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Citation: 2003TCC904
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Date: 20031208
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Docket: 2002-3739(IT)G
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BETWEEN:
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CLIFFORD KILLINGER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell, J.
INTRODUCTION
[1] In each of the taxation years 1993
through 1997, the Appellant was employed by Noble International
Services Ltd. ("NISL") and performed his employment
duties outside Canada. The Appellant, like other Canadians
employed by NISL, claimed the overseas employment tax credit
(OETC") in his tax returns in each of these years, claiming
a deduction from tax payable on the basis that NISL was a
"specified employer" under the Income Tax Act
(the "Act").
[2] In April 1998, the Minister issued
reassessments to the Appellant, disallowing the claims for this
credit for these years because NISL was not a specified employer.
As a result the Appellant owed income tax and interest. By two
instalments, on April 30, 1998 and June 9, 1998, NISL paid the
Appellant the amount of $86,566.00, which was equivalent to his
tax liability. The Appellant did not include this amount in
computing his income for the 1998 taxation year.
ISSUE
[3] The issue is whether the Appellant
must include this amount received from NISL as a taxable benefit
in computing his income in the 1998 taxation year.
LEGISLATION
[4] A taxpayer's income for a year
includes income from an office, employment, business, property or
other source. The applicable provision of the Act
reads:
3. The income
of a taxpayer for a taxation year for the purposes of this Part
is the taxpayer's income for the year determined by the
following rules:
(a) determine the total of all amounts each of which is the
taxpayer's income for the year (other than a taxable capital
gain from the disposition of a property) from a source inside or
outside Canada, including, without restricting the generality of
the foregoing, the taxpayer's income for the year from each
office, employment, business and property.
[5] Subsection 5(1) provides that a
taxpayer's income for the year from employment is salary,
wages, and other remuneration, including gratuities, received in
the year.
[6] Paragraph 6(1)(a) states that
included in computing a taxpayer's income for the year from
employment is the value of other benefits received or enjoyed by
the taxpayer in the course of or by virtue of the employment.
That section states:
6(1) There shall be included in
computing the income of a taxpayer for a taxation year as income
from an office or employment such of the following amounts as are
applicable:
(a) value of
benefits - the value of board, lodging and other benefits of
any kind whatever received or enjoyed by the taxpayer in the year
in respect of, in the course of, or by virtue of an office or
employment, except any benefit
(i)
derived from the contributions of the taxpayer's employer to
or under a registered pension plan, group sickness or accident
insurance plan, private health services plan, supplementary
unemployment benefit plan, deferred profit sharing plan or group
term life insurance policy,
(ii)
under a retirement compensation arrangement, an employee benefit
plan or an employee trust,
(iii) that was
a benefit in respect of the use of an automobile,
(iv) derived
from counselling services in respect of
(A) the mental or physical health of the taxpayer or an
individual related to the taxpayer, other than a benefit
attributable to an outlay or expense to which paragraph 18(1)(l)
applies, or
(B) the re-employment or retirement of the taxpayer, or
(v)
under a salary deferral arrangement, except to the extent that
the benefit is included under this paragraph because of
subsection (11);
EVIDENCE
[7] The Appellant gave evidence, as
well as Gerald Ross Johnson, who was also an employee of NISL in
1996 and 1997.
[8] NISL approached the Appellant and
offered him the job of chief mechanic on a barge in Nigeria. He
refused the offer, as the pay was too low. NISL contacted him
again in January 1992 and advised him they would increase his
rate of pay. During this phone call the NISL representative,
Marc Overstreet, made comments to the Appellant that
employees of NISL would qualify for the OETC. The Appellant was
aware that this could mean tax savings for him. His evidence was
that he considered this an extra bonus, as he would pay less tax.
However he stated he would work for NISL without this incentive
because NISL had agreed to pay him what he wanted. In each year
an offer of employment was signed by the company and the
Appellant (or his wife who had a power of attorney). These offers
listed the terms and conditions of his employment but made no
reference to the OETC. Form T-626, completed by a representative
of NISL along with an earnings statement (equivalent of a T4),
was supplied to the Appellant each year. Form T-626 certified
that NISL was a specified employer under the Act.
[9] Rumours that NISL might not
qualify as a specified employer began to circulate in 1994. The
Appellant himself wrote to NISL in April, 1994 inquiring into the
company's status. Between 1994 and 1996, information was
exchanged between the employer and employees on the OETC. In
January 1996 Noble sent out another memo responding to questions
and confirmed that NISL was a specified employer and that a
T-626, together with an earnings statement, would issue for
1995.
[10] When the Minister advised the Appellant
in January 1997 that his claim, together with those of other NISL
employees, was under review, the company stepped in and advised
the employees not to contact Revenue Canada as the company would
respond on behalf of the employees after determining a course of
action. A further memo confirmed the company's intention to
meet with Revenue Canada. On May 16, 1997 the company wrote to
the Appellant confirming that they were working with Revenue
Canada and their accountants to resolve the issue.
[11] During this time period, informal
discussions occurred among the employees on the barge to the
effect that this situation was unfair to the employees and that a
lawsuit might have to be pursued. However the Appellant did not
contact a lawyer nor was he aware of any other employee that did.
A lawsuit was never filed.
[12] On April 29, 1998, the company paid the
first of two instalments to the Appellant and a release agreement
was executed. The Appellant testified that he understood this
problem was the company's fault and that they accepted this
and they agreed "...to pay the tab".
[13] On June 4, 1998 the second instalment
was paid and a second release agreement was signed.
[14] The second witness, Mr. Johnson, had
discussions with NISL prior to being hired and was also advised
of the eligibility for this credit as an employee of NISL. He
testified he was convinced that NISL qualified as a specified
employer and that the OETC made some difference for him in
respect to the overall employment package. However in agreeing to
work for NISL, he was more concerned about the country he could
work in and the type of weather it would offer him. In February
1997 he received a T-626 form. He left Noble's employment in
1997, as he wanted to work in South America for another company.
When he received a notice of reassessment, he contacted
Noble's representatives and was told the company would look
after it. Eventually he too received money and subsequently
signed a release.
ANALYSIS
[15] My decision in this case depends
largely on the wording of paragraph 6(1)(a) of the
Act. Canada v. Savage, [1983] 2 S.C.R. 428 is the
leading case dealing with this provision. The Supreme Court
interpreted paragraph 6(1)(a) very broadly in dealing with the
term "benefits". The case reviewed English authorities
and concluded that our Act has a wider scope when it
speaks of a benefit "in respect of" an office or
employment. At page 440, Dickson, J. wrote:
...The meaning of "benefits of whatever kind" is
clearly quite broad; in the present case the cash payment of $300
easily falls within the category of "benefit". Further,
our Act speaks of a benefit "in respect of" an
office or employment. In Nowegijick v. The Queen, [1983]
S.C.R. 29 this Court said, at p. 39, that:
The words "in respect of" are, in my opinion, words
of the widest possible scope. They import such meanings as
"in relation to", "with reference to" or
"in connection with". The phrase "in respect
of" is probably the widest of any expression intended to
convey some connection between two related subject matters.
[16] In Gernhart v. R., 96 DTC 1672,
financial assistance provided to an Appellant by her employer to
offset an increased tax burden imposed as a consequence of a
change in residence from the United States to Canada, was found
to be a benefit.
[17] Although the Gernhart case
can be distinguished from the facts of the present case,
Justice Bonner made a number of statements which are nevertheless
directly applicable. At paragraph 9 of that case, he wrote:
9. It is, I
think, self-evident that a benefit in the form of a direct
addition to the wealth of an employee is received when an
employer discharges an income tax burden which would otherwise
fall on the employee in his or her personal capacity.
[18] The Federal Court of Appeal, in
Mohawk Oil Co. v. R., [1992] 2 F.C. 485, held
that in determining the character of the payment, made in respect
to a settlement of a claim, it was important to look at its
significance to the recipient rather that the payer. The Court
concluded that although the amount was a settlement of a damage
claim from the payer's viewpoint, it was replacement for lost
income and compensation for loss of a depreciable capital asset.
Justice Stone at page 496 stated:
The findings of the learned Trial Judge were that the
settlement payment was agreed to by Phillips in order to
"get rid" of Mohawk's claim and to preserve its
reputation and that it was in excess of the amount provided for
in the limitation of damages clause contained in the January 27,
1978 purchase agreement. The manner in which a settlement amount
has been characterized by the payor in the course of negotiations
would seem to be an unsafe test for determining its true nature.
The payor's motives for settling a dispute may be many and
varied in any given case, and it must be a difficult thing to
know precisely what his true motivation may have been, especially
where the settlement amount is represented by a lump sum which
the documentation does not assign to any particular head of
claim. I do not see how the settlement amount can be viewed as
being "akin to a windfall" merely because the
respondent says it was paid by Phillips to get rid of the
claim.
...The evidence is clear that, while Phillips would not agree,
the respondent sought from the outset and throughout the
settlement negotiations to be made whole including compensation
for lost profits and expenditures thrown away.
[19] In The Queen v.
Blanchard, 95 DTC 5479, The Federal Court of Appeal
concluded that a payment, being the equivalent of the estimated
real estate commission which would be payable if the taxpayer
were to sell his home, was an amount paid in respect of
employment. In concluding there was an economic benefit to the
taxpayer, Justice Linden wrote at page 5482:
I disagree with both the respondent's submissions and the
Trial Judge's conclusion that the ETAP payment arose from
factors "extraneous" or "collateral" to the
respondent's employment. There is no doubt that the payment
to the taxpayer came about as part of a real estate
transaction. But this transaction was not a mere
"house deal", totally divorced from the employment
relationship of the taxpayer, which might take it out of the
reach of paragraph 6(1)(a). That section, if I am to respect
its unambiguous wording, requires only some connection between
the receipt of a payment and the recipient's
employment--nothing seems to turn on the source of the payment.
It makes no difference whether a receipt arises from a land deal,
a boat deal, a livestock deal, or any other type of deal, as long
as the receipt is linked to the recipient's employment.
[20] In the present case, the Appellant has
asked that I characterize the payment as damages arising from the
tort of negligent misrepresentation while the Respondent asks
that I accept the payment as being made in respect of the
employment relationship. In arguing their respective positions,
both counsel relied considerably on the wording of the two
release agreements, which were essentially the same except that
they were executed several months apart. In fact the Appellant
suggested that I would dismiss the appeal if I decided that the
release, being the consideration for the payment, was issued in
respect of a claim that arose out of the employment relationship.
I do not believe that as much reliance should be placed on the
releases, as counsel suggested.
[21] The release documents contain several
references to the employment relationship. The parties are
referred to as employers and employees, in lieu of the usual
releasor and releasee. Although the document is drafted in a very
general sense, as most releases are, releasing the company and
its related corporate entities from present and future liability,
the agreement does specifically state at paragraph 4.1:
4.1. The Company agrees to pay
Employee the sum of Forty four thousand one hundred forty four
United States Dollars (US$44,144.00), less applicable
withholding, if any, legally required, in full settlement,
release, discharge, accord and satisfaction of any and all claims
that Employee may currently have, or could make or allege at any
time in the future, against the Company or any other of the
Released Parties growing out of, or connected with, or
resulting in any way from amounts due and payable by Employee as
Canadian taxes with respect to Employee's employment by the
Company or any other of the Released Parties during the
Disputed Years ...
(Emphasis are mine.)
[22] Paragraph 2.2 refers to Revenue
Canada's assessment of additional tax and refers to this as
the "disputed tax". At paragraph 2.3 it goes on to
state in part:
2.3. The Company is not liable
for the Disputed Tax assessed against Employee. Nevertheless,
the Company desires to offer assistance to Employee as
provided for in this Release. This Release does not in any manner
constitute an admission of liability or wrongdoing on the part of
the Company or any of the other Released Parties, and the Company
and the other Released Parties in fact expressly deny any such
liability or wrongdoing, and enter into this Release in order
to assist Employee and for the sole purpose of avoiding further
trouble or expense;
(Emphasis are mine.)
[23] And finally under the heading
"Scope of Settlement", paragraph 2.4 states:
2.4. Employee desires to enter
into this Release in order to provide for a full settlement,
receipt, release, discharge, accord and satisfaction of any and
all amounts to which Employee is or could claim to be entitled
now or in the future from the Company or any other of the
Released Parties on account of the Disputed Tax or any other
amount of tax assessed by Revenue Canada for the Disputed
Years.
[24] The Appellant argued that the wording
in these releases supports that the amounts paid by the company
were in respect to representations that were made. However I do
not see any such reference, either explicit or implicit. The
release simply states that the employer is offering assistance
and it is because the Appellant was involved in an employment
relationship that the payment was made. In any event, I prefer to
look to the overall relationship between the Appellant and his
employer instead of focusing only on the release documents to
determine the character of the payment. There was no evidence
before me as to the motive of NISL in making these payments, and
certainly no evidence that they felt they had made negligent
misrepresentations, as the Appellant argued. The release simply
states, as would be expected, that the employer makes no
admissions respecting liability. The evidence before me points in
one direction only and that is that the payment is connected to
or at least incidental to the employment relationship.
[25] The Appellant argued that the offers of
employment contained nothing respecting the OETC, and therefore
there was no obligation on NISL to provide the credit pursuant to
an employment contract. Instead, the Appellant states, there were
representations made prior to the employment and during the
course of the employment through the issuance of T-626 forms and
company correspondence which stated it was a qualified employer.
Employees placed reliance on these direct representations when
they applied for the credit each year. I do not agree with the
Appellant that these payments were made outside the scope of the
employment relationship. NISL discussed the credit with both the
Appellant and Mr. Johnson. Although both individuals stated they
would have worked for NISL regardless of the credit, I do believe
that both parties in discussing the credit prior to accepting the
job considered it one of the inducements of entering an
employment relationship with NISL. That it continued to play a
vital part of the overall ongoing employment relationship was
reflected in the concern expressed by the Appellant and other
employees when rumours surrounding the loss of this credit
started circulating. In fact it prompted a written memo from the
Appellant personally where he requested that the company clarify
its position. He requested that his monthly salary be increased
to compensate for this tax liability if NISL could not supply the
credit. Both the Appellant and Mr. Johnson testified that the
credit was part of an overall package. The documentation
concerning this credit suggests that the ability of employees to
claim this credit was an important aspect of their employment and
inextricably tied to their wages. In fact the Appellant found the
reassessments by CCRA "unpleasant" because it affected
his wages and he did not "like anybody messing with your pay
cheque". In the end what mattered to the Appellant was his
net pay and his evidence points to the fact that he viewed the
credit denial as adversely affecting his net pay.
[26] Each of the offers of employment for
the years 1994, 1995, 1997 and 1998 (at Tabs 1 through 4 of the
Summary of Admissions) contained a final paragraph which
stated:
All employment with the Company is on an "at will"
basis. This document is not intended to create, nor is it to be
construed to constitute, a contract between the Company or any of
its affiliates and any of its Employees.
It would appear from this paragraph that NISL did not view
this document or did not wish that it be viewed as an employment
contract. In fact it is titled "offer of employment". I
do not have to decide that issue here but it does create the
impression that in addition to the conditions and terms specified
in the offer of employment, there might be other items incidental
to the relationship although not included in the offer. NISL
obviously believed the credit to be a part of the employment
relationship and one upon which employees had placed reliance
because the company continued throughout this period to respond
to employee inquiries. If it felt the credit did not form part of
the employment relationship it could have said so. Even if I
accept the Appellant's argument that the payment was a
separate arrangement, I believe that it was connected to the
Appellant's employment with NISL based on the evidence.
[27] The true character of the payment,
viewed solely from the perspective of the wording in the release,
is contained at paragraph 2.3 where the paragraph states it is:
"... to assist employees and for the sole purpose of
avoiding further trouble and expense". However, as I
mentioned before, I look to this wording as supportive, rather
than the sole basis, in determining the character of the payment.
When viewed in the overall context of the employment
relationship, the true character of the payment was to make up
amounts that the Appellant felt NISL owed him as an employee.
There is no evidence to support a conclusion that the payment was
made to release NISL from an action in tort. There was concern
about the OETC status and the reassessment, but according to the
evidence, neither the Appellant nor any of the other employees
ever turned a collective mind to contacting a lawyer or
instituting a lawsuit and there is certainly no evidence to
suggest it would have been framed in the tort of negligent
misrepresentation.
[28] I do not view this payment as a
severable and independent transaction based on a claim in tort.
In all of the circumstances it cannot be completely divorced from
the employment relationship. Because I have concluded that these
payments are ancillary compensation which arose out of the
employment relationship, they are caught by the broad wording of
6(1)(a) and the interpretation given to this provision pursuant
to the Savage decision. In essence NISL paid the
Appellant's tax liability which was assessed as a direct
consequence of his employment. This is clearly a benefit caught
by 6(1)(a) as it is paid in respect to or in connection with the
Appellant's employment. I do not see any particular relevance
to the Appellant's argument that the Savage decision
and similar decisions can be distinguished based on the fact that
the Appellant ceased to work for NISL on December 31, 1997. He
was in fact still employed by the related group of Noble
companies if not specifically NISL, but even if he were not
employed, the payments in my view would still be made in respect
of or by virtue of his employment even though the employment had
ceased. As such the payment must be included in computing the
Appellant's income for the 1998 taxation year.
[29] Although I need not consider the
Respondent's alternative argument that the payments could be
salary, wages or other remuneration pursuant to subsection 5(1),
I believe these payments could also be included in the
Appellant's income pursuant to this subsection in light of my
characterization of the payments as part of the Appellant's
overall employment relationship.
[30] The appeal is dismissed with costs.
Signed at Ottawa, Canada this 8th day of December 2003.
Campbell, J.
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