Docket: 2008-1102(IT)I
BETWEEN:
GERALDINE M. FRIZZLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal
heard on November 6, 2008, at Sydney, Nova Scotia
Before: The Honourable
Justice Wyman W. Webb
Appearances:
|
Agent for the Appellant:
|
George
Beverly Frizzle
|
|
Counsel for the Respondent:
|
Kendrick Douglas
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under
the Income Tax Act for the Appellant’s 2006 taxation year is allowed, without costs, and the matter is referred
back to the Minister of National Revenue for reconsideration and reassessment
on the basis that the amount to be included in the income of the Appellant for
2006 pursuant to paragraph 6 (1)(f) of the Income Tax Act is to be
reduced by $10 and in the event that the Appellant has not been allowed to
claim a deduction for legal fees of $8,488, that the Appellant be allowed a
deduction for this amount in computing her income for 2006.
Signed at Vancouver, British Columbia, this 27th day of November 2008.
“Wyman W. Webb”
Citation: 2008TCC651
Date: 20081127
Docket: 2008-1102(IT)I
BETWEEN:
GERALDINE M. FRIZZLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The issue in this appeal is
whether a lump sum payment received by the Appellant in 2006, as a settlement
of an action brought by the Appellant against her former employer and the insurance
company contracted by her former employer to provide an Income Protection Long
Term Plan (the “wage loss plan”), should be included in the income of the Appellant
in 2006 pursuant to paragraph 6 (1)(f) of the Income Tax Act. The wage
loss plan would be a disability insurance plan for the purposes of subparagraph
6(1)(f)(ii) of the Income Tax Act. Paragraph 6 (1)(f) of the Income
Tax Act provides, in part, as follows:
6.
(1) 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
(i) a sickness or accident insurance plan,
(ii) a disability insurance plan, or
(iii) an income maintenance insurance plan
to
or under which the taxpayer's employer has made a contribution,…
[2]
The Appellant had been employed as
a bank teller at the Canadian Imperial Bank of Commerce (“CIBC”). She became
disabled, and was unable to work. Her employer had paid the premiums under the
wage loss plan and she started receiving periodic payments under this plan in the
amount of $1,055 per month, commencing September 27, 2001. In early 2002, the
insurance company stopped making payments. There is no dispute that the amounts
that the Appellant received as payments under this plan in 2001 and 2002 were
taxable to her.
[3]
The Appellant commenced an action
against her former employer and the insurance company. The Appellant and her
spouse attended a settlement conference in early 2006. The defendants in the
action made a settlement offer of $20,500 to settle all claims that the Appellant
had against them. The Appellant accepted this offer and this amount was paid to
her in 2006.
[4]
The Appellant submitted copies of
the T4A slips issued for 2001 and 2002 by the insurance company. In each case
the T4A slip stated the amount of income (which was the amount that was paid to
the Appellant under the wage loss plan) and the amount of income tax deducted.
The Appellant also submitted a copy of the T4A slip issued for 2006, which showed
that the lump sum payment amount of $20,500 was income but also indicated that
no income tax had been deducted from such payment. While the Appellant argued
that the failure to deduct income tax from the $20,500 lump sum payment was
significant, the failure to deduct income tax does not, in and of itself, make
the payment non-taxable. It is the nature of the payment and what it was
intended to replace that will determine whether the amount should be included
in the Appellant’s income, not whether an amount of income tax was deducted by
the payer from the payment.
[5]
The Appellant also relied on a
decision of this Court in Landry v. The Queen 98 DTC 1416, [1998] 2
C.T.C. 2712. However, that decision was rendered in 1998, which was before the
Supreme Court of Canada rendered its decision in Tsiaprailis v. The Queen,
2005 SCC 8, 2005 DTC 5119, [2005] 2
C.T.C. 1, 248. The majority of the Justices of the Supreme Court of Canada in
that case determined that the portion of a payment for a settlement of a claim
under a disability insurance plan that relates to the arrears of payments that
should have been made periodically will be included in the income of the
recipient, if the payment of the periodic payments would have been included in
the income of the recipient. The part of the settlement amount that extinguishes
the claim for future benefits would not be taxable. In part, Justice Charron of
the Supreme Court of Canada stated as follows:
11 When
the reasoning in Armstrong is applied to the present case, it is clear that
monies paid in settlement of any future liability under the disability
insurance plan were not paid “pursuant to” the plan because there is no
obligation to make such a lump sum payment under the terms of the plan. The
part of the settlement for future benefits is in the nature of a capital
payment and is not taxable under s. 6(1)(f) of the Act.
…
15 The
determinative questions are: (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? In this case, the evidence
of what the amount was intended to replace is clear and cogent. As my colleague
noted, the evidence established that the negotiated lump sum was “based on
three aspects of liability under the policy: an amount to extinguish Ms.
Tsiaprailis' claim for accumulated arrears, an amount to extinguish her claim
for future benefits, and an amount to extinguish her claim for costs” (para. 54
(emphasis added)). Hence, it cannot be disputed on the evidence that part of
the settlement monies was intended to replace past disability payments. It is
also not disputed that such payments, had they been paid to Ms. Tsiaprailis,
would have been taxable.
16 To
conclude that the payment for past benefits was not made “pursuant to” the
insurance disability plan in these circumstances is to render the surrogatum
principle meaningless. Hence, I would conclude that the portion of the lump sum
allocated to the accumulated arrears is taxable and I would dismiss the appeal,
with no order as to costs.
[6]
In this particular case, the
insurance company stopped paying benefits in early 2002. As a result, by early
2006, when the settlement was reached, the arrears of payments to that point,
based on a payment of $1,055 per month, exceeded $50,000. Therefore the arrears
as of the date of settlement were more than double the amount that the Appellant
accepted in settlement. No documentation was introduced to show how the lump
sum settlement amount of $20,500 was determined or to provide any assistance in
determining how the amount should be allocated. It seems reasonable that the components
of the claim made by the Appellant would be the same as in the claim described
in the Tsiaprailis case. It would seem reasonable that there would be
three components -- the amount claimed for the arrears (i.e. the missed
payments from January 2002 to the date of payment), the claim for future
payments, and an amount for costs. Without any indication of how the amount of
$20,500 was determined or how it was to be allocated, I am unable to conclude
that the Appellant has established that any significant amount should be
allocated to the extinguishment of the claim for future payments. The Appellant
will be 65 in 2009 at which time the payments under the wage loss plan would
have ceased in any event. As a result the time period related to the arrears
was longer than the time period for potential future payments as of the date of
the settlement.
[7]
The amount received was significantly
less than the amount of the arrears as of the date of payment and it seems
reasonable to assume that almost the entire settlement amount received was to
compensate the Appellant for the payments that were missed. Since the intent of
the settlement amount would therefore have been to replace in part the periodic
payments that the Appellant is claiming that she ought to have received under
this disability insurance plan and since the Appellant would have been required
to include the periodic payments in her income if she would have received such
periodic payments, then almost the entire lump sum amount would be included in
the income of the Appellant pursuant to paragraph 6 (1)(f) of the Income Tax
Act.
[8]
In the Reply the Respondent acknowledges
that the Appellant incurred legal fees of $8,488. These legal fees were
deducted by the Appellant’s lawyer from the settlement amount that was paid in 2006
and therefore these fees were paid in 2006. There is no mention in the Reply of
whether the Appellant was allowed a deduction for these legal fees. In
Farrell v. The Queen 2005 TCC 352, 2005 DTC 842, [2005] 3 C.T.C.
2360 Justice Campbell confirmed that legal fees paid to recover an amount under
a disability insurance plan were deductible under paragraph 8 (1)(b) of the Income
Tax Act.
[9]
It is not clear whether the Appellant
was allowed a deduction for these legal fees and the matter should be referred
back to the Minister of National Revenue for reconsideration and reassessment
on the basis that if the Appellant has not been allowed to claim a deduction for
legal fees of $8,488, then the Appellant should be allowed to claim a deduction
for this amount. Since, pursuant to subsection 171(1) of the Act the
matter can only be referred back to the Minister of National Revenue for
reconsideration and reassessment if the appeal is allowed, the appeal will be
allowed to allocate $10 of the settlement amount to the settlement of the claim
for future payments. The amount allocated to the extinguishment of her claim
for future payments would not be included in the income of the Appellant
pursuant to paragraph 6 (1)(f) of the Income Tax Act.
[10] As a result, the appeal is allowed, without costs, and
the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the amount to be included in
the income of the Appellant for 2006 pursuant to paragraph 6 (1)(f) of the Income
Tax Act is to be reduced by $10 and in the event that the Appellant has not
been allowed to claim a deduction for legal fees of $8,488, that the Appellant
be allowed a deduction for this amount in computing her income for 2006.
Signed at Vancouver, British Columbia, this 27th day of November 2008.
“Wyman W. Webb”
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