kanuka
Gentlemen:
Re: Mr. Jack Fraser — Your file #3768 JWK
Your letter of May 16, 1968 is acknowledged.
The Board of Directors of Motor Dealers Acceptance Company Ltd. considered the position of Mr. Fraser at a regular Board meeting held on the 17th of May, 1968.
Although Mr. Fraser has been authorized by letter dated May 10, 1968, to conduct negotiations to dispose of the assets of the Company and to enter into whatever arrangements he wishes with M.G.F. Management Limited until the transaction is completed, Motor Dealers Acceptance Company Ltd. considers the Management Agreement of July 1, 1967, fully operative and binding. It is presumed that if the transaction is completed Motor Dealers Acceptance Company Ltd. would be converted to an investment and holding company, in which event Mr. Fraser would be relieved of his duties.
It is the view of the Board of Directors, subject to approval by the shareholders of Motor Dealers Acceptance Company Ltd., that the proposed conversion would be in the best interests of the Company. If, however, the conversion does not become a reality, Motor Dealers Acceptance Gompany Ltd. will continue its present business and Mr. Fraser would continue to be retained as the General Manager in accordance with his contract.
Considering the future, however, and in order to avoid any misunderstanding or court proceedings, Motor Dealers Acceptance Company Ltd. is, prepared to make the following offer in the event the conversion is effected:
1. ... In exchange for a complete release by Mr. Fraser of. the. undertakings of Motor Dealers Acceptance Company Ltd. contained in the Management Agreement of July 1, 1967, Motor Dealers Acceptance Company Ltd. will pay to Mr. Fraser the sum of Fifteen Thousand Dollars ($15,000.00) on the 2nd day of January A.D. 1969.
2. ... Mr Fraser must give a covenant not to sue Motor Dealers Acceptance Company Ltd. for breach of contract and will undertake further not to influence the Directors or the shareholders of Motor Dealers Acceptance Company Ltd. without the prior approval of M.G.F. Management Limited.
3. ... To ensure payment of the amounts set out above Motor Dealers Acceptance Company Ltd. would undertake to provide reasonable security.
The foregoing offer is conditional upon the contemplated conversion becoming a reality and is made only as a means of avoiding any conflict with Mr. Fraser now or in the future.
The foregoing contents of this letter are strictly without prejudice to the rights of the Company in the event that the proposed conversion is not proceeded with.
Motor Dealers Acceptance Company Ltd. is completely aware and in fact has authorized Mr. Fraser to co-operate fully with M.G.F. Management Limited and has no objection to Mr. Fraser receiving compensation or remuneration for the assistance he may give that Company.
Yours truly,
MOTOR DEALERS ACCEPTANCE COMPANY LTD.,
per: “J. R. Davidson”
J. R. Davidson, President.
Further discussions and negotiations took place, and on June 11, 1968 Mr Kanuka replied by letter filed as Exhibit A-14, accepting the offer and together therewith forwarded an executed release by the appellant in favour of the company, which release was filed as Exhibit A-4. This release is in the usual form, undertaking, in consideration of the said payments of $15,000 per annum for 8 years, commencing on January 2, 1969, to release the company of all claims he may have against it, and not to sue the company for breach of agreement. This release was amended slightly, and the amended release, dated July 9, 1968, was forwarded to the company. This. release was filed as. Exhibit A-5.
The company, by agreement dated May 17, 1968, agreed with MGF Management Limited—hereinafter referred to as “MGF”—that MGF should have the exclusive listing for the sale of the company’s business as a going concern for a sum not less than $2,500,000. The commission payable to MGF was agreed at $50,000, plus 3% on any amount over and above the $2,500,000. This agreement was filed as Exhibit R-1.
MGF, by agreement in the form of a letter to the appellant dated May 17, 1968, hired the appellant to assist it in the said sale, and, on satis factory conclusion thereof, obligated itself to pay the appellant $20,000 plus one-third of the percentage excess fee received by MGF under its agreement with MD. This agreement was filed as Exhibit R-2, which reads as follows:
J. W. Fraser, Esq.,
2054 Broad Street,
Regina, Saskatchewan.
Dear Mr. Fraser:
We are coincidentally herewith entering into arrangements with Motor Dealers Acceptance Company, Ltd. (“MD”) providing for the sale of its present business through us and its conversion into an investment and holding company, all in accordance with an agreement with schedules annexed which you have seen. In consideration of your co-operation in assisting us in arranging the sale of the business of MD and on condition that MD shall have accepted our offer to purchase rights in the form seen by you and shall enter into the foregoing agreement, we agree to pay to you out of the fee receivable by us in connection with such sale the sum of $20,000.00 plus one- third of the percentage excess fee receivable by us. You will assist us in interesting and aiding potential purchasers of the business of MD to submit an acceptable offer to purchase to MD and you will further aid in the solicitation and obtaining of support and proxies for the management proposals at the resultant shareholders’ meeting of MD as contemplated under the foregoing agreement. It is understood also that you will use your best efforts to cause the directors to approve the foregoing agreement in the initial instance and to proceed thereafter in accordance with its provisions and intent.
Save and except in respect of your presently outstanding employment contract with Motor Dealers Acceptance Company Ltd., you will, after we have become investment manager of Motor Dealers Acceptance Company Ltd., refrain from influencing directly or indirectly the directors or shareholders of Motor Dealers Acceptance Company Ltd., except with our approval.
For our part, we will at all times use our best efforts to cause MD to comply with its existing contract with you.
Please acknowledge your agreement of the foregoing in the space provided
below.
Yours very truly,
M.G.F. MANAGEMENT LIMITED
Per: (Illegible) President Per: (Illegible) Secretary The foregoing is acknowledged and I agree to be bound thereby.
“J W Fraser”
J W Fraser
On August 21, 1968 MGF paid the appellant $20,000. From the evidence of the appellant and Mr Kanuka, it would appear that MGF obligated itself to the appellant for more than appears in Exhibit R-2, such as payment of bank interest on the appellant’s loan of $85,000 till the loan was fully retired by the appellant, and obtaining for the appellant an option of 10,000 initial shares of Westgrowth Investment Ltd, which was the converted form of MD.
Bearing in mind that all other transactions were carefully documented, and this additional matter not at all, I am not prepared to find that there was in fact a binding agreement to that effect. The appellant sought to establish that any dealings he had with MGF were part of the “package deal” he and his solicitor put forward to MD for settlement of damages, which he placed at approximately $233,000 for MD’s breach of contract and arbitrary termination of his employment. He did not care, he stated, where the money in the said amount came from.
Viewing the evidence in its totality, I am not prepared to accept this submission. In any event, MGF did not pay the bank interest, nor take any steps to secure the stock for the appellant. MGF did, however, pay, on October 3, 1969, to the appellant, the sum of $14,500 following a mutual release executed by both parties on July 7, 1969 and filed as Exhibit A-7. It appears to me—and I so find—that this payment relates to the one-third of excess fee referred to in Exhibit R-2.
Having given the matter my best consideration, I find that the sums of $20,000 and $14,500 paid by MGF to the appellant were in respect of services rendered by the appellant, and therefore taxable.
In so far as the settlement with MD—now known as “Westgrowth Investments Ltd”—is concerned, the question is whether this constitutes a capital payment or income in the hands of the appellant. The fact that the payments are spread over a period of 8 years is of no significance in determining the point. Similarly, it does not matter what the quantum of settlement was, although, in this instance, the appellant, with the aid of an able lawyer, ended up with a princely amount.
The respondent relies on section 25 of the Act, which reads as follows:
25. An amount received by one person from another,
(a) during a period while the payee was an officer of, or in the employment of, the payer, or
(b) on account or in lieu of payment of, or in satisfaction of, an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer,
shall be deemed for the purpose of section 5, to be remuneration for the payee’s services rendered as an officer or during the period of employment unless it is established that, irrespective of when. the agreement, If any, under which the amount was received: was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received
(i) as consideration or partial consideration for accepting the office or entering into the contract of employment,
(li) as remuneration or partial remuneration for services as an officer or under the contract of employment, or
(iii) in consideration or partial consideration for covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.
The question is: is this settlement of $20,000 an: obligation: arising out of the agreement? In perusing Exhibit A-1 there is no reference whatsoever to a situation such as déveloped ten .or eleven months later. The contract does not even contemplate such a situation. The evidence establishes beyond any doubt that the company was in breach of the agreement when it decided to convert to an investment company without any provision for a similar position for the appellant. It is obvious that the company realized that it could not successfully contest a lawsuit at the instance of the appellant, and agreed to settle as it did, rather than face a court order. The appellant succeeded in settling for an amount almost as great as he would have earned had the company continued to exist. This, however, does not make it subject to tax, and I so find. It represents damages for breach of contract. The penalties Imposed by the respondent are not supported by any evidence. The fact that the appellant bona fide takes the position that a certain sum is capital and not income does not render him liable to penalty when his position is overruled on appeal.
In view of my findings, the appellant’s appeal is allowed in part as follows:
(1) all penalties imposed by the respondent are hereby disallowed;
(2) the appellant’s taxable income for the years 1969 and 1970 is hereby reduced by $15,000 in each of these years, and the matter is referred back to the respondent for reassessment accordingly.
Appeal allowed in part.