Date:
20020911
Docket:
2001-4304-IT-G
BETWEEN:
DR. SYED Y.
AHMAD,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Miller
J.
[1]
Dr. Syed Y. Ahmad worked for 20 years for Atomic Energy Canada
Limited ("AECL") from 1967 to 1987. In 1984, he was
demoted by AECL due to the interference of AECL's major
customer, Ontario Hydro. In August 1986, Dr. Ahmad brought an
action against Ontario Hydro for inducement of breach of
contract. In October 1987, he was wrongfully dismissed by AECL
and received $102,000 as a settlement from AECL. In 1993, in his
action against Ontario Hydro for inducement of breach of
contract, Dr. Ahmad received the following award from the Ontario
Superior Court:
General
Damages
$488,525
Libel
Damages
40,000
Pre-judgment
interest
388,212
Post-judgment
interest
199,371
Per diem
interest
6,329
[2]
In July 1997, the Ontario Court of Appeal confirmed this
judgment. The Minister of National Revenue reassessed Dr. Ahmad
including in his income for 1997 the general damages and interest
(other than approximately $45,000 of interest relating to the
libel damages).
[3]
The issues are:
(i)
Whether the general damages are income pursuant to
subsection 56(1) of the Income Tax Act as a retiring
allowance, being an amount received as damages in respect of a
loss of an office or employment.
I find the
general damages do not fall within the definition of retiring
allowance.
(ii)
Whether the amount described as pre-judgment interest is brought
into income as interest pursuant to paragraph 12(1)(c) of
the Income Tax Act.
I find it is
not interest covered by paragraph 12(1)(c).
Facts
[4]
Dr. Ahmad was employed by AECL from April 1, 1967 up to the date
of his dismissal on October 30, 1987. He was a scientist involved
in nuclear research, specifically relating to heat transfer. He
was held in high esteem by other scientists in this
field.
[5]
By 1974, he had been promoted by AECL to head of the engineering
branch of the Chalk River Nuclear Laboratories. AECL had a
long-standing business relationship with Ontario Hydro which
generated many millions of dollars worth of contracts. There
arose a difference of opinion between Dr. Ahmad and Ontario
Hydro, arising from Dr. Ahmad's refusal to approve a
subordinate's report. Dr. Ahmad maintained there was
insufficient scientific evidence to support the report. The
financial impact to Ontario Hydro and AECL of the report not
being approved was significant. Ontario Hydro induced AECL to
remove Dr. Ahmad as head of the branch in 1984. According to Dr.
Ahmad, he was given a desk to sit at in a corner, though he
continued to draw his salary and received raises until
1986.
[6]
In August 1986, Dr. Ahmad filed an action against Ontario Hydro
claiming, among other things, general damages and pre- and
post-judgment interest in respect of the tort of inducement of
breach of his employment contract with AECL. AECL was aware of
this action at that time. It did not dismiss Dr. Ahmad but
froze his salary. As he was having difficulty obtaining
information from AECL to assist in his action against Ontario
Hydro, Dr. Ahmad on the advice of his counsel, decided to join
AECL in the lawsuit. In October 1987, he provided AECL and
the Department of Justice with a draft statement of claim.
Fifteen days later, AECL fired Dr. Ahmad. AECL settled the action
with Dr. Ahmad by payment of $102,000. Dr. Ahmad reported this as
a retiring allowance in 1987.
[7]
Since 1984, Dr. Ahmad has been unable to work in his specialty of
heat transfer in nuclear research. This is because the only two
major players in the field are AECL and Ontario Hydro. All other
companies in the area were dependent on these two, so none of
them would consider hiring Dr. Ahmad. He worked for Alberta
Research Council for two years between 1987 and 1989 in an area
which was not his expertise. He went on unemployment insurance
for one year. He then obtained employment with the government of
the Northwest Territories Science Institute, a position greatly
under-utilizing his capabilities.
[8]
On December 24, 1993, the Ontario Superior Court found that
Ontario Hydro did indeed induce a breach of contract in 1984.
Justice McWilliam determined general damages based on the
calculation of the present value of Dr. Ahmad's salary
and pension at AECL had he remained with AECL, presuming the
trend of regular increments, less the present value of his actual
earnings and pension assuming he continued to work to age 65. The
judge did some fine-tuning of these numbers presented by the
actuarial evidence. He ultimately determined the difference was
$488,525. He asked counsel to agree on the interest amounts which
they determined to be $388,212 pre-judgment interest and $199,371
post-judgment interest. He further rewarded $40,000 for libel
damages. The interest pertaining to the libel award was
approximately $45,000.
[9]
Issue
(i)
Are the general damages received by Dr. Ahmad income pursuant to
paragraph 56(1)(a) of the Act as a retiring
allowance, being an amount received as damages in respect of a
loss of an office or employment?
Appellant's Argument
[10] The
Appellant first argues that the definition of retiring allowance
has as a precondition that the amount is received "in
respect of a loss of office or employment". He maintains
that the amount paid was not of such a nature, but was paid
because of the tortious wrong done. Next, the Appellant contends
that the cause of action arose in 1984 as a result of the
inducement to breach the employment contract, not by terminating
it, but simply by shifting responsibilities away from Dr. Ahmad.
There was no loss of office or employment. Thus, the precondition
in the definition of retiring allowance has not been
met.
[11] While the
damages were measured by a calculated loss of earnings, this
simply represented the quantification and not the nature of the
award. The Appellant cites a number of cases in support of this
proposition (The Glenboig Union Fireclay Co., Ltd. v.
C.I.R., The Queen v.
Atkins and Stolte
v. The Queen). The Appellant
emphasizes that damages awarded for the tort of inducement of
breach of contract are damages at large. Justice McWilliam
recognized this in his decision awarding Dr. Ahmad damages as
follows:
... In view
of the fact that the standard to measure damages is not the same
in unlawful dismissal and the intentional tort of inducing breach
of contract, I do not intend to deduct the $102,000. In any
event, as Mackoff J. said in Alltrans Express Ltd. et al. v.
General Truck Drivers and Helpers Local Union 213, [1982]
2.W.W.R. 533:
Damages for
the tort of inducing breach of contract are said to be at large.
This means that their assessment is a 'matter of impression
and not addition' (or inferentially here subtraction). ... In
this respect they are similar to the damages for libel ... The
Court must assess a global figure approximating the harm it
thinks he has suffered.
Respondent's Argument
[12]
The Respondent's position was
concise. The definition of retirement allowance as applicable to
this case has two requirements:
(i)
an amount of damages must have been received.
There is no
dispute on this point.
(ii)
There must be a causal connection between the receipt and the
loss of office or employment.
The
Respondent contends that Justice McWilliam's judgment clearly
makes that connection, by his analysis of the income Dr. Ahmad
would have earned had he stayed in his managerial position with
AECL, versus what he actually earned or could expect to earn
until age 65. This income calculation arises because, due to the
Respondent, Ontario Hydro's actions led first to a demotion
but ultimately to a dismissal, a loss of employment. Given that
the courts have held the term "in respect of" must be
given the broadest meaning (see Niles v. M.N.R. and
Nowegijick cases), it
follows that damages calculated on the basis of a loss of
employment can be said to be "in respect of" of that
loss of employment. There is a sufficient connection between the
receipt of the money by Dr. Ahmad and his loss of
employment.
[13]
The Respondent also argues that
there is no requirement in the definition of retiring allowance
that the payment must come from the employer. The case of
Overin v. The Queen was given as an
example of where a third-party payment was characterized as a
retiring allowance. That case also suggested a two-prong test for
the determination of whether or not damages constitute a retiring
allowance:
(i)
But for the loss of employment would the amount have been
received?
(ii)
Was the purpose of the payment to compensate for a loss of
employment?
The
Respondent suggests both tests have been met in the case before
me.
Analysis
[14] As was
pointed out by Justice McWilliam in his decision, there is a
difference between the character of damages in a wrongful
dismissal action and damages in the tort action of inducing
breach of contract. The latter are damages at large, a matter of
impression not addition. That difference is significant. It is
presumably why Justice McWilliam did not deduct the $102,000
amount paid by AECL to Dr. Ahmad as damages for wrongful
dismissal from his award of general damages in the tort action.
The damages are of a different nature. The wrongful dismissal
damages are clearly in respect of the loss of employment. The
tort damages are not. They are in respect of the wrong done to
Dr. Ahmad, not in the ultimate loss of his job, but in the
stripping of his responsibilities as a nuclear researcher. The
breach of the employment contract was a shift from a responsible
researcher and manager to an employee without responsibilities.
The damages arose from that breach.
[15] Given its
widest meaning, the expression "in respect of" as used
in the context of damages "in respect of loss of
employment" would cover any damage award if there were even
some connection between the award and the loss of employment.
This would then, for example, pick up damages of the employee
physically injured in a car accident who could no longer work. If
the judge in his calculation of damages considers the loss of
future employment income, then the damages could be said to be
"in respect of the loss of employment". This takes the
expression well beyond what I believe the context of the
definition of retiring allowance supports. To be "in respect
of the loss of employment" suggests to me a primary purpose
test. What is the first answer that leaps to mind when asked why
did the injured employer receive damages? It is not, I would
suggest, because he lost his job. It is because someone injured
him in a car accident. Likewise, why did Dr. Ahmad receive
damages from Ontario Hydro? It is not because he lost his job. It
is because Ontario Hydro wronged him in stripping him of the
ability to ever conduct nuclear research.
[16] I recognize
that the calculation of the damages was based on salary
projections. I agree that the yardstick used for measurement of
damages, as Judge Bowman put it in the Stolte case,
is not conclusive evidence of the nature of the damages
themselves. Where the breach of the contract induced is not the
loss of employment itself, there must be some closer tie between
the damages and the loss of employment than simply that the
subsequent loss of employment was used to calculate the quantum
of damages. The determination of how close the connection must be
is best answered by a review of the two tests cited in the
Overin case; the 'but for test' and the
'purpose test'.
[17] Looking
first at the 'but for' test. But for the loss of
employment, would the general damages have been received? The
breach of contract which was induced by Ontario Hydro was not the
termination of the contract. The breach was the removal of Dr.
Ahmad's responsibilities vis-à-vis AECL's
work for Ontario Hydro. For two years after the induced breach,
Dr. Ahmad continued as an employee of AECL and indeed
continued to receive salary increases. Once he commenced an
action against Ontario Hydro, AECL stopped the salary increases.
One year after that, and only when he commenced the suit against
AECL, did AECL actually dismiss him. Had AECL not dismissed him,
but continued his employment, without raises, there would
certainly still have been damages for inducement of breach of
contract. Dr. Ahmad could not perform the nuclear research
for which he was qualified, though he would remain an AECL
employee. The ultimate loss of employment would not have altered
the finding that Ontario Hydro committed the tort.
[18] The
Respondent contends that it would have been a Pyrrhic victory
only, as Dr. Ahmad would not have received a general damages
award of $488,000. The Respondent makes this contention obviously
because the $488,000 was a calculation based on actual earnings
versus projected AECL earnings. This was an easy formula for
Justice McWilliam to follow. But, given damages for this tort are
damages at large, Justice McWilliam was not limited to using this
type of calculation. Who is to say what he might have assessed,
had Dr. Ahmad continued with AECL though not in a nuclear
research capacity. The factors then to consider would have been:
Dr. Ahmad could not use his significant talents in his area of
expertise, the mental and emotional toll this would take on him
and of course the difference in salary between a frozen salary
and the salary of someone continuing to climb the corporate
ladder. I do not share the Respondent's view that the
consideration of these factors would lead to a Pyrrhic victory
only. Indeed, I am not at all convinced that the damages in such
a scenario would be any less than those calculated by Justice
McWilliam under the actual circumstances. But for the loss of
employment would there still have been damages? I am satisfied
there would have been. Would the damages have been the same is a
more difficult issue, but I do not believe I need to reach a
determination on that point. It is enough that significant
damages would have arisen regardless of the ultimate loss of
employment. I find therefore the first test has not been
met.
[19] While it is
not necessary to consider the second test, for fullness of
analysis I would like to do so. Was the purpose of the payment to
Dr. Ahmad of $488,000 to compensate a loss of employment? No. I
have already stated my views on the purpose test though I wish to
expand. The calculation in determining this amount included three
years while Dr. Ahmad was in fact still employed at AECL. So,
even if I accept that the method of calculation of the damages at
large is determinative of their nature, clearly the full amount
cannot possibly be for loss of employment, as Dr. Ahmad did not
lose his employment for three of the years under consideration.
However, I do not accept that the method of calculation of the
damages in tort are conclusive of their nature.
[20] The
Respondent did not draw a distinction between the demotion in
1984 and the loss of employment in 1987. He characterized what
happened in 1984 as a constructive dismissal and consequently,
made the closer tie between damages and the loss, albeit
constructive, of employment; that is, the purpose was to
compensate for loss of employment. He was unable to provide me
with any precedent where a court has decided that damages from a
constructive dismissal, where employment actually continued, had
been held to constitute a retiring allowance. I do not find this
surprising. One can only imagine the Registered Retirement
Savings Plan driven tax planning possibilities which would
captivate the minds of this country's tax intelligentsia. A
constructive dismissal, by its very term, denotes no actual loss
of employment. I am not prepared to find that a breach of
contract constituting a constructive dismissal, in the context of
a tort action for inducement of breach of contract, is a loss of
employment as contemplated by the definition of retiring
allowance, where the employment continues for three years after
the breach.
[21] What was
the purpose of the damages award? To compensate Dr. Ahmad for the
wrong done to him in stripping him of his ability to work as a
nuclear researcher. The purpose cannot be simplified to a mere
mathematical calculation of money lost by a loss of employment
three years after the wrong committed. This is demeaning to a
scientist who has already suffered the degradation and
humiliation of questionable corporate action. The purpose of the
damages was to provide some dignity, some respect and some
justification to a scientist who stood by his ethical standards
and paid a high price for it. I will not take away those restored
traits from Dr. Ahmad by finding that the general damages were
merely in respect of loss of employment. They represent much
more. The Court of Appeal recognized this in Dr. Ahmad's
appeal, when it stated:
As the
trial judge noted, damages for inducing breach of contract are at
large and need not be referable to actual monetary loss.
Given the high professional reputation enjoyed by the
respondent in the scientific community, and his stature within
AECL, we believe that the assessment of damages was fair and
reasonable.
[My emphasis]
[22] There is a
distinction between the loss of a particular job with a
particular employer, which is contemplated by the "retiring
allowance" definition, and the loss of a career as a nuclear
researcher. The latter is a much greater wrong that falls well
outside the definition of a retiring allowance.
Issue
[23] Is the
amount described as pre-judgment interest caught by
paragraph 12(1)(c) as interest?
Appellant's Argument
[24] The
Appellant argues that interest is only exigible if there is a
principal amount owing. Here, as the damages arose from a tort
action, there was no debt owing until determined by a court that
damages should be awarded, and in what amount. The Appellant
relies on statements of Justice Thurlow in Huston et al. v.
M.N.R. in which he
indicates that just because something is called interest, doe not
make it so. Justice Thurlow went on to say:
... No case
of which I am aware goes so far as to hold such an amount, call
it interest or damages or compensation or any other name, to be
interest or income when there was neither interest accruing in
fact on the "principal" amount during the material
period nor any right to the "principal" amount vested
in the taxpayer during that period.
Judge Bowie
of this Court referred to the Huston case in his recent
decision of Coughlan v. The Queen,
though distinguished it in deciding pre-judgment interest in that
case was interest, as it was based on liquidated amounts
wrongfully withheld. The Appellant argues no such liquidated
amounts wrongfully withheld exist in the case before
me.
Respondent's Argument
[25] The
Respondent's position is that the pre-judgment interest is a
separate specifically calculated amount of interest caught by
paragraph 12(1)(c) of the Act. He cites section 128
of the Ontario Court of Justice Act as supportive of his
position that the amount is appropriately characterized as
interest. Section 128 reads:
128(1) A person who is entitled to
an order for the payment of money is entitled to claim and have
included in the order an award of interest thereon at the
prejudgment interest rate, calculated from the date the cause of
action arose to the date of the order.
[26] He also
relies on comments in the Federal Court of Appeal expropriation
case of Shaw v. Canada to suggest that
if an amount is calculated as a discrete sum, it is not merged in
the total compensation paid. Finally, he relies on
Judge Bowie's finding in Coughlan that an amount
awarded as interest on liquidated amounts wrongfully withheld
represent interest, not incremental damages.
Analysis
[27] Can an
amount labelled "interest" be something other than
interest? Certainly. The Minister has acknowledged such in
IT-365R2 where it is stated:
Where an
amount in respect of damages for personal injury or death has
been awarded by a Court or in an out-of-court settlement, no part
of such amount will be income to the recipient even though the
amount includes or is augmented by an amount which, pursuant to
the terms of the Court order or the settlement agreement, is
referred to as interest. ...
What is
termed "interest" is not interest for purposes of
paragraph 12(1)(c). In the case before me, the Court has
not brought into income the amount called interest on the libel
damages. Again, an acknowledgement that not all payments called
interest are interest for purposes of paragraph 12(1)(c).
A common theme in the government's treatment of these
non-interest amounts appears to be that if the award itself is
not taxable, the so-called interest attached to it is likewise
not taxable. This is an overly simplistic response. It is
necessary to delve somewhat deeper into the true nature of the
pre-judgment interest in the case before me.
[28] The
starting point for the determination of the nature of an interest
payment is the oft-cited definition of the Supreme Court of
Canada in Re The Validity of Section 6 of the Farm Security
Act, 1944 of the Province of Saskatchewan:
Interest is, in general terms, the return or consideration or
compensation for the use or retention by one person of a sum of
money, belonging to, in a colloquial sense, or owed to, another.
...
But the definition, as well as the obligation, assumes that
interest is referable to a principal in money or an obligation to
pay money. Without that relational structure in fact and whatever
the basis of calculating or determining the amount, no obligation
to pay money or property can be deemed an obligation to pay
interest.
There must
be a relational structure between the interest and the principal
amount. The Respondent suggests that the relationship existed
from the time of the cause of action as Dr. Ahmad had a right at
that point. But what right did he have? He had a right to bring
an action, but I am not satisfied that prior to the judgment it
can be said he had a right to compensation for his loss. Until
the judgment, it had not been determined whether he had even been
wronged let alone whether he had suffered a loss from such wrong,
and how much that loss was worth. I harken back to Justice
Thurlow's statement cited earlier suggesting there must be a
right to a principal amount.
[29] Judge Bowie
referred to Justice Thurlow's comments in the Coughlan
case, recognizing the pre-judgment interest may or may not be
income for tax purposes depending on the circumstances. In
Coughlan, the right to an indemnity arose as a matter of
contract, and the obligation to pay interest ran as a matter of
contract from the date that Coughlan's right to
indemnity arose. Coughlan had to sue on his contract of
indemnity to get the amount wrongfully withheld. Judge Bowie
found that the interest arising was, as such, a liquidated amount
wrongfully withheld and had the characteristics of income. He
went on to indicate, however, there remains a difference between
pre-judgment interest on a debt or other liquidated amount
wrongfully withheld on the one hand, and an award of damages on
the other.
[30] I am
dealing with damages arising in tort, not contract. There is no
liquidated amount wrongfully withheld by Ontario Hydro that is
akin to the Coughlan situation. Dr. Ahmad had to fight
long and hard to prove that he had been wronged by Ontario Hydro,
not by the breach of any contract with Ontario Hydro, of which
there was none, but by their tortious activities. In these
circumstances, I do not view Dr. Ahmad as having any right which
vested in him prior to judgment to a principal amount. Failing
that, there can be no interest until judgment. This position is
supported by the characterization of damages in an inducement of
breach of contract action as damages at large given to assessment
by impression not addition. I am satisfied that the pre-judgment
interest in this case has the character of being part of such
damages, and not as a separate income item.
[31] I allow the
appeal and refer the matter back to the Minister for
reconsideration and reassessment on the basis that the general
damages do not constitute a retiring allowance pursuant to
subsection 248(1) and that the pre-judgment interest is not
interest for purposes of paragraph 12(1)(c) of the
Act. Costs to the Appellant.
Signed at
Ottawa, Canada, this 11th day of September, 2002.
J.T.C.C.
COURT FILE
NO.:
2001-4304(IT)G
STYLE OF
CAUSE:
Dr. Syed Y. Ahmad and
Her Majesty the Queen
PLACE OF
HEARING:
Edmonton, Alberta
DATE OF
HEARING:
August 8, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge
Campbell J. Miller
DATE OF
JUDGMENT:
September 11, 2002
APPEARANCES:
Counsel
for the Appellant: Warren J.A. Mitchell, Q.C.
Counsel
for the
Respondent:
Louis A.T. Williams
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Warren J.A. Mitchell, Q.C.
Firm:
Thorsteinssons
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-4304(IT)G
BETWEEN:
DR. SYED Y.
AHMAD,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on August 8, 2002, at Edmonton, Alberta, by
the
Honourable Judge Campbell J. Miller
Appearances
Counsel
for the Appellant: Warren J.A. Mitchell, Q.C.
Counsel
for the
Respondent:
Louis A.T. Williams
JUDGMENT
The appeal from the assessment of tax made under the Income
Tax Act for the 1997 taxation year is allowed, with costs,
and the assessment is referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis
that the general damages do not
constitute a retiring allowance pursuant to
subsection 248(1) and the pre-judgment interest is not
interest for purposes of paragraph 12(1)(c) of the
Act.
Signed at
Ottawa, Canada, this 11th day of September, 2002.
J.T.C.C.
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