Gowling v. MNR, 78 DTC 1624, [1978] CTC 2885 (TRB)

Guy Tremblay:—The case at bar was heard in Montreal, Quebec, on May 10, 1978.

1. Point at Issue

The question here is whether a sum of $6,000 received by the appellant in 1974 as consulting fees according to a settlement signed by the appellant, or as liquidated damages because of a breach of contract according to the appellant, is taxable in the same manner as a salary.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessment was not justified. This burden of proof is based not on a particular section of the Income Tax Act but on several judicial decisions, among them a decision of the Supreme Court of Canada rendered in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1 In October of 1973 the appellant was engaged by the firm “Dales of Canada Limited’’. He started to work on November 5, 1973. The main conditions of the contract of employment were a salary of $27,000 per annum plus a car allowance of $125 per month.

3.2 On February 19, 1974, the appellant was informed by the president of the company that his services were no longer required and he was forced to resign.

3.3 The appellant then asked for a legal opinion. His attorneys sent a letter to his employer dated February 25, 1974, (Exhibit R-3) advising that:

As Mr Gowling feels that your request for his resignation is totally unjustified and without cause, he has no intention of resigning.

The undersigned has advised Mr Gowling that, taking into consideration his salary, his responsibilities with your Company, and the inconvenience he incurred in moving to Montreal to accept employment with your Company, he is entitled to one year’s notice of termination or one year’s salary in lieu thereof. Furthermore, Mr Gowling reserves all his rights for any damages that may result to his professional reputation from your totally unjustified request for his resignation.

3.4 In a letter dated March 4, 1974, (Exhibit R-2) addressed to the appellant, it is said inter alia:

On February 19, 1974, you were informed that our firm would no longer require your services as controller and you were asked to look for other employment. You were told that you would remain on the payroll for the period necessary for you to find another job, not to exceed three months. You said that you wanted six months’ salary as severance pay which was refused and subsequently your attorney' advised our attorney that you wanted notice of termination with pay until December 31, 1974 to which you are not entitled either legally or in equity.

Accordingly, Dale’s of Montreal Ltd is hereby giving you a three month notice of termination of your employment up to June 6, 1974. You will be expected to work normal hours during the said period of notice during which you will receive your regular weekly salary of $520. You will be permitted to take off up to three hours per week for interviews for jobs for which you may have applied. If you should obtain employment before the end of three months, you will be expected to give us one week’s notice of your leaving.

3.5 The appellant’s attorney, in a letter dated March 6, 1974, (Exhibit R-4) addressed to the appellant’s employer, wrote inter alia:

I am advised by Mr Gowling that at no time did he ever agree to accept either six months’ notice of termination or six months’ severance pay. Taking into consideration Mr Gowling’s salary, his responsibilities with your Company and the inconvenience he incurred-in moving to Montreal to accept employment with your Company, he is entitled to one years notice, of termination or one year’s salary In lieu thereof.

Mr Gowling is making every effort to find another position as quickly as possible. However, should your Company terminate Mr Gowling’s employment on June 6, 1974 and if Mr Gowling has been unable to find other employment at a similar salary by said date, then Mr Gowling will have no alternative but. to claim from your Company any and all damages he may suffer as a result of the termination of his employment by your Company.

As you are aware, Mr Gowling’s salary is $27,000 per annum payable weekly plus a car allowance of $125 a month and I understand that the appropriate amounts will continue to be paid to Mr Gowling.

3.6 On May 1, 1974, the following agreement (Exhibit R-1) was signed by the appellant:

I hereby acknowledge having received from Dale’s of Montreal Ltd. the sum of $3,500 in full and final settlement of all amounts due to me for salary and fringe benefits to date, including vacation pay and allowances and in full and final settlement of any and all claims of any nature whatsoever that I may have against Dale’s of Montreal Ltd and subsidiary companies arising out of my engagement by the said companies as a comptroller including a claim for damages for one year’s salary made on my behalf by my attorneys, Ogilvy, Cope, Porteous, Hansard, Marler, Montgomery & Renault, and also including any claim for moving charges, purchase of a home, or any other expenses and also any alleged damages to my reputation as a comptroller and as a chartered accountant.

I also hereby acknowledge receiving as consulting fees the sum of $6,000 in advance for the twelve months ending April 30, 1975 pertaining to any consulting work required by you for the above-mentioned companies. It is understood’ that I will be available at the request of any of the above companies or their principals, if and when, my services are required in this endeavour. This latter fee of $6,000 will not be subject to withholding tax and I take full responsibility for payment of all taxes in this regard.

In consideration of the foregoing, I agree and undertake not to do anything that might harm or injure any of the said companies involved, including the principals, nor to do anything that may involve them in any difficulties.

This is a final settlement between the companies and myself of all differences between us.

Yours truly,

(signed)

William Gordon Gowling, CA

3.7 The appellant continued to work until June 6, 1974. After that date he did not go back to his employer’s office to perform any consulting services or any other services.

3.8 The respondent, by his notice of re-assessment dated February 16, 1976, included in the revenue of the appellant the sum of $6,000.

3.9 Following a notice of objection dated April 8, 1976, filed by the appellant, a notification dated April 18, 1977, was sent by the Minister confirming the re-assessment.

3.10 On May 16, 1977, an appeal was lodged before the Tax Review Board.

4. Law — Jurisprudence — Comments

4.1 Subsection 6(3) of the Income Tax Act, SC 1970-71-72, c 63, as amended, is the main section involved in this case.

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.

4.2 The following fifteen judgments were cited by the parties:

Robert B Curran v MNR, [1959] CTC 416; 59 DTC 1247; Louis Richstone v Her Majesty the Queen, [1974] CTC 155; 74 DTC 6129; Her Majesty the Queen v Robert B Atkins, [1976] CTC 497; 76 DTC 6258; Yvon A Alexander v MNR, [1973] CTC 405; 73 DTC 5321; Roddy Choquette v Her Majesty the Queen, [1974] CTC 742; 74 DTC 6563; Peter Moss v MNR, [1963] CTC 535: 63 DTC 1359; Thomas G Quance v Her Majesty the Queen, [1974] CTC 225; 74 DTC 6210; Louis Richstone v MNR, [1972] CTC 265; 72 DTC 6232; Her Majesty the Queen v Robert B Atkins, [1975] CTC 377; 75 DTC 5263; Paul Girouard v MNR, [1977] CTC 2588; 78 DTC 1011; David G Hughes v MNR, [1970] Tax ABC 162; 70 DTC 1114; Patrick D McTaggart-Cowan v MNR, [1974] CTC 2076; 74 DTC 1058; William Unaitis v MNR, [1978] CTC 2279; 78 DTC 1193; MNR v Gordon W Pannell, [1973] CTC 81; 73 DTC 5038; Ralph Pickard Bell v MNR, [1962] CTC 253; 62 DTC 1155.

4.3 Comments

First it is clear to the Board that the amount of $6,000 had been received “during a period while the payee was . . .■» in the employment of the payer’’ according to paragraph 6(3)(a) of the Income Tax Act. It is proven, in fact, that the said amount had been received on May 1, 1974. The appellant had continued working until June 6, 1974. Consequently, the presumption operates against the appellant and the amount of $6,000 is “deemed, for the purposes of section 5, to be remuneration for the payee’s services’’ as an employee.

This presumption, however, can be rebutted if the appellant can prove that all the conditions described in paragraphs (c), (d) and (e) of subsection 6(3) of the new Act do not exist in this case.

It is difficult for the Board to decide that the condition of paragraph (d) has not been met.

An amount received . . . shall be deemed . . . to be remuneration . . . unless it is established that . . . it cannot reasonably be regarded as having been received

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

According to the agreement signed May 1, 1974, the sum of $6,000 was paid “as consulting fees in advance for the twelve months ending April 30, 1975’’, (Exhibit R-1 cited at 3.6). The fact that the appellant did not go back to his employer’s office to perform any consulting services (paragraph 3.7 of the facts) is immaterial. The said agreement is clear that it was for consulting fees. The fact that “Dales of Canada Limited’’ or one of its subsidiaries did not consult the appellant does not change the fact that he was paid for consulting fees.

The Board has no other alternative but to confirm the assessment and dismiss the appeal.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.