T-1758-73
The Queen (Plaintiff)
v.
Jean-Marc Poulin (Defendant)
Trial Division, Walsh J.—Montreal, September
17; Ottawa, September 24, 1976.
Income tax—Payment on withdrawal from partnership—
Whether true partnership—Whether moneys paid to defendant
on withdrawal from partnership capital receipts or taxable
income—Whether amounts paid to defendant by partnership
made on account of capital or deductible expenses of
partnership.
Defendant withdrew from a partnership with M.P. and M.C.
by written agreement setting out the conditions of his with
drawal as being a lump sum payment of $20,000, payable in
1967 and 1968. Defendant claims these were capital receipts
and not taxable income. In 1968 the partnership consisted of
M.P. and H.-P.L. The payments to the defendant were assessed
as disallowed expenses of the partnership and the appeals of
H.-P.L. and M.P. against this assessment were heard at the
same time as the present case. The plaintiff assessed the
defendant for the sums received as being income and disallowed
these payments to H.-P.L. and M.P. as having been made on
account of capital. M.P.'s estate claims that the partnership
agreement between him and H.-P.L. absolved him of any
responsibility for the payments to the defendant. H.-P.L.
claims there was no true partnership between him and the
defendant because the defendant never bought into the
partnership.
Held, the plaintiffs appeal is dismissed as are the appeals by
H.-P.L. and M.P. (In respect of the latter two cases, the
Minister cannot be bound by any agreement between the
parties and the assessment must therefore be the same for
both.) The evidence shows that a partnership existed between
the defendant and H.-P.L. even though the defendant made no
capital contribution to it. The agreement under which the
defendant withdrew from the partnership shows that he sold
out his interest for a sum less than it would have been worth
had he insisted on a balance sheet being prepared at the time.
There was no determination of his share of the net profits of the
partnership and the calculation of the sum payable to him was
not made on the basis of any provision for allocation of profits
on termination of the partnership. I.e., in the absence of other
agreements and in order to avoid a fiscal liquidation of the
partnership the defendant sold his interest for an arbitrary
price not based on the value of the capital assets or a percent
age of the accounts receivable or the net income of the
partnership.
Gresham Life Assurance Society v. Styles [1892] A.C.
309 and M.N.R. v. Ouellette [1971] C.T.C. 121, applied.
Bourboin v. Savard (1926) 40 K.B. (Que.) 68; M.N.R. v.
Wahn [1969] S.C.R. 404 and M.N.R. v. Sedgwick [1964]
S.C.R. 177, distinguished.
INCOME tax appeal.
COUNSEL:
C. Blanchard for the Queen.
J.-M. Poulin, defendant, on his own behalf.
H.-P. Lemay, plaintiff (T-4131-74), on his
own behalf.
M. Paquin, plaintiff (T-4132-74), on his own
behalf.
SOLICITORS:
Deputy Attorney General of Canada for the
Queen.
J.-M. Poulin, Montreal, defendant, for
himself.
Lemay, Paquin & Gilbert, Montreal, plain
tiffs, for themselves (T-4131-74 & T-4132-
74).
The following are the reasons for judgment
rendered in English by
WALSH J.: By order of Associate Chief Justice
Thurlow dated August 24, 1976, this action was
heard jointly and on the same evidence as the cases
of Lemay v. The Queen (T-4131-74) and Paquin v.
The Queen (T-4132-74). The appeal in the present
case is brought by Her Majesty The Queen from a
decision of February 7, 1973, of the Tax Review
Board allowing in part the appeal by defendant of
an assessment by the Minister of National Reve
nue for his 1967 and 1968 taxation years in which
the Minister had included in the taxable income of
the defendant an amount of $5,000 for his 1967
taxation year and $10,000 for his 1968 taxation
year.
Defendant is an attorney who practised his
profession in the Province of Quebec from 1959 to
May 1, 1967, in association with Henri-Paul
Lemay and Micheline Corbeil.
He withdrew from this partnership after an
exchange of correspondence between them consist
ing of letters written by him on April 11 and April
17, 1967, suggesting the terms of this withdrawal
which were accepted by a letter of April 20, 1967,
addressed to him by the said Henri-Paul Lemay
and Micheline Corbeil.
By virtue of this he was to receive $20,000 by
eight quarterly instalments of $2,500 each of
which two were payable in 1967 amounting to
$5,000 and four amounting to $10,000 in 1968
which he contended were capital receipts in his
hands and hence not taxable as income. Before his
withdrawal, and with his concurrence, one Louis
Gilles Gagnon, whose taxation is not an issue in
the present proceedings, had been added to the
partnership as of January 1, 1967, and effective
January 1, 1968, Mr. Lemay had entered into
partnership with Maurice Paquin and Miss Cor-
beil withdrew. The terms of her withdrawal are
not an issue in the present proceedings nor is any
further reference made to Mr. Gagnon, and it
appears that following January 1, 1968, Mr.
Lemay and Mr. Paquin were the only two part
ners. The statement of revenue and expenses as of
December 31, 1967, headed Lemay, Poulin and
Corbeil and underneath, Lemay, Corbeil and
Gagnon, shows as an expense item "distribution of
fees on liquidation" in the amount of $5,000. A
similar statement of revenue and expenses for the
year ending December 31, 1968, headed Lemay,
Paquin and Corbeil, shows distribution of fees on
liquidation of $15,335. Another statement for the
year ending December 31, 1969, again headed
Lemay, Paquin and Corbeil shows distribution of
fees on liquidation in the amount of $8,960.
Although Mr. Lemay did not benefit by the entire
net income of the partnership after Mr. Poulin's
departure in May 1967, the re-assessment of his
income tax return for that year added the entire
$5,000 paid to Mr. Poulin as a disallowed expense.
For his 1968 taxation year the sum of $5,760.45
was added as a disallowed expense representing his
share of payments made to Mr. Poulin in that
year. His 1969 tax assessment is not before the
Court in the present proceedings but it is of some
interest to note that the same procedure was fol
lowed in that year and the amount $3,076.92 was
added back as a disallowed expense representing
his share of payments to Mr. Poulin. There is no
readily apparent explanation as to why the entire
$5,000 disallowed as an expense of the partnership
was added back to Mr. Lemay's income for 1967.
Neither was any explanation given as to how the
figures of $15,335 and $8,960 respectively were
shown in the 1968 and 1969 statement of income
and expenses as distribution of fees on liquidation
when the amounts paid to Mr. Poulin in those
years were respectively $10,000 and $5,000. Poss
ibly the other items represent payments to Miss
Corbeil who seems to have left the firm on Mr.
Paquin's entry since the sharing of income for the
years 1968 and following was only made between
Mr. Lemay and him, despite Miss Corbeil's name
appearing on the head of the financial statement.
Perhaps her name was still used in the firm name
when she ceased to be a partner as would appear
to be indicated by the partnership agreement be
tween Messrs. Lemay and Paquin entered into
December 12, 1967 to take effect January 1, 1968
which refers to a sum of $20,000 payable to Miss
Corbeil pursuant to an agreement between them
and her which was not produced.
In the case of Mr. Paquin, since he did not
become a partner until 1968, it is his 1968 and
1969 income tax returns which have been re
assessed rather than the 1967 and 1968 returns as
in the cases of Mr. Poulin and Mr. Lemay. In Mr.
Paquin's 1968 re-assessment, the sum $4,239.55
was added back as a disallowed expense represent
ing his share of the payments made to Mr. Poulin
in that year and similarly an amount of $1,924.08
was added back to his income for the 1969 taxa
tion period. If we add the amount added back for
him in 1968 of $4,239.55 to the $5,760.45 added
back to the income of Mr. Lemay we reach the
figure of $10,000, being the full amount of the
payments to Mr. Poulin in 1968, and similarly if
we add the amount of $1,924.08 disallowed to Mr.
Paquin in 1969 to the amount of $3,076.92 disal
lowed to Mr. Lemay, whose 1969 return is not
however before the Court in the present proceed
ings, we arrive at the figure of $5,000 being the
total of the payments made to Mr. Poulin in 1969,
so these figures reconcile, and it is clear that Miss
Corbeil did not participate in any of these
payments.
The Minister, no doubt for reasons of security,
decided to make contradictory assessments. On the
one hand he assessed Mr. Poulin for the sums
received as being on account of income, while on
the other hand he disallowed these payments to
Mr. Lemay and Mr. Paquin as having been made
on account of capital. The finding of the Tax
Review Board that they constituted capital pay
ments when received by Mr. Poulin would, if
confirmed, of course have the result of preventing
Messrs. Lemay and Paquin from deducting their
share of these payments from their taxable income
for the years in question so their appeals would fail
and the Minister's re-assessments of their returns,
be confirmed. The decision in the present case
therefore will be applicable to the other two cases
and counsel for the Minister was forced into the
difficult position of attempting to sustain opposite
and conflicting points of view in his cross-examina
tion of the witnesses at the hearing, while at the
same time being in an almost neutral position since
if the Crown succeeds in the Poulin appeal it will
follow that the taxpayers will succeed in the other
two appeals, and conversely if the Crown loses the
Poulin appeal then judgment will be rendered dis
missing the other two appeals. There is one possi
ble modification to this which should be dealt with.
Counsel for the Paquin estate, Mr. Paquin having
died since proceedings were commenced, contends
that no part of the payments to Mr. Poulin in 1968
and 1969 should have been disallowed and added
back to Mr. Paquin's income since he was not a
partner or in any way involved in the agreement in
May 1967 by virtue of which the payments
became payable to Mr. Poulin.
The partnership agreement between Mr. Lemay
and Mr. Paquin signed on December 12, 1967, to
take effect from January 1, 1968, contains a
revised clause written in longhand and initialled by
Messrs. Lemay and Paquin which reads as follows:
[TRANSLATION] When the auditors will have established the
amounts foreseen in Annex A in accordance with its stipula
tions and the total value of the contributions of H.P.L. shall
have been established, the amount of $15,000 payable to J. M.
Poulin by quarterly instalments of $2,500 of which the first will
become due February 1st, 1968, and also the amount of
$20,000 payable to Micheline Corbeil according to the terms of
an agreement entered into this day between H. P. Lemay,
Maurice Paquin and Micheline Corbeil shall be deducted, these
said amounts of $15,000 and $20,000 shall be payable from the
revenues of the present partnership.
While this makes it clear that Mr. Paquin is not
responsible for these payments which are to be
deducted from Mr. Lemay's capital interest in the
partnership, it stipulates that the source of the
funds to make these payments shall be the income
of the new partnership. Such an agreement cannot
be binding on the Minister nor have the effect of
converting capital payments, if that is what they
are found to be, into payments deemed to be
payments out of income for taxation purposes. See
for example the principle laid down by Lord Chan
cellor Halsbury in Gresham Life Assurance Socie
ty v. Styles [ 1892] A.C. 309 at page 315:
The thing to be taxed is the amount of profits or gains. The
word "profits" I think is to be understood in its natural and
proper sense—in a sense which no commercial man would
misunderstand. But when once an individual or a company has
in that proper sense ascertained what are the profits of his
business or his trade, the destination of those profits, or the
charge which has been made on those profits by previous
agreement or otherwise, is perfectly immaterial. The tax is
payable upon the profits realized, and the meaning to my mind
is rendered plain by the words "payable out of profits."
The simple fact is that these payments to Mr.
Poulin were deducted as an expense item in state
ments of the Lemay and Paquin partnership in
1968 and 1969 and hence reduced the net income
distributable to the partners in accordance with
the terms of their partnership agreement. When
the Minister disallowed these as expenditures
deductible from income the proportion attributable
to Mr. Paquin was added back to his income, as in
the case of Mr. Lemay. The assessor could not
have done otherwise and if the re-assessment off
Mr. Lemay is sustained, the similar re-assessment
of Mr. Paquin must also be sustained. The income
of the partnership available for distribution was
merely increased as a result of these re-assess
ments, and if Mr. Paquin became liable to addi
tional taxation resulting from the payments out of
partnership income to Mr. Poulin, which payments
were an obligation of Mr. Lemay, this would result
from the terms of their agreement, and it is not an
issue before this Court to determine whether his
estate has any claim against Mr. Lemay. In so far
as the re-assessments are concerned I find the
situation to be identical.
The feature which makes this case distinguish
able from much of the previous jurisprudence on
partnership dissolutions, and difficult to decide on
the facts, is that there was no written partnership
agreement at any time between the partners and
their sharing of the profits was done on a some
what complex basis. Each of them drew weekly
predetermined amounts which were increased from
time to time as the net income of the partnership
justified, and it was only the excess over these
amounts which was divided on a percentage basis,
which in 1967 and the preceding year in any event,
consisted of 55% for Mr. Lemay, 35% for Mr.
Poulin and 10% for Miss Corbeil. Their weekly
drawings, although unequal, were not distributed
on the same percentage basis; in fact if they had
been, Miss Corbeil's share for example would have
been unreasonably low. Mr. Lemay already had
his library and much of his office equipment when
Mr. Poulin joined the partnership and while addi
tions and replacements were of course made from
year to year and paid for out of the partnership
account, Mr. Lemay, according to his evidence,
apparently considered that these expenditures
should not be capitalized in any way but were
normal current expenses, especially as many of the
books purchased were the current issues of taxa
tion and other services which became obsolete each
year when replaced by the following year's edi
tions. The partnership never had any audited
financial returns prepared, the accounting returns
filed for income tax purposes being prepared inter
nally, and these returns did not, until Mr. Paquin
entered into partnership with Mr. Lemay after
Mr. Poulin's departure, include any balance sheet,
being confined merely to statements of income and
expenses and various schedules supporting this. It
is Mr. Lemay's contention that there was no true
partnership between him and Mr. Poulin and Miss
Corbeil since there was never any contribution by
them to the capital of it and that the percentages
allocated to them over and above the basic weekly
drawings merely were a sharing of the profits and
did not indicate a similar nor any percentage
interest in the capital of the partnership. He con
tends that, on the other hand, following the 1st of
January, 1968, he and Mr. Paquin had a true
partnership as appears from the audited account
ing statements drawn up for the years 1969 and
1970 including a balance sheet.
The terms on which Mr. Poulin severed his
association with Mr. Lemay and Miss Corbeil are
set out in his letters of April 11 and April 17, 1967
and their reply of April 20. These documents
constitute the entire dissolution agreement be
tween them. The significant portions of these
documents read as follows:
[TRANSLATION] Letter of April 1 I
I do not intend at present to provoke a dissolution of the
partnership because I foresee that such mode of proceeding
could result in a number of problems which are not desirable.
He then makes the following suggestions:
1. Establishment of my interest in the partnership of Lemay,
Poulin & Corbeil
Since we have never had a written partnership agreement
and the interests of the three partners have varied since 1959, I
would accept to establish my interest in the partnership my
percent of the net revenues of it as of December 31st, 1965, as
appears from the financial statements.'
It is to be noted that in the contract which we signed with
Mr. L. Gilles Gagnon we foresaw this method to establish the
number of shares belonging to each of the partners. 2
2. Balance due on 1965 and 1966 revenues
The balance for 1965 is established at $ . The balance
for 1966 is not yet known since the figures for this year are not
yet available. 3
3. Establishment of my capital in the partnership.
Under this heading he states that they could
have drawn up a balance sheet showing physical
assets, accounts receivable less reserve for bad
accounts, work in progress or for which they had
been retained, but he concedes that this method
would be inconvenient and prejudicial to the con
tinuation of the firm and therefore instead of this
and without any audit or liquidation of the assets
he is prepared to transfer his shares on the condi
tions set out under
4. Conditions and amounts.
Under this heading he refers to payment on
acceptance of his offer of the balance due him as
his share of the net income, and the sale of his
share in the partnership for $20,000 to be paid in
12 months by four quarterly payments of $5,000
each, and various other conditions such as being
relieved of any responsibility arising from the
agreement with Mr. Gagnon, not meddling in any
way in the future conduct of the office, the right to
withdraw if he desires his office furniture, the
' This figure was 35%.
2 The agreement of the three partners with Mr. Gagnon
dated January 5, 1967, states in paragraph 12 D:
[TRANSLATION] The price of the partnership shares trans
ferred to the new partner by the partners prorated on the
basis of those they hold will be established by taking into
account all the assets of the partnership including physical
assets, accounts receivable and work in progress.
(This was a clause to take effect if Mr. Gagnon was permitted
to buy into the partnership).
3 The figures appear in the letter of April 17th and the
amounts totalling $4,725.94 were duly paid to Mr. Poulin by
two cheques issued on May 1 and June 1, 1967 and declared by
him as income in his 1967 tax return.
transfer of an Evinrude motor to him at its capital
cost, and a final settlement of all claims.
In his letter of April 17 he merely establishes
the amounts of the balances due to him for 1965
and 1966 as $665.94 and $4,060 respectively and
states that for the portion of 1967 up to May 1, the
date of his departure, instead of closing the books
he agrees to accept as his income for that period
his regular weekly drawings which he has received.
In the acceptance letter addressed to Mr. Poulin
by Mr. Lemay and Miss Corbeil on April 20,
1967, reference is made to his two letters of April
11 and April 17 and the second paragraph reads:
[TRANSLATION] For the purposes of a friendly settlement of
our business as partners we have verbally advised you that we
have agreed to pay you $20,000 instead of proceeding to a
dissolution which is neither practical nor advantageous for any
of us and that in return we retain, as you told us, all the
possessions and physical or other assets of whatsoever sort of
the partnership which we have terminated by mutual
agreement.
The next paragraph refers to payment of the
$20,000 by notes for $2,500 each which would be
payable each three months commencing August 1,
1967, until the final payment in May 1969 and
also to two cheques payable May 1 and June 1,
1967, totalling $4,725.94 representing the balance
of the annual profits which Mr. Poulin had not yet
received for the years 1965 and 1966.
While these three letters set out the terms of the
dissolution certain other documents are of interest
in view of Mr. Lemay's contention that there was
never a real partnership between the parties but
merely an agreement as the basis for distribution
of the profits over and above the agreed-upon
drawings. In making this argument he relies on the
case of Bourboin v. Savard 4 in which Rivard J. in
the Quebec Court of Appeal points out that three
elements are essential for a partnership, one being
the creation of a common fund by contributions
which each partner makes of his property, his
4 (1926) 40 K.B. (Que.) 68.
credit, his skill or his industry 5 . At page 72 he
states:
[TRANSLATION] The fact that the remuneration is not a
fixed sum but a share of the profits or a share of a special part
of the profits does not signify that the parties had the intention
of forming a partnership.
and again on the same page:
[TRANSLATION] The mere participation in the benefits does
not necessarily create the existence of a partnership and the
intention of forming such a contract must otherwise appear.
It is however evident that Mr. Poulin, even if he
did not buy into the partnership when he joined it,
as Mr. Gagnon was later required to do, neverthe
less contributed his skill and industry to it and
hence would not be excluded from the definition of
partnership set out in the Quebec Civil Code on
which Mr. Justice Rivard's statement is based.
Moreover at the dissolution he left clients and files
of work in progress with it. It is interesting to note
that Pigeon J., in rendering the judgment of the
Supreme Court in the case of M.N.R. v. Wahn 6 ,
found no difficulty in connection with the exist
ence of a partnership in which the respondent had
made no capital contribution for he states at page
424:
It must also be noted that when respondent was admitted to
the partnership, he was not required to make and did not make,
at that time or at any other time, any contribution to the
capital account. Under such circumstances it is only natural
that the agreement was not intended to compel the other
partners to pay a substantial capital sum for the privilege of
retaining assets to which respondent had not contributed.
This judgment will be referred to later when I deal
with the main issue in the present case as to
whether the payments made to Mr. Poulin were
payments on account of capital or on account of
income, but I refer to this statement at this time as
an indication that the absence of capital contribu
tions by Mr. Poulin to the partnership does not
mean that a full partnership did not exist, as Mr.
Lemay contends.
I have already made reference in a footnote to
the agreement between Messrs. Lemay, Poulin and
Miss Corbeil and Mr. Gagnon when he entered
into the partnership on January 1, 1967, but fur
ther reference may be made to Paragraph 12 E of
that agreement which reads:
5 This is what article 1830 of the Quebec Civil Code sets out
as essential to a contract of partnership.
6 [1969] S.C.R. 404.
[TRANSLATION] For the purposes of transferring the part
nership shares by the partners to the new partner the 100
shares are held by each partner in the same proportion as that
in which they shared the net income for the year 1965.
While of course no shares were ever issued as
such this agreement, which was signed by Mr.
Lemay, makes it abundantly clear that Mr. Poulin
who was a partner and party to the agreement at
the time, was a full partner in the capital of the
partnership for the same percentage as his share in
the net income. Paragraph 2 of the partnership
agreement between Mr. Lemay and Mr. Paquin
signed on December 12, 1967, to take effect from
January 1, 1968, sets out that the assets of the
partnership will be composed of all those
[TRANSLATION] constituting at present possessions of the part
nership of advocates existing between Henri-Paul Lemay and
Micheline Corbeil, comprising all the physical assets, the
records, the accounts receivable, the value of work in progress
established according to the billing methods presently in effect,
the clients and all those which will be obtained in future.
The agreement provides for a balance sheet to be
prepared as of December 31, 1967, as an annex to
the agreement which would establish these
amounts. While Mr. Poulin was not of course a
party to this agreement the reference to assets of
the partnership of Mr. Lemay and Miss Corbeil
certainly confirms that she had a partnership in
terest in the capital assets. This would similarly
have been the case with Mr. Poulin prior to his
departure since he had been a partner on the same
basis as Miss Corbeil although for a higher
percentage.
The handwritten clause in this agreement to
which I have already referred (supra) would also
make it appear that the payments to Mr. Poulin
were capital payments since Mr. Lemay's capital
contribution to the partnership was to be reduced
by the amount of them, even if they were to be
paid out of income.
Another document of interest is a letter signed
by Mr. Poulin dated April 20, 1967, the same date
as the Lemay-Corbeil letter to Mr. Poulin accept
ing his terms for dissolution of the partnership,
which authorizes his said former associates to sue
in his name and theirs to recover all fees for
professional services rendered while he was a
member of the partnership. In it he recognizes that
he has no right to the amounts which may be
received as a result of this.'
The balance sheet to be prepared as of Decem-
ber 31, 1967, to give effect to the partnership
agreement between Messrs. Lemay and Paquin
was not completed by the auditors until June 10,
1971. For what it is worth it showed accounts
receivable and work in progress less write-offs as
of January 1, 1968 in the very large sum of
$293,797.45, all of which was attributed in the
new partnership to Mr. Lemay. The sums due
under these headings as of December 31, 1970, are
increased by $138,448.31, one half of which, or
$69,224.15, is attributable to Mr. Lemay and the
other half to Mr. Paquin, representing their part
nership shares of the increases during the years
1968, 1969 and 1970. While, as already stated, no
balance sheet had been prepared for the year
ending December 31, 1967, until this statement
prepared in 1971, there was an unaudited schedule
attached to the partnership's income and expense
account filed with their 1967 tax returns showing
the value of furniture and fixtures as $21,773.28
less depreciation of $12,035.04 resulting in a net
value as of that date of $9,738.24.
The exchange of letters which formed the basis
of the dissolution of the partnership and the evi
dence on discovery make it clear that the $20,000
figure was not based on any calculation of the
value of accounts receivable, work in progress or
furniture and fixtures and these figures were not
available at the time. At most they give some
indication as to what Mr. Poulin might have
received had the partnership been dissolved in this
way, instead of a settlement having been made
with him for the round figure of $20,000. Even if
the figures were used to give some such indication
they would have to be used with great caution. In
the first place they are figures for January 1, 1968
and since Mr. Poulin left the partnership on May
1, 1967, there might have been a substantial dif
ference in the figures in the interval. In the second
place, in so far as income is concerned it was not,
by virtue of the partnership agreement, a flat 35%
' While only an unsigned copy of this letter was produced in
the book of documents filed as an exhibit at trial the signed
copy of it was produced as Exhibit R2 before the Tax Review
Board.
of the net income to which Mr. Poulin was en
titled, but only 35% of the residual amount over
and above the fixed weekly drawings of the part
ners, which amounts were themselves increased
from time to time by agreement and not on the
basis of their percentage interests in the partner
ship. Had he remained, therefore, he would not
have been entitled to a flat 35% of these accounts
receivable and the accounts to be eventually ren
dered for the work in progress. All that these
figures indicate, therefore, is that Mr. Poulin may
have sold out his interest in the partnership for a
sum representing substantially less than what it
would have been worth had he insisted on a bal
ance sheet being prepared at the time.
When pressed in giving evidence for an indica
tion as to how he reached the figure of $20,000 he
was asking for he stated that this represented
approximately what it cost him to live for a year
according to his usual standards after taking into
account the net amounts available to him in previ
ous years after payment of income tax on same
and that he wanted sufficient security to give him
time to get re-established in a law practice on his
own.' Mr. Lemay, for his part, when testifying
stated that although he did not wish to introduce
any elements of personal animosity into the litiga
tion, he had considered at the time that it was
worth $20,000 to him to be free of the troubles
(which by implication his association with Mr.
Poulin were causing him). Certainly there is noth
ing in either version, nor in the round figure
chosen, to indicate that this $20,000 was in any
way connected with amounts which would have
become payable in future as a share of the income
of the partners resulting from services rendered up
to the date of the dissolution on May 1, 1967.
Clear distinction was made between this $20,000
and the sum of $4,725.94 representing Mr. Pou-
lin's share of the income of the partnership which
had already been received by it but not yet dis
tributed for the years 1965 and 1966. The
Supreme Court case of M.N.R. v. Sedgwick 9 can I
believe be distinguished from the present action on
the facts. Sedgwick and his associates had loaned
money to one Purcell to purchase a seat on the
8 For the year ending December 31, 1966 his earnings were
$25,107.10.
9 [1964] S.C.R. 177.
Toronto Stock Exchange and for working capital
and in return would receive a percentage of the
profits. When it was found that this conflicted
with the rules of the Stock Exchange a second
agreement was reached that Purcell would pay
them the sum of $550,000 for relinquishing all
their rights under the previous agreement which
included the sum of $300,000 as the share of the
creditors in the net profits of the business for the
year. In finding that this $300,000 was taxable in
the hands of the recipients, Martland J. rejected
the argument of respondent that it was in the
nature of a capital receipt. The learned Judge
states at page 182:
Counsel for the respondent contended that these profits were
not taxable in the respondent's hands, but in the hands of
Purcell, because the respondent, by the agreement, sold his
interest in the partnership business to Purcell and the whole of
the payment to which the respondent became entitled would be
a receipt of capital. He submitted that the fact that the price
was determined, in part, by the share of the Lenders in the
partnership profits for the fiscal year ending March 31, 1956,
does not alter the quality of the payment to be made to them by
Purcell. He cited the statement of Lord Macmillan in Van den
Berghs, Limited v. Clark, [1935] A.C. 431 at 442:
But even if a payment is measured by annual receipts, it is
not necessarily itself an item of income. As Lord Buckmaster
pointed out in the case of Glenboig Union Fireclay Co. v.
Commissioners of Inland Revenue ((1922) S.C. (H.L.) 112):
"There is no relation between the measure that is used for
the purpose of calculating particular result and the quality of
the figure that is arrived at by means of the test."
In my opinion this argument fails and I am unable, with
respect, to agree with the conclusions reached by the learned
trial judge because I cannot construe the agreement of
February 1, 1956, as being one for the sale of interests in a
partnership. It is rather an agreement for the winding up of the
partnership, which had been necessitated by the decision of the
Board of Governors of the Toronto Stock Exchange. As a result
of that decision, the Lenders were thereafter precluded from
sharing in the profits of the business. That right they gave up in
the agreement because they had been compelled to do so.
It is apparent that this finding was based on the
dissolution of the partnership, not the sale of a
partner's rights in it, and the terms of the second
agreement clearly determined the share of the net
profits as $300,000 whereas no such determination
has been made for the $20,000 in issue in the
present case.
The Supreme Court case of M.N.R. v. Wahn
(supra) can also be distinguished since that case
dealt with payments made over a period of four
years to a partner who withdrew from a law firm
pursuant to the provisions of a written partnership
agreement, clause 14 of which clearly provided for
the evaluation of the share of the withdrawing
partner in the profits of the partnership. In render
ing the judgment, the Court finding this payment
to be taxable income in the hands of the recipient,
Pigeon J. stated at page 424:
It is contended that what is said in the agreement respecting
income tax cannot override the provisions of the Act. This is
quite true but does not mean that what is said is not to be taken
as expressing the intention of the parties. I find it obvious that
the intention was that the payment to a withdrawing partner
should be an allocation of profits. It is true that the fact that a
payment is measured by reference to profits may not prevent it
from being of a capital nature but there must be something to
show that such is the true nature of a payment. In the present
case, I can find nothing tending to indicate that it is so. On the
contrary, clause 18 provides clearly that a withdrawing partner
has no interest in the capital assets of the firm.
and again at pages 424-5:
The wording of the provision for the allowance to a with
drawing partner shows that it was not intended to be a capital
payment for goodwill but an allocation of profits and this is
conclusive evidence that it is income of the recipient as was
held by this Court in M.N.R. v. Sedgwick, [1964] S.C.R. 177.
In the present case in the absence of any partner
ship agreement there was no provision for alloca
tion of profits on termination of it. The calculation
of the sum payable was certainly not made on this
basis.
The case of the M.N.R. v. Ouellette 10 confirmed
by the Supreme Court ([1975] C.T.C. 111), dealt
at some length with a situation somewhat similar
to the present case and analyzed the jurisprudence
on the subject. The issue there was whether a
payment of $75,000 made to a partner named
Blauer who was being forced out of the partner
ship by his former associates, Ouellette and Brett
was in lieu of a distribution to him of his estimated
share in anticipated profits on certain tunnel con
tracts as Brett and Ouellette contended and hence
deductible by them and taxable in his hands or
whether it represented the value of his goodwill in
the partnership, this being the term used in the
dissolution agreement. In that case litigation had
ensued between the parties, Blauer suing his
10 [1971] C.T.C. 121.
former associates both in the civil courts and also
having laid charges against them for conspiracy
and fraud. These actions were withdrawn as a
result of the settlement. It was concluded that the
settlement with Blauer was not made by Brett and
Ouellette for the purpose of earning income in
connection with the tunnel projects which they
were already carrying out, and the fact that one of
the results of the settlement would be that they
would now share in the net profits of these two
contracts in the proportion of one-half each
instead of one-third each did not alter this. Instead
it was found that the settlement was a form of
transaction to dispose of all the litigation and
claims which Blauer had against the partnership,
and included his share in the goodwill of same. In
distinguishing the Sedgwick case (supra) the judg
ment in the Ouellette case stated at page 150:
In particular, the Sedgwick case held that the agreement
could not be construed as being one for the sale of an interest in
a partnership, but that it was rather an agreement for the
winding-up of the partnership and that the respondent was
liable to pay tax in respect of his share of the partnership
income for the fiscal year ending when the partnership was
wound up. In the present case, on the contrary, Brett and
Ouellette contend that there never was a general partnership
entitling Blauer to share in the fees earned in the Boucherville
tunnel and Sherbrooke projects and while they, in their own
minds, may have based the amount to be paid to him as a
settlement on dissolution of the partnership and for withdrawal
of the various proceedings he had laid, on an amount equal to
what they considered his share of the profits on these two
projects would amount to, it is clear that the settlement was not
based on an accounting of the partnership, treating it as a
general partnership, up to the date of the dissolution, resulting
in a payment to Blauer of his share in the partnership income to
this date, for no such accounting was made.
Neither can Brett and Ouellette claim that the payment
made to Blauer was an expense laid out by them for the
purpose of earning income within the meaning of Section
12(1)(a) of the Income Tax Act.
As to the present case I agree with the conclu
sion of Lucien Cardin then Assistant Chairman of
the Tax Review Board in his decision which states:
I am of the view that in the absence of other agreements
appellant and his partners, in order to avoid a fiscal liquidation
of the partnership, concluded a formal and legal agreement by
which appellant sold his partners all his interests in the partner
ship in the accounts receivable as well as the assets to the
partnership for an agreed but arbitrary price, which was not in
any way based on the value of the capital assets nor on any
percentage of the accounts receivable. The sum received by
appellant was in fact less, and bore no relation to the percent
age of net income of the partnership to which he would have
been entitled under the agreement concluded between the
partners.
The appeal is therefore dismissed with costs and
in the other two cases heard on the same evidence
Lemay v. The Queen (T-4131-74) and Paquin v.
The Queen (T-4132-74), the appeals are dismissed
with costs but in each of these two cases only
one-half of the tariff fees for preparation for hear
ing and conduct of hearing shall be allowed, in
view of the trials having been heard jointly on
common evidence.
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