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Citation: 2008 TCC 418
Date: 20080722
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Docket: 2007-3396(IT)I
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BETWEEN:
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EYVONE WILLIAMS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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ORAL REASONS FOR JUDGMENT
(Delivered from the Bench on June 18, 2008
at Toronto, Ontario)
Campbell J
[1] The appeal is in respect to the Appellant's
2004 taxation year.
[2] Ms. Williams is a Registered Nurse who worked for the City of Toronto since 1989, until she was involved
in an accident on August 10, 2001. She was unable to work for over two years.
[3] One of the benefits she received while working for the City was
involvement in a long-term disability insurance plan. This plan was funded by
both employer and employee premiums, with the City paying all of the premiums
up to August 2002, approximately one year after the accident, and the
Appellant paying the premiums to the plan after August 2002.
[4] The City paid the premiums for one year after the accident but since
the Appellant was still unable to return to work, she had to commence payment
of these premiums to maintain the plan.
[5] Ms. Williams continued to pay these premiums after August 2002
because her claim to Manufacturers Life Insurance (“ManuLife”) had not been
settled.
[6] She hired a lawyer and commenced her legal action against ManuLife
in late 2001. A settlement was reached in which ManuLife paid $57,500 to Ms.
Williams' lawyer, in trust, with $7,500 of that amount designated as legal
fees. From this total the solicitor actually withheld $21,173.58 for legal fees
plus disbursements.
[7] ManuLife issued a T4A to Ms. Williams, which at box 28 of the form, included under the
heading "other income", the amount of $50,000 and referenced it in this
form as “wage loss replacement”.
[8] The Minister of National Revenue (the “Minister”) reassessed the
Appellant to include the amount of $50,000 ($57,500 total settlement less
$7,500 designated as legal fees in the settlement document) as income as per
the T4A slip issued by ManuLife in respect to a wage loss replacement payment.
[9] Ms. Williams was also permitted a deduction for legal fees incurred
to collect this payment in the amount of $21,173.
[10] The Minister further reassessed to recalculate
for the qualifying retroactive lump sum payment in respect to the wage loss
payment in accordance with information provided by the Appellant on form
T1198E. This meant that the $50,000 payment was allocated to the Appellant's
2002 and 2003 taxation years in the amount of $25,000 in each year.
[11] The Appellant was also given a deduction from
income of $1,492 in respect to employee premiums which she paid in 2002 and
2003 to the plan after her employer ceased to make those payments.
[12] This special method of recalculation of tax
was at the Appellant's request and the federal tax calculated according to form
T1198E was more beneficial to the Appellant than computing the tax on the
entire amount for the 2004 taxation year.
[13] According to the evidence of Randal King, the
Senior Claims Consultant with ManuLife, the plan which the City held was an
“administrative services only” plan. He explained that all financing was done
through the employer, with ManuLife administering the plan. He testified that
the Appellant made a request to ManuLife in June 2005 to have the payment
classified as an insurance benefit rather than taxable income as per the T4A
slip which had been issued.
[14] Mr. King checked with the taxation department
of ManuLife, which confirmed that the payment would be a wage loss replacement
amount. The Appellant's request to change this was refused.
[15] Mr. King testified that the disability
insurance payment would not be a taxable benefit if the policy states that they
are not taxable, and where the employee paid one hundred per cent of the
premiums.
[16] In this case the Appellant did not pay all of
the premiums except for a brief period after 2002 and her policy, according to
Mr. King's evidence, stated that it was a taxable benefit.
[17] The issues are: 1) whether the $50,000 payment
to the Appellant is a taxable benefit and, 2) if I decide the amount is not a
taxable benefit, whether the Appellant can deduct the legal fees of $21,173 and
employee premiums of $1,492 which she paid to this plan, both of which amounts
have been previously allowed as a deduction.
[18] It would have been helpful if I had been
provided with a copy of the policy or the plan which governed the Appellant's
entitlement to these benefits. In addition, I was given only the first page of
the full and final release document which the Appellant executed, Exhibit A-2,
when she settled her legal claim. Attached to this first page of the release
was one page showing the solicitor's account of fees and disbursements, with
the final payment to the Appellant.
[19] The first paragraph of the one page of this release
referred to the claim simply as being one for the payment of benefits
under the policy.
[20] The issue turns on whether the amount
allocated as benefits in the release was payable on a periodic basis pursuant
to a disability insurance plan in accordance with paragraph 6(1)(f) of the Income
Tax Act (the “Act”).
[21] Paragraph 6(1)(f) reads as follows:
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
…
(ii) a disability insurance plan, …
[22] The Supreme Court of Canada in the case of Tsiaprailis
v. Canada, [2005] S.C.J. No. 9, at paragraph 7, stated that the
tax treatment of a transaction is dependant upon what the amount or payment was
intended to replace. Therefore I must look at the nature and purpose of the
settlement payment to the Appellant to determine if it falls within the scope
of paragraph 6(1)(f) and therefore would be taxable. This is essentially a
factual determination.
[23] At paragraph 15 of that case the Supreme Court
set forth the following two questions which will be determinative:
(1) what was the payment intended to replace? And, if
the answer to that question is sufficiently clear, (2) would the replaced
amount have been taxable in the recipient's hands?
[24] Because I do not have the policy or the full
release agreement before me, I must rely solely on the evidence of the
Appellant and Mr. King of ManuLife, as well as a few sketchy documents to
answer these queries.
[25] The Appellant testified that she believed she
would obtain periodic payments once she instituted her legal action. Under the
insurance plan she believed she would be entitled to, and would receive,
approximately 75 per cent of her wages, although she settled for much less as
she required immediate income to pay her bills.
[26] Mr. King confirmed that ManuLife issued a T4A
slip to the Appellant when she settled her claim and signed the release and
allocated the amount as a wage loss replacement because the employer, the City
of Toronto, paid the premiums for one year after the accident and the policy
referred to amounts paid as taxable benefits according to the evidence. Again,
since I did not have the policy before me I have only the evidence of the
Appellant and Mr. King to rely on but I have no reason to believe that the
evidence does not reflect the reality of these documents.
[27] The evidence which I do have establishes that
the lump sum payment of $50,000 was taxable income payable to the Appellant in
lieu of payments on a periodic basis according to the evidence of both the
Appellant and Mr. King and in accordance with paragraph 6(1)(f) of the Act.
[28] The fact that the amount was less than the
Appellant felt she was entitled to will not change the nature and purpose of
the amount that she agreed to accept.
[29] In addition, I do not believe that the nature
of the policy changed when the Appellant took over payment of the premiums in
2002 in order to maintain this plan. The plan in effect at the time of the
accident was a plan in which the City of Toronto paid all of the premiums and, therefore, the policy remains within
the ambit of Mr. King's testimony, with the payment made to the Appellant
pursuant to this policy.
[30] The replaced amount would certainly have been
taxable in the recipient's hands.
[31] As an alternative argument, the Respondent
contends that if I did find that the $50,000 amount was not taxable, then there
can be no deduction for the legal fees under sections 8(1)(b) and 8(2) or for
the premiums which the Appellant paid after 2002.
[32] I agree that this would be the result and
although I have not completed calculations, I believe that the Appellant would
be in only a slightly better monetary position if I had allowed the appeal with
the $50,000 amount as a non-taxable benefit and denied the deduction for legal
fees and the premium amount which she paid.
[33] The Appellant has simply not met the onus or
burden of proof as no facts were introduced to overcome the Minister's assumptions.
[34] Accordingly, for these reasons I must dismiss
the Appellant's appeal.
[35] I wish to have it on record, and since you are
here, Ms. Aird, I understand that in dismissing the appeal that it will not
affect the Appellant's application which she originally made to have the
$50,000 amount allocated to 2002 and 2003 between each of those years rather
than 2004.
Signed at Charlottetown, Prince Edward Island, this 22nd day of July 2008.
Campbell J.
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