Alan M. Schwartz v. Her Majesty the Queen, [1993] 2 CTC 2125, 93 DTC 555

Rip, T.C.C.J.:—The issue in this appeal from an assessment of income tax for 1989 is whether the Minister of National Revenue (" Minister”), the respondent, was correct in considering that a “retiring allowance”, as defined in subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), includes money received by a taxpayer from a corporation as a consequence of the corporation cancelling an employment contract with the taxpayer prior to the taxpayer providing services to the corporation. Any amount received by a taxpayer in the year as, on account of or in lieu of payment of, or in satisfaction of, a retiring allowance is to be included in his income for the year: subparagraph 56(1)(a)(ii).

In the alternative, the respondent submitted, the money received by the appellant, Alan Schwartz ("Schwartz") from Dynacare Health Group Inc. (' Dynacare") was a benefit received by him in the course of, or by virtue of an office or employment and accordingly is to be included under section 6 in his income for 1989. Counsel also argued the payment, if damages, was income from a source, that is, the agreement to employ the appellant, within the meaning of section 3 of the Act.

Facts

Schwartz is a lawyer who, in 1988, was a partner in a Toronto law firm. In April of that year he received a verbal offer of employment from Dynacare for a position as Senior Executive Vice-President. Schwartz and Dynacare's chairman discussed terms of employment.

In May, 1988 Schwartz wrote to Dynacare confirming the general terms of the agreement whereby Dynacare "will employ me". The terms of the agreement included:

(a) what Schwartz’ duties and responsibilities “ will consist of";

(b) the compensation Schwartz “will receive" for his services; and

(c) general details respecting the option to acquire equity shares he “ ill receive".

(This undated letter together with the verbal understanding between the parties is sometimes referred to as the "employment agreement.”)

Dynacare and Schwartz understood that Schwartz would not join the company until sometime after an assignment he had undertaken for the Ontario Government would be completed; this was not expected before November, 1988.

The appellant then notified the Managing Partner of his firm that he would be withdrawing from the partnership after completion of the project for the Ontario Government.

In late September, 1988 Dynacare’s President called Schwartz to his office and informed him that Dynacare had a change of plans and Schwartz's services would not be required. By letter dated October 6, 1988, Dynacare's lawyer confirmed to Schwartz the cancellation of the employment agreement and advised him that “[I]n recognition of [Dynacare's] obligation and in order to settle any claims that you may have, Dynacare is prepared to offer to you the sum of $75,000 in exchange for a full and final release. . . .” Dynacare's lawyer also referred Schwartz to his obligation to mitigate any damages.

Schwartz did not accept Dynacare's offer and retained counsel. At the time Schwartz was still practising law and continued to do so until he withdrew from the partnership at the partnership’s year-end on January 31, 1989. He had completed his work for the Ontario Government prior to Christmas.

On February 1, 1989 Schwartz commenced employment with a firm of investment advisers.

In the meantime negotiations continued with Dynacare. On August 21, 1989 Schwartz and Dynacare executed mutual releases in consideration of Schwartz receiving $400,000, of which the sum of $40,000 was paid on account of costs and the sum of $108,000 was withheld by Dynacare for remission to Revenue Canada.

Schwartz testified the amount of $400,000 was more or less picked from the air" although losses on stock options and of salary were considered. He stated he suffered embarrassment, anxiety and inconvenience as a result of the breach of the agreement by Dynacare. There was no evidence to indicate any allocation of the settlement amount between losses of income from stock options and salary on one hand and embarrassment, anxiety and inconvenience on the other hand.

At no time did Schwartz perform any services for Dynacare in any capacity under the employment agreement. He had never been assigned a title or office by Dynacare nor did he hold out to the public he was an officer or employee of Dynacare. He never received any remuneration or compensation from Dynacare.

Appellant's submissions

The argument of the appellant's counsel was very simple. One must distinguish between the cancellation of an employment contract once employment commences and of an employment contract prior to the employment commencing. In the first case it is clear any amount received by the taxpayer is a retiring allowance; in the second case the taxpayer never held an office or employment and therefore the amount received cannot be a retiring allowance.

Subsection 248(1) defines a "retiring allowance” to mean:

. . . means an amount. . . received

(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal

by the taxpayer or. . . .

The words “ office” and “employment” are defined in subsection 248(1) as follows:

"office" means the position of an individual entitling him to a fixed or ascertainable stipend or remuneration . . . and also includes the position of a corporation director; and“ "officer" means a person holding such an office. . . .

"employment" means the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign) and "servant" or employee" means a person holding such a position;

Mr. Zarnett, appellant's counsel, submitted that to be a loss of office or employment there must first exist an office or employment. Some meaning must be given to the words "loss" and “employment” in the definition of retiring allowance. The word “loss” must refer to something that existed, not something that never existed. Schwartz never held or had any employment or office with Dynacare.

Appellant's counsel referred to two decisions of this Court, Buchbinder v. M.N.R., an unreported judgment of Brulé, T.C.C.J., dated July 12, 1990 and Ashford v. M.N.R., [1986] 1 C.T.C. 2044, 86 D.T.C. 1079. [1] In Buchbinder the taxpayer entered into an employment contract but two days before he was to report for work, the employer advised him that his services were not required. The taxpayer commenced an action for breach of contract but reached a settlement before going to court. He received a payment of $65,000 which the Minister of National Revenue (" Minister") included in his 1984 income as being a" retiring allowance” and therefore taxable. The taxpayer argued that because he never commenced employment he did not receive the payment" in respect of a loss of an office or employment". Judge Brulé held that the settlement payment received by the taxpayer was not "damages" as that term appears in the definition of "retiring allowance” and therefore is not taxable pursuant to subparagraph 56(1)(a)(ii). He stated that "while the statute may use this word I believe it contemplates that employment had existed”.

Judge Brulé was referred to Specht v. The Queen, [1975] C.T.C. 126, 75 D.T.C. 5069 (F.C.T.D.), where, at page 134 (D.T.C. 5073), Collier, J. said:

Further, in my opinion the payments agreed upon were not made. . . “in respect of loss of office or employment”. I do not propose to attempt any all- encompassing statement as to the meaning to be given to that phrase. Speaking generally, it envisages a payment made for loss of a source of income, on or after withdrawal from usual business activity or employment or after withdrawal by reason of the elimination or expiration of the particular office or employment.

Brulé, T.C.J. relied on the reasons for judgment in Ashford, supra. Ashford was a hockey official who was advised that his year to year contract would not be renewed. He received a settlement payment from the National Hockey League which the Minister included in his income as a retiring allowance". There was no employment contract to breach in Ashford (as there is in the case at bar) and therefore Kempo, T.C.C.J. held that there was no office or employment from which Ashford could withdraw by reason of retirement or otherwise. (For the taxation years in issue in Ashford, the definition of "retiring allowance” did not include an amount" received. . .in lieu of, damages".)

Neither the Buchbinder nor the Ashford decision was appealed.

Counsel for appellant also argued that the definition of "employment" contemplates the position of a person in the service of another and there is a subsisting action of a person actually holding such a position. The definition of employment, he submitted, does not include intended or prospective employment.

In support of his latter submission, counsel referred to the following words of subsection 80.4(1) of the Act:

. .. by virtue of the office or employment or intended office or employment of an individual. . . .

Thus, he reasoned, Parliament knows the difference between "existing employment" and "intended employment”. Words, counsel reasoned, have meaning and if different words are used in the statute, they must mean different things. The term "retiring allowance” does not include payments received in respect of a loss of intended or prospective employment. Counsel referred to Prestcost (Central) Ltd. v. Minister of Labour, [1969] 1 W.L.R. 89 (C.A.) where Lord Diplock stated, at page 97:

Again, the habit of a legal draftsman is to eschew synonyms. He uses the same words throughout the document to express the same thing or concept, and consequently if he uses different words the presumption is that he means a different thing or concept. Another habit, relevant to this case, is that a legal draftsman aims at uniformity in the structure of his draft. If he has thought it desirable to qualify what he has stated in one part of the document and has omitted to qualify a statement of a similar kind in another part of the document, the presumption is that the latter statement is to be understood as not being subject to a similar qualification, even though the natural meaning of the second statement would otherwise have been understood sub silentio as subject to it. This comment was made in reference to the principle of statutory construction expressio unius est exclusio alterius”, which in English means the express mention of one thing is the exclusion of the other.

In Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041, the Supreme Court of Canada held the words “in respect of" in the context of section 87 of the Indian Act was probably the widest of any expression intended to convey some connection between related subject matters. They import such meaning as "in relation to", "with reference to”, or “in connection with”. Appellant’s counsel submitted that with respect to the definition of "retiring allowance” in the Act, the words “in respect of" must connect to the defined words "office" or "employment". His client, he insisted, held no office or employment with Dynacare.

Minister's submissions

The Minister’s main argument, of course, was that Schwartz received a retiring allowance.

The Minister’s counsel submitted that the fact Schwartz had not entered the service of Dynacare prior to the cancellation of the employment agreement and the payment is not relevant. She reviewed the definition of" employment". "Employment" is, she said, a position. The word "employment" is a noun. The words “in the service" describes the "position" of employment and not the individual. Schwartz had a position with Dynacare because he had an enforceable contract with the company. It was because the "position" of employment was taken away from him by Dynacare did Schwartz consider claiming damages from Dynacare.

She argued there is no requirement that a person be in the service of another to have the position of employment. Schwartz had an enforceable employment contract with Dynacare. Dynacare breached the agreement and he lost his position. She stated one is not required to be physically present at the employer and actually perform services to have a position of employment: Viau v. M.N.R., [1986] 1 C.T.C. 2570, 86 D.T.C. 1437 (T.C.C.) and Henderson v. M.N.R., [1991] 2 C.T.C. 2048, 91 D.T.C. 1116 (T.C.C.). Schwartz's counsel claimed his client held no position with Dynacare and was not in the service of Dynacare. A person does not become an employee by the fact he or she executes an employment contract, he argued.

The definition of “ retiring allowance” was amended effective after November 12, 1981 to include amounts received as on account of, or in lieu of payment of, damages. Accordingly, Minister's counsel submitted, the reasons for judgment in The Queen v. Atkins, [1975] C.T.C. 377, 75 D.T.C. 5263 (F.C.A.) and Pollock v. The Queen, [1981] C.T.C. 389, 81 D.T.C. 5293 (F.C.T.D.), are of no assistance in the appeal at bar. In these cases the Federal Court of Appeal held that damages received for wrongful dismissal were not received as "salary", “wages” or" remuneration” or as a benefit "received or enjoyed . . . in respect of, in the course of, or by virtue of the office or employment". The damages were received for breach of an employment agreement and were not a benefit under it. In assessing, the Minister relied on subsection 5(1) and paragraph 6(1)(a) of the Act. Counsel said the amended definition of "retiring allowance” contemplates the payment made to Schwartz. Various papers published with the budget of November 12, 1981 and resolutions tabled at the time, she insisted, support her position. The Budget in More Detail, November 12, 1981 on page 39, states that "payments received by an employee on his dismissal or termination of his employment, which may in certain circumstances be exempt from tax, will now become fully taxable”. Pages 21 and 22 of the Budget Papers, Supplementary Information and Notice of Ways and Means Motion on the Budget provide that ”. . . the full amount of all job termination payments represents remuneration or a substitute for remuneration and should thus be taxable”. Finally, the Explanatory Notes to a Bill Amending the Income Tax Act, December 12, 1982 sets forth that the amendment to the definition of" retiring allowance” “ treats as a retiring allowance the full amount of any payment to an employee received as damages or pursuant to a judicial determination".

Analysis

The Supreme Court has approved recent trends in interpreting the Act less strictly. In The Queen v. McClurg, [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001, at pages 182-83 (D.T.C. 5010-11), Dickson, C.J.C. explained:

In recent years this Court, in an income tax appeal, has found it beneficial to engage explicitly in the development of an interpretive approach to the Income Tax Act, an approach which is wedded neither to a rule of" strict construction" nor to an all-encompassing test of" independent business purpose". This trend began with the judgment of Estey, J. in his majority reasons in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305. In that case, Estey, J. undertook an extensive discussion of interpretive techniques, and he drew a conclusion as to the preferred approach to be taken by the courts at page 315 (D.T.C. 6322):

It seems more appropriate to turn to an interpretation test which would provide a means of applying the Act so as to affect only the conduct of a taxpayer which has the designed effect of defeating the expressed intention of Parliament. In short, the tax statute, by this interpretative technique, is extended to reach conduct of the taxpayer which clearly falls within “the object and spirit" of the taxing provisions.

Estey, J. expanded upon this test of "object and spirit" in his majority judgment in The Queen v. Golden, [1986] 1 S.C.R. 209, [1986] 1 C.T.C. 274, 86 D.T.C. 6138 at pages 214-15 (C.T.C. 277, D.T.C. 6140):

. . .. the law is not confined to a literal and virtually meaningless interpretation of the Act where the words will support on a broader construction a conclusion which is workable and in harmony with the evident purposes of the Act in question. Strict construction in the historic sense no longer finds a place in the canons of interpretation applicable to taxation statutes in an era such as the present.

More recently, in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, I described the approach in terms of the need to discern the commercial reality of a taxpayer's transaction at pages 52-53 (C.T.C. 128, D.T.C. 5066-67):

I acknowledge, however, that just as there has been a recent trend away from strict construction of taxation statutes . . . so too has the recent trend in tax cases been towards attempting to ascertain the true commercial and practical nature of the taxpayer's transactions. There has been, in this country and elsewhere, a movement away from tests based on the form of transactions and towards tests based on . . . a common sense appreciation of all the guiding features of the events in question. . . .

This is, I believe, a laudable trend provided it is consistent with the text and purposes of the taxation statute. Assessment of taxpayers’ transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help to avoid the inequity of tax liability being dependent upon the taxpayer's sophistication at manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.

Thus, in proceeding to analyze the tax consequences of the application of the discretionary dividend clause, it is necessary to determine both the purpose of the legislative provision and the economic and commercial reality of the taxpayer's actions. . . .

This line of cases is in accordance with section 10 of the Interpretation Act, R.S.C., c. 1-21 which provides, amongst other things, that the law:

. . . Shall be applied to the circumstances as they arise, so that effect may be given to the enactment according to its true spirit, intent and meaning.

If one were to ask a person on the street if Schwartz had a position with Dynacare in September, 1988, the answers would vary. One may say no because, "the job hasn't started yet." Another person would opine that Schwartz had a job but” it hadn't started yet”. These are common sense appreciations of the facts in which two people have come to two different, but reasonable, conclusions. In interpreting a provision, one ought not to read into that provision words that are not present. The definition of “retiring allowance” does not mention any “intended” or "prospective" employment. The definitions of "employment" and "office" refer to the word "position". The definitions of "employee" and "officer" include the word “holding”. These words are used daily without any confusion and have no special magic. A judge should not alter the meaning of the words.

The Shorter Oxford Dictionary on Historical Principles defines the word "position" as". . . an official situation, place or employment".

The French language definitions of "office" and “employment”, "charge" and "emploi", state that:

“charge” signifie un poste qu’occupe un particulier et qui lui donne droit à un traitment ou à une rémunération fixés ou vérifiables et. . .,

and

"emploi" signifie le poste qu’occupe un particulier, au service d'une autre personne. . . .

Le Petit Robert I defines "poste" as"[E]mploi auquel on est nommé dans une hiérarchie, lieu où l'on exerce. . . .”

An officer then, is one who holds, has possession of or fills a position which grants him a right to stipend or remuneration and an employee occupies a position in the service of another.

At the time Schwartz was informed by Dynacare's president that Dynacare would not honour its agreement with him, Schwartz was still a partner in his erstwhile law firm. He cannot be said to have been an employee of Dynacare: he performed no services with Dynacare and was under no obligation to provide services to Dynacare at the time; he was paid no salary nor other remuneration by Dynacare. Schwartz testified the directors of Dynacare had not yet appointed him Senior Executive Vice-President of the company.

Schwartz would commence to hold the position of employee and officer of Dynacare provided for in the employment agreement only when he had completed his work for the Ontario Government. Until that time the terms of the employment agreement had not been executed; neither of the parties to the agreement, in September, 1988, had performed under the terms of the agreement. The letter from Schwartz to Dynacare referred to future duties and compensation. Dynacare repudiated the agreement before any employeremployee relationship was established between Dynacare and Schwartz. There is no evidence that the office of Senior Executive Vice-President at Dynacare had been eliminated or had expired or that it had even existed in September, 1988. No position of employment or office had yet been created, although it was contemplated under the agreement. The agreement was a contractual obligation by Schwartz to hold the position of Senior Executive Vice-President at some time in the future and for Dynacare to give this office to Schwartz in the future. The employment agreement was an agreement for employment at an indefinate, but determinable, time in the future; verbally the parties agreed when Schwartz would join Dynacare, at a time when he had completed his work for the Ontario government. In essence, Schwartz had a legal right to be employed and he lost that right.

I am not unaware that the distinction between deciding not to honour an employment agreement before the commencement of the rendering of services under it and after may be somewhat artificial and arbitrary. Surely Schwartz would not be before the Court if Dynacare's president had informed him on his first day on the job Dynacare was not going to honour their agreement, or even if during the evening before the first day he was to appear at Dynacare, he was informed not to show up because his position had been eliminated. In both of these situations it seems to me Schwartz would have suffered a "loss of an office or employment".

Artificiality, however, is the illegitimate child of the Act. Each budget of the Minister of Finance brings with it amendments to the Act that take effect arbitrarily on the day of the budget or a day later. In many situations, as a result of an arbitrary and artificial date set out in a budget, the timing of an event determines its taxability. The trite maxim that notwithstanding the same commercial result may be achieved in several ways, only one way may result in favourable tax consequences itself smells of artificiality.

Schwartz could not be said to have lost any office or employment. The payment to Schwartz was not payment envisaged by Collier, J. in Specht, supra. The budget papers of November 12, 1981 and the Explanatory Notes to the Bill amending the Act on December 12, 1982 assume the payments were received by an employee as a "job termination” payment. In the case at bar Schwartz was never an employee of Dynacare ana he was not yet holding any position with Dynacare. The budget papers and explanatory notes do not assist the Minister.

In the authorities cited by Minister's counsel in support of her submission that the $400,000 is a retiring allowance, the taxpayer had been an employee of the employer prior to receiving money from the former employer. [2] This is not a fact in the appeal at bar. I cannot find that the "object and spirit” of the definition of retiring allowance” catches a taxpayer who may have had a right to be employed but was not yet employed by a particular employer at the time the employer breached the contract between them.

I am not satisfied that the amount of damages received by Schwartz come within the definition of “retiring allowance" within the meaning of subsection 248(1). In such circumstances, Sopinka, J., in Fries v. Canada, [1990] 2 C.T.C. 439, 90 D.T.C. 6662 (S.C.C.) stated the benefit of the doubt must go to the taxpayers".

Alternative considerations

Employment benefit: paragraph 6(1)(a)

Minister’s counsel submitted that if the damages were not a retiring allowance, they were received by Schwartz as a benefit by virtue of an office or employment and therefore, pursuant to paragraph 6(1)(a) [3] are to be included in his income.

Absent the amended definition of" retiring allowance” I would be bound to follow the reasons for judgment of the Federal Court of Appeal in Atkins, supra, notwithstanding the "grave doubt” Pigeon, J. had with respect to the correctness of Atkins: Jack Cewe Ltd. v. Jorgenson, [1980] 1 S.C.R. 812, [1980] C.T.C. 314, 80 D.T.C. 6233. At page 814 (C.T.C. 315, D.T.C. 6234), Pigeon stated:

Damages payable in respect of the breach of a contract of employment are certainly due only by virtue of this contract, I fail to see how they can be said not to be paid as a benefit under the contract. They clearly have no other source.

He explained his views further on pages 818-19 (C.T.C. 317, D.T.C. 6236):

Furthermore, it appears that damages for wrongful dismissal are“ earnings" for unemployment insurance purposes, being defined by the Unemployment Insurance Regulations as income “arising out of employment". In Attorney-General of Canada v. Walford, [1979] 1 F.C. 768, the Federal Court of Appeal reversed an Umpire's decision holding that a payment of damages for wrongful dismissal was not income. The judgment in The Queen v. Atkins was held not to be an authority in the interpretation of the Unemployment Insurance Regulations. The anomoly of considering damages for wrongful dismissal as income for unemployment insurance purposes but not for income tax purposes is an additional reason for doubting the correctness of the decision in Atkins.

However, in Pollock v. The Queen, supra, Pratte, J., speaking for the Federal Court of Appeal declared, at page 353 (D.T.C. 6371), that while the

. . . Court has the power to reconsider and refuse to follow one of its previous decisions, we are of opinion that we should do so only when we are convinced that our previous decision was wrong. . . .

the Court did not have the conviction Atkins was wrongly decided.

On the authority of Atkins, therefore, it would appear I cannot find that the damages received by Schwartz for breach of the employment contract can be regarded as "salary", “ wages” or "remuneration" or as a benefit "received or engaged by him. . . in respect of, in the course of, or by virtue of the office or employment" within the meaning of section 5 and paragraph 6(1)(a) of the Act. That Schwartz was never an employee or officer of Dynacare makes the reasoning of the Federal Court of Appeal in Atkins and Pollock even more persuasive that he did not receive a benefit of employment from Dynacare.

Income from source: section 3

The Minister’s counsel declared that for Schwartz to escape tax on the receipt of money from Dynacare the receipt must be a windfall, that is, a gratuitous and unexpected payment by Dynacare to Schwartz. The payment cannot be a receipt from an office or employment or from a business or trade or from a particular source; the payment must be a gift personal to the taxpayer: The Queen v. Cranswick, [1982] C.T.C. 69, 82 D.T.C. 6073 (F.C.A.), at pages 72-73 (D.T.C. 6075-76) and Federal Farms Ltd. v. M.N.R., [1959] C.T.C. 98, 59 D.T.C. 1050 (Ex. Ct.). In counsel's view the payment by Dynacare to Schwartz included compensation to Schwartz for lost income and was not similar to a windfall. Indeed, the settlement, as in Canada v. Mohawk Oil Co., [1992] 1 C.T.C. 195, 92 D.T.C. 6135 (F.C.A.), was to bring to an end a commercial transaction. In Mohawk Oil the Court concluded there was evidence that the settlement amount included an income component and therefore the fisc was correct in allocating the amount between income and capital. Schwartz knew Dynacare would pay for its breach of contract; the money paid to him was an expected return resulting from a threat of litigation. The source of the payment, counsel stated, was the employment contract. Thus the payment from Dynacare was income from a source and is to be included in Schwartz’ income in accordance with section 3.

In The Queen v. Manley, [1985] 1 C.T.C. 186, 85 D.T.C. 5150, Mahoney, J. of the Federal Court of Appeal referred to the decision of that Court in The Queen v. Atkins, supra. At page 190 (D.T.C. 5154), Mahoney, J. stated:

I take Atkins as authority, which I must respect, for the proposition that an amount paid in settlement of a claim for damages for wrongful dismissal is not salary, taxable as income from an office or employment under subsection 5(1) of the Income Tax Act. That is nothing more than an application of the well known principle that a taxpayer is entitled to the benefit of any doubt as to legislative intention to tax. It is an application in a case where the fisc evidently elected to plead legislative intention on a single, and as it turned out, erroneous basis. Income tax appeals in this Court are, of course, ordinary actions in which the issues are defined by the pleadings. The Court makes no decision on what might have been pleaded but was not. 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.

Prior to November 12, 1981, when the current definition of "retiring allowance" came into force, damages on repudiation of an employment agreement in most cases were not included in income. This was the situation, for example, when it was reasonably assumed no ascertainable part of the sum represented arrears of salary, commission or benefit was derived from employment or that the term of employment was soon to expire. In other words, as explained by Messrs. Hannan and Farnsworth, [4] at pages 271-74, that part of damages referable to future services was not to be included in income and the payments referrable to past services was to be included in income. Also, the authors state, that if the service contract would, in the normal course of events, have expired within a comparatively short period, any sum received as compensation for its cancellation takes on the aspect of income which would have been gained by the full performance of the contract. The latter payments include those payments referred to by Mahoney, J. in Manley, supra.

In the case at bar, the appellant's position is even stronger than that of those former employees who received damages resulting from a breach of an employment contract. Schwartz suffered inconvenience and prejudice when he was informed his services would not be required. He had given notice of withdrawal to his law partnership. He had to begin to look for employment. Schwartz was never an employee or officer of the purported employer. The damages he received was in a small part, if any, for loss of income for future services and to a larger part, according to the evidence, for embarrassment, anxiety and inconvenience. None of the damages could be referable to past services. The reasons in Mohawk Oil, supra, are not relevant. Schwartz left the partnership on January 31, 1989 and commenced employment with a firm of investment advisers on February 1,1989. I believe I may reasonably infer, since there was no contrary evidence in this respect, that to a large extent Schwartz mitigated damages for loss of salary and the moneys he received and the question of his receipt from Dynacare was only insignificantly, if at all, related to loss of income. In McLaurin v. Federal Commissioner of Taxation (1961), 104 C.L.R. 381 (H.C.A.), the Australian Court stated, at page 391 :

It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or nonincome nature attributed to portions of it accordingly . . . . But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated . . . or are otherwise ascertainable by calculation . . . it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole . . . .

The question is whether on the facts in the appeal at bar, an amount paid to settle a potential claim for damages is income for tax purposes. One ought never to forget that a taxpayer is to include in his income for purposes of the Act only those receipts or receivables that the Act expressly states is to be included in income. Counsel for the Minister submitted, if I understood her correctly, that the receipt from Dynacare was not a windfall; hence it must be income from a source and included in income in accordance with paragraph 3(a) of the Act.

During the course of my preliminary review of the evidence I came to the view that there was an arguable case that the breach of contract by Dynacare resulted in a disposition of the employment agreement by Schwartz and the money he received from Dynacare constituted proceeds of disposition, or, perhaps as a result of the breach, Schwartz acquired a right of action which he disposed of for $400,000. I asked counsel for their comments on, amongst other things, whether Schwartz did dispose of the employment agreement as a capital asset. [5]

In the Minister’s view the employment agreement, because it is a source of income itself, cannot be a capital asset in the hands of the appellant. Counsel argued that an employment contract is not a capital asset that can be employed for the purpose of gaining income from business or property; it will generate income for the appellant and no one else. I cannot agree: the employment contract was a source of potential income to the appellant in the same way a rental building is to its owner. The employment agreement was an asset or advantage of enduring benefit to Schwartz and once it was acted on by the parties, would be the source of income and other advantages to him.

In Fries, supra, the Supreme Court reversed a decision of the Federal Court of Appeal, [1989] 1 C.T.C. 471, 89 D.T.C. 5240 that" strike pay" was income "from a source inside or outside Canada” within the meaning of paragraph 3(a) of the Act. In my view the receipt of damages by Schwartz was not income "from a source inside or outside Canada" within the meaning of paragraph 3(a). The ordinary concept of income is that of recurring receipts and does not extend to a lump sum received because a source of income has been taken away or destroyed; Schwartz was deprived of an enduring right. [6] He did not receive any income from, or as a result of, the employment agreement.

The appeal is allowed with costs.

Appeal allowed.