Citation: 2010 TCC 47
Date: 20100126
Docket: 2006-1736(IT)G
BETWEEN:
MIKE SCHEWE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1]
This appeal is from an
assessment by the Minister of National Revenue, by which he added $90,000.00 to
the income of the Appellant for the 2001 taxation year which the Appellant
received as an award for the breach of his contract of employment with Okanagan University College (“OUC”). OUC issued a T4A information slip
for that amount.
[2]
The Minister issued an
arbitrary assessment on March 11, 2004 for ninety thousand dollars, taking the
position that this amount constituted a “retiring allowance” as defined in
subsection 248(1) of the Income Tax Act (the “Act”), as it was
… an amount received…
(b) in respect of a loss of an office or employment
of a taxpayer, whether or not received as, on account or in lieu of payment of,
damages or pursuant to an order or judgment of a competent tribunal…
and must be included as income pursuant to subparagraph 56(1)(a)(ii)
of the Act.
Facts
[3]
The parties filed an
agreed statement of facts as follows:
2.
The Appellant began employment with the Okanagan University
College (the “University”) in 1981 as an instructor.
3.
In the fall of 1990, the Appellant was appointed
part-time Assistant Dean, Vocation Programs at the University, effective
January 2, 1991.
4.
On December 31, 1990, the Appellant was
appointed Dean of Vocational Programs at the University. A copy of the letter
of appointment dated December 31, 1990 is attached as Appendix 1 to the
Statement of Facts.
5.
In 1993, amendments were made by the University
to their Policy for Administrative Staff (the “Policy”), which governed the
Appellant’s position as Dean. A copy of the Policy is attached as Appendix 2
to the Statement of Agreed Facts.
6.
In 1995, the Appellant, at his option under the
amendments to the Policy, requested an assessment from the University of his
eligibility to qualify for an instructor’s position in addition to the position
as Dean.
7.
By letter dated April 21, 1995, the Selection
Committee for the University unanimously recommended that the Appellant’s
position as Dean have a full-time continuing position of Instructor attached to
it (the “Instructor Position”). A copy of the letter dated April 21, 1995,
including schedule “C”, is attached as Appendix 3 to the Statement of
Agreed Facts.
8.
The University terminated the Appellant’s
employment and it offered him severance of certain lump sum payments, which the
Appellant did not accept.
9.
The Appellant received no payment from the
University concurrent with his termination.
10.
The Appellant commenced a suit in the Supreme
Court of British Columbia against the University for wrongful dismissal and
breach of contract.
11.
Mr. Justice Brooke of the British Columbia Supreme
Court issued a judgment in favour of the Appellant on March 6, 2001 [Schewe v. Okanagan
University College, 2001 BCSC 343, 103 A.C.W.S. (3d) 747].
12.
After the judgment was rendered, the University
paid the Appellant the $90,000.00 in damages for breach of contract, as
ordered.
13.
The Appellant’s counsel requested pre-judgment
interest from the University on the $90,000.00 award for breach of contract,
but that request was refused. A copy of the March 13, 2001 letter from counsel
for the University to counsel for the Appellant concerning pre-judgment
interest is attached as Appendix 4 to the Statement of Agreed Facts.
14.
The Appellant’s 2001 taxation year was
arbitrarily assessed by the Minister of National Revenue on March 11, 2004 to
include the $90,000.00 received from the University in the Appellant’s income
as a retiring allowance.
15.
The Appellant’s 2001 taxation year was
subsequently reassessed by the Minister of National Revenue on November 29,
2004, following an objection by the Appellant, to allow the Appellant a
deduction of $26,103 for legal fees.
[4]
Additional evidence was
given by Cynthia Borch who was an auditor for CRA. She has taken courses in
Business Administration and Accounting.
[5]
In 2004, she handled
the assessment of the Appellant and considered his objection. She received the
T4A issued by OUC. This was admitted into evidence as Exhibit R3. The Appellant
did not file a T1 return, thus the arbitrary assessment.
[6]
She allowed a deduction
of $26,103 for legal fees. No deductions were made by OUC from the payment.
Argument of the Respondent
[7]
In written and oral
argument, counsel for the Respondent said that the Appellant had the right of a
full-time continuing position as instructor in addition to his position of
Dean. There was a gap in time between the time where the Appellant was assessed
(November 1, 1999) and the time when he intended to return to the workforce as
an instructor (July 1, 2001).
[8]
However, the factual
findings of the Court to determine the terms of the employment contract, and to
determine whether or not there had been a breach, indicate that the employment
as Dean, and the attached instructor position were inextricably linked. This
brings the present case outside of the case of Schwartz v. The Queen, 96
D.T.C. 6103 (S.C.C.).
[9]
Here there was impending
employment in the future. Thereby a continuing relationship and that makes the
Appellant’s receipt here, taxable.
[10]
The Appellant’s seniority
in relation to determining the damages from the loss of the instructor position
was tied to the date when the continuing instructor position attached to his
position of Dean.
[11]
The Court found that
Appendix “C” to the Policy for Administrative Staff formed part of the
Appellant’s employment contract. That policy indicated that the instructor
position was available by a Dean upon the giving of proper notice.
[12]
Nothing in the language
of Appendix “C” required a Dean electing to assume an attached continuing
position of College instructor to go without employment or pay for any period of
time prior to the change becoming effective. The Appellant did not elect to
take up the attached instructor position until November 22, 1999.
[13]
The award in issue was
ordered to be paid as damages for the loss of the instructor position, in
respect of the Appellant’s loss of employment, and was intended to compensate
him for loss of employment and benefits (see Tremblay v. Her Majesty the
Queen, 2009 TCC 437, 2009 D.T.C. 1284 at para. 35 and 46). At the
time, the University breached the employment contract with respect to allowing
the Appellant to take up the attached instructor position, the Court found
that:
While the Plaintiff was summarily dismissed effective
November 1, 1999, he retained his status to claim benefits throughout
the period of notice of at least three months [Schewe v. Okanagan University
College, 2001 BCSC 343, 103 A.C.W.S. (3d) 747].
[14]
Therefore, it is clear
that the damages awarded to the Appellant clearly related to his past service
with the University and specifically related to the benefit he had elected to
assure (i.e. the attached instructor position) while he was entitled to do so.
[15]
Counsel maintained that
there were four specific factors that made it clear that the award for loss of
the attached instructor’s position was a retiring allowance and not an award
for loss of “prospective” or “intended employment”:
(a)
The instructor position
elected for by the Appellant attached to his ongoing contract of employment as
Dean years earlier in 1995;
(b)
The instructor position
which attached to the contract of employment was a benefit granted to the
Appellant during the continuance of employment, the loss of which warranted compensation
in damages.
(c)
The Appellant
exercised, in 1999, his right to take the instructor position in accordance
with Appendix “C” at a time when he retained his status to claim benefits under
the employment contract; and
(d)
The Appellant’s
seniority for the instructor’s position (which the Court considered in
calculating the damages accrued) extended back in time to l995 when the
instructor position actually attached to the Appellant’s position as Dean.
[16]
These factors, together
with all of the findings of Brooke J. in Schewe v. Okanagan University
College, supra, make it clear that the case at bar is not a
situation where the terminated employee had no existing employment relationship
with, nor obligation to provide services to the employer as in Schwartz v.
R., supra.
[17]
Counsel relied upon the
case of Anderson v. The Queen 98 D.T.C. 1190 (T.C.C.) and said that in
the case at bar as there, there was a nexus between the damages and the loss of
employment.
[18]
She reiterated that
nothing in the agreement required that there be a gap in the employment. It
only happened that way because of the way that the election was made.
[19]
The Appeal should be
dismissed.
Argument of the Appellant
[20]
In written and oral
submissions the Appellant said that the appeal should be allowed. The trial
judge in the Supreme Court decided two different issues [Schewe v. Okanagan
University College, supra]:
(1)
The institution was
required to pay the Appellant compensation for lack of notice and appropriate
severance pay, and
(2)
The institution was
required to pay compensation of $90,000.00 for denying the right to further
employment on the basis of his contractual instructional position.
[21]
The institution refused
to pay interest on the outstanding $90,000.00 owed by taking the position that
it was awarded as damages for breach of contract, which contract would have
allowed him the right to take up the instructional position and it was not
subject to interest.
[22]
There was no monetary
value to moving the instructor’s position attached to his position as Dean. It
required a selection process as if he were starting all over again. It had no
bearing on his position as Dean.
[23]
The attached position
does not guarantee future employment. However, there was a termination
provision in the administrative policy.
[24]
The position of Dean
could be terminated at any time without cause and without relief. It was immaterial
that he had no attached position.
[25]
Proper notice was given
of the intention to take up the position of instructor effective July 1, 2001.
He was told that it was not an attached position to Dean and so he sued.
[26]
The judgment said two
distinct parts: (1) Wrongful dismissal as Dean and (2) he was paid nine
months salary and paid tax on it.
[27]
The award of $90,000.00
was for the attached position, much like that in Schwartz v. R., supra.
[28]
He took the position
that when you have regard to subsection 248(1), it does not define when someone
becomes an employee. We all may have a contract of employment, but he was not
being paid as an employee. The employment had not yet begun. The contract
covered future employment. He was prepared to start his employment under the
contract of employment on July 1, 2001. He was prepared to access the position
of instructor as of that date and the university said no.
[29]
The Court awarded the
$90,000.00 for damages for breach of contract for that position. It recognized
that there would be a gap in time when the university would not have to employ
him. According to the income tax bulletins where the award is for the breach of
a pre-employment contract, it is not taxable.
[30]
As in Schwartz v. R.,
supra, it was not a retirement allowance because the award was not with
respect to a loss of employment under subsection 248(1). One must
consider the starting point. One must be in the service. This excludes
prospective or intended employment.
[31]
The Appellant opined
that the other cases cited by counsel for the Respondent involved people who were
working.
[32]
The employment does not
start when the contract is signed. Subsection 248(1) refers to words of
employment, loss of office or employment. The taxpayer must be an employee.
[33]
In Income Tax Bulletin
IT-337R4 (consolidated) the words loss of employment or office are discussed
and two questions are added to determine whether a connection exists for
purposes of a retiring allowance which are as follows:
1 – But for the loss of employment would the amount have been received?
And
2 – Was the purpose of the payment to compensate a loss of
employment?
Only if the answer to the first question is “no” and the answer to
the second question is “yes” will the amount received be considered a retiring
allowance.
[34]
In this case, the answer
to the first question is “yes” and the answer to the second question is “no”.
Therefore, it was not a “retiring allowance” as defined.
[35]
The award here was for
something occurring after the date of the judgment.
[36]
The appeal should be
allowed.
Analysis and Decision
[37]
The parties have
correctly identified the sole issue in this case. The resolution of this
issue calls for the consideration of subparagraph 56(1)(a)(ii) of the Income
Tax Act, R.S.C. 1985, c. 1 (5th supplement), as amended, and the
definition of “retiring allowance” in subsection 248(1) of the Act. If
the amount in question is determined to be a “retiring allowance” under
subsection 248(1) of the Act, then it is taxable in the hands of the Appellant
under subparagraph 56(1)(a)(ii) of the Act.
[38]
Subsection 248(1) of
the Act defines “retiring allowance” as follows:
“retiring allowance” means an amount (other than a superannuation or
pension benefit, an amount received as a consequence of the death of an
employee or a benefit described in subparagraph 6(1)(a)(iv)) received
(a) on or after retirement of a taxpayer from
an office or employment in recognition of the taxpayer’s long service, or
(b) in respect of a loss of an office or
employment of a taxpayer, whether or not received as, on account or in lieu of
payment of, damages or pursuant to an order or judgment of a competent
tribunal,
by the taxpayer or, after the taxpayer’s death, by a dependant or a
relation of the taxpayer or by the legal representative of the taxpayer.
[39]
To determine the nature
of the payment we must consider the judgment of Brooke J. as indicated in the
judgment in favour of the Appellant of March 6, 2001 [Schewe v. Okanagan
University College, supra].
[40]
When considering
whether the attached position formed part of the contract of employment, he
said at page 9 of the judgment,
I find that the attached position does form part of the contract of
employment. While it did not form part of the contract at the time it was
entered into between the parties, it is like a benefit given by an employer to
an employee during the continuance of the employment.
[41]
The learned trial judge
went on to find that the Appellant’s counsel correctly invoked the request for
the attached instructional position effective July 1, 2001. Later on, at
paragraph 15 he said:
… The defendant deprived the plaintiff of something of value. The
question then is what damages reasonably flow from this aspect of the
defendant’s breach of the contract of employment?
[42]
The learned trial judge
obviously did not have income tax implications in mind when he made this
statement or he may have gone to greater pains to describe the award.
[43]
However, as the
Appellant pointed out in his argument, the Court also found that the Appellant
was wrongfully dismissed and awarded damages to him based upon nine months
salary.
[44]
At paragraph 24 of the
judgment, the Court said:
For the loss of the attached position, I award the plaintiff
$90,000. I do so taking into account the uncertain value of a return to the
Bargaining Unit as the junior member of that bargaining unit “for “layoff
purposes”, as well as the risks of a dispute with the union or litigation that
the defendant would have faced had it terminated the plaintiff after one year.
[45]
This Court is satisfied
that the trial judge was talking about a contract of employment which would
have been acted upon in the future, for example, after July 1, 2001 in
accordance with the Appellant’s notice.
[46]
This Court accepts the
Appellant’s argument in that regard.
[47]
This Court does not accept
the Respondent’s submission that the employment as a Dean and the “attached
position” were inextricably linked. They were linked in the sense that while
the Appellant was Dean he had satisfied the college that he was qualified to
hold the attached position of instructor; but that the two jobs were distinct;
and, in order to obtain the instructor’s position the Appellant had to follow
certain procedures, which he did.
[48]
This Court accepts the
argument of the Appellant that the Court awarded the $90,000 for breach of
contract for the attached position, which was, in essence, a contract for
future employment.
[49]
It is satisfied, on the
basis of all of the evidence that the award for damages for the loss of the
instructor position was not directly related but was extraneous to the loss of
the employment as Dean. It is satisfied that the damages awarded to the
Appellant clearly did not relate to his past service but for the loss of a
future position, for future employment that he had elected to pursue.
[50]
In so concluding, the
Court is not unmindful of the Respondent’s position that the instructor
position attached to this ongoing contract of employment as Dean years earlier
in 1995. However, he was employed as Dean during that time and he had no
contract of employment as instructor because he had not yet elected to take up
that position.
[51]
Again, the right to
take up the instructor position was a benefit but it had nothing to do with his
position as Dean, from which he could have been dismissed at any time.
[52]
The fact that the award
took into account the seniority of the position back to 1995 is not
determinative of the issue nor is the fact that the Appellant exercised, in
1999, his right to take up the instructor position in accordance with Appendix
“C” at a time when he retained his status to claim benefits under the
employment contact (as Dean). He would have no rights under the instructor position
until he took up that position in the future.
[53]
In the case of Schwartz
v. The Queen, supra, Rip J., as he then was, concluded that:
What the appellant lost when the contract was cancelled, […] was not
his employment or his position, but the legal right entitling him to employment
in the future.
[54]
As argued by the
Appellant in the case at bar, that was his situation. He was prepared to start
his contract on July 1, 2001, but the university said no. The Court accepts the
Appellant’s argument that the award was for something occurring after the date
of the judgment.
[55]
The Court agrees with
the Appellant that the answer to the question, but for the loss of employment
would the amount have been received is “yes” and the answer to the second
question, was the purpose of the payment to compensate a loss of employment is
“no”.
[56]
In the end result, the
Court finds that the award received by the Appellant was not a “retiring
allowance” under the definition found in subsection 248(1) of the Act
and was not taxable in the year in question under subparagraph 56(1)(a)(ii)
of the Act.
[57]
The appeal is allowed
and the matter remitted to the Minister for reassessment and reconsideration
based upon these findings.
[58]
The Appellant was not
represented by counsel and the parties were able to agree upon the facts. There
will be no costs.
Signed at Winnipeg, Manitoba, this 26th day of January 2010.
“T.E. Margeson”
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