Tsiaprailis v. The Queen, docket 1999-3063-IT-G

Date: 20011220

Docket: 1999-3063-IT-G

BETWEEN:

VASILIKI TSIAPRAILIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Bowman, A.C.J.

[1]            This appeal is from an assessment for the appellant's 1996 taxation year.

[2]            The appellant was injured in an automobile accident. After receiving long-term disability benefits for a number of years under an insurance policy carried and paid for by her employer the insurer stopped paying her. She sued the insurer and after protracted negotiations between her solicitor and the insurer a compromise was reached and a lump sum settlement of $105,000 was paid. The question is whether this amount, less legal fees of $18,069, was taxable in the year of receipt under paragraph 6(1)(f) of the Income Tax Act or alternatively 6(1)(a). The assessment was based on paragraph 6(1)(f) but by an amendment to the reply to the notice of appeal the respondent raised paragraph 6(1)(a) as an alternative basis for upholding the assessment.

[3]            The evidence consisted of a statement of agreed facts and a common book of documents. The statement of agreed facts is as follows.

1.              Vasiliki Tsiaprailis was born on July 1, 1948.

2.              At all material times, the Appellant was employed at Tamco Limited, a private Ontario corporation with its principal place of business located in Windsor, Ontario. She had been performing her duties as a press machine operator since February 15, 1972.

3.              Pursuant to a Collective Bargaining Agreement between Tamco Limited and The International, United Automobile, Aerospace and Agricultural Implement Workers of America and its Local 195 (the "Union"), the Appellant was entitled to long term disability benefits under Policy G12402 with Dominion Life Assurance Company. Manufacturers Life Insurance Company ("Manulife") subsequently assumed Dominion Life Assurance Company's obligation to the Appellant.

Union Agreement, Tamco Limited and the Union,

(January 1, 1978)

Common Book of Documents, Tab 1.

4.              The insurance premiums were paid solely by Tamco Limited and no amount in respect of these premiums was included in the Appellant's income as a taxable benefit.

5.              Under Policy G12402, long term disability benefits are 66 2/3% of monthly earnings, with a maximum of $1,100, minus Canada Pension Plan benefits. The long term disability benefits are payable monthly, up to the 65th birthday of the employee or until he or she ceases to be totally disabled.

                                Policy G12402 of Tamco Limited,

                                Common Book of Documents, Tab 2.

6.              On November 10, 1984, the Appellant was involved in an automobile accident in the City of Windsor in which she sustained bodily injuries including emotional injuries associated with her bodily injuries, treatment and convalescence. The Appellant was permanently disabled as a result of the injuries sustained during the accident.

7.              From May 11, 1985 to May 10, 1993, the Appellant received the long term disability benefits, minus her Canada Pension Plan benefits. In May of 1993, the Appellant's entitlement to long term disability benefits was $1,100 a month, which sum was reduced by her CPP benefit of $353.25, for a total sum paid by Manulife of $746.75 a month.

8.              Manulife terminated the benefits and so advised the Appellant in July of 1993.

9.              On March 30, 1994, the Appellant commenced civil proceedings against Manufacturers Life Insurance Company for a declaration that she was entitled to the continuance of Long Term Disability Benefits from and after May 10, 1993 pursuant to the Group Policy G12402 entered into between Tamco Limited and Manulife Agreement. A Statement of Defence was filed by Manulife.

                                Statement of Claim,

                                Common Book of Documents, Tab 3.

                                Statement of Defence,

                                Common Book of Documents, Tab 4.

10.            In 1996, negotiations occurred between Donald W. Leschied, the lawyer representing the Appellant and Blair Groff, acting on behalf of Manulife, for the purpose of settling the civil proceedings.

                                Correspondence from Manulife dated July 22, 1996,

                                Common Book of Documents, Tab 5.

                                Correspondence from Leschied dated September 13, 1996,

                                Common Book of Documents, Tab 6.

                                Correspondence from Manulife dated October 7, 1996,

                                Common Book of Documents, Tab 7.

                                Correspondence from Leschied dated October 7, 1996,

                                Common Book of Documents, Tab 8.

                                Correspondence from Manulife dated October 8, 1996,

                                Common Book of Documents, Tab 9.

                                Correspondence from Leschied dated October 11, 1996,

                                Common Book of Documents, Tab 10.

11.            In October 1996, the Appellant entered into a settlement agreement with Manulife and received a lump sum payment of $105,000 in lieu of continued benefits pursuant to the terms of settlement. The sum of $105,000 essentially meant Manulife was paying:

(a)            the Appellant's entitlement to past benefits, plus interest;

(b)            75% of the present value of the Appellant's entitlement to future benefits under the policy;

(c)            $6,455 for costs, GST and disbursement.

                                Correspondence from Leschied dated October 11, 1996,

                                Common Book of Documents, Tab 10

12.            On October 18, 1996, the Appellant signed a Direction and Authorization instructing her solicitors in respect of the sum of $105,000. The Appellant paid $18,068.97 in legal fees, plus disbursements and GST.

                                Direction and Authorization,

                                Common Book of Documents, Tab 11.

13.            On October 18, 1996, a Full and Final Release was executed by the Appellant.

                                Full and Final Release,

                                Common Book of Documents, Tab 12.

14.            An Order was issued by the Ontario Court (General Division) dismissing the action without costs.

                                Order of Ontario Court (General Division),

                                Common Book of Documents, Tab 13.

15.            After the settlement and without the Appellant's knowledge or consent, Manulife issued and delivered a T4-A to the Appellant.

                                T4-A of Vasiliki Tsiaprailis,

                                Common Book of Documents, Tab 14.

16.            On or about April 30, 1997, the Appellant filed a T1 Adjustment Request reporting the settlement proceeds based upon the T4-A issued by Manulife and claiming legal expenses.

                                T1 Adjustment Request,

                                Common Book of Documents, Tab15.

17.            By letter dated June 26, 1997, R. Hume of Revenue Canada requested more information from the Appellant relating to the claim for legal expenses.

                                Letter from Hume dated June 26, 1997,

                                Common Book of Documents, Tab16.

18.            By notice of reassessment dated September 8, 1997, the Minister of National Revenue reassessed the Appellant for the 1996 taxation year to include the amount of $105,000 in income, but omitted to allow legal expenses.

19.            By letter dated October 8, 1997, Timothy Graham wrote to Revenue Canada on the Appellant's behalf, advising that the amount of $105,000 should not be included in income.

                                Letter from Graham dated October 8, 1997.

                                Common Book of Documents, Tab 17.

20.            By letter dated November 24, 1997, Lynn Vanstone advised Timothy Graham that a notice of reassessment would be issued, including the amount of $105,000 in income.

                                Letter from Lynn Vanstone dated November 24, 1997,

                                Common Book of Documents, Tab 18.

21.            By letter dated December 9, 1997, Timothy Graham wrote to Revenue Canada on the Appellant's behalf enclosing a copy of the Statement of Claim issued in respect of this matter and again stating that the settlement should not be included in the Appellant's income as the damage award arose out of her permanent disability and was not an income replacement policy provided by Manulife.

                                Letter from Graham dated December 9, 1997,

                                Common Book of Documents, Tab 17.

22.            By letter dated December 17, 1997, Lynn Vanstone advised Timothy Graham that Manulife confirmed the payment was made due to a disability insurance plan that was funded by the Appellant's employer. Therefore, it remained Revenue Canada's position that the benefit is taxable.

                                Letter from Lynn Vanstone dated December 17, 1997,

                                Common Book of Documents, Tab 20.

23.            By notice of reassessment dated December 15, 1997, the Minister further reassessed the Appellant for the 1996 taxation year to allow the amount of $18,069 as a deduction from income for legal expenses.

                                Notice of reassessment dated December 15, 1997,

                                Common Book of Documents, Tab 21.

[4]            The original collective agreement contains the following article 26.

ARTICLE 26 - HEALTH AND WELFARE

26.01        Effective from the date of the signing of this Agreement, the Company will pay on behalf of all eligible seniority employees and their eligible dependents as defined in the individual policies, hereinafter named, who are enrolled under any of the following plans, one hundred per cent (100%) of the premiums payable, or under such other plans as may be issued in replacement of or in substitution for any of the following:

Benefit Plan                                          Carrier                                   Policy No.

Ontario Health Insurance

Plan (OHIP)

Crown Life Extended                            Crown Life

Health Care Plan                    Insurance Co.                        37970

Group Life Insurance                            Mutual Life

                                                                Assurance Co.                       G 14767

Group Weekly Indemnity    Crown Life

                                                                Insurance Co.                        37970

Total Disability Insurance Crown Life

                                                                Insurance Co.                        37971

Dental Plan                                             Green Shield

                                                                Prescription

                                                                Services Inc.                          Basic 100

a)              The Company agrees to improve Item 2 to the intention to provide for a Thirty-Five (35 ¢ ) cent drug plan which plan will be effective not later than June 1st, 1978.

b)             The Company agrees that it will take all necessary steps to [unreadable] the present group life insurance and accidental death and [unreadable] insurance policy to be increased from $7,000.00 to $9,000.00 such increase to be effective not later than June 1st, 1978.

c)              Maximum under group weekly indemnity (Item 4) will be increased [unreadable] the present One Hundred and Twenty-Three ($123.00) Dollars per week to One Hundred and Sixty ($160.00) Dollars per week. Such increase to be effective immediately and this maximum amount will be [unreadable] as the Unemployment Insurance Act is amended.

d)             The Company agrees that Item 5, total disability insurance, as stated will be that provided by Crown Life Insurance Co. Group Policy No. 37971 and subject to and in accordance with the terms and provisions of that policy will be continued for the duration of the Agreement for all eligible employees.

e)              The Company agrees to institute the Green Shield Dental Plan Basic 100, which dental plan shall be effective not later than the 1st day of April, 1978.

26.02        The Company will continue to pay the premiums for insurance coverage on Items 26.01-1, 2, 3, and 6, above, for eligible seniority employees who are on lay off for the balance of the month in which the lay off occurs and for the following month. Any employee who continues to be laid off thereafter and who is desirous of continuing his enrollment in the plans referred to in 26.01-1, 2, 3 and 6 may, subject to the terms and provisions of the said plans, do so by delivering to the Company not later than the 1st day of the month in which the premiums are to be paid, the amount of premiums payable, which premiums the Company will remit on behalf of the employee.

26.03        The Company and the Union agree that the pension plan presently provided under the terms of the contract with Equitable Life Insurance Co. and the method of making contributions thereto shall continue during the term of this Agreement.

[5]            I presume that substantially the same provision applied on November 10, 1984, the date of the accident, although the insurer changed. The policy with Dominion Life, which was succeeded by Manulife, contains the following clause with respect to eligibility for insurance.

An Employee is eligible for insurance under this Policy if he or she:

a)              is a member of a Classification which is eligible for insurance, as set out in the Schedule; and

b)             is younger than the Termination Age shown in the Schedule; and

c)              has continuously been an Employee, as defined, for a period as long as the Waiting Period shown in the Schedule.

[6]            When Manulife discontinued the disability payments on May 10, 1993 the appellant issued a statement of claim against Manulife. Her claim was as follows.

1.              THE PLAINTIFF CLAIMS:

a)              The Plaintiff claims a declaration that she is entitled to continuance of Long Term Disability Benefits from and after May 10, 1993 pursuant to a group policy number 12402-LO entered into between the Defendant and the Plaintiff's employer, Tamco Limited;

b)             Pre-Judgment interest pursuant to the Courts of Justice Act, 1984;

c)              The Plaintiff's costs of this action as between a solicitor and client;

d)             Such further and other relief as this Honourable Court may deem just.

[7]            The statement of defence of Manulife denies liability. Paragraphs 10 to 18 of the statement of defence read

10.            The plaintiff has received monies from third parties and/or other insurers for which she has not accounted to Manulife and which may create an overpayment for which she is liable to Manulife.

11.            The plaintiff is no longer qualified to receive benefits under the policy of insurance.

12.            The plaintiff's condition arises from pain magnification and overreaction, and not from any injury or illness.

13.            The plaintiff is not totally disabled.

14.            The plaintiff voluntarily stopped her therapy and is not receiving any medical or psychiatric treatment.

15.            The plaintiff has failed to provide sufficient proof of a continuous total disability as required under the policy.

16.            If Manulife has any liability to the plaintiff which is expressly denied, it denies that the plaintiff has suffered any damages.

17.            If Manulife has any liability to the plaintiff which is expressly denied, the plaintiff's damages are too excessive and remote.

18.            If Manulife has any liability to the plaintiff and the plaintiff has suffered damages both of which are expressly denied, the plaintiff has failed to mitigate those damages.

[8]            Between July 22, 1996 and October 11, 1996 there were negotiations between Mr. Donald Leschied, Mrs. Tsiaprailis' lawyer, and Mr. Blair Groff, on behalf of Manulife.

[9]            These negotiations can be summarized as follows.

1.              July 22, 1996. Mr. Groff threatens to pursue Manulife's rights of subrogation in respect of monies received by Mrs. Tsiaprailis under a judgment. I presume there is some substance to the threat although it may have been used as a form of leverage to achieve a settlement.

2.              September 13, 1996. Mr. Leschied calculates the past and future benefits as follows.

My calculation of the past and future benefits is as follows:

a)              May 10, 1993 to September 28, 1996 (177 weeks) $746.75 monthly divided by 4.3 weeks x 177 weeks = $30,738.31;

b)             Pre-judgment interest thereon at 5% per annum calculated for the full 177 weeks = $5,231.42;

c)              September 30, 1996 to July 1, 2013 (65th birthday) 15 years 9 months or 15.75 years x $8,961.00 per annum = $141,135.75;

                TOTAL OWING: $177,105.48

[10]          He then proposes a compromise as follows.

I am prepared to recommend to my client that in lieu of the payment of the past benefit plus interest and the ongoing monthly benefits to age 65 that she consider a discount by way of a lump sum for the future benefits of $141,135.75 and to reduce that future benefit by 25% so that my recommendation is as follows:

a)              Past benefits plus interest $35,969.73

b)             Future benefit, discounted - $112,908.60

                TOTAL RECOMMENDATION: $148,878.33

In addition, a reasonable sum for costs would have to be paid.

For the reasons I indicated during our telephone discussion, I do not believe any reduction for a potential claim for subrogation can be made, in this case.

...

One last item and that was the LTD policy included a significant benefit for extended health care (ie hospital, drug, various therapies, etc.) and I would think that the monthly cost of that benefit to Manulife for this woman is considerable. I would think her drug/prescriptions alone would run to $4,000 - $5,000 per year.

[11]          On October 7, 1996 Mr. Groff makes a counter proposal as follows.

It appears that we are in agreement with respect to some fundamental issues such as a monthly figure of $746.75 and the fact that at least for the purpose of settlement, we will assume Ms. Tsiaprailis will not work again before her 65th birthday.

I am concerned however that your proposed recommendation may have been based on some erroneous calculations and I will attempt to outline how our thoughts differ.

First of all, with respect to arrears, I believe the period between May 10th, 1993 to September 28th, 1996, is one of 176 weeks rather than 177 weeks. If $746.75 was accumulated monthly throughout that period and interest at 5% per annum was compounded monthly throughout, the total arrears owing would be $32,940.95. This is not significantly different than your figures however it does reflect a slightly lower amount.

The key issue however is the computation of the future benefits. The method that you used is simply a multiplication of the monthly benefit times the number of months Ms. Tsiaprailis would receive the benefit to age 65. This figure was then discounted to $141,135.75, however I am unsure as to what that figure reflects.

I would suggest that a present value calculation using actuarial principles would more accurately reflect the value of these future payments. I have had an actuary compute the present value as of October 1st, 1996 and this figure comes to $79,973.19.

This amount plus the arrears amount mentioned earlier total $112,914.14. I propose that this number should be reduced by 25% for contingencies.

Manulife Financial is therefore prepared to offer $84,685.61 in full satisfaction of Ms. Tsiaprailis claim. Of course, we are willing to pay a reasonable sum with respect to your costs as well. This perhaps can be discussed at a future date.

[12]          On October 7, 1996 Mr. Leschied makes a counter proposal:

Thank you for yours of October 7th. I have analysed your numbers and also engaged an Economist to do a Present Value calculation of the future benefits.

On the Past Benefits, I double checked the number of weeks and re-did the interest calculations and arrived at the same number of $35,969.73.

The future benefits total $83,435.00 using a discount rate of 7.75%. Enclosed is the report of Professor Charette dated September 14, 1996.

I see no justification for discounting the past benefit. I am prepared to recommend settlement as follows:

1.              Past Benefits                                                                    $ 35,969.73

2.              Future Benefits

                (75% of $83,435.00)                                                       $ 62,576.25

                                                                                                          $ 98,545.98

3.              Drug Benefit                                                                      $ 5,000.00

4.              Costs                                                                                 $ 8,000.00

                TOTAL                                                                         $111,545.98

                Plus disbursements.

[13]          On October 8, 1996 Mr. Groff counters as follows:

Nonetheless, in an effort to put this matter to rest, Manulife is prepared to increase its previous offer to the all inclusive sum of $100,000.00.

[14]          On October 11, 1996 Mr. Leschied responds with a counter offer of $105,000.

I reviewed your letter of October 8th with my clients at length yesterday, October 10th, and they have given me firm instructions to settle this claim for a lump sum in lieu of monthly benefit payments and the insured is prepared to release Manulife in exchange for the all-inclusive sum of $105,000.00; otherwise, she is content to accept the past benefit to date with interest and a reasonable sum for legal fees and continue to receive her monthly benefit through to age 65. That offer, by way of a lump sum, essentially means that Manulife is paying the past benefits plus interest, 75% of the present value of the future benefit and about $6,455.00 for costs, GST and disbursements; an amount that I considered low given the extent of my time in this file.

[15]          This lump sum settlement, less $18,068.97 for legal fees paid to the appellant's solicitors, was accepted by the appellant and a very broad release of all claims was signed by her in favour of Manulife.

[16]          The remainder of the documents in the Common Book of Documents are lengthy letters between the appellant's solicitors and Revenue Canada in which they put forward their respective positions.

[17]          I shall deal first with the issue under paragraph 6(1)(f). This case differs in two respects from Landry v. The Queen, 98 DTC 1416.

(a)            Here the assessment was based on paragraph 6(1)(f) and the respondent relied upon it at trial. In Landry the Crown expressly declined to rely on paragraph 6(1)(f).

(b)            In Landry the premiums paid by the employer were included in the appellant's income.

[18]          Whether the Crown relies on paragraph 6(1)(f) or not it has no application. The lump sum payment arrived at after a law suit was commenced and negotiated as a compromise cannot on any basis of statutory interpretation be described as an "amount ... payable to the taxpayer on a periodic basis".

[19]          Counsel for the respondent contends that if I find that paragraph 6(1)(f) does not apply, as I do, then I must consider the possible application of paragraph 6(1)(a) as if paragraph 6(1)(f) were not there at all. With respect, I do not think this proposition is correct. One cannot ignore the existence of paragraph 6(1)(f). It is a specific provision relating to benefits received under certain types of insurance plans funded by employers. The fact that an employee receives benefits under such a plan but for some reason all of the conditions necessary to the application of paragraph 6(1)(f) are not met does not mean that the provision is erased from the Act. As I stated in Landry, at page 1418:

Paragraph 6(1)(a) is a general provision and it is not intended to fill in all the gaps left by paragraph 6(1)(f) — expressio unius est exclusio alterius.

[20]          Counsel for the respondent suggested that the proposition should be given limited application. I agree that all principles of statutory interpretation — including Latin maxims of ancient vintage — should be treated with some caution. Nonetheless we have a specific section containing detailed conditions for the inclusion of an amount in income that would not otherwise be income. Since a crucial condition is not met — in this case that the amount be payable on a periodic basis — the Crown tries to bring it into income under a general provision. This is contrary to the most fundamental rules of statutory interpretation — indeed one endorsed by the Crown itself in Munich Reinsurance Co. (Canada Branch) v. Canada, [2001] F.C.J. No. 1780, where the Federal Court of Appeal said at paragraphs 21 to 24:

21             Both parties argue that the Tax Court Judge should not have gone outside subsection 138(9) to determine whether the interest in question was required to be included in the appellant's Part I income. They rely on the rule of statutory interpretation that requires a specific provision to be applied in preference to a more general provision that conflicts with it (R. Sullivan, Driedger on the Construction of Statutes, 3rd ed. (Toronto: Butterworths, 1994)). The Tax Court Judge did not accept that argument because he saw no conflict. I respectfully disagree with him on that point, for the following reasons.

22             Subsection 138(9) and the related regulations comprise a lengthy, complex and detailed statutory scheme dealing with a small category of taxpayers -- insurers who are not residents of Canada but who carry on an insurance business in Canada and also carry on an insurance business elsewhere -- to provide rules for the reasonable allocation of certain investment income between the Canadian insurance business and other businesses (F. Borgman, Canadian Insurance Taxation (Markham, Ont.: Butterworths, 1998) and R.C. Knechtel, "Taxation of the Life Insurance Industry: The 1978 Tax Reform", Canadian Tax Journal, Vol. 28, No.1 at 17).

23             A non-resident insurer who is subject to subsection 138(9) is required by that provision to determine what part of its investment income is from "property used by it in the year in, or held by it in the year in the course of, carrying on" its Canadian insurance business. To require a non-resident insurer to look beyond subsection 138(9) to determine the tax character of its investment income would render the scheme of subsection 138(9) largely redundant with respect to the very question it is intended to address, or it would result in the Canadian allocation of the investment income being larger or smaller than the allocation dictated by subsection 138(9). There is no reason to believe that Parliament intended such a redundancy, or such inconsistency.

24             I therefore accept the argument of both parties that interest on the appellant's tax overpayments must be excluded from its Part I income unless it is within the scope of subsection 138(9). It follows that this appeal must succeed if the appellant's right to a refund of its tax overpayments was not used by the appellant in the year in, or held by it in the course of, carrying on its insurance business in Canada. I return now to that key question.

[21]          The respondent relies upon the decision of the Supreme Court of Canada in The Queen v. Savage, 83 DTC 5409, where the Crown unsuccessfully attempted to bring into a taxpayer's income under paragraph 6(1)(a) the value of a bursary specially dealt with under paragraph 56(1)(n). At page 5416 Dickson J. said:

I agree with counsel for Mrs. Savage that the opening words "Without restricting the generality of Section 3", in paragraph 56(1) would seem to have been inserted to defeat an argument of "expressio unius est exclusio alterius", in order to relate income items contained in paragraph 56(1) to the arithmetical calculation set out in s. 3. Income can still be income from a source if it does not fall within s. 56. Moreover, s. 56 does not enlarge what is taxable under s. 3, it simply specifies.

                When s. 56 is seen in this context, it is clear the Crown's submission cannot be sustained. The Crown's position, to repeat, is that a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer, if less than $500, and if obtained in respect of, in the course of, or by reason of an office or employment, is taxable under ss. 5 and 6, notwithstanding s. 56(1)(n). Section 56(1)(n) makes it clear that a prize for achievement is income from a source under s. 3 just as income from an office or employment is income from a source under s. 3. If a prize under $500 would equally be taxable under s. 5 and 6, it would have to follow on the Crown's argument that a prize under $500 would equally be taxable under s.3. That cannot be right. That would mean that a prize over $500 would be taxable under s. 56(1)(n) and a prize up to $500 would be taxable under s. 3. The $500 exclusion in s. 56(1)(n) would never have any effect. It seems clear that the first $500 of income received during the year falling within the terms of s. 56(1)(n) is exempt from tax. Any amount in excess of $500 falls under s. 56(1)(n) and is taxable accordingly. If that is not the effect, what purpose is served by the subsection?

[22]          Far from supporting the respondent's position, Savage supports the appellant's position.

[23]          Nor do I think that the Crown's position is assisted by the English decision London & Thames Haven Oil Wharves, Ltd. v. Attwooll, [1967] 2 All E.R. 124 at p. 134. The frequently quoted passage by Lord Diplock is as follows.

... The question whether a sum of money received by a trader ought to be taken into account in computing the profits or gain arising in any year from his trade is one which ought to be susceptible of solution by applying rational criteria; and so, I think, it is. I see nothing in experience as enbalmed in the authorities to convince me that this question of law, even though it is fiscal law, cannot be solved by logic, and that, with some temerity, is what I propose to try to do.

                I start by formulating what I believe to be the relevant rule. Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance; from a secondary obligation arising out of non-performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charterparty, or unliquidated; from an obligation to pay damages for tort, as in the present case; from a statutory obligation; or in any other way in which legal obligations arise.

                The source of a legal right is relevant, however, to the first problem involved in the application of the rule to the particular case, viz., to identify for what the compensation was paid. If the solution to the first problem is that the compensation was paid for the failure of the trader to receive a sum of money, the second problem involved is to decide whether, if that sum of money has been received by the trader, it would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the date of receipt, i.e., would have been what I shall call for brevity an income receipt of that trade. The source of the legal right to the compensation is irrelevant to the second problem. The method by which the compensation has been assessed in the particular case does not identify for what it was paid; it is no more than a factor which may assist in the solution of the problem of identification.

[24]          I can see no reason for extending that rule, which has been quoted with approval in Canadian courts (e.g., The Queen v. Manley, 85 DTC 5150) beyond the computation of income from a business. I have no difficulty with the idea that where a person receives damages or insurance proceeds for the failure to receive business income those damages are themselves income from that business. That is a far cry from the notion that the same principle can justify that a lump sum payment made as the result of a compromise of a law suit brought to recover disability payments that are taxable only if the strict conditions of paragraph 6(1)(f) are met can be swept into income under the broad provisions of paragraph 6(1)(a). That is a distortion of the logic and common sense of the point that Lord Diplock was making.

[25]          It is not this court's role to dream up imaginative ways of taxing disabled people on lump sum settlements that they receive from insurance companies. If Parliament thinks that its revenues are in jeopardy because it does not get its tax on such payments it can amend the legislation.

[26]          The appeal is allowed with costs and the assessment for the appellant's 1996 taxation year is referred back to the Minister of National Revenue for reconsideration and reassessment to delete from the appellant's income the lump sum settlement received from The Manufacturers Life Insurance Company.

Signed at Ottawa, Canada, this 20th day of December 2001.

"D.G.H. Bowman"

A.C.J.

COURT FILE NO.:                                                 1999-3063(IT)G

STYLE OF CAUSE:                                               Between Vasiliki Tsiaprailis and

                                                                                Her Majesty The Queen

PLACE OF HEARING:                                         Windsor, Ontario

DATE OF HEARING:                                           December 4, 2001

REASONS FOR JUDGMENT BY:                      The Honourable D.G.H. Bowman

                                                                                Associate Chief Judge

DATE OF JUDGMENT:                                       December 20, 2001

APPEARANCES:

Counsel for the Appellant:                  James H. Cooke, Esq.

Counsel for the Respondent:              Daniel Bourgeois, Esq.

COUNSEL OF RECORD:

For the Appellant:                

Name:                James H. Cooke, Esq.

Firm:                  Wilson Walker Hochberg Slopen

                          Windsor, Ontario

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

1999-3063(IT)G

BETWEEN:

VASILIKI TSIAPRAILIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on December 4, 2001, at Windsor, Ontario, by

The Honourable D.G.H. Bowman

Associate Chief Judge

Appearances

Counsel for the Appellant:          James H. Cooke, Esq.

Counsel for the Respondent:      Daniel Bourgeois, Esq.

JUDGMENT

          It is ordered that the appeal from the assessment made under the Income Tax Act for the 1996 taxation year be allowed with costs and the assessment be referred back to the Minister of National Revenue for reconsideration and reassessment to delete from the appellant's income the lump sum settlement received from The Manufacturers Life Insurance Company.

Signed at Ottawa, Canada, this 20th day of December 2001.

"D.G.H. Bowman"

A.C.J.