Whitehouse v. The Queen, docket 98-266-IT-I (Informal Procedure)

Date: 19991110

Docket: 98-266-IT-I

BETWEEN:

RUSSELL WHITEHOUSE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Lamarre, J.T.C.C.

[1] This is an appeal under the informal procedure from an assessment issued in accordance with the Income Tax Act ("Act")in respect of the appellant's 1995 taxation year. The facts are admitted by the parties and can be summarized as follows:

a. the Appellant was an employee of the company NLK Celpap Canada (Montréal) Inc. (the "company") from November 1989 to August 15^th 1991;

b. the Appellant had a group disability insurance policy;

c. in 1991, following a sickness, the Appellant claimed disability benefits from Great-West;

d. as Great-West has refused to pay the Appellant, the latter sued that insurance company;

e. the Appellant claimed a monthly benefit from June 1991 to June 2004 - when he would reach age 65 years – in accordance with the group disability insurance policy;

f. but instead, a deal was concluded with the Great-West for an amount of $138,000 pursuant to a "Receipt, Full and Final Mutual Release and Transaction" document (Exhibit A-1). The essential clauses of this Transaction are set out hereinafter:

RECEIPT, FULL AND FINAL MUTUAL

RELEASE AND TRANSACTION

In consideration of the payment of the sum of ONE HUNDRED AND THIRTY EIGHT THOUSAND DOLLARS ($138,000.00) in capital and interest by Defendant/Cross-Plaintiff The Great-West Life Assurance Company (hereinafter referred to as "GREAT-WEST"), that the Plaintiff/Cross-Defendant Russell E. Whitehouse (hereinafter referred to as ("WHITEHOUSE") hereby acknowledges having received, WHITEHOUSE forever fully releases and discharges GREAT-WEST, its representatives, employees, agents, mandataries, directors, officers, assigns and insurers from any and all claims, actions, causes of action and damages that WHITEHOUSE had, has or may have against GREAT-WEST as beneficiary to a group policy issued by GREAT-WEST for WHITEHOUSE's former employer Nystrom Lee Kobayashi & Associates (NLK CONSULTANTS INC.) which policy is identified as 134308GHA (hereinafter referred to as the "Policy");

WHITEHOUSE, without restricting the generality of the foregoing, further discharges and releases GREAT-WEST, its representatives, employees, agents, mandataries, directors, officers, assigns and insurers from all damages, known or unknown at the date hereof, and from all claims past, present and future, arising directly or indirectly from any of the facts alleged in the proceedings or exhibits filed in Court record bearing docket number 500-05-007438-938 or resulting directly or indirectly from any representations, verbal or written, facts or decisions made by GREAT-WEST during the enquiry, administration and decision process regarding the disability claim of WHITEHOUSE;

[...]

WHITEHOUSE acknowledges that, as a result of the payments mentioned above, he renounces to any rights that may result directly or indirectly to him from the said Policy, his coverage under the said Policy is now terminated for all intents and purposes;

[...] In addition, WHITEHOUSE renounces to claim the annulment of this Receipt, Full and Final Mutual, Release and Transaction for any reason whatsoever including any error in law or in fact and hereby acknowledges and recognizes that the above-mentioned payments cover any and all headings of damages known or unknown at the date hereof against GREAT-WEST its representatives, employees, agents, mandataries, directors, officers, assigns and insurers including any possibility of complication or future aggravation;

WHITEHOUSE hereby recognizes that the above-mentioned payments by GREAT-WEST do not constitute an admission of liability and have been made only to settle this matter on an amicable basis. Moreover, WHITEHOUSE recognizes that the present Receipt, Full and Final Mutual Release and Transaction constitutes a Transaction pursuant to articles 2631 seq. of the Civil Code of Quebec;

g. the Appellant received an amount of $69,000 in each of the 1995 and 1996 taxation years (that is, 50 per cent of $138,000 for each of those two years).

[2] The sole issue is to determine whether the amount of $69,000 received by the appellant in the 1995 taxation year is to be included in income pursuant to paragraphs 6(1)(a) or 6(1)(f) of the Act.

[3] Paragraphs 6 (1)(a) and (f) read as follows:

Section 6: Amounts to be included as income from office or employment.

(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) Value of benefits – the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit

(i) derived from the contributions of the taxpayer's employer to or under a registered pension plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy,

(ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust,

(iii) that was a benefit in respect of the use of an automobile,

(iv) derived from counselling services in respect of

(A) the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to an outlay or expense to which paragraph 18(1)(l) applies, or

(B) the re-employment or retirement of the taxpayer, or

(v) under a salary deferral arrangement, except to the extent that the benefit is included under this paragraph because of subsection (11);

(f) Employment insurance benefits – 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 his employer has made a contribution, not exceeding the amount, if any, by which

(iv) the total of all such amounts received by the taxpayer pursuant to the plan before the end of the year and

(A) where there was a preceding taxation year ending after 1971 in which any such amount was, by virtue of this paragraph, included in computing the taxpayer's income, after the last such year, and

(B) in any other case, after 1971,

exceeds

(v) the total of the contributions made by the taxpayer under the plan before the end of the year and

(A) where there was a preceding taxation year described in clause (iv)(A), after the last such year, and

(B) in any other case, after 1967.

[4] In the instant case, it is clear that paragraph 6(1)(f) is inapplicable. The amounts received by the appellant were not payable to him on a periodic basis and so were not caught by paragraph 6(1)(f) (see this Court's decisions in Peel v. M.N.R., 87 DTC 268; Cook v. The Queen, 95 DTC 853; Landry v. The Queen, 98 DTC 1416). Furthermore, there is no allegation or assumption in the settlement agreement (Exhibit A-1) that the total of $138,000 represented simply the aggregate of periodic payments that the appellant might have received over his lifetime as was the case in Marchand v. M.N.R., 87 DTC 630 (T.C.C.).

[5] Counsel for the respondent also argued that if the lump sum received by the appellant is not taxable under paragraph 6(1)(f), it is nevertheless taxable pursuant to paragraph 6(1)(a). Although Judge Taylor of this Court, relying on the decision of the Supreme Court of Canada in The Queen v. Savage, 83 DTC 5409, adopted that position in Cook, Judge Bowman of this Court decided to do otherwise in Landry.

[6] I agree with Judge Bowman that paragraph 6(1)(a) is a general provision and is not intended to fill in the gaps left by paragraph 6(1)(f). This interpretation is consistent with the approach taken by the Supreme Court of Canada in Schwartz v. Canada, [1996] 1 S.C.R. 254. In that case, the Minister argued that even if a lump sum received by the taxpayer could not be characterized as a retiring allowance and was thus not taxable under subparagraph 56(1)(a)(ii) of the Act, it nevertheless constituted income from an unenumerated source taxable under the general provision of paragraph 3(a) of the Act.

[7] La Forest J., speaking for the majority, rejected this argument in the following terms at pages 293-94:

[...] In the present case, accepting the argument made by the Crown would amount to giving precedence to a general provision over the detailed provisions enacted by Parliament to deal with payments such as that received by Mr. Schwartz pursuant to the settlement.

As indicated earlier, Parliament adopted a specific solution to a specific problem that resulted from a number of rulings by the courts respecting the taxability of payments similar to the one received by the appellant. Under these rulings, damages paid with respect to wrongful dismissal were not taxable as income from office or employment under s. 5(1); nor were they taxable as constituting retiring allowances. The Crown had at that point many options. The Minister could have argued that such damages were taxable as income from a source under the general provision in s. 3(a) of the Act. It could also have sought an amendment to the Act making such payments expressly taxable as income from office or employment. But neither of these courses was taken. Instead, the Act was amended twice so that such amounts could be taxable under s. 56 as income from "another" source. First, it was provided that termination payments were taxable. Then, the Act was amended to make such a payment taxable as constituting a retiring allowance. It is thus pursuant to these provisions that taxability should be assessed. To do otherwise would defeat Parliament's intention by approving an analytical approach inconsistent with basic principles of interpretation.

This Court has always refused to interpret the Act in such a manner. For example, in The Queen v. Savage [83 DTC 5409], [1983] 2 S.C.R. 428, the taxpayer received $300 from her employer as a prize for achievement. Section 56(1)(n) of the Act provided that such gifts, when worth over $500, constituted taxable income. The prize was not, therefore, caught by this provision. The Minister, however, argued that the amount also fell within the purview of s. 6(1)(a) of the Act as a general benefit, and as such was taxable as income from an office or employment. Dickson J., as he then was, rejected this argument. At page 446, he stated:

If a prize under $500 would still be taxable under ss. 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?

The situation here is analogous. To find that the damages received by Mr. Schwartz are taxable under the general provision of s. 3(a) of the Act would disregard the fact that Parliament has chosen to deal with the taxability of such payments in the provisions of the Act relating to retiring allowances.

[8] This latter proposition was also adopted by Major, J., speaking for the minority in Schwartz at page 6120:

In cases where a receipt of money has fallen outside of s. 3 and subdivision d of Division B of Part I of the Act, the money has not been taxed. For example, in The Queen v. Savage, [1983] 2 S.C.R. 428, the taxpayer received $300 as a prize for achievement. As a result, it fell outside of s. 56(1)(n), which provided for taxation of prizes over $500. The Minister claimed that the sum was still taxable as a "benefit" under s. 6(1)(a). Dickson, J., as he then was, rejected this argument, because to do otherwise would have meant that s. 56(1)(n) had no meaning. As that sum was not specifically included in the Act it was not taxable.

[9] I therefore conclude, as Judge Bowman concluded in Landry, that the Savage case does not help the respondent's position and that the appellant received the lump sum payment from Great-West qua insured, not qua employee. This sum was therefore not taxable pursuant to paragraph 6(1)(a) of the Act.

[10] The appeal is allowed and the assessment referred back to the Minister for reconsideration and reassessment on the basis that the sum of $69,000 should not be included in the appellant's income for the 1995 taxation year. The appellant is entitled to his costs, if any.

Signed at Ottawa, Canada, this 10th day of November 1999.

"Lucie Lamarre"

J.T.C.C.