Docket:
T-38-12
Citation: 2013 FC 955
Ottawa, Ontario, September
17, 2013
PRESENT: The
Honourable Mr. Justice Harrington
SIMPLIFIED ACTION
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BETWEEN:
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MARTHA NEWCOMBE
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Plaintiff
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and
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HER MAJESTY THE QUEEN
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Defendant
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REASONS FOR JUDGMENT AND JUDGMENT
[1]
There are two issues in this case. The first is
whether the amount paid by the Federal Department of Justice in Halifax to its departing employee, Ms. Newcombe, was taxable at source. The second is
whether this Court has jurisdiction to determine that issue.
[2]
Briefly put, Ms. Newcombe’s position is that the
money paid to her was by way of liquidated damages in settlement of several
outstanding grievances, and thus not taxable. The Department considers that the
payment was in lieu of notice of termination, or failing that, a retirement
allowance. In either case, the payment was taxable income. It was required by
law to deduct at source, remit a portion thereof to the Canada Revenue Agency
(CRA) and issue a T4 form (Statement of Remuneration Paid).
[3]
The Department adds that in its pith and
substance this action is a collateral attack on a Notice of Assessment issued
by the CRA. The Tax Court of Canada has exclusive jurisdiction. Ms. Newcombe
counters that this is an action against the Crown for breach of contract in
which the prime remedy sought is a writ of mandamus requiring the Crown
to issue an amended T4. In accordance with s. 17 of the Federal Courts Act,
this Court has concurrent original jurisdiction in all cases in which relief is
claimed against the Crown. Furthermore, the Federal Court has exclusive
jurisdiction to issue a writ of mandamus against any federal board,
commission or other tribunal in accordance with s. 18 of its enabling Act.
[4]
It is necessary to come to some understanding of
the facts and the applicable law before it can be determined what the true
subject matter of the action is, and whether this Court has jurisdiction.
THE FACTS
[5]
Ms. Newcombe joined the Department of Justice in
Halifax as a legal assistant in 1996. She left following the death of her
husband, but then returned in the year 2000. According to her uncontradicted
testimony, all went well until 2004. At that time, new personnel joined the
Department. She was harassed, given poor performance reviews and spent, on
doctor’s orders, some time on stress leave. Come June 2006, she had filed a
number of grievances against her employer which were at the first, second and
third levels. These grievances included claims of harassment, and contestation
of performance reviews.
[6]
She enlisted the aid of her union as both she
and the Department were more than willing to part ways. By agreement signed at Halifax June 12, 2006, Ms. Newcombe resigned and agreed not to apply for work at the Department
of Justice in the future. She also agreed to withdraw any and all grievances
which she had brought, any and all outstanding appeals relating thereto and not
to file any further complaints by grievance, action or otherwise.
[7]
For its part, the Department agreed to pay her
“the lump sum of one year’s salary (12 months) total amount, $46,290, less the
applicable statutory deductions”, and further sums representing outstanding
superannuation deficiencies and death benefit deficiencies. The Department also
agreed not to recover any sick leave credits and to remove and destroy from Ms.
Newcombe’s personnel file any documentation reflecting workplace issues with
the employer.
[8]
Within days, the Department deposited $35,466.65
into her bank account. Ms. Newcombe said her mind was in a bad place and she
did not realize moneys had been deducted at source until the T4 form was issued
in February 2007.
[9]
Not surprisingly, the Notice of Assessment
issued May 30, 2007 listed reported income as set out in the T4 slip, which
comprised her salary up to her resignation in June 2006, and the lump sum
payment.
[10]
This is where matters began to go wrong. Ms.
Newcombe should have filed a Notice of Objection to the Notice of Assessment.
She did not. Rather, she called CRA to say that the T4 form was wrong and had
to be amended. The CRA pointed out that it could not amend the form, only the
employer could. If an amended form was received, her tax liability would be
reconsidered.
[11]
After her departure from the Department, Ms.
Newcombe applied for employment insurance benefits. Human Resources and Skills
Development Canada expressed some concern that she had simply resigned and thus
was not entitled to benefits. Theodore K. Tax, Senior Regional Director,
Atlantic Regional Office, Department of Justice Canada, who had signed the
agreement with Ms. Newcombe, wrote with reference to that agreement. He said:
At the time that we
entered into negotiations, the employee had several legal matters outstanding
with the employer which are mentioned in paragraph 4 of the Agreement. From the
employer’s perspective, the settlement resolved all legal issues
relating to the employee’s employment with our Department. The settlement also
ensured that there were no further grievances, appeals or further legal
proceedings.
In exchange for a settlement of all
actions and in exchange for a letter of resignation which terminated the
employment relationship, the employer agreed to pay a negotiated settlement
lump sum amount. The lump sum amount was based on a review of similar court or
adjudication decisions or settlements. The reference to any salaried amount was
for guideline purposes only based on a review of what might be viewed as
possible judgments, litigation costs and contingencies in these circumstances.
I would point out that in no way did the parties intend that the settlement
amount be viewed or intended as salary of earnings owed to Ms. Newcombe.
[12]
Following receipt of that letter, Human
Resources approved Ms. Newcombe’s claim for benefits “because we consider that
she voluntarily left her employment with just cause as she had no reasonable
alternative, having regard to all circumstances.”
[13]
From that point on, until the institution of this
simplified action in January 2012, matters went from bad to worse. She, or from
time to time counsel on her behalf, was in communication with the Department of
Justice and the CRA. Mr. Tax, now Judge Tax of the Nova Scotia Provincial Court,
was subpoenaed. He testified that he had no hand whatsoever in the issuance of
the T4 form, or other financial documents. They would have been issued by
personnel people in either Halifax or Ottawa. Indeed, the T4 form was issued by
Public Works. The Department of Justice in Halifax made inquiries. It appears
that in requesting monies, the Department used a “code 088”. Public Works
replied that code 088 is for a lump sum taxable income payment: “If this was
not the code that should have been used then what code were you supposed to use?
The T4 was done correctly by the system based on what was input in the system.
A separate T4 is not issued for this type of entitlement.”
[14]
Ultimately, the position was taken by Public
Works that the settlement payment was processed appropriately and that the T4
form was correctly issued. Meanwhile, this lump sum payment together with her
salary from January through June 2006 put her in a higher tax bracket.
Penalties and interest were assessed and her salary at her new employer was
garnished.
THE TRIAL
[15]
There were only two witnesses at trial: Judge Tax,
as aforesaid, and Ms. Newcombe. The Department did not call witnesses.
[16]
The agreement resulted from negotiations
involving the Department, including Mr. Tax, Ms. Newcombe and her union
representative. With respect to clause 7: the agreement to pay “less the
applicable statutory deductions”, Mr. Tax has no specific recollection of
discussions pertaining thereto. He is adamant that he would not have offered any
advice with respect to income tax liabilities. For her part, Ms. Newcombe is
quite clear that the subjects of income tax and employment insurance were never
broached. There was a discussion with respect to payment of union dues and
health insurance.
DISCUSSION
[17]
Lump sum payments to an employee may be
considered as employment income, retirement allowance, or liquidated damages,
or indeed a payment may have a dual purpose depending on the circumstances. See
for instance Forest v The Queen, 2007 FCA 362, 2008 DTC 6506, [2007] FCJ No 522 (QL) and Dunphy v
The Queen, 2009 TCC 619, 2010
DTC 1028, [2009] TCJ No 506 (QL).
[18]
The Department’s position is that on the
plain reading of the agreement, at least some amount was intended to represent
income because the payment was for $46,290 “less the applicable statutory
deductions”. Event absent that language, if the payment in whole or in part
represented employment income or a pension allowance, the Department would have
been obliged under the Income Tax Act to make a deduction at source and
to issue a T4 form. However, either there are statutory deductions or there are
not. The parties do not admit the law.
[19]
The other point asserted by the Department is that the preamble
of the agreement states:
AND WHEREAS THE
PARTIES wish to terminate the employment relationship and have entered into a
negotiation to determine the terms and conditions governing the termination of
the employment relationship;
[20]
This, it is submitted, is a clear statement that
the focus was on employment. I disagree. Drawing upon the interpretation of
statutes, only minimal weight is attached to preambles (Attorney General v
HRH Prince Ernest Augustus of Hanover, [1957] AC 436, [1957] 1 All ER 49 and Sullivan on the Construction of Statutes, 5th
edition, pp 381 and ff).
[21]
Far more paramount are clauses 2 through 6 by
which Ms. Newcombe:
a.
agreed to sign a letter of resignation in the
form attached;
b.
agreed not to work for the Department in the
future;
c.
withdrew any and all grievances and any and all
outstanding appeals;
d.
released the employer and its employees of any
and all actions, claims and demands, which she then may have had including
defamation or harassment, and that should she commence any legal proceedings in
the future, including a human rights complaint, such would be in breach of
contract so that the employer would be entitled to recover amounts paid under
the agreement as liquidated damages and costs on a solicitor/client basis; and
e.
would not make any request to the Access to
Information Office.
[22]
In my opinion, the case most on point is the
decision of Mr. Justice Rip, now Chief Justice of the Tax Court of Canada, in Fournier
v Canada, [1999] 4 CTC 2247, [1999] TCJ No 495 (QL). In that case, Ms.
Fournier left her employment, when various grievances and complaints were still
outstanding. The employer made source deductions considering that the payment
was a retirement allowance.
[23]
Mr. Justice Rip determined that the payment was
not made in respect to a loss of employment. “The payments were made due to the
fact that employees of the Ministry were harassing the appellant and that the
appellant had a valid claim for damages against the Ministry due to the actions
of its employees.” Whether or not the employer admitted the claim was not
relevant. The reason for the payment was the outstanding complaints. He said at
paragraph 13:
As far as her agreeing
to resign is concerned, that is simply a way for the Ministry to get rid of an
employee. Ms. Fournier did not receive any payment in consideration of, or on
account of, her agreeing to leave the employment of the Ministry, she did not
receive these amounts as damages for any stress, medical or other injuries she
sustained as result of the termination of her employment
He held that the
payment did not fall within the ambit of the “ordinary concept of income”. So
it is in this case.
[24]
I agree with the Department that the agreement
speaks for itself and is not ambiguous. Should I be wrong on that point, there
are two documents which support Ms. Newcombe. One is the letter from Mr. Tax
intended to deal with employment insurance issues. Although on its face it
supports Ms. Newcombe, the Department argues it does not touch upon what the
payment might have been apart from payment in lieu of notice. For instance, it
says nothing about the possibility of the payment representing a retirement
allowance. However, the Department led no evidence whatsoever to support that
proposition.
[25]
The second is a form proffered to Ms. Newcombe
on June 13, 2006, the day after execution of the agreement. It is titled Disposition
of a Retiring Allowance, A Return of Contributions and a Transfer Value
Payment. It referred to the payment as a retirement allowance. That line,
however, was scratched out by Ms. Newcombe, who inserted lump sum payment. The
agreement had already been made. The fact of the matter is, there is no T4 form
for this type of payment, as it was not remuneration, but rather liquidated
damages.
[26]
The T4 form was issued in error. The error arose
because the Department of Justice coded the payment incorrectly. Ms. Newcombe
asks that I order the issuance of an amended T4 form and that she be held
harmless in one fashion or another from what she considers to be the
consequences of that error. She was put in a higher tax bracket for 2006, and
interest and penalties were imposed upon her.
[27]
Unfortunately, I cannot give Ms. Newcombe any of
the relief she seeks. I have come to the conclusion that this is in its pith
and substance a tax assessment matter, over which this Court has no
jurisdiction. The issue is not the incorrect T4 form, but rather the Notice of
Assessment. Under s. 152(8) of the Income Tax Act, the assessment
is deemed to be valid notwithstanding any error, defect or omission until it is
varied or vacated on objection or appeal. See Canada (Minister of National
Revenue) v MacIver, 172 FTR 273, 99 DTC 5524, [1999] FCJ No 1182 (QL)
and Canada (Minister of National Revenue-MNR) v Arab, 2005 FC
264, 2005 DTC 5134, [2005] FCJ
No 333 (QL).
[28]
Furthermore, the Department is out-of-pocket for
the entire sum. Section 153(3) of the Income Tax Act provides that when
an amount has been deducted or withheld, it is nevertheless deemed to have been
received by Ms. Newcombe. In addition, s. 227(1) of the Act provides that no
action lies against any person for deducting or withholding any sum in
compliance or intended compliance with the Act. Although the Department was in
error, there is no question of bad faith. If in breach of contract, there is no
remedy against it.
[29]
I can well understand why Ms. Newcombe focused
on the incorrect T4 form. However, neither the original T4 form, nor an
amendment thereto, would be binding on the CRA. Ms. Newcombe’s remedy was to
file a Notice of Objection. Ignorance of the law cannot help her.
[30]
If not satisfied with the results of her
objection, her further recourse lay in an appeal to the Tax Court of Canada.
Section 12 of the Tax Court of Canada Act states that the Court has
exclusive original jurisdiction to hear and determine references and appeals on
matters arising under the Income Tax Act.
[31]
Thus, even though framed as an action against
the Crown with a writ of mandamus component, the action is an impermissible
collateral attack upon the assessment (Canada v Roitman, 2006 FCA 266, 2006 DTC 6514, [2006] FCJ No1177
(QL); Verdicchio v Her Majesty the Queen, 2010 FC 117, 2010 DTC 5036, [2010] FCJ No 130
(QL); Canada v Addison & Leyen Ltd, 2007 SCC 33, [2007] 2 S.C.R. 793; and Moise v Canada (Revenue), 2012
FC 1468, [2012] FCJ No 1581 (QL)).
[32]
Should I be wrong with respect to jurisdiction,
I still cannot give Ms. Newcombe the remedies she seeks. Mandamus is a
discretionary remedy. No valid purpose would be served by ordering the issuance
of an amended T4 form, as it would not be binding on the CRA. Ultimately, it
falls upon it, subject to appeal, to determine the true nature of a
transaction, irrespective of what the parties say or do. For instance, there
are situations in which it is in the financial interest of both the employer
and the employee to treat the employee as an independent contractor.
[33]
Whatever recourse Ms. Newcombe may still have,
it is not one before this Court. For instance, s. 152(4.2)(a) of the Income
Tax Act provides:
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(4.2) Notwithstanding subsections
(4), (4.1) and (5), for the purpose of determining, at any time after the end
of the normal reassessment period of a taxpayer who is an individual (other
than a trust) or a testamentary trust in respect of a taxation year, the
amount of any refund to which the taxpayer is entitled at that time for the
year, or a reduction of an amount payable under this Part by the taxpayer for
the year, the Minister may, if the taxpayer makes an application for that
determination on or before the day that is ten calendar years after the end
of that taxation year,
(a) reassess tax, interest or
penalties payable under this Part by the taxpayer in respect of that year;
and
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(4.2) Malgré les paragraphes (4),
(4.1) et (5), pour déterminer, à un moment donné après la fin de la période
normale de nouvelle cotisation applicable à un contribuable — particulier,
autre qu’une fiducie, ou fiducie testamentaire — pour une année d’imposition
le remboursement auquel le contribuable a droit à ce moment pour l’année ou
la réduction d’un montant payable par le contribuable pour l’année en vertu
de la présente partie, le ministre peut, si le contribuable demande pareille
détermination au plus tard le jour qui suit de dix années civiles la fin de
cette année d’imposition, à la fois :
a) établir de nouvelles cotisations
concernant l’impôt, les intérêts ou les pénalités payables par le
contribuable pour l’année en vertu de la présente partie;
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[34]
Being without jurisdiction, I cannot order that
an amended T4 form be issued, but perhaps the Minister will decide to do the
right thing and help her.
[35]
Quite apart from what Ms. Newcombe’s ultimate
liability for tax may be, s. 220(3.1) of the Income Tax Act authorizes
delegated officials of the CRA to waive or cancel penalties and interest.
Details are to be found in the CRA, Income Tax Information Circular titled Tax
Payer Relief Provisions No ICO7-1, issued May 31, 2007. A negative decision
in that regard is subject to judicial review in this Court, not the Tax Court
of Canada.
[36]
In my discretion, I am not prepared to award the
defendant costs.
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