Paul D. Rodgers v. Minister of National Revenue, [1990] 2 CTC 2634, 91 DTC 129

Christie, A.CJ.T.C.: —Immediately before July 27, 1982, the appellant was employed as president of Spalding Canada, a division of Questor Commercial Inc., ("Spalding"). On that date they severed their relationship on these terms: the appellant received $120,000 plus the continuation for a period of 18 months of a number of benefits that he had received as president, e.g. payments for a leased automobile, life insurance and club memberships.

On August 12, 1982, Spalding discovered information about an alleged bonus paid to the appellant and because of this on August 20 it repudiated the terms pertaining to the severance of the appellant's employment and demanded repayment of the $120,000. On January 25, 1983, Spalding had a writ issued out of the Supreme Court of Ontario and on the same date a statement of claim was delivered seeking the return of all money paid to the appellant plus interest, damages and costs. A statement of defence and counterclaim was delivered on February 23, 1983, denying what was alleged by Spalding and seeking damages and other payments. The reply and defence to the counterclaim was delivered on Spalding's behalf on June 16, 1983. The dispute was settled in 1987. Under the settlement the appellant retained $108,000.

In calculating his income for 1982 the appellant did not include the $120,000. The respondent reassessed on November 28, 1985, and added that amount to the appellant's income. By a further reassessment made on July 13, 1988, the $120,000 was reduced to $108,000.

The appellant's notice of appeal was prepared by a solicitor, but he acted on his own behalf at the hearing of this appeal and, among other things, relied on what was set out in the notice of appeal. The position taken in that notice is that the $108,000 is properly to be included in computing the appellant's income for 1987 and that none of what was received in 1982 had the “quality of income”. These words are adopted from this passage in the reasons for judgment delivered by Mr. Justice Thorson (later president of the court), which was cited in the notice of appeal, in Kenneth B. S. Robertson Ltd. v. M.N.R., [1944] C.T.C. 75; 2 D.T.C. 655 at page 90-91 (D.T.C. 660-61):

. . . the question remains whether all of the amounts received by the appellant during any year were received as income or became such during the year. Did such amounts have, at the time of their receipt, or acquire, during the year of their receipt,the quality of income, to use the phrase of Mr. Justice Brandeis in Brown v. Helvering, [291 U.S. 193]. In my judgment, the language used by him, to which I have already referred, lays down an important test as to whether an amount received by a taxpayer has the quality of income. Is his right to it absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment? To put it in another way, can an amount in a taxpayer's hands be regarded as an item of profit or gain from his business, as long as he holds it subject to specific and unfulfilled conditions and his right to retain it and apply it to his own use has not yet accrued, and may never accrue?

This statement from what was said by Mr. Justice Taschereau (later Chief Justice) in delivering the judgment of the court in Frank Sura v. M.N.R., [1962] C.T.C. 1; 62 D.T.C. 1005 (S.C.C.) at page 5 (D.T.C. 1006-7) is also cited in the notice of appeal:

[Translation]

We (cannot) have the least hesitation in conceding without reservation that only he must pay income tax who has absolute enjoyment of the income, unfettered by any restriction on his freedom to dispose of the income as he sees fit. (Vide Robertson Ltd. v. M.N.R., [1944] Ex. C.R. at page 180; [1944] C.T.C. at page 75.)

Assume that a taxpayer receives money from or belonging to another person and at the time of receipt there is a potential claim for its return or subsequently a demand is made for its return, which may or may not be reinforced by instituting legal proceedings, on the ground that the taxpayer was not lawfully entitled to receive the funds. To my mind none of these circumstances could of itself or in combination necessarily negate the conclusion that the money is to be regarded as having been received by the taxpayer for the purpose of computing his income in the year of receipt.

I think that follows from The Queen v. Poynton, [1972] 3 O.R. 727; [1972] C.T.C. 411; 72 D.T.C. 6329, a judgment of the Ontario Court of Appeal. The essentials of this case are described in Heggie v. M.N.R., [1985] 1 C.T.C. 2417; 85 D.T.C. 357 at 2423 (D.T.C. 361):

Poynton involved the prosecution of a former employee of Milne and Nicholls Limited, a general building contractor, for making false or deceptive statements in his income tax returns for 1967 and 1968 and wilfully evading payment of income taxes. This is what was before the Court for determination. In computing his income was the accused required to include

(i) moneys which he had stolen from his employer by way of obtaining kick- backs from sub-contractors of the employer; and

(ii) the value of certain benefits conferred on him by way of improvements to his residence which, by virtue of his fraudulent conduct, had been paid for by funds appropriated unlawfully from his employer?

The Court said yes. It was not suggested in Poynton that what the accused did was not in respect of or in the course of his employment. Obviously it was. The debate in the case revolved around an entirely different question, namely, whether stolen or embezzled funds can properly be regarded as income in the hands of the thief or embezzler under the Act. Funds of that kind are not the property of the thief or embezzler, but of his victim. The Court was of the view that nevertheless the funds could properly be regarded as income. The test is whether the thief or embezzler had in fact the actual use and enjoyment of the funds and it is not concerned with their ownership.

There can be no doubt that when the stolen and misappropriated funds were received by Poynton he was liable to his employer for that amount although it was not a certainty that he would be required to discharge that liability.

Commonwealth Construction Company Ltd. v. The Queen, [1984] C.T.C. 338; 84 D.T.C. 6420, [1] a decision of the Federal Court of Appeal, is perhaps even more to the point. The appellant had entered into a number of construction contracts for constructing a pulp mill. The Manitoba Development Corporation ("M.D.C.") was also involved because it provided partial financing. There was a default in making progress payments and the appellant instituted proceedings under the Manitoba Mechanic's Lien Act. M.D.C. was party to these proceedings as intervener. After a lengthy trial the appellant was awarded $4,573,602 plus interest of $1,498,993 and costs. It was agreed on December 13, 1974, that M.D.C. would pay the full amount of the judgment and interest ($6,072,595) provided, inter alia, that the appellant guaranteed up to $1,500,000 in respect of any potential reduction of the judgment by the Manitoba Court of Appeal. On December 24, 1974, M.D.C. appealed the judgment in the mechanic's lien action and on December 30, 1974, the appellant received $6,072,595 subject to the obligation to repay the money in whole or in part if the Court of Appeal should reverse or vary the judgment of the trial judge. The trial judge fixed the costs at $725,221 on March 6, 1975. They were paid to the appellant during its 1975 taxation year without any specified obligation with respect thereto. In February 1976 M.D.C. filed an amended notice of appeal to include costs and in April 1977 the litigation was settled by repayment to M.D.C. by the appellant of $455,000 of the total amount it had received from that corporation.

The question for determination was whether, as contended by the appellant, the total amount received was properly included in its 1977 return of income or should it have appeared in its 1974 and 1975 returns as contended by the respondent. Mr. Justice Urie, who delivered the judgment of the court in favour of the respondent, summed up the appellant's basic argument in these words at page 340 (D.T.C. 6422):

They (the amounts in issue) were not finally determined until the exact amount of the judgment was agreed upon in April, 1977. Thus they did not have, nor could they have had, the “quality of income” required to make them taxable in the years in which they were received. In counsel's submission, unless the recipient had an unqualified right to retain the funds (which the appellant had not in this case because of the possibility that the appeal might be successful in whole or in part) they did not have the quality of income. That character was not acquired until 1977 when final settlement of the judgment was made.

This was rejected.

His Lordship went on at pages 341-42 (D.T.C. 6423-24):

The phrase “quality of income" appears in a case relied on both by the appellant and the respondent, namely, Kenneth BS Robertson Ltd v. MNR, [1944] CTC 75; 2 DTC 655. At 90-91 [660] of the report Thorson, J (as he then was), after disposing of an argument that the appellant in that case was entitled to set up reserves in respect of certain types of commissions paid on insurance premiums received, made the following statement.

[The passage previously cited in these reasons from Kenneth B.S. Robertson Ltd. followed and Urie, J. continued.]

To apply phrases from that quotation to the case at bar, the record discloses that the rights of the appellant to the amounts paid to it in 1974 and 1975 were “absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment." They were not held subject to any specific and unfulfilled conditions. Once the conditions precedent imposed in the letter agreements between the parties, supra, had been fulfilled, as they were, the right to receive the moneys and to retain them had accrued and was absolute. True, it might be necessary to return the moneys in whole or in part if the appeal were successful. But, as I see it, that was a condition subsequent which did not affect the unrestricted right of the appellant to use them until such a requirement occurred. It did not, as I see it, affect their quality as income upon receipt.

When the appellant received the $120,000 in 1982 it was not subject to specified conditions about its use or disposition. He was then in a position to use the money as he saw fit even though he might subsequently have to repay some or all of it. I believe that when Thorson, J. spoke of “specific and unfulfilled conditions" and when Taschereau, J. used the words “free of any restriction" they had in mind conditions and restrictions on the use of funds that arise, for example, in the creation of a trust. There specific equitable obligations exist at the time of receipt that are binding on the trustee in respect of the manner in which he deals with the trust property. Another example that comes to mind is when a taxpayer acts as an escrow agent in respect of money. Undoubtedly there are others.

It follows from what I have said that this appeal is dismissed.

Appeal dismissed.