Guy Tremblay:—The case at bar was heard at Montreal, Quebec, on May 9, 1978.
1. Point at Issue
The question here is whether the amount of $22,846.27 received by the appellant in 1974 resulting from a judgment of the Superior Court of Quebec, District of Montreal, is taxable in the same manner as a salary.
2. Burden of Proof
The appellant has the burden of showing that the respondent’s assessment was not justified. This burden of proof is based not on a particular section of the Income Tax Act but on several judicial decisions, among them a decision of the Supreme Court of Canada rendered in RWS Johnston v MNR, [1948] CTC 195; 3 DTC 1182.
3. Facts
3.1 In 1963 the appellant had worked as President for Canadian Adhesives Limited to build up the company. In 1964 and later, specifically on September 18, 1968, a written contract of, employment (Exhibit A-1) was introduced to confirm his employment as President and make the provision for the payment of a pension.
3.2 Paragraphs 2, 4 and 7 of Exhibit A-1 read as follows:
2. The Company shall pay to Love for his services such salary at such rate as may from time to time be determined by mutual agreement between the Company and Love, but which, until otherwise determined, shall be at the rate of not less than $1,560 per month;
4. If Love be dismissed or resign from the employ of the Company during any fiscal year, the Company shall pay to Love, within 1 month following the termination of such fiscal year 5% of the net income of the Company before any and all taxes on income as reported in a statement of income and expenditures of the auditors of the Company for such year, for that part of such year up to the effective date of such dismissal or resignation.
7. Nothing herein contained shall prevent the Company from dismissing Love from its employ at any time upon 90 days prior notice in writing of such dismissal, and nothing herein contained shall prevent Love from resigning from the employ of the Company at any time upon 90 days prior notice of such resignation. However, in the event that Love leaves the employ of the Company for any reason whatsoever, other than being dismissed for gross misconduct, the Company will pay to Love, in addition to the pension provision of paragraph 6 hereof, the amount of salary as set forth in paragraph 2 above, or such other amount as may have been agreed to between Love and the Company subsequent to the execution of these presents, payable monthly, for a period of one year from effective date of such termination. Nevertheless the payment of such salary shall cease forthwith from the date that. Love may, directly or indirectly engage in any business whether as principal, significant shareholder, director or employee which manufactures, produces or sells any of the products sold by the Company or in any other way competes with the Company in that part of Canada east of the border of the provinces of Ontario and Manitoba.
3.3 On March 10, 1973, the appellant was dismissed from his position on the basis that he had illegally increased his salary without the resolution of the Board of Directors. An amount of $9,758.79 was demanded to be reimbursed.
3.4 The appellant refused to pay, alleging he had the approbation of the Vice-President and main shareholder of the company. That method of increasing salaries had been used since 1964, and was confirmed by Exhibit A-1.
3.5 The company, in the legal action before the Superior Court of the province of Quebec, demanded that the Court declare the contract rescinded since 1973, and the appellant be condemned to pay to the plaintiff the amount of $9,758.79.
3.6 In his plea the appellant pleaded inter alia that he had the right to the advantages provided in paragraphs 2, 4 and 7 of the contract of employment. He also claimed an amount of $25,000 as damages to his reputation.
3.7 In his judgment rendered July 31, 1974, (Exhibit A-4) the Honourable Maurice Cousine-au, Judge, agreed with the plaintiff company concerning the amount of $9,592.07 because the defendant’s increases of salary had not been approved by a resolution of the Board of Directors as provided in the contract. The Court, however, refused to qualify the conduct of the defendant as “gross misconduct” and agreed with the conclusion of the plea of the defendant concerning the advantages provided in the contract.
Le défendeur a droit, dans l’opinion de cette Cour, de recevoir tous les montants auxquels la demanderesse s’est engagée suivant les ententes intervenues qui demeurent en vigeur, tenant compte du salaire annuel du défendeur fixé en vertu du contrat de 1968, tel qu’amendé par l’entente intervenue en 1971. Ces montants se divisent comme suit:
3.8 The litigation before the Board is valued at $23,846.27 which is the amount to be found in paragraphs “c” and “f” as quoted in my paragraph 3.7. The other amounts were included in the appellant’s revenue when he filed his 1974 income tax return.
| a) une semaine de vacances qui n’a pas été prise en 1972: | $ | 390.00 |
| b) préavis de trois mois pour mettre fin au contrat: | 4,680.00 | |
| c) douze fois le salaire mensuel prévu au contrat au moment | ||
| du congédiement: | 18,720.00 | |
| d) 4% du salaire gagné du 1er mai 1972 au 10 mars 1973 | ||
| (45 semaines à $390.00-4% de $17,550.00) | 702.00 | |
| e) contribution de la demanderesse au fonds de pension du | ||
| défendeur en excédant de ce qui a déjà été payé: | 12,635.22 | |
| f) indemnité de départ suivant la clause 4 de l’exhibit D-5, | ||
| soit 5% du revenu net de la demanderesse: | 5,126.27 | |
| le tout formant un grand total de: | $42,253.49 | |
3.9 Concerning the amount of $25, 000 for damages claimed. the judgment reads:
Le défendeur, dans sa demande reconventionnelle, réclame une somme additionnelle de $25,000 à titre de dommages, alléguant que la demanderesse a porté atteinte à son intégrité personnelle et à sa réputation. Le défendeur cependant, par l’entremise de son procureur, s’est désisté à l’enquête de cette partie de sa réclamation, ayant reconnu qu’il n’avait effectivement subi aucun dommage quant à ce chef de réclamation.
3.10 The notice of assessment dated October 10, 1975, includes the amount of $23,846.27 in the revenue of the appellant:
3.11 Following the notice of objection filed on December 15, 1976, the Minister of National Revenue sent a notification dated February 23, 1977, confirming the notice of assessment.
3.12 On April 14, 1977, an appeal was lodged before the Tax Review Board.
4. Law — Judgments — Comments
4.1 Subsection 6(3) of the Income Tax Act, SC 1970-71-72, c 63, as amended, is the main section which is implied in the case at bar.
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 purposes 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
(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,
(d) as remuneration: or partial remuneration for services as an officer or
under the contract of employment, or
(e) in consideration or partial consideration for a covenant with reference
to what the officer or employee is, or is not to do before or after the termination of the employment.
4.2 The following judgments were cited by the parties:
Dale (HM Inspector of Taxes) v de Soissons, 32 TC 118; [1950] 1 All ER 912; [1950] 2 All ER 460; Henry (HM Inspector of Taxes) v Arthur Foster, 16 TC 605, 145 LT 225; Peter Moss v MNR, [1963] CTC 535; 63 DTC 1359; Thomas G Quance v Her Majesty the Queen, [1974] CTC 225; 74 DTC 6210; Her Majesty the Queen v Robert B Atkins, [1975] CTC 377; 75 DTC 5263; [1976] CTC 497; 76 DTC 6258; Paul Girouard v MNR, [1977] CTC 2588; 78 DTC 1011.
4,3 Comments
The judgment of the Superior Court in fact condemning the company to pay to the appellant the amount of $23,846.27 was based on paragraphs 2, 4 and 7 of the contract (paragraph 3.2 of thie facts) signed on September 18, 1968. Consequently, it is clear to the Board that the presumption provided in paragraph 6(3)(b) operates against the appellant and the said amount “is deemed, for the purposes of section 5, to be remuneration for the payee’s services’’ as an officer.
This presumption can be rebutted if the appellant can prove that all the conditions described in paragraphs (c), (d) and (e) of subsection 6(3) of the new Act do not exist in this case.
It is quite difficult for the Board to decide if condition (d) is not filled.
as remuneration or partial remuneration for services as an officer or under the.contract of employment.
It is clear in the judgment rendered by the Honourable Maurice Cousineau, Judge:
Le défendeur a droit, dans l’opinion de cette Cour, de recevoir tous les montants auxquels la demanderesse s’est engagée suivant les ententes intervenues qui demeurent en vigueur . . .
Consequently, it is clear that the said amount of $23,846.27 was a remuneration “under the contract of employment”. The said amount is certainly not for damages (see paragraph 3.9 of the facts).
The Board has studied the cited judgments but found they cannot be applied to the case at bar to benefit the appellant.
The Board states that subsection 6(3) is “dura lex sed lex’’ and it must be strictly construed.
In the opinion of the Board, it has no alternative but to confirm the assessment.
5. Conclusion
The appeal is dismissed in accordance with the reasons for judgment stated above.
Appeal dismissed.