Citation: 2007TCC546
Date: 20070911
Docket: 2007-889(IT)I
BETWEEN:
BRUCE
W. HARNISH ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The
issue in this case is whether the amount of $43,774.48 that was paid to the Appellant
in 2004 by Sun Life Assurance Company of Canada (“Sun Life”) under a long term
disability plan should be included in the income of the Appellant in 2004 even
though, at the time the amounts were paid, the Appellant was subject to a
condition that the amounts may have to be repaid.
[2]
The Appellant was
injured in a motor vehicle accident on September 27, 2003 when his
vehicle was rear-ended by another vehicle. Because of his injury he was unable
to return to work. For the balance of 2003, he used his sick leave time that
was available to him. Since the Appellant was not able to return to work after
the expiration of the sick leave time period, he applied for long term
disability benefits under the long-term disability plan with Sun Life.
[3]
Both the Appellant’s
employer and the Appellant had made payments under the long term disability
plan. The Appellant had paid a total of $2,705.22 of the premiums under the
plan. The total amount that was paid to the Appellant in 2004 by Sun Life under
the long-term disability plan was $43,774.48. The Appellant was reassessed to include
this amount in his income pursuant to paragraph 6(1)(f) of the Income
Tax Act (“Act”). This paragraph provides, in part, 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:
(f) 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,
(ii) a disability insurance plan, or
(iii) an income maintenance insurance plan
to or under which the taxpayer’s employer has made a contribution, not
exceeding the amount, if any, by which
(iv) the total of all such amounts received by the
taxpayer pursuant to the plan before the end of the year. ...
exceeds
(v) the total of the contributions made by the taxpayer
under the plan before the end of the year. ...
[4]
In this case the
amounts that were payable to the Appellant by Sun Life were paid on a periodic
basis as he received monthly payments. As well the amounts were paid in respect
of the loss of the Appellant’s income from his office or employment as he was
unable to work on a full time basis in 2004. He did start back to work on a
gradual basis on November 1, 2004 and in 2005 was able to return on a full time
basis. However, throughout 2004, he was unable to work on a full time basis.
[5]
Prior to the Appellant
receiving any payment from Sun Life and as a condition imposed by Sun Life upon
the Appellant receiving any payments, he signed a Subrogation Acknowledgment
with Sun Life. This Subrogation Acknowledgment provides in part as follows:
Where benefits under this policy have been paid or may be payable to
an Employee and the Employee has a right of action against a Third Party for
recovery of loss of income which otherwise would have been earned by the
Employee during the whole or any part of the period that benefits are paid, or
may be payable, to the Employee under this policy,
1. any amount recovered by the Employee from the
Third Party (including general damages, damages of loss of income, interest and
legal costs, whether recovered through settlement or trial), less the
Employee’s legal costs expended for such recovery, shall be deemed to be the
Employee’s Net Recovery from the Third Party;
2. the Employee shall pay to Sun Life Financial
an amount equal to 75% of his/her Net Recovery from the Third Party (to a
maximum of the amounts paid to the Employee under this policy), such percentage
of his/her Net Recovery to be held in trust by the Employee for Sun Life Financial
until payment is made to Sun Life Financial.
[6]
The position of the Appellant
was that because it was a condition of his receiving payments that he sign the Subrogation
Acknowledgment, the amounts that he received from Sun Life were a loan and not
income. However since the amounts that were paid to the Appellant by Sun Life
were paid under the long-term disability plan which imposed an obligation on
Sun Life to make these payments because the Appellant was unable to work, I
find that the amounts were not a loan. As well, Sun Life issued a T4A slip to
the Appellant for the total amount of the payments made in 2004 and therefore Sun
Life obviously did not consider these amounts to be a loan.
[7]
The issue is whether
the amounts that were paid had the quality of income for the purposes of the Act.
In Commonwealth Construction Company v. Her Majesty The Queen,
[1984] C.T.C. 338, 56 NR 309, 84 DTC 6420, the Federal Court of Appeal made the
following comments:
21 The phrase “quality of income” appears in a case relied on
both by the appellant and the respondent, namely, Kenneth BS Robertson Limited v. Minister of National Revenue, [1944] C.T.C. 75; 2 DTC 655. At 90-91 [660] of the report Thorson J.
(as he then was), after disposing of an argument that the Appellant in that
case was entitled to set up reserves in respect of certain types of commissions
paid on insurance premiums received, made the following statement:
This does not, however, dispose of this appeal, for the question
remains whether all of the amounts received by the appellant during any year
were received as income or became such during the year. Did such amounts have,
at the time of their receipt, or acquire during the year of their receipt, the
quality of income to use the phrase of Mr. Justice Brandeis in Brown v.
Helvering (supra). In my judgment, the language used by him, to
which I have already referred, lays down an important test as to whether an
amount received by a taxpayer has the quality of income. Is his right to it
absolute and under no restriction, contractual or otherwise, as to its
disposition, use or enjoyment? To put it in another way, can an amount in a
taxpayer’s hands be regarded as an item of profit or gain from his business, as
long as he holds it subject to specific and unfulfilled conditions and his
right to retain it and apply it to his own use has not yet accrued, and may
never accrue?
22 To apply phrases from that quotation to the case at bar,
the record discloses that the rights of the appellant to the amounts paid to it
in 1974 and 1975 were “absolute and under no restriction, contractual or
otherwise, as to its disposition, use or enjoyment.” They were not held subject
to any specific and unfulfilled conditions. Once the conditions precedent
imposed in the letter agreements between the parties, supra, had been
fulfilled, as they were, the right to receive the moneys and to retain them had
accrued and was absolute. True, it might be necessary to return the moneys in
whole or in part if the appeal were successful. But, as I see it, that was a
condition subsequent which did not affect the unrestricted right of the appellant
to use them until such a requirement occurred. It did not, as I see it, affect
their quality as income upon receipt.
23 As to the difference in effect of a condition precedent
from a condition subsequent on the question of an accrual to income, the
learned trial judge relied on a quotation from Meteor Homes Ltd. v. Minister
of National Revenue, [1960] C.T.C. 419, 61 DTC 1001 at 43-31; [1007-1008]
which substantiates the view which I expressed, supra:
... Mertens, Law of Federal Income Taxation, Vol 2, c 12, p
127, considers “the problem of when items are ... deductions to the
taxpayer on the accrual basis”, and deals with it at p132 in these terms:
Not every contingency prevents the accrual of income: the
contingency must be real and substantial. A condition precedent to the creation
of a legal right to demand payment effectively bars the accrual of income until
the condition is fulfilled, but the possible occurrence of a condition subsequent
to the creation of a liability is not grounds for postponing the accrual. (Emphasis
mine)
24 The possibility of a successful appeal does not,
therefore, appear to derogate from the quality of income of the payments in
issue at the time of receipt.
[8]
In the Commonwealth
Construction Company Limited case the conditions precedent imposed in the
letter agreements referred to above were conditions related to the execution of
various documents. This would be similar to the condition imposed upon the
Appellant in this case in relation to the execution of the Subrogation Acknowledgement.
Once the Subrogation Acknowledgment was signed, the Appellant was entitled to
the funds from Sun Life and no conditions were imposed upon him in relation to
the disposition of these funds. As the Appellant acknowledged, he was free to
spend his money as he saw fit. As a result I find that the condition imposed
upon the Appellant under the Subrogation Acknowledgment related to the possible
requirement to repay the funds to Sun Life was a condition subsequent.
[9]
In the case of Théberge
v. Her Majesty the Queen, 2003 CarswellNat 5426, 2003 TCC 97 Justice
Archambault dealt with a situation where an employee had received an amount
from his employer under the collective agreement with the employer during a
period while the employee was unable to work. The collective agreement also
included a condition that required the employee to repay any amounts that the
employee may receive as wage compensation under Quebec's Workers'
Compensation Act. The facts in Théberge are summarized by Justice
Archambault are as follows:
2 Mr. Théberge has worked for the city of Montréal for 25 years. In 1997, the
taxation year at issue, he was a parking officer. On September 9, 1997, after
being given a ticket by Mr. Théberge, a citizen chased him
in his car, while driving in a dangerous manner, then got out of the car, shook
his fists at Mr. Théberge, and threatened to kill him.
3 A few days later, on September 23, 1997, Mr.
Théberge went on sick leave. He
testified that he suffered a nervous breakdown that kept him off work until
February 1998. After a brief return to work, he went on sick leave once again,
from March to August 1998.
4 Under the collective agreement governing the
conditions of his employment, Mr. Théberge was entitled to receive an amount
equal to the net wages, at straight time, he would have received if he had
remained at work. More specifically, clauses 25.01 and 25.02 of this collective
agreement stipulate as follows:
[TRANSLATION]
25.01 (a) In case of injury or
disease resulting from the performance of the employee's duties, the
employee shall receive an amount equal to the net wages, at straight time, the
employee would have received had that person remained at work. However, the
employee shall repay the employer any amount of money the employee receives as
wage compensation under Quebec's Automobile Insurance Act
or its accompanying regulations. Similarly, the employee shall repay the
employer any amount of money the employee receives as wage compensation under Quebec's Workers' Compensation Act or its accompanying regulations.
(b) In all other cases, Quebec's Act respecting industrial
accidents and occupational diseases (R.S.Q., c. A-3.001), as amended, shall
be applicable.
25.02 For the purposes of
interpreting this article, the amount of the net wages, at straight time,
shall be equal to the compensation payable under Quebec's Workers'
Compensation Act, increased by an amount sufficient to maintain the net
wages, excluding any bonuses except the bonus provided for in clause G-8.01
and after deductions for the regular contributions to the employer's
supplementary pension plan, income tax, and the public plans applicable to this
amount. The related calculations shall be made on an annual basis.
[Emphasis
added.]
[10]
After reviewing the cases dealing
with the quality of income, Justice Archambault concluded that the wages
paid to the taxpayer during the 1997 sick leave period were to be included in
the income of the taxpayer even though the taxpayer was subject to the
condition that he may have to repay the amount if he received sufficient
amounts under Quebec’s Workers' Compensation Act. In Théberge, as
in this case, amounts were paid during a period when the taxpayer was unable to
work (in Théberge the amounts were paid pursuant to a collective
agreement and in this case the amounts were paid pursuant to a long-term
disability plan) and in each case the taxpayer at the time that he received the
amounts was subject to a condition that the amounts may have to be repaid. In Théberge
the obligation was under a collective agreement and related to amounts that the
taxpayer may receive under Quebec’s Workers' Compensation Act and in the current
case it was the Subrogation Acknowledgment and the obligation related to the
amounts that the Appellant may recover from the Third Party or their insurer.
[11]
Based on the decision of Justice
Archambault in Théberge and on my conclusion that the condition that was
imposed by the Appellant in this case in relation to the repayment of the funds
received from Sun Life was a condition subsequent which did not affect his
ability to use the funds for any particular purpose or in any particular
manner, the amount received by the Appellant from Sun Life in 2004 had the
quality of income for the purposes of the Act and therefore was to be
included in his income pursuant to paragraph 6(1)(f) of the Act.
[12]
Paragraph 6(1)(f) provides
that the amount that is to be included in income is the amount received minus
the total of the contributions made by the taxpayer before the end of the year.
Since the total of the amount paid by the Appellant before the end of the year was
$2,705.22, the amount included in his income for 2004 is to be reduced by this
amount.
[13]
Therefore the appeal is allowed,
in part without costs, to reduce the amount included in the income of the
Appellant for 2004 by $2,705.22.
Signed at Toronto,
Ontario, this 11th day of September 2007.
“Wyman W. Webb”
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