Delmer E Taylor:—This is an appeal against an assessment for the taxation year 1975 in which the Minister of National Revenue increased the taxable income of the appellant by an amount of $42,196.85, termed “additional remuneration’’. The appeal, together with that of Gordon R Dell (77-1091), was heard on common evidence. The respondent relied, inter alia, upon sections 3, 5, 8 and 61 of the Income Tax Act, RSC 1952, c 148 as amended by SC 1970-71-72, c 63.
Facts
The appellant was an employee of Dell’s Dairy, a dairy business operated in the City of Niagara Falls, Ontario, for some 28 years and upon incorporation of the business in 1963 as Dell’s Dairy Limited (hereinafter referred to as “Dell’s” or‘the “Company”), he acted as the Secretary of the corporation. During the taxation year ending December 31, 1973, he received by way of earnings from his employment with Dell’s the sum of $19,343. On December 31, 1973, Dell’s was sold to Avondale Dairy (hereinafter referred to as “Avondale”). During the taxation year ending December 31, 1974, he received the sum of $20,883 from Dell’s for management salaries, and also received from Avondale Dairy Limited (hereinafter referred to as “Avondale”) by which he was employed during part of the year, the sum of $7,794. For the taxation year ending December 31, 1975, he received by way of compensation for employment from Avondale the sum of $8,584 and received from Industrial Life Insurance Company (hereinafter referred to as “Industrial”) an annuity payment of $340.
Contentions
The position of the appellant was that:
—he did not receive either from Dell’s or from any other source the sum of $42,196.85 included in computing his income.
—Dell’s paid out for 1974 as retirement allowance to former employees with long service the following amounts to the hereinafter named persons:
| Gorden Dell | $31,482.27 |
| Rosamond Dell | 9,330.07 |
| Robert Coombe | 31,482.27 |
| Marion Coombe | 12,099.10 |
| $84,393.71 |
—prior to the payment of the retirement allowances, as an officer of Dell’s, he caused inquiries to be made through the representatives of Industrial to inquire as to whether the amounts were reasonable, and received confirmation from the Assessing Section of the Department of National Revenue that the amounts were in fact reasonable and made arrangements for the purchase of the Income-Averaging Contract hereinbefore referred to within 60 days of the end of the 1974 taxation year.
—the additional remuneration of $42,196.85 added to his 1975 income should be deleted and his 1975 assessment varied accordingly.
The respondent contended that:
—the appellant did not retire at the end of his 1973 taxation year but received employment income from Avondale and management salary from Dell’s in his 1974 and 1975 taxation years.
—the appellant, together with Gordon Dell and their respective wives, each owned half of the shares of Dell’s.
—no part of the payment of $42,196.85 received by the appellant in his 1975 taxation year and used for the purchase of an Income- Averaging Annuity was received upon his retirement as a single payment in recognition of his long service as an employee, or upon or after retirement in recognition of his long service.
—the amount of $42,196.85 was not an amount paid to the appellant upon his retirement from Dell’s.
Evidence
The appellant described his work (and that of Dell and their wives) both before and after the sale of Dell’s to Avondale. Each was gainfully employed before the sale, but the requirement and responsibility changed dramatically after the sale when the function of Dell’s became more that of an investment or holding company. Two of the exhibits which were identified and submitted by the appellant are noted as being of particular interest to the Board:
Exhibit A-5—A copy. of an income-averaging annuity contract for
$31,482.27 between the appellant and Industrial dated February 1, 1975. (This is hereinafter referred to as “IAC”)
Exhibit A-9—A copy of a letter to the appellant from Ralph Powell re
“Forward Averaging Contracts”, dated March 27, 1975, which is reproduced hereunder in total:
Mr Robert L Coombe,
2161 North East 42nd Court,
Apt 208,
Lighthouse Point,
Florida, USA.
Dear Mr Coombe:
Re: Fordward Averaging Contracts
The contracts were purchased through the Industrial Life Insurance Co as they were the only company that would guarantee us 100% refund of premiums if the amounts deferred were not accepted by the Department of National Revenue.
The guaranteed rate of interest—9.92%—was also the highest of all companies which submitted proposals.
After several submissions on behalf of Dells Dairy and one meeting in Ottawa, we have received written confirmation that the amounts listed are acceptable to the Department of National Revenue.
Gordon Dell $31,482.27 Rober Coombe 31,482.27 Rosamond Dell 9,330.07 Marion Coombe 12,099.10 The total amount for deferral was $84,393.71. I have forwarded all the contracts to Mr Gordon Dell for sake-keeping until your return.
Yours very truly,
(Signature)
Ralph Powell,
President.
RP/ejs.
cc Gordon Dell
John Howe, CA
In cross-examination of this witness, counsel for the respondent filed with the Board copies of the financial statements of Dell’s for the years 1973, 1974, 1975 and 1976, which showed “management salary’’ charges for each year.
Mr Ralph Powell, business consultant, confirmed the information provided to the Board by Coombe and identified and filed certain documents, some of which are reproduced:
Exhibit A-11—Internal memorandum (undated):
Dells Dairy Ltd
Approval to pay out retiring allowances to the following employees. The amounts are to be forward income averaging by each individual.
Gordon Dell $35,669.72 Robert Coombe 35,669.72 Marion Coombe 13,700.19 Rosamond Dell 10,561.68 Total Retiring Allowances $95,601.31 The assets of Dells Dairy were sold December, 1973 and currently is holding $115,000 cash.
Partnership: Melvin Dell
Gordon Dell
Robert Coombe
from 1954 to 1963.
Incorporated December, 1963.
Company to relinquish charter in June, 1975.
Base of calculation:
Amount required to purchase an annuity equal to 2% ‘times years of employment times the employees best six years average earnings. Length of service and average earnings including partnership.
Service Average Earning Gordon Dell 30 yrs $19,300.00 Robert Coombe 28 19,300.00 Rosamond Dell 11 7,800.00 Marion Coombe 11 5,600.00 Exhibit A-12—Letter - Revenue Canada Taxation Your file Our file Mr Hugh H Mole, 6320 Valley Way, Apt 707, Niagara Falls, Ontario. Local 255 Assessing Section: R Cam January 21, 1975, Dear Sir: It is my opinion that clause 40(5)(c)(ii)(A) of ITAR has no application to subparagraph 61 (2)(a)(ii) of the Income Tax Act. Therefore, the reasonableness of the retiring allowance would appear to be based on the circumstances related to this particular case.
It is my opinion, on the basis of the facts you’ve presented, that the amounts paid are not unreasonable and would therefore be qualifying income for the purpose of purchasing an income-averaging annuity.
Your truly,
(Sgd) R Cam
for Director—Taxation
Department of National Revenue, Taxation
RC:j]
Dells Dairy Ltd
32-46 Church Street
St Catharines, Ont
L2R 3B9
Tel 688-4000
Exhibit A-13—Letter
January 28, 1975. Mr J W Sanders,
Industrial Life Insurance Company,
150 Eglinton Avenue, East,
Toronto 12, Ontario.
Dear Mr Sanders:
Please find attached cheque in the amount of $84,393.71 covering: Income Averaging Annuities for the following:
Gordon Dell $31,482.27 Rosamond Dell 9,330.07
Robert Coombe 31,482.27 Marion Coombe 12,099.10 $84,393.71 Please let me know is there is anything further you require.
Regards,
Ralph Powell,
President.
RP/Ir
Ends
Mr John Howe, Chartered Accountant, now practising under his own name, but in the year under review with the firm of Winspear, Higgins, Stevenson & Co, Chartered Accountants of Niagara Falls, Ontario, had the responsibility for the preparation of the income tax returns filed with the Board. He was also responsible for the general accounting procedures and initiated the steps in purchasing the IAC which led to this appeal. Howe’s evidence and cross-examination relating to the financial statements of the Company, showed that the following had been expenses charged in the accounting records of the Company:
| (1973)—Management salaries | $115,000.00 |
| (1974)—Retirement allowance | 11,159.71 |
| $126,159.71 |
That total, however, was paid out of the funds of the Company in the following manner:
1974— (To the appellant and Dell, from 1973 accrued
| management salaries) | $ 41,766.00 |
| 1975— (To Industrial for the purchase of | |
| lAC’s for four shareholders) | 84,393.71 |
| $126,159.71 |
Particular reference was also made to one specific journal entry dated December 31, 1974:
| Dr Accrued Mgmt salaries | $73,234.00 |
| Dr Retiring allowance | 11,159.71 |
| Cr Term Deposit | $65,000.00 |
| Cr Bank | $19,393.71 |
| To record mgmt salary. |
According to Howe, the payment of the $41,766 in 1974 out of the 1973 accrued management salary expense of $115,000 left a balance in that account of $73,234 as at December 31, 1974 which together with the amount of the $11,159.71 expense from the year 1974 made up the total company payment of $84,393.71 (later established to have been made on February 4, 1975), for the purchase of IAC’s for the four shareholders.
($115,000 (1973) accrual) — $41,766 (1974 payment) + $11,159.71 (1974 journal entry charge) = $84,393.71 (1975 payment))
Several quotations from the cross-examination of Mr Howe dealing with this point are reproduced:
Q Now, in 1973 a journal entry under December 31st was prepared which, I believe, debited management salaries and credited accrued salaries of or for $115,000, is that correct?
A Yes.
Q Now, these management salaries of $115,000 were expensed in the 1973 taxation year, correct?
A That’s right.
Q And they referred, presumably, to salaries that were owing to, through Mr Coombe’s testimony, all four of the principals, correct?
A The amount was provided for the four individuals, Now, whether that was to be classified as salary or not, I don’t know. It was given that terminology at that point.
Q You called it “salary”?
A Yes.
Q You made the entry?
A Yes.
Q What else would you have called it?
A If we’re going to use hindsight, we should have called it “retiring allowance”, maybe.
Q Now, on the same date (December 31, 1974), we have a somewhat complex journal entry, ‘debit accrued management salaries $73,234; debit retiring allowance $11,159.71 ; credit term deposit $65,000; credit bank $19,393.71’. Do you recognize that journal entry, sir?
A Yes.
Q Did you make that journal entry?
A Probably somebody on our staff did at the time.
Q You made the December 31 entry?
A I didn’t make any of the entries in ’74. I said I made the one at the end of ’73 for the $115,000. I had nothing to do with it in ’74. I’m aware of it, though.
Q You saw it and reviewed it?
A Yes.
Q Now, the explanation is that entry is to “record management salary”. Is that correct?
A That’s what it says there.
Q Do you have your books and records of the company or your working papers?
A No, I don’t.
Q Is it correct that this is the first mention in the accounting records of a retiring allowance?
A Probably.
Q To your knowledge, is it the first?
A Yes.
Q And what you have done, in effect, is convert the management salaries in ’73 to a retiring allowance in ’74. Is that correct?
A Yes.
Q Is that proper accounting procedure that you can just convert what was a management salary in ’73 and charged to the company in ’73, into a retirement allowance in ’74?
A In my opinion it was proper. On the advice we received and so forth, it was proper.
Q It wasn’t really a retiring allowance because it was a management salary that had accrued in 1973?
A At the time it was provided for—you haven’t asked the question where the $115,000 figure was arrived at. Nobody’s asked that. ... I think it’s important. It’s only a figure to reduce the corporation income down into the low tax bracket at the time because the company was going to have serious difficulties, perhaps paying income tax and if we can save it some way, pay it out in salaries later or something else, the shareholders involved are going to be dollars ahead.
Q The fact remains the $115,000 was set up then to bring the net income level down to about $50,000?
A Right.
Q In your view then, it bore no relationship whatsoever to a bona fide salary due to Mr Dell or Mr Coombe?
A There was no specific amount specified for any of the four individuals. The $115,000 was for all four of them as a group.
Q Did it bear any relationship to the amount of work they performed for the company or was it a figure pulled out of a hat?
A I don’t say we pulled it out of a hat. I told you the reason why it was there.
Q That was the only reason it was set up?
A Except that the company was going to wind itself up and they could take Salaries out in ’74, perhaps.
Q Does it bear any relationship to the amount of work by Mr Dell or Mr Coombe or Mrs Coombe or Mrs Dell performed for the company? Does it or doesn't it?
A No.
Q Do the management salaries set up in 1974, 1975 and 1976 bear any such relationship, in your view?
A No.
Mr Norman Grant, a group head in the Audit Division of Revenue Canada in St Catharines, Ontario, described for the Board an examination he had performed on the Company records (following the sale to Avondale), which had resulted in the assessment under review. It was his report to Revenue Canada, and the essence of the evidence to the Board that since the entry of $115,000 had been for “management salaries’’, its receipt (whenever this occurred) should be treated as “salary’’ income—income from employment earned prior to the sale of Dell’s in 1973. He disagreed diametrically with Howe’s casual interpretation of the significance of the details assigned to this particular accounting entry, "management salaries” in the Company’s records and financial statements.
Argument
Counsel for the appellant informed the Board that he had been unable to locate case reference material which he was satisfied dealt specifically with the point at issue. As he saw that issue, it was to determine if the appellant had or had not retired after the sale of Dell’s business in December 1973, and whether or not the payment made to Industrial to purchase an IAC qualified as a retiring allowance. He detailed the responsibilities which the appellant held as the office manager prior to the sale, and emphasized the change in requirements to maintain the company functions after that date, these functions being merely the limited banking arrangements. He pointed out that the Company itself probably could not be wound up, even if this were desirable, in the light of the income tax appeal which was the subject of this hearing. The use of the funds available .(the accrued management salary item) for investment in the income averaging annuity was completely proper as explained by the accountant, Mr Howe. The evidence provided by Mr Grant, in counsel’s opinion, had not been complete and there was good reason to feel that if that assessor had been aware of all the facts, the assessment in question might not have been made.
Counsel for the respondent pointed out that there was no evidence that any consideration had been given by Mr Howe (or certainly Mr Powell) to retirement allowances in December 1973, when the business was sold, and that it had only developed as an afterthought in order to reduce or defer the personal income tax of the appellant. Mr Powell had not taken the time to get an advance ruling from Revenue Canada and his dealings with the tax officials related to the calculation of an amount only, and did not provide for the deductibility claimed by the appellant and Dell in the light of the known circumstances. He took issue with Mr Howe’s view of the importance or the reliability of accounting entries and/or explanations provided in journal entries. These were the records of the Company, and the Minister through the auditor, Mr Grant, was entitled to take them for what they said they were. Further, the Company had not been wound up, the appellant did not divest himself of his shares in Dell’s, and he had continued to receive income both from Dell’s and Avondale after the sale. Counsel agreed that there was little in the way of judicial record on the issue of whether or not the appellant had retired under the circumstances described to the Board, but he did produce one case—Charles M Coutlee v MNR, [1971] Tax ABC 32; 71 DTC 44—which, since it is short, the Board will reproduce totally:
In August, 1968, the appellant, a company manager, received a lump sum of $10,000 from Independent Coal and Lumber Company (1961) Limited, at Ottawa, and claims to be entitled to invoke the provisions of section 36(5)(c) of the Income Tax Act, which provides for averaging, so to speak, of the tax payable in such a circumstance. The Minister declined to accede to this claim in August, 1969, and the present appeal is the result.
The pertinent facts are that the appellant continued in the company’s employ after its undertaking had been sold to Petrofina Canada Limited and after the said sum was received, and still does so, and thus it did not come into his hands as a retiring allowance but rather as a payment made by way of a reward for good and efficient service in the Heating Division of the company over a period of years prior to 1968. Appellant had begun working for the first-mentioned company in 1949. There has been no severance of his occupational connection therewith.
The short answer, therefore, is that this section cannot propertly be invoked by the taxpayer and the appeal must be dismissed accordingly, unfortunate as it may seem.
Findings
The Board notes for the record that some relevance to certain aspects of this matter might be found in the comments provided by the respective learned Justices Décary and Kerr in the Federal Court —Trial Division cases of Roddy Choquette v Her Majesty the Queen, [1974] CTC 742; 74 DTC 6563, particularly at 745 and 6565 respectively, and Her Majesty the Queen v Ken and Ray’s Collins Bay Supermarket Limited, [1975] CTC 504; 75 DTC 5346, at 510 and 5351 respectively:
Choquette:
Before turning to the authorities brought to the attention of the Court by learned counsel for the parties, and examining sections 3, 5, 6(1)(a)(v), 25, 36 and 136(1 )(aj) of the Act, I feel it is advisable to deal with a preliminary question, namely whether the fact a payment is described as capital in fact makes it capital. In Simon’s Income Tax, (1964-65) Volume I, page 59, we find this quotation from Viscount Simon on the case Inland Revenue Commissioners v Weslyan and General Assurance Society, [1948] 1 All ER 555-557:
“It may be well to repeat two propositions which are well established in the application of the law relating to income tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it.”
This principle of the relationship of form and substance is, in my opinion, an elementary principle, not only of interpretation but of justice, which allows us to disregard legalism and formalism in determining the true nature of a contract.
Ken and Ray's Collins Bay Supermarket Limited:
If, contrary to that conclusion, the $58,590 was an expense incurred by the company in that fiscal year, there will be the questions whether the purpose of the grant of bonuses was tax avoidance or reduction, and whether the claim would unduly or artificially reduce the income of the company.
The deduction of the $58,590 as an expense reduced the company’s reported net income before taxes to $34,997. While this may raise a suspicion that the purpose was to bring the net income into the $35,000 or less bracket, and the reason for fixing that specific amount was left largely unexplained, I do not think that the purpose was to achieve that fiscal result. In my opinion the result was incidental to implementation of the earlier decision to pay bonuses of $25,000 to $35,000 each to McEwen and Robinson, which was made in the fall of 1968 when the prospects of large business profits for the year were excellent and payments of bonuses out of profits would be in accordance with well accepted principles of business practice, and the amounts fixed were reasonable having regard to profits and were within the range that had been decided. An equal sharing of bonus money was also reasonable despite the inequality in share ownership. In my opinion tax avoidance or reduction was not a purpose of the bonuses, and the expense was not one that, if allowed, would unduly or artificially reduce the company’s income.
Further, a question remains in the mind of the Board—whether or not proper application of subsection 78(3) of the Act was made as it might affect both the corporation and the individual, in the assessment process which has resulted in this appeal. However, it is my view that the determination of the issue before the Board does not require an exhaustive review of either this point (subsection 78(3)) or those which might be reflected in the jurisprudence quoted above, although considerable effort was dedicated during the nearing to these aspects of the matter.
A review of the “contentions” of the appellant (detailed earlier) would indicate that two basic positions were put forward: that the appellant did not receive the amount of $42,196.85 (and therefore cannot he held taxable on it); or alternatively, that since any relevant amount which can be calculated as $42,196.85 was used for the purchase of income-averaging contracts, it should be deleted from his taxable income. The appellant’s case was directed almost exclusively to supporting the alternative proposition, and no attempt was made to dispute the “receipt” of the amount in question, although it was pointed out that the IAC for the appellant was in the amount of $31,482.27, not $42,196.85. It is my view that in purchasing the four IAC’s at a cost of $84,393.71, the Company did make a payment or payments, on behalf of or for the benefit of the appellant, and in the circumstances of this case that did constitute “receipt”. This occurred for income tax purposes on February 4, 1975, in my opinion, the journal entries of December 31, 1973 and December 31, 1974 notwithstanding. It would be difficult indeed for the appellant to claim “receipt” of a retiring allowance on December 31, 1974 only by virtue of a journal entry, while denying “receipt” of a management salary on December 31, 1973 (or later) also established in the same way— only by virtue of a journal entry.
There are two major places the term “retiring allowance” appears in the Act: subparagraph 56(1)(a)(ii)—which requires its inclusion in income, and subsection 248(1)—where the term is defined as it relates to “retirement”. Even if the appellant’s contentions were accepted by the Board (he had indeed “retired”, and received a “retiring allowance”), that would only serve to ensure that the amount be included in his income, a taxable status already accorded to him by the Minister. To then obtain a further and subsequent deduction from income, the IAC must meet the conditions of subsection 61(2) of the Act, and the term “retiring allowance” (per se) does not appear in section 61 of the Act:
61.(2) For the purposes of subsection (1), an amount described in this subsection in respect of an individual for a taxation year is any following amount:
(option 1)
(a) a single payment received by him in the year
(ii) upon his retirement as an employee in recognition of long service . . .
(or option 2)
(b) a payment or payments made by an employer to the individual as an employee or former employee upon or after retirement in respect of loss of office or employment, if made in the year of retirement or within one year after that year;. (The italics are mine.)
It might be useful to note that a certain degree of ambiguity can be read into the definition provided in subsection 248(1): ‘retiring allowance’ means an amount received upon or after retirement from an office or employment in recognition of long service or in respect of loss of office or employment . . .”’ One could easily be led into thinking that such a payment would always qualify if made “upon or after retirement” with respect to the date of that retirement. However, in my view there is no such flexibility when the complementary portions of section 61 (noted above) are read in conjunction with that definition:
61.(2)
(a) ...
(ii) upon his retirement as an employee in recognition of long service
(b) ... as an employee or former employee upon or after retirement in respect of loss of office or employment . . . (The italics are mine.)
It would appear that to qualify in recognition of long service, the retiring allowance must be paid upon retirement—but may be paid at a later date in respect of loss of office or employment.
Counsel did not apparently note any significant difference whether the “retirement” occurred in 1973 or 1974, nor the purpose of the “retiring allowance”—whether for long service or loss of office or employment. According to him, the appellant has a claim to “retirement” on the basis that he retired from his employment and ceased to function as “office manager”, as contrasted with continuing his role in the office of ‘‘Secretary Treasurer’. No distinction of merit has been brought to the attention of the Board between the functions performed by the appellant for Dell’s in the year 1974 and those performed by him in the year 1975. Accordingly, the date of December 31, 1973 would appear to be an essential feature of the appellant’s “retirement” (even on the narrow and precarious ground advanced by his counsel) in order to allege any right of access to the “accrued management salary” and use it as a “retiring allowance”. In the same way, while some of the testimony and argument could leave room for consideration that the “retiring allowance” claimed was for loss of employment rather than in recognition of long service, no such doubt remains when the factual material is reviewed:
Notice of Appeal:
. . . as retirement allowance to former employees with long service . . .
Exhibit A-11
Base of calculation:
Amount required to purchase an annuity equal to 2% times years of employment times the employees best six years average earnings.
Length of service and average earnings including partnership.
Service Average Earning Gordon Dell 30 yrs $19,300 Robert Coombe 28 19,300 Rosamund Dell 11 7,800 Marion Coombe 11 5,600 Exhibit A-12 . . . no application to subparagraph 61 (2)(a)(ii) of the Income Tax Act. (Note: that subparagraph deals only with “long service”.)
Accordingly, as I see the matter, the appellant is claiming “retirement” on December 31, 1973, and receipt of a “retiring allowance” on February 4, 1975 (but not earlier) might be established. I am unable to conclude that this span of time could be accommodated in any definition accorded the word “upon” in income tax jurisprudence which would be relevant to the phrase “upon his retirement”. The Board finds it necessary therefore to decide whether or not there was a “retirement” on the grounds proposed by counsel, or payment of a “retiring allowance” in the circumstances of the case.
There may be less than complete certainty that the amount of $42,196.85 as additional remuneration should be included in the appellant’s 1975 income. But his contention that it should be disregarded in calculating his income tax liability because it was used for the purchase of a qualifying income-averaging annuity cannot be sustained. The amount in question was not a payment received by him upon his retirement, as that payment and his retirement were portrayed to the Board.
Decision
The appeal is dismissed.
Appeal dismissed.