MacDonald v. MNR, 90 DTC 1751, [1990] 2 CTC 2269 (TCC)

Couture, C.J.T.C.:—This appeal is in respect of a reassessment by the respondent for the 1984 taxation year whereby an amount of $8,346 was added to the income of the appellant and legal expenses in the amount of $5,500.29 deducted in computing his income were disallowed. This appeal deals only with the deduction of the legal expenses.

Evidence given by the appellant disclosed the following facts:

He had been employed by United Tire & Rubber Co. Ltd. from October 1981 until February 14, 1983 when his employment was terminated.

He took an action in the Supreme Court of Ontario for wrongful dismissal and judgment was rendered in his favour in the amount of $8,346.71 plus costs of the action. In his reasons for judgment the learned justice came to the conclusion that a reasonable notice of the termination of his employment should have been three months. In addition he held the defendant should pay his legal and commission expenses with respect to the sale of his house in Cobourg, Ontario.

The appellant, invoking the provisions of paragraph 8(1)(b) of the Income Tax Act (the "Act"), claimed the amount of $5,500.29 of legal expenses as a deduction in computing his income.

Paragraph 8(1)(b) reads:

8(1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(a) n/a

(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by him in collecting salary or wages owed to him by his employer or former employer.

His argument, if I understood it clearly, was that since the trial judge had held that a proper notice under the circumstances of his dismissal should have been three months, that the portion of the award granted by the Court related to that finding was in fact salary or an amount in replacement of salary and therefore he met the requirements of paragraph 8(1)(b).

Counsel for the respondent submitted that the amount that the appellant received as a result of the Court decision was a retiring allowance within the meaning of this expression in subsection 248(1) which provides:

248(1) “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.

She also pointed out that the definition of the words "salary"or "wages" in subsection 248(1) specifically excludes a retiring allowance as a qualifying component. The subsection reads:

“salary or wages" except in sections 5 and 63 and the definition "death benefit” in this subsection, means the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I and includes all fees received for services not rendered in the course of the taxpayer's business but does not include superannuation or pension benefits or retiring allowances.

Her conclusion was that since a retiring allowance is not considered a "salary" or “wages” for the purpose of the Act, therefore the provisions of paragraph 8(1)(b) are not applicable and the appellant may not deduct his legal expenses in computing his income for the taxation year under appeal.

I agree with the proposition submitted by Counsel for the respondent. The amount that was awarded to the appellant by the Court was in the nature of damages for breach of a contractual obligation on the part of his former employer. In arriving at the quantum of the award, the Court took into account the salary of the appellant and applied it to a notional period of employment which it considered should have been given to the appellant prior to the termination of his employment. That exercise however, did not translate an amount of damages into salary or wages.

The amount in question in my opinion was in respect of loss of his employment received as, on account or in lieu of payment of, damages pursuant to a judgment of a competent tribunal as provided in paragraph 248(1) and was therefore a retiring allowance within the meaning of this definition. In addition the word "salary" as defined by the dictionary does not include an amount of the type received by the appellant. The Concise Oxford Dictionary defines "salary": "n. fixed payment made by employer at regular intervals, usu. monthly or quarterly, to person doing other than manual or mechanical work."

In my opinion, by his action against his former employer, the appellant was seeking the right to damages for wrongful dismissal and not salary or wages as he had never performed any services for his former employer to be entitled to a salary or wages.

What paragraph 8(1)(b) contemplates in my opinion is the situation whereby a taxpayer having performed the duties of his employment his employer has refused to pay him his salary for whatever reasons he may invoke. In other words, the employee has earned the salary or wages in question, but his employer has not paid him and he had to incur legal expenses to collect what was owing to him.

For the above reasons the appeal is dismissed.

Appeal dismissed.