REASONS
FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1]
The fallout and litigation arising from the
financial difficulties experienced by Nortel Networks Corporation (“NNC”) and its subsidiaries (collectively, “Nortel”) in 2009 continues. In these Appeals, although Nortel
is not a litigant, some of its former employees, or the surviving spouses of former
employees, are the Appellants.
[2]
These Reasons apply to Appeals instituted by
James Scott, Susan Kennedy, Mary Ellis and Ann McCann respectively, and relate
to the taxability of distributions that were made in 2011 from a health and
welfare trust established by Nortel in 1980. The Appellants filed their income
tax returns for 2011 on the basis that those distributions formed part of their
income. However, after the Canada Revenue Agency (the “CRA”),
on behalf of the Minister of National Revenue (the “Minister”),
issued notices of assessment (the “Assessments”)
in accordance with the income tax returns as filed, the Appellants filed
Notices of Objection, taking the position that the distributions were not
taxable. After the CRA confirmed the Assessments, the Appellants instituted
these Appeals.
II. FACTS
[3]
At the commencement of the hearing, the
Appellants and the Respondent (collectively, the “Parties”)
presented to the Court a Statement of Agreed Facts (the “SAF”).
The SAF is reproduced as Appendix A to these Reasons. Certain of the relevant
facts are summarized in the ensuing paragraphs.
A. Background
[4]
Until January 14, 2009, NNC was a publicly traded
Canadian corporation and the direct or indirect parent of numerous subsidiaries.
On January 14, 2009, most of the Nortel Entities filed for bankruptcy
protection. In Canada, the Canadian corporations filed under the Companies'
Creditors Arrangement Act (the “CCAA”). Ernst & Young Inc. was appointed
as the monitor (the “Monitor”) of the Nortel
estate.
[5]
During the CCAA proceeding, Nortel
divested itself of substantially all of its assets and business units and
terminated the employment of most of its employees in Canada.
B. Health and Welfare Plans
[6]
As of January 1, 1980, Nortel established health
and welfare plans (the “HW Plans”) for
the benefit of certain active and former employees. The HW Plans provided for
various benefits, including health care (medical and dental) benefits, sickness
and accident benefits, long term disability benefits, survivor income benefits
and group life insurance.
[7]
Most of Nortel’s health and welfare benefits,
including life insurance and survivor income/transition benefits, were
delivered through the Nortel Health and Welfare Trust (the “HWT”) established pursuant to a trust agreement (the “Trust Agreement”), made effective as of January 1,
1980, between Montreal Trust Company and Northern Telecom Limited (which was
then the name of NNC).
The HWT was a single trust fund created for the purpose of delivering health
and welfare benefits to active and retired employees of Nortel and their
eligible dependents in accordance with the HW Plans.
[8]
Most of Nortel’s non-pension employee benefits,
including group life insurance, long term disability, health care (medical and
dental) and survivor income benefits, were funded by Nortel on a pay-as-you-go
basis; however, as an administrative matter, they were paid using the HWT as a
payment mechanism. Certain other benefits were funded, in part, by the HWT using
its trust assets. Although the assets for the funded benefits were notionally
allocated in the financial statements of the HWT, those assets were not
segregated by benefit plan, and no separate bank accounts were established,
with the result that all of the HWT assets were commingled.
[9]
By agreement dated December 1, 2005, Nortel
appointed the Northern Trust Company, Canada (the “Trustee”)
as the successor trustee under the HWT, and the Trust Agreement was amended to
reflect this change. As of the same date, Nortel entered into a letter
agreement with the Trustee, wherein Nortel agreed:
a)
to be solely responsible for administering the
HW Plans and for determining the contributions required to adequately fund the
HW Plans, and
b) to indemnify the Trustee from all claims and liabilities incurred by
the Trustee and arising out of the administration of the HW Plans or out of the
contributions made (or not made) by Nortel to the HWT.
The letter agreement
also stated that “to the extent necessary, this letter
shall constitute an amendment to the Health and Welfare Trust.”
[10]
As Nortel’s financial situation deteriorated and
it ultimately became insolvent, it nevertheless continued to fund certain
benefits for more than a year after the CCAA filing, but it became apparent
that Nortel could not continue to do so indefinitely, which lead to the
negotiation of an agreement concerning some of the issues related to the HW
Plans and other plans.
[11]
Certain employment-related issues of former
Nortel employees were addressed in an Amended and Restated Settlement Agreement
made as of March 30, 2010 (defined above as the “ARSA”)
among NNC, four other Nortel Entities, the Monitor, the court-appointed
representatives of the former Nortel employees (the “Former Employee Representatives”), Susan Kennedy on
behalf of the Represented LTD Beneficiaries,
and Representative Counsel
(collectively, the “Settlement Parties”).
[12]
The ARSA was approved by the Ontario Superior
Court of Justice (the “Superior Court”) by
Order dated March 31, 2010 (the “Settlement Approval
Order”). The Settlement Approval Order was affirmed by the Ontario Court
of Appeal on June 3, 2010.
[13]
The ARSA provided that, up to December 31, 2010,
Nortel was to continue to pay life insurance benefits and survivor
income/transition benefits. The ARSA also provided that no such benefits were
to be paid by Nortel for any benefit coverage period after December 31, 2010.
[14]
Pursuant to the ARSA, the affected employees and
survivors, including the Appellants, were entitled to file an unsecured claim
as ordinary creditors against the Nortel estate in the CCAA proceeding for any
funding deficit in the HWT or for any HWT-related claims (the “HWT Claims”).
[15]
Certain of the representative parties to the
ARSA, on their own behalf and on behalf of the parties represented by them,
released the Trustee of the HWT, the Monitor and others from any claims
related to the HWT. Nothing in the ARSA released Nortel from any claim for any
funding deficit in the HWT or for any HWT Claims, to
the extent that such claims were allowed as ordinary unsecured claims against
Nortel.
[16]
In the ARSA, the Settlement Parties agreed to “work towards developing a Court approved distribution of the
HWT corpus in 2010 to its beneficiaries entitled thereto and the resolution of
any issues necessarily incident thereto.” The ARSA did not affect “the determination on any basis whatsoever of the entitlement
of any beneficiary to a distribution from the corpus of the HWT.”
[17]
The HWT allocation agreed to by the Settlement
Parties was submitted to the Superior Court for approval. The HWT
allocation and the distribution of the HWT’s corpus were approved by the
Superior Court by Order dated November 9, 2010 (the “HWT Allocation Order”). The methodology for
allocation of the corpus of the HWT approved by the Superior Court provided
that the amount of the allocation was to be calculated based on each approved
participating benefit’s respective share of the present value of all the
approved participating benefits.
The Order also provided that certain beneficiaries, including the Appellants, were
to receive distributions from the approved participating benefits’ pro rata
share of the HWT corpus. The distribution of the corpus of the HWT was to be
made by the Trustee (or an agent of the Trustee or Nortel) to the entitled
individuals in accordance with the HWT Allocation Order.
[18]
The date of the Notice of Termination for all
purposes under and pursuant to the Trust Agreement was deemed by the HWT
Allocation Order to be December 31, 2010. The HWT Allocation Order also
provided that the requirement for and delivery of a Notice of Termination
to the Trustee pursuant to section 2 of Article VI of the Trust Agreement
was dispensed with for all purposes.
By way of background, the first two sentences of section 2 of Article VI
of the Trust Agreement read as follows:
Upon sixty (60)
days prior written notice to the Trustee, the Corporation may terminate its
obligation to make employer’s contributions in respect of benefits after the
date of written notice to the Trustee (hereinafter called the “Notice of Termination”). Upon receipt of the Notice
of Termination the Trustee shall within one hundred twenty (120) days determine
and satisfy all expenses, claims and obligations arising under the terms of the
Trust Agreement and Health and Welfare Plan up to the date of the Notice of
Termination.
Thus, the term “Notice of Termination” refers to the termination of
NNC’s obligation to make contributions in respect of benefits under the HW
Plans, and not to the termination of the Trust. The date of the Notice of
Termination marked the end of NNC’s obligation to make contributions to the HWT
and the effective date for the determination and satisfaction of the expenses,
claims and obligations of the HWT.
[19]
As at December 31, 2010, the HWT had
insufficient assets to deliver the vested employee benefits. Nortel was then insolvent
and could not fund the benefits.
[20]
Distributions from the HWT, in accordance with
the HWT Allocation Order, commenced in 2011, pursuant to various interim
distribution orders issued by the Superior Court in 2011. The Appellants all
received distributions, some of which are described below.
[21]
By Order dated November 19, 2013, the Superior
Court further ordered and declared that “upon the posting
of the Notice of Declared Distribution on the Monitor’s website and completion
of the distributions from the HWT as provided for in this Order, the HWT will
automatically terminate.”
As of August 2016, the distributions from the HWT had apparently not been
completed.
C. The HWT’s 2011 Income Tax
Return
[22]
The hearing of these Appeals commenced on
Thursday, August 25, 2016. On Monday, August 22, 2016, a trial management
conference was held by telephone conference call. At that time, counsel for the
Appellants advised that there would be no witnesses called at the hearing and
that there would be a statement of agreed facts, as well as agreed-upon exhibits.
Counsel for the Respondent concurred with the foregoing statements. Three days
later, shortly after the beginning of the hearing, the SAF was entered as
Exhibit AR-1 and a three-volume Joint Book of Documents (defined above as the
“JBOD”) was entered as Exhibit AR-2.
[23]
At the commencement of the hearing and before
the above-mentioned documents were entered as exhibits, counsel for the
Respondent requested leave to file, as contemplated by subsection 244(9) of the
Income Tax Act
(the “ITA”), an affidavit (the “Affidavit”) sworn by a CRA auditor and containing, as
exhibits, copies of the 2011 T3 Trust Income Tax and Information Return filed
by the HWT and the 2011 Trust Notice of Assessment issued by the CRA to the
HWT. Counsel for the Appellants objected to the admission of the Affidavit. I
directed that the Affidavit be marked as Exhibit R-1 for Identification, and
indicated that I would consider, and ultimately make a determination
concerning, the admissibility of the Affidavit.
D. Mary Ellis (Pensioner Life
Insurance Benefit)
[24]
In 2010, Ms. Ellis, who was a retired employee
of Nortel, had a vested right, by virtue of her employment with Nortel, to
receive life insurance benefits under the Nortel Group Term Life Insurance Plan
(the “Group Life Plan”). Ms. Ellis’ benefit
consisted of group life insurance coverage and the payment by the HWT of the requisite
insurance premiums during her lifetime. The amount of the insurance proceeds
that would have been paid, on the death of Ms. Ellis, to her beneficiary, and
which was based on her earnings while she was an active employee of Nortel, was
$17,000. For taxation years ending before 2011, Ms. Ellis included, in
computing her income, the amount of the group life insurance premiums paid on
her behalf by the HWT.
[25]
Pursuant to the ARSA, the HWT continued to pay the
life insurance premiums in respect of Ms. Ellis until December 31, 2010, but no
premiums were paid thereafter. The Monitor estimated that, as at December 31,
2010, the present value of Ms. Ellis’ claim was $6,855.
[26]
As Ms. Ellis was a beneficiary of the HWT, when
distributions from the corpus of the HWT were made in 2011, Ms. Ellis
received $1,371. The Monitor subsequently issued to Ms. Ellis a T4A slip in
respect of the $1,371 distribution. When Ms. Ellis prepared and filed her
income tax return for 2011, she included the distributed amount of $1,371 in
computing her income. Ms. Ellis’ 2011 tax return was assessed as filed, and she
subsequently objected and later appealed.
E. Susan Kennedy (Long Term
Disability Life Insurance Benefit)
[27]
In 2010, Ms. Kennedy was a former employee of
Nortel who was receiving long term disability benefits (“LTD Benefits”) under the Nortel Long Term Disability
Plan for full-time employees (the “LTD Plan”).
As such, she had a vested right to receive life insurance coverage under the
Group Life Plan (while she was in receipt of LTD Benefits), until attaining age
65, whereupon she would have been eligible for pensioner life insurance coverage
under the Group Life Plan for her lifetime. The amount of the insurance
proceeds that would have been paid, on the death of Ms. Kennedy, to her
beneficiary was $62,000 for basic life insurance and $186,000 for optional life
insurance. For taxation years ending before 2011, Ms. Kennedy included, in
computing her income, the amount of the group life insurance premiums paid on
her behalf by the HWT.
[28]
The HWT paid the life insurance premiums in
respect of Ms. Kennedy until December 31, 2010. No premiums were paid
thereafter. The Monitor estimated the present value of Ms. Kennedy’s claim, as
at December 31, 2010, to be $29,394.
[29]
As Ms. Kennedy was a beneficiary of the HWT, she
was entitled to receive a share of the distribution of the corpus of the HWT.
She received lump-sum payments in the amounts of $7,281.88 and $1,730 in
September 2011 and December 2011 respectively. The Monitor subsequently issued
one or more T4A slips (presumably in the aggregate amount of $9,011.88, i.e.,
$7,281.88 + $1,730) to Ms. Kennedy, who, in preparing her income tax
return for 2011, included the distributed amounts in computing her income. The CRA assessed Ms. Kennedy’s
2011 income tax return as filed, after which Ms. Kennedy objected and later
appealed.
F. James Scott (Management Survivor
Income Benefit)
[30]
While she was alive, the spouse of Mr. Scott was
an active non-unionized full-time employee of Nortel. After the death of his
spouse, Mr. Scott, pursuant to the Management Survivor Income Benefit Plan (the
“SIB Plan”), became entitled to receive monthly
survivor income benefits (the “SIBs”), each in
the amount of $871.46, by reason of his spouse’s employment with Nortel. In
preparing his income tax returns, Mr. Scott reported the SIBs as death benefits,
which he included in computing his income. Mr. Scott received SIBs until
December 31, 2010, but not thereafter.
[31]
Mercer (Canada) Limited (“Mercer”), which was Nortel’s actuary, estimated the
present value of Mr. Scott’s SIBs, as at December 31, 2010, as being
$124,345. When the corpus of the HWT was distributed in 2011, Mr. Scott
received lump-sum payments of $724.18 in January 2011, $482.79 in May 2011 and
$7,319.20 in July 2011 (resulting in aggregate distributions of $8,526.17 to
him in 2011).
The Monitor subsequently issued one or more T4A slips to Mr. Scott in
respect of the distributions, and Mr. Scott included the distributed amounts in
computing his income for 2011. After his 2011 income tax return was assessed as
filed, Mr. Scott objected and later appealed.
G. Ann McCann (Union Survivor
Transition Benefit)
[32]
Before his death, the spouse of Ms. McCann was a
unionized employee of Nortel. Upon the death of her spouse, Ms. McCann became
entitled to receive monthly survivor transition benefits (“STBs”) under the Union Survivor Transition Benefit
Plan (the “STB Plan”), by virtue of her spouse’s
employment with Nortel. Specifically, under the STB Plan, Ms. McCann was
entitled to receive a monthly payment in the amount of $725 for a fixed
five-year term that would have expired on December 31, 2013. Pursuant to the
ARSA, Ms. McCann continued receiving the monthly STBs until December 31,
2010, after which no further benefits were paid. The Monitor estimated the
present value of Ms. McCann’s STBs, as at December 31, 2010, to be
$24,644.
[33]
As Ms. McCann was a beneficiary of the HWT, when
distributions from the corpus of the HWT were made in 2011, she received $2,175
in January 2011, $285.97 in May 2011 and $3,691.45 in July 2011 (resulting in aggregate
distributions of $6,152.42 to her in 2011).
The Monitor subsequently issued one or more T4A slips to Ms. McCann in
respect of the distributions to her.
[34]
When Ms. McCann filed her income tax return for
2011, she included the distribution of $6,152.42 in computing her income. The
CRA subsequently assessed her return, apparently to include, in computing her
income, STBs in the amount of $6,438.39, after which Ms. McCann objected and
later appealed.
III. ISSUES
[35]
The issues to be resolved in respect of these
Appeals are the following:
A. Is the Affidavit, together with the HWT’s 2011 T3 Trust Income Tax
and Information Return and 2011 Trust Notice of Assessment, admissible?
B. Are sections 104 through 108 of the ITA applicable to the
disposition of these Appeals, and, if so, how?
C. Should the distribution in the amount of $1,371 by the HWT to Ms.
Ellis in 2011 be included in computing her income for 2011?
D. Should the distributions in the aggregate amount of $9,011.88 by the
HWT to Ms. Kennedy in 2011 be included in computing her income for 2011?
E. Should the distributions in the aggregate amount of $8,526.17 by the
HWT to Mr. Scott in 2011 be included in computing his income for 2011?
F. Should the distributions in the aggregate amount of $6,152.42 by the
HWT to Ms. McCann in 2011 be included in computing her income for 2011?
IV.
ANALYSIS
A. Admissibility of the Affidavit
(1) Background
[36]
When drafting an agreement concerning the use of
a statement of agreed facts or a joint book of documents, it is not uncommon
for one or more of the parties to reserve the right to call one or more
witnesses or to introduce additional documentary evidence at the hearing. There
was no such reservation by either Party here, although the introductory
paragraph of the SAF concludes by saying, “Nothing in
this document precludes any parties from relying on the facts otherwise in the
record before the court.” As mentioned above, counsel for the Respondent
applied to have the Affidavit admitted as evidence so that it and its exhibits
would be part of the record before the Court.
[37]
It is my understanding that the primary reason
for which the Respondent wanted to introduce the Affidavit (including the HWT’s
2011 tax return and notice of assessment) as evidence was to prove that the HWT
existed in 2011 and that, in computing its income for 2011, the HWT deducted
the amounts distributed by it to the Appellants in 2011. Counsel for the Respondent
submitted that the matching principle was applicable, such that, assuming that
the HWT deducted the distributed amounts, it would follow that those amounts
should be included in computing the income of the recipients.
[38]
Counsel for the Appellants objected to the
admission of the Affidavit on the basis that the delivery of the Affidavit to
him on the morning of the first day of the hearing constituted prejudicial “last-minute trial-by-ambush type tactics.” Furthermore, counsel for the
Appellants pointed out that the HWT is not a party to these Appeals and that
its tax return and notice of assessment are confidential. In addition, counsel
for the Appellants submitted that the matching principle does not exist and
that the manner in which the HWT was taxed is not relevant to the taxability of
the Appellants.
[39]
While making his submissions concerning the admissibility
of the Affidavit, counsel for the Appellants stated that, although the HWT
Allocation Order provided that the date of the Notice of Termination (which, in
my view, marked the end of NNC’s obligation to make contributions to the HWT and
set the effective date for the determination and satisfaction of the expenses,
claims and obligations of the HWT)
was deemed to be December 31, 2010, he was willing to concede that the
winding-up of the affairs of the HWT continued into 2011, 2012 and subsequent
years and that the HWT has filed tax returns for each year during which the
winding-up has continued.
(2) Rule
89(1)
[40]
Each of the Appellants filed a List of Documents
(Partial Disclosure) on January 30, 2015. Each List referred to the 2011 Income
Tax and Benefit Return of the particular Appellant, but did not refer to the
2011 T3 Trust Income Tax and Information Return of the HWT.
[41]
On January 30, 2015 the Respondent filed a List
of Documents (Partial Disclosure) in each of these Appeals. The Lists filed in
respect of Mr. Scott’s and Ms. McCann’s Appeals referred to copies of the
2011 income tax returns of those two Appellants respectively. The Lists filed by the Respondent
in respect of Ms. Kennedy’s and Ms. Ellis’ Appeals referred to the 2011 Option
C Printouts for those two Appellants,
rather than to their actual tax returns. The Lists filed by the Respondent did
not refer to the HWT’s 2011 income tax return or notice of assessment.
[42]
Subsection 89(1) of the Tax Court of Canada
Rules (General Procedure)
(the “Rules”) states:
89(1) Unless
the Court otherwise directs, except with the consent in writing of the other
party or where discovery of documents has been waived by the other party, no
document shall be used in evidence by a party unless
(a) reference to it appears in the pleadings, or in a
list or an affidavit filed and served by a party to the proceeding,
(b) it has been produced by one of the parties, or
some person being examined on behalf of one of the parties, at the examination
for discovery, or
(c) it has been produced by a witness who is not, in
the opinion of the Court, under the control of the party.
[43]
The HWT’s 2011 tax return and notice of
assessment do not come within paragraph 89(1)(b) or (c) of the Rules,
nor are they referred to in the pleadings or in the Respondent’s List of
Documents. They are, however, included as exhibits in the Affidavit,
which was not filed with the Court before the commencement of the hearing and
was only served on the Appellants on the morning of August 25, 2016 (the day when
the hearing commenced). Paragraph 89(1)(a) of the Rules does
not specify a deadline for filing and serving a list of documents or an
affidavit containing a document. Subsection 81(1) of the Rules provides
that a list of documents (partial disclosure) is to be filed and served within
30 days following the closing of the pleadings. This suggests that a list of
documents should be filed sooner, rather than later.
[44]
The context of sections 78 through 91 of the Rules
suggests that, in paragraph 89(1)(a), the word “affidavit”
means an affidavit of documents as contemplated by subsections 82(4) through
(6) and section 88 of the Rules, rather than an affidavit of the type
contemplated by subsection 244(9) of the ITA.
[45]
If the Affidavit is not an affidavit of the type
contemplated by paragraph 89(1)(a) of the Rules, unless the
Court otherwise directs, the HWT’s 2011 tax return and notice of assessment may
not be used in evidence by the Respondent. If the Affidavit is an affidavit of
the type contemplated by paragraph 89(1)(a), and if I determine
that the Affidavit is admissible, the service of the Affidavit on the
Appellants on the morning of the commencement of the hearing placed the
Appellants at a significant disadvantage.
(3) Jurisprudence
concerning Rule 89(1)
[46]
Subsection 89(1) of the Rules has a
salutary objective, which is to reduce the possibility of taking the other
party by surprise (colloquially referred to as trial by ambush). Hence, the general rule is to
exclude from evidence a document that is not referred to in the pleadings or the
list of documents of the party who seeks to introduce the document. Absent some agreement between
the parties, subsection 89(1) of the Rules and other evidentiary
requirements relating to the production of documents should not readily be
ignored.
A departure from the general rule requires some justification or some reason.
[47]
The opening words of subsection 89(1) of the Rules
provide the Court with a discretion to allow a document into evidence even if
the requirements of subsection 89(1) have not been met. As a foundation for the
exercise of this discretion, there should be some reason provided to the Court
in support of the proposition that a previously undisclosed document should be
allowed into evidence.
The Court must exercise its discretion judicially, according to the rules of
reason and justice, and not arbitrarily.
In determining whether to admit a previously undisclosed document, there must
be a balancing of the competing interests of both parties, so as to avoid a miscarriage
of justice.
The Court must also be mindful of the interests of justice and the overriding
importance of having all of the relevant information before the Court to enable
it to arrive at a proper and just disposition of the particular appeal. Finally, the Court should not
lose sight of subsection 4(1) of the Rules, which provides that the
Rules are to “be liberally construed to secure
the just, most expeditious and least expensive determination of every
proceeding on its merits.”
[48]
During the discussion of the admissibility of
the Affidavit, neither counsel specifically addressed the question of whether
the Respondent’s failure to include the HWT’s 2011 tax return and notice of
assessment in its List of Documents precludes, by reason of subsection 89(1) of
the Rules, the Respondent from using that tax return and notice of
assessment in evidence.
Given that subsection 89(1) of the Rules was not discussed expressly by
either counsel, counsel for the Appellants did not urge me to exclude the
Affidavit on the basis of subsection 89(1) of the Rules, and counsel for the
Respondent made no submission as to why the Court should exercise its
discretion so as to allow the Affidavit to be admitted, nor did counsel for the
Respondent provide a justification or reason for departing from the general
rule in subsection 89(1) of the Rules. Counsel for the Respondent
explained why they would like the HWT’s 2011 tax return and notice of
assessment to be entered into evidence and why the desire to enter those
documents into evidence arose only a day or two before the hearing, but they
did not explain why I should ignore the general rule of exclusion in subsection
89(1) of the Rules.
[49]
As the impact of subsection 89(1) of the Rules
was not argued before me, I am reluctant to base my decision concerning
the admissibility of the Affidavit solely on that particular rule.
(4) Subsections
241(1) and (3) of the ITA
[50]
Another ground for the objection by counsel for
the Appellants to the admission of the Affidavit was that the exhibits to the
Affidavit constitute taxpayer information (as defined in subsection 241(10) of
the ITA), and, as such, are confidential and are, by reason of paragraph
241(1)(a) of the ITA, precluded from public disclosure. Paragraph
241(1)(a) of the ITA reads as follows:
241(1) Except as authorized by this section, no
official or other representative of a government entity shall
(a) knowingly provide, or knowingly allow to be provided, to
any person any taxpayer information….
[51]
The opening phrase of subsection 241(1) of the ITA
makes it clear that the remainder of section 241 may contain exceptions to the
general prohibition contained in subsection 241(1) of the ITA. One such
exception is found in paragraph 241(3)(b) of the ITA, which reads
as follows:
241(3) Subsections (1) and (2) do not apply in
respect of …
(b) any legal proceedings relating to the administration or
enforcement of this Act, the Canada Pension Plan, the Unemployment
Insurance Act or the Employment Insurance Act or any other Act of
Parliament or law of a province that provides for the imposition or collection
of a tax or duty.
(5) Jurisprudence
Concerning Section 241
[52]
In the Slattery case, Iacobucci J of the
Supreme Court of Canada enunciated some of the principles that apply to the
interpretation and application of section 241 of the ITA, as follows:
In my view, s.
241 involves a balancing of competing interests: the privacy interest of the
taxpayer with respect to his or her financial information, and the interest of
the Minister in being allowed to disclose taxpayer information to the extent
necessary for the effective administration and enforcement of the Income Tax
Act and other federal statutes referred to in s. 241(4).
Section 241
reflects the importance of ensuring respect for a taxpayer’s privacy interests,
particularly as that interest relates to a taxpayer’s finances. Therefore,
access to financial and related information about taxpayers is to be taken
seriously, and such information can only be disclosed in prescribed situations.
Only in those exceptional situations does the privacy interest give way to the
interest of the state….
By instilling
confidence in taxpayers that the personal information they disclose will not be
communicated in other contexts, Parliament encourages voluntary disclosure of
this information….
Parliament has
also recognized, however, that if personal information obtained cannot be used
to assist in tax collection when required, including tax collection by way of
judicial enforcement, the possession of such information will be useless. Disclosure
of information obtained through tax returns or collected in the course of tax
investigations may be necessary during litigation in order to ensure that all
relevant information is before the court, and thereby to assist in the correct
disposition of litigation. But this necessity is sanctioned by Parliament
in a very limited number of situations. Disclosure is authorized in criminal
proceedings and other proceedings as set out in s. 241(3). Certain other
situations are specified in s. 241(4), which have been described … as being “largely of an administrative nature” …. [Emphasis added.]
[53]
Iacobbuci J went on to discuss the two
connecting phrases that appear in the statutory provision quoted above. In
particular, he considered the phrase “in respect of,”
which appears in the first line of subsection 241(3) of the ITA and the
phrase “relating to” which appears in the first
line of paragraph 241(3)(b) of the ITA. Quoting from the Nowegijick
case, he noted that “[t]he phrase
‘in respect of’ is probably the widest of any expression intended to convey
some connection between two related subject matters.” He
also stated that, in his view, the comments quoted from Nowegijick are
equally applicable to the phrase “relating to”.
He then observed:
So, both the
connecting phrases of s. 241(3) suggest that a wide rather than narrow view
should be taken when considering whether a proposed disclosure is in respect of
proceedings relating to the administration or enforcement of the Income Tax
Act.
Later in his
reasons, Iacobucci J reiterated his comments concerning the breadth of
subsection 241(3) of the ITA, as follows:
As mentioned
earlier, in my opinion the exception authorizing Revenue Canada to disclose tax
related information in proceedings is very broad; that is, it operates in
respect of proceedings relating to the enforcement of the Income Tax Act. [Emphasis in original.]
[54]
In my view, particularly in light of the broad
interpretation given to subsection 241(3) of the ITA in Slattery,
the Appeals instituted by Mr. Scott, Ms. Kennedy, Ms. Ellis and Ms. McCann
constitute legal proceedings relating to the administration or enforcement of
the ITA. I am not aware of any requirement that the legal proceedings in
which the disclosure of otherwise confidential taxpayer information is sought
must pertain to the taxpayer who is the subject of that information. In fact,
the Federal Court of Appeal has previously ordered that the income tax returns
of a third party, which were relied on by the Minister in assessing another
taxpayer, were to be disclosed to the assessed taxpayer who had commenced legal
proceedings to challenge its assessments.
[55]
Counsel for the Appellants referred me to the Tor
Can Waste Management case, which dealt with a motion brought by a reassessed
taxpayer for disclosure by the Crown of information and documentation obtained
by the CRA from a third party from whom the reassessed taxpayer had purchased
certain waste containers or bins. In the course of deciding the motion, Lyons J
stated:
23. Subsections 241(1) and (2) of the Act embody the
basic principles that restrict the release of confidential taxpayer
information. Paragraph 241(3)(b) of the Act contains an
exception to the prohibition in respect of legal proceedings relating to the
administration or enforcement of the Act….
24. The prohibition against disclosure by the Minister of
protected third-party taxpayer information and documentation applies if it is
not relevant to nor was relied on by the Minister in reassessing a tax return.
25. Courts will not order the disclosure of third-party
information where the Minister did not use the information nor if there was
virtually no reason to use the information to make an assessment.
26. Courts have ordered disclosure of third-party information
(income tax returns and information exchanged with the Minister) if the
information was relied on by the Minister in making the assessment.
27. In the decision of Oro Del Norte S.A. v R., [1990]
2 CTC 67 (Fed. T.D.), the Court held that third-party information relevant to
the issues between the parties or relied on by the Minister in assessing is
disclosable. Recently, in Heinig …, Webb J. confirmed those
principles (relevance and reliance).
[Footnote numbers omitted.]
There was no
suggestion by counsel for the Respondent that the CRA relied on the HWT’s 2011
tax return in assessing Mr. Scott, Ms. Kennedy, Ms. Ellis or Ms. McCann.
However, counsel for the Respondent asserted that, by reason of the matching
principle, the HWT’s 2011 tax return is relevant to these Appeals. Counsel for
the Appellants took the position that the manner in which the HWT was taxed is
not relevant to the taxability of the Appellants. I will discuss the question
of relevance below.
[56]
In Tor Can Waste Management, Lyons J
noted (in footnote 16) that in 9005-6342 Québec Inc., Hogan J had canvassed the
principles relating to section 241 of the ITA. The 9005-6342 case,
like many of the cases dealing with section 241 (including some of those
referred to above), dealt with an application by a taxpayer to require the CRA
to produce third-party tax information that was used by the CRA in assessing
the taxpayer or that was relevant to the taxpayer’s appeal. Given that 9055-6342
did not deal with a situation where the CRA or the Crown was endeavouring to
enter confidential third-party tax information as evidence in an appeal
relating to another taxpayer, that case is not directly on point with the
current situation. Nevertheless, some of the principles pertaining to section
241 of the ITA, as enunciated by Hogan J and paraphrased below, might
have some application here:
a) Reasons of public policy and relevance might preclude the use of
third-party tax information that would otherwise qualify for disclosure under
paragraph 241(3)(b) of the ITA.
b) Third-party tax information should not be disclosed to another
taxpayer if the CRA had virtually no reason to use the information when
assessing the other taxpayer.
c)
Even though subsection 241(3) of the ITA
(which refers to any legal proceedings relating to the administration or
enforcement of the ITA) is broader than paragraph 241(4)(a) of
the ITA (which requires that the information contemplated by that
provision be regarded as necessary for the purposes of the administration or
enforcement of the ITA), and even though subsection 241(3) of the ITA
does not specify that third-party tax information must be relevant to a
particular case, the information may be disclosed only if it is relevant.
d) The notion of relevance must be interpreted broadly.
With respect to
the principle summarized in subparagraph b) above, counsel for the Respondent
did not make any submission to suggest that, in assessing the Appellants, the
CRA used, or even considered, the information contained in the HWT’s 2011 tax
return or notice of assessment.
[57]
In Gordon v The Queen, after noting that the
Supreme Court of Canada had indicated in Slattery that a wide view
should be taken when determining whether a proposed disclosure is in respect of
a proceeding relating to the enforcement or administration of the ITA,
O’Keefe J concluded that certain third-party taxpayer information could be
released by the CRA and other government officials to counsel for the Crown to
enable counsel to defend an action that had been brought against the Crown.
However, O’Keefe J expressed the view that notice of the proposed release of
taxpayer information should be given to the third parties:
There is no
requirement under the Income Tax Act that third parties be given notice
that their tax information will be released. However, this does not mean that
some type of advance notice should not be given to the taxpayer [presumably
meaning the third party whose tax information is to be released]. I am of
the opinion that some type of advance notice should be given to the taxpayer.
Based on the information available to me on this hearing, I am not prepared to
dictate the form of notice. I would, however, direct the parties to the
statements of Justice Phelan in Scott Slipp Nissan Ltd. v Canada (Attorney
General), [2005] G.S.T.C. 70, 2005 FC 1479 at paragraphs 15 and 16 where he
stated:
15. It was appropriate for the
Minister to give notice to third parties and to provide them respectively with
their confidential information that was to be released. The principles of
fairness generally would require this procedure as these third parties may have
rights or interests affected by the Minister’s decision to disclose….
[58]
In Tor Can Waste Management, Lyons J
referenced the Oro Del Norte case, which was a motion by a taxpayer for
an order compelling the Crown to produce certain documents containing
third-party taxpayer information. It is noteworthy that, in the context of that
motion, counsel for the Crown advised the third parties that the applicant in
that motion was seeking production of their confidential documents.
[59]
There was no indication given to me by counsel
for the Respondent that the HWT had been given notice that the Respondent
proposed to enter the HWT’s 2011 tax return and notice of assessment as
evidence in respect of these Appeals. I am reluctant to disregard the view
expressed by O’Keefe J that some type of advance notice should be given to a
third party before its taxpayer information is used in legal proceedings
pertaining to some other taxpayer.
(6) Relevance
[60]
As noted above, both Lyons J and Hogan J
indicated that, notwithstanding that subsection 241(3) of the ITA might
authorize the disclosure of confidential taxpayer information in the context of
legal proceedings relating to the administration or enforcement of the ITA,
such disclosure should not be made unless the information is relevant to those
proceedings. The classic explanation of relevance was reiterated by the Supreme
Court of Canada in 2011, as follows:
In order for
evidence to satisfy the standard of relevance, it must have “some tendency as a matter of logic and human experience to
make the proposition for which it is advanced more likely than that proposition
would be in the absence of that evidence”….
[61]
In Oro Del Norte, Jerome ACJ made the
following comments concerning relevance:
A taxpayer must
therefore be permitted access to all documents which are relevant to or relied
upon by the Minister of National Revenue in reassessing a return. Counsel for
the defendant concedes that the broad test of relevancy expounded by McEachern
C.J. in Boxer and Boxer Holdings Ltd. v. Reesor, et al. and adopted by
Urie J. in Everest & Jennings Canadian Ltd. v. Invacare Corporation
[1984] 1 F.C. 856 (F.C.A.) applies:
It seems to me that the clear right
of the plaintiffs to have access to documents which may fairly lead them
to a train of inquiry which may directly or indirectly advance their
case or damage the defendant’s case particularly on the crucial question of one
party’s version of the agreement being more probably correct than the other,
entitles the plaintiffs to succeed on some parts of this application…. [Emphasis
in original.]
… I fail to see
how documents pertaining to the activities of other mining companies, whether
similar to the plaintiffs or not, can in any way “lead
the plaintiffs to a train of inquiry which may directly or indirectly advance
their case or damage the defendant’s case…” The Minister has an
obligation to treat all similarly situated taxpayers in the same manner, but it
does not follow that documents pertaining to a similarly situated taxpayer are
relevant to any other taxpayer’s reassessment.
Of course, the
Respondent is not suggesting that the HWT is a taxpayer who is similarly
situated to any of the Appellants. Rather, I assume that the Respondent’s
objective is to show that the HWT, in computing its income for 2011, presumably
deducted the distributions made to the Appellants, from which, according to the
Respondent, it would follow that the distributions should be included in
computing the Appellants’ income for 2011. In other words, this would be an
application of the so-called matching principle, as described by counsel for the
Respondent (or, as I prefer to call it, reciprocity of tax treatment).
[62]
In their submissions concerning the relevance of
the HWT’s 2011 tax return and notice of assessment, counsel for the Respondent
explained that one of the issues in these Appeals is whether the distributions
from the HWT to the Appellants were income or capital. Counsel submitted that,
in a general situation, one of the factors to be considered when resolving an
income-versus-capital issue is a comparison of the manner in which the payor
and the payee of a particular payment report the payment on their respective
income tax returns.
While counsel did not refer me to any specific authority for that proposition,
I acknowledge that certain comments made by the Federal Court of Appeal
and the Supreme Court of Canada in Redeemer Foundation are supportive.
In the Federal Court of Appeal, Pelletier JA stated:
There is
reciprocity in the tax treatment of most commercial transactions. Simply put,
one person’s business deduction is another person’s revenue. The Minister has
every interest in confirming that the amount claimed as a business expense by
the buyer is the amount recorded as revenue by the seller. In the case of
registered charities, the same reciprocity applies. If the Minister determines
that donations received are not eligible for deduction, then he has an interest
in reviewing the returns of those to whom a receipt has been issued in respect
of those donations. This ability to subject both parties to a transaction to
equivalent tax treatment is a fundamental aspect of the verification process.
In the Supreme
Court of Canada, Rothstein J (dissenting in part) quoted a portion of the above
statement by Pelletier JA, and then stated:
I agree that
there is reciprocity of tax treatment of many commercial and charitable
transactions and that the CRA may have an interest in seeing how both the
taxpayer and the other party to a transaction have recognized it for tax
purposes.
[63]
Given that the concept of relevance must be
interpreted broadly,
and given the Supreme Court’s recognition of the reciprocity of tax treatment
and the desirability of avoiding asymmetrical tax treatment, I am of the view
that the manner in which the HWT reported the distributions to the Appellants
is relevant to these Appeals, although it is not necessarily determinative.
(7) Decision
[64]
Although the HWT’s 2011 tax return and notice of
assessment are relevant to these Appeals and there is a presumption of
admissibility,
I have concluded that, in the circumstances of these Appeals, the Affidavit
should not be admitted into evidence for the following reasons:
a) I have not been provided with adequate justification for departing
from the general rule of exclusion set out in subsection 89(1) of the Rules;
b) there has been no indication that the CRA, in assessing the
Appellants, used or considered any information in the HWT’s 2011 tax return or
notice of assessment; and
c) notice has not been given to the HWT of the Respondent’s request to
introduce the HWT’s confidential taxpayer information as evidence in these
Appeals.
B. Applicability of Trust
Provisions
[65]
During oral argument, I raised the question of
whether the trust provisions contained in sections 104 through 108 of the ITA
are applicable to the disposition of these Appeals. I asked counsel to provide
written submissions in respect of this issue.
(1) Appellants’
Submissions
[66]
In “Supplementary
Written Submissions of the Appellants,” filed on October 5, 2016, counsel
for the Appellants submitted that the provisions contained in sections 104
through 108 of the ITA are not relevant to the determination of the
issues in these Appeals. Counsel for the Appellants acknowledged that the
rollover provisions in section 107.1 of the ITA do apply to the HWT, as
it is a trust described in paragraph (a.1) of the definition “trust” in subsection 108(1) of the ITA. The
effect of paragraphs 107.1(a) and (c) of the ITA,
which are the applicable provisions, is that neither the HWT nor the Appellants
realized a gain or a loss on, respectively, the disposition of property by the
HWT when making the distributions or the disposition by the Appellants of parts
of their respective interests in the HWT in exchange for the distributions.
However, the CRA did not assess the Appellants in respect of any alleged gain,
such that section 107.1 is not relevant to these Appeals.
(2) Respondent’s
Submissions
[67]
Counsel for the Respondent, in “Respondent’s Supplementary Written Submissions re: Sections
104 to 108,” filed on November 4, 2016, submitted that sections 104 to
108 of the ITA do not assist in the determination of the issues in these
Appeals. Thus, counsel for the Respondent concurs with the main thrust of the
submissions by counsel for the Appellants concerning the non-applicability of
sections 104 through 108. However, counsel for the Respondent then went on to
suggest that paragraphs 104(13)(a) and 108(5)(a) of the ITA
could constitute an alternative basis for the taxation of the distributions
made in 2011 by the HWT to the Appellants.
(3) Concurrence
[68]
I concur with the general positions taken by
counsel for the Appellants and counsel for the Respondent to the effect that
sections 104 through 108 of the ITA are not determinative of the issues
in these Appeals. I accept the submissions made by counsel for the Appellants
in the “Appellants’ Reply to Respondent’s Supplementary
Written Submissions,” filed on November 24, 2016, that the Assessments
were issued on the basis that section 6 of the ITA (in the case of Ms.
Ellis and Ms. Kennedy) or section 56 of the ITA (in the case of Mr.
Scott and Ms. McCann) brought the respective distributions into income, and
that it is too late for the Respondent now to suggest, in the alternative, that
the applicable charging provisions are paragraphs 104(13)(a) and 108(5)(a)
of the ITA.
[69]
Having concluded that I need not consider
sections 104 through 108 of the ITA further, I will now turn my
attention to sections 6 and 56 of the ITA.
C. Taxability of Distributions
(1) Life
Insurance
(a) Mary Ellis (Distribution of
$1,371)
[70]
Before December 31, 2010, the HWT paid the
premiums in respect of the group life insurance coverage for Ms. Ellis. In
computing her income from employment for 2010 and preceding taxation years, Ms.
Ellis, as required by subsection 6(4) of the ITA, included the amount
prescribed by Part XXVII of the Income Tax Regulations (the “ITR”).
[71]
The amount distributed to Ms. Ellis by the HWT
in 2011 represented a portion of the present value of her beneficiary’s loss of
life insurance coverage as at December 31, 2010. The calculation of the amount
to be distributed to Ms. Ellis was based on the present value of the
amount of the life insurance proceeds that would have been paid to her
beneficiary on the death of Ms. Ellis; it was not calculated by reference to
the premiums that would have been paid if the Group Life Plan had not been
terminated.
Specifically, if the Group Life Plan had remained in effect, the amount of the
life insurance proceeds that would have been payable on the death of Ms. Ellis was
$17,000. Mercer calculated the present value of her claim amount as at December
31, 2010 to be $6,855.
The amount actually distributed by the HWT to Ms. Ellis in 2011 in respect of the
life insurance claim was $1,371.
(b) Susan Kennedy (Distribution of
$9,011.88)
[72]
Before December 31, 2010, the HWT paid the
premiums in respect of the group life insurance coverage for Ms. Kennedy. In
computing her income from employment for 2010 and preceding taxation years, Ms.
Kennedy, as required by subsection 6(4) of the ITA, included the amount
prescribed by Part XXVII of the ITR.
[73]
The amount distributed to Ms. Kennedy by the HWT
in 2011 represented the present value of the amount of the life insurance proceeds
that would have been paid to her beneficiary on the death of Ms. Kennedy. If
the Group Life Plan had remained in effect, the amount of the life insurance
proceeds that would have been payable on the death of Ms. Kennedy was $62,000
for basic life insurance and $186,000 for optional life insurance. Mercer
calculated the present value of her claim amount as at December 31, 2010 to be
$29,394.
The amount actually distributed by the HWT to Ms. Kennedy in 2011 in respect of
the life insurance claim was $9,011.88.
(2) Survivor
Benefits
(a) James Scott (Distribution of
$8,526.17)
[74]
Before December 31, 2010, the HWT paid to Mr.
Scott monthly survivor income benefits (defined above as “SIBs”), each in the amount of $871.46. Mr. Scott,
as required by subparagraph 56(1)(a)(iii) of the ITA,
included the SIBs in computing his income for 2010 and preceding taxation
years.
[75]
The amount distributed to Mr. Scott by the HWT
in 2011 in respect of the SIBs represented a portion of the present value of
the actuarial equivalent of the aggregate SIBs that would have been paid to him
during his lifetime if Nortel had not become insolvent. Specifically, Mr.
Scott’s SIB claim amount was calculated by Mercer as being $124,345. The amount actually
distributed by the HWT to Mr. Scott in 2011 in respect of his SIB claim was
$8,526.17.
(b) Ann McCann (Distribution of
$6,152.42)
[76]
Before December 31, 2010, the HWT paid to Ms.
McCann monthly survivor transition benefits (defined above as “STBs”), each in the amount of $725. Ms. McCann, as
required by subparagraph 56(1)(a)(iii) of the ITA, included the
STBs in computing her income for 2010 and preceding taxation years.
[77]
Mercer calculated Ms. McCann’s STB claim amount to
be $24,644.
The amount actually distributed by the HWT to Ms. McCann in 2011 in respect
of the STB claim was $6,152.42.
(3) Position
of the Appellants
[78]
The Appellants submit that the distributions to
them from the HWT represented settlement payments in consideration for the
surrender of their right to receive the benefits that they, or their
beneficiaries, would otherwise have received.
The Appellants take the position that the distributed amounts constituted
consideration for the disposition of a right to receive future amounts, such
that the distribution was a capital transaction. According to the Appellants,
the distribution was consideration for the surrender or release of a right,
rather than a replacement of an underlying benefit.
[79]
Ms. Ellis and Ms. Kennedy also submitted that
the amounts distributed to them represented a present valuation of the tax-free
life insurance proceeds that would have been paid on their deaths to their
beneficiaries, such that, if the surrogatum principle were to apply, the
result would be non-taxability.
[80]
In addition, Mr. Scott and Ms. McCann submitted
that, as the amounts distributed to them were paid in settlement of their
rights to future benefits, a right which they submitted existed independently
of the former Nortel employees (i.e., their respective deceased spouses), it is
unreasonable to infer that the distributions were received in recognition of
their spouses’ employment with Nortel, such that the distributions did not
constitute death benefits, as defined in subsection 248(1) of the ITA.
(4) Position
of the Respondent
The Crown takes
the position that the comments by Charron J in Tsiaprailis in
respect of the non-taxability of a compensatory payment in respect of future
benefits were obiter dicta, and that the ratio decidendi of the
majority decision in Tsiaprailis was to the effect that the lump-sum settlement
payment in respect of arrears was properly taxable. The Crown also takes the
position that the obiter dicta should be confined to situations
involving paragraph 6(1)(f) of the ITA, a provision that includes
in income certain amounts that are received “on a
periodic basis … pursuant to” certain specified types of plans.
Paragraph 6(1)(f) of the ITA is not applicable in these Appeals,
such that the Tsiaprailis obiter dicta is not applicable here.
The Crown also takes the position that the distributions by the HWT in 2011 were
not promised under a settlement agreement and did not extinguish the
Appellants’ respective claims against Nortel.
In addition, the Crown takes the position that sections 5, 6 and 56 of the ITA
provide that, subject to certain exceptions which are not applicable here, any
payment or benefit received in respect of employment is taxable. As well, the Crown submits
that the surrogatum principle does apply and that the distributions in
2011 replaced vested employment benefits.
(5) Analysis
of Tsiaprailis
[81]
As the Tsiaprailis case was a prominent
feature of the submissions presented by counsel for the Appellants and counsel
for the Respondent, I will briefly review a few aspects of that case. As
the case is well known, I will not provide a detailed summary of its facts.
Suffice it to say that Ms. Tsiaprailis had been in receipt of monthly disability
payments pursuant to a group insurance policy arranged by her employer, which had
also paid the premiums in respect of the policy. When the insurer discontinued
the payments, Ms. Tsiaprailis sued, and ultimately negotiated a
settlement, pursuant to which the insurer paid to Ms. Tsiaprailis a lump-sum
payment, portions of which were allocated respectively to the arrears that
should have been paid periodically up to the date of the settlement, to the
loss of future benefits, and to costs.
In analyzing the reasons of the three levels of judges in Tsiaprailis, I
have focused on the portions of their reasons pertaining to the amount paid in
satisfaction of the claim for future benefits, which is the aspect of that case
that is most germane to these Appeals. In particular, I have endeavoured to
extract the general principles enunciated by the various judges in respect of
the scope of paragraph 6(1)(a) of the ITA, the applicability of
the surrogatum principle, and the capitalization of a future income
stream.
[82]
In considering Tsiaprailis in the context
of these Appeals, it is important to note that the monthly disability payments
that Ms. Tsiaprailis received (before the insurer discontinued those
payments) were included in computing her income pursuant to paragraph
6(1)(f) of the ITA. Accordingly, Tsiaprailis is
not directly on point with these Appeals, as, before 2011, in
computing their income, Ms. Ellis and Ms. Kennedy included their life
insurance benefits pursuant to subsection 6(4) of the ITA, and Mr. Scott
and Ms. McCann included their survivor benefits pursuant to
subparagraph 56(1)(a)(iii) of the ITA.
(a) Tax Court of Canada
(i) Limitation on Scope of Paragraph
6(1)(a)
[83]
The trial judge in Tsiaprailis, Bowman
ACJ (as he then was), revisited a principle that he had enunciated earlier in Landry,
in which he had stated:
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.
In his argument
in Tsiaprailis, counsel for the Crown suggested that the above statement
should be given limited application. Bowman ACJ disagreed:
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….
(ii) Surrogatum Principle
[84]
Another significant aspect of the trial decision
in Tsiaprailis was the statement by Bowman ACJ that the surrogatum
principle should be limited to the computation of income from a business:
I can see no
reason for extending that rule [i.e., the surrogatum principle], 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.
[85]
In allowing Ms. Tsiaprailis’ appeal, Bowman ACJ
held the settlement payment was not to be included in computing her income. The
Crown appealed.
(b) Federal Court of Appeal
[86]
In the Federal Court of Appeal, the majority
(Pelletier JA and Strayer JA) determined that the lump-sum payment received by
Ms. Tsiaprailis should be allocated between the past and future components of
the settlement amount. The majority went on to hold that the portion of the
settlement amount relating to accumulated arrears was taxable pursuant to
paragraph 6(1)(f) of the ITA because it related to amounts
payable on a periodic basis, notwithstanding that it had been paid as a lump
sum as a result of the settlement. The majority acknowledged that the portion
of the lump-sum settlement amount pertaining to Ms. Tsiaprailis’ future
entitlement did not come within paragraph 6(1)(a) or paragraph 6(1)(f)
of the ITA.
(i) Limitation on Scope of
Paragraph 6(1)(a)
[87]
Concerning the scope of paragraph 6(1)(a)
of the ITA, Pelletier JA stated:
Associate Chief
Justice Bowman held that a section of general application such as paragraph
6(1)(a) could not be used to sweep into income an amount which did
not fit within a provision aimed at amounts of that type, such as
paragraph 6(1)(f). I adopt the learned Trial Judge’s position on
this issue.
Evans JA, who
dissented and who would have dismissed the Crown’s appeal and upheld the
decision of Bowman ACJ in its entirety, stated the following in respect of this
point:
I have had the
benefit of reading the reasons of my colleague Pelletier J.A. I agree that
the Crown’s argument on paragraph 6(1)(a) of the Income Tax Act …
must fail.
Thus, all three
members of the panel who heard the Tsiaprailis appeal concurred that
paragraph 6(1)(a) of the ITA cannot be used to sweep into income
an amount of a particular type that does not come within a specific provision
aimed at amounts of that type.
(ii) Surrogatum Principle
[88]
The Federal Court of Appeal did not refer to the
surrogatum principle by name. However, Pelletier JA cited London and
Thames Haven Oil Wharves, as applied in Manley, as authority for the
proposition that, “Where a person has a right to
receive a payment, the fact that collection activity must be undertaken to
compel payment does not change the nature of that payment in the hands of the
payee.”
Evans JA (in dissent) noted that:
… in London
and Thames Haven Oil Wharves … it was held that the underlying source of an
award of damages was relevant to determining whether the sum awarded should be
treated as profits for tax purposes…. Similarly, this Court has also looked
behind awards of damages or settlements to determine whether to characterize a
payment as a capital gain or business income….
As authority for
the above statement, Evans JA cited Manley, Mohawk Oil, and T. Eaton, all of which dealt with
taxpayers who participated in an adventure in the nature of trade or carried on
a business.
(iii) Surrender of Right to
Receive Future Benefits
[89]
Although he did not rely on the concept in his
decision, Pelletier JA made the following observation concerning the surrender
or other disposition of a right to receive future benefit payments:
This right to
receive disability benefits so long as the state of total disability persists
is a valuable right, just as the obligation to make the payments so long as the
insured is eligible to receive them is a significant liability. The right and
the corresponding obligation have a monetary value. An insured can agree to
surrender his or her rights, thereby extinguishing the insurer’s liability, in
return for a payment. The fact that the parties choose to negotiate the value
of that right/obligation by reference to the amounts which could become payable
under the policy if the insured remained [eligible to receive them] does not
mean that the settlement is a pre-payment of the insurer’s obligations under
the policy. We are not called upon to decide the nature of that right in this
appeal but, in other circumstances, the disposition of a right to receive
future amounts has been held to be a capital transaction.
(c) Supreme Court of Canada
[90]
Ms. Tsiaprailis appealed from the decision by
the Federal Court of Appeal that the arrears component of the lump-sum
settlement payment was taxable. The Crown did not appeal from the decision that
the future component of the settlement payment was not taxable. It appears that
the Crown did not argue before the Supreme Court of Canada that the arrears
component of the settlement payment came within paragraph 6(1)(a) of the
ITA. Thus, the only issue before the Supreme Court of Canada was whether the
arrears component of the settlement payment came within paragraph 6(1)(f)
of the ITA.
(i) Surrogatum Principle
[91]
Both Charron J and Abella J discussed the
applicability of the surrogatum principle. In her dissent, Abella J
questioned the application of the surrogatum principle both on the facts
of the case and the statutory provisions under consideration. However, she went
to say that, if the surrogatum principle were to be applied, she would
not find the arrears to be taxable, as the general nature of the settlement amount
paid to Ms. Tsiaprailis was to release the insurer from a claim that it was
liable and to extinguish her claim for entitlement under the disability
insurance policy.
[92]
After explaining the surrogatum principle
in a statement that will be set out below, Charron J observed that the
principle has been adopted in a number of Canadian cases, as noted by Peter W.
Hogg et al. and Vern Krishna in their respective textbooks. Charron J goes on to discuss
the surrogatum principle in such a manner as to indicate that it was
applicable to the portion of the settlement amount received by Ms. Tsiaprailis in
respect of accumulated arrears, implying that it was not to be limited to
situations where a taxpayer is engaged in an adventure in the nature of trade
or a business.
Charron J did not suggest that the surrogatum principle would result in
the portion of the settlement amount for future benefits being taxable.
(ii) Capitalization
[93]
Dealing with the concept of capitalization, Charron
J referred to the decision of Kellock J in the Supreme Court’s decision in 1956
in Armstrong, which dealt with the deductibility of a $4,000 payment
made by Mr. Armstrong to his wife (or perhaps former wife) to be released from
his obligation pursuant to a decree nisi of divorce ordering him to pay
$100 a month for the maintenance of the child of the marriage until the child
attained age 16 or until the particular court otherwise ordered.
Mr. Armstrong deducted the $4,000 payment pursuant to a statutory
provision which permitted the deduction of certain amounts payable on a
periodic basis for the maintenance of children of a marriage. Charron J
quoted the following statement made by Kellock J, in determining that the $4,000
payment was not deductible:
Such an outlay
made in commutation of the periodic sums payable under the decree is in the
nature of a capital payment to which the statute does not extend.
Charron J. then went on to state:
In Kellock J’s
view, the payment of a lump sum for future benefits would … be characterized as
a capital payment.
When the
reasoning in Armstrong is applied to the present case, it is clear that
monies paid in settlement of any future liability under the disability
insurance plan were not paid “pursuant to” the
plan because there is no obligation to make such a lump sum payment under the
terms of the plan. The part of the settlement for future benefits is in the
nature of a capital payment and is not taxable under s. 6(1)(f) of the
Act.
I read the above
comments by Charron J as indicating that the amount received by Ms.
Tsiaprailis in respect of future benefits was not taxable under
paragraph 6(1)(f) of the ITA because it was a capital
payment that was not paid pursuant to the disability insurance plan, such that
the payment did not come within the wording of paragraph 6(1)(f). In
other words, non-taxability arose because the statutory language of paragraph
6(1)(f) was not satisfied, and not merely because the settlement amount
was a capital payment.
(iii) Obiter Dicta
[94]
In their written submissions, counsel for the
Respondent pointed out that the above statement and other statements in the reasons
of Charron J that dealt with the tax treatment of the portion of the lump sum
paid to Ms. Tsiaprailis in respect of future benefits were obiter dicta. In considering the
Respondent’s submission, I have reviewed the guidance by the Supreme Court in
respect of its obiter statements:
All obiter
do not have, and are not intended to have, the same weight. The weight
decreases as one moves from the dispositive ratio decidendi to a wider
circle of analysis which is obviously intended for guidance and which should be
accepted as authoritative. Beyond that, there will be commentary, examples or
exposition that are intended to be helpful and may be found to be persuasive,
but are certainly not “binding” in the sense the Sellars
principle in its most exaggerated form would have it.
Counsel for the
Respondent did not make any submission as to whether the obiter dicta by
Charron J in Tsiaprailis constituted a wider circle of analysis intended
for guidance (which should be accepted as authoritative) or commentary,
examples or exposition intended to be helpful (which may be persuasive, but are
not binding).
[95]
In Prokofiew, Doherty JA of the Ontario
Court of Appeal made the following comments about obiter dicta from the
Supreme Court of Canada, after quoting paragraph 57 of the Henry case:
19. The question then becomes the following: how does one
distinguish between binding obiter in a Supreme Court of Canada judgment
and non-binding obiter? In Henry at para. 53, Binnie J. explains
that one must ask, “What does the case actually decide?”
Some cases decide only a narrow point in a specific factual context. Other
cases – including the vast majority of Supreme Court of Canada decisions –
decide broader legal propositions and, in the course of doing so, set out
analyses that have application beyond the facts of the particular case.
20. Obiter dicta will move along a continuum. A legal
pronouncement that is integral to the result or the analysis that underlies the
determination of the matter in any particular case will be binding. Obiter
that is incidental or collateral to that analysis should not be regarded as
binding, although it will obviously remain persuasive.
21. Lower courts should be slow to characterize obiter
dicta from the Supreme Court of Canada as non-binding. It is best to begin
from the premise that all obiter from the Supreme Court of Canada should
be followed, and to move away from that premise only where a reading of the
relevant judgment provides a cogent reason for not applying that obiter.
The orderly and rational development of the jurisprudence is not served if
lower courts are too quick to strike out in legal directions different than
those signalled in obiter from the Supreme Court of Canada.
The comments made
by Charron J in Tsiaprailis about the non-taxability of the future
component of Ms. Tsiaprailis’ settlement payment were not integral to the
result or the analysis that underlay the determination of the matter before the
Supreme Court of Canada in that case, given that the appeal dealt only with the
taxability of the arrears component of the settlement payment. Therefore, the obiter
dicta was only incidental or collateral to the analysis before the Supreme
Court. In determining the impact of that obiter dicta on these Appeals,
it is important to note that Tsiaprailis dealt with paragraph 6(1)(f)
of the ITA, whereas these Appeals deal with subsection 6(4) or
subparagraph 56(1)(a)(iii) of the ITA, as the case may be.
Therefore, Tsiaprailis is not on all fours with these Appeals. Thus,
even if the obiter dicta is binding, it is not determinative of these
Appeals. Accordingly, I do not think that it is necessary for me to determine
whether, in the context of these Appeals, that obiter dicta is binding
or merely persuasive.
[96]
It should be emphasized that the fact that some
of the comments by Charron J in Tsiaprailis were obiter does not
minimize or detract from the holding by the Federal Court of Appeal in Tsiaprailis
that the portion of the lump-sum settlement amount pertaining to
Ms. Tsiaprailis’ future entitlement did not come within paragraph 6(1)(a)
or paragraph 6(1)(f) of the ITA.
(6) Surrogatum Principle
(a) Statement of Principle
[97]
All Parties acknowledged that the tax treatment
of damages and settlement payments is generally determined by reference to the surrogatum
principle,
which provides that the taxability of an award of damages or a settlement
payment is determined by reference to the nature and purpose of the payment
that the damages or settlement amount replaces, as explained in Tsiaprailis by
Charron J as follows:
… [A]wards of
damages and settlement payments are inherently neutral for tax purposes…. [I]n
assessing whether the monies will be taxable, we must look to the nature and
purpose of the payment to determine what it is intended to replace. The inquiry
is a factual one. The tax consequences of the damage or settlement payment is
then determined according to this characterization. In other words, the tax
treatment of the item will depend on what the amount is intended to replace.
This approach is known as the surrogatum principle.
In dissent,
Abella J explained the principle this way:
Damage and
settlement payments are inherently neutral for tax purposes and must therefore
be classified to determine whether they are taxable. This is the surrogatum
principle, as defined by Lord Diplock in London & Thames Haven Oil
Wharves Ltd. v. Attwooll (Inspector of Taxes) (1966), [1967] 2 All E.R. 124
(Eng. C.A.) as follows:
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 … 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.
(b) Applicability of Principle
[98]
Counsel for the Appellants have submitted that
the surrogatum principle does not apply to render the distributions by
the HWT to Ms. Ellis and Ms. Kennedy as taxable income because those
payments did not replace the insurance benefits that they had a vested right to
receive.
Counsel for the Appellants also submitted that the distributions did not
replace the premiums payable in respect of the Group Life Plan or the eventual
life insurance proceeds.
However, as an alternative argument, counsel for the Appellants suggested that,
if the distributions were in replacement of anything, it was the tax-free life
insurance proceeds that would have been paid to the beneficiaries, such that the
surrogatum principle should be applied so as to treat the distributions
as similarly being tax free.
[99]
The primary argument put forward by counsel for
the Respondent was that sections 5, 6 and 56 of the ITA brought the
distributions from the HWT trust into the income of the respective recipients. However, as an alternative
argument, counsel for the Respondent submitted that the surrogatum
principle does apply and that the distributions by the HWT replaced vested
employment benefits.
In rebutting the Appellants’ alternative argument that the distributions
replaced tax-free life insurance proceeds, counsel for the Respondent submitted
that those proceeds would only have become payable on the death of the insureds
and that the proceeds would have been payable to the beneficiaries, not to the
insureds.
Counsel for the Respondent did not provide detailed submissions as to what it
was specifically that the distributions replaced, other than to say that the
things replaced were vested employment benefits.
[100]
I concur with the submissions of counsel for the
Appellants and counsel for the Respondent that the distributions by the HWT to
Ms. Ellis and Ms. Kennedy did not replace life insurance proceeds, as such
proceeds would have been payable to the beneficiaries and not to the insureds,
and would have been paid on the deaths of the insureds. As well, I am of the
view that the distributions did not replace the premiums payable in respect of
the Group Life Plan, because:
a) there was no life insurance coverage in place in 2011;
b) no premiums were payable after 2010;
c) if premiums had been payable in 2011, they would have been paid to
the insurer and not to the insureds;
d) the distributions were not calculated by reference to the amounts of
the premiums payable before 2011; and
e) the distributions did not result in any life insurance being put in
place.
[101]
An analysis of the surrogatum principle,
as enunciated by Diplock LJ, shows that the classical statement of the
principle is not ideally suited for the distributions paid in 2011 by the HWT
to Ms. Ellis and Ms. Kennedy. The critical passage from London and
Thames Haven Oil Wharves reads as follows:
Where … 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.
I have difficulty
in applying the above formulation of the surrogatum principle to the
distributions to Ms. Ellis and Ms. Kennedy, as they were not traders in
2011, i.e., they were not carrying on a business in 2011. Furthermore, the surrogatum
principle applies where a person receives compensation for that person’s
failure to receive a sum of money. However, as has been noted above, Ms. Ellis
and Ms. Kennedy were not entitled to receive either the life insurance proceeds
or the life insurance premiums.
[102]
Accordingly, in view of the inherent
difficulties in endeavouring to apply Lord Diplock’s statement of the surrogatum
principle to Ms. Ellis and Ms. Kennedy, I have considered an alternative
expression of the principle, as given by Mogan J in Dumas, where he made
the following comment:
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.
In determining
why the distributions were paid in 2011 by the HWT to the Appellants, I have
concluded that the distributions were paid to Ms. Ellis and Ms. Kennedy as
partial compensation for the termination of the Group Life Plan, and the
distributions were paid to Mr. Scott and Ms. McCann as partial compensation for
the termination of the monthly payment of their respective death benefits.
[103]
There is value in having one’s life insured,
particularly if the insurance is maintained and paid for by someone else. It
seems to me that the distributions to Ms. Ellis and Ms. Kennedy were intended
to compensate them, in small part, for no longer having their lives insured.
This view is supported by the fact that the amounts of the respective
distributions were calculated by reference to the present values of the amounts
of the life insurance proceeds that would have been paid to the beneficiaries
on the deaths of the insureds, and not by reference to the premiums that would
have been paid if the Group Life Plan had not been terminated. In other words, I view the
distributions as not replacing the life insurance proceeds or, strictly
speaking, the premiums per se, but as, in a sense, providing partial compensation
for the loss of the status of being a member of the Group Life Plan, whose
premiums would have been paid by the HWT.
In my view, the distributions paid by the HWT to Ms. Ellis and Ms. Kennedy to
compensate in part for the loss of that status constituted a benefit, which
will be discussed below.
(7) Income
or Capital
[104]
There is no evidence as to whether the
distributions in 2011 by the HWT to the Appellants were paid out of the income
or the capital of the HWT. If the distributions were paid out of both income
and capital, there is no evidence as to the allocation of the distributions
between the income and the capital. However, that is not a concern, as I do not
think that such evidence would be determinative of these Appeals.
[105]
The income/capital dichotomy might be relevant
in a slightly different context. As noted above, several cases have indicated that
a lump-sum payment paid to commute a stream of periodic payments otherwise includable
in income is a capital payment. For instance, in Armstrong, Kellock J
stated that an outlay made in commutation of the periodic sums payable under a divorce
decree was in the nature of a capital payment. Similarly, in the decision
of the Federal Court of Appeal in Tsiaprailis, Pelletier JA noted that
in some circumstances the disposition of a right to receive future amounts is a
capital transaction.
As well, in obiter dicta (as has already been noted), in the decision of
the Supreme Court of Canada in Tsiaprailis, Charron J referred to the
characterization by Kellock J in Armstrong of the lump-sum payment
paid to commute the monthly support payments, and then stated that the part of
the settlement amount received by Ms. Tsiaprailis for future benefits was
in the nature of a capital payment.
[106]
The concept of capitalization was discussed by
Archambault J in Beninger, which dealt with a situation where a court
order reduced accumulated arrears of spousal support from $69,416 to $20,000
and cancelled the balance of $49,416. The Crown argued that this changed the
nature of the amount owing by the taxpayer, such that it no longer represented support
payable on a periodic basis, but represented an amount paid for a release with
respect to the payment of the arrears. Archambault J stated:
… I do not
believe that whenever a taxpayer pays an amount less than the amount of arrears
of spousal support (or of any other deductible or taxable amount for that
matter) one must automatically conclude that the amount so paid is not
deductible or taxable because the nature of the payment has changed. For
example, if an employee sues his employer for unpaid salary, the fact that he
later accepts a lesser amount in satisfaction of the original claim does not
mean that what he received from, or what is paid by, his employer is not
salary. The same logic would apply equally with respect to a creditor who sues
his debtor for unpaid interest and who, for whatever reason, accepts in full
satisfaction of the interest arrears a lesser amount.
In my view, the
situation is different where a person agrees to pay for being released from
future obligations, such as the payment of a pension, an annuity or any other
kind of future income. In such a case, a “capitalization”
occurs. In the words of J.P. Hannan and A. Farnsworth, the authors of The
Principles of Income Taxation Deduced from the Cases, (London: Stevens
& Sons Limited, 1952) at page 287, “[c]apitalisation
is simply the act of converting what would be income into what is capital”. It
is also enlightening to cite their observations on how the capitalization
process works. At page 288, they state:
Capitalisation looks to the
future−that is, it operates on a right to future income. It cannot
operate on arrears of what would have been income if it had been received…. [Emphasis in the
original.]
[107]
As the distributions by the HWT to Ms. Ellis and
Ms. Kennedy were not paid to commute the HWT’s obligation to pay future
insurance premiums, I am of the view that those distributions did not represent
a capitalization. However, as Mr. Scott and Ms. McCann were entitled to receive
monthly survivor benefits, the distributions made by the HWT to them represented
a capitalization.
[108]
The fact that a future income stream is
capitalized does not always mean that the capitalized payment is not to be
included in computing income. For instance, in Monart, where a landlord
received a payment whose amount appeared to have been calculated by reference
to the landlord’s loss of future rent arising from a tenant’s premature
termination of its lease, the payment was held to be income of the landlord,
notwithstanding that the landlord had argued that the tenant’s termination of the
lease had resulted in a substantial diminution in the value of the landlord’s
building, such that (according to the landlord) the payment should be capital. Similarly, in Canadian
National Railway, it was held that a shipper’s payment to CNR of liquidated
damages, calculated at the rate of $15 per ton, to compensate the railway for
the shipper’s failure to meet its contractual shipping commitment, was held to
be income, as it was compensation for a loss of income, rather than a loss of capital. In addition, in Reusse
Construction, a lump-sum settlement payment compensating a landlord for a
tenant’s failure to pay future rent was treated as income of the landlord.
(8) Surrender
or Release of Right to Receive Future Benefits
[109]
As noted above, the Appellants took the position
that the distributions by the HWT to them constituted consideration for the
disposition of a right to receive future amounts, and as such, constituted a
capital transaction.
In the context of the distributions to Ms. Ellis and Ms. Kennedy, the Appellants
base their argument on the fact that the respective amounts of the
distributions were calculated by reference to the present value of the life
insurance proceeds to be paid on death, and not the present value of the
insurance premiums.
[110]
Some guidance in respect of this issue might be
provided by the Dumas case, which had an element of similarity to Tsiaprailis
and Landry, in that, after an insurer had discontinued the payment of
monthly disability payments to Mrs. Dumas, she sued the insurer and recovered
a lump-sum settlement amount of $105,000, in exchange for the signing of a full
and final release, without the insurer admitting liability. In concluding that
the settlement amount constituted income, Mogan J stated:
25. … 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 ...:
… 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….
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.
The above
comments suggest to me that, even though Mrs. Dumas released the insurer from
its obligation to pay future disability payments, she nevertheless received the
settlement amount in respect of or by virtue of her employment.
(9) Scope
of Paragraph 6(1)(a) of the ITA
[111]
Paragraph 6(1)(a) of the ITA has a
broad scope. In 1963, a provision similar to the current paragraph 6(1)(a)
was found in paragraph 5(1)(a) of the Income Tax Act as it then
read. The former provision read as follows:
5(1) Income for a taxation year from an office or employment is
the salary, wages and other remuneration, including gratuities, received by the
taxpayer in the year plus
(a) the value of board, lodging and other benefits of any
kind whatsoever (except the benefit he derives from his employer’s
contributions to or under a registered pension fund or plan, group life,
sickness or accident insurance plan, medical services plan, supplementary
unemployment benefit or deferred profit sharing plan) received or enjoyed by
him in the year in respect of, in the course of, or by virtue of the office or
employment….
[112]
In Ransom, Noël J noted that the above
paragraph 5(1)(a), together with paragraph 5(1)(b), as they then
read, used “such embracing words that at first glance
it appears extremely difficult to see how anything can slip through this wide
and closely interlaced legislative net.”
[113]
The above statement (and more) by Noël J was
quoted by Dickson J in the Savage case. Dickson J went on to consider
the phrase “benefits of any kind whatever …” and
noted that “[t]he meaning of ‘benefits of whatever
kind’ is clearly quite broad….”
[114]
In Blanchard, Linden JA explained the
purpose and scope of section 6 of the ITA in an elucidating passage:
3. Section 6 of the Income Tax Act was designed to
supplement and broaden the notion of taxable employment income as set out in section
5, which provides that all forms of remuneration are to be included as
employment income…. The notion of “remuneration”,
however, encompasses only those payments flowing from an employer to an
employee for services rendered or work performed. It does not encompass other
gains or advantages not directly classifiable as remuneration but arising,
nonetheless, out of the taxpayer’s employment. To capture these items, various
inclusion provisions were added. Two of those provisions concern us directly here,
paragraph 6(1)(a) and subsection 6(3).
4. Paragraph 6(1)(a) is an all-embracing provision. It
provides that all “benefits of any kind whatever” are
to be included as employment income if they were received “in respect of, in
the course of, or by virtue of an office or employment”. The section casts a
wide net, incorporating two broadly worded phrases. The first is “benefits of
any kind whatever”. The scope contemplated by this phrase is plain and
unambiguous: all types of benefits imaginable are to be included. Speaking for
the majority in The Queen v. Savage, … Dickson J. (as he then was)
stated that paragraph 6(1)(a) was “quite broad” and covered any “material acquisition which confers an economic benefit”.
5. The second phrase is a group of
three phrases: “in respect of”, “in the course of”, and “by virtue of”. In Nowegijick
v. The Queen, … the Supreme Court of Canada explained the words “in respect
of”…:
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.
6. The above comments are relevant in interpreting paragraph
6(1)(a). Parliament, [sic] has added the phrases “in the course of” and “by virtue of”, to the phrase “in
respect of” in order to emphasize that only the smallest connection to
employment is required to trigger the operation of the section.
7. Paragraph 6(1)(a) leaves little
room for exceptions, but a few have surfaced in the jurisprudence. [Footnotes omitted.]
[115]
The broad scope of paragraph 6(1)(a) of
the ITA was reaffirmed by the Federal Court of Appeal in McGoldrick,
as follows:
As a general
rule, any material acquisition in respect of employment which confers an
economic benefit on a taxpayer and does not constitute an exemption falls
within paragraph 6(1)(a)….
[116]
The distributions to Ms. Ellis and Ms. Kennedy
were material acquisitions which conferred an economic benefit on each of them.
Given that “[t]he phrase ‘in respect of’ is probably the widest of any expression
intended to convey some connection between two related subject matters,” and
given that the addition to paragraph 6(1)(a) of the phrases “in the course of” and “by
virtue of” emphasizes “that only the
smallest connection to employment is required to trigger the operation of”
paragraph 6(1)(a), I am of the view that, even if the distributions
paid to Ms. Ellis and Ms. Kennedy represented a capitalization (which, in
my view, they did not) or if they were consideration for the surrender or
release of a right, they would nevertheless have a small connection to the employment
of Ms. Ellis and Ms. Kennedy so as to come within paragraph 6(1)(a)
(subject to any applicable exception). I am not aware of any authority that
expressly indicates that a payment representing a capitalization or a payment
in consideration of a surrender or release of a right cannot also be a material
acquisition which confers an economic benefit on the recipient in respect of,
in the course of, or by virtue of the recipient’s employment.
[117]
Thus, Ransom, Savage, Blanchard
and McGoldrick clearly establish that paragraph 6(1)(a) of the ITA
casts a wide net and that the provision leaves little room for exceptions – but
there are exceptions.
(10) Limitations
on the Scope of Paragraph 6(1)(a)
[118]
Without endeavouring to list all of the
exceptions to paragraph 6(1)(a) of the ITA, I will note a few. The
statutory provision itself contains six exceptions, as set out in subparagraphs
6(1)(a)(i) through (vi). Subparagraph 6(1)(a)(i) excepts any
benefit derived from the contributions of a taxpayer’s employer to or under
(among other things) a group term life insurance policy. The purpose of this
exception is to prevent the employer’s contributions in respect of the policy
itself from being included in income at this point by reason of the words “value of benefits of any whatever”. However, where an employee’s
life is insured under a group term life insurance policy, there may be an
income inclusion under subsection 6(4) of the ITA.
[119]
In Blanchard, Linden JA noted that
reimbursements for costs actually incurred by an employee are not caught by
paragraph 6(1)(a) and that benefits wholly extraneous or collateral to
one’s employment (i.e., a benefit received in one’s personal capacity) may fall
outside paragraph 6(1)(a).
[120]
When one considers the reasoning of Dickson J in
Savage, it appears that the $500 exemption for scholarships, fellowships,
bursaries and prizes in paragraph 56(1)(n) of the ITA, as it read
in 1976, constituted, in a sense, an exception to paragraph 6(1)(a).
[121]
As explained by Bowman J in the trial decision
in Tsiaprailis (which was adopted on this point by the Federal Court of
Appeal), another exception arises where, in addition to the general provision
in paragraph 6(1)(a), there is “a
specific [statutory provision] containing detailed conditions for the inclusion
of an amount in income that would not otherwise be income.” If a crucial condition for the application of the
specific provision is not met, the general provision cannot be used “to fill in all the gaps left by” the specific
provision,
or “to sweep into income an amount which [does] not fit
within [the specific] provision aimed at amounts of that type….” In
Tsiaprailis, the specific provision was paragraph 6(1)(f) of the ITA.
In the Appeals of Ms. Ellis and Ms. Kennedy, there is a different specific
provision, subsection 6(4) of the ITA, which required them to include a
prescribed amount in computing their income for the taxation years during which
their lives were insured under the Group Life Plan.
[122]
Subsection 6(4) of the ITA reads as
follows:
Where at any time
in a taxation year a taxpayer’s life is insured under a group term life
insurance policy, there shall be included in computing the taxpayer’s income
for the year from an office or employment the amount, if any, prescribed for
the year in respect of the insurance.
Part XXVII of the
ITR contains detailed rules for calculating the prescribed amount, if
any, to be included in a taxpayer’s income under subsection 6(4) of the ITA
in respect of insurance under a group term life insurance policy. In essence,
the prescribed amount for a taxpayer is the total the taxpayer’s term insurance
benefit under the policy, the taxpayer’s prepaid insurance benefit under the
policy, and certain sales and excise taxes payable in respect of premiums paid
under the policy.
Part XXVII of the ITR does not make any reference to distributions of
the type that are the subject of these Appeals.
[123]
Some indication of the relationship between
subsection 6(4) and paragraph 6(1)(a) of the ITA was provided by
the Technical Notes issued by the Department of Finance in November
1994, when subsection 6(4) was amended:
Subsection 6(4)
includes in the income of an employee or former employee an amount in respect
of life insurance provided as an employment benefit under a group term life
insurance policy. This subsection applies in place of the general benefit
rule in paragraph 6(1)(a).
[Italicized and underlined emphasis added.]
Also of note is
the following statement in the Canada Tax Service:
Although
subparagraph 6(1)(a)(i) excludes benefits derived from an employer’s
contributions to a group term life insurance policy from the benefits taxable
to the employee under the general provisions of paragraph 6(1)(a),
subsection 6(4) provides for a specific income inclusion in respect of
life insurance under a group term life insurance policy provided as an employment
benefit.
[Emphasis added.]
[124]
I have concluded that subsection 6(4) of the ITA
and Part XXVII of the ITR are specific provisions designed to include in
income certain amounts in respect of insurance coverage under a group term
life insurance policy. Those specific provisions applied to Ms. Ellis and
Ms. Kennedy so as to require them, in computing their income from
employment, for each applicable taxation year before 2011, to include the
prescribed amount in respect of their participation in the Group Life
Plan. As those specific provisions have not captured the distributions
paid in 2011 by the HWT to Ms. Ellis and Ms. Kennedy, paragraph 6(1)(a)
of the ITA cannot be used to fill in the gaps left by subsection 6(4)
and Part XXVII or to sweep those distributions into income.
(11) Death
Benefits
(a) Statutory Provisions
[125]
In 2010 and previous taxation years (as
applicable), Mr. Scott and Ms. McCann included their respective survivor benefits
in their income pursuant to subparagraph 56(1)(a)(iii) of the ITA,
which reads as follows:
56(1) Without restricting the generality of section 3, there
shall be included in computing the income of a taxpayer for a taxation year,
(a) any amount received by the taxpayer in the year as, on
account or in lieu of payment of, or in satisfaction of, …
(iii) a death benefit….
[126]
The relevant portion of the definition of the
term “death benefit,” as found in subsection
248(1) of the ITA, reads as follows (and is subject to certain
exclusions, which are not listed below):
“death benefit” means the total of all amounts received by a
taxpayer in a taxation year on or after the death of an employee in recognition
of the employee’s service in an office or employment….
It is my
understanding that all the Parties acknowledge that the monthly payments
received before 2011 by Mr. Scott and Ms. McCann ($871.46 in the case of
Mr. Scott and $725 in the case of Ms. McCann) constituted death benefits.
(b) Jurisprudence
[127]
The phrase “as, on
account or in lieu of payment of, or in satisfaction of,” which appears
in paragraph 56(1)(a) of the ITA, also appears in
subsection 212(1) of the ITA. In the Transocean
case, which dealt with a payment made to a non-resident as consideration for
the voluntary termination of a bareboat charter (which had obligated the payor
to pay rent for the use of an offshore drilling rig, which rent would have been
taxable under paragraph 212(1)(d) of the ITA), the Federal
Court of Appeal stated the following:
46. By virtue of the additional words in paragraph 212(1)(d),
that provision also applies to any payment made on account of such
compensation, or in satisfaction of such compensation. That would appear
to cover virtually all situations in which a payment is made to discharge, in
full or in part, an obligation to pay compensation to a non-resident for the
past or current use, in Canada, of property.
47. However, paragraph 212(1)(d) of the Income Tax Act
also includes a payment made in lieu of compensation for the use, in
Canada, of property. The ordinary meaning of the phrase “in lieu of”, according to a number of dictionaries,
is “instead of” or “in
place of”: Black’s Law Dictionary (7th ed., 1999), The
Canadian Oxford Dictionary (2001, Oxford University Press), Gage
Canadian Dictionary (1983, Gage Publishing Limited), The Canadian Dictionary
of English Law (2nd ed[.], Thomson Canada Limited). It seems
axiomatic that an amount that is paid instead of a payment of a particular
legal character, or in the place of such a payment, does not have that same
legal character. Parliament, in using the words “in lieu of” in paragraph
212(1)(d), must have intended to expand the scope of paragraph 212(1)(d) to
include payments other than payments that have the legal character of rent.
48. If the phrase “in lieu of rent” is
interpreted to include only payments made as compensation for the past or
current use of property, which is essentially the position of counsel for
Transocean, it would add nothing to paragraph 212(1)(d), and thus would
have no meaning. However, it would have meaning if it is interpreted, as the
Crown contends, to include an amount paid as compensation for the anticipatory
breach of a rental agreement. In my view, that is a consideration that would
favour adopting the Crown’s interpretation in preference to the interpretation
proposed by counsel for Transocean. [Italics in original.]
In my view, the
above comments by Sharlow JA also apply to the interpretation of the same
phrase in paragraph 56(1)(a) of the ITA.
[128]
In Pechet, Campbell J noted that, in Transocean,
Sharlow JA gave an expansive scope to the phrase “in
lieu of.”
(c) Applicability of the Surrogatum
Principle to the Death Benefits
[129]
In Transocean, Sharlow JA indicated that
the “judge-made rule, sometimes called the ‘surrogatum
principle’,” did not need to be considered in that case because the statutory
words “in lieu of” expressed a similar idea. Likewise, I am of the
view that the words “in lieu of” in subsection
56(1) of the ITA express an idea similar to the surrogatum
principle, such that I do not need to consider that principle separately in the
context of the death benefits.
(d) Nature of the Distributions to
Mr. Scott and Ms. McCann
[130]
During the Third Party Examination for Discovery
on May 5, 2016 of Lee Close, as a representative of the Monitor, the
following exchanges took place:
115. Q. And why was Mr. Scott entitled to receive
survivor income benefits, to the monitor’s knowledge?
A. His spouse had been an employee of Nortel. He would have
the benefit and when Mr. Scott’s spouse died, he became entitled to payments
under the plan.
116. Q. So is it fair to say that had Mr. Scott’s spouse
not been employed with Nortel, he would not have been entitled to the survivor
income benefit?
A. Yes….
239. Q. Can you explain why Ms. McCann was receiving the
monthly benefits prior to December 31, 2010?
A. Because of an entitlement that she had relevant to her
spouse’s employment with Nortel at the time of the spouse’s death….
242. Q. So is it correct that if Ms. McCann’s spouse was
not employed with Nortel, she would not have been eligible for those survivor
transition benefits?
A. Yes.
It is my
understanding that all the Parties acknowledge that the monthly benefits paid
to Mr. Scott and Ms. McCann before 2011 were in recognition of the service of
their respective spouses while they were employed by Nortel.
[131]
During her examination, Ms. Close made the
following comment about the connection between the distributions paid to Mr.
Scott and Ms. McCann and his SIBs or her STBs, as the case may be:
173. Q. So turning to the James Scott narrative, why is
it that he received three distributions?
A. So pursuant to the second paragraph of Mr. Scott’s
document, it indicates that a series of court orders dated December 15, 2010,
May 3, 2011, and June 21, 2011, provided for interim distributions from the HWT
on account of the survivor income benefit.
174. Q. And the next line says that there would be
cumulative distributions from the Health and Welfare Trust on account of the
SIB benefits calculated using the HWT methodology be brought to 25 percent.
A. Yes.
175. Q. What is your understanding of that?
A. Is that cumulatively, the effect of these three
distributions would be that Mr. Scott would have received 25 percent of his SIB
benefit calculated using the HWT methodology….
274. Q. If we turn to the narratives that were prepared
by Ernst & Young and specifically that of Ann McCann, … we see that the HWT
methodology brought her claim to 25 percent. Can you explain why that is?
A. A series of court orders dated December 15, 2010, May 3,
2011, and June 21, 2011, provided that Ms. McCann would cumulatively – sorry
provided for distributions, interim distributions on account of her
survivor transition benefit calculated using the HWT methodology. [Emphasis added.]
The above
statements by Ms. Close refer to three court orders. The first of
those orders, which was issued by the Ontario Superior Court of Justice on
December 25, 2010, contained the following provision:
THIS COURT ORDERS
that the Trustee shall make an interim distribution all on the direction of the
Monitor or the Applicants on account of the Income Benefits to the
Income Beneficiaries on before January 31, 2011, or as soon thereafter as is
practicable.
[Emphasis added.]
[132]
The second Order referred to by Ms. Close was
dated May 3, 2011, and contained the following provision:
THIS COURT ORDERS
that the Trustee shall make an interim distribution all on the direction of the
Monitor or the Applicants on account of the Income Benefits to the
Income Beneficiaries on or before May 31, 2011, or as soon thereafter as is practicable
(the “May/June Interim Distribution”). [Emphasis added.]
[133]
Ms. Close also referred to a court order dated
June 21, 2011, which stated (among other things) the following:
THIS COURT ORDERS
that the Trustee shall make an interim distribution all on the direction of the
Monitor or the Applicants on account of the Income Benefits to the
Income Beneficiaries on or before July 31, 2011, or as soon thereafter as is
practicable (the “Third Interim Distribution”).
THIS COURT ORDERS
that the amount of the Third Interim Distribution of the HWT corpus to each
Income Beneficiary, for which the Monitor or the Applicants shall direct
payment, will be, when taken with the January Interim Distribution and the
May/June Interim Distribution, 25 percent of Income Benefits calculated in
accordance with the Approved HWT Allocation Methodology, using data available
as of December 31, 2010 according to the Applicants’ books and records, as
updated from time to time.
[Emphasis added.]
[134]
Paragraph 3 of each of the Orders of the
Superior Court referenced above provided for interim distributions to be made
on account of the Income Benefits to the Income Beneficiaries. I have not been
provided with the respective meanings of the terms “Income
Benefits” or “Income Beneficiaries.” A
glimpse into the meaning (at least in part) of those terms may be obtained from
the narratives prepared on or about February 10, 2016 by the Monitor in respect
of Mr. Scott and Ms. McCann. The narrative in respect of Mr. Scott contains the
following statements:
Mr. Scott has a
Survivor Income Benefit (‘SIB’) benefit liability amount of $123,121.61
calculated using the HWT Methodology.
A series of court
orders dated December 15, 2010, May 3, 2011 and June 21, 2011 provided for
interim distributions from the HWT on account of SIB. The cumulative effect of
these orders was contained in the June 21, 2011 order, paragraph 4, which
ordered that the cumulative distributions from the HWT on account of SIB
calculated using the HWT Methodology be brought to 25%. Accordingly, Mr. Scott
received a distribution of 25% on $123,121.61 resulting in an interim HWT
distribution to him in 2011 of $30,780.40.
The narrative in
respect of Ms. McCann states:
Ms McCann has a
Survivor Transition Benefit (‘STB’) benefit liability amount of $24,609.69
calculated using the HWT Methodology.
A series of court
orders dated December 15, 2010, May 3, 2011 and June 21, 2011 provided for
interim distributions from the HWT on account of STB. The cumulative effect of
these orders was contained in the June 21, 2011 order, paragraph 4, which
ordered that the cumulative distributions from the HWT on account of STB
calculated using the HWT Methodology be brought to 25%. Accordingly, Ms. McCann
received a distribution of 25% on $24,609.69 resulting in an interim HWT
distribution to her in 2011 of $6,152.42.
Based on the
testimony given by Ms. Close (as quoted above) and the above statements
from the narratives in respect of Mr. Scott and Ms. McCann, I am of the
view that the term “Income Benefits,” as used in
the Orders dated December 15, 2010, May 3, 2011 and June 21, 2011,
included the SIBs and the STBs, and the term “Income
Beneficiaries,” as used in those same Orders, included Mr. Scott
and Ms. McCann.
[135]
Paragraph 46 of Transocean, as quoted
above, seems to indicate that the phrases “on account
of” and “in satisfaction of,” which
appear not only in subsection 212(1) but also in paragraph 56(1)(a) of
the ITA, suggest that those statutory provisions may apply to any
payment made on account of or in satisfaction of compensation of the applicable
type, such that “virtually all situations in which a
payment is made to discharge, in full or in part, an obligation to pay [such]
compensation”
would be covered. Having read the three Orders of the Superior Court referred
to above, the testimony given by Ms. Close and the narratives prepared by
the Monitor, it is my understanding that the distributions paid in 2011 by the
HWT to Mr. Scott and Ms. McCann discharged 25% of the SIB benefit liability or
the STB benefit liability, as the case may be, owed by the HWT to Mr. Scott and
Ms. McCann respectively. Furthermore, given that those Orders provided that the
interim distributions that were the subject of the Orders were to be made “on account of” the Income Benefits (which, in my
view, included the SIBs and the STBs), I am of the view that those
distributions came within subparagraph 56(1)(a)(iii) of the ITA,
as that statutory provision contains the phrase “any
amount received … on account … of … a death benefit”.
[136]
If the above view is incorrect, I will now consider
whether the distributions were amounts received in lieu of a death benefit.
[137]
On April 25, 2016 counsel for the Parties, as
well as counsel for Mercer, conducted the Third Party Examination for Discovery
of Ellen Whelan, who was an actuary consulting in employment benefits at Mercer
when the amounts of the distributions to the Appellants were quantified. During
the course of her examination, Ms. Whelan made the following comments about the
distributions to Mr. Scott:
28. Q. So beginning on the very first page of Exhibit
2, I will ask you to refer to the second full paragraph on that first page, and
midway through that paragraph it reads: “This process,
including the basis for calculating your employment-related claim
(‘Compensation Claim’) has been approved by the Ontario Superior Court of
Justice….” Do you see that?
A. Yes
29. Q. What
is meant there by “employment-related claim”?
A. My understanding is this was to be
an amount determined for all benefits that employees were going to lose due to
the insolvency of the company….
31. Q. Further, was the
reference here to “employment-related claim” a reference to an amount claimed
by James Scott in recognition of his former spouse’s service in an office or an
employment with Nortel Canada?...
32. …
A. Yes, it was a claim because of his former spouse’s
employment with Nortel.
33. Q. Returning again to the first page of Exhibit 2,
in the next paragraph it concludes with, “your
aggregate Compensation Claim against Nortel Canada is: $218,254.” Do you
see that?
A. Yes….
39. Q. To the best of your knowledge, what was the
$218,254 Compensation Claim intended to replace?
A. The table shows the various benefits that the $218,254….
MR. DAVIS: Just so we’re clear for the record, we’re looking at
Form A, the document entitled Your Compensation Claim Amount and the table
on that page, the first page of that document….
THE DEPONENT: So this table summarizes the various different
employment-related benefits that Mr. Scott would have been entitled to receive
had the company survived due to his former spouse’s employment, and the amounts
calculated for each benefit represent the foregone future ability to claim
against those benefits because the company is insolvent….
90. Q. To the best of your knowledge, do you know what
the payments that he would have received were intended to replace?
A. The payments he would have received from the Health and
Welfare trust were intended to replace a portion of some of the benefits we walked
through on Form B [sic].
91. Q. On Form B there were several benefits that were
listed. Do you know which one of those benefits the payments were intended to
replace or compensate for?
A. In particular, the survivor income benefit and the
pensioner life insurance benefits were compensated from the Health and Welfare
Trust.
MR. DAVIS: You’re looking at Form A.
THE DEPONENT: Sorry, Form A.
[138]
During her examination, Ms. Whelan made the
following comments in respect of the distributions to Ms. McCann:
151. Q. … Is it correct that the compensation claim
identified relates to an amount claimed by Ann McCann in recognition of her
spouse’s service in an office or employment with Nortel?
A. Yes.
152. Q. In the third full paragraph on the first page, it
indicates, “your aggregate Compensation Claim against
Nortel Canada: $55,067.”
A. Yes….
158. Q. And to the best of your
knowledge, what was the compensation claim in amount of $55,067 intended to
replace?
A. If you turn over two pages to Form
A, the table on that page gives a breakdown of the calculation of the $55,067.
So primarily the payment was in lieu of lost survivor transition benefits,
$24,644, and lost post-retirement medical and dental benefits, is the main
claim.
[139]
It is my understanding that Ms. Whelan was
examined as a representative of a third party, presumably pursuant to section
99 of the Rules. The transcript of her examination was entered as
Exhibit AR-3, upon the request of counsel for the Appellants and counsel for
the Respondent. Ms. Whelan did not testify as an expert. It is my understanding
that the purpose of her examination was to explain the manner in which Mercer
analyzed the respective claims of the Appellants (and numerous other employees,
former employees or survivors of former employees) against Nortel. I read the
comments quoted above as indicating Mercer’s understanding of the context in
which it performed its calculations, and not as a conclusive determination of
the nature and purpose of the distributions. Thus, the amounts of the distributions
to Mr. Scott and Ms. McCann were calculated by Mercer on the understanding that
those amounts would partially replace, or be in lieu of, the death benefits
that would have been paid to them if NNC had not become insolvent.
[140]
As indicated above, I am of the view that the
principles enunciated by the Federal Court of Appeal in interpreting
the phrase “in lieu of” in
paragraph 212(1)(d) of the ITA may also be applied to the
interpretation of subparagraph 56(1)(a)(iii) of the ITA. I have
found the following statement (which I have modified) from the reasons in Transocean
to be particularly helpful:
Parliament, in
using the words “in lieu of” in paragraph
212(1)(d) [or subparagraph 56(1)(a)(iii)], must have intended to expand
the scope of paragraph 212(1)(d) [or subparagraph 56(1)(a)(iii)] to
include payments other than payments that have the legal character of rent [or
a death benefit].
Thus, the
distributions paid in 2011 by the HWT to Mr. Scott and Ms. McCann did not need
to have the legal character of death benefits in order to come within
subparagraph 56(1)(a)(iii) of the ITA. Rather, it was sufficient
for those distributions to have been paid instead of, in place of, or in lieu
of, the death benefits that would have been paid but for the Nortel insolvency.
[141]
To conclude on this point, if the
distributions paid in 2011 by the HWT to Mr. Scott and Ms. McCann were not
received by them on account of the death benefits that they were entitled to
receive, I am of the view that those distributions were received by them instead
of, in place of, or in lieu of, those death benefits, so as to come within the
statutory phrase “any amount received … in lieu of
payment of, … a death benefit.”
[142]
I am not aware of
any authority that expressly indicates that a payment representing a
capitalization of monthly death benefits or a payment in consideration of a
surrender or release of a right to receive monthly death benefits cannot also constitute
an amount received by the recipient instead of, in place of, or in lieu of payment
of, those monthly death benefits.
V. CONCLUSION
[143] Based on the above reasons:
a) the Appeals of Ms. Ellis and Ms. Kennedy are allowed and the
Assessments that are the subject of those Appeals are referred back to the
Minister for reconsideration and reassessment on the basis that the
distributions in the amounts of $1,371 and $9,011.88 paid in 2011 by the HWT to
Ms. Ellis and Ms. Kennedy respectively in respect of the Group Life Plan are
not to be included in computing their income for 2011;
b) the Appeal of Ms. McCann is allowed and the Assessment that is the
subject of that Appeal is referred back to the Minister for reconsideration and
reassessment on the basis that the amount of the distribution paid in 2011 by
the HWT to her that pertained to her STBs and that is to be included in
computing her income for 2011 is $6,152.42 (and not $6,438.39); and
c) the Appeal of Mr. Scott is dismissed.
Counsel for the
Appellants and counsel for the Respondent may make submissions, in writing or
orally (as they desire), concerning costs.
Signed at Ottawa,
Canada, this 9th day of November, 2017.
“Don R. Sommerfeldt”
APPENDIX
A
2014-3260(IT)G,
2014-3263(IT)G,
2014-3265(IT)G,
and 2014-3266(IT)G
TAX COURT OF
CANADA
BETWEEN:
James Scott, Susan Kennedy, MARY ELLIS,
and Ann McCann
Appellants
- and -
HER MAJESTY THE
QUEEN
Respondent
______________________________________________________________________________
STATEMENT
OF AGREED FACTS
______________________________________________________________________________
The
parties to these appeals admit, for the purposes of these proceedings only, the
truth of the facts set out in this Statement of Agreed Facts and the
authenticity, as defined in section 129 of the Tax Court of Canada Rules
(General Procedure), of the documents cited herein or included in the Joint
Book of Documents, and consent to the admissibility of these documents. Nothing
in this document precludes any parties from relying on the facts otherwise in
the record before the court.
I.
Background
1.
Until January 14, 2009, Nortel Networks Corporation ("Nortel")
was a publicly-traded Canadian company and the direct or indirect parent of
more than 130 subsidiaries located in more than 100 countries. It operated a
global networking solutions and telecommunications business. On January 14,
2009 most of the Nortel entities filed for bankruptcy protection. In Canada,
the Canadian incorporated entities filed under the Companies' Creditors
Arrangement Act (the "CCAA").
2.
The Superior Court appointed Ernst & Young
Inc. as the monitor of the Nortel estate (the "Monitor").
3.
During the CCAA proceeding, Nortel
divested itself of substantially all of its assets and business units and
terminated the vast majority of its employees in Canada.
4.
The Appellants consists of former employees of
Nortel and surviving spouses of former Nortel employees who had a vested right
to various benefits by virtue of their employment or their spouse's employment
with Nortel, including the life insurance benefits or survivor income benefits
at issue in these appeals.
5.
As of January 1, 1980, Nortel established Health
and Welfare Plans (“HW Plans”) for the benefit of certain active and former
employees.
6.
Most of Nortel's health and welfare benefits,
including the life insurance and survivor income/transition benefits were
delivered through the Nortel Health and Welfare Trust (the "HWT")
established pursuant to the trust agreement between the Montreal Trust Company
and Northern Telecom Limited, a predecessor of Nortel, made effective as of
January 1, 1980, as amended from time to time (the "Trust
Agreement").
The HWT is a single trust fund created for the purpose of delivering health and
welfare benefits to active and retired employees of Nortel and their eligible
dependents in accordance with the HW Plans.
7.
By agreement dated December 1, 2005, Nortel
appointed the Northern Trust Company, Canada (the "Trustee") as the
successor Trustee under the HWT and the Trust Agreement was amended to reflect
this change. As of the same date, Nortel entered into a letter agreement with
the Trustee, wherein Nortel agreed to be solely responsible for determining the
contributions required to adequately fund the HW Plans and for administering
the HW Plans and indemnified the Trustee from all claims and liabilities
incurred by the Trustee arising out of the contributions made (or not made) by
Nortel to the HWT or out of the administration of the HW Plans. The letter
provides that “to the extent necessary, this letter shall constitute an
amendment to the Health and Welfare Trust”.
8.
As at December 31, 2010, the HWT had
insufficient assets to deliver the vested employee benefits. Nortel is
insolvent and cannot fund the benefits.
9.
Certain employment-related issues of former
Nortel employees are addressed in the Amended and Restated Settlement Agreement
made as of March 30, 2010 (the "ARSA") between Nortel, the Monitor
and the court-appointed representatives of the former Nortel employees (the "Former
Employee Representatives"), the Appellant Sue Kennedy on behalf of the
Represented LTD Beneficiaries, and Representative Counsel (collectively the "Settlement
Parties").
10.
The ARSA was approved by the Superior Court by Order
dated March 31, 2010 (the "Settlement Approval Order"). The
Settlement Approval Order was affirmed by the Ontario Court of Appeal on June
3, 2010.
11.
The ARSA provided
that up to December 31, 2010, Nortel continued to pay life insurance benefits
and survivor income/transition benefits. The ARSA
provides that no such benefits shall be paid by Nortel for any benefit coverage
period following December 31, 2010.
12.
Pursuant to the ARSA, the affected employees and
survivors, including the Appellants, are entitled to file an unsecured claim as
ordinary creditors against the Nortel estate in the CCAA proceeding for any
funding deficit in the HWT or any HWT related claims.
13.
The Appellants provided a release, as set out in
section G of the ARSA, of any other claims against the Trustee of the HWT, the
Monitor, among others. Nothing in the ARSA released Nortel from any claim for
any funding deficit in the HWT or any HWT related claims (the "HWT
Claims") to the extent such claims are allowed as ordinary
unsecured claims against Nortel.
14.
In the ARSA, the Settlement Parties agreed to
"work towards developing a Court approved distribution of the HWT corpus
in 2010 to its beneficiaries entitled thereto and the resolution of any issues
necessarily incident thereto."
The ARSA did not affect "the determination on any basis whatsoever of the
entitlement of any beneficiary to a distribution from the corpus of the
HWT."
15.
The HWT allocation agreed to by the Settlement Parties was
submitted to the Superior Court for approval as set out in the
Fifty-first Report of the Monitor dated August 27, 2010.
16.
The allocation was based on the methodology
agreed to by the Settlement Parties for the purpose of the HWT distribution
(the "HWT Methodology") as set out in the valuation report prepared
by Nortel's actuarial firm, the Mercer Company ("Mercer") dated
August 27, 2010, as amended (the "Mercer Report").
17.
The HWT allocation as proposed by the Monitor in
its Fifty-first Report was approved by the Superior Court. The reasons for
judgement are set out in Superior Court's endorsement of November 9, 2010 and
the allocation and distribution of the HWT’s corpus was approved by the
Superior Court by Order dated November 9, 2010 (the "HWT Allocation Order").
18.
The methodology for allocation of the corpus of
the HWT endorsed by the Ontario Superior Court of Justice provided that the
amount of the allocation was to be calculated based on each approved
participating benefit’s
respective share of the present value of all the approved participating
benefits.
The Order also provided that certain beneficiaries, including the
Appellants, will receive distributions from the approved participating
benefits’ pro rata share of the HWT corpus.
19.
The distribution of the corpus of the HWT was to
be made by the Trustee (or an agent of the Trustee or Nortel) to the entitled
individuals in accordance with the HWT Allocation Order.
20.
Distributions from the HWT in accordance with
the HWT Allocation Order commenced in 2011 pursuant to various interim
distribution orders issued by the Superior Court in 2011. The Appellants all
received distributions as set out below.
21.
The date of Notice of Termination of the HWT for
all purposes under and pursuant to the Trust Agreement was deemed to be
December 31, 2010 in the HWT Allocation Order.
22.
By Order dated November 19, 2013, the Superior
Court further ordered that "upon the posting of the Notice of Declared
Distribution on the Monitor's website and completion of the distributions from
the HWT as provided for in this Order, the HWT will automatically
terminate."
As of August 2016, the distributions from the HWT have not been completed.
II.
Compensation claims against the Nortel Estate
23.
Pursuant to the ARSA, the Appellants agreed that
with respect to any HWT Claims, the Appellants shall not advance, assert or
make any claim that any HWT Claims are entitled to any priority or preferential
treatment over ordinary unsecured claims, and such claims, to the extent
allowed against Nortel, shall rank as ordinary unsecured claims on a pari
passu basis with the claims of the ordinary unsecured creditors of Nortel. The amount of the
payments from the Nortel estate that will be received by the Appellants based
on their claims have yet to be determined.
24.
The amount of the total claim determined for
each Appellant for the present value of all benefit claims as at December 31,
2010 was determined by Mercer in accordance with the Court-approved
compensation claim methodology by Order dated October 6, 2011 and the procedure
for submitting the claims was set out in the Order dated October
6, 2011.
Particulars of such amounts are:
|
Appellant
|
Benefit
claim amount as of December 31, 2010
|
2011 pro rata payment from HWT
|
|
Mary
Ellis
|
$6,855
|
$1,371
|
|
Susan
Kennedy
|
$29,394
|
$9,011
|
|
James
Scott
|
$124,345
|
$8,526
|
|
Ann
McCann
|
$24,644
|
$6,152
|
25.
The Appellants received T4A slips in respect of
their pro rata payments in 2011, and included those amounts in computing
their taxable income for the year. The Minister assessed the Appellants’ T4A
income amounts as filed. The Appellants subsequently objected to the tax
assessments, and ultimately appealed to this Court.
III.
The Appeals
26.
There are four type of benefits at issue in
these appeals as follows:
|
Appellant
|
Benefit
|
|
Mary
Ellis
|
Pensioner
Life Insurance
|
|
Susan
Kennedy
|
Long
Term Disability Life Insurance
|
|
James
Scott
|
Survivor
Income Benefit
|
|
Ann
McCann
|
Survivor
Transition Benefit
|
A. Mary Ellis – Pensioner Life Insurance Benefit
27.
Mary Ellis ("Ellis") is a retired
employee of Nortel who had a vested right to receive life insurance benefits
for her lifetime under the Nortel Group Term Life Insurance Plan (the "Group
Life Plan") by virtue of her employment with Nortel.
28.
Ellis was a beneficiary of the HWT and was
entitled to receive a share of the HWT distribution in accordance with the HWT
Allocation Order.
29.
The terms of the Group Life Plan are set out in
various insurance policies (collectively referred to as the "Insurance
Policies")
and various employee and pensioner benefit booklets provided to Nortel
employees and pensioners (collectively referred to as the "Benefits
Booklet").
30.
Life insurance proceeds were payable on the
death of the pensioner to their designated beneficiary. The amount of
proceeds payable under the Insurance Policies to the beneficiary on the death
of the Pensioner varied based on the earnings of the pensioner while they were
an active employee of Nortel.
For Ellis, the insurance proceeds that would have been paid to her beneficiary
on her death was $17,000.
31.
Pursuant to the ARSA, Ellis continued receiving
life insurance benefits with premiums paid until December 31, 2010. No life
insurance benefits were paid by Nortel for any benefit coverage period
following December 31, 2010.
32.
The present value of Ellis' claim as at December
31, 2010 was estimated by the Monitor to be $6,855 based on
the methodology adopted by the Monitor and agreed to by the Settlement Parties
to value compensation claims made against the Nortel estate in the CCAA
Proceedings (the "Compensation Claims Methodology").
33.
In accordance with the HWT Allocation Order,
Ellis received a lump sum payment of $1,371 in 2011 from the HWT. This amount was
calculated in accordance with the HWT Methodology.
34.
The Group Life Plan was silent with respect to any
payments to be made to the insured pensioner and any lump sum payments to
either the pensioner or their designated beneficiary, other than the insurance
proceeds payable to the beneficiary on the death of the pensioner.
35.
Prior to December 31, 2010, Ellis included the group
term life insurance benefits as a taxable benefit when computing her taxable
income.
36.
With respect to the lump sum payments from the corpus
of the HWT received by Ellis,
the Monitor issued T4As and Ellis filed her tax return to include in taxable
income the lump sum payments received from the HWT. Ellis was assessed as
filed.
37.
Ellis served a Notice of Objection for 2011 to object
to the inclusion of the lump sum payments in her taxable income.
B. Susan Kennedy – LTD Life
Insurance Benefit
38.
Susan Kennedy ("Kennedy") is a former
employee of Nortel who was receiving long term disability benefits ("LTD
Benefits") under the Nortel Long Term Disability Plan for full-time
employees (the "LTD Plan").
39.
As an LTD Benefits recipient, Kennedy had a
vested right to receive life insurance benefits until the age of 65 under the
Group Life Plan by virtue of her employment with Nortel while she was in
receipt of LTD Benefits (the "LTD Life Benefits"), and after age 65
would have been eligible for Pensioner Life insurance benefits under the Group
Life Plan for her lifetime.
40.
Kennedy is a beneficiary of the HWT under the
Trust Agreement and was entitled to receive a share of the HWT distribution in
accordance with the HWT Allocation Order.
41.
The terms of the LTD Life Benefits are set out
in the same Insurance Policies and Employee Booklets as the Pensioner Life
Benefit at issue in the Ellis Pensioner Life Benefit Appeal.
42.
The life insurance proceeds were payable on the
death of the LTD Employee to their designated beneficiary and varied based on
the earnings of the LTD Employee while an active employee of Nortel. For Kennedy, the
insurance proceeds that would have been paid to her beneficiary on her death
consisted of $62,000 for basic life insurance and $186,000 for optional life
insurance benefits.
43.
Pursuant to the ARSA, Kennedy continued
receiving a life insurance benefit with premiums paid until December 31, 2010.
No life insurance benefits were paid by Nortel for any benefit coverage period
following December 31, 2010.
44.
The present value of Kennedy's claim as at
December 31, 2010 was estimated by the Monitor to be $29,394
based on the Compensation Claims Methodology.
45.
In accordance with the HWT Allocation Order,
Kennedy received lump sum payments of $7,281.88 in September 2011 and $1,730.00 in December 2011 from
the HWT. This amount was calculated in accordance with
the HWT Methodology.
46.
The Group Life Plan was silent on any payments
to be made to the LTD Employees and any lump sum payments to either the LTD
Employee or their designated beneficiary, other than the insurance proceeds
payable to the beneficiary on the death of the LTD Employee.
47.
Prior to December 31, 2010, Kennedy included the
group term life insurance benefits as a taxable benefit when computing her
taxable income.
48.
With respect to the lump sum payments from the
corpus of the HWT received by Kennedy, the
Monitor issued T4As and Kennedy filed her tax return to include in taxable
income the lump sum payments received from the HWT. Kennedy was assessed
as filed.
49.
Kennedy served a Notice of Objection for 2011 to
object to the inclusion of the lump sum payments in her taxable income.
C. James
Scott – Management Survivor Income Benefit
50.
James Scott ("Scott") is the spouse of
a deceased former employee of Nortel who had a vested right to receive monthly
survivor income benefits (the "SIB") under the Management Survivor
Income Benefit Plan (the "SIB Plan") by virtue of his spouse's
employment with Nortel.
51.
The SIB Plan covered all active non-unionized
full-time employees of Nortel designated as management or management support
staff, including Scott's deceased spouse.
52.
The terms of the SIB Plan are set out in the
plans attached as appendix A to the Trust Agreement.
53.
The SIB Plan provided eligible SIB Survivors with
a monthly income benefit based on a percentage of the deceased employee's basic
annual salary, to be paid on a monthly basis for the life of the surviving
spouse.
54.
Scott was entitled to receive a monthly SIB payment
of $871.46 on or after the death of his spouse in recognition of his spouse's
employment with Nortel.
55.
Pursuant to the ARSA, Scott continued receiving a
monthly SIB benefit until December 31, 2010. No SIB benefits were paid by
Nortel for any benefit coverage period following December 31, 2010.
56.
In accordance with the HWT Allocation Order,
Scott received lump sum payments of $724.18 in January 2011, $482.79 in May
2011, and $7,319.20 in July 2011. These amounts were calculated in accordance with the HWT Methodology.
57.
The present value of Scott's SIB benefits as at
December 31, 2010 was estimated by Mercer to be $124,345
based on the Compensation Claims Methodology.
58.
The SIB Plan was silent with respect to any lump
sum payment to be made to an eligible Survivor, other than a lump sum payment
where a Nortel employee died as a result of an occupational accident, which is
not applicable in these Appeals.
59.
Prior to December 31, 2010, Scott included the
monthly SIB payments he received as a taxable death benefit when computing his
taxable income.
60.
With respect to the lump sum payments to Scott,
the Monitor issued T4As and Scott filed his tax return to include in taxable
income the lump sum payments received from the HWT. Scott was assessed as
filed.
61.
Scott served a Notice of Objection for 2011 to
object to the inclusion of the lump sum payments in his taxable income.
D. Ann McCann – Union Survivor
Transition Benefit
62.
Ann McCann ("McCann") is the spouse of
a deceased unionized employee of Nortel. She had a vested right to receive
monthly survivor transition benefits (the "STB") under the Union
Survivor Transition Benefit Plan (the "STB Plan") by virtue of her
spouse's employment with Nortel.
63.
McCann was a beneficiary of the HWT and was entitled
to receive a share of the HWT distribution in accordance with the HWT
Allocation Order.
64.
The STB Plan covered all active unionized
employees of Nortel under various collective bargaining agreements with various
unions that provided for STB benefits (collectively referred to as the "Collective
Agreements") for employees covered by the applicable Collective
Agreements, including McCann's deceased spouse.
65.
The terms of the STB Plan are set out in the
various insurance policies (collectively referred to as the "STB Insurance
Policies") and the Benefits Booklets.
66.
The STB Plan provided similar benefits to the
SIB Plan at issue in the Scott SIB Survivor Appeal outlined above; upon the
former employee's death, monthly income payments were made to eligible STB
Survivors.
67.
McCann was entitled to receive a monthly STB
benefit of $725.00 on or after the death of her spouse in recognition of
her spouse's employment with Nortel for a fixed five year
period, which would have ended on December 31, 2013.
68.
Pursuant to the ARSA, McCann continued receiving
a monthly STB benefit until December 31, 2010. No STB benefits were paid by
Nortel for any benefit coverage period following December 31, 2010.
69.
The present value of McCann's STB
benefits as at December 31, 2010 was estimated by the Monitor to be $24,644 based on the Compensation Claims Methodology.
70.
In accordance with the HWT Allocation Order,
McCann received lump sum payments of $2,175 in
January 2011, $285.97 in May 2011, and $3,691.45 in July 2011 from the HWT, calculated in accordance
with the HWT Methodology.
71.
The STB Plan was silent with respect to any lump
sum payment to be made to an eligible STB Survivor, other than a lump sum
payment where the Nortel employee died as a result of an occupational accident,
which is not applicable in these Appeals.
72.
Prior to the December 31, 2010, McCann included
the monthly STB payments received as a taxable death benefit in computing her taxable
income.
73.
With respect to the lump sum payments received
by McCann, the Monitor issued T4As and McCann filed her tax return to include
in her taxable income the lump sum payments received from the HWT. McCann was
assessed as filed.
74.
McCann served a Notice of Objection for 2011 to
object to the inclusion of the lump sum payments in her taxable income.
DATED at the City of Toronto,
Ontario, on this 23rd day of August, 2016.
William F. Pentney, Q.C.
Deputy Attorney General for Canada
Solicitor for the Respondent
Per: Bobby J. Sood / Rita Araujo
DEPARTMENT OF JUSTICE
Ontario Regional Office
Tax Law Services Division
The Exchange Tower
130 King Street West
Suite 3400, Box 36
Toronto, ON M5X 1K6
Counsel
for the Respondent
DATED
at the City of Toronto, Ontario, on this ____ day of August, 2016.
_________________________________
Mark Zigler /
Roberto Tomassini
KOSKIE
MINSKY LLP
20 Queen
Street West, Suite 900
Toronto, ON M5H 3R3
Counsel for
the Appellants
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