Anna Berlinski v. Minister of National Revenue, [1989] 2 CTC 2191, 89 DTC 433

Taylor, T.C.J.:—This is an appeal heard in Edmonton, Alberta, on June 14, 1989, against an income tax assessment in which the Minister of National Revenue disallowed as a deduction from other income an amount of $26,246.68 which represented the purchase of an income averaging annuity contract (I.A.A.C.), and further disallowed an amount of $2,974.60 claimed as interest expenses incurred in acquiring the I.A.A.C. The question at issue, while quite direct, arises out of a complicated series of transactions, and accordingly substantial reference will be made to the background as found in the notice of appeal:

— The Appellant was employed by Western Hen House Ltd. (the "Company") until her retirement.

— The company paid the Appellant a single payment in the amount of $31,000 upon her retirement as an employee from the Company, which payment was made in recognition of the Appellant's long service with the Company.

— The Appellant purchased an income averaging annuity contract within the meaning of section 61 of the Income Tax Act (the "Act") in the amount of $26,246.68 within the time prescribed.

— In calculating her income for tax purposes for her 1980 taxation year the Appellant claimed a deduction in the amount of $26,246.68 pursuant to the provisions of section 61 of the Act.

— In computing her income for tax purposes for her 1981 taxation year the Appellant claimed as a deduction pursuant to the provisions of paragraph 20(1)(c) of the Act interest expenses in the amount of $2,974.60 incurred by her in acquiring the income averaging annuity contract.

— By reassessments, notices of which were dated November 28, 1983, the M.N.R. disallowed the claimed deductions set forth in paragraphs 5 and 6 herein on the basis that the $31,000 payment by the Company to the Appellant did not qualify for an annuity contract.

— The Appellant submits that the amount of $26,246.68 is properly deductible in computing her income for tax purposes pursuant to the provisions of section 61 of the Act as said amount constitutes part of a single payment received by her upon her retirement as an employee in recognition of long service and which amount was paid by her as consideration for an income averaging annuity contract within the time prescribed by the Act.

And from the reply to notice of appeal:

— the Appellant was employed by the company for approximately 6 years;

— the Appellant's T-1 personal returns of income for the 1975 through 1980 taxation years inclusive show that the appellant's remuneration received from the company was low except in 1979;

— the company had extraordinary income in 1980, its final year, as a result of C.C.A. recapture in the amount of $22,290.62 and taxable capital gain of $8,269.51 from disposal of assets;

— the $31,000.00 payment was a non-arm's length payment;

— the resolution passed by the company to make the payment was passed 5 months after the payment was made; and

— the $31,000.00 payment to the appellant was not made in a single payment.

— The Respondent relies, inter alia, upon Section 3, Section 61, paragraph 20(1)(c) and subparagraph 61(2)(a)(ii) of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C. 1970-71-72, c. 63, s.1 applicable to the 1980 and 1981 taxation years of the Appellant.

— He submits that the payment in the amount of $31,000.00 to the Appellant was not a payment described in subparagraph 61(2)(a)(ii) of the Act and that he properly disallowed the application of Subsection 61(1) of the Act to the Appellant's income for the 1980 taxation year and that the interest expense claimed by the Appellant in her 1981 taxation year was not incurred for the purpose of gaining or producing income from property.

Mr. Mel Berlinski, acting as agent for the appellant, stated that while he did agree the resolution noted above had been passed by the company five months after the payment at issue had been made, there were valid reasons for this which would be provided. In addition he indicated the payment had been a "single payment", and would show that to be the case. Otherwise, he agreed with the respondent's general outline of the facts.

In evidence, Mrs. Berlinski stated that the business, not the corporation, had been sold effective June 1, 1980, and as at June 3, 1980, an amount of $35,000 from the sale had been deposited by the company in its own name in a short-term deposit. On July 4, 1980, a total of $50,000 was deposited in the personal joint bank account of Melvin/Anna Berlinski. Part of this $50,000 came from the $35,000 (plus interest) noted above, and according to Mrs. Berlinski contained the $31,000 which was at issue before the Court. This was the basis for her contention that the $31,000 had been received by her in a single payment. While not conceding that the transaction itself, or the mechanics of receiving the funds necessarily met the requirements of the Income Tax Act (the Act) under review, counsel for the Minister did agree that the Court should consider the amount had been received as a "single payment". Regarding the five-month delay before the resolution of the Board, the evidence was that she had been waiting for advice and instructions from their accountant, insurance agent and lawyer, regarding what to do with the money and how it should best be treated from an income tax viewpoint. Mrs. Berlinski also noted that the shares in the corporation were held only by herself and her husband, and that she had been virtually its only employee. Counsel for the Minister, in cross-examination of Mrs. Berlinski, introduced a copy of the resolution which read :

The following Directors resolution was passed by the undermentioned Company on the date stated:

Name of Company: Western Hen House Ltd

Date resolution passed: January 19, 1981

Resolution:

"BE IT RESOLVED THAT” a Past Service Bonus of THIRTY-ONE THOUSAND ($31,000.00) DOLLARS be given to ANNA BERLINSKI, payable the 31st day of JULY, 1980.

Mrs. Berlinski agreed that she had found other employment about two months after the sale of the business, and from then on continued to be active. The claim itself in this appeal was based on the purchase of the I.A.A.C. but the parties agreed that the issue to be determined by the Court was whether the amount of $31,000 could be treated as falling under the provisions of section 61 of the Act (and Counsel, during the hearing agreed that transfer of the $31,000 as part of the $50,000 deposited in the joint account on July 4, 1980 should be regarded as ''payment").

Argument

It was the position of the agent for the appellant that Mrs. Berlinski had done everything suggested to her by her advisors—that she retired after the sale of the business, and was entitled to consideration based on her long service. It appeared that he just considered "long service" from the viewpoint of long days and nights, even weekends, running the business, rather than the reflection of the number of years employed.

Counsel for the Minister noted that in order to claim the deduction of the I.A.A.C. the appellant must fit into one of the two clauses of the Act, available to her. Subparagraph 61(2)(a)(ii) “upon his retirement as an employee in recognition of long service and not made out of or under a superannuation fund or plan" or paragraph 61(2)(b) "a payment or payments made by an employer to the individual as an employee or former employee upon or after retirement in respect of loss of office or employment, if made in the year of retirement or within one year after that year;". Counsel, in referring to the alternatives, contended again that there was no evidence of "retirement" or "long service", on the part of Mrs. Berlinski, in the records related to the company put before the Court—even the January 1981 resolution. In her view it was clear, she had not "retired" —she had gone back to other employment. Counsel referenced the case of Specht v. The Queen, [1975] C.T.C. 126; 75 D.T.C. 5069 and Hoyt v. M.N.R., [1982] C.T.C. 2287; 82 D.T.C. 1256. Section 61 of the current income tax legislation has a lengthy prior history extending without material change in the wording of these two clauses, back many many years.

Analysis

It is not as clear to me as it appears to be to counsel for the Minister, that Mrs. Berlinski does not qualify to use the provision of subsection 61(2) of the Act.

Dealing first with subparagraph 61(2)(a)(ii), as I follow counsel, "retirement" should be given a meaning arising out of Specht, supra at page 133 (D.T.C. 5073):

The Shorter Oxford English Dictionary (3rd ed. rev.): “withdrawal from occupation or business activity”

The Living Webster (1st ed.) "retire"-"to withdraw from business or active life”.

The meaning attributed to those definitions by the learned judge in Specht, supra, was noted therein, also on page 133 (D.T.C. 5073) as:

[. .]

The plaintiff did not retire or go into retirement from his occupation with MacMillan Bloedel within the ordinary meaning of “retire” or, "retirement" This is, he did not withdraw from his employment because he had reached a mutually stipulated age, or generally withdraw from his occupation or business activity.

I would also add that some additional assistance is provided by the reasons for judgment in Lorenzen v. The Queen, [1981] C.T.C. 377; 81 D.T.C. 5251 and in Shell et al. v. M.N.R., [1982] C.T.C. 2391; 82 D.T.C. 1369. From Lorenzen, supra, at page 379 (D.T.C. 5253):

.. . Mr McDougall for the taxpayer urges that the term "retirement" as used in such subsection 248(1) must be read in a specific sense rather than generally. In other words he submits that one may retire from a position with one company and even though he thereafter carries on the same occupation with another company he comes within the meaning of such section and is entitled to the benefit of such paragraph 60(j). He says the leaving or parting with the first company is a retirement within the meaning of the section and that this interpretation is made clearer by the fact that it is referred to in the section as a retiring allowance as distinguished from a retirement allowance. If this interpretation of the two sections is adopted it follows that one could take advantage of paragraph 60(j) on each occasion that he changed his employer.

And from Shell et al. at pages 2392, 2394 and 2396 (D.T.C. 1370, 1371 and 1373):

. . ., counsel referred to the definition of the words "retire" and “retirement” in THE OXFORD ENGLISH DICTIONARY as follows:

Retire: To withdraw from office or an official position; to give up one's business or occupation in order to enjoy more leisure or freedom (esp. after having made a competence or earned a pension).

Retirement: The act of withdrawing into seclusion or privacy; withdrawal from something; withdrawal from occupation or business activity.

[. . J

As far as I am concerned, and without embellishment, those are the bare facts of the case, and I think it is essential to make a decision on whether or not, as counsel for the appellants put it, a person who has been accustomed to an active and demanding life is expected to vegetate and cannot do anything from then forward after retirement simply because he has received an allowance.

[. . •]

In applying the interpretation of "retirement" and the definitions of THE OXFORD ENGLISH DICTIONARY, I find that I must do the same. I must follow the Lorenzen case and the decision of Mr Justice Grant.

As I read the comments above from Shell, supra, and on the facts of that case, carefully detailed by the learned member, I would have no difficulty in agreeing that Mr. Shell had not retired, and that such a decision may be based on Lorenzen, supra. However, I do not read Shell, supra, to mean that in the dismissal of that appeal, the case stands for the proposition that "a person who has been accustomed to an active and demanding life is expected to vegetate and cannot do anything from then forward after retirement simply because he has received an an allowance. supra" I would think that to whatever degree that phraseology of the rhetorical question posed actually represented the argument put forward by counsel for the appellants in Shell, supra, it would be a most extreme perspective to be placed on retirement. I do not read Shell, supra, to mean that indeed after "retirement" a person must indeed "vegetate and cannot do anything.” Some status and condition less passive than that can surely still be called quite properly retirement, even for the strict requirements of the Income Tax Act.

Taking the definitions provided in Specht, supra, it would seem to me that "retirement" could be simply "withdrawal from occupation . . .”; and from the definition in Shell, supra, to "retire" would be "to withdraw from office or official position”, and "to give up one's business or occupation in order to enjoy more leisure or freedom (esp. after having made a competence or earned a pension)” (Emphasis added). I do not find it necessary in this particular appeal to address the point made in Lorenzen, supra, at Page 379 (D.T.C. 5253):

. . . If this interpretation of the two sections is adopted it follows that one could take advantage of paragraph 60(j) on each occasion that he changed his employer.

I am satisfied under the circumstances placed before the Court the term "retirement" is an appropriate description for the cessation of Mrs. Ber- linski's employment with Western Hen House Ltd. I do not see the term retirement to be so narrowly defined as to exclude the very action which prompted this appeal—the withdrawal from office or an official position, a withdrawal from occupation (see definition above) in the case of Mrs. Ber- linski. It follows therefore that paragraph 61(2)(b) of the Act encompasses the payment made to this taxpayer, and since I see no other factual or definitional problem arising therefrom, she is entitled to whatever benefit may flow from that situation.

In this matter the Court need not determine whether Mrs. Berlinski could have so qualified also under the provisions of subparagraph 6(2)(a)(ii) as the term “long service” might be defined.

But I do not wish to leave any implication that I would necessarily find this as an additional impediment. Under the transitory and migratory patterns of modern day employment arrangements, it is at least arguable that the adjective "long" should not be accorded the same relevant significance to which it once was accustomed. With "portable pension plans” providing for an accumulation of pension benefits —both under and outside the Act, it is not too difficult to conceive of a series of income averaging benefits accruing to a taxpayer by virtue of more than one "retirement". As I read it, the comments and conclusions above are consistent with the views and reservations expressed in Hoyt, supra, a case cited by the Minister's counsel.

The appeals are allowed and the entire matter is referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party-and-party costs.

Appeals allowed.