Girouard v. The Queen, 80 DTC 6205, [1980] CTC 284 (FCA)

Pratte, J [TRANSLATION]:—This is an appeal from a Trial Division judgment, which dismissed the appeal brought by appellant against the assessment of his income tax made for the 1970 taxation year.

The only problem raised by this case concerns a sum of $5,000 which appellant received from a former employer after he had been dismissed by the latter at the end of August 1970. Does this sum represent for appellant, as the trial judge held, a taxable benefit from an employment?

Early in May 1968, appellant was hired as financial director of Villa Medica Inc, a corporation operating a private hospital in Montreal. The terms of this contract of employment were amended on January 10, 1969 to specify that appellant’s services were retained for a five-year period from May 1, 1968 to April 30, 1973, and to provide that, in the event that he was dismissed without cause before expiry of the term fixed, he would be entitled

in his entire discretion and without prejudice to any other recourse he could exercise, to demand that the Company pay him a sum of $30,000 as liquidated damages.

At the end of August 1970 when he returned from vacation, appellant was told that his employment would be terminated in August 31. On August 20, the president of Villa Medica Inc told the corporation’s board of directors that he was terminating appellant’s employment, that the amount of $30,000 that had been paid to him as a consequence of this dismissal would be paid in 24 equal and consecutive monthly amounts, and finally, that the corporation should enter into a contract with appellant recognizing that his contract of employment had been breached on the condition stated. The board of directors then adopted a resolution approving the proposed contract and authorizing the corporation’s vice-president to sign it. The following day, August 21, 1970, appellant and Villa Medica Inc signed a deed containing the following stipulations:

(a) the parties agreed to terminate appellant’s contract of employment on August 31, 1970;

(b) Villa Medica Inc undertook to pay appellant the sum of $30,000 which it owed him as liquidated damages, in twenty-four equal and consecutive monthly amounts, beginning on September 30, 1970, provided that appellant made no claim against his former employer;

(c) appellant undertook not to work for another private hospital in Quebec for a period of two years; and he further undertook to make no criticism of Villa Medica Inc, its directors, officers, or employees.

During 1970 Villa Medica Inc paid appellant the sum of $5,000, on account on the amount of $30,000 which it owed him. It is this amount of $5,000 which the judgment a quo regarded as taxable income from appellant’s employment within the meaning of section 5 of the Income Tax Act.

Section 5 of the Income Tax Act indicates what, in a taxation year, constitutes a taxpayer’s income from an office or employment. In principle, this income is “the salary, wages and other remuneration . . . received by the taxpayer in the year’’, plus the value of “other benefits . . . received or enjoyed by him in the year in respect of, in the course of, or by virtue of the office or employment’’.

Counsel for the respondent maintained, first, that the sum of $5,000 in question here constituted, within the meaning of section 5, either a “salary’’, wages or other remuneration from appellant’s employment’’ or, in any case, a benefit which was “received by him’’ by virtue of “his employment, because payment of this sum was a benefit stipulated in his contract of employment”. I cannot accept this argument. The $5,000 received by appellant was paid to him as liquidated damages to compensate him for the detriment he suffered as a result of the loss of his employment. If the agreement liquidating the amount of these damages had been concluded after appellant’s dismissal, it is clear from the decision of this Court in The Queen v R B Atkins, [1976] CTC 497; 76 DTC 6258 that the sum of $5,000 would not have constituted “salary”, “wages”, “remuneration” or a “benefit” received by appellant by virtue of his employment. I do not see how the fact that Villa Medica Inc’s obligation to pay damages was anticipated and liquidated before rather than after the contract was terminated can alter the nature of the amount in question: both cases involve damages liquidated by agreement.

The second argument made by counsel for the respondent was that the sum of $5,000 is deemed, under section 25 of the Act,* to have been received by appellant as remuneration for his services. This argument requires the Court to consider whether on the evidence the sum of $5,000 can reasonably be regarded as having been received by appellant under one of the headings described in clauses (i), (ii) and (iii) of section 25. In answer to this question I would say, first, that appellant definitely did not receive this sum in the circumstances provided for by clauses 25(i) and (ii): it was not paid to him either to induce him to enter into a contract of employment or as remuneration for services which he had rendered. However, did appellant receive it as provided for by clause 25(iii), in consideration or partial consideration for a covenant with reference to what he was to do or not do after the employment terminated? One is at first tempted to answer this question in the affirmative, since the contract concluded between appellant and Villa Medica Inc on August 21, 1970 provided, on the one hand, that Villa Media Inc undertook to pay him the sum of $30,000, and on the other hand that appellant undertook not to work for another private hospital in Quebec, and in addition not to make criticisms of his former employer. From merely reading this contract, it would seem that the circumstances contemplated by clause 25(iii) have been fulfilled here. The matter is otherwise, however, if we look at all the evidence without giving undue importance to the “form” or “legal effect” of the agreement of August 21, 1970. It then appears, in my opinion, that the amount paid by Villa Medica Inc cannot be reasonably regarded as having been received in consideration or partial consideration for appellant’s undertaking not to work in a private hospital and not to criticize his former employer. Before the contract of August 21, 1970 was entered into Villa Medica Inc, which had just dismissed appellant, already owed him (and admitted owing him) the sum of $30,000 which it had undertaken to pay him as liquidated damages; and he was subsequently paid the $5,000 in question here in partial performance of this obligation. In other words, appellant in fact undertook not to criticize his former employer and not to work for another private hospital in Quebec, but in my opinion the evidence established that the sum of $30,000 promised by Villa Medica Inc did not constitute the consideration for this under- taking. I accordingly conclude that the evidence showed that the sum of $5,000 received by the appellant from his former employer was not paid to him in the circumstances contemplated by clauses 25(i), (ii) and (ili).

For these reasons, I would allow the appeal, quash the judgment of the trial judge, vacate the assessment and refer the matter back to the Minister for him to re-assess appellant, assuming this time that the sum of $5,000 which he reveived from Villa Medica Inc does not constitute a benefit from an employment. I would award appellant his costs in this Court and at trial.