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Citation: 2005TCC181
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Date: 20050309
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Docket: 2004-943(IT)I
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BETWEEN:
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DON J. SWITZER,
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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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REASONS FOR JUDGMENT
Miller J.
[1] In 2001, Mr. Don Switzer received
a payment pursuant to a negotiated settlement with Great-West
Life Assurance Company in the amount of $53,455. Mr. Switzer did
not bring any of that amount into his 2001 income for income tax
purposes. The position of the Minister of National Revenue is
that the portion representing an accrued but unpaid disability
benefit is taxable pursuant to paragraph 6(1)(f) of the
Income Tax Act. This case was heard a week before the
Supreme Court of Canada heard the appeal in the case of
Tsiaprailis v. Canada.[1] I reserved rendering my
judgment pending clarification by the Supreme Court of Canada as
to the application of paragraph 6(1)(f) to lump sum
payments made pursuant to a negotiated settlement. The Supreme
Court of Canada decision came out on February 25, 2005. Based on
that decision, I must reject Mr. Switzer's argument that
settlement proceeds representing a portion of past benefits
payable are not taxable.
[2] Since 1977, Mr. Switzer worked as
an aircraft technician with Spar Aerospace Limited, formerly
Canadian Aviation Electronics, and formerly Northwest Industries.
In February 1996, he became president of the local union, a
position which involved labour negotiations and caused him to
cross paths with a certain individual in the Human Resources
Department of the employer. This, according to Mr. Switzer,
resulted in a litany of woes. By August 1996, he was dismissed.
Arbitration did not commence for a year after that and it then
lasted for 22 days. On August 12, 1998, Mr. Switzer was
reinstated with an award. The payment of the award was further
delayed until July 1999 and approximately $33,000 was deducted
from the award, for which Mr. Switzer has never received an
accounting. During Mr. Switzer's reinstatement, he was fully
monitored by the employer.
[3] By August 1999, Mr. Switzer was
suffering depression, and a psychologist's report indicated
that he could not continue to function safely in his position. He
was put on medication. In November 1999, Dr. Hibbard confirmed
that Mr. Switzer remained disabled and should continue treatment.
Mr. Switzer sought short-term and long-term disability but was
denied.
[4] Mr. Switzer stated that
unbeknownst to him at the time, his employer terminated his
entitlement to benefits. Mr. Switzer provided a copy of a GWL
claimant's explanation of benefits form dated October 23,
1999 stating: "expenses incurred after termination of
insurance are not covered". He was not made aware of this
until after he ultimately settled with GWL.
[5] The Employee Benefits Handbook
sets out the short-term ($40 a week for 15 weeks) and long-term
(60% of regular monthly earnings) disability entitlements.
[6] Mr. Switzer hired a lawyer to
pursue his claim against GWL. On July 12, 2001, his lawyer
advised him by memo:
1. You will be
terminated from insurance coverage immediately the agreement is
signed;
2. They will
pay the current LTD arrears, plus any medical benefits which
would be normally covered under that clause of the policy to the
policy limits during the term of the policy until it is
discontinued; policy limit for dentures on an annual basis is
$500; they calculate the arrears of LTD currently to be $37,600;
they would also pay about $600 being their responsibility under
the STD provision; they would pay expenses for medical reports
and treatment within the policy limits.
3.
...
In 2001, Mr. Switzer accepted a settlement of $53,455.81 and
signed a release which stated in part:
It is understood and agreed that this settlement is the
compromise of a disputed claim or claims and, that payment is not
to be construed as an admission of liability by Great-West Life
for payment of benefits to me pursuant to the Policy, and that
Great-West Life expressly denies such liability.
[7] Of the $53,455.81, $3,455 went
directly to costs. From the remainder, Mr. Switzer's
lawyer retained approximately $7,661 in legal expenses.
Mr. Switzer received the balance. The Respondent varied its
position from the assessment, to acknowledge that, of the $50,000
initially assessed as income subject to tax, only the portion
reflecting the short-term and long-term disability payments
should be so included. The short-term disability was $600. The
Respondent calculated the long-term disability as being 84 weeks
(January 31, 2000 to September 12, 2001) multiplied by $501.33,
being the amount assumed in the Reply to the Notice of Appeal,
for a total of $42,711.72. Mr. Switzer presented no evidence to
refute the amount assumed in the Reply.
Analysis
[8] Paragraph 6(1)(f) of the
Act is the operative section and it reads:
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:
(a) ...
(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) ...
(ii) a disability insurance plan
[9] In the recent Supreme Court of
Canada case of Tsiaprailis, the Court was similarly
dealing with a taxpayer who received a lump sum payment
representing her entitlement to past benefits under an insurance
plan, as well as 75% of present value of future benefits plus an
amount for costs, disbursements and GST. The issue was the
application of paragraph 6(1)(f) of the Act to the
portion intended to compensate her past benefits. As the Supreme
Court of Canada stated, the question turns on whether the
amount allocated for past benefits was "payable on a
periodic basis" and "pursuant to a liability insurance
plan". It found yes on both counts. It went on to analyze as
follows:
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.
[10] I find it as equally clear in Mr.
Switzer's case that part of the $50,000 payment was intended
to replace past benefits. This is evident from:
(i) the statement of claim filed
by Mr. Switzer against GWL seeking an amount equal to unpaid
disability payments; and
(ii) the memo from Mr.
Switzer's lawyer of July 12, 2001 confirming GWL will pay
short-term and long-term disability arrears.
Yet Mr. Switzer makes the point that as far back as September
1999, GWL had terminated his insurance coverage, and therefore
any payments from GWL after that could not have been for
benefits. This argument is not supportable, as the very basis for
Mr. Switzer's lawsuit was the he was covered and GWL was
obligated to pay benefits in accordance with that coverage. The
lump sum settlement was determined on that basis
notwithstanding that Mr. Switzer signed a release
acknowledging payment is not to be construed as an admission of
GWL's liability. A similar such denial of liability was
present in the Tsiaprailis case.
[11] In answer to the Supreme Court of
Canada's second question, again there is no question the amount
of past benefits would have been taxable had they been paid to
Mr. Switzer periodically as long-term disability payments.
[12] The Tsiaprailis case and the
case before me are simply too similar to do anything other than
answer the two questions posed by the Supreme Court of Canada in
a manner that renders $42,711.72 received by Mr. Switzer as
taxable pursuant to paragraph 6(1)(f). The arguments that
might have swayed me otherwise are the arguments incorporated
into the dissenting decision of the Supreme Court of Canada. That
is unfortunate for Mr. Switzer.
[13] As this is less than the original
assessment amount of $50,000, the appeal is allowed and referred
back to the Minister for reassessment and reconsideration on the
basis that the amount of $42,711.72 is to be brought into income
in the 2001 taxation year, pursuant to paragraph 6(1)(f)
of the Income Tax Act.
Signed at Edmonton, Alberta, this 9th day of March, 2005.
Miller J.
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