Ralph P. Adler v. Her Majesty the Queen, [1995] 1 CTC 2590

Margeson J.T.C.C.:-The sole question before me for determination is whether the amount in question, $21,029.66 received in the year 1991, is to be included in income in that year. There was withholding tax deducted from the gross amount in accordance with the provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act"). The gross amount was $21,029.66, the deductions were $6,308.90 and the net was $14,720.76.

Mr. Adler testified on his own behalf. He put into evidence a number of exhibits, Exhibits A-l to A-8, and there was no objection. They included sections of the Act, Exhibit A-1. Exhibit A-2 was the master agreement which was in effect apparently between the Public Service Alliance and the Treasury Board for some time. A circular letter, Exhibit A-3, refers to the results of the efforts of the Public Service Alliance to obtain some benefit for its members who were retiring, much in the position of the appellant himself. We have Exhibit A-4, the notice of reassessment for 1991, and Exhibit A-5, the original assessment for 1991. Exhibit A-6, the original assessment for 1990 and Exhibit A-7 which is the report of the amount of money paid to the appellant in the year in question. Exhibit A-8 was the 1991 return which was submitted by Mr. Adler as to what the end result should be if I were to accept his argument.

The appellant’s testimony was to the effect that the amount that was received, whatever its character, was not severance pay. It was received as a benefit, but he says it was not a "retiring allowance" as described in subparagraph 56(l)(a)(ii) of the Act. Section 56 of the Act sets out the amounts that are to be included in income within a year, under subdivision d, "Other Sources of Income", and under subparagraph 56( 1 )(a)(ii), to be included in income is:

a retiring allowance, other than an amount received out of or under an employee benefit plan, a retirement compensation arrangement or a salary deferral arrangement.

Now it is to be noted of course that just because the term "retirement compensation arrangement" is excepted under that section, that does not necessarily mean that it automatically does not have to be included in income. Perhaps Mr. Adler believed that that was the case and he addressed that point. The first argument is whether or not it is a retiring allowance. Mr. Adler’s argument was that it was not that, it was a retirement compensation arrangement. That was his position.

Mr. Adler’s evidence was that he retired and it was an agreement arrived at by bargaining between Treasury Board and the Public Service Alliance. It was severance pay or a severance allowance, but it was not a retirement allowance. He said Exhibit A-7 refers to it as severance pay, and that term has been used as a matter of fact. There is some writing on Exhibit A-7 which also refers to severance pay, and I do not think that there is much doubt that it was that, whatever other character it had. On page 2 of Exhibit A-7 he says it sets out the amount less the withholding tax, and he says that withholding tax has been taken from it and that is all that has to be deducted from it. He says nowhere is it described as a retiring allowance. True, it is not described as a retiring allowance, but that does not end the matter. It is the duty of the court to determine whether or not an item is to be included in income under section 56 of the Act and so I have to decide as to its character and whether or not it is to be included in income. Under (ii) I must decide whether it is a retiring allowance or whether it is a retirement compensation arrangement. If I find that it is a retirement compensation arrangement, I further have to find whether or not it is to be included in income under some other section. If I find that it is a retiring allowance, that is the end of the matter because it is included in income under subparagraph 56(1 )(a)(ii).

That was basically the evidence of Mr. Adler on direct examination. On cross-examination he identified Exhibit R-1 as his original return for 1991, and he admitted that he retired on February 28, 1991. He admitted that he had no further employment after that period of time actively. He said that he was a business examiner for 26 years, mostly involved in business audits with Revenue Canada. He said upon retirement he received the amount set out in Exhibit A-7, $21,029.66, as the gross amount of severance pay. He further indicated that this amount represented one week’s pay for each year of service at the rate of pay that he enjoyed just prior to the retirement. He was not disputing, as he indicated, the amount withheld at source. He said though that that is the only amount that should have been deducted and that there were no additional taxes or deductions that should be made. Any additional tax, he said, was an overcharge according to the law. In redirect examination, he said he did not report it in 1991 in his return as he felt that all the taxes that had to be deducted were deducted and of course no issue was made of that fact here today. The Minister reassessed him in due course and said that it should have been included in income. No further evidence was given and the parties tendered their documents and rested.

Respondent’s argument

In argument, counsel for the respondent said that under paragraph 56(1 )(a) all amounts have to be included in income for the year and under subparagraph 56(l)(a)(ii) that that includes a retiring allowance. Counsel said that this is exactly what we have in this particular case, a retiring allowance under the definition set out in paragraph 248(1 )(a). Section 248 of the Act describes a retiring allowance as being:

an amount (other than a superannuation or pension benefit or an amount received as a consequence of the death of an employee)...

which is not the case here, "received":

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his long service.

Counsel for the Minister argued that that is exactly what we have here and that is exactly what the appellant testified that he had when he said that he was a long service employee of Revenue Canada. On cross-examination, she brought out that he was there for 26 years. She brought out that it was one week’s pay for each year of service at the rate of pay just prior to retirement and that along with the other evidence classifies what was received as a retiring allowance under section 248. She disagreed that it was a retirement compensation arrangement.

Counsel for the Minister said that it must be brought into income in the year in question under the Act and she referred to the case of Henderson v. M.N.R., [1991] 2 C.T.C. 2048, 91 D.T.C. 1116 (T.C.C.), as a case similar to the present one. In that particular case, the Minister had disallowed the deductions that were sought in the year in question and the taxpayer had appealed. Judge Beau bier dealt with the case and he said that he was satisfied that the evidence was that the appellant served E. M. Henderson Drugs Ltd. for his entire life and his predecessor, Mr. Henderson, for a total of 28 years, which is more than half of the average Canadian’s working life. It was certainly within the standard of long service. Therefore the Court found that the payments were quite properly made by the corporation in recognition of the appellant’s long service. That is the same wording as we are dealing with here under section 248:

..upon or after retirement of a taxpayer from an office or employment in recognition of his long service.

Counsel said that it comes squarely within that definition and that Judge Beaubier found the same thing in Henderson, supra.

Counsel further argued that the rate of tax is set by law at various rates, that is something that I have no control over and whether or not the appeal should be allowed in this particular case must be based upon the characterization of the payment. I can see nothing in the evidence which indicates that there is any real issue about the rate of tax which was charged. The amount of tax that one must pay is the amount of tax that you are required to pay at the applicable rate less the amount paid in.

Appellant's argument

The appellant for his part said that what he received was a retirement compensation arrangement. He said that it comes within the definition in 248 of the Act which defines ’’retirement compensation arrangement" as follows:

... retirement compensation arrangement” means a plan or arrangement under which contributions (other than payments made to acquire an interest in a life insurance policy) are made by an employer or former employer of a taxpayer, or by a person with whom the employer or former employer does not deal at arm’s length, to another person or partnership (in this definition and in Part XI.3 referred to as the "custodian") in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer or the loss of an office or employment of the taxpayer, but does not include....

The appellant said that that is what he received in this particular case. I asked him some questions about that to satisfy me that he came within the terms of that definition and he was unable to point to anything specific that would do so. In particular there did not seem to be any answer to the type of arrangement that appears to be set up under that definition as a custodian, as there is a third party involved. He did argue later on that there really was a third party or a custodian involved.

The appellant said that it was a grant or a gift. He was reading from some text and I found it difficult to follow exactly what he was reading from, but in any event, the end result of what he said was that a retirement benefit or arrangement is one where the employer has to pay it or is required to pay it and there is no option. Basically, he said that is what we had here. He had it as a result of the agreement that was reached between Treasury Board and the Public Service Alliance. Further than that he said that this was something that always existed because it was there under the master agreement. He said a retirement allowance is something that is optional in nature, unlike the one here. Here it was required to be done and consequently was not a retiring allowance. He said that that makes it a retirement compensation arrangement under the definition under section 248 and that it fits.

With respect to the case cited by counsel for the Minister, he said it is not applicable. In that particular case there was no prearrangement prior to the retirement, it was optional, it was not compulsory, and consequently it is not the same thing at all. Further, he said that as far as the tax consequences are concerned, this payment should be excluded under paragraph 6(1 )(a) of the Act. He said it is subject to withholding tax under subsection 153(1) of the statute. Of course he has been given credit for the deduction that was made as a result of that section and that is not really an issue.

He argued that that is the only deduction that should be made. He said Treasury Board obviously had section 153 in mind when it entered into this kind of arrangement because it is nowhere described as a retirement allowance and Treasury Board must have had all of this in mind and must have figured when the withholding amount was taken out that that was all the tax that was intended to be taken. There is no evidence before me as to what Treasury Board thought except the master document here and the circular letter which the appellant has put into evidence setting out the arrangement that was reached between Treasury Board and the Public Service Alliance approximately five weeks or so prior to March 20, 1989.

Rebuttal

In rebuttal, counsel for the Minister said that what we have here is not a retirement compensation arrangement under section 248. Counsel argued, even if it were, it does not help the appellant any because it would be taxable under paragraph 56(1 )(x) which makes reference to a retirement compensation arrangement and brings it into income in the year in question. In any event, she said we do not have to worry about it because it is not that anyway, it is a retirement allowance. Counsel submitted that the fact that Exhibit A-7 treats it differently does not mean anything because the two are treated differently under the Act anyway.

I allowed the appellant to say something by way of surrebuttal and he referred to paragraph 56(1 )(x) and he said that this does not apply.

Analysis and decision

I find that this payment was a retiring allowance. It is one which comes within the parameter of the definition in subparagraph 56(l)(a)(ii) of the Act, a retiring allowance. If it is a retiring allowance, and I say that it 1s, then it has to be included in income under subparagraph 56( 1 )(a)(ii). I find it is not a retirement compensation arrangement under subparagraph 56(l)(a)(ii) as argued by the appellant.

If you consider the definition of the two, considering first of all section 248, a retiring allowance, what is a retiring allowance? It means:

an amount (other than a superannuation or pension benefit or an amount received as a consequence of the death of an employee) received

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his long service....

I cannot see how the payment received here was anything other than that. Even on the appellant’s own testimony the only reasonable conclusion I could come to is that it was such a payment. It does not matter how it is described by somebody else, by Treasury Board or by anyone else, it is the Court’s duty to define the proper character of the payment under the Act I do so and I find that the proper characterization of it is a retiring allowance under subparagraph 56(1 )(a)(ii) in accordance with the definition of retiring allowance under section 248.

If you consider the argument advanced by the appellant that it was a retirement compensation arrangement, the payment bears no relationship whatsoever to the type of payment which is contemplated by the definition of retirement compensation arrangement. Obviously that section contemplates payment made to a third party, a party dealing at non-arm’s length, it contemplates the position of a custodian and obviously it is not meant to cover the situation that we have before us. I find that it was not a retirement benefit arrangement.

The appellant argued that if it was a retirement compensation arrangement, it was exempt under subparagraph 56(l)(a)(ii) because it was only subject to the withholding tax under subsection 153(1) of the Act, that that amount has been deducted and therefore there is no other tax owing. I cannot accept that argument.

First of all it is subject to withholding tax, there is no question about that. Secondly, even if I were to find that it was a retirement compensation arrangement, I would find it would be subject to tax under the provisions of paragraph 56(1 )(x) of the Act. The appellant could not have the relief that he seeks even if he was right in having it characterized as a retirement compensation arrangement.

I do not know what Treasury Board had in mind when they were trying to characterize this payment. They did not really make much of an effort to characterize it in any event, and again, as I said, even if they did it makes no difference to me because I must still decide whether or not the character fits within a certain section of the Act. I have no doubt in my mind as to what section it fits under.

I am satisfied that the case referred to by the Minister, Henderson, supra, does have some applicability here. Basically the payment received in that case was very much similar to the payment received in the case at bar. I can say like Judge Beaubier did in that case that it was certainly a payment which was made by the corporation-or by the government in this particular case-in recognition of the appellant’s long service. That, together with the other evidence put before me, puts it squarely within the definition of ’’retirement allowance" as set out in the Act and so this case is applicable here.

The end result is that I am satisfied that the payment was received as a retirement allowance, that it was taxable in the year in question and that it was properly taxed by the Minister and has to be included in income in that year. In spite of the fact that the appellant pays a rather large amount of tax as a result of it, there is nothing the Court can do about that as the rates are set and it must be taxed in accordance with the applicable rate. Therefore I will dismiss the appeal and confirm the Minister’s assessment.

Appeal dismissed.