Date: 20010823
Docket: 1999-2936-IT-G
BETWEEN:
BONNIE FRY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1]
The issue is whether:
(1)
The amount of $82,500 paid by Manufacturers' Life Insurance
Company ("Manufacturers") as settlement in respect of
injuries sustained in an automobile accident is includable in the
Appellant's income for her 1996 taxation year; and
(2)
If so, whether the Appellant is entitled to deduct legal fees in
the sum of $38,293.73 from same.
FACTS:
[2]
The Appellant was injured in a motor vehicle accident on August
18, 1991 and, since that time, has been unable to work. She
submitted a claim through her employer's group disability
insurance policy to North American Life Insurance Company
("North American"). North American denied her
claim.
[3]
The Appellant sued the insurer for a declaration that she was
entitled to long term disability benefits ("LTD"). This
action proceeded to private mediation and the Appellant's
claim against North American, which had been taken over by
Manufacturers' Life Insurance Company, was settled on
September 26, 1996 by the payment of $82,500 by Manufacturers to
the Appellant.
[4]
The Appellant paid her lawyer the sum of $38,293.73 in respect of
all legal services performed by him for her arising out of the
automobile accident.
[5]
Pursuant to the LTD policy the Appellant's monthly
entitlement to LTD benefits was $1,388.96 based on 66.67% of
gross salary of $25,000. Monthly LTD benefits were reduced by
Canadian Pension Plan disability benefits being $516.42 at the
time of settlement. This resulted in a net LTD entitlement of
$872.54 per month, totalling $10,470.48 per annum. She received
the equivalent of approximately 6.5 years of future LTD benefits,
plus $15,000 as a contribution to her legal expenses. Had she
received the equivalent of the lump sum for LTD entitlements to
age 65 she would have received benefits for a period of
approximately 28 years. Based on a present value calculation,
using a 5% discount factor without indexing, the total
entitlement to future LTD benefits in terms of 1996 dollars would
have been $151,507.85.
[6]
Manufacturers issued a T4A and submitted same to Revenue Canada
resulting in the Appellant being assessed for income tax on that
amount. Such form was not sent to the Appellant. She did not
declare that amount as income, believing that the settlement was
not subject to income tax. The Appellant had paid no part of the
premiums for the group LTD benefits.
APPELLANT'S SUBMISSIONS:
[7]
Appellant's counsel submitted that the only provision of the
Income Tax Act ("Act") which could
possibly require the settlement amount to be included in income
is paragraph 6(1)(f). It provided:
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:
... the total of all amounts received by the taxpayer in the
year that were payable to the taxpayer on a periodic basis in
respect of the loss of all or any part of the taxpayer's
income from an office or employment, pursuant to
(i)
a sickness or accident insurance plan ...
[8]
He submitted simply that the Appellant had received a lump sum
and that there were no amounts received "on a periodic
basis" in respect of the insurance. He referred to
Whitehouse v. R., 2000 DTC 1616 in which the facts were
almost identical to those in this appeal. This Court determined
that paragraph 6(1)(f) was inapplicable, the amounts
received by the Appellant not having been payable on a periodic
basis. That case made reference to Landry v. R., 98 DTC
1416 in which the Court held:
The lump sum payment received by Mrs. Landry was not payable
on a periodic basis and there is no allegation or assumption that
the $25,000 represented simply the aggregate of periodic payments
that she might have received over her lifetime.
Counsel submitted that there was no such allegation or
assumption in the present case. Alternatively, he argued that
even if the sum of $82,500 was taxable, the Appellant was
entitled to deduct legal fees in the sum of $38,293.73.[1]
RESPONDENT'S SUBMISSIONS:
[9]
Respondent's counsel submitted that the amount should be
includable in income under paragraph 6(1)(a) of the
Act which requires the inclusion of:
the value of board, lodging and other benefits of any kind
whatever received or enjoyed by the taxpayer in the year in
respect of, in the course of, or by virtue of an office or
employment, except any benefit
(i)
derived from the contributions of the taxpayer's employer to
or under a registered pension plan, group sickness or accident
insurance plan, ...
[10] She then
referred to this Court's decision in Cook v. R., 95
DTC 853. In this case, the Appellant received from the insurer,
after having been refused claimed benefits, a single payment of
$15,000 in respect of all costs. This Court, in relying upon
R. v. Savage, 83 DTC, 5409 (S.C.C.) determined that:
The significant and the simple point is whether the amount is
founded in the Appellant's rights under an employment
contract and it is so found. The amount is taxable because of the
provisions of paragraphs 6(1)(a) of the Act.
[11] The
Court, at page 5414, said that the words in paragraph
6(1)(a), namely, "in respect of", referring to
Nowegijick v. The Queen, 83 DTC 5041 (S.C.C.) were words
of the widest possible scope. The Court then held that the
payments were in respect of employment.
[12] Counsel
also referred to Dumas v. Her Majesty the Queen, 2000 DTC
2603 in which this Court determined that an amount paid to settle
a legal action by an employee unable to perform her duties, was
includable in income as a benefit under paragraph 6(1)(a)
of the Act. It found that because the settlement amount
was not paid "on a periodic basis" it was not taxable
under paragraph 6(1)(f), but that it was taxable under
paragraph 6(1)(a) as a benefit received "in respect
of, in the course of, or by virtue of an office or
employment", relying upon the Savage decision .
[13]
Respondent's counsel also submitted that the amount was
includable in income under paragraph 6(1)(a) and that the
exception in subparagraph (i) related only to the premiums paid
by her employer in respect of the accident insurance plan.
ANALYSIS AND CONCLUSION:
[14] The
amount of $300 at issue in Savage had nothing to do with
an insurance claim settlement. It was, in fact, a reward to an
employee for passing an examination. Paragraph 6(f) was
not in issue and was not considered. Although the Court in
Dumas relied upon this decision, I have reached a
conclusion consistent with the decisions in Whitehouse and
Landry. In the present case, there was no allegation or
assumption that the $82,500 represented the aggregate of periodic
payments that the Appellant might have received over her
lifetime. In addition, paragraph 6(f) deals specifically
with amounts paid pursuant to an accident insurance plan:
...that were payable ... on a periodic basis in respect of the
loss of all or any part of the taxpayer's income from an
office or employment.
That paragraph would have little, if any meaning if, in
circumstances where it cannot be applied to a taxpayer, an amount
escaping inclusion by virtue of its terms would be includable in
another subparagraph. It is noted that paragraph 6(1)(a)
is not paramount to paragraph 6(1)(f). Each of the
paragraphs contained under subsection 6(1) stand separate and
apart from each other. The subject matter of payment under an
accident plan having been dealt with under paragraph
6(1)(f), the matter is closed.
[15]
Accordingly, the appeal is allowed with costs.
Signed at Ottawa, Canada this 23rd day of August, 2001.
"R.D. Bell"
J.T.C.C.
COURT FILE
NO.:
1999-2936(IT)G
STYLE OF
CAUSE:
Bonnie Fry v. The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
August 14, 2001
REASONS FOR JUDGMENT
BY:
The Honourable Judge R.D. Bell
DATE OF
JUDGMENT:
August 23, 2001
APPEARANCES:
Counsel for the
Appellant:
David Share
Counsel for the
Respondent:
Lesley King
COUNSEL OF RECORD:
For the
Appellant:
Name:
David Share
Firm:
Share, David, Associates
Toronto, Ontario
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-2936(IT)G
BETWEEN:
BONNIE FRY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 14, 2001 at Toronto,
Ontario, by
the Honourable Judge R.D. Bell
Appearances
Counsel for the
Appellant:
David Share
Counsel for the
Respondent:
Lesley King
JUDGMENT
The
appeal from the reassessment made under the Income Tax Act
for the 1996 taxation year is allowed, and the reassessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with the attached
Reasons for Judgment.
Costs
are awarded to the Appellant.
Signed at Ottawa, Canada this 23rd day of August, 2001.
J.T.C.C.
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