T-1149-73
Roddy Choquette (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Decary J.—Quebec, March 6;
Ottawa, March 7, 1974.
Income tax—Moneys received from employer—Assessed
by Minister as retirement allowance— Regarded on appeal
as income from employment—Assessment affirmed—Income
Tax Act, ss. 3, 5, 6(1Xa)(v), 25, 36 and 139(1Xaj)--S.C.
1970-71-72, c. 63, s. 177.
The plaintiff was employed by a laundry company from
1966 to 1968, as comptroller and consultant. In 1968 these
positions were confirmed for a period ending in 1972 in a
contract declared irrevocable. In 1969, a further contract
released the employer from payment of the salary due for
the unexpired portion of the contract and relieved the
employee of further duties, subject to his right to continue
as a consultant at $50 a week. The employer paid the
employee the sum of $25,000, described as a capital indem
nity. The Minister assessed the employee in respect of the
sum of $25,000, as a retirement allowance. The assessment
was affirmed by the Tax Review Board. The employee,
plaintiff, appealed.
Held, dismissing the appeal, the circumstances of the
arrangements instituted in 1966, in the contract of 1968,
and, five months later, the revising contract of 1969,
showed a gradual unfolding of the employee's scheme to
obtain as much as possible from his employer. While the
indemnity of $25,000 was described as capital, the descrip
tion was not conclusive. The sum was received from the
employment (sections 3, 5 and 25(a)(ii)). As there was
neither long service nor loss of employment, there was no
ground for treating the sum of $25,000 as a retiring allow
ance (sections 6(1)(a)(v) and 139(1)(a1). The Minister's
assessment was based on the ground of retiring allowance
and the dismissal of the taxpayer's appeal from assessment
carried with it affirmation of the tax imposed, even though
the taxpayer should have been assessed for income from
employment, carrying a higher rate of tax (S.C. 1970-71-72,
c. 63, section 177).
Inland Revenue Commissioners v. Wesleyan and Gener
al Assurance Society [1948] 1 All E.R. 555; Jones v.
M.N.R. 69 DTC 4; Beaupré v. M.N.R. 69 DTC 7 and 73
DTC 5255; Alexander v. M.N.R. 73 DTC 5321; and
Garneau v. M.N.R. 58 DTC 132, distinguished. Winfield
v. M.N.R. 70 DTC 1333; Cleet Estate v. M.N.R. 69
DTC 135; and Julien v. M.N.R. 54 DTC 120, con
sidered. Curran v. M.N.R. [1959] S.C.R. 850; Moss v.
M.N.R. 63 DTC 1359; Harris v. M.N.R. [1965] 2
Ex.C.R. 653 and Consolidated Building Corporation
Limited v. M.N.R. [1966] Ex.C.R. 139, applied.
INCOME tax appeal.
COUNSEL:
Maurice Boisvert for plaintiff.
Jean Potvin for defendant.
SOLICITORS:
St. Laurent, Monast, Desmeules etc.,
Québec, for plaintiff.
Deputy Attorney General of Canada for
defendant.
DECARY J.—This is an appeal from a decision
of the Tax Review Board, dated December 6,
1972, dismissing Mr. Choquette's appeal.
The purpose of the hearing is to determine,
for the purposes of the Income Tax Act', the
nature of a sum of $25,000.00 received by the
plaintiff from his employer, and in so doing to
interpret the provisions of sections 3, 5,
6(1)(a)(v), 25, 36 and 139(1)(aj) of the Act.
The evidence shows that the plaintiff was
employed by Les Buandiers Nettoyeurs Inc.
and its subsidiaries from the beginning of
November 1966 until the end of June 1969, a
period of thirty-two months. At a meeting of the
company's board of directors on July 3, 1968, a
decision was taken to confirm the plaintiff in his
duties as comptroller and consultant until the
end of 1972. It was stipulated that the terms of
the plaintiff's employment were irrevocable.
The directors' decision was approved and rati
fied by the shareholders on the same day.
A document, dated February 11, 1969 but
signed on March 27 of that year—nine months,
therefore, after the signing of the contract of
July 3, 1968—is worded as follows:
R.S.C. 1952, c. 148.
[TRANSLATION] Quebec City, February 11, 1969
Mr. Roddy Choquette
600 Laurier Avenue
Quebec City
Dear Mr. Choquette:
As majority shareholders and directors of Les Buandiers
Nettoyeurs Inc. and its subsidiaries, and on our own behalf,
we submit to you the following proposal:
Our mother, Mrs. Alphonse Turgeon, is prepared, on
certain conditions, to lend each of us, on the security of a
promissory note, the sum of $12,500.00, making a total of
$25,000.00.
Upon receipt of the cheques from our mother, we are
prepared to endorse each of these cheques payable to you
and to hand them to you personally for deposit by you in
return for the following considerations:
1. As shareholders and directors, we recognize that since
the beginning of your employment, you have fulfilled your
duties as comptroller and financial adviser to Les Buandiers
Nettoyeurs Inc. and its subsidiaries in such a way that the
financial position of these companies has improved consid
erably, as is reflected in the annual financial statements
audited since the beginning of your employment by our
accountants;
2. In consideration of the payment of this capital indemni
ty, however, you will release Les Buandiers Nettoyeurs Inc.
and its subsidiaries from the unexpired portion of the con
tract, amounting to four years at an annual salary of
$16,800.00, so that the companies may at any time termi
nate your employment as circumstances may require; if you
accept these conditions, we for our part undertake to vote as
shareholders for your release by the companies from your
employment contract.
Until either party expresses a desire to act otherwise,
however, we would like you to remain in the service of the
companies as a consultant, with the same powers, but with
out the obligation to exercise them, and with an indemnity
of $50.00 per week payable to you in fees and expenses. It
is understood that as far as your obligation is concerned, it
will be up to you to decide whether your health or other
personal reasons will allow you to continue these services
until the expiry of the employment contract.
It is in our real, personal interest that you accept these
conditions, since your acceptance of this offer would permit
our salaries to be raised by $6,000.00 each per year, without
increasing operating expenses under this item. Your accept
ance of these conditions would also enable the companies,
in view of their improved liquidity situation, to bring up to
date the payments due to our mother, Mrs. Alphonse Tur-
geon (approximately $24,000.00) and make subsequent
monthly payments to her of $833.33 instead of the current
monthly payments of $400.00 due under certain contracts
between her and ourselves, a liability assumed by Les
Buandiers Nettoyeurs Inc.
This offer on our part is firm and valid for a period of
three months from the date of its signature, and your written
acceptance, consisting of your signature on a duplicate of
this letter, will constitute an irrevocable agreement for both
parties.
Yours Sincerely
Réal Turgeon 27/ 3 / 6 9
Armand Turgeon
Roddy Choquette
Accepted this .. .
The circumstances surrounding this agree
ment showed during the hearing that the idea of
the agreement, the legalistic manner, and the
tone and style of the document were the work
of the plaintiff. The Turgeon brothers were
placed in a position which I would describe as
quasi-adherence to a contract.
In comparing the testimony of the two Tur-
geon brothers with that of the plaintiff, I feel
that the credibility of the Turgeons is greater
than that of the plaintiff, and I am therefore
relying on their testimony. The plaintiff, in fact,
admits having given his instructions to a notary
over the telephone, but this notary was not
called as a witness. The Turgeons have a differ
ent version of the facts surrounding the content
and the drawing-up of the agreement. One of
the Turgeon brothers has stated categorically
that it was drawn up by the plaintiff and that he
did not discuss this draft contract with the plain
tiff before February 11, 1969. The other brother
also stated, equally categorically, that he had
had no discussions with the plaintiff as to the
content of the draft contract before February
11, 1969.
As the contract dated February 11 indicates,
the plaintiff released Les Buandiers Nettoyeurs
Inc. and its subsidiaries from their obligations
under the irrevocable employment contract in
consideration of payment of $25,000.00. How
ever, on March 3, 1972, three years after releas
ing the companies, the plaintiff threatened to
sue Messrs. Réal and Armand Turgeon for
$26,200.00, this being the balance of the total of
$51,800.00 he would have received if the
employment contract had run its full course.
The plaintiff had already received $25,000.00
plus $600.00 in consultant's fees.
I believe that these facts reveal the gradual
unfolding of Mr. Choquette's scheme to obtain
as much as possible from his employer. It began
in 1967 with a simple employment contract with
full powers as general manager, and he was the
one who wrote up the minutes of the parent
company. Then in November 1968, he proposed
a binding four-year contract to the company,
and he was the one who wrote up the minutes.
A scant five months later, he persuaded the
company to pay him $25,000.00 and to retain
his services as a consultant, and he was the one
who signed the cheques issued by a subsidiary.
In my opinion, the only possible interpreta
tion for all these facts is that Mr. Choquette
wished to obtain the highest possible remunera
tion from his employer, and that he exploited
the absolute confidence the Turgeon brothers
had placed in him. The evidence shows that it
was he who, as general manager, made all the
decisions. In order to reach his goal, the plain
tiff used all necessary means to obtain from his
employer, first a binding contract for four years,
and then only five months later terminated this
contract, for which he received $25,000.00
compensation. It is difficult to ignore the fact
that the plaintiff was an experienced business
man who since 1966 had carefully prepared his
plan to obtain as much as possible from his
employer.
It must be pointed out that in the contract
dated February 11, 1969, the parties described
this payment of $25,000.00 as a capital
indemnity.
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 139(1)(aj) of the Act, I
feel it is advisable to deal with a preliminary
question, namely whether the fact that a pay
ment is described as capital in fact makes it
capital. In Simon's Income Tax 2 , we find this
quotation from Viscount Simon on the case
Inland Revenue Commissioners v. Wesleyan and
General Assurance Society 3 :
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 prin
ciple, not only of interpretation but of justice,
which allows us to disregard legalism and for
malism in determining the true nature of a
contract.
The Minister of National Revenue regarded
the sum of $25,000.00 as the plaintiff's income,
specifically as a retiring allowance for the 1969
taxation year., and atax of $5,756.10 was levied
on the plaintiff's income for that year.
It is a well-established principle that an
assessment is valid until it is proven that there
has been an error in fact or in law on the part of
the Minister. The plaintiff must therefore estab
lish the evidence that the facts in this case do
not permit the application of sections 3, 5,
6(1)(a)(v), 25, or 139(1)(aj) of the Act.
The authorities cited by learned counsel for
the plaintiff are the following: Simon's Income
Tax 4 , Jones v. M.N.R. 5 , Beaupré v. M.N.R. 6 ,
Alexander v. M.N.R. 7 , and Garneau v. M.N.R. 8 .
These authorities are all to be distinguished
from the case at bar in that they deal either with
illegal breach of employment contracts or with
2 (1964-65) Volume I, page 59.
3 [1948] 1 All E.R. 555 at page 557.
4 Volume 3, pages 108, 109, 110, 111, 112, 121 and 122.
69 DTC 4.
6 69 DTC 7 and 73 DTC 5255 (F.C.C.).
7 73 DTC 5321.
8 68 DTC 132.
payments for reasons other than termination of
employment, neither of which are relevant here.
Counsel for Her Majesty was faced with an
established fact: the Minister's assessment was
made under sections 6(1)(a)(v), 139(1)(aj) and
36 of the Act. He was therefore restricted to
citing authorities in which the object of the
litigation was to determine whether or not the
payment constituted a retiring allowance.
His authorities were as follows: Alexander v.
M.N.R. 9 , Winfield v. M.N.R. 10 , Cleet Estate v.
M.N.R. 11 , and Julien v. M.N.R. 12 .
At the hearing, the Court advised counsel to
consider the cases of Curran v. M.N.R. 13 , and
Moss v. M.N.R. 14 .
Section 3 of the Act reads as follows:
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year from all
sources inside or outside Canada and, without restricting the
generality of the foregoing, includes income for the year
from all
(a) businesses,
(b) property, and
(c) offices and employments.
In the case of Curran v. M.N.R. (supra), the
Supreme Court had to decide on the nature of a
payment received by Mr. Curran from a share
holder of a company for accepting employment
in another company. The payment was con
sidered by the Court to be income under the
provisions of section 3 of the Act.
It should be noted that in the Curran case
(supra), the payment had not been made by the
employer, whereas in this case it has been
shown that the payment was made by the
employer.
The following quotation from Maitland J. in
the same case deals with the applicability of
section 24A—later 25—of the Act (ibid, page
862):
9 73 DTC 5321.
10 70 DTC 1333.
11 69 DTC 135.
12 54 DTC 120.
13 [1959] S.C.R 850.
14 63 DTC 1359 (Exchequer Court).
Counsel for the respondent conceded that s. 24A was not
applicable to the circumstances of this case. Counsel for the
appellant, however, urged that s. 24A was enacted in order
to broaden the scope of s. 5 so as to tax certain kinds of
income not otherwise taxable under s. 5. He pointed out that
s. 24A might have applied to the payment in question here if
it had been made to the appellant by Federated or by Home.
Since it did not apply, because the payment was not made
by the appellant's employer, he contended that the payment
could not be regarded as income within s. 3, because so to
hold would make s. 24A meaningless in its application.
It seems to me, however, that s. 24A was essentially a
provision dealing with onus of proof and deemed certain
payments as therein defined to be payments within s. 5,
unless the recipient could establish affirmatively that a
payment did not reasonably fall within the provisions of
paras. (i), (ii) or (iii) of s. 24A. I do not think that it follows
that payments which would fall within s. 24A, except for the
fact that they were made by someone other than the
employer, of necessity cannot be income within the provi
sions of s. 3.
In my opinion, in the light of the decision in
the Curran case, the sum of $25,000.00
received by the plaintiff constitutes income
under the provisions of section 3 of the Income
Tax Act, since it was received from a source
which I regard as employment.
The money was received by the plaintiff
when he was in the payer's employ, since two
cheques were made out by La Buanderie Lévis
Limitée, a wholly-owned subsidiary of Les
Buandiers Nettoyeurs Inc., each in the amount
of $12,500.00, one payable to the plaintiff and
Réal Turgeon and the other payable to the plain
tiff and Armand Turgeon. The plaintiff was
employed by these companies when he received
the $25,000.00 and continued in their employ.
Only his title was changed from that of comp
troller to that of consultant. After the signing of
the February 11, 1969 contract, the plaintiff
clearly devoted much less time to the compa
nies, but the income was nevertheless derived
from the same employment.
I am nonetheless of the opinion that some
useful purpose is served by discussion of sec
tion 25 of the Act, in view of the fact that in this
case the plaintiff drew the amount from his
employer or his employer's agent, as the
cheques show. Martland J. has commented on
section 25, as quoted above, to the effect that
its provisions deal with the burden of proof and
that certain payments are considered to fall
within its provisions unless the recipient can
prove that the payment cannot reasonably be
regarded as having been received under one of
the circumstances cited. Section 25 reads as
follows:
25. An amount received by one person from another,
(a) during the 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 remu
neration 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 accept
ing the office or entering into the contract of
employment,
(ii) as remuneration or partial remuneration for services
as an officer or under the contract of employment, or
(iii) in consideration or partial consideration for cove
nant with reference to what the officer or employee is,
or is not, to do before or after the termination of the
employment.
The conditions imposed by paragraphs (a) and
(b) of section 25 of the Act establish an assump
tion of remuneration for services rendered
which may, however, be refuted if the amount
cannot reasonably be regarded as having been
received under one of the circumstances
described in subparagraphs (i), (ii) and (iii) of
the section.
In my opinion, applying the provisions of
paragraph (a) and subparagraph (ii), the pay
ment can reasonably be regarded as having been
received in accordance with an employment
contract. The plaintiff has therefore not refuted
this assumption.
Section 25 of the Act was clearly analyzed by
Thorson J., when he was presiding Judge of the
Exchequer Court, in Moss v. M.N.R. (supra), at
pages 1365-66:
I now come to the contention advanced on behalf of the
Minister that section 25 of the Act is applicable to the facts
of the case and that the amount of $34,600 received by the
appellant from Prairie Cereals Ltd. should be deemed for
the purpose of section 5 to be remuneration for the appel
lant's services rendered as an officer or during the period of
employment.
The first enquiry is whether the amount was received
during a period while the appellant was an officer of, or in
the employment of Prairie Cereals Ltd. I have already set
out the evidence relating to the date when the amount was
received by the appellant and the conflicting evidence on
when he left the employment of Prairie Cereals Ltd. It
could, in my opinion, be reasonably found on the evidence
that the amount was received by the appellant from Prairie
Cereals Ltd during a period while he was an officer of and
in its employment within the meaning of paragraph (a) of
section 25. Certainly, the appellant has failed to establish
that the amount was received by him after he had ceased to
be an officer of or in the employment of Prairie Cereals Ltd.
But, in any event, the facts bring the case within the ambit
of paragraph (b) of section 25. The amount of $34,600 was
in satisfaction of the obligation arising out of the agreement
made by Prairie Cereals Ltd with the appellant, dated April
12, 1956, which implemented the offer made in the letter of
March 24, 1956, and its acceptance. The agreement was,
therefore, made during the period that the appellant was an
officer of and in the employment of Prairie Cereals Ltd.
Under the circumstances, the amount should be deemed, for
the purpose of section 5, to be remuneration for the appel
lant's services rendered as an officer or during the period of
employment unless the conditions specified in subpara-
graphs (i), (ii) or (iii) are established.
It is my opinion that there is no essential
difference between the facts in the Moss case
cited above and those in the case at bar, and
that the precedent should therefore be followed.
The payment received by the plaintiff is thus
deemed to be a remuneration within the mean
ing of section 25(a) of the Act, and consequent
ly constitutes income under the provisions of
section 5 of the Act, since the plaintiff has not
discharged the burden of proof imposed in sub-
paragraphs (i), (ii) and (iii) of section 25.
Counsel for the defendant indicated to the
Court that the Minister of National Revenue
had regarded the payment received by the plain
tiff as a retiring allowance, and thus as income
within the meaning of section 6(1)(a)(v) of the
Act. This section reads as follows:
6. (1) Without restricting the generality of section 3, there
shall be included in computing the income of a taxpayer for
a taxation year
(a) amounts received in the year as, on account or in lieu
of payment of, or in satisfaction of
(v) retiring allowances, or
The term "retiring allowance" is defined as
follows in section 139(1 )(aj):
"retiring allowance" means an amount received upon or
after retirement from an office or employment in recogni
tion of long service or in respect of loss of office or
employment (other than a superannuation or pension ben
efit), whether the recipient is the officer or employee or a
dependant, relation or legal representative;
Retiring allowance as defined here implies
long service or loss of employment. I cannot
believe that an employment of twenty-nine
months can constitute long service. The plaintiff
was employed by the companies only from
November 8, 1966 onwards, whereas he
received the amount of $25,000.00 on March
27, 1969. While I recognize that the meaning of
an adjective such as "long" is relative, and that
there is no absolute criterion by which one can
determine what is long and what is not, I do not
believe that a reasonable man could conclude
that twenty-nine months constituted long ser
vice. To claim otherwise would mean that over
the course of a working life of, say, forty years,
a person would have fourteen periods of long
service. A period of twenty-nine months does
not constitute long service in this case, since in
my view the length of a period of service should
be calculated on the basis of service with one
specific employer and not with several
employers.
We must also consider whether the amount
received by the plaintiff consisted of compensa
tion for loss of office or employment.
In my opinion, his employment did not end on
March 27, 1969, when the plaintiff signed the
agreement, but rather was modified, not in
regard to its duties, but in regard to its intensity,
and by reason of the fact that he was no longer
obliged to work. All that was required of him
was that he be available, for which he received
a salary of $50.00 a week.
Since there was neither long service nor loss
of employment, the amount cannot, in my view,
be regarded as a retiring allowance for the pur
pose of the Act.
The method by which the Minister chose to
proceed allowed him to apply the provisions of
section 36 of the Act, which reduces the tax by
allowing the taxpayer's income to be assessed
otherwise than as ordinary income. This reduc
tion is made at the taxpayer's option.
If the amount received by the plaintiff had
been a retiring allowance, the Minister's proce
dure would have been appropriate and in
accordance with the Act. However, since there
had been neither loss of employment nor long
service, the Minister could not legally treat the
amount received as a retiring allowance.
After a remark by the Court to the effect that
all were equal before the law and that benefits
such as the one in section 36 could be granted
only to those who were entitled to them, coun
sel for the defendant referred the Court to the
case of Harris v. M.N.R. 15 , in which my learned
colleague Thurlow J. noted:
I do not think, however, that this is the correct way to
deal with the matter. On a taxpayer's appeal to the Court the
matter for determination is basically whether the assessment
is too high. This may depend on what deductions are allow
able in computing income and what are not but as I see it the
determination of these questions is involved only for the
purpose of reaching a conclusion on the basic question. No
appeal to this Court from the assessment is given by the
statute to the Minister and since in the circumstances of this
case the disallowance of the $775.02 while allowing $525
would result in an increase in the assessment the effect of
referring the matter back to the Minister for that purpose
would be to increase the assessment and thus in substance
allow an appeal by him to this Court. The application for
leave to amend is therefore refused.
I share my learned colleague's opinion that
the Court must decide, generally speaking,
whether the assessment is too high and, I would
add, whether or not an assessment should have
been made in a case where it must be deter
15 [1965] 2 Ex.C.R. 653 at page 662.
mined whether an amount constitutes capital or
income. In the case at bar, the object of the
litigation is to establish whether the amount
received is taxable purely as income, or as
income in the form of a retiring allowance.
Since the amount is regarded by the Minister as
a retiring allowance, the Court must determine
whether the assessment is too low because of
the preferential treatment for retiring allow
ances provided for under section 36 of the Act.
My learned colleague has said that under the
Act, the Minister may not appeal against his
own assessment. I share this opinion.
This judgment by my learned colleague Thur-
low J., was followed by that of my learned
colleague Cattanach J. in Consolidated Building
Corporation Limited v. M.N.R. 16
Section 177 of the Income Tax Act 17 , which
defines the appeal jurisdiction of the Court,
reads as follows:
177. The Federal Court may dispose of an appeal, other
than an appeal to which section 180 applies, by
(a) dismissing it; or
(b) allowing it and
(i) vacating the assessment,
(ii) varying the assessment,
(iii) restoring the assessment, or
(iv) referring the assessment back to the Minister for
reconsideration and reassessment.
When an appeal is dismissed, the Court's
competence is limited to a simple dismissal,
even if, as in this case, the plaintiff should have
been assessed at a higher rate.
It is my considered opinion that the amount
of $25,000.00 received by the plaintiff consti
tutes income within the meaning of section 3, as
income from a source within Canada, as well as
under section 5 of the Act, since it is deemed
income from employment. The appeal is dis
missed with costs.
16 [1966] Ex.C.R. 139 at page 152.
17 S.C. 1970-71-72, c. 63.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.