Dumas v. The Queen, docket 1999-1633-IT-G

Date: 20001026

Docket: 1999-1633-IT-G

BETWEEN:

CATHERINE DUMAS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Mogan J.T.C.C.

[1] In 1986, the Appellant was employed by the North Grenville & District Association for the Mentally Retarded ("NGDA"). She was a counsellor to mentally disturbed adults at an institution in Kemptville, Ontario about 40 kilometres south of Ottawa. She started her employment in June 1983. She was ill in the early summer of 1986 but went back to work at the end of August. She had to stop work in mid-October 1986 because she was unable to perform her duties and she has not worked since then. There was a collective agreement between NGDA and the Ontario Public Service Employees Union (Exhibit A-2) which provided for group insurance including long-term disability ("LTD"). The group insurance for NGDA was placed with Great-West Life Assurance Company ("GWL").

[2] GWL issued an individual certificate to the Appellant (Exhibit A-3) listing benefit information including LTD. The premium for the LTD insurance was paid 75% by the employer/NGDA and 25% by the employee/Appellant. In the winter of 1986/1987, the Appellant's LTD coverage if she qualified was $1,210 per month. GWL paid to the Appellant $3,630 as LTD for the three-month period February 14 to May 13, 1987 (Exhibit A-10). GWL refused to pay any LTD benefits after May 13, 1987 on the basis that the Appellant had not qualified for such benefits. The Appellant sued GWL. The legal action was settled in September 1995 when GWL paid to the Appellant $105,000. The issue in this appeal is whether the amount of $105,000 is to be included in computing the Appellant's income for 1995.

[3] The Appellant travelled a long road before starting the lawsuit. When she stopped working for NGDA on October 8, 1986, she received "weekly indemnity benefits" (Exhibit A-11) from October 9, 1986 to February 13, 1987. Her LTD benefits commenced on February 14, 1987 but expired on May 13, 1987 because GWL did not have sufficient clinical objective medical information. In September 1988, the Appellant retained a lawyer in Kemptville to claim LTD but her claim was rejected by GWL (Exhibit A-12) because they said there was no medical evidence to support physical disability. The Appellant was suffering from what later became more commonly known as chronic fatigue syndrome. On September 27, 1990, the Appellant herself wrote to GWL (Exhibit A-13) asking them to accept chronic fatigue syndrome as a disability qualifying for LTD. They refused and stated (Exhibit A-14) that her insurance terminated on June 13, 1987 because she did not return to work as of May 14, 1987.

[4] Further letters from GWL on December 12, 1990, March 12, 1991 and April 28, 1993 (Exhibits A-15, A-16 and A-18) continued their refusal to recognize the Appellant's claim for LTD. GWL stated in Exhibit A-19 that they thought the time limit for legal action had expired on August 11, 1990 (one year and 90 days after the last benefit payment of May 13, 1987). On November 24, 1992, the Appellant commenced a legal action against GWL in the Ontario Court (General Division) by filing a Statement of Claim (Exhibit A-20) through her solicitors, Nelligan-Power of Ottawa. The Statement of Claim speaks for itself but set out below are those parts which I view as most relevant:

4. The Plaintiff was employed as a Life Skill Instructor with the North Grenville District Association for the Mentally Retarded (hereinafter referred to as "North Grenville District A.M.R."). One of the benefits associated with her employment was her entitlement to the benefits of a group insurance policy with Great West Life.

7. As a result of this extreme fatigue and deteriorating health, the Plaintiff stopped work on October 9, 1986. At this time, she made a claim for short term disability benefits under the group insurance policy issued to the North Grenville District A.M.R. being group policy 65212 by Great West Life.

8. A short term disability benefit in the amount of $249 per week was paid to the Plaintiff from October 18, 1986 to February 13, 1987 to Catherine Dumas by Great West Life.

9. The Plaintiff has been unable to return to work since February 13, 1987 by reason of illness from Chronic Fatigue Syndrome, also diagnosed as Myalgic Encephalomyletis and is totally disabled within the meaning of the group insurance policy no. 65212.

10. The Plaintiff states that the aforementioned group policy provided for monthly payments to her in the amount of $1,210 per month in the event that she became totally disabled while she was an employee of the North Grenville District A.M.R. These payments were to commence 120 days after the date of the disability and to continue until the date of cessation of the total disability or the date of the employee's 65th birthday.

11. The Plaintiff applied to Great West Life, for long term disability benefits as required by the provisions of the aforementioned policy. She did receive long-term disability benefits from February 13, 1987 to May 13, 1987.

12. Great West Life purported to terminate the monthly benefit of the Plaintiff Catherine Dumas effective May 14, 1987, and since that date has failed to pay any benefits to her.

13. The Plaintiff claims to be entitled under the terms of the group policy to monthly payments in the amount of $1,210 per month commencing on May 14, 1987 until such time as the total disability ceases or she obtains the age of 65 years.

[5] GWL filed a Statement of Defence dated July 7, 1993 (Exhibit A-22) in which it took the position (i) that the Appellant was not disabled or entitled to LTD benefits pursuant to the provisions of policy 65212; (ii) that the Appellant's insurance under policy 65212 had terminated; (iii) that the Appellant had commenced her legal action beyond the limitation period in policy 65212; and (iv) if the Appellant was disabled within the meaning of policy 65212 and entitled to any LTD benefits, such benefits were subject to reduction by any payment she was entitled to receive under any law of Canada or a Province (like Canada Pension Plan or Old Age Security). The Appellant was convinced that she was disabled and, through her legal counsel, she delivered an Offer to Settle dated September 20, 1993 (Exhibit A-23) under which she would be paid the total amount of monthly disability benefits of $1,210 outstanding from May 1987 to date, plus continuing monthly disability benefits until her total disability ceased or she obtained the age of 65 years. GWL did not accept the Appellant's Offer to Settle.

[6] Legal counsel for GWL attempted to conduct an examination for discovery of the Appellant. As a result of her chronic fatigue syndrome, she had loss of memory, confusion and was dazed by light and sound. Before the examination for discovery could be completed, the Appellant collapsed and was taken to the hospital in an ambulance. In 1995, there were serious settlement discussions between counsel for the Appellant and GWL. On February 10, 1995, GWL submitted a written offer to settle for $25,000 (Exhibit A-25); rejected by the Appellant. On May 5, 1995, GWL made an oral offer of $45,000 (Exhibit A-28, letter from Appellant's counsel to Appellant) which was rejected by the Appellant. On July 6, 1995, GWL submitted a written offer to settle for $90,000 (Exhibit A-29). This third offer from GWL was met with a counter-offer from the Appellant's counsel on August 8, 1995 (Exhibit A-30) stating that the Appellant would settle for approximately $106,000 plus costs of $10,000.

[7] Further discussions between counsel produced a final settlement in the amount of $105,000. A letter from Appellant's counsel to her dated September 8, 1995 (Exhibit A-31) commenced with this paragraph:

Further to our recent telephone conversation, this will confirm that this matter has now settled with your acceptance of the most recent Offer made by Great West Life to pay you the all inclusive amount of $105,000.00 for arrears in disability payments, future disability payments, interest and legal costs.

The Appellant signed a Full and Final Release dated September 21, 1995 (Exhibit A-32) in which she released GWL from all claims and demands of every kind in respect of policy 65212 or matters in issue in the legal action, in consideration for the payment by GWL of $105,000 to the Appellant. At no time in the settlement documents or negotiations did GWL ever admit any liability to the Appellant. It is a fact, however, that GWL paid $105,000 to settle the Appellant's claim.

[8] In May 1995, the Appellant's counsel had prepared a Damage Assessment (Exhibit A-27) which attempted to compute the LTD benefits from May 14, 1987 to April 30, 1995. The document contains an obvious error (the years 1988 to 1994 inclusive are seven and not six) but the computations may be summarized as follows:

12 monthly payments of $1,210 equals $14,520

1988 to 1994 (7 years) = 101,640

May 14 to December 31, 1987 = 9,075

(7.5 x $1,210)

January 1 to April 30, 1995 = 4,840

(4 x $1,210)   

Total disability amounts from May 14, 1987 115,555

to April 30, 1995

Less: CPP benefits for same period 45,410

70,145

Less: UI payments received 2,352

Aggregate Amount which would have

been paid by GWL from May 14, 1987 to

April 30, 1995 if GWL had admitted liability $67,793

[9] The computation in paragraph 8 above is derived from Exhibit A-27 but it does not in any way lead to the final settlement amount of $105,000. I return to the first paragraph of Exhibit A-31 quoted in paragraph 7 above. The Appellant's own counsel writing to her confirms the settlement with the "all inclusive amount of $105,000 for arrears in disability payments, future disability payments, interest and legal costs". These words acquired more meaning when read in context with the letter of July 6, 1995 from Mr. Millican (counsel for GWL) to the Appellant's counsel (Exhibit A-29). Mr. Millican stated:

The last time we spoke you indicated that Mrs. Dumas was prepared to settle the action for the amount of benefits owing to her to date, on a net basis, and 50% of the net disability benefits in the future, as set out in your letter of April 18, 1995. My recollection of this matter is that you were to provide me with the figurer at (sic) you considered reasonable for costs, but I have not heard from you.

I assume that the Appellant's benefits owing to date "on a net basis" would be approximately $68,000 as shown in the computation in paragraph 8 above.

[10] Similarly, I assume that "50% of the net liability benefits in the future" would be one-half of the aggregate benefits if the Appellant was disabled until age 65 and the policy amount each month ($1,210) was reduced by the monthly CPP (approximately $540 from Exhibit A-27). The Appellant was 43 years old in 1987. Therefore, she was 51 in 1995. She would have had about 13 years before reaching age 65. Thirteen years contain 156 months. If the policy amount of $1,210 is reduced by the CPP amount ($540) to a net monthly amount of $670, the aggregate future benefits for 156 months would be:

156 x $670 = $104,520

One-half of those future benefits 52,260

There is no evidence concerning the present value in 1995 of $52,260 paid over the next 156 months but, if that present value is in the range of $40,000, then the net arrears of approximately $68,000 (see paragraph 8 above) plus $40,000 is close to the settlement amount of $105,000. If the present value is less than $40,000, then GWL might have conceded an amount for the Appellant's out-of-pocket costs plus interest.

[11] I am satisfied after reviewing Exhibits A-27 (Damage Assessment), A-29 (letter from GWL's lawyer), A-31 (letter from Appellant's lawyer) and the computations in paragraphs 8, 9 and 10 above that the settlement was negotiated by two sophisticated lawyers each of whom had to rationalize the settlement amount to her or his respective client. The final amount of $105,000 was not pulled out of thin air. Although GWL did not at any time admit any liability to the Appellant under policy 65212, GWL did in fact pay a settlement amount ($105,000) which was negotiated as if GWL had some liability over some period of time for gross monthly payments in the range of $1,210.

[12] For whatever reason, GWL issued to the Appellant a Revenue Canada form T4A for 1995 showing in box 28 the amount of $105,000 identified as "other income". When the Appellant filed her income tax return for 1995 (Exhibit R-2), she did not report the $105,000 as income but she did attach the form T4A making full disclosure of her receipt of that amount. By Notice of Reassessment dated January 27, 1997 (Exhibit R-4), the Minister of National Revenue added the $105,000 to the Appellant's reported income. She objected. The Minister confirmed the reassessment by Notification dated December 7, 1998 (Exhibit R-5) stating that the $105,000 was income from employment under paragraph 6(1)(a) of the Income Tax Act or income under section 3. For me, it is not relevant whether GWL issued a form T4A or any similar form with respect to the amount of $105,000.

[13] The dominant issue in this appeal is whether the amount of $105,000 received by the Appellant in September 1995 was income under the Act. At face value, it was an amount paid before trial to settle a legal action commenced in the Superior Court of Ontario. That face value description is neutral for income tax purposes. One has to ask why the amount was paid and received? In the Reply to the Notice of Appeal, the Respondent relies on paragraphs 6(1)(a) and (f) of the Act. The relevant parts of those two paragraphs as applied in 1995 are:

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) 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) ...

(f) the aggregate of all amounts received by him in the year that were payable to him on a periodic basis in respect of the loss of all or any part of his 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 aggregate of all such amounts received by him 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 his income, after the last such year, and

(B) in any other case, after 1971,

exceeds

(v) the aggregate 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), after the last such year, and

(B) in any other case, after 1967;

[14] The Appellant relies on the decision of this Court in Landry v. The Queen, 98 DTC 1416. In that case, Ms. Landry was employed by the City of Sudbury. She became disabled and stopped working. Through her employment, she had group long-term disability insurance with London Life Insurance Company. The premiums for that insurance were paid by her employer. When London Life refused to pay her long-term disability benefits, Ms. Landry sued. To settle the action, London Life paid a lump sum of $30,000 to Ms. Landry. Her legal costs were $5,000 and so London Life issued a T4 slip for $25,000 being the net amount she retained. The Minister included the amount of $25,000 in Ms. Landry's 1995 income under paragraph 6(1)(a) of the Act. The Minister did not rely on paragraph 6(1)(f). Judge Bowman allowed Ms. Landry's appeal stating at page 1417:

With respect, I think that Judge Taylor was right in Peel. Neither the Savage case nor paragraph 6(1)(a) has anything to do with this case. Paragraph 6(1)(f), upon which counsel for the respondent expressly declined to rely, deals specifically and in detail with disability benefits payable on a periodic basis. The lump sum payment received by Mrs. Landry was not payable on a periodic basis and there is no allegation or assumption that the $25,000 represented simply the aggregate of periodic payments that she might have received over her lifetime. (Marchand v. M.N.R., 87 DTC 630 (T.C.C.)).

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.

There is a further reason for not including the lump sum in Mrs. Landry's income. The employer, it is true, paid the premiums in the first instance but they were included in Mrs. Landry's income as a taxable benefit. In essence and in substance, the payments were being made on her behalf by the employer. It would be a wholly unacceptable result if she were to be taxed again when the benefits are paid. What she received from London Life was received qua insured, not qua employee. The benefit, which was taxed, lay in the employer's provision of insurance coverage, not in the benefits paid by the insurer.

[15] In the present appeal, the premiums to GWL were paid 25% by Mrs. Dumas and 75% by her employer. There is no evidence that her employer's portion of the premium was included in her income as a taxable benefit of employment. Such a result appears to be contrary to subparagraph 6(1)(a)(i) of the Act. Also, Judge Bowman held that there was no allegation or assumption that the $25,000 received by Ms. Landry represented the aggregate of periodic payments she might have received over her lifetime. In the present appeal, there is evidence that the amount of $105,000 was negotiated on the basis of (i) past LTD payments (net of CPP) for the period May 14, 1987 to September 1995; and (ii) the present value in 1995 of one-half of what she might have received from September 1995 to age 65. In my view, the facts in the present appeal are different from the facts in Landry. In any event, Landry was only an informal appeal.

[16] In The Queen v. Savage, 83 DTC 5409, the Supreme Court of Canada considered the meaning of paragraph 6(1)(a) of the Act in relation to a small prize of $300 paid to Ms. Savage by her employer (a life insurance company) because she passed examinations in three courses which she took voluntarily concerning the life insurance business. Writing for the majority, Dickson J. (as he then was) stated at page 5414:

... Our Act contains the stipulation, not found in the English statutes referred to, "benefits of any kind whatever .... in respect of, in the course of, or by virtue of an office or employment". The meaning of "benefit of whatever kind" is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of "benefit". Further, our Act speaks of a benefit "in respect of" an office or employment. In Nowegijick v. The Queen, 83 DTC 5041 this Court said, at p. 5045, that:

The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.

...

It is difficult to conclude that the payments by Excelsior to Mrs. Savage were not in relation to or in connection with her employment. As Mr. Justice Grant said, the employee took the course to improve his or her knowledge and efficiency in the company business and for better opportunity of promotion.

Although the $300 was held to be an employment benefit under paragraph 6(1)(a), Ms. Savage was successful in her appeal because the $300 was also held to be a "prize" within the meaning of paragraph 56(1)(n) and not taxable because it was less than $500.

[17] In Schwartz v. The Queen, 96 DTC 6103, Mr. Schwartz had agreed with Corporation D in the spring of 1988 to commence work in November 1988 at a salary of $250,000 per year. In September 1988, Corporation D informed Mr. Schwartz that his services would not be required. There were protracted negotiations between the respective lawyers for Mr. Schwartz and Corporation D. In August 1989, Corporation D paid to Mr. Schwartz a lump sum of $360,000 as damages plus $40,000 on account of costs. The Minister of National Revenue added the damages ($360,000) to Mr. Schwartz's income for 1989.

[18] In the Supreme Court of Canada, the Minister argued that the damages were taxable under paragraph 3(a) of the Act as income from an unenumerated source (i.e. the employment contract which was broken before the intended employment commenced); or taxable as a "retiring allowance". Both of the Minister's arguments failed and Mr. Schwartz's appeal was allowed. In my opinion, the decision of the Supreme Court in Schwartz is not helpful in this appeal because the Supreme Court relied on the basic fact that employment had not commenced and Mr. Schwartz had never been in the service of his prospective employer. In this appeal, the Appellant (Mrs. Dumas) had been a full-time employee of NGDA prior to her disability. Also, the Minister is not attempting to tax the Appellant under the broad provisions of paragraph 3(a).

[19] In income tax law, there is nothing magic about an amount recovered by a plaintiff in civil litigation whether it be the result of a favourable judgment or a negotiated settlement. The amount recovered is compensatory in nature. That alone will not determine its character for tax purposes as being income or capital or something else. The real question is to determine why the compensatory amount was paid. The answer is often found in the pleadings of the plaintiff and defendant in the civil litigation. A case in point is London & Thames Haven Oil Wharves, Ltd. v. Attwooll, [1967] 2 All E.R. 124 in which a jetty owned by the wharf company was damaged by a negligently navigated tanker. The wharf company sued the owner of the tanker and recovered a payment which was apportioned between (i) physical damage to the jetty and (ii) loss of use of the jetty for 380 days during repair. It was decided that the portion ( £ 21,404) of the damages allocated to loss of use of the jetty was income for tax purposes.

[20] In The Queen v. Manley, 85 DTC 5150, the Federal Court of Appeal applied the decision of the United Kingdom Court of Appeal in London & Thames Haven Oil Wharves and, in particular, quoted the general rule stated by Diplock L.J. The Federal Court of Appeal also examined the measure of damages which had been awarded to Mr. Manley by the Ontario Court in his litigation against Mr. Levy. Mahoney J.A. writing for the Court referred to the decision in The Queen v. Atkins, 76 DTC 6258 and stated at page 5154:

... Atkins is not, and does not purport to be, authority for the proposition that damages, or an amount paid to settle a claim for damages, cannot be income for tax purposes.

The measure of damages for breach of warranty of authority is the amount that will put the party, to whom the representation of authority was made, in the position he would have been had the authority existed. ...

That is the measure of damages in fact awarded by the Ontario Court of Appeal here.

[21] In The Queen v. Mohawk Oil Co. Ltd., 92 DTC 6134, the taxpayer corporation (Mohawk) had contracted with Phillips to supply and install a waste oil reprocessing plant. When the plant failed to perform as expected, Mohawk claimed compensation from Phillips in the initial amount of $15 million. After hard negotiations, the parties settled on the amount $6,000,000 in US funds ($7,162,187 Canadian). Of this amount, the Minister of National Revenue regarded $3,443,708 as compensation for loss of profits and $3,718,430 as proceeds of disposition of property. The Federal Court of Appeal allowed the appeal on behalf of the Minister and upheld the assessment. In so doing, the Court reviewed the evidence of the negotiations between Mohawk and Phillips to see if it supported the Minister's allocation. This is further authority for the proposition that a lump sum paid in settlement of a claim must be examined to see why it was paid. The answer may be found in the pleading (if there was litigation) or in other documents which attempt to justify the claim of the recipient of the lump sum.

[22] In Amway of Canada Ltd. v. The Queen, 96 DTC 6135, the corporate taxpayer had defrauded Revenue Canada of large amounts of money by falsifying the value of goods imported into Canada. Revenue Canada commenced five different actions against Amway with respect to the recovery of customs duties, sales taxes, interest and penalty. These actions were finally settled in 1989 when, under the terms of the settlement, Amway paid $45 million to Revenue Canada. When assessing income tax for the 1977 and 1978 taxation years, the Minister of National Revenue accepted $7.9 million as payment of customs duties and sales taxes (and therefore deductible) but the Minister allocated $37.1 million as payment of non-deductible penalties. Amway appealed from the Minister's assessment. To find out why the $45 million was paid in settlement, the Federal Court of Appeal reviewed the pleadings in the five actions which had been commenced by Revenue Canada and certain court proceedings in those five actions. Strayer J.A. writing for the Court stated at pages 6138-6139:

It is not in dispute that the total sum of $45,000,000 was paid, in part, to settle the four actions commenced in 1980 and the fifth action commenced in 1984. Nor is it in dispute that $7.9 million of the total must be allocated to the settlement of the 1984 action, an action clearly and solely for recovery of duties and taxes. But I respectfully disagree with the learned trial judge that the 1980 actions were for both the recovery of a penalty and the recovery of duties and taxes. The statements of claim in those four actions do not support this view as they contain no prayer for relief for recovery of the duties and taxes as such. Furthermore, for the same reasons as were given by the Federal Court of Appeal on two appeals in interlocutory decisions in these four actions, I conclude that these were actions for the recovery of a penalty. Whether or not those earlier decisions are binding on us in the present case they are in my view highly persuasive. ...

[23] Although Amway was concerned with the deduction (in computing income) of an amount paid to settle a claim as distinct from the inclusion in income of an amount received as damages, I am impressed by the fact that the Federal Court of Appeal reviewed the pleadings in Amway, reviewed the decision of the Ontario Court of Appeal in Manley, and reviewed the negotiation correspondence in Mohawk Oil to determine why a plaintiff (or potential plaintiff) claimed a particular amount and why some corresponding amount was paid. The underlying civil litigation or other dispute process is important to characterize for income tax purposes an amount received or an amount paid.

[24] The Appellant's claim against GWL is succinctly stated in paragraph 13 of her Statement of Claim (Exhibit A-20) in the Ontario Court:

13. The Plaintiff claims to be entitled under the terms of the group policy to monthly payments in the amount of $1,210 per month commencing on May 14, 1987 until such time as the total disability ceases or she obtains the age of 65 years.

The letter of July 6, 1995 (Exhibit A-29) from Mr. Millican (GWL's lawyer) and the letter of August 8, 1995 (Exhibit A-30) from Ms. Roccamo (the Appellant's lawyer) confirm the fact that the lawyers were negotiating to settle with a view to net disability benefits in arrears plus 50% of the future disability benefits. Having regard to paragraph 13 of the Statement of Claim (Exhibit A-20), the Damage Assessment prepared by Ms. Roccamo (Exhibit A-27), and the letters from the respective lawyers (Exhibits A-29, A-30 and A-31), I find that the settlement amount of $105,000 was based primarily on net disability benefits in arrears (to September 1995) plus 50% of future disability benefits.

[25] If those disability benefits (arrears and future) had been paid on a periodic basis, they would have been included in the Appellant's income as received from year to year under paragraph 6(1)(f) of the Act. Those benefits were not paid on a periodic basis or paid at all. The Appellant sued GWL and recovered $105,000. The Appellant's problem in this appeal is to demonstrate that the character of the settlement amount is different from the character of the periodic payments (i.e. income) which would otherwise have been received. I will repeat here a statement of Mahoney J.A. in Manley as quoted in paragraph 20 above:

... Atkins is not, and does not purport to be, authority for the proposition that damages, or an amount paid to settle a claim for damages, cannot be income for tax purposes.

The decisions of the Federal Court of Appeal in Manley and Mohawk Oil prove that all or a portion of an amount recovered as damages (as in Manley) or by way of settlement (as in Mohawk Oil) may be characterized as income for tax purposes. The character of an amount received as damages or to settle a claim will be influenced, if not wholly determined, by the nature of the claim made by the person receiving the amount.

[26] The Appellant (as Plaintiff in the Ontario Court) claimed "monthly payments in the amount of $1,210 per month commencing on May 4, 1987 ... ". I am satisfied that the settlement amount of $105,000 is income to the Appellant in 1995 just as much as the periodic disability benefits would have been income under paragraph 6(1)(f). I rely on the decisions of the Federal Court of Appeal in Manley and Mohawk Oil. Because the settlement amount was not paid or received "on a periodic basis", it is not taxable under paragraph 6(1)(f). It is, however, taxable under paragraph 6(1)(a) as a benefit received "in respect of, in the course of, or by virtue of an office or employment". I rely on the decision of the Supreme Court of Canada in Savage.

[27] Appellant's counsel raised the question as to whether Mrs. Dumas received the amount of $105,000 qua insured or qua employee. In my view, this question is not helpful because the Appellant would not have had any LTD insurance unless she had been employed by NGDA. Her LTD insurance was part of the benefits package which she received as an employee of NGDA. Rather than regarding her receipt of the amount "qua insured or qua employee" as if they were mutually exclusive alternatives, I would say that she received the amount in respect of or by virtue of her employment with NGDA having LTD insurance coverage.

[28] Having decided that the character of the $105,000 amount is income, I am required to consider whether the entire amount is to be included in income (as assessed) or some lesser amount. There is uncontradicted evidence from the Appellant's husband that she incurred legal and medical costs of $20,000 to obtain the settlement from GWL. Without those costs, the settlement amount would not have been obtained. In some cases which are settled, the amount paid is allocated between damages and costs. See Schwartz in paragraph 17 above. In this appeal, there was no allocation as evidenced by the first paragraph of Exhibit A-31 quoted in paragraph 7 above.

[29] Paragraph 6(1)(a) of the Act includes as income the "value of ... benefits of any kind whatever". The value of this settlement amount to the Appellant cannot be $105,000 if she was required to incur costs of $20,000 in order to obtain it. In my opinion, her costs must be taken into account. I find that the value of the benefit received within the meaning of paragraph 6(1)(a) of the Act was $85,000 ($105,000 less $20,000) and not the full amount of $105,000 which the Minister added to the Appellant's reported income for 1995. The appeal is allowed only for the purpose of reducing the value of the employment benefit from $105,000 to $85,000.

[30] In all the circumstances of this appeal, I will make no award of costs unless counsel should wish to address that subject by telephone conference.

Signed at Ottawa, Canada, this 26th day of October, 2000.

"M.A. Mogan"

J.T.C.C.