T-724-74
Gilles Thibault (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Ottawa, September 9
and October 17, 1975.
Income tax—Calculation of income—Tax on tax—Whether
tax can be assessed on amounts which taxpayer is entitled to
claim by virtue of a contract but which he is unable to
collect—Whether agreement to indemnify taxpayer against
any tax assessed would only come into play when such an
assessment was made—An act to amend the Income Tax Act,
S.C. 1952-53, c. 40, s. 43.
Plaintiff sold shares to be paid for by monthly annuities.
Monthly payments were received in 1968 and 1969, and,
although the taxpayer claimed that the amounts were instal
ment payments on account of a capital sum, the Minister
considered that because the purchase price was to be paid in
monthly instalments, the amount being calculated on an annui
ty basis, the interest portion on each payment was assessable as
income. Tax was also levied on tax, by virtue of an agreement
whereby purchasers had agreed to indemnify plaintiff by
paying additional sums should tax become payable.
Held, the appeal is dismissed. There is nothing in section 43
of S.C. 1952-53, c. 40 to indicate that tax is not collectable on
amounts received by virtue of a contract of indemnification
against any tax payable. It is a confirmation of existing practice
to add this tax so paid on taxpayer's behalf to taxable income.
While plaintiff claims that the mere right which he had in 1968
and 1969 to claim indemnity does not add the tax to income if
he never received payment of it, there is an indication that
some, if not all of it, was collected. Secondly, although the
actual claim for this tax on tax was only made in 1971, and it
was not until after the re-assessment that plaintiff could avail
himself of the agreement, the additional taxes were payable for
1968 and 1969 by virtue of the indemnity agreement, and the
right t6 claim same from the guarantor constituted additional
income for those years even though the actual amount was not
determined until after the re-assessment.
New York Central Railroad Company v. M.N.R. (1952-
53) 7 Tax A.B.C. 334; Commissioners of Inland Revenue
v. The Granite City Steamship Co. Ltd. (1927-1928) 13
T.C. 1; Hartland v. Diggines [1926] A.C. 289; Salter v.
M.N.R. [1946] Ex.C.R. 634, Commissioners of Inland
Revenue v. Baillie (1933-1937) 20 T.C. 187; In re Kemp
[19 . 40] S.C.R. 353; Re Wood [1943] C.T.C. 199; The King
v. Montreal Telegraph Company [1925] Ex.C.R. 79;
Michelham's Executors v. Commissioners of Inland
Revenue (1928-31) 15 T.C. 737 and Kliman v. Wink-
worth (1928-1933) 17 T.C. 569, considered.
INCOME tax appeal.
COUNSEL:
S. P. Mendell for plaintiff.
B. Schneiderman for defendant..
SOLICITORS:
Phillips & Vineberg, Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: This is an appeal against a re-assess
ment of plaintiff's income tax dated May 20, 1971
which included in his taxable income for the 1968
and 1969 taxation years the amounts of $4,804.90
and $5,765.88 respectively as the income portion
of certain payments considered to be annuities,
and in addition levied tax on tax by virtue of an
agreement whereby purchasers of shares of a com
pany from plaintiff had undertaken to pay him an
additional amount to indemnify him against any
income tax which would become payable as a
result of the terms of the said purchase agreement.
By an agreement dated October 9, 1968, five of
the sons of the late Pierre Thibault sold the shares
in Pierre Thibault (Canada) Ltée which they had
inherited from him to Guy Charron Limitée acting
for itself and on behalf of Finco Limitée for $610,-
000 cash. By an agreement dated March 11, 1968
the other four sons, namely the plaintiff Gilles,
,and his brothers Pierre-Paul, Réjean and Guy sold
their shares similarly inherited to the same pur
chasers for the total sum of $560,000 or $140,000
each. By a second agreement dated March 11,
1968, the daughter of the late Pierre Thibault and
his widow sold the shares which they held jointly
(a different number of shares) to the same pur
chasers for the sum of $100,000. Both agreements
of March 11, 1968 provided for the payment to the
present plaintiff Gilles, his brothers Pierre-Paul,
Réjean and Guy, his mother Julia Thibault and his
sister Pierrette Thibault Dufault of the purchase
price by means of monthly annuities guaranteed
for fifteen years but since the brothers were of
different ages and also the capital sum to be paid
to the sister and mother was a lesser amount, the
monthly annuity payments were in different
amounts, but if the annuity payments had been
made for a minimum period of fifteen years in
each case, each recipient would have received sub
stantially more than the sale price of his or her
shares. The two women demanded and received a
life annuity guaranteed for a 15 year term which
was purchased for them by Finco Limitée and Guy
Charron Limitée from the Provincial Life Assur
ance Company Limited with the payment of a
single premium amounting to $103,873. The four
brothers concerned who had not sold their shares
for cash were content to receive their monthly
annuity payments from the purchasers. The
monthly payments were received by all the vendors
in the 1968 and 1969 taxation years and although
the taxpayers claimed that amounts received were
instalment payments on account of a capital sum
for which they had sold their shares, the Minister
considered that in view of the fact that the pur
chase price was to be paid by monthly instalments,
the amount being calculated on an annuity basis,
the interest portion of each payment was assess-
able as income and made the calculation accord
ingly which resulted in the re-assessment. This was
appealed and by decision of the Tax Review Board
the appeal was dismissed. The taxpayers then ini
tiated appeal proceedings in this Court.
At the commencement of the hearings it was
agreed that the decision in the present case should
apply to the five other appeals. Counsel for plain
tiff also stated that plaintiff was no longer appeal
ing the assessment of the interest portion of the
payments on an annuity basis, the appeal now
being limited to assessment of tax on tax pursuant
to the third agreement.
This agreement, also dated March 11, 1968,
read as follows:
[TRANSLATION] Guy Charron Limitée, Finco Limitée, and
Guy Charron personally undertake jointly and severally to
Messrs. Pierre-Paul Thibault, Gilles Thibault, Réjean Thibault
and Guy Thibault, all of Pierreville in the County of Yamaska
that the manner of payment which they have accepted for the
transfer of shares, that is to say a capital annuity payable
monthly with a guaranteed term of fifteen years on the basis
indicated in paragraph 2 of the agreement signed the I1th
March, 1968, will not be taxable by virtue of the income tax
laws. If it should be otherwise, we undertake to indemnify you.
We make this firm undertaking. The present agreement applies
also to the annuity payable to Mesdames Thibault and Dufault.
Unfortunately for the four brothers involved in
these appeals who neither sold their shares for cash
nor arranged for the purchasers to buy annuities
for them from an insurance company as Julia
Thibault and Pierrette Thibault Dufault had done,
the payments terminated in June, 1972. Guy
Charron Limitée went into bankruptcy and Finco
Limitée never had any assets. When the tax assess
ment was made which resulted in additional taxes
being assessed in the amount of $10,925.20 for the
six Thibaults, they paid them and filed their claim
in the bankruptcy proceedings. In addition to this,
all of them with the exception of Pierrette Thi-
bault Dufault whose re-assessment was for a com
paratively trivial amount, commenced proceedings
in 1971 in the Superior Court or Provincial Court
as the case might be in Montreal against Guy
Charron personally as a result of his personal
guarantee of the annuity payments and taxes, if
any, due thereon. Guy Charron testified and stated
that he was in no better position to make the
payments personally than was the bankrupt com
pany and on the threat of making a personal
assignment in bankruptcy, a settlement was made
on April 11, 1973 between him, the four brothers,
Gilles, Pierre-Paul, Réjean and Guy, and the
mother Julia Thibault, whereby they were paid the
sum of $17,000 in full settlement of all claims
existing or future in connection with the agree
ments of March 11, 1968. The proceedings in the
Quebec courts were withdrawn and Charron
agreed to pay the fees of counsel in connection
with the notices of opposition to the tax assess
ments and that if any amounts were received by
the Thibaults from the Minister of National Reve
nue as a result of these oppositions or any future
oppositions, these sums would remain the entire
property of the Thibaults. Since Gilles Thibault
was supposed to receive $1,016 per month, Pierre-
Paul $1,130, Réjean $937 and Guy $930 for life
and the tax involved in the 1968 and 1969 assess
ments amounted to $10,925.20 as already stated, it
is evident that the amount of the settlement would
not even cover annuity payments for two months
plus the amount of tax assessed on the income
portion of the annuity payments for 1968 and
1969. No break-down was made or attempted as to
what portion of the settlement was attributable to
tax liability and what portion to annuity payments,
this evidence only having been presented with a
view to establishing that all possible efforts had
been made to collect not only the annuity pay
ments but the additional tax on the tax assessed on
the income portion thereof, and that these efforts
had yielded minimal results, no dividend having
been paid or anticipated in connection with the
claim against Guy Charron Limitée.
The only issues before the Court in the present
appeal are first, whether tax can be assessed on
amounts which a taxpayer is entitled to claim by
virtue of a contract but which he is unable to
collect, and second, whether the agreement to
indemnify the taxpayer against any income tax
assessed as a result of the annuity payment would
only come into play when such an assessment was
made—in the present case in 1971—or whether,
since the tax was allegedly due for the 1968 and
1969 years, the right to claim indemnity should be
considered as applicable to those years even
though no re-assessment was made by the Minister
of National Revenue until 1971.
There is some jurisprudence which, although not
directly in point, throws some light on the matter.
The case which is most closely in point is a Tax
Appeal Board judgment, The New York Central
Railroad Company v. M.N.R.' which carefully
examines existing Canadian and British jurispru
dence respecting the assessment of tax on tax. The
headnote sets out the facts as follows:
The appellant was the lessee of the property of another
railway company and as such took over the management of the
properties of two other companies, incurring, inter alia, the
obligation to pay all taxes levied on the said companies. In 1950
the appellant was assessed in respect of the year 1948 in a
manner whereby the full amount of the total tax to be paid on
behalf of the two companies was added to the taxable income of
the companies, i.e. the appellant was called upon to pay tax on
tax. To arrive at the exact tax so payable, sixteen computations
were necessary to reach the point where income tax had been
assessed in respect of every dollar paid by the appellant for the
two companies and treated as addition taxable income to them.
(1952-53) 7 Tax A.B.C. 334.
The appellant submitted that this method of assessment had no
legitimate place in applying the provisions of the Act, and that
it was a departure from the departmental practice formerly
followed.
At page 337 three methods of computation are set
out. In the first the lessee was not permitted a
deduction of the tax paid on behalf of the two
lessors and the amount so paid was not added to
the lessors' taxable income. In the second method,
the tax paid for the two lessors was added to their
income and the lessee was only permitted to
deduct the initial tax chargeable and paid and not
the further tax imposed. In the third method the
tax was recomputed fifteen times before the
amount added to the lessors' income became less
than one cent and the tax finally calculated was
added to the lessors' taxable income, the lessee
deducting the full amount paid on • behalf of the
lessors. The Board in pointing out the apparent
unfairness of the third method stated at page 342:
This method does not commend itself and its adoption at this
late date, as though an afterthought, cannot fail to impress one
as unfortunate. It is regrettable that the Board is not in a
position to interfere. Legislative enactment, if it should appear
indicated, would seem to be the appellant's only remedy.
In this case two British judgments were referred to
at page 340, namely, Kliman v. Winkworth
((1933) 17 T.C. 569 at 572) in which Finlay J.
said:
There is no room, of course, in a taxing Act for equitable
considerations .... It is, of course, for the Legislature and not
for the Courts to consider matters of that sort.
Reference is also made to a statement by Lord
Blackburn in 1927 in The Commissioners of
Inland Revenue v. The Granite City Steamship
Co. Ltd. ((1927-28) 13 T.C. 1 at 16) in which he
said: "Equity and income tax are strangers". Quite
possibly as a result of this decision, an amendment
was made to the Income Tax Act in 1953 by S.C.
1952-53, c. 40, s. 43 which reads as follows:
43. (1) Where under a contract, will or trust, made or
created before the coming into force of this Part, a person is
required to make a payment and is required by the terms of the
contract, will or trust to pay an additional amount measured by
reference to tax payable by the payee under Part I of The
Income Tax Act by reason of the payment,
(a) the tax payable by the payee under the said Part I for
the taxation year in or in respect of which such a payment is
paid or payable is the amount that the payee's tax under the
said Part I for the year would be if no amount under the
contract were included in computing his income for the year
plus
(i) the amount by which his tax under the said Part I
would be increased by including the payment in computing
his income, and
(ii) the amount by which the payee's tax under Part I for
the year would be further increased by including, in the
computation of his income for the year, the amount fixed
by subparagraph (i) or the additional payment, whichever
is the lesser, and
(b) if the payer would otherwise be entitled to deduct the
amounts payable under such a contract, in computing his
income for a taxation year, he is not entitled to deduct the
amount determined under subparagraph (ii) of paragraph
(a).
(2) This section is applicable to the 1953 and subsequent
taxation years.
By the use of the words "paid or payable" in
reference to the additional amount being included
in computing the taxpayer's income for a taxation
year, it would appear that the claim for payment
in a subsequent year nevertheless increases the
taxpayer's income for the taxation year in
question.
Counsel argued that the purpose of this amend
ment was to eliminate the application of the third
method of calculation used in The New York
Central Railroad Company case and its infinite
computations and to give legislative sanction to the
second method whereby the tax paid or payable on
behalf of the taxpayer is added to his taxable
income and tax is then paid on same without
carrying the process further. It was pointed out,
however, that section 43 (1) applies only to a "con-
tract, will or trust, made or created before the
coming into force of this Part" (italics mine) and
that subsection (2), making the section applicable
to the 1953 and subsequent taxation years merely
means that the method of calculation set out in
subsection (1) would be applied in any taxation
year commencing with the 1953 year, but does not
affect the limitation in subsection (1) that it only
applies to contracts created before the coming into
force of the section. If it had been intended to
apply it to all contracts made thereafter, subsec
tion (1) should have read "before or after the
coming into force of this. Part". I agree with this
interpretation but it does not help plaintiff's con-
tention since, even though this section may not
have been applicable to the present agreement, the
Minister has assessed tax on this basis without
pyramiding it as he might well have done as this
section does not apply to the present case. More
over, there is in any event nothing in this section
which would indicate that tax is not collectable on
amounts received by a taxpayer by virtue of a
contract to indemnify him against income tax
which he may be called upon to pay. It is rather a
confirmation of the existing practice to add this
tax so paid on his behalf to the taxpayer's taxable
income. See, for example, Hartland v. Diggines 2 ;
Salter v. M.N.R. 3 which approved Hartland v.
Diggines and Commissioners of Inland Revenue
v. Baillie 4 , all of which are referred to in The New
York Central Railroad Company case (supra).
Two other cases, although they deal primarily
with interpretation of wills, are also of interest. In
the case of In the Matter of the Trusts under the
Will of the Honourable Sir Albert Edward Kemp'
the Supreme Court of Canada held that whether
the trustees of an estate paid the money to meet
the income tax payments of the widow before they
became due or recouped the widow thereafter-
wards, the money, under the provisions of the
Income War Tax Act, was part of her income for
income tax purposes. In the case of Re Wood 6 an
annuity was left to the widow free and clear of all
taxes which were to be paid each year out of the
estate and it was further provided that should the
widow pay any such taxes with respect to her
income either before or after receipt of such
income the tax so paid by her should be repaid to
her out of the estate. This case followed the deci
sion in Re Kemp (supra) and, while the editorial
note points out that presumably because the point
was not raised for consideration, the Court omitted
to pass upon the question of whether the payment
of part of the widow's income tax by the executors
constituted additional taxable income to her, this
proposition is not new to Canadian tax law. A
reference is made to the case of The King v. The
2 [1926] A.C. 289.
3 [1946] Ex.C.R. 634.
4 (1933-37) 20 T.C. 187.
3 [1940] S.C.R. 353.
6 [1943] C.T.C. 199.
Montreal Telegraph Company ([1925] Ex.C.R.
79) where at page 81 Audette J. remarked:
The tax is a personal tax upon the person or company. Were
the contractors remitting, as contended by the defendant com
pany, this sum of $165,000 together with $16,599.69 and
interest, to cover the defendant's income tax, what would be the
position of the defendant? Clearly the defendant would receive
a higher revenue and would thereby become liable to pay their
income tax upon $165,000 and $16,599.69, the amount of their
revenue or income. This view is supported by a number of
decisions.
See also the case of Aimée Lady Michelham's
Executors v. The Commissioners of Inland
Revenue' in which Lord Hanworth M.R. said at
pages 748-749:
Lady Michelham has to pay her Income Tax. She has to pay
Income Tax in respect of f25,000 which she receives in the
year, and she has also to pay, as being part of her income, the
amount in respect of which she receives immunity, by reason of
the trustees, to avoid circuity, paying the Income Tax charged
upon her.
In the light of the foregoing jurisprudence I find
that both issues must be resolved against plaintiff.
While plaintiff contends that the doctrine of con
structive receipt can only be applied if the tax to
be paid by purchasers on his behalf was actually
collected by him, and that the mere right which he
had in 1968 and 1969 to claim indemnity for any
tax imposed as a result of the sale agreement when
payment of same was demanded of him by the
Minister in 1971 does not add this tax to his
income if he never received payment of same,
there is an indication that some if not all of it was
in fact collected as a result of the settlement with
Guy Charron, depending on how the attribution of
the sums received by virtue of this settlement is
made. On the second issue, although the actual
claim for this tax on tax was only made by the
Minister in the re-assessment in 1971 and hence it
was not until after that re-assessment that plaintiff
could in turn avail himself of the provisions of the
indemnity agreement to reclaim same from the
guarantor, nevertheless, the additional taxes
assessed were payable for the 1968 and 1969
taxation years respectively by virtue of the indem
nity agreement and the right to claim same from
the guarantor constituted additional income for
7 (1928-31) 15 T.C. 737.
the plaintiff in each of those years even though the
actual amount of same .was not determined until
subsequently following the re-assessment. (See, for
example, The New York Central Railroad (supra)
where the assessment which was upheld was made
in 1950 adding the tax as income for the 1948
taxation year.) I therefore find that the re-assess
ment was properly made and plaintiff's action is
dismissed, with costs. Although the other five
actions were not before the Court for trial, by
agreement between the parties the same disposi
tion will be made of all of them, save that in the
other five actions there will, of course, be no costs
allowed for proof and hearing.
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.