James R. Crighton v. Minister of National Revenue, 91 DTC 511, [1991] 1 CTC 2318 (TCC)

Watson, D.J.T.C.:—This appeal, heard in Toronto, Ontario, on November 15, 1990, is from the Minister of National Revenue's reassessment of income tax for the appellant's 1984 taxation year.

The issue is whether an amount paid by the appellant's former employer to a trust established for the appellant is taxable in the year of payment, i.e., 1984, or in the year the money is distributed from the trust.

The appellant's position is that a portion of the amount in question was not received by him in 1984 but was contributed by his former employer, Saskatchewan Government Insurance “SGI") to an employee benefit plan, the Crighton Employee Benefit Plan Trust CCEBPT") and not taxable as income until received by him from CEBPT.

The respondent's position is that the amount in question was a retiring allowance, having been received in respect of the loss of an office or employment, and should be included in computing the appellant's income for the 1984 taxation year. The Minister's alternative position is that the payment from SGI to CEBPT was a payment or transfer of property pursuant to the direction of the appellant for his benefit and should be included in his 1984 taxation year.

A total of $150,000 was paid by SGI on the termination of the appellant's employment. Of this amount, $52,000 was transferred to the appellant's RRSP and $98,000 was paid to the CEBPT. The amount of $35,000 was subsequently distributed by the CEBPT to the appellant in 1984. It was agreed by both parties that the amount in dispute for the 1984 taxation year is $63,000; this is the balance in the CEBPT at the end of 1984.

Facts

The appellant is a former vice-president (claims) of Saskatchewan Government Insurance "SGI"), a Saskatchewan Crown Corporation. On January 16, 1984, he was informed by the president that SGI was reorganizing the executive office of the corporation, that he was not included in the president's plan, that his employment was terminated effective January 31, 1984 and that the matter was not subject to appeal. He was handed a letter dated January 16, 1984 produced in evidence as Exhibit A-1, which stated as follows:

This is to confirm my advice to you that your employment with the Corporation is terminated effective January 31, 1994.

In recognition of your service with the Corporation, we are prepared to offer you the following Severance Compensation Package to assist you in your relocation efforts.

Severance Compensation Package

1. You will be paid a sum of $150,000; which is in excess of 24 months' salary, in whatever form you choose which best suits your financial and tax requirements and is acceptable to the Corporation.

2. I have arranged for you to obtain financial counselling through the firm of Executive Compensation Consultants Limited, Toronto, who are experts in senior executive severance packages—the cost to be borne by the Corporation.

3. To support and assist you in your efforts in establishing your future course of direction, the Corporation will pay the entire cost of counselling provided by Life Management Centre Ltd., Toronto. I have made arrangements for Mr. Frank Butler, whom you know, to be personally involved in your program.

4. Your coverage under the following SGI benefits to which you have been entitled shall be maintained by SGI, as detailed below, or until you commence new employment; whichever should occur first, at which point such coverage shall terminate:

(a) You will be entitled to vacation pay up until August 1, 1984;

(b) Your present dental coverage will continue until August 1, 1984;

(c) Your present Group Life Insurance coverage at the current level of three

times your salary, equalling $210,000, will continue until August 1, 1984;

5. Your coverage under the Long Term Disability Plan and Travel Accident Plan shall cease on January 31, 1984.

6. With respect to the SGI Pension Plan, details pertaining to value, etc. will be provided under separate cover. Any questions you may have regarding your status under the Pension Plan should be directed to Mr. Robert A. Warren.

7. The Corporation will have no further obligation with respect to the maintenance of your club membership.

8. You may, if you wish, retain the use of the Corporate car, including normal operating expenses in accordance with C.V.A. regulations, until August 1, 1984.

9. All payments made to you under this package will be subject to appropriate deductions of income tax.

10. You shall provide the Corporation with a full and final Release from any claims by you, together with an indemnity in respect of income tax, both on a form acceptable to the Corporation.

11. If the foregoing Severance Compensation Package is acceptable to you, it will be set forth in an agreement, including the Release and Indemnity, drawn up by the Corporate solicitors, which will be entered into by the Corporation and yourself.

12. You are asked to return to the Corporation any Corporation Identification Card, keys, travel and credit cards in your possession, as well as clearing any travel advance you may have.

I would ask you to consider the Corporation's offer herein carefully and would recommend that you obtain legal advice. In regard to the method of payment, we wish to emphasize that we are prepared to co-operate with any suggestions presented to you after consultation with your financial adviser. I require your decision in writing no later than January 31st, 1984. I would, however, advise you that the Corporation's offer is automatically withdrawn falling my receipt of your written acceptance by January 31st, 1984.

The appellant sought legal advice the same day and requested his lawyer to make a counter proposal seeking to obtain a SGI agency contract that included a motor vehicle licence issuing contract; this counter proposal was turned down by SGI. On January 17, 1984, the day following reception of Exhibit A-1, he travelled to Toronto to meet with representatives of Life Management Centre Ltd. (LMC") and Executive Compensation Consultants Ltd. (' ECC"). After two days of discussions he returned to Regina to meet with his lawyer to discuss the results of the meetings with LMC and ECC and to seek further legal advice. In a letter dated January 25, 1984, from ECC to the appellant, a course of action was proposed that was to be discussed that included the transfer of $52,000 to an RRSP. and the establishment of an employee benefit plan in the amount of between $75,000 and $80,000. A few days later, the appellant requested ECC to make a counter proposal to SGI that would include establishment of an employee benefit plan by SGI. Prior to January 30, 1984, the appellant's lawyer and SGI agreed to the counter proposal and a "Letter of Intent", produced as Exhibit A-4 was signed by a SGI vice-president and the appellant. It stated as follows:

J.R. Crighton and Saskatchewan Government Insurance agree to set up an Employee

Benefit Plan Trust through Executive Compensation Consultants of Toronto. The date of the Employee Benefit Plan Trust will be January 30, 1984. The trust will receive monies to be agreed upon by J.R. Crighton and Saskatchewan Government Insurance.

An Interim Release, produced as Exhibit A-5, signed by the appellant on January 31, 1984 provided:

for and in consideration of the sum of $150,000.00 to be paid to me in the form which best suits my needs and is acceptable to Saskatchewan Government Insurance (SGI) as well as counselling services provided by Life Management Centre Inc. and Executive Compensation Consultants Ltd., Toronto, and other benefits listed in the letter to myself from Donald W. Black President, SGI dated January 16, 1984, do hereby release and forever discharge the said Saskatchewan Government Insurance, its successors and assigns, of all claims, damages, causes of action, sums of money, costs and demands whatsoever, arising or to arise to me by reason of my retirement from my employment with Saskatchewan Government Insurance. A full and final release will be signed by Wednesday, February 15, 1984.

The agreement between SGI ("Settlor") and James Ross Crighton and Thomas Waller (‘ Trustees”) dated January 31, 1984, was produced as Exhibit A-6. It provides the following: SGI settles an irrevocable trust for the benefit of its employee James Ross Crighton (beneficiary"), the trustees will hold the trust fund in trust until January 31, 1999 or a date prior that the trustees may appoint by deed, "Division Day”); the annual income will be paid or transferred to or for the benefit of the beneficiary; payment, transfer, or distribution of any amount of capital to the beneficiary as the trustees may decide; payment or transfer of the whole or balance of the trust fund to the beneficiary on Division Day; survivor rights in case of the death of the beneficiary before Division Day; payment of income tax and the replacement of any trustee. Schedule A sets out the powers, liabilities, rights and duties of the trustees.

The appellant was the only witness heard in this appeal and I consider his evidence to be worthy of belief. He stated that at no time did he ask for more than the $150,000 offered by SGI, and that the purpose of the plan was to pay income tax as the money was withdrawn from the CEBPT. All fees and expenses relating to the services of ECC, LMC and his lawyer were paid by SGI. The decision to give a full and final release to SGI was made on the advice received and after SGI had agreed to the counter proposal made through his lawyer to establish an employee benefit plan. He remained on leave of absence without pay until August 1, 1984 to qualify for pension benefits. Other benefits set out in paragraphs 4 and 8 of the initial letter (Exhibit A-1) continued on past the termination date of employment.

Questions to be resolved

(1) Was the payment of $98,000 ($150,000 less the transfer of $52,000 to the appellant's RRSP) by SGI to CEBPT a contribution to an employee benefit plan as defined in subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") and, therefore, a benefit excepted pursuant to subparagraph 6(1)(a)(ii) and taxable only in the year actually received by the appellant from CEBPT (paragraph 6(1)(g) )?

(2) Was the $98,000 a retiring allowance as defined in subsection 248(1)?

(a) Was it payable in respect of a loss of an office or employment?

(b) Was it received by the appellant in 1984 and therefore taxable income in the 1984 taxation year (subparagraph 56(1)(a)(ii) )?

(3) Was the $98,000 an indirect payment pursuant to subsection 56(2)?

The relevant parts of the Income Tax Act in 1984 read as follows:

6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit

(ii) under an employee benefit plan or employee trust, or

(g) the aggregate of all amounts each of which is an amount received by him in the year out of or under an employee benefit plan or from the disposition of any interest in any such plan, other than the portion thereof that is

(i) a death benefit or an amount that would, but for the deduction provided

in the definition of that term in subsection 248(1), be a death benefit,

(ii) a return of amounts contributed to the plan by him or a deceased employee of whom he is an heir or legal representative, or

(iii) a superannuation or pension benefit attributable to services rendered by a person in a period during which he was not resident in Canada; and

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,

(ii) a retiring allowance, other than an amount received out of or under an employee benefit plan,

56. (2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.”

248. (1) In this Act,

"employee benefit plan" means an arrangement under which contributions are made by an employer or by any person with whom the employer does not deal at arm's length to another person (in sections 18 and 32.1 referred to as the "custodian") and under which one or more payments are to be made to or for the benefit of employees or former employees of the employer or persons who do not deal at arm's length with any such employee or former employee (other than a payment that, if section 6 were read without reference to subparagraph (1)(a)(ii) and paragraph (1)(g) thereof, would not be required to be included in computing the income of the recipient), but does not include

(a) a fund or plan referred to in subparagraph 6(1)(a)(i) or paragraph 6(1)(d) or (f),

(b) a trust described in paragraph 149(1)(y),

(c) an employee trust,

(d) an arrangement the sole purpose of which is to provide education or training for employees of the employer to improve their work or work-related skills and abilities, or

(e) a prescribed fund or plan.

“Retiring allowance” means an amount (other than a superannuation or pension benefit or an amount received as a consequence of the death of an employee) received

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his 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 his death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer;

The definition of an employee benefit plan appears to be very broad. In my view, the evidence before me shows that there was an arrangement under which the employer (SGI) made a contribution ($98,000) to another person (CEBPT, the custodian) where under the arrangement one or more payments were to be made by the custodian to the former employee (appellant). I am satisfied that an employee benefit plan was in fact created in the agreement of January 31, 1984 (Exhibit A-6).

Had SGI's initial offer contained in Exhibit A-1 been accepted outright by the appellant, it may well have been considered to be a retiring allowance that was taxable pursuant to subparagraph 56(1)(a)(ii) or as an indirect payment pursuant to subsection 56(2). However, as the evidence clearly establishes, this initial offer was not accepted. Only after extensive consultation with the three sources suggested by SGI and after at least two counter proposals by the appellant was the $98,000 paid to CEBPT. This payment was made by SGI pursuant to a negotiated arrangement and was subject to the restriction that amounts would not be payable until a specified time in the future. Had the employee benefit plan not been established, the payment could have been considered to be a benefit pursuant to paragraph 6(1)(a) or an indirect payment pursuant to subsection 56(2).

The entitlement to the $150,000 arose only after the negotiations between the parties. It would be pure speculation to imagine what the situation would have been had this agreement not been concluded before the termination of employment and had the appellant taken proceedings on the basis of wrongful dismissal. A lot of ground was covered in a very short period of time between the initial offer by SGI and the final agreement to establish an employee benefit plan that suited the purposes of both parties thus avoiding the possibility of lengthy and expensive litigation. The evidence discloses that the payment of the $98,000 into CEBPT was not under the direction of the employee but as a result of the agreement of both parties. What was agreed to by both parties was not what was contemplated by SGI in its original offer. What started off as a possible retiring allowance ended up as a contribution to an employee benefit plan. The payment to the other person (custodian) was to the CEBPT, not to the appellant.

I was greatly impressed by the thorough and extensive preparation by both counsel in this appeal and their submissions. It is unfortunate that there appears to be no case law dealing with employee benefit plans. As mentioned by counsel, the various cases that were referred to in this appeal were decided on the facts of each case. In my view, this appeal also should be decided on the facts before the Court. I find that an employee benefit plan was in fact established, that the amount paid was sheltered in the CEBPT as custodian and that it was done with the expressed agreement of the employer and employee.

The appellant had the burden of establishing on a balance of probabilities that the respondent's reassessment for the 1984 taxation year was incorrect and, in my view, he has succeeded in doing so. Accordingly, the appeal is allowed with costs to the appellant and the matter is referred back to the Minister for reconsideration and reassessment on the basis that the amount of $63,000 is to be excluded as income from the appellant's 1984 taxation year.

Appeal allowed.