T-3534-79
Zoel Chicoine Inc. (Plaintiff)
v.
The Queen (Defendant)
and
Davalmar Inc. (Mis -en-cause)
Trial Division, Dubé J.—Montreal, June 9 and 10;
Ottawa, June 19, 1981.
Income tax — Income calculation — Income or capital
receipt — Plaintiff agreed to perform services in a manage
ment capacity in consideration for 10 per cent of the annual
profits of the shopping centre and 10 per cent of the profit of
sale of the shopping centre — In 1974 plaintiff received 10 per
cent of the net profit of the sale — Minister assessed the
plaintiff on the basis that this sum was on his income account
as it had been received for management fees — Plaintiff
contends that this amount was a receipt of a capital nature
which was paid to it as compensation for damages incurred as
a result of the cessation of the beneficial relations between the
parties, or as payment received on the disposal of a right to
income — Amount was paid and received as fees for manage
ment services — Income Tax Act, S.C. 1970-71-72, c. 63, s.
174.
Front & Simcoe, Ltd. v. Minister of National Revenue
[1960] C.T.C. 123, referred to. Minister of National
Revenue v. Import Motors Ltd. 73 DTC 5530, referred to.
H. A. Roberts Ltd. v. Minister of National Revenue
[1969] S.C.R. 719, referred to. Barr, Crombie & Co., Ltd.
v. Commissioners of Inland Revenue 26 T.C. 406, referred
to. Courrier M. H. Inc. v. The Queen 76 DTC 6331,
referred to. Girouard v. The Queen 80 DTC 6151, referred
to.
APPLICATION.
COUNSEL:
Marc Noël and Guy Du Pont for plaintiff.
Jacques Côté and Lise Provost for defendant.
Maurice Régnier, Q.C. and Guy Masson for
mis -en-cause.
SOLICITORS:
Verchère, Noël & Eddy, Montreal, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
Stikeman, Elliott, Tamaki, Mercier & Robb,
Montreal, for mis -en-cause.
The following is the English version of the
reasons for judgment rendered by
DUBÉ J.: This is a reference to the Federal
Court pursuant to the provisions of section 174 of
the Income Tax Act, R.S.C. 1952, c. 148, as
amended by S.C. 1970-71-72, c. 63, s. 1. The
question submitted to the Court is the following:
[TRANSLATION] Namely, whether a sum of $1,017,221.00
received by Zoel Chicoine Inc. and paid by Davalmar Inc.
(formerly Centre Laval Inc.) as a consequence of the sale of the
Centre d'Achat Laval was received by Zoel Chicoine Inc. and
paid by Davalmar Inc. as fees for management services or as a
breach of contract, or for any other reason which this honour
able Court may determine.
At the outset, counsel for the mis -en-cause and
the Crown sought to limit the discussion on this
question to the purely civil nature of the payment,
without reference to the fiscal context in which it
was made. I thought it advisable not to allow this
argument and to widen the discussion sufficiently
to embrace the true nature of the transaction and
the circumstances surrounding it, without however
attempting to resolve the fiscal problem.
After all, subsection 174(3) provides that the
Court may proceed to determine the question in
such manner as it considers appropriate, if it is
persuaded that the decision rendered on this ques
tion "will affect assessments in respect of two or
more taxpayers". Moreover, a decision in civil
terms only, without reference to the Income Tax
Act, could prove to be entirely academic and be of
little or no assistance in solving the problem.'
Plaintiff is a real estate management company
whose services consist, inter alia, in managing,
promoting and administering land and, in particu
lar, shopping centres. Its principal shareholder,
Zoel Chicoine, began working with Max Fried-
man, Jack Friedman and Harry Glassman in
about 1962 in Montreal. The latter were the
owners of various companies working in the con
struction and operation of small shopping centres,
bowling alleys and other businesses.
' See Cameron J. in Front & Simcoe, Ltd. v. M.N.R. [1960]
C.T.C. 123, at p. 132, and more recently Uric J. in M.N.R. v.
Import Motors Ltd. 73 DTC 5530, at p. 5534.
In 1966 they suggested to Chicoine that he join
them in the promotion, construction and operation
of a large shopping centre in Laval. They offered
him 10% of the shares. He refused, disliking a
minority shareholder position and preferring more
certain and immediate income. He therefore asked
for 10% of annual profits of the centre and 10% of
the profit on the sale, if the shopping centre was
sold. On May 25, 1966 the four businessmen
concluded a contract between M. M. Construction
Inc., represented by Max Friedman, its president,
and Rojel Homes Inc. (now Zoel Chicoine Inc.),
represented by Zoel Chicoine.
The two introductory paragraphs of the contract
read as follows:
WHEREAS the Party of the First Part wishes to engage the
services of the Party of the Second Part in a management
capacity in promoting, renting and administrating the project
of the Party of the First Part, said project relating to a farm in
which the Party of the First Part has a 50% interest and which
is known as farm 1002 located in the City of LaSalle. The said
project shall be hereinafter referred to as "The Project";
WHEREAS the Parties wish to set forth hereinafter their
understanding relating to the consideration to be paid to the
Party of the Second Part for the work to be performed by it.
The following paragraphs are essential to under
standing and solving the problem.
2. In consideration of the services performed by the Party of the
Second Part and referred to hereinabove, the Party of the First
Part shall pay to the Party of the Second Part a sum of money
equal to 10% (ten percent) of the Net Profits realized by the
Party of the First Part from the Project each year as described
hereinafter.
5. In the event of the decease of Mr. Zoel Chicoine, President
of Rojel Homes Inc., any amount due to Rojel Homes Inc. not
received shall automatically be cancelled and the Party of the
Second Part shall have no claim whatsoever against the Party
of the First Part.
7. In the event of the termination of this Agreement by either
party, if an amicable settlement of the amount owing to the
Party of the Second Part cannot be reached, then the auditors
of the Party of the First Part shall prepare a statement as of the
date of termination of this Agreement and the moneys due to
the Party of the Second Part shall be payable on Net Profits up
to this date, as if it were a fiscal year end.
If at the time of termination of this Agreement there shall be
erected by the Party of the First Part a property which shall be
revenue producing (i.e. producing a net revenue) then the Party
of the Second Part shall receive 10% of the Net Profits of the
property until the property is sold, subject to paragraph 5
hereinabove. In the event of the sale of the property, the Party
of the Second Part shall receive 10% of the Net Profits of the
sale to be payable as proceeds are received, and subject to the
terms of paragraph 8.
8. If at any time a property is sold forming part of the Project
and the Party of the Second Part is entitled to receive 10% of
the Net Profits with respect to said sale, then the payment of
same when there remains a balance of sale shall be deferred
and shall be payable as the proceeds are received by the Party
of the First Part, but always to the extent of 10% thereof until
the full amount has been paid, subject to paragraphs 4 and 5
hereof.
14. It is clearly understood that the Party of the Second Part
has no ownership interest in the Party of the First Part and that
these presents do not constitute a joint venture or partnership
undertaking and that the Party of the Second Part is only an
employee of the Party of the First Part.
On the same date, by a supplementary agree
ment, the parties at issue incorporated in the
aforesaid agreement a project undertaken by
Centre Laval Inc., described as the Centre d'Achat
Laval, which is the centre in question here.
On January 21, 1969, by a further supplemen
tary agreement, the same parties incorporated in
the aforesaid agreements another project under
taken by Centre Langelier Inc. and described as
the Centre Langelier. These companies were
owned by the Friedmans and by Glassman.
In 1974, the Centre d'Achat Laval was sold and,
in accordance with the agreements, plaintiff
received 10% of the net profit on the sale, namely
$1,017,221, in the following manner: $957,221 at
the time of the transaction and an amount payable
of $60,000.
The Minister of National Revenue assessed
plaintiff for the 1974 taxation year on the basis
that the $1,017,221 was on his income account, as
it had been received as management fees.
In its amended return, dated April 22, 1980,
plaintiff took the position that the said sum con
stituted a receipt of a capital nature which was
paid to it as compensation for damages sustained
on the sale of the Centre d'Achat Laval. On the
other hand, the mis -en-cause, Davalmar Inc. (for-
merly Centre Laval Inc.), claimed the said sum as
a deduction as management fees.
In his oral argument, counsel for the plaintiff
maintained that his client, in order to obtain the
aforesaid sum, had to give up a right to annual
income: it therefore killed the goose which laid the
golden eggs. Even if this event was provided for in
the contract in advance, this was still its nature.
He further argued that the amount was compensa
tion for damages incurred as a consequence of the
cessation of the beneficial relations between the
parties: by losing its annual income of 10% of the
profits of the Centre d'Achat Laval, Zoel Chicoine
Inc. lost 80% of its sources of income (the other
20% came from other shopping centres).
Counsel is no longer alleging that his client has
a real right of ownership in the shopping centre, or
the company which built it, since Zoel Chicoine
Inc. holds no shares in this company. In his sub
mission, this is rather a payment received on the
disposal of a right to income, a right not depending
on services rendered, or a compensation arranged
in the event of loss of a management contract. He
now rejects the original allegation of a breach of
contract giving rise to damages. He refers to the
following decisions: H. A. Roberts Ltd. v. M.N.R.;
Barr, Crombie & Co., Ltd. v. Commissioners of
Inland Revenue; Courrier M. H. Inc. v. The
Queen; Girouard v. The Queen. 2
In my view, it can clearly be seen from the first
contract of May 25, 1966 that this is an agreement
to obtain the management services of Zoel Chi-
coine (at the request of the latter, Zoel Chicoine
Inc.). The language of the two introductory para
graphs is clear: "Whereas the Party of the First
Part wishes to engage the services of the Party of
the Second Part in a management capacity .
their understanding relating to the consideration to
be paid to the Party of the Second Part for the
work to be performed by it". These two para
graphs apply equally to the 10% of profits of sale
of the shopping centre, provided for in paragraph
7, and to the 10% of annual profits provided for in
paragraph 2.
Finally, the last paragraph, No. 14, could not be
more direct: "It is clearly understood that the
Party of the Second Part has no ownership interest
2 [1969] S.C.R. 719; 26 T.C. 406; 76 DTC 6331; 80 DTC
6151.
in the Party of the First Part ... and that the
Party of the Second Part is only an employee of
the Party of the First Part." The document, of
course, is signed by Zoel Chicoine, an experienced
businessman, himself. The contract was designed
in accordance with his wishes: a percentage of the
annual, final profit without risk, in consideration
for his services.
Plaintiff cannot therefore claim to have the
rights of an owner, since it did not undertake the
financing of the shopping centre, did not guarantee
any of the loans, held no shares, did not participate
in any losses, and exercised no control over the sale
of the shopping centre.
It also cannot be said that plaintiff sustained
damage. No fault was demonstrated, no causal
link and no injury. It received exactly what it was
entitled to, namely 10% of the profits while the
shopping centre was operating and 10% of the
profit on sale of the said shopping centre when it
was sold. Accordingly, the latter amount can only
be a payment for services rendered, as provided in
the contract.
The answer to the question is therefore that the
amount of $1,017,221 was paid and received as
fees for management services and not as compen
sation for damages sustained as the result of a
breach of contract or for any other reason.
Costs to follow.
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.