Citation: 2007TCC409
Date: 20070716
Docket: 2007-520(IT)I
BETWEEN:
TREVOR DAVIES,
Appellant
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on June 26, 2007 at Ottawa, Canada.)
V.A. Miller, J.
[1] Trevor A. Davies is
appealing from a Notice of Confirmation for the 2004 taxation year, in which
the Minister of National Revenue upheld the reassessment which included the
amount of $16,071 in Mr. Davies’ income. The Minister upheld the reassessment
on the basis that the payment of $16,071 received by Mr. Davies from his former
employer, Alcatel Canada Inc. was interest income in accordance with paragraph 12(1)(c)
of the Income Tax Act.
[2] The parties
submitted an Agreed Statement of Facts, which was filed as Exhibit A-2, which
included four schedules. The relevant portions of the Agreed Statement of
Facts are as follows:
1. The Appellant was employed with Alcatel
Canada Inc. (“Alcatel”) until his termination on April 24, 2001.
2. On July 18, 2002, the Appellant brought an
action (the “Action”) against Alcatel for wrongful dismissal in the Ontario
Superior Court of Justice. Attached hereto as Schedule “A” is a true copy of
the Statement of Claim filed in support of the Action.
3. In paragraph 1 of the Statement of Claim,
the Appellant claimed damages from Alcatel in respect of, among other things,
pre-judgment interest.
4. On April 1, 2004, the Action was settled
out of court.
5. On April 2, 2004, Alcatel paid the
Appellant a sum of money pursuant to the terms of the April 2004 settlement,
including $16,071 for pre-judgment interest, calculated from the date of the
Appellant’s termination at the rate of 5.8% (such being the court-appointed
rate applicable in respect of actions commenced in the second quarter of 2001).
Attached hereto as Schedule “B” is a true copy of a letter to the Appellant
from Dan Palayew, of Ogilvy Renault, dated April 2, 2004, enclosing payment
pursuant to those terms.
6. Alcatel issued a Statement of Investment
Income (T5 slip) to the Appellant, indicating that Alcatel had paid the
Appellant an amount of $16,071.50 in interest from Canadian sources in the 2004
taxation year. Attached hereto as Schedule “C” is a true copy of the T5 slip.
7. Prior to January 1, 2004, the Minister of
National Revenue’s administrative position concerning pre-judgment interest
received in respect of damages or settlement amounts arising from wrongful
dismissal actions was that such amounts were non-taxable.
8. In May, 2004, this administrative position
was changed: effective for court orders or settlements dated on or after
January 1, 2004, such pre-judgment interest amounts are treated as being
taxable. Attached hereto as Schedule “D” is a copy of Income Tax Technical
News 30 dated May 21, 2004, in which at pages 12 to 14 this
change was announced.
9. This change was not the result of any
amendment to either the Income Tax Act or the Income Tax Regulations.
APPELLANT’S ARGUMENT
[3] Mr. Davies said
that there were three bases for his appeal. His first argument concerned the
change in Canada Revenue Agency’s (CRA) policy to tax pre-judgment interest in
respect of awards of damages for wrongful dismissal. This change is stated at
paragraphs 7 and 8 of the Agreed Statement of Facts. Mr. Davies said that if he
had known there was a change in the policy by CRA it would have been a
consideration in the settlement agreement he negotiated with Alcatel Canada
Inc. Mr. Davies argued that this change in policy which is applied
retroactively is unfair and discriminatory. He referred to the CRA’s web pages entitled
“Fairness and Taxpayer Bill of Rights”.
[4] The Court does not
interpret Mr. Davies’ first argument as raising a Charter challenge.
[5] Mr. Davies’ second
argument was based on Interpretation Bulletin 396R dated May 29, 1984 and, in
particular, a portion of paragraph 12 thereof which states:
This position arises from the fact that a liability for damages is
considered to originate on the date on which an injury occurred and there is
therefore an amount owing to, or belonging to, the injured party from that
date. It is immaterial that the amount owing was not determinable until a later
date because once the right to receive damages has been established, that right
exists from the time at which the injury giving rise to those damages
occurred.
Mr. Davies relied on this statement for the
proposition that interest on the award of wrongful dismissal damages would have
accumulated from the date his employment was terminated. The portion of the
interest that accumulated in 2001, 2002 and 2003 would not have been taxable
according to the exemption policy that CRA applied prior to January 1, 2004.
[6] Mr. Davies
supported this argument by reference to a document from CRA’s website entitled:
“Current Income Tax Interpretation Bulletins” and, in particular, the following
paragraph:
ITs do not have the force of law
…
Subject to the above, an interpretation or position contained in an
IT generally applies as of the date on which it was published, unless otherwise
specified. If there is a subsequent change in that interpretation or position,
and the change is beneficial to taxpayers, it is usually effective for future
assessments and reassessments. If, on the other hand, the change is not
favourable to taxpayers, it will normally be effective for the current and
subsequent taxation years or for transactions entered into after the date on
which the change is published.
The conclusion of Mr. Davies’ second argument is that
as a result of the foregoing, CRA’s change in policy should apply to only that
portion of the interest which he estimated was accumulated in 2004.
[7] Mr. Davies’ final
argument was that in the alternative, subsections 12(4) and 12(9) apply. As a
result, interest accrued each year from the date his employment was terminated
and the interest should be included in his income in each of the years 2001,
2002, 2003 and 2004 as follows:
|
2001
|
$3,694.96
|
|
2002
|
$5,351.83
|
|
2003
|
$5,351.83
|
|
2004
|
$1,671.53
|
[8] I am unable to
agree with Mr. Davies’ submissions. It is unfortunate that Mr. Davies’ lawyer
did not learn of CRA’s change in policy. According to Exhibit A-2, Tab D, this
change in policy was discussed at the Canadian Tax Foundation Conference held
in Montreal from September 21 to
23, 2003.
ANALYSIS AND CONCLUSION
[9] The Court
interprets Mr. Davies’ first argument as raising the issue of estoppel. That
is, he said that he relied on the published policy of CRA that it would exempt
from tax all pre-judgment interest payable in respect of awards of damages for wrongful
dismissal. In fact, in his Notice of Appeal, he asked that, “to ensure fairness
and eliminate discrimination, pre-judgment interest in a wrongful dismissal
case that was completed or settled during the period 1 January 2004 to 21 May
2004, should be subject to an exemption to this retroactive change to CRA’s
longstanding non-taxable assessment of pre-judgment interest in wrongful
dismissal cases.”
[10] The case law is
clear that an assessment must be made pursuant to the provisions of the Income
Tax Act and it is not open to a taxpayer to set up an estoppel to prevent the
operation of the statute. (See, for example, Woon v. M.N.R. [1950]
C.T.C. 263 at paragraph 17, where Cameron, J. stated:
17 It
is not necessary in this case, however, to consider the effect of the cases to
which reference has just been made. It is sufficient to state that the
assessment here under appeal was made pursuant to the terms of a statute and
that, therefore, it is not open to the appellant to set up an estoppel to prevent
its operation.
As well, I point to M.N.R. v.
Stickel [1972] C.T.C. 210 at paragraph 70, where Cattanach, J. stated:
70 In
short, estoppel is subject to the one general rule that it cannot override the
law of the land.
[11] Paragraph 12(1)(c)
of the Income Tax Act reads as follows:
12. (1) There shall be included in computing the income of a
taxpayer for a taxation year as income from a business or property such of the
following amounts as are applicable
…
(c) subject to subsections (3) and (4.1),
any amount received or receivable by the taxpayer in the year (depending on the
method regularly followed by the taxpayer in computing the taxpayer's income)
as, on account of, in lieu of payment of or in satisfaction of, interest to the
extent that the interest was not included in computing the taxpayer's income
for a preceding taxation year;
[12] In Tourigny v. The Queen, 2006 CarswellNat 4546,
Lamarre-Proulx, J. had before her a fact situation very similar to the present
case. At paragraphs 26 to 29 of her Reasons for Judgment she found:
26. The judgment awarded no amount in damages
other than that awarded for notice. The judge therefore awarded no amount for
damages, as he stated in paragraph 192 of his Reasons. He adds in paragraph 212
that the same is true for the other requests, specifically damage to his
reputation, since according to the Judge, there was an absence of bad faith on
the part of the employer and an absence of a legal bond. Nowhere in this
judgment are there damages granted other than contractual damages related to
the loss of employment.
27. The definition of a retiring allowance
specifically includes amounts received as damages in respect of the loss of
employment. The amount of $105,000 must accordingly be included in calculating
the income of the Appellant for the year in which he received it pursuant to
subparagraph 56(1)(a)(ii) of the Act.
28. With regard to the interest paid, this is
indeed interest and must be included in the computation of the Appellant's
income during the year where he received it pursuant to paragraph 12(1)(c) of
the Act.
29. The damages were calculated on the basis of
a patrimonial right acquired by the employee at the time that the cause of
action occurred. This is compensation in the form of notice that the employer
was required to give. Under the terms of the judgment, the interest began from
the date of agreement on this amount.
[13] I agree with the
decision of Lamarre-Proulx, J. The amount in issue in the present case has been
characterized by both parties as interest income and has been characterized by
the documentary evidence as interest income. See Exhibits A-3, A-2 at Tab C.
[14] As a result, I find
that the amount of $16,071.50 is interest income that must be included in
income in the year it was received, that is 2004, in accordance with paragraph
12(1)(c) of the Income Tax Act.
[15] However, I will go
on to deal with the further arguments that were made by Mr. Davies. The answer
to Mr. Davies’ second argument also lies in the application of the principle of
estoppel. I repeat, the Minister can not be estopped from applying the law, in
spite of any prior rulings or policies he may have had.
[16] Mr. Davies, in his
third argument, raised the argument that the interest amount should be apportioned
between his 2001, 2002, 2003 and 2004 taxation years on the basis that
subsections 12(4) and 12(9) apply.
[17] Subsection 12(4)
requires the inclusion of interest on an accrual basis for interest with
respect to an investment contract.
[18] Mr. Davies did not
have an investment contract. He had a wrongful dismissal action against his
former employer. When one reads the definitions in subsection 12(11), it
confirms that the right Mr. Davies held was not an investment contract.
[19] Subsection 12(11)
defines the term “anniversary date” that is used in subsection 12(4). It reads:
Anniversary date of an investment contract means
(a) the day that is one year from the day immediately
preceding the date of issue of the contract,
(b) the day that occurs at every successive one year interval
from the day determined under paragraph (a), and
(c) the day on which the contract was disposed of;
There was no contract issued in the
present case.
[20] For the above
reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 16th day of July, 2007.
"V.A. Miller"
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