Date: 20010131
Docket: 1999-5116-IT-I; 1999-5117-IT-I
BETWEEN:
JEROME WALLSTEN, LAKESIDE PROPERTIES LTD.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE
[1] The issue is whether the sum of $11,958 included by Lakeside Properties Ltd. ("Lakeside"), a company of which Jerome Wallsten ("Wallsten") was a shareholder and director, was properly so included by Lakeside in its 1997 taxation year or whether it should, as reassessed, be included in Wallsten's income for his 1996 taxation year.
FACTS
[2] There is no dispute about the total commission amount paid to Wallsten by the insurers, namely $63,852. A statement filed with the Reply to the Notice of Appeal shows expenses claimed by Lakeside in the sum of $51,894 resulting in net income of $11,958. The Minister appears to have regarded all income and all expenses as those of Wallsten. No evidence respecting this peculiarity was adduced by the Respondent. The issue can, therefore, be restated as to whether the Minister was correct in including the $11,958 in Wallsten's income[1].
[3] Wallsten was a shareholder, director and employee of Lakeside, his wife and children owning the other issued and outstanding shares.
[4] Prior to 1996 Wallsten was an employee of Sun Life Assurance Company of Canada ("Sun Life"). Wallsten entered into a written contract with Sun Life effective January 1, 1996 under which he agreed to sell products of that company while being free to carry on his business activities by also representing other insurance companies.
[5] Paragraph XIII in the Independent Agent's Agreement entitled NATURE OF THE RELATIONSHIP reads:
"The relationship between the parties shall be that of independent contractors. None of the terms of this agreement will be construed as creating an employer/employee relationship between Sun Life and the Agent."
[6] Another clause entitled ASSIGNMENT AS SECURITY reads as follows:
"The Agent may not assign any right or benefit under this agreement except the Agent's entitlement to commissions and bonuses which may be assigned as security. Sun Life will register any collateral assignment of the Agent's entitlement to commissions and the bonuses."
[7] A written agreement shown to have been made the 1st day of January 1996 and described as TRUST DECLARATION provides, in part:
"1. The Agent agrees to receive proceeds and funds from Sun Life and/or other corporations on behalf of the Company.
2. The Agent acknowledges that the Agent is not entitled to receive any proceeds or compensation except as per his personal arrangement with the Company and all revenues, receipts and incomes paid to the Agent in the capacity as a life underwriter or in a related field such as a seller of mutual funds or other securities shall be paid in advance to the credit of the Company without deductions.
3. The Agent authorizes this Company to endorse any cheques on behalf of the Agent as it deposits same and grants such authority absolutely and for valuable consideration."
[8] Jerome Wallsten testified that one result of the new arrangement was that he would no longer have disability and other types of insurance benefits. He decided that he would have to become an employee of Lakeside in order to obtain small business benefits. He stated that Sun Life would not issue a licence in a limited company name to an agent like him. He said that he wished to have all insurance income in Lakeside and that he would receive a salary such as would any other employee. He described this as simplifying his lifestyle.
[9] Wallsten stated that all cheques from Sun Life were payable to him but were deposited in Lakeside's bank account.
[10] Wallsten included in his 1996 taxation year income the sum of $49,729 as salary from Lakeside. The Minister of National Revenue ("Minister"), by reassessment, added the sum of $11,958 to Wallsten's income for that year, this being an amount received by Wallsten from Sun Life and deposited to Lakeside's account. The Minister, in the words of the Reply to the Notice of Appeal, "deleted" the amount of $11,958 from Lakeside's income.
[11] Wallsten testified that he had no equipment, office, vehicle, special computer, fax, desks, et cetera for the conduct of business and that all of these facilities were supplied by Lakeside. Wallsten stated that Lakeside paid for advertising and office supplies and that the only property owned by him and used in his business was his clothes.
[12] On cross-examination, when asked if Sun Life knew of his arrangement with Lakeside, Wallsten said that the Sun Life branch manager and group manager in Slave Lake were in his office on many occasions. He said that there was no sign advertising Sun Life or mentioning Sun Life's name on Lakeside's office.
SUBMISSIONS
[13] Counsel for the Appellants stated that Wallsten knew from January 1, 1996 that the company would supply facilities and receive commissions and that he would be in a position to receive benefits from Lakeside, such benefits no longer being available from Sun Life. He submitted that Wallsten could have received and retained the commissions and Lakeside could have charged him a management fee for an equal amount and the result would have been the same as claimed by the Appellants. He referred to Her Majesty the Queen v. Dr. H. Hoyle Campbell 80 DTC 6239, a decision of the Supreme Court of Canada. Campbell incorporated a company to operate a private hospital. He owned all the shares of the company. It employed him and paid him a fixed salary and in return he paid to the company all fees for medical services which he received from the Provincial Health Insurance Plan. The Minister assessed Campbell on that income. The Court decided that the company was not practising medicine. It noted that the Crown had made no allegation that the company was a sham. It further decided that the fact that fees under the provincial health plan were required to be paid directly to the doctor was not the controlling element when there was a valid arrangement between Campbell and the company regarding salary to Campbell and an accounting of fees to the company as employer. It determined that the income from the professional services provided by Campbell was the income of the company.
[14] Respondent's counsel emphasized the fact that Wallsten's interest in the agreement with Sun Life was not assignable except as security and that there was no evidence that this assignment of commissions by Wallsten to Lakeside was made as security. He referred to Linden Gardens Trust Ltd. (H.L.(E.)) [1994], 86 where at page 108 the following words were quoted by Respondent's counsel:
"Therefore the existing authorities establish that an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights. I regard the law as being satisfactorily settled in that sense. If the law were otherwise, it would defeat the legitimate commercial reason for inserting the contractual prohibition, viz., to ensure that the original parties to the contract are not brought into direct contractual relations with third parties."
[15] However, the issue in this appeal has nothing to do with a contractual dispute with a third party.
CONCLUSION
[16] I have concluded that the appeals should succeed. The fact that the agreement between them was in violation of Wallsten's contract with Sun Life does not affect tax liability. My finding is consistent with the reasoning of the Supreme Court of Canada in Campbell above.
[17] Accordingly, both appeals are allowed with costs.
Signed at Ottawa, Canada, this 31st day of January 2001.
"R.D. Bell"
J.T.C.C.
[1] Wallsten's appeal is to the effect that it is Lakeside's income. Lakeside's appeal is to the effect that the sum of $11,958 was properly included in its income.