Quance v. The Queen, 74 DTC 6210, [1974] CTC 225 (FCTD)

Cattanach, J:—This is an appeal from a decision of the Tax Review Board whereby the plaintiff’s appeal to that tribunal from his assessments by the Minister of National Revenue to income tax for his 1969 and 1970 taxation years was dismissed.

There is no dispute between the parties as to the facts which are simple and straightforward.

The plaintiff is a professional engineer who in 1958 was engaged by McGraw-Edison of Canada Limited, which is a wholly-owned subsidiary of a parent company incorporated pursuant to the laws of one of the States of the United States of America under a corporate name somewhat similar to that of the subsidiary, in the capacity of president. At that time the subsidiary was in the business of manufacturing and dealing in small electrical appliances.

In time the operations of the subsidiary were expanded to include power systems. The plaintiff was designated the president of that division and more latterly became the managing director of that division.

The plaintiff was engaged under a verbal contract of hiring and accordingly there was no express term setting forth the duration of the contract. The plaintiff’s salary was fixed on a yearly basis but he was paid the appropriate instalments semi-monthly. The plaintiff, during the period of his employment with the company beginning in 1958 and the termination of that employment on June 12, 1967, received four increases in salary. In 1969 his salary was $23,000 per annum. He was also permitted to participate in a stock option plan. Stock options were offered three times during the period of the plaintiff’s employment. In addition he was the participant in a pension plan which appeared to have been tied in some way which was not explained in evidence to the profits of the company.

In the spring of 1969 the plant was struck by an employees’ union. The plaintiff was negotiating settlement on behalf of his employer. Apparently the plaintiff’s efforts were not satisfactory to the employer because he was replaced as negotiator by an employee of the parent company who held a title indicating that he was a specialist in labour relations. This employee settled the strike, which settlement, the plaintiff testified, was effected by a complete capitulation to the union demands.

On June 12, 1969, which was shortly after the settlement of the strike, the plaintiff was summoned into the presence of Mr Gieseke who was the president of both the parent and subsidiary companies and Mr G Axson, the executive vice-president of the subsidiary, McGraw-Edison of Canada Limited and the plaintiff’s superior.

At that meeting the plaintiff was invited to resign. He refused to do so. Thereupon the president terminated the plaintiff's employment as of 5 o’clock that day. The plaintiff was offered six and one-half months salary in lieu of notice. He refused this offer as inadequate and expressed the view that the offer should be at least one year’s salary. He then left the interview. Later that day the president telephoned the plaintiff at his home and increased the offer in lieu of notice to nine and one-half months salary. This offer the plaintiff also rejected as being inadequate.

By letter dated June 17, 1969 the executive vice-president confirmed the termination of the plaintiff’s employment and his rejection of the offer of salary in lieu of notice and withdrew that offer. However he expressed the willingness to discuss the matter further if the plaintiff wished to do so.

On receipt of that letter the plaintiff consulted his solicitors who wrote the plaintiff’s former employer pointing out that in their view reasonable notice would have been one year. On behalf of the plaintiff they proposed settlement by payment of $33,256.68 to the plaintiff, that amount being made up of one year’s salary at $23,000, $66 for hospitalization, $152.76 for group life insurance premiums, $37.92 for disability insurance premiums and an estimated loss of $4,000 for profit sharing pension plan and $6,000 for stock option benefits.

lt was emphasized by the solicitors that the proposed amount was payment for damages for wrongful dismissal, not salary, wages, or other remuneration and should not be subject to withholding for income tax by the employer.

The company did not deign to reply to the solicitors’ letter. Instead by letter dated July 24, 1969 the company forwarded to the plaintiff three cheques for the amount payable to him for the balance of June 1969 and for July 1969. The company announced its intention to pay the plaintiff his regular salary for nine and one-half months to cover his loss of employment based upon an income of $23,000 per year and that a cheque would be sent on the 15th and 30th of each month.

By letter dated August 8, 1969 the solicitors advised the company that the plaintiff was not prepared to accept the cheques as salary but would accept them as part-payment on account of damages and reiterated their request that the employer should not deduct income tax from the cheques. They also demanded payment of the amounts already deducted for that purpose.

Again the company ignored the solicitors’ letter but continued to make semi-monthly payments to the plaintiff until the final payment forwarded by letter dated March 25, 1970. In that letter reference was made to the payment being “as per our arrangement re termination salary”. The word “our” must be a use of the royal pronoun because the “arrangement” was unilateral. The plaintiff was not a consenting party thereto and denied the existence of any arrangement.

The total amount so paid to the plaintiff in his 1969 taxation year was $12,592.82 and in his 1970 taxation year the total amount was $5,748. It is upon these amounts that the Minister computed his assessments for the taxation years in question. The actual amounts received by the plaintiff in those respective years were $8,841.71 and $4,002.30, the differences of $3,751.65 and $1,745.70 represent the amounts of income tax deducted by the company and remitted to the Department of National Revenue.

On September 2, 1969 the plaintiff found other employment but at an annual salary of $17,500 which was $5,500 less per year than the salary he had been paid by his previous employer.

Upon receipt of the letter dated March 25, 1970 from McGraw-Edison of Canada Limited, enclosing the final payment of nine and one-half months salary in lieu of notice of dismissal, the plaintiff again consulted his solicitors. On their advice he did not sue for wrongful dismissal because as a result of the payment of the equivalent of nine and one-half months salary and the plaintiff’s subsequent employment by another employer, although at a lesser salary, the quantum of damages would be reduced to an amount which would not warrant litigation.

The contract of employment between the plaintiff and McGraw- Edison of Canada Limited was an oral contract of general or indefinite hiring. In the absence of any express terms as to termination the general principle is that such a contract might be terminated on reasonable notice. It is an implied term of such a contract that reasonable notice shall be given. If such notice is not given the failure to do so constitutes a breach of the implicit term in the contract of employment and the dismissal will be actionable. The damages recoverable will be the salary which would have been earned during the period of notice. Accordingly it follows that payment of salary for a period coincident with the period of reasonable notice will prevent the dismissal from being wrongful and actionable for the payment of the salary is, in effect, the payment of liquidated damages in advance of the action.

What constitutes reasonable notice depends on the grade of employment. In essence the dispute between the plaintiff and his employer was the reasonableness of the period of notice and some other incidental benefits. That is not the dispute before me.

The issue before me is whether the amounts of $12,592.82 and $5,948 received by the plaintiff from his employer in the plaintiffs 1969 and 1970 taxation years under the circumstances outlined above are properly subject to income tax in his hands.

The provisions of the Income Tax Act which I consider pertinent to the present appeal are reproduced hereunder:

3. The income of a taxpayer for a taxation year for the purposes of this Part in his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

5. (1) Income for a taxation year from an office or employment Is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year plus

(a) the value of board, lodging and other benefits of any kind whatsoever (except the benefit he derives from his employer’s contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, medical services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy) received or enjoyed by him in the year In respect of, in the course of, or by virtue of the office or employment; . . .

25. An amount received by one person from another,

(a) during a period while the payee was an officer of, or In the employment of, the payer, or

(b) on account or in lieu of payment of, or In satisfaction of, an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer,

shall be deemed, for the purpose of section 5, to be remuneration for the payee’s services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received

(I) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(ii) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(iii) in consideration or partial consideration for covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.

The plaintiff’s employer was within its rights to dismiss the plaintiff upon giving him reasonable notice. However the employer dismissed him forthwith but it did continue the plaintiff’s salary for a period of nine and one-half months presumably on the assumption that this was a period equivalent to a reasonable period of notice.

The amounts so received by the plaintiff from his employer were in satisfaction of an obligation arising out of the contract of employment between the plaintiff and his employer. That obligation was to give the plaintiff reasonable notice of the termination of his employment and upon failing to do so to pay him, in lieu thereof, the salary that would have been earned during the period of notice.

In my view those facts fall precisely within section 25 of the Income Tax Act and accordingly the amounts paid are deemed thereby to be remuneration for the payee’s services during his period of employment for the purposes of subsection 5(1) of the Act.

During his argument on behalf of the plaintiff counsel conceded that payments of salary made in lieu of notice of termination of an indefinite hiring are properly taxable as an obligation arising out of the agreement of employment but he contended that when the employee must sue to enforce that contract what is received are damages.

Mr Justice Cameron considered the taxability of damages for loss of profits by infringement of a trade mark in Donald Hart Ltd v MNR, [1959] CTC 268; 59 DTC 1134, and said at page 270 [1135]:

... In Income tax matters, the receipt of compensation by way of ‘“damages” is neutral, without further evidence as to the nature and quality of the award. It is trite law to say that the receipt of an award of “damages” may or may not result in the receipt being taxable income.

He then went on to find that the damages awarded in that case were taxable and said at page 273 [1137]:

Interpreting the judgment as best I can to ascertain the true nature and quality of the award for the purposes of income tax, I have reached the conclusion that it was made for the purpose of filling the hole in the appellant’s profit which it could normally have expected to make, but which had been lost to it by reason of the tortious acts of the defendant therein. . ..

As I have pointed out above the damages that the plaintiff would receive for dismissal without notice are to replace the income he was deprived of by not being given reasonable notice. That is the reason for awarding that item of damages for breach of a contract of employment. Accordingly such an award is imbued with the quality of income.

I fail to follow the logic of the contention that an obligation arising out of a contract of employment which is deemed to be income by the income Tax Act is metamorphosed into a capital receipt because that Obligation was the subject of a successful law suit resulting in a judgment for the amount of the obligation involved. In my view the nature and quality of the receipt remains unchanged but the simple and complete answer to this contention on behalf of the plaintiff is that the plaintiff did not sue.

For the foregoing reasons the appeal is dismissed with costs.