Lawson v. The Queen, 82 DTC 6331, [1982] CTC 368 (FCTD)

Mahoney, J:—In issue is the proper income tax treatment of $25,000 received by the plaintiff in 1979. The Defendant has assessed the entire amount to tax; the plaintiff reported as income and now pleads that the $25,000 was a termination payment whereof the taxable amount was $14,986. The arithmetic is not in issue.

The plaintiff, aged 28 in early 1979, was employed as manager of a mobile home manufacturing plant in Yorkton, Saskatchewan, at an annual salary of between $26,000 and $27,000 a year. He was married with two children, aged 10 and 3, and had lived in Yorkton three years.

Sometime in May, he was offered, and accepted, the position of general manager of Weber Homes, also a mobile home manufacturer, by its proprietor. He was to begin July 1. The annual salary was $50,000. He understood Weber intended him to run the operation and to “go to the sidelines” himself.

The plaintiff gave notice terminating his employment effective June 30. He left it on that date. After he had given the notice, Weber had advised the plaintiff that matters were not yet organized for him to start and asked that he defer starting until August 1. Being unemployed, the plaintiff asked for something to see him through July and, in late June or early July, Weber paid him $5,000.

The plaintiff started work August 1. After seven working days, on August 13, Weber fired him, citing “internal problems bringing him on board”. The plaintiff was flabbergasted and told Weber he would be taking legal advice, which he did that day. Its effect was that he was entitled to some compensation. He saw Weber again on August 14. He advised him that unless offered a satisfactory settlement, he would sue. He was initially offered between $10,000 and $15,000, which he refused. In the result, the settlement, reached August 14, was a lump sum of $25,000. That included the $5,000 paid earlier and also compensation for the period he actually worked.

Nothing was put in writing. There was no contract of employment, no letter transmitting either the $5,000 or $20,000 payment, no release.

The following provisions of the Income Tax Act are in play:

5. (1) ... a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

6. (3) 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 purposes 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

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

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

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

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 in the year as, on account of or in lieu of payment of, or in satisfaction of,

(ii) a retiring allowance,

(viii) a termination payment;

248. (1) In this Act

“retiring allowance” means an amount received upon or after retirement from an office or employment in recognition of long service or in respect of loss of office or employment (other than a superannuation or pension benefit), whether the recipient is the officer of employee or a dependant, relation or legal representative;

“termination payment” for a taxation year means an amount equal to the lesser of

(a) the aggregate of all amounts each of which is an amount received in the year in respect of a termination of an office or employment, whether or not received pursuant to an order or judgment of a competent tribunal, other than

(i) an amount required by any provision of this Act (other than subparagraph 56(1 )(a)(viii) ) to be included in computing the income of a taxpayer for a year,

(b) the amount by which 50% of the aggregate of all amounts each of which is the amount that may reasonably be considered to be the employee’s salary, wages and other remuneration from an office or employment for the 12 months preceding the date that is the earlier of

(i) the date on which the office or employment was terminated, and

(ii) the date on which an agreement, if any, in respect of the termination was entered into

exceeds the amount determined under paragraph (a) for each previous year in respect of that termination

whether the recipient is the officer or employee whose office or employment was terminated or a dependant, relation or legal representative of the officer or employee;

I do not accept the plaintiff’s thesis that this was, in fact, a $25,000 lump sum settlement of a right of action for dismissal without reasonable notice. There were two payments: $5,000 in late June or early July, before termination, and $20,000 on or about August 14, after termination.

The character of the $5,000 payment is to be determined as at the date the plaintiff received it. That character was not changed by the subsequent settlement which apparently reflected a mutual decision not to argue over how much, if any, of it had been owing to or earned by the plaintiff under the contract of employment.

I do not accept the defendant’s contention that the $5,000 payment fell within the contemplation of subsection 6(3). While it was an amount within paragraph (a), it cannot reasonably be regarded as having been received as consideration for any of the things enumerated in paragraphs (c), (d) or (e) thereof.

The $5,000 payment was an amount received by the plaintiff that was within the contemplation of subsection 5(1) and, as such, was taxable. The decision to defer the date the plaintiff would actually go to work was a unilateral decision by Weber. It did not result in an amendment to the contract of employment. The plaintiff was available, as agreed, on July 1, and was entitled to be paid from that date on, whether or not his services were actually required, until the contract was terminated.

As to the $20,000 payment, it was clearly not, as the defendant argued, a retiring allowance. It would be euphemism approaching irony to characterize his severance as retirement. The $5,000 did, perhaps coincidentally, roughly approximate the portion of the $50,000 annual salary to which the plaintiff was entitled for the period July 1 to August 13 inclusive. I think it fair to accept that the entire $20,000 was paid in settlement of the Plaintiff’s right of action for dismissal without proper notice. I have no doubt that he had such a right of action and, in all the circumstances, $20,000 is not an excessive amount to ascribe to its settlement.

Subparagraph 56(1 )(a)(viii) and the definition of “termination payment” in section 248 were added to the Act by amendment in 1979, (SC 1979, c 5, ss 15 and 66) and apply to amounts received in respect of a termination after November 16, 1978. Together, they are evidently a legislative response to The Queen v R B Atkins, [1975] CTC 377; 75 DTC 5263; [1976] CTC 497; 76 DTC 6258. An amount received in settlement of a claim for dismissal without reasonable notice is clearly within the definition: “an amount received . . . in respect of a termination of an office or employment”. The $20,000 payment was a termination payment within the contemplation of the Act taxable in the amount calculated as prescribed.

The decision of this Court in B N Pollock v The Queen, [1981] CTC 389; 81 DTC 5293, which applied the Atkins decision notwithstanding disapproving dicta in Jack Ce we v Jorgenson, [1980] CTC 314; 80 DTC 6233, while recently rendered, dealt with a termination in 1976.

The plaintiff’s 1979 income tax return is referred back to the Minister of National Revenue for reassessment on the basis that:

1. $5,000 of the moneys received by the plaintiff from Weber in 1979 was fully taxable under subsection 5(1); and

2. the remaining $20,000 was taxable as a termination payment under subsection 56(1).

The plaintiff is entitled to his costs.