Jack Cewe Ltd. v. Jorgenson, 80 DTC 6233, [1980] CTC 314, [1980] 1 S.C.R. 812

Pigeon, J:—Judgment was rendered at trial against the appellant (the “Company”) in an action for wrongful dismissal brought by the respondent. The trial judge held that the proper amount of damages to be awarded was a full year’s salary. From this, he deducted amounts received from various sources during the relevant 12 months, including unemployment insurance benefits in the amount of $1,330. An appeal by the Company was unanimously dismissed by the Court of Appeal for British Columbia (1978), 93 DLR (3d) 464. On respondent’s cross-appeal, it was held that the unemployment insurance benefits should not be deducted. From this judgment, the Company appeals by leave of this Court on two points only:

1 A deduction should be made for income tax;

2 Unemployment insurance benefits should be deducted in proportion to the Company’s contribution.

With respect to income tax, the Company’s submission rests on the premise that respondent is not liable to income tax on the damages awarded. This is based on the judgment of the Federal Court of Appeal in The Queen v R B Atkins, [1976] CTC 497; 76 DTC 6258, affirming the judgment of Collier, J, [1975] CTC 377; 75 DTC 5263. This judgment is contrary to the decision of Cattanach, J, in T G Quance v The Queen, [1974] CTC 225; 74 DTC 6210, as to which Jackett, CJ said, speaking for the Federal Court of Appeal:

Having regard to the weight placed by the appellant on the decision of the Trial Division in Quance v The Queen, [1974] CTC 225; 74 DTC 6210, I deem it advisable to state in my own words what I regard as the basic fallacy in the appellant’s position.

Once it is conceded, as the appellant does, that the respondent was dismissed “without notice’’, monies paid to him (pursuant to a subsequent agreement) “in lieu of notice of dismissal” cannot be regarded as “salary”, “wages” or “remuneration” or as a benefit “received or enjoyed by him . . . in respect of, in the course of, or by virtue of the office or employment”. Monies so paid (ie “in lieu of notice of dismissal”) are paid in respect of the “breach” of the contract of employment and are not paid as a benefit under the contract or in respect of the relationship that existed under the contract before that relationship was wrongfully terminated. .. .

I have grave doubt as to the validity of this reasoning. Damages payable in respect of the breach of a contract of emloyment are certainly due only by virtue of this contract, I fail to see how they can be said not to be paid as a benefit under the contract. They clearly have no other source. In Livesley v Horst, [1924] SCR 605, Duff, J said, speaking for the Court (at 607):

In principle, it is difficult to discover a solid ground for refusing to classify the right to damages for breach of contract with other rights arising under the proper law of the contract, and recognizable and enforceable as such.

The basic principle governing the award of damages for breach of contract is that “the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed’’. I fail to see any reason why this would not hold true towards the tax collector as well as towards the parties to the contract. In The Queen v Jennings, [1966] SCR 532, where the damages awarded were in tort and mainly for permanent disability, Judson, J gave the reasons for declining to follow British Transport Commission v Gourley, [1956] AC 185, where a deduction for income tax had been made. Before coming to that conclusion, he said (at 544):

Gourley was decided upon an admission of counsel that the damages were a non-taxable capital receipt. This admission was taken to be an accurate reflection of the law and of the practice of the Inland Revenue.

For what it is worth, my opinion is that an award of damages for impairment of earning capacity would not be taxable under the Canadian Income Tax Act. To the extent that an award includes an identifiable sum for loss of earnings up to the date of judgment the result might well be different. But I know of no decisions where these issues have been dealt with and until this has been done in proceedings in which the Minister of National Revenue is a party, any expression of opinion must be insecure. Such litigation would have to go through the Board of Tax Appeals or direct to the Exchequer Court with a final appeal, in appropriate cases, to this Court. . ..

In my view, the present situation with respect to income tax on this award of “an identifiable sum for loss of earnings” must be considered legally insecure. This Court might well disagree with the conclusion reached by the Federal Court of Appeal in Atkins. In this respect, I will note that in that case consideration appears to have been given only to the question whether the damages for wrongful dismissal were income “from an office or employment’’ within the meaning of sections 5 and 25 of the Income Tax Act (RSC 1952). No consideration appears to have been given to the broader question whether they might not be income from an unspecified source under the general provision of section 3.

Counsel for the appellant referred to Parsons v BNM Laboratories Ltd, [1963] 2 All ER 658. In that case the English Court of Appeal relied on a specific provision of the British Act making such payments taxable above a stated amount, this was held to imply that under such amount they were not taxable. As to the reasons for the ultimate conclusion that the employer should in such a situation get the benefit of the income tax that the dismissed employee would not have to pay, the majority rely on Gourley by which they consider themselves bound but which this Court has firmly rejected in Jennings. I find much more persuasive the reasons given by Sellers, LJ for making no such deduction than the reasons given for the majority for making it. He says (at 663-664):

The justification for regarding tax in assessing damages is at least more questionable when looked at in terms of contract. The employer has at all times during the subsistence of a service agreement to pay the employee the contractual sum, no contractual provision is made for any deduction of or reduction of tax. It is true that the sum the employee receives when it comes to be distributed by him has to meet the requirements of income tax which for the convenience of administration under our PAYE scheme is, in effect, handed back to the employer to pay over to the Inland Revenue on behalf of the employee, the taxpayer. It seems unnecessary to say that that is the employee’s expenditure and payment to meet his contribution to the services he receives from the state and to which he may have to make further contribution by way of surtax. If his salary were less, the employee would no doubt pay less tax, but whatever he pays in taxes in no way reduces the contractural obligation on the employer to pay the whole of the agreed sum.

. . . income tax might appropriately have been made payable by the employee on the damages received, for he will have had his earnings so computed, and the tax could be assessed on the basis of probable liability, as Gourley’s case contemplates it will be where Gourley’s case applies, or on some other basis, and either paid by the employer to the revenue or collected direct from the taxpayer, but as it chances (and it may possibly be a “flaw” or omission in our taxation law) the grossed-up lost income is treated as a capital sum and is not, subject to some recent provisions which call for consideration, exigible to income tax. This is a fortuitous circumstance which has nothing to do with the employer or his contract of service with the employee and cannot, as I see it, enure to his benefit so as to result in his contract being treated as one not to pay the sum stipulated but some lesser sum which might vary between a number of employees all having a common form of contract for, say £2,000 a year but each having a different tax liability. . . .

These observations were answered by the majority in holding Gourley binding and undistinguishable. Having rejected Gourley we must hold this to be no answer. Even on the assumption that respondent will escape income tax on the damages awarded by him, it would be illogical to allow his employer a deduction for income tax not payable.

I cannot dismiss this point without referring to Florence Realty Co Ltd v The Queen, [1968] SCR 42, a decision which came less than two years after Jennings. In that case compensation had been assessed in the Exchequer Court for the loss of a private railway siding. It was determined, as upon an expropriation, at the amount which a prudent owner would have paid rather than lose the rail service. In thus estimating the value of a permanent asset used for profit making purposes, the annual profit lost was taken into account net of income tax. This Court held that its judgment in Jennings was not applicable to exclude such deduction in the assessment of the compen- sation. It is unnecessary to consider whether this is consistent with expropriation compensation principles and cases generally, this decision concerning compensation for the loss of a permanent asset has no possible application in the assessment of a loss of personal earnings any more than in the assessment of a loss of personal earning capacity.

Turning now to the unemployment insurance benefits, I find the Company’s contention untenable. The payment of unemployment insurance contributions by the employer was an obligation incurred by reason of respondent’s employment, therefore, to the extent that the payment of those contributions resulted in the provision of unemployment benefits, these are a consequence of the contract of employment and, consequently, cannot be deducted from damages for wrongful dismissal. The situation is similar to contributory pension benefits which this Court recently decided should not be deducted in assessing compensation for loss of earnings. In Guy v Trizec, [1979] 2 SCR 756, Ritchie, J said, expressing the unanimous opinion of the full court (at 762):

... I am unable to share the opinion that the pension benefits should be deducted in the manner proposed because I take the view that this contributory pension is derived from the appellant’s contract with his employer and that the payments made pursuant to it are akin to payments under an insurance policy. This view is in accord with the judgment of the House of Lords in Parry v Cleaver, [1970] AC 1, which was expressly approved in this Court in the reasons for judgment of Mr Justice Spence in Canadian Pacific Ltd v Gill, [1973] SCR 654 . . .

Furthermore, it appears that damages for wrongful dismissal are “earnings” for unemployment insurance purposes, being defined by the Unemployment Insurance Regulations as income “arisng out of employment”. In Attorney General of Canada v Walford, [1979] 1 FC 768 the Federal Court of Appeal reversed an Umpire’s decision holding that a payment of damages for wrongful dismissal was not income. The judgment in The Queen v Atkins was held not to be an authority in the interpretation of the Unemployment Insurance Regulations. The anomaly of considering damages for wrongful dismissal as income for unemployment insurance purposes but not for income tax purposes is an additional reason for doubting the correctness of the decision in Atkins.

I do not find it necessary to consider whether, due to the time element, respondent will be entitled to retain the unemployment insurance benefits which were allowed to him at a time when he was being denied compensation for his wrongful dismissal. Even if it should happen that he will not now be obliged to reimburse them, this is a matter between him and the unemployment insurance authorities, it does not concern the appellant company.

I would dismiss the appeal with costs.