Louis Richstone (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Collier J.—Montreal, March 21;
Ottawa, June 5, 1972.
Income tax—Sale of interests in business—Restrictive
covenant by vendor—Payments received for—Income Tax
Act, R.S.C. 1952, c. 148, section 25(b)(iii).
In 1963 the Richstone brothers H and L sold to G their
interests in certain companies for $300,000 payable $150,-
000 down and the balance over ten years. The sale contract
contained covenants by H and L not to compete with any of
the companies for 25 years. H and L were assessed to
income tax for 1964 and 1965 on the payments made to
them in those years on the ground that the payments were
received in consideration for the restrictive covenant within
the meaning of section 25(b)(iii) of the Income Tax Act.
Held, H and L were properly assessed.
INCOME tax appeal.
M. Vineberg for appellant.
John R. Power and André Gauthier for
respondent.
COLLIER J.—This is an appeal from the Tax
Appeal Board [1969] Tax A.B.C. 928. There is
another appeal from the Board by Harry Rich-
stone, a brother of the present appellant. Harry
Richstone died during the intervening period,
but by agreement these appeals were heard
together because the facts and issues are the
same. It was also agreed the evidence before
this Court would be the transcript of the oral
testimony given before the Board and the docu
ments filed as exhibits at that hearing.
The respondent re-assessed the appellants for
the years 1964 and 1965 by adding to their
incomes for those years certain payments made
to them by certain companies in which they
once had an alleged interest. The question is
whether these payments are caught by section
25 of the Income Tax Act R.S.C. 1952, c. 148
as amended. That section reads as follows:
25. An amount received by one person from another,
(a) during a 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 serv
ices 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.
To be more precise, the issue turns on wheth
er the payments received fall within subpara-
graph (iii).
The Tax Appeal Board confirmed the
re-assessments.
I adopt the statement of facts as set forth in
the reasons for judgment of the Board, as
reported at page 928 to the end of the first
paragraph on page 940. It appears a somewhat
different argument was advanced by the appel
lants in this Court to that put before the Board,
and in order to make these reasons understand
able, I find it necessary to summarize the essen
tial facts.
For many years prior to 1963 the appellants
Harry and Louis and their brothers Saul and
George had been associated in a bakery busi
ness carried on in the city of Montreal under
the name Richstone Bakeries Incorporated. The
Richstone name and its products were well
known. The bakery had originally been started
by their father but on the incorporation in 1927
he discontinued his interest. The sons thereafter
had equal interests.
Around 1950 serious disagreements arose
among the brothers, the protagonists being
George and to some extent Saul on one side,
and Louis and Harry on the other. These dis
putes led to the ousting by George Richstone,
through a voting trust agreement, of Louis as a
director and officer of the company, and the
termination of his employment. When Harry
shortly afterwards attempted to intervene, the
same fate befell him.
Complicated and bitter civil litigation by
Louis and Harry ensued which was ultimately
resolved in October of 1953 by an agreement
which purported to restore Louis and Harry to
their original positions in Richstone Bakeries
Incorporated. In the agreement reference is also
made to Richstone Realties Inc., Richstone
Sales Inc. and Richstone Corporation Ltd. I
mention these other companies chiefly because
of the use of the name Richstone in each one;
the evidence indicates each brother held 204
shares in Richstone Bakeries Inc., 88 shares in
Richstone Realties Inc., but Louis and Harry
held no shares in the remaining two companies.
This agreement also set out the duties and
salaries of the four brothers.
Harmony prevailed until 1956 when Louis
and Harry took the position their promised res
toration as directors and officers had not been
carried out. The acrimony developed to the
point that by 1958 the two groups of brothers
ceased speaking to each other. Communications
were channelled through the controller of the
company. According to Louis, he and Harry
were stripped of all their powers and neither did
any actual work for the business thereafter.
Louis and Harry consulted lawyers and crimi
nal proceedings were instituted against George
in 1958, charging common law conspiracy. A
preliminary inquiry was held but not completed.
Attempts were made by their advisers to have
the brothers somehow resolve their differences
and finally on May 10, 1963, Louis and Harry
sent to George the following offer:
We, the undersigned, LOUIS RICHSTONE and HARRY
RICHSTONE, ... offer to sell to you all our shares, rights,
titles and interest in RICHSTONE BAKERIES INC.,
RICHSTONE REALTIES LTD., RICHSTONE CORPO
RATION LTD., and RICHSTONE SALES INC., for and in
consideration of a total sale price of Three Hundred Thou
sand Dollars ($300,000.00), payable cash upon the execu
tion of the necessary documents.
This offer is open and good for acceptance until the 7th
day of June, 1963, at 5:00 P.M., in default of which it shall
lapse and become null and void by the mere efflux of time.
Louis did not feel the sum of $300,000 repre
sented the true value of his and Harry's 50%
interest; he estimated the true value to be at
least half a million dollars. He testified his
brother Harry was quite ill; his own wife was
sick and for her health reasons they were going
to move from Montreal to the Maritimes; nei
ther he nor Harry intended to go back into
business. The object of the offer was in Louis'
view, to settle the whole matter, and get out.
George, on May 15, 1963, sent to his two
brothers what was entitled an "Acceptance of
Offer to Sell". This document, which was really
a counter-offer, had quite different terms and
was refused by Louis and Harry. It provided
for an immediate cash payment of $50,000 and
a balance of $100,000 payable at $10,000 per
year for 10 years for the shares and whatever
other rights Louis and Harry had in the four
Richstone companies. It further provided that
Louis and Harry agree not to use the name
"Richstone" in any form of bakery business in
Quebec and Ontario for 25 years. The consider
ation for the latter agreements was to be an
additional cash payment of $50,000 and a bal
ance of $100,000 payable at $10,000 a year for
10 years.
As I have said, this counter-offer was
refused.
On June 4, 1963, another "Acceptance of
Offer to Sell" was tendered by George to his
two brothers. As the Board said in its reasons
for judgment, this is a crucial document in
respect to its effect on the tax position of the
parties. It reads as follows:
I, George G. Richstone and/or my nominees (hereinafter
called the Purchaser), do hereby accept your offer, dated
May 10, 1963, to sell to me all your shares, rights, title and
interest in Richstone Bakeries Inc. and Richstone Realties
Inc., and all your alleged rights, title and interest in Rich-
stone Sales Inc., and Richstone Corporation Ltd. (hereinaf-
ter called the Companies), the whole as therein contained
and subject, moreover, to the following terms, clauses,
stipulations and conditions, namely:-
1. The purchase price for the above shares, rights, title
and interest in all the said four (4) Companies, including all
your rights, title and interest, if any, with respect to the five
(5) Common shares of the capital stock of Richstone Baker
ies Inc. presently owned by and registered in the name of
James Richstone, Bakery Executive, residing at 9532 Cresta
Drive, Los Angeles, California, shall be the sum of ONE
HUNDRED FIFTY THOUSAND DOLLARS ($150,-
000.00), payable in cash at the time of the signing of the
Deed of Sale;
2. Your approval of the present Acceptance shall com
prise the immediate termination of your employment with
Richstone Bakeries Inc. and of your employment, if any,
with all the remaining Companies, without indemnity or the
necessity of any further notice or writing whatsoever and all
your salaries, remuneration and other benefits of any kind
shall cease immediately upon the execution of the Deed of
Sale and the payment of the aforesaid sum of ONE HUN
DRED FIFTY THOUSAND DOLLARS ($150,000.00);
3. You shall undertake, in favour of the Purchaser and
the Companies, jointly and severally, as follows:—
(a) Not to own, operate and/or engage in, directly or
indirectly, the business of manufacturing, distributing
and/or selling bread, rolls, cakes, pastry, confectionery,
and/or all other bakery products, or a business of the
same or similar nature as that carried on by any one of
the said Companies (except Richstone Realties Inc.) or
any other business related or allied thereto, either as
principal, director, shareholder, manager, agent or
employee, during a period of Twenty-five (25) years
within the territory comprising the Provinces of Quebec
and Ontario; and,
(b) Furthermore, you shall not use or authorize the use of,
directly or indirectly, the name "Richstone", or variation
thereof in appearance, sound or otherwise, or a word or
words or representations similar thereto, as part of a
trade or corporate name for the purpose of owning,
operating and/or being engaged in any business whatso
ever, in any of the capacities and during the same period
of time and within the same territorial areas, the whole as
stipulated herein before in subparagraph (a) of the present
Clause 3;
4. In consideration for your undertaking contained in
Clause 3 hereof, I warrant that the said Companies, jointly
and severally, will pay you the additional sum of ONE
HUNDRED FIFTY THOUSAND DOLLARS ($150,-
000.00), payable in and by TEN (10) equal, annual instal
ments of FIFTEEN THOUSAND DOLLARS ($15,000.00)
each, the first whereof to become due and payable One (1)
year after the signing of the Deed of Sale and the unpaid
balance at any time to bear interest at the rate of SIX
PERCENT (6%) per annum, payable semi-annually; how
ever, the Companies will have the right to anticipate pay
ment of the said sum of $150,000 by prepaying the whole or
any part of the outstanding balance, at any given time and
without indemnity, provided that each such prepayment
shall never be less than FIVE THOUSAND DOLLARS
($5,000.00);
The payment of the aforesaid sum of $150,000.00, or
such balance thereof remaining unpaid at any time, shall be
properly guaranteed either by a first hypothec on immove
able property to be executed before a notary chosen and
paid for by the said Companies or by a surety bond issued
by a recognized Bonding Company, whichever the Compa
nies herein will elect;
5. In the event of your violation of any of the obligations
contained in the Deed of Sale to be signed in consequence
hereof, I and the said Companies, jointly and severally,
shall be entitled to claim, as liquidated damages, the sum of
ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,-
000.00), and to demand forfeiture of any sums not yet paid
in virtue of the said Deed of Sale, the whole without
prejudice to the rights of myself and the Companies, jointly
and severally, to institute injunction or other proceedings,
with or without damages, to enforce the provisions violated;
6. All pending litigation, civil or criminal, shall be
declared settled out of court concurrently with the signing
of the Deed of Sale, all parties concerned paying their own
legal costs;
7. In addition, a mutual and reciprocal release and dis
charge will be given by the interested parties, namely the
Vendors, the Purchaser and the said Companies, for all
claims, demands, rights of action, costs and expenses, aris
ing directly or indirectly from your association with the said
four (4) Companies and/or for any other cause or reason
whatsoever;
8. You will sign all such documents as may be required
or necessary in order to give full force and effect to the
spirit and intent of the present Acceptance of Offer, either
at the time of the Deed of Sale or subsequently when called
upon so to do and, upon your failure to sign when request
ed, I or any person appointed by me will have express
authority to sign such documents in your place and stead
and with equal effect;
9. The Deed of Sale and all other legal documents for its
completion shall be prepared by Mtre George I. Harris,
Q.C., and shall be signed by the parties hereto not later than
July 9th, 1963, each party to pay his own legal costs
throughout;
10. All your obligations herein, in the said Deed of Sale
and all other documents relating thereto shall be joint and
several and indivisible; the breach of such obligations by
either one of you is to be construed as a breach by both of
you and, consequently, such breach shall engage the respon
sibility of both, jointly and severally and indivisibly;
11. The rights and obligations arising from the document
referred to in Clause 10 herein shall enure for the benefit of
and be binding upon the respective heirs, legatees, execu
tors, administrators, successors, and assigns of the parties
hereto;
12. The present Acceptance of Offer to Sell is open for
your approval not later than June 7th, 1963, at 5:00 o'clock
p.m. after which time it shall be considered null and void
and non-existent.
Louis and Harry approved and signed this
document on June 6, 1963.
In respect to the remaining facts in this case,
I adopt the findings of the Board which are as
follows:
Mr. Louis Richstone testified that it had never been
suggested to him that there was a difference between the
$300,000 consideration referred to by the two vendors in
their original "Offer to Sell" of May 10, 1963, (Ex. A-15)
and the $300,000 which made up the total consideration in
the "Acceptance of Offer to Sell" (Ex. A-17) which was not
only the final document, but also the only one agreed to and
signed by all of the parties. The witness said:
I was anxious to get out; as a matter of fact I was willing
to settle for less, provided I could get cash, and get out,
and forget about the whole thing because we were anx
ious to get away.
The witness said he had seen the first document (Ex.
A-16) which George Richstone had submitted in respect of
their original offer to sell (Ex. A-15) and, although the said
Exhibit A-16 had contained restrictive covenants which had
not appeared in the initial offer (Ex. A-15) and had allocat
ed a separate amount of consideration to shares and rights
and had ascribed another specific amount as consideration
in respect of the restrictive covenants, he had considered it
as nothing more than a matter of form for selling the shares
and rights "because I only had one thing in mind—to sell
our shares and get out".
The principal difference between the proposition con
tained in Exhibit A-16, which was never accepted by the
appellants, and the proposals contained in Exhibit A-17
which were accepted by all the parties, consisted of the
provisions for payment. In the proposal accepted, the entire
consideration for the shares, etc., was to be paid in cash
rather than only one-third in cash and the rest on terms; and
the consideration for the restrictive covenants was to be
paid in ten equal instalments of $15,000 each with interest
at 6% per annum rather than one-third in cash with the
balance spread over ten years in equal annual instalments of
$10,000 each, suggested in the earlier proposal.
On June 6, 1963, following their approval of George
Richstone's acceptance of their offer to sell (Ex. A-17),
Louis Richstone and his brother Harry entered into an
agreement between themselves (Ex. A-20) which reads in
part as follows:
NOW THEREFORE THE PARTIES HERETO AGREE
AS FOLLOWS:
(1) The parties hereto shall share the purchase price
arising out of the foregoing and be responsible for any
liabilities arising out of the foregoing, such as legal fees,
notarial fees, etc. on the following basis:
Louis Richstone-66 2/3%
Harry Richstone-33 1/3%
(2) This agreement shall inure for the benefit of and be
binding upon the respective heirs, legatees, executors,
administrators, successors and assigns of the parties
hereto.
On June 28, 1963, the three Richstone brothers reduced
their negotiations to a formal Notarial Deed of Sale passed
before Notary Harry Kolber, in which Louis and Harry
Richstone are referred to as the Vendors and George G.
Richstone as the Individual Purchaser, while Richstone
Bakeries Inc., Richstone Sales Inc., and Richstone Corpora
tion Ltd. are referred to as the Company Purchasers and as
being represented by their president, George G. Richstone.
This document sets out that the parties thereto have agreed,
in part, as follows:
FIRST: The Vendors do hereby sell ... unto the
Individual Purchaser ... the following assets, namely:—
(a) All the Vendors' common and preferred shares in
the capital stock of Richstone Bakeries Inc. and Rich-
stone Realties Inc., and all their other rights, title and
interest in and to both the said Companies;
(b) All the Vendors' alleged rights, title and interest in
and to Richstone Sales Inc. and Richstone Corporation
Ltd.;
(c) All the Vendors' rights, title and interest, if any,
with respect to the FIVE (5) common shares in the
capital stock of Richstone Bakeries Inc. presently
owned by and registered in the name of James Rich-
stone ...
SECOND: The consideration for the sale of the assets
described ... is the total price and sum of ONE HUN
DRED AND FIFTY THOUSAND DOLLARS ... pay
able by the Individual Purchaser unto the Vendors in
cash, which amount the Vendors do hereby acknowledge
to have received in full at the execution of the present
Sale ... and which amount shall be distributed between
the Vendors in the manner that they themselves shall
determine;
THIRD: The Vendors do, in addition to the foregoing,
sell, transfer, convey, make over and assign, unto the
Individual Purchaser and the Company Purchasers, joint
ly and severally, the following assets, namely:—
(a) All the Vendors' rights, title and interest to own,
operate and/or engage in, directly or indirectly, the
business of manufacturing, distributing and/or selling
bread, rolls, cakes, pastry, confectionery and/or other
bakery products, or a business of the same or similar
nature as that carried on by any one of the Company
Purchasers (except Richstone Realties Inc.) or any
other business related or allied thereto, either as princi
pal, director, shareholder, manager, agent or employee
during the period of TWENTY-FIVE (25) years from
the date hereof and terminating on the Twenty-Eighth
day of June, Nineteen Hundred and Eighty-Eight and
within the territory comprising the Provinces of Quebec
and Ontario; and,
(b) All the Vendors' rights, title and interest to use or
authorize the use of, directly or indirectly, the name
"Richstone", or any variation thereof in appearance,
sound or otherwise, or a word or words or representa
tions similar thereto, as part of a trade or corporate
name for the purpose of owning, operating and/or being
engaged in any business whatsoever, either as principal,
director, shareholder, manager, agent or employee
during the period of TWENTY-FIVE (25) years from
the date hereof and terminating on the Twenty-Eighth
day of June, Nineteen Hundred and Eighty-Eight and
within the territory comprising the Provinces of Quebec
and Ontario;
FOURTH: The consideration for the sale of the assets,
described in Clause Third (a) and Third (b) hereinabove,
is the total price and sum of ONE HUNDRED AND
FIFTY THOUSAND DOLLARS ($150,000.00), which
the Individual Purchaser and the Company Purchasers
oblige themselves, jointly and severally, to pay unto the
Vendors, and which amount shall be distributed between
the Vendors in the manner that they themselves shall
determine, in and by TEN (10) equal, consecutive and
annual instalments of FIFTEEN THOUSAND DOL
LARS ($15,000.00) each, the first whereof to become
due and payable ONE (1) year from the date hereof and
to continue annually thereafter until the 28th day of June,
1973...
The Deed is elaborate in its provisions and stipulates,
among other things, for prepayment of the said instalments,
the immediate transfer of title to assets sold, and a warranty
as to title of the said assets. In Clause Seventh, there
appears the following agreement:
As further consideration for the price and sum provid
ed in Clause Fourth herein, the Vendors do hereby
expressly covenant and undertake, in favour of the
Individual Purchaser and the Company Purchasers, joint
ly and severally:—
(a) Not to own, operate and/or engage in, directly or
indirectly, any of the businesses set out in the above
Clause Third (a), in any of the capacities, during the
period of time and within the territorial area, as more
fully stipulated in the said Clause Third (a); and,
(b) Not to use or authorize the use of, directly or
indirectly, the name "Richstone", as more fully defined
and described in Clause Third (b) hereof, for the pur
poses, in the capacities, during the same period of time
and within the same territorial area as stipulated in the
said Clause Third (b).
On the same day as the Notarial Deed was executed, and
concurrently therewith, i.e., on June 28th, 1963, Louis and
Harry Richstone each signed and delivered to Richstone
Bakeries Inc. and the directors thereof a notice of resigna
tion reading as follows:
I hereby tender my resignation as Director and/or Offi
cer of Richstone Bakeries Inc., to take effect immediately
upon acceptance by the Board.
Also produced and filed at the hearing were copies of
transfers from Louis and Harry Richstone respectively to
George G. Richstone, each for 204 shares of common stock
of Richstone Bakeries Inc. By way of date, these transfers
bear only the year "1963" but the witness Louis Richstone
said these transfers were also signed contemporaneously
with the execution of the Notarial Deed and their respective
resignations on June 28, 1963.
The first of the ten equal consecutive annual instalments
of $15,000 to be made under the terms of the said Deed of
Sale (Ex. A-18) fell due and was paid on June 28, 1964,
together with interest on the outstanding balance calculated
at 6% per annum, and was not declared as income by either
appellant.
Harry I. Grossman, the comptroller as well as a director
of Richstone Bakeries Inc., testified that Louis and Harry
Richstone were on the bakery payroll until June 29, 1963,
the date on which the last salary cheques were issued in
their names and forwarded with a covering letter to their
then solicitor, Murray Lappin, Esquire, Q.C.
George G. Richstone appeared under subpoena as a wit
ness for the respondent and gave evidence that for some
time prior to the final settlement effected in 1963 there had
been "an actual feud or a vendetta" between the two
appellants and himself, both in business and socially. He
added: "As a matter of fact, they left in 1963 and prior to
that, five years prior to that, we were not even on speaking
terms . .. although they were at that time directors and
officers of the company plus shareholders and also
employees." All communications between the parties were
carried on through the comptroller of the bakery company,
who was a distant relative and had remained on speaking
terms with both factions.
The witness George Richstone testified that, within the
five years or more during which the criminal proceedings
were pending, there had been a series of attempts to estab
lish a basis of settlement between the parties. The consider
ation first demanded had been $600,000 which was finally
reduced to $300,000 to be divided into $150,000 to be paid
by the witness for the appellants' shares and $150,000 to be
paid by Richstone Bakeries Inc. et al in respect of the
restrictive covenants which had been inserted to prevent the
appellants from establishing themselves in the bakery, pas-
try-making or confectionery business in competition with
Richstone Bakeries Inc. or using the name "Richstone" in
connection with any business similar to any of those carried
on by the bakery company and the other two subsidiaries.
According to the witness they had attempted something of
this nature in 1950 and 1951 when the earlier civil litigation
was proceeding by cutting prices and using the name "Rich-
stone" to compete with the business from which Louis had
been ejected. George Richstone rejected any suggestion that
the restrictive covenants were an afterthought which was
unnecessary or that they were not made with any serious
purpose in mind. In fact he insisted strongly to the contrary
and said the payments to be made in respect thereof by the
company purchasers were deliberately spread over a ten
year period with the intention of subjecting them to deduc
tion as business expenses made to protect the income of the
bakery business and have in fact been so claimed.
The respondent relies on clauses 3 and 4 of
exhibit 17 and clauses fourth and seventh of
exhibit 18, as well as the evidence of George
Richstone that Louis and Harry, between 1950
and 1951, had been competitors and had used
the Richstone name. Counsel for the respondent
submits the payments in question fall squarely
within s. 25(b), that is, these were amounts
received "on account ... of an obligation aris
ing out of an agreement made by the payer with
the payee ... during or immediately after a
period that the payee was an officer of, or in
the employment of, the payee ...", and further
must reasonably be regarded as "... having
been received . .. in consideration, or partial
consideration ... ' for the covenants not to
compete'.
The appellant, on the other hand, asserts that
on the true construction of the material docu
ments, particularly the notarial deed, the trans
action in question was fundamentally a sale of
assets: the shares and whatever other interests
Louis and Harry had in the four companies,
their rights to carry on a bakery business for 25
years, and their rights to the use of the name
Richstone in any business (see clauses first,
second, third and fourth of the notarial deed)
for 25 years. I have no doubt that clauses first
and second deal with a sale of assets. Clauses
third and fourth describe the rights (to engage in
bakery businesses and to the Richstone name)
being sold as a sale of assets, and I am prepared
to accept that description. If the notarial deed
ended there, any payments received pursuant to
clause fourth, in my opinion, could not be rea
sonably regarded as having been received in
consideration for an agreement not to compete.
There remains the problem as to the meaning
or effect of clause seventh having regard to s.
25(b)(iii) of the Act. As I understood them, the
appellant's contentions were as follows:
(1) The covenant not to compete nor to use
the name Richstone is a mere appendage to
what is really a sale of assets.
(2) The total consideration of $300,000
could only refer to the sale of those assets
because the value of the shares alone far
exceeded that amount.
(3) The covenant not to compete is unen
forceable in law and therefore must be
disregarded.
(4) There was no intention on the part of
Louis or Harry ever to go into business again,
and from their side of the matter, no consid
eration or payments were received in respect
to the covenant not to compete.
(5) There were five "payers" according to
the notarial deed, and Louis and Harry were
certainly never employees of four of them,
and were not at the material times "em-
ployees" of Richstone Bakeries Inc.
I shall deal with these contentions in the
order I have set them out.
(1) I cannot regard the covenant not to
compete as a mere appendage. The evidence
is uncontradicted that George Richstone
stipulated for it because of the competition
which, in fact, took place in 1950 and 1951.
The covenant had value to him, and while
Louis and Harry may have thought it value
less to them they nevertheless agreed to it. In
my view the agreement reached covered
more than a sale of assets. The notarial deed,
by clause seventh, expressly supports this
view.
(2) The evidence as to the value of the
interest of Louis and Harry in Richstone Bak
eries Inc. and the other companies is, to my
mind, unsatisfactory and it is impossible to
come to any firm conclusion as to overall
value. There is no doubt Louis felt the value
of his and his brother's interest far exceeded
$300,000; on the other hand, George felt it
was too much. The other evidence in respect
to values is, as I have said, unsatisfactory.
(3) I will accept, without deciding, that the
covenant not to compete would probably be
held to be unenforceable if it were the subject
of litigation in the Province of Quebec. That,
however, does not solve the problem for the
purposes of the section of the Income Tax
Act in question. The covenant is a subsisting
one: no one has yet challenged it and until
that is done it is binding on the parties.
(4) I do not think the future intention of
Louis and Harry not to enter business again
is relevant. In my opinion, one cannot go
behind the express words in clause seventh.
To put the matter another way, I do not think
it would be any defence by Louis if he violat
ed this clause to say it was not binding on him
because at the time he signed the agreement
he had no intention to violate it.
(5) It is established that Louis and Harry
were never employees of the other payers
under the notarial deed, other than Richstone
Bakeries Inc. In my view, the conclusion
from the evidence is irresistible that Louis
and Harry were employees (within s. 25) of
Richstone Bakeries Inc. until the end of June,
1963. They were paid up until the end of that
month by that company. It is true they had
not done any work for several years but they
nevertheless had been paid as employees
right up to the date I have just mentioned.
In my view, the decision of the Tax Appeal
Board was correct as was the re-assessment
made by the respondent.
The appeal is therefore dismissed with costs.
I have not overlooked the respondent's contention that
the onus is on the taxpayer to establish that the amounts
received cannot reasonably be regarded as having been
received in consideration or partial consideration for the
covenants not to compete. See Curran v. M.N.R. [1959]
S.C.R. 850 per Martland J. at p. 862.
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.