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Citation: 2009 TCC 437
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Date: 20090904
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Docket: 2004-122(IT)G
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BETWEEN:
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CLAUDETTE TREMBLAY, EXECUTRIX OF THE ESTATE
OF MARCEL TREMBLAY,
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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
Little J.
A.
FACTS
[1] The Appellant was an individual who
resided in Cochrane, Alberta.
[2] In 1986, the Appellant founded the
Enerplus group of companies (“Enerplus”). The business model of Enerplus was to
raise capital and attract investors in order to invest in oil and gas assets.
Enerplus Global Energy Management Inc. (“EGEM”) and Enerplus Energy Services
Ltd. (“EES”) were private management companies responsible for managing
approximately six private and public income trust funds in the oil and gas
industry.
[3] According to the testimony of the Appellant’s
son, Eric Tremblay, the Appellant was the “pioneer” in the development of the
Royalty Trust concept. This concept involved establishing income trusts that
invested in the oil and gas industry. Under the Appellant’s management, the
assets managed by Enerplus grew to over $2.3 billion.
[4] The Appellant had been employed by
Enerplus continuously and without interruption from 1986 through July 31, 2000.
[5] El Paso Energy Corporation (“El Paso”), a company incorporated in the United States, was interested in acquiring control
of Enerplus and commenced negotiations with the Appellant in early 2000. On
August 1, 2000, El Paso
successfully acquired the business of Enerplus, through the acquisition of the
management companies EES and EGEM.
[6] Following the new corporate ownership,
the Appellant entered into a new employment agreement with EES on July 31, 2000
(the “Employment Agreement”). Pursuant to the Employment Agreement, the
Appellant was employed as President and Chief Executive Officer and a member of
the board of Enerplus for a five-year term. According to the Employment Agreement,
the Appellant’s base salary was $328,650.00 per year, to be reviewed annually.
The Appellant was also eligible to participate in two bonus programs, the
Enerplus Bonus Plan and the Encap Bonus Plan. The Encap Bonus Plan guaranteed a
minimum payment of $380,000.00 per year.
[7] The Employment Agreement also provided
that “in the event of termination without cause, severance pay will be paid in
accordance with statutory requirements in the Province of Alberta and the
policy of El Paso for similarly situated employees in Canada”.
[8] Soon after the change
of ownership, conflicts arose between the Appellant and the new management from
El Paso. The escalation of this
conflict resulted in the Appellant’s employment being terminated in early 2001
by El Paso.
[9] According to the
testimony of Mrs. Tremblay (the Appellant’s widow) and Eric Tremblay, the
Appellant suffered from chronic health conditions since the early 1990s. The
Appellant was a type 2 diabetic, had a bleeding ulcer and chronic high blood
pressure and had undergone several heart procedures during the 1990s. The
evidence provided by Mrs. Tremblay and Eric Tremblay was to the effect that the
Appellant’s health deteriorated following the conflicts arising with the El Paso management. During the conflicts
and after the dismissal, the Appellant underwent several heart operations and
procedures.
[10] The evidence also indicated that the Appellant contemplated commencing litigation against Enerplus and
El Paso as a result of the events that occurred following the purchase by El Paso and his termination, but decided
against it. However, it was not clear on the evidence as to what the Appellant would
base his lawsuit.
[11] On May 9, 2001, a letter
of intent from Enerplus to the Appellant confirmed that the terms of a
settlement agreement (the “Settlement Agreement”) have been reached by the
parties (“Enerplus Letter”; Exhibit A-2). The letter described a “Severance
Payment … representing 2 years’ compensation, in consideration of the
termination of his employment contract … and in consideration of his
resignation from the public and private boards.” The letter also stated that
the “Severance Payment will be characterized as a retiring allowance”.
[12] In addition to the
reference to the Settlement Agreement, the Enerplus Letter described a
“Consulting Agreement” that would be entered into by EGEM and the Appellant, whereby
the Appellant would provide consulting services to Enerplus for an annual fee
until August 2005.
[13] Pursuant to an agreement
contained in the Enerplus Letter, the Appellant also agreed to send his
employees and the board of directors certain letters, wherein he would state
that his tenure at the Management Company has been terminated by the new owners
due to irreconcilable differences and that in order to minimize any potentially
negative implications for unitholders of the public funds or employees, he
agreed to a settlement of the matter.
[14] EGEM and the Appellant
entered into the Settlement Agreement as of June 22, 2001 (Exhibit A-3).
[15] Pursuant to section 6 of
the Settlement Agreement, the Appellant provided a confidentiality covenant, whereby
he agreed to not use for his own purpose, or for any purpose other than that of
Enerplus, any information which he learned as a result of his employment and/or
involvement with Enerplus.
[16] Section 7 of the
Settlement Agreement contains various restrictive covenants, including:
(a)
a non-competition clause, whereby the Appellant
agreed not to “form, manage, actively participate, carry on or be engaged in or
concerned with or interested in, own more than 5% … any Canadian oil and gas
income fund or similar product or management company”;
(b)
a non-solicitation clause, whereby the Appellant
also agreed to not contact any clients of the Enerplus fund;
(c)
a non-solicitation in respect of Enerplus
employees, whereby the Appellant agreed not to request or influence any
Enerplus employee to terminate their employment with Enerplus; and
(d)
a non-defamation clause, whereby the Appellant
agreed not to make any “disparaging or critical remark” about Enerplus, its
representatives or employees, business practices or operations.
[17] Section 9 of the
Settlement Agreement states that if the Appellant breaches any provision of the
Agreement, including sections 6 and 7, the Agreement would be repudiated and
any further payments under it owing to him by Enerplus would be cancelled.
[18] Section 12 of the
Settlement Agreement states that “the restrictions and covenants contained in
paragraphs 6 and 7 constitute a material inducement to the Company to enter
into this Agreement, and that the Company would not enter into this Agreement
absent such inducement.”
[19] Pursuant to section 17
of the Settlement Agreement, the Appellant released and discharged Enerplus,
and its subsidiaries and affiliates, from any claims for damages, loss, or
injury, suits, debts, sums of money, indemnity, expenses, interest, costs, and
claims of any and every kind and nature whatsoever that the Appellant or his
heirs or executors may have in relation to his employment with Enerplus, his
termination with Enerplus, including claims for damages, salary, termination
pay, and severance pay.
[20] Pursuant to section 21
of the Settlement Agreement, the Appellant declared that he had sought and
obtained independent legal advice on the matters addressed in the Settlement
Agreement. In addition, the parties agreed that any verbal statements,
representations, warranty or undertakings prior to the date of the Settlement
Agreement did not constitute a part or modify or amend the Settlement Agreement.
[21] Section 23 of the
Settlement Agreement states the Agreement embodied the entire Settlement
Agreement between the Appellant and Enerplus.
[22] Pursuant to the
Settlement Agreement, the Appellant received a severance payment in the amount
of $2,488,064.00 (the “Severance Payment”), representing two years of compensation
at $2,671,713.00, discounted by an annualized discount factor of 10%, less an
outstanding expense balance owed by Tremblay in the amount of $27,323.45, for a
net payment of $2,460,740.55 minus applicable statutory deductions.
[23] The Settlement Agreement
also stated that the Severance Payment “will be characterized as a Retiring
Allowance.”
[24] On June 22, 2001, a
Consulting Agreement was entered into by EGEM and Ghost Lake Manor Corp.
(“GLMC”), an Alberta
corporation wholly owned by the Appellant. Pursuant to this agreement, GLMC
agreed to provide various consulting services for a specified term, ending on
August 1, 2005. As consideration, Enerplus was to pay GLMC $52,433.48 monthly
until March 31, 2003 and then, $33,333.33 monthly thereafter until the end of
the term. The Consulting Agreement also included similar restrictive covenants
as those covered in sections 6 and 7 of the Settlement Agreement.
[25] Mrs. Tremblay testified
that the Appellant never went back to the offices of Enerplus after his
dismissal (Transcript, at page 51).
[26] The Appellant died on December 29, 2005.
[27] Enerplus issued a T4A
(“Statement of Pension, Retirement, Annuity and Other Income”) to the Appellant
in the amounts of $22,000.00 for an eligible retiring allowance and
$2,438,740.55 for a non-eligible retiring allowance. Enerplus withheld income
tax on these amounts.
[28] When the Appellant filed his income tax return
for the 2001 taxation year he:
(a)
reported that he received the net amount of the
payment in issue (being $2,460,750.55) as “other income”;
(b)
included an “other income summary” which
indicated that he received an eligible retiring allowance of $22,000.00 and a
non-eligible retiring allowance of $2,438,740.55; and
(c)
sought an “other deduction” (at line 232 of the
tax return) from net income in the amount of $2,671,713.00 (which is the gross
amount of the Severance Payment) on the basis that this amount was a
non-taxable payment for personal damages.
[29] The Minister of National Revenue (the
“Minister”) reassessed the Appellant for his 2001 taxation year. The Minister
disallowed the “other deduction” of $2,671,714.00 that had been claimed by the
Appellant.
[30] During the hearing,
Counsel for the Appellant submitted a spreadsheet detailing how the amount of
$2,671,714.00, representing two years’ salary was calculated (Exhibit A-6).
This spreadsheet provided as follows:
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2000
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2001
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Average
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Salary
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328,650
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328,650
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328,650
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Bonus – Trust
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208,013
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806,400
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507,207
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Management
Company Bonus
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-
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500,000
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500,000
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Average
Salary for previous 2 years
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1,335,857
x 2 years
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$2,671,714
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B. ISSUE
[31] The issue is whether the
Severance Payment of $2,488,064.00 should be included in calculating the
Appellant’s income for his 2001 taxation year.
C. ANALYSIS
[32] The phrase “retiring allowance” is
defined in subsection 248(1) of the Income Tax Act (the “Act”)
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;
[Emphasis
added]
[33] The definition of “retiring allowance”
under subsection 248(1) was specifically amended in 1981 to include any damages
received in respect of a wrongful dismissal or the loss of an office or employment.
The 1981 Budget Supplementary Information (BSI) said the following in respect
of this amendment:
Since 1978, all job-termination payments amounting to
less than six months' salary have been taxable, regardless of their form,
whereas the tax status of larger payments has depended on whether they could be
considered to be damages. This has led higher-income individuals who receive
large payments on termination of an employment to attempt to have them appear
as damages for wrongful dismissal, and thus be tax-exempt. In fact, the full
amount of all job termination payments represents remuneration or a substitute
for remuneration and should thus be taxable. Effective for employees who
terminate employment after November 12, 1981, the entire amount of all job
termination payments will be required to be included in income
[Emphasis
added]
[34] Similarly, the 1982 Technical Notes said
the following:
The amendment to the definition “retiring allowance”
is consequential on the changes in the tax treatment of damages for wrongful
dismissal and other similar amounts that were previously included in the
definition of termination payments. The amendment treats as a retiring
allowance the full amount of any payment to an employee received as damages or
pursuant to a judicial determination.
[Emphasis
added]
[35] The Court must determine whether the
Severance Payment received by the Appellant was made in respect of the
Appellant’s loss of employment.
[36] Counsel for the Appellant argued that the evidence indicates
that some portion of the Severance Payment was made for silence, some portion
for non‑compete, and some portion for severance of employment
(Transcript, page 176, lines 4-6).
[37] Counsel for the Appellant also stated:
… I stress that it is the character of the receipt in
the recipient’s hands that is significant; …
(Transcript, page
180, lines 15-17).
[38] Counsel for the Appellant also sated:
But what we do have is the testimony from
Enerplus that the payment, no matter how it’s classified in the document, how
it’s labelled in the document, how it might apply to the global concept of
retiring allowance, is that it was there to ensure that he would not, to use
his phrase, bad mouth El Paso and/or Enerplus in the marketplace and that
further he would not go across the street and open another income trust. That’s
what they needed.
(Transcript, page
182, lines 23-25 and page 183, lines 1-7)
[39] However, there was no evidence provided to indicate what portion
of the Severance Payment should be applied to “silence”, what portion of
the payment should be applied to “non-compete” or what portion of the
payment should be applied to “severance”.
[40] Counsel for the Respondent noted that the Appellant reported the
Severance Payment as income and there is no provision in the Act for the
Appellant to receive the deductions claimed by him. Counsel for the Respondent
said:
… the appeal must be dismissed on that basis alone.
(Transcript, page
222, lines 1-5)
[41] Counsel for the
Respondent also said:
… the settlement agreement
entered into with the parties expressly stipulates that the payment of $2,460,740
is a severance payment and is to be characterized as a retiring allowance.
(Transcript, page 229,
lines 18-21)
[42] Counsel for the Respondent also said:
Going on, it [i.e. the Settlement
Agreement] also states that if there’s any verbal statements, representations,
warranties or undertakings prior to the agreement, don’t constitute in part or
modify this agreement, and at that point -- I’m paraphrasing, he’s accepting,
voluntarily accepting the terms and conditions of the agreement for the purpose
of making a full and final compromise, adjustment and settlement of all claims.
In paragraph 23 is an acknowledgment that
this is the entire agreement. So this is the agreement that sets out the terms
of the severance payment.
It’s clear that in the Settlement Agreement
the parties, and I say “the parties” because Mr. Tremblay signed it, went
through great pains to make it clear that Enerplus’s payment to Tremblay was to
be seen as a retiring allowance and not payment for anything else, and yes,
there’s an acknowledgment that there’s other terms considered, but those terms
relate to the termination of Mr. Tremblay. And as we’ll discuss later, that’s
very important because it’s not just -- if you look at the whole reason for the
settlement -- the whole package, and we’ll go into that in more detail.
Now, it’s submitted that the appellant is
asking the Court to entirely ignore the legal agreement and the substance of
payment in issue. She, by that I mean the executrix, is asking the Court to
look behind a legally binding contract and conclude that the payment in issue
is something entirely different than what the parties expressly agreed.
The nature of the payment is clear; it was
negotiated by two sophisticated parties, and it clearly sets out what the
parties meant, that this was supposed to compensate. It’s clearly and
irrevocably identified. The appellant is attempting to recharacterize the
agreement it entered into with Enerplus in order to escape tax consequences of
the agreement, something which is not permitted in tax law.
Again I’m going to rely on Shell Canada,
and that is in my authorities, at Tab 2, or it’s Case Number 2. The reference
is to paragraph 41, and I believe Mr. Shea did refer to that paragraph, but
rather than stand here and read that paragraph, I’m going to submit that this
stands for the proposition, as I’ve already indicated, that the Courts, the CRA
and the parties have to abide by the legal consequences of a legally valid
transaction. You can’t look to what it might have meant, what the parties may
have, in the backdoor, had intended it to mean. It is what was actually meant
by the legal transaction. You can’t restate is it for tax purposes.
(Transcript page 233,
lines 15-25; page 234, lines 1-25; page 235, lines 1‑20)
[43] Counsel for the Respondent also referred to Overin v. The
Queen, 98 D.T.C. 1299, a decision of Justice Rip (as he then was).
[44] In Overin, a two-prong test was developed for the purpose
of determining which damages fall within the definition
of “retiring allowance” under subsection 248(1) of the Act. At page
1302, Rip J. reached the following conclusion regarding the use of the words
“in respect of” in the definition:
The use of the words "in respect of" in the
definition of retiring allowance has been recognized as conveying a connection
between a taxpayer's loss of employment and the subsequent receipt. [FOOTNOTE
4: Niles v. MNR, 91 DTC 806 (TCC) per Sobier, J.T.C.C., Merrins
v. The Queen, 94 DTC 6669 (FCTD) per Pinard, J. on appeal from the Tax
Court of Canada; both decisions considered the Supreme Court of Canada's
interpretation of the words in Nowegijick v. The Queen, 83 DTC 5041 at
5045:
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.]
In order for the retiring allowance
provision to have real meaning, however, some limit must be placed on the ambit
or scope of the required connection between a receipt and a loss of employment. In this regard two decisions may be of
some assistance. First, in Merrins, supra, Pinard, J. observed at
6670:
There is no doubt that the amount was received by the
plaintiff in respect of the loss of his employment with AECL. Had there been no
loss of employment, there would have been no grievance, no settlement, no award
and, therefore, no payment of the sum to the plaintiff.
What is implied from Pinard, J.'s analysis is that in
determining the limit to be placed on the connection between a payment and a
loss of employment, the appropriate test is to ask "but for the loss of
employment would the amount have been received?" If the answer to that
question is in the negative, then a sufficient nexus exists between the receipt
and the loss of employment for the payment to be considered a retiring
allowance.
[Emphasis
added]
[45] Rip J. continued at page 1302, to add a
second question to the test:
In Leest, supra, Dussault, J.T.C.C.
observed:
As there is no doubt in my mind that the appellant
lost, for all practical purposes and effect his employment for a lengthy
period, although not permanently as he was later reinstated by the Arbitration
Board, I also conclude that the award of damages by the Arbitration Board was
directly related to that loss and directed at compensating it.
In that sense, the amount was "with respect
of" the loss of employment. This being so, such damages can rightly be
considered a "retiring allowance" as that term is now defined by
subsection 248(1) of the Act. They are thus taxable by virtue of subparagraph
56(1)(a)(ii) of the Act.
It is quite clear then that in addition to
the "but/for" test, where the purpose of a payment is to compensate a
loss of employment it may be considered as having been received "with
respect to" that loss.
[Emphasis
added]
[46] After considering the evidence in some
detail, I have concluded that when the Appellant and El
Paso signed the Settlement Agreement, the Appellant
agreed to accept a Severance Payment in the amount of $2,488,064.00 in final
settlement of all of his claims against El Paso. I agree with the position outlined by Counsel for the Respondent
that the Court should not look behind the Settlement Agreement to find that a
portion of the Severance Payment was to cover the Appellant’s silence or to
relate to a non-competition agreement or for any other purpose. I also note
that section 17 of the Settlement Agreement states that the Appellant released
and discharged Enerplus and its subsidiaries and affiliates from any claims for
damages, loss, or injury, suits, debts, sums of money, indemnity, expenses,
interest, costs and claims of any and every kind whatsoever that the Appellant
or his heirs or executors may have in relation to his employment with Enerplus,
his termination with Enerplus, including claims for damages, salary,
termination pay and severance pay.
[47] I have concluded that the Severance Payment in the amount of
$2,488,064.00 paid to the Appellant is a retiring allowance within the meaning
of the definition contained in subsection 248(1) of the Act.
[48] The appeal is dismissed with costs.
Signed at Vancouver, British Columbia, this 4th day of September 2009.
Little
J.
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