Date: 19990909
Docket: 97-3398-IT-G
BETWEEN:
ALLAN M. FOSTEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal in respect of the 1992 taxation year. The Appellant was employed by B.L. Fostey Customs Brokers Ltd. ("B.L. Fostey") until October 31, 1991. His employment was terminated on that date because B.L. Fostey sold its goodwill to Cole McCubbin Ltd. (now known as Cole International Inc.) ("Cole Inc."). The sale agreement between the two companies indicated that Cole Inc. would hire the Appellant for a "forty month personal employment contract" which started on November 1, 1991.
[2] B.L. Fostey paid $30,000 to the Appellant as a retiring allowance, which he invested in a registered retirement savings plan.
[3] The Minister of National Revenue (the "Minister") reassessed the Appellant for the 1992 taxation year and disallowed the $30,000 that he had claimed as a retiring allowance.
FACTS
[4] A Partial Agreed Statement of Facts was filed. It reads as follows:
1. B.L. Fostey Customs Brokers Ltd. (the "Corporation") was a corporation incorporated under the laws of Manitoba.
2. The Corporation carried on customs brokerage operations in the town of Sprague, Manitoba.
3. In 1991, Allan Fostey ("Fostey") held 51% of the shares of the Corporation, and Helen Fostey held 49% of the shares.
4. Fostey was the President of the Corporation, and was employed by the Corporation.
5. The Corporation employed Fostey to carry out its customs brokerage operations from 1978 to October, 1991.
6. Fostey was remunerated at the rate of $3,000.00 per month for his employment position with the Corporation.
7. On October 29, 1991, the Corporation, Fostey and Cole McCubbin Limited ("Cole") entered into an asset purchase agreement (the "agreement") whereby Cole agreed to purchase, and the Corporation agreed to sell, inter alia, the goodwill of the Corporation. The agreement stipulated that the purchase price would be $92,000.00, allocated among the purchased assets as follows:
Furniture $2,000.00
Goodwill Balance of Price
8. Fostey did not have any ownership interest in Cole.
9. Cole did not continue the operations of B.L. Fostey.
10. Pursuant to the agreement, Cole, the Corporation and Fostey agreed, inter alia:
a) to permit Fostey to assist Cole in converting and maintaining the Corporation's existing clients;
b) that Cole and Fostey would enter into an employment agreement, providing that, inter alia:
i) Cole would lease from the Corporation the then present business premises of the Corporation at a rate of $500.00 per month;
ii) Fostey would be employed by Cole for a 40 month term, commencing November 1, 1991;
iii) Fostey would be employed as the manager of the Sprague office;
iv) Fostey would be remunerated for his position as manager at the rate of $3,000.00 per month;
v) Fostey would be entitled to a car allowance at the rate of $1,000.00 per month, payable to the Corporation;
vi) Fostey would be entitled to 12 weeks holidays per year;
vii) Fostey would enter into a non-competition clause, agreeing not to compete in a similar business, either directly or indirectly, within a 100-mile radius of the Town of Sprague, for a period of 3 years from the expiry or termination of the employment agreement.
11. Fostey and Cole did in fact enter into an employment agreement (the "employment agreement") containing the provisions stipulated by the agreement.
12. Cole did in fact lease the business premises of the Corporation beginning November 1, 1991, and carried on and continues to carry on customs brokerage operations there.
13. Cole employed Fostey as the manager of the Sprague office beginning November 1, 1991. Fostey in fact carried out duties as the manager of the Sprague office upon his employment with Cole, and continues to so carry out those duties.
14. Upon his commencement of employment duties with Cole, Fostey was remunerated at the rate of $3,000.00 per month, as per the employment agreement.
15. Upon the cessation of Fostey's employment with the Corporation, the Corporation paid him $30,000.00 (the "payment"). Whether or not the payment was a retiring allowance is in dispute between the parties.
16. Fostey invested the payment in a Registered Retirement Savings Plan ("RRSP"), and claimed a deduction in respect of the RRSP on his 1992 income tax return.
17. By Notice of Reassessment dated May 28, 1996, the Minister of National Revenue (the "Minister") reassessed Fostey to reduce the amount allowed as a deduction in respect of the RRSP, on the basis that the payment did not constitute a retiring allowance.
18. Fostey objected to the reassessment by Notice of Objection dated August 16, 1996.
19. The Minister confirmed the reassessment by Notice of Confirmation dated August 20, 1997.
THE EVIDENCE AT TRIAL
[5] The Appellant described his role with B.L. Fostey as that of Chief Executive Officer. In that role, he directed the business including seeking out new clients, servicing existing clients and doing all things necessary to carry out the customs brokerage business. He travelled and represented the corporation in the south-eastern part of Manitoba.
[6] The business was small (two full-time employees and one half-time employee). In relation to the performance of the employee functions, the Appellant did some and supervised others. Most of the representations to government on behalf of clients and the research into clients' matters he did personally. In his corporate employment, he reported to no one and the limited staff reported to him.
[7] When the assets of the company were sold pursuant to the agreement, part of the negotiations included the Appellant being employed by the purchaser as the 'manager' of the Sprague office.
[8] The purchaser's insistence on this provision was to ensure a continuity of the customs brokerage business to the purchaser in the Sprague office and to provide a qualified customs brokerage person in that office.
[9] After the sale, B.L. Fostey surrendered its customs brokerage licence and the corporation became inactive.
[10] After the sale, the Appellant's role changed. He had no contact with the clients or with importers. Further, he had no financial responsibility (previously he was required on behalf of B.L. Fostey from time to time to advance funds personally for clients' transactions). Many of the clerical duties previously performed by the Appellant were now done by others and no longer did the Appellant perform any external representation or research roles. Most importantly, he was not the control behind the customs brokerage business that he was under B.L. Fostey. Essentially, he became an employee for Cole Inc. performing primarily clerical functions.
LEGISLATION
[11] Subsection 248(1) of the Income Tax Act (the "Act") defines "retiring allowance" as:
"retiring allowance" means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received
(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or
(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,
by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer.
(emphasis added)
JURISPRUDENCE
[12] In Lorenzen v. The Queen, 81 DTC 5251, Deputy Judge Grant of the Federal Court — Trial Division had to determine if the sum received by the taxpayer was a retiring allowance. In that case, the taxpayer was President and a director of International Tax Services who decided to sell all of its assets to Lorenzen Associates Ltd., a corporation which also had the taxpayer as its President and a director. International Tax Services paid the taxpayer a sum, which he considered to be a retiring allowance. Deputy Judge Grant stated at page 5253:
It can not be said that such amount was paid to him for loss of office or employment as he arranged the change to Lorenzen Associates Ltd. himself voluntarily and it can not be said to be a loss particularly by reason of the fact that he retained the same business in the same premises and he sustained no loss thereby. ... Retirement implies a complete cessation of one's profession or business. In reality the plaintiff continued to carry on the same business with the only change being the transfer of assets to a limited company bearing the same name as that under which he carried on such business to December 31, 1971.
(emphasis added)
[13] Associate Chief Justice Jerome of the Federal Court — Trial Division in Doyle v. The Queen, 83 DTC 5383, also had to determine whether a sum received by the taxpayer was a retiring allowance. The taxpayer was a major shareholder and a director of Butress Investments Limited. Butress Investments Limited sold its assets to Weram, a corporation which also had the taxpayer as a shareholder and a director. The taxpayer's tasks and responsibilities were the same as before the sale occurred. Associate Chief Justice Jerome stated at page 5384:
The onus, of course, of establishing the contention that the $15,500 was correctly classified as a retirement allowance or a retiring allowance within the terms of the statute falls upon the taxpayer ...
[14] He then went on to say at page 5385:
[B]ut in every case in which there has been simply a continuation in the same capacity, the same responsibilities, but under a different company and especially where there is some relationship in the shareholdings of the companies the decisions uniformly and consistently reject the notion that there has been retirement and that, therefore, any sum paid falls within the terms of subsection 248(1).
(emphasis added)
[15] In Serafini v. M.N.R., 89 DTC 653, the taxpayer had filed his returns of income on the basis that his retirement would take effect on October 30, 1985. He was to receive almost $40,000 as a retiring allowance in monthly instalments up until October 30, 1986. However, the Minister reassessed him on the basis that the sum of money was not a retiring allowance as defined in subsection 248(1) of the Act. Judge Sarchuk of this Court stated at page 656:
What is apparent from the agreement (Exhibit A-2) is that the appellant's employment relationship was not intended to terminate prior to October 31, 1986. In my view, it would be abusing the language of that agreement to find otherwise. Counsel for the appellant submitted that the terms and conditions set out in the agreement (and according to him the other documents) did not constitute a contract of employment. I do not agree.
[16] Therefore, Judge Sarchuk, in finding that the Appellant was still an employee up until October 30, 1986, found that the sum of money could not be a retiring allowance as he had not retired.
[17] In Shell et al. v. M.N.R., 82 DTC 1369, F.J. Dubrule, Q.C., of the Tax Review Board had to decide whether or not the payments made to the Appellants were retirement allowances. In that case, the Appellants said that they were retiring at the end of the month but agreed to complete the contracts that were not yet completed.
[18] The Board found there was confusion as to what transpired after the purported retirement date. At the end of the case the Board found the Appellants were not retired.
[19] In Specht v. The Queen, 75 DTC 5069, Justice Collier of the Federal Court of Canada — Trial Division had to determine if the $40,000 receivable annually for the five years after the Appellant resigned was a retiring allowance. Mr. Specht was President of MacMillan Bloedel and Powell River Limited. Upon reorganization, he declined to accept the position of Chief Financial Officer. Justice Collier stated at page 5073:
In my view, the payment here was not made upon or after the plaintiff's retirement. The plaintiff did not retire or go into retirement from his occupation with MacMillan Bloedel within the ordinary meaning of "retire" or "retirement". That is, he did not withdraw from his employment because he had reached a mutually stipulated age, or generally withdraw from his occupation or business activity. I have obtained some assistance on this point, in endeavouring to ascertain the ordinary meaning of "retirement", from dictionary definitions:
The Shorter Oxford English Dictionary (3rd ed. rev.): "withdrawal from occupation or business activity"
The Living Webster (1st ed.) "retire" "to withdraw from business or active life".
... What the plaintiff did here was, by agreement, resign. He did not, as I see it, retire.
ANALYSIS
[20] The Appellant was, as he described, the Chief Executive Officer of B.L. Fostey. In his employment he managed, controlled and directed all the business activities of B.L. Fostey. The cessation of the employment by B.L. Fostey of the Appellant was final and complete. B.L. Fostey surrendered its brokerage licence and became inactive.
[21] The Appellant was not a shareholder, director or officer of Cole Inc. nor in his new employment did he exercise any control over Cole Inc. Further, in his new employment he did not perform the same services that he performed with B.L. Fostey.
[22] Specifically, the Appellant in his new managerial-clerical employment with Cole Inc. did not have the same executive role with its consequent responsibilities, duties or authority that he had with B.L. Fostey. I conclude the Appellant retired from his Chief Executive Officer employment with B.L. Fostey and when he ceased his employment in that capacity he received a retiring allowance from B.L. Fostey in respect of his many years of long service.
DECISION
[23] The appeal from the assessment made under the Act for the 1992 taxation year is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the amount of $30,000 received by the Appellant is a retiring allowance within the meaning of subsection 248(1) of the Act.
[24] The Appellant is entitled to his costs.
Signed at Ottawa, Canada, this 9th day of September 1999.
"D. Hamlyn"
J.T.C.C.