Income Tax - Waiving Commission #249

Mar 01, 1996



By Gerry Neely
B.A., LL.B.

The tax laws can have the unfortunate consequence of turning an act of kindness, into a taxable benefit resulting in tax to be paid upon an amount not received. A licensee wrote to suggest that a warning be given to licensees of an assessment of tax by Revenue Canada arising from a decision by a licensee to waive his commission for an equivalent reduction in the sale price. The reason for this benevolence was that the buyer was a friend of the selling salesperson.

Then, how would this decision come to the attention of Revenue Canada? The seller claimed the full commission as a moving expense when she filed her annual income tax return. Revenue Canada allowed a deduction of only one-half the commission, stating that this was all that the seller had paid. As proof of payment of the full commission, the unsuspecting salesperson gave the seller a letter outlining the circumstances, to be delivered to Revenue Canada.

Revenue Canada allowed the full exemption, and then notified the selling salesperson that the forgiven commission would be attributed back to him, to be included in his income for that year. The licensee who reported this made the very prudent suggestion that if a salesperson negotiated away all or part of the commission, the salesperson should retain at least enough to pay the taxes on the forgiven commission if the need arises.


A Contract of Purchase and Sale contained a condition that the purchase agreement was subject to the buyer satisfying himself, "that a parking area will likely be allowed by the city in the basement area of the building." The contract was also subject to engineering studies being done to the buyer's satisfaction. By a separate clause the buyer agreed to use his best efforts and good faith to effect the fulfillment of these two conditions.

The advice received from engineers and others was that although the construction of parking was technically feasible, it was not economically feasible. The buyer did not remove the condition concerning parking, and as a result of the terms of the contract, it was atan end.

The buyer sued when the seller refused to release the deposit of $250,000, losing the first round in the Supreme Court when the trial judge ruled that the wording of the condition covered only technical feasibility, not economic feasibility.

The Court of Appeal took a different approach. It was based upon the view that offers such as these should not be set aside for uncertainty, because a clause is not phrased completely or precisely. Thus, what would have been the parties' response if at the beginning of the negotiations, they had been asked specifically if they understood the parking condition to mean that the project must be both technically and economically feasible to the buyer?

If they agreed that they understood the condition to mean this, then the Court of Appeal would interpret the conditional clause in a commercially rational way by implying a term that the parking must be reasonably economically feasible, having regard to the buyer's plans. The Court of Appeal concluded that the parties would have come to this agreement, and an Order was made directing payment of the deposit to the buyer.

No mention is made in the Court of Appeal, Reasons for judgment, that the contract may have been void, as the conditions resulted in an option rather than an offer, along the lines of the whim and fancy cases. That would appear to be an argument that would have helped the buyer in obtaining the return of his deposit.

Since it was not made, the parties' lawyers may have decided the argument did not apply because the parties had evidenced their intention that this be an offer, by requiring the buyer to use his best efforts in good faith.

It is too bad that this point had not been argued since, if the court came to the conclusion that the addition of this kind of clause was sufficient to create an offer and not an option, it would avoid the necessity of providing consideration for the whim and fancy clauses.1

  1. Head v Scott-Bathgate Ltd.,B.C. C.A., Vancouver RegistryCA016449, Reasons for judgment, September 7, 1994.

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