Citation: 2009TCC619
Date: 20091215
Docket: 2008-3787(IT)I
BETWEEN:
PATTRICK A.M. DUNPHY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The issue in this appeal is whether all or some of a $45,000
lump sum payment the Appellant received from his former employer was a “retiring
allowance” and required to be included in his income under subparagraph 56(1)(a)(ii)
of the Income Tax Act. The term “retiring allowance” is defined in subsection
248(1) of the Act:
“retiring
allowance” means an amount … received
…
(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…
[2] In reassessing
the Appellant’s 2006 taxation year, the Minister of National Revenue concluded
that the $45,000 payment was caught by this definition and included the entire
amount in the Appellant’s income.
[3] The Appellant’s
position is that $17,277 of the $45,000 payment was not for loss of employment but
rather, in respect of the settlement of a complaint he had filed against his
employer with the provincial Human Rights Commission; accordingly, that amount
ought not to have been included in income.
Facts
[4] The Appellant
represented himself and was the only witness to testify at the hearing of this
appeal. I found him to be a credible and well-prepared witness who presented
his evidence in a straight-forward manner.
[5] The Appellant
had been a physical education teacher with the Halifax Regional School Board
for nearly 30 years when in 2003, a new position for a physical education teacher
became available at the school where he was teaching. Although for the
Appellant, it represented a lateral move within the Halifax Regional School
Board system, he was very interested in the job. Confident that his education,
experience and seniority would all but guarantee his success, the Appellant decided
to apply for the new position. To his surprise, it was offered to a female
teacher from a different school with only 6 years experience.
[6] The Appellant’s
reaction was to file a union grievance under his collective bargaining
agreement alleging gender discrimination against the Halifax Regional School
Board. In this pursuit, he was assisted by his union representative, Mr. Kelloway,
and a union-appointed lawyer.
[7] Around the same
time, the Appellant filed a complaint against the Halifax Regional School Board
with the Human Rights Commission alleging gender discrimination. As this was a
private matter, the Appellant retained his own lawyer, a Mr. Pavey, to handle
the complaint.
[8] Meanwhile, the
Appellant continued teaching in the position he had held before making his
application. His evidence was that prior to filing the union grievance and the
complaint with the Human Rights Commission, he had enjoyed an “impeccable
record” with the Halifax Regional School Board; afterwards, he said, “… the
wheels fell off.”. What began as unpleasantness escalated to the point
where the Appellant laid a charge of criminal harassment against one of his
colleagues. The Appellant was accused of a variety of misdeeds, including the
fabrication of marks and misappropriation of school funds. In the end, the
Appellant was discharged from his employment with the Halifax Regional School
Board for what may be generally described as misconduct in the performance of
his duties. He then exercised his right under the Nova Scotia Education
Act to appeal his discharge to the Minister of Education.
[9] The appeal was
set down for arbitration but was ultimately adjourned sine die
because of, among other things, serious medical problems the Appellant and his
wife were then experiencing. Time passed and by early 2006, the Appellant began
to consider putting the stress of appealing his discharge behind him. He was
also bothered by the human rights complaint which also remained unresolved. Negotiations
ensued and in March 2006, his union representative and his union lawyer reached
an agreement with the lawyer for the Halifax Regional School Board, Mr.
Pickard. The Appellant agreed to the terms presented and signed Minutes of
Settlement dated March 21, 2006.
[10] On March 23,
2006, pursuant to paragraph 6 of the Minutes of Settlement, the Appellant’s
human rights complaint lawyer, Mr. Pavey, wrote to the Human Rights Commission
to withdraw his complaint. As it turned out, there would be no response to this
letter until August 31, 2006 when the Human Rights Commission finally wrote to
advise that the Appellant’s complaint had, in fact, been discontinued in
January 2006 and having received no response from the Appellant within the time
provided, the Commission had confirmed that decision on March 16, 2006,
some 5 days before the parties executed the Minutes of Settlement. Neither the
Appellant nor the Halifax Regional School Board had been informed of these
decisions when they signed the Minutes of Settlement. (In fact, as of the date
of this hearing, the Appellant had still not received official notice from the
Human Rights Commission of their 2006 decision.)
[11] Under their
agreement, the Halifax Regional School Board paid the Appellant a total of
$68,276. Of that amount, $23,276 was a long‑service payment that was
rolled over into an RRSP; only the balance of $45,000 is in issue in this
appeal. At some point, the Appellant received three T-4 slips from the Halifax
Regional School Board in respect of the $68,276 payment, one of which indicated
an amount of $17,277. In each of the T-4’s issued by the Halifax Regional
School Board, the amount was described as a “retiring allowance”.
[12] Some time in June
2006, the Appellant sought advice from a Canada Revenue Agency official
regarding the tax consequences of the $45,000 payment he had received under the
Minutes of Settlement. Following that conversation, his understanding was that
where a lump sum payment was received in respect of loss of employment that
also involved a human rights complaint, approximately 30% of that amount might
reasonably be apportioned for damages in respect of the human rights issue. The
Appellant was also referred to Interpretation Bulletin IT-337R4 “Retiring
Allowances”. Paragraphs 9 and 12 of that document are reproduced below:
Types of
Receipts
Damages
¶9. Generally,
compensation received by an individual from the individual’s employer or former
employer on account of damages may be employment income, a retiring allowance,
non-taxable damages, or a combination thereof. Such a determination is a
question of fact, which requires a review of all relevant facts and
documentation of each particular case.
…
¶12. Where
personal injuries have been sustained before or after the loss of employment
(for example, in situations of harassment during employment, or defamation
after dismissal), the general damages received in respect of these injuries may
be viewed as unrelated to the loss of employment and therefore non-taxable. In
order to claim that damages received upon loss of employment are for personal
injuries unrelated to the loss of employment, it must be clearly demonstrated
that the damages relate to events or actions separate from the loss of
employment. In making such a determination, the amount of severance that the
employee would reasonably be entitled to will be taken into consideration.
Similarly,
general damages relating to human rights violations can be considered unrelated
to a loss of employment, despite the fact that the loss of employment is often
a direct result of a human rights violations complaint. If a human rights
tribunal awards a taxpayer an amount for general damages, the amount is
normally not required to be included in income. When a loss of employment
involves a human rights violation and is settled out of court, a reasonable
amount in respect of general damages can be excluded from income. The
determination of what is reasonable is influenced by the maximum amount that
can be awarded under the applicable human rights legislation and the evidence
presented in the case. Any excess will be taxed as a retiring allowance.
[13] Knowing that the
Minutes of Settlement was silent as to the apportionment of the $45,000 payment,
the Appellant consulted his union representative and union lawyer. They were of
the opinion that it would be foolhardy to ask the Halifax Regional School Board
to sign a new agreement. According to the Appellant, the Halifax Regional
School Board was then in a “dysfunctional state of affairs”
and for that reason, he agreed that the wiser course would be to ask the lawyer
for the Halifax Regional School Board, Mr. Pickard, to write a letter confirming
that a portion of the $45,000 payment was intended to be in respect of the
human rights complaint and specifying an amount.
[14] On June 26, 2006,
the Appellant wrote a letter to Mr. Pickard reminding him of that the Halifax
Regional School Board had agreed that a portion of the lump sum payment was to
be attributed to the human rights complaint. He attached a copy of
Interpretation Bulletin IT‑337R4 and indicated that on his interpretation
of that document, it would be reasonable to allocate 30% of the $45,000 payment
($13,500) to the settlement of his human rights complaint.
[15] Mr. Pickard
replied to his letter on July 17, 2006 acknowledging that a portion of the
payment was in respect of the human rights settlement, the Halifax Regional
School Board but leaving unanswered the Appellant’s request that an amount be
allocated to the human rights complaint settlement:
…
I am writing
on behalf of the Halifax Regional School Board to confirm that a portion of the
settlement funds being paid out to you by the Halifax Regional School Board
were with respect to the settlement of the human rights complaint you
had filed against the Board.
The Board is
in agreement with your categorization that a portion of the settlement funds be
termed general damages with respect to the settlement of a human rights case.
…
[16] Around the same
time, the Appellant had also asked an official with the Halifax Regional School
Board to issue an amended T-4 describing some portion of the $45,000 as being
in respect of the human rights complaint settlement. That request also went
unheeded.
[17] In
the absence of any indication of quantum from the Halifax Regional School
Board, when the Appellant filed his 2006 income tax return, he claimed $17,277,
(approximately 38%) of the $45,000 payment in respect of the human rights
complaint settlement.
[18] Just prior to the
hearing of this appeal and more than three years after his initial requests for
clarification from the Halifax Regional School Board, the Appellant was
surprised to receive a copy of a letter dated September 23, 2009 from Mr. Pickard
to the Canada Revenue Agency, in care of counsel for the Respondent, indicating
that under the Minutes of Settlement, the Halifax Regional School Board had
contemplated “an amount in the range of $5,000” in respect of the settlement of
the human rights case:
Litigation
Officer
Canada Revenue
Agency
c/o Jan Jensen
Department of
Justice
Suite 1400, Duke
Tower
5251 Duke
Street
Halifax NS B3J
1P3
Dear Mr.
Jensen:
Halifax Regional
School Board – Patrick Dunphy
On July 17,
2006, in order to complete a settlement of various matters between the Halifax
Regional School Board and Patrick Dunphy, I wrote a letter that referenced his
human rights complaint. In that letter I indicated the Halifax Regional School
Board was prepared to categorize a portion of the settlement funds as general
damages with respect to the settlement of his human rights case as against the
Halifax Regional School Board.
The Halifax
Regional School Board viewed the human rights case to be without merit,
however, as part of the overall settlement of a number of matters respecting
his employment with the Board, the Board felt it appropriate to categorize a
portion of the settlement funds as being related to the settlement of the human
rights case.
In using the
expression “portion of the settlement funds” the Board was contemplating an
amount in the range of $5,000.00.
Yours very
truly,
Ian C. Pickard
ICP/cs
c.c. Client
Patrick
Dunphy
[19] Why this
information could not simply have been provided to the Appellant when he asked
for it shortly after the execution of the Minutes of Settlement remains a
mystery. Instead, whether out of indifference or ineptitude, the Halifax
Regional School Board chose to leave him in limbo resulting, ultimately, in the
reassessment under appeal. The Appellant’s testimony reveals the dispiriting effect
of the treatment he received at the hands of the Halifax Regional School Board:
And I also reminded [the Halifax Regional School Board through
Mr. Pickard] about how we had came about -- how that came about. And that
the School Board would -- may not have -- the agreement may have been nullified
and rather than have that happen I agreed to sign off on the original
settlement agreement with the idea that I'd receive a letter.
And that when I received -- right. And then I -- so what I finally did
is I got a letter from [Mr. Pickard] on July 17th [2006]. This was
about a month, a little less than a month later stating that a portion of it
but not telling me what a portion would be.
And then he responds to I guess an inquiry by [the CRA in care of]
Mr. Jensen as to what was going on and then Mr. Pickard sent Mr. Jensen
back a letter telling him that the portion of the -- part of the settlement the
Board was contemplating an amount in the range of five thousand when why we
didn't get into that in '05 I don't know.
Because it seems to me he led my lawyer -- my representative at the
union to believe that this was not going to happen, you couldn't -- we couldn't
put a portion in the agreement. We wouldn’t be here today if we could have put
a portion of it in the settlement agreement.
But they didn't. They gave me a letter to state that it was -- that a
portion would be attributed to the settlement as a result of signing off but he
never put a figure on it.
And then now he does three years later.
Analysis
[20] The jurisprudence
is clear that the use of the words “in respect of” in the definition of
“retiring allowance” is very broad in scope.
[21] To determine
whether there is a sufficient nexus between the loss of employment and the
payment received, the courts have held that the appropriate test is “but for
the loss of employment would the amount have been received?”
To paraphrase former Chief Justice Bowman in Stolte v. R.,
the trick is to figure out what the payment was for; the answer will depend on
the facts in each case.
[22] Counsel for the
Respondent submitted that the entire $45,000 payment could be traced back to
the Appellant’s loss of employment since, but for his failure to obtain the new
teaching position and the subsequent filing of his complaint with the Human
Rights Commission, the events that led ultimately to the Appellant’s discharge
would not have occurred.
[23] I am not
persuaded by this argument. While I accept that the Appellant was upset with
the decision of the Halifax Regional School Board to select what he felt was a
less qualified candidate and that afterwards, his relationship with certain
individuals in the Halifax Regional School Board soured, there is no evidence
to show that the Halifax Regional School Board discharged him because he had
filed a complaint with the Human Rights Commission. Certainly, it would be a
bold employer who would admit to having based an employee’s dismissal on such
grounds. Nor did the
Appellant lose his employment because he
did not get the new position. He remained in his employment with the Halifax
Regional School Board after his unsuccessful bid for the new teaching position
and indeed, for quite some time after filing his complaint with the Human
Rights Commission.
[24] It
is clear from the letters on behalf of the Halifax Regional School Board and
the Minutes of Settlement executed by the parties that the $45,000 payment was for
the settlement of two discrete matters: the Appellant’s discharge from
employment because of certain conduct in the performance of his duties; and the
complaint filed with the Human Rights Commission after his unsuccessful bid for
the new position.
[25] Notwithstanding
the imprecise description of the $45,000 in the Minutes of Settlement and the
T-4’s issued by the Halifax Regional School Board, as shown by Mr. Pickard’s
letters, the Appellant’s former employer did not contradict the Appellant’s
evidence that some portion of that amount was in respect of the settlement of
the human rights complaint. As for the Minutes of Settlement, after having addressed
the settlement of the appeal of the Appellant’s discharge from employment in
the preamble and paragraphs 1-5, the parties turned their minds to the other
matter in dispute, his complaint to the Human Rights Commission. Under
paragraph 6, the Appellant agreed to withdraw his complaint once the Halifax
Regional School Board had met its obligations under the Minutes of Settlement.
It is notable that the language used in paragraph 6 treats the “Human Rights
Complaint” as something different from the appeal under the Education Act referred
to in the preamble. The same distinction is made in paragraph 7.
[26] In my view, the
Appellant has met his onus of showing that the settlement of the human rights
complaint was a “claim as existing apart from the loss of employment”, the test
set out in Fawkes v. R. following the reasoning in Jolivet v. Minister
of National Revenue.
[27] In
Fawkes, Hershfield, J. found that the taxpayer had used “the threat of
an ‘apparently’ supportable human rights claim for reinstatement or of a claim
for ambiguous additional damages … to exact a high severance package” and
accordingly, concluded that “… the nexus between the receipt and the loss of
employment [was] sufficient to bring the entire receipt into the scope
of a retiring allowance defined in the Act regardless of inferences to
the contrary in [Interpretation Bulletin IT-337R4]”. The
same cannot be said here. There is nothing to suggest that the Appellant’s
filing of the human rights complaint was a bargaining chip in a larger strategy
to increase a settlement in respect of his loss of employment. As in the Stolte decision, the Appellant’s human rights complaint arose out of the behaviour
of his former employer prior to the events that culminated in his discharge.
[28] Taken
as a whole, the evidence leads to the conclusion that the parties understood
and agreed that the settlement of his human rights complaint was something
quite separate from their settlement in respect of the Appellant’s loss of
employment. Thus, not all of the $45,000 payment ought to have been treated by
the Minister as a “retiring allowance”.
[29] The question
remains as to whether it is open to this Court to apportion some part of the
$45,000 payment to the settlement of the human rights complaint and if so, what
that amount should be.
[30] On the first
point, counsel for the Respondent referred the Court to a decision of the
Federal Court of Appeal, Forest v. R. in which Noël, J.A. relied on Schwartz v. R., [1996] 1
S.C.R. 254 to conclude that:
25 ... once it has been established that a payment has a dual
purpose, the bar for determining apportionment must not be set too high. As Mr. Justice La
Forest explains … (Schwartz at paragraph 41),
the party that has the burden [of proving the dual purpose] …
… should not have the burden of presenting, in every case where the
apportionment of a general award is at issue, specific evidence amounting to an
explicit expression of the concerned parties’ intention with respect to that
question, however, there must be some evidence, in whatever form, from
which the trial judge will be able to infer, on a balance of probabilities,
which part of that general award was intended to compensate for specific types
of damages.
26 I conclude from this passage that, to the extent there is
some evidence from which the trial judge can reasonably identify what a global
amount is composed of, that evidence should be accepted.
[31] From this it follows that having
established the dual nature of the $45,000 payment, the Appellant faces a rather
low evidentiary threshold in respect of the appropriate apportionment of that
amount.
[32] Having received no response from the
Halifax Regional School Board to his proposal of allocating $13,500 to the settlement of the human rights case, the
Appellant ultimately apportioned $17,277 of the $45,000 to that issue, probably
because that figure conformed to an amount shown in one of the T-4’s that the Halifax
Regional School Board refused to take the trouble to amend.
[33] Counsel for the
Respondent made the point that because no damages were ever awarded by the
Human Rights Commission, no value could properly be put on the settlement of
the human rights complaint. It seems to me, however, that the question is not
what the Appellant might ultimately have been awarded had he prosecuted his
claim but rather, what value the Halifax Regional School Board put on laying it
to rest. After ignoring the Appellant’s requests for clarification of the
amount for some three years, the Halifax Regional School Board finally disclosed
(notably, not to the Appellant but to the CRA) that it had contemplated “an
amount in the range of $5,000” in respect of the human rights case. From this I
infer that amount was the minimum value the Halifax Regional School Board would
have placed on the settlement of the human rights complaint.
[34] In these
circumstances, it seems to me that the most reasonable course of action is to
split the difference between the amount actually claimed by the Appellant of $17,277
and the minimum admitted to by the Halifax Regional School Board of $5,000
making for an apportionment of $11,139 in respect of the human rights settlement.
[35] The appeal is
allowed and referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the lump sum payment of
$45,000 received by the Appellant in the 2006 taxation year had a dual purpose:
the settlement of his appeal of his discharge from employment with the Halifax
Regional School Board and the settlement of the complaint he filed against the
Halifax Regional School Board with the Human Rights Commission, and that
$11,139 of that amount is apportioned to the settlement of the human rights
complaint.
Signed at Edmonton, Alberta, this 15th day of December, 2009.
“G. A. Sheridan”
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