Robert Savard v. Minister of National Revenue, [1987] 2 CTC 2337, [1987] DTC 602

Couture, C.J.T.C. [Translation]:— In his tax return for the 1982 taxation year, the appellant included a sum of $31,000.77 in his income as a retiring allowance and deducted a sum of $17,500 from this amount as a premium under a registered retirement savings plan.

The appellant is a lawyer and during the relevant years he was employed by the Valleyfield CEGEP (the CEGEP) from July 1972 to 1977 as Secretary General and Director of Personnel Services.

In June 1977 the appellant voluntarily resigned his employment with the CEGEP to accept immediately the position of Director of Communications and Secretary General of CRSSS (Conseil de la santé et des services sociaux de la région de Montréal Métropolitain) for southern Montréal, his new employer.

The appellant's contract of employment with the CEGEP was summarized in a letter of appointment in which it was stated that his terms and conditions of employment were set out in an administrative policy document, according to the appellant.

In April 1977 a new contract of employment was approved by the CEGEP which applied exlcusively to managers, including the appellant.

The relevant provision of this contract for the purposes of this appeal reads as follows:

[Translation]:

5.5. Any member of management who has completed three (3) years of service at the Collège shall be entitled to severance pay, in the event of resignation, dismissal or non-renewal of his contract.

This pay shall be equivalent to two (2) months of salary per year of service up to a maximum of 12 months. It may take the form of leave with pay; in such cases, for employment benefit purposes, the recipient shall be regarded as being employed by the Collège until the end of his leave.

Since the appellant had five years of service with the CEGEP to his credit, he thus appeared to be entitled to severance pay equivalent to ten months of salary pursuant to the provisions of clause 5.5 above.

In July 1977, that is, after he had resigned, according to a memorandum to the Director General of the CEGEP from one Agenor Desponts in the finance department, a copy of which was filed, it appears that the appellant requested an advance of $2,000 on the amount to which he claimed to be entitled under the contract of employment amended in April 1977, which amount was paid voluntarily by the CEGEP. In this exhibit the amount is referred to as a "severance bonus".

The name given to the pay provided for in clause 5.5 obviously has no bearing on its nature for purposes of the Income Tax Act (the Act). We must refer to the definition of "retiring allowance” contained in subsection 248(1) and in the case law pertaining thereto to determine its true meaning for purposes of this Act.

Based on the events that followed July 1977, it appears that the CEGEP, for reasons set out in a judgment of the Superior Court, judicial district of Beauharnois, province of Quebec, refused to honour its obligation toward the appellant under clause 5.5 of the contract of employment of April 1977, leading the appellant to bring an action in the Superior Court to force it to comply with the terms of that contract.

The Court decided in the appellant’s favour on March 1,1982 and ordered the CEGEP to pay him the balance of the pay, being $25,848 with interest from January 16, 1978 and costs. The appellant thus received a total of $33,772.77 consisting of:

(i) the balance of the pay, being $25,848.90, received in 1982;

(ii) interest in the amount of $5,923.87 also received in 1982;

(iii) $2,000 as an advance on the pay received in July 1977.

It should be noted that in his notice of appeal, in paragraph 2, the appellant refers to $32,772.77, but this was merely a typing error.

From the $25,848 he deducted $17,500 as a premium under a registered retirement savings plan for the 1982 taxation year, on the ground, as mentioned earlier, that the pay he had received from the CEGEP constituted a “retiring allowance” within the meaning of subsection 248(1) of the Act.

The respondent for his part argued that this pay could not be regarded as a "retiring allowance" and that consequently the appellant could not deduct the premium in question in computing his taxable income. He added that the entire amount of $33,772, in other words, including the $2,000 advance paid in 1977, was taxable in 1982, the year during which this $2,000 portion had "finally vested" in him.

In his notice of appeal the appellant asked the Court to order that the assessment issued by the respondent be amended as follows:

(a) that the sum of $2,000 received in 1977 be deducted from his income for the 1982 taxation year, as stated in the assessment, and that it be taxed for 1977;

(b) that the sum of $5,923.87 paid in 1982 as interest pursuant to the judgment be regarded as representing damages for the delay on the part of his former employer in discharging its obligations under the contract of employment;

(c) that the sum of $25,848.90 be regarded as a retiring allowance within the meaning of subsection 248(1) of the Act and consequently that the sum of $17,500 which he paid into a registered retirement savings plan in 1982 as a premium be deducted from his income for the year in question.

After reviewing the legislation in effect during the relevant period, between 1977 and 1982, I have come to the conclusion that even if the $25,848 paid to the appellant in the circumstances set out above might constitute a retiring allowance within the meaning given to this expression in subsection 248(1) of the Act, a question I shall refrain from answering in view of the conclusion to which I have come respecting this appeal, the appellant could not deduct the $17,500 he claimed as a premium under a registered retirement savings plan in computing his income in 1982.

Subsection 248(1) defines the expression “retiring allowance" as follows:

“retiring allowance” 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, or

(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 a taxpayer or, after his death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer;

This definition or designation came into effect pursuant to S.C. 1980-81-82-83, chapter 140, section 128(10), applicable with respect to amounts received in respect of any termination of an office or employment after November 12, 1981.

If the amount received by the appellant in 1982 was in the nature of a "retiring allowance” within the meaning of the Act, this amount had to be included in his income for the said year pursuant to the provisions of subparagraph 56(1)(a)(ii). On the assumption that this was a "retiring allowance," the one and only legislative provision that allowed him to deduct the sum of $17,500 in computing his income for the 1982 taxation year is paragraph 60(j.1).

Paragraph 60(j.1) was added to the Act by S.C. 1980-81-82-83, chapter 140, section 28(7), and reads as follows:

60. There may be deducted in computing a taxpayer's income for a taxation year such the following amounts as are applicable:

(j.1) such part of the aggregate of all amounts each of which is an amount paid to the taxpayer by an employer as a retiring allowance and included in computing his income for the year by virtue of subparagraph 56(1)(a)(ii) as

(i) is designated by the taxpayer in his return of income under this Part for the year,

(ii) does not exceed the amount, if any, by which the aggregate of

(A) $2,000 times the number of years during which the employee or former employee in respect of whom the payment was made (in this paragraph referred to as the "retiree") was employed by the employer or a person related to the employer, and

(B) $1,500 times the number by which the number of years described in clause (A) exceeds the number that can reasonably be regarded as the equivalent number of years in respect of which employer contributions under with a pension fund or plan or a deferred profit sharing plan of the employer or a person related to the employer had vested in the retiree at the time of the payment

exceeds the aggregate of all amounts deducted under this paragraph in respect of amounts paid before the year by the employer or a person related to the employer in respect of the retiree, and

(iii) does not exceed the aggregate of all amounts each of which is an amount paid by the taxpayer in the year or within 60 days after the end of the year

(A) as a contribution to or under a registered pension fund or plan, other than the portion thereof deductible under paragraph (j) or 8(1)(m) in computing his income for the year, or

(B) as a premium (within the meaning assigned by section 146) under a registered retirement savings plan under which he is the annuitant (within the meaning assigned by section 146), other than the portion thereof that has been designated for the purposes of paragraph (j) or (1),

to the extent that it was not deducted in computing his income for a preceding taxation year

and for the purposes of this paragraph, "person related to the employer" includes

(iv) any person whose business was acquired or continued by the employer, and

(v) a previous employer or the retiree whose service therewith is recognized in determining the retiree's pension benefits;

Subsection 28(15) of chapter 140 adds:

(15) Subsections (6) to (8) are applicable with respect to retirements occurring after November 12, 1981, other than retirements occurring before 1982 pursuant to an arrangement made before November 13, 1981.

The appellant left his employment with the CEGEP in 1977 as a result of his resignation, an event he submits is in the nature of a retirement. Therefore since the provisions of paragraph 60(j.1) do not apply to a retirement occurring before November 13, 1981 and the said paragraph 60(j.1) was the only provision in effect in the Act that allowed a taxpayer in 1982 to transfer a “retiring allowance” or a portion thereof into a registered retirement savings plan, it follows, unfortunately, that the sum of $17,500 was not deductible by the appellant for the 1982 taxation year.

Moreover, if the $25,848.90 received by the appellant in 1982 was not in the nature of a retiring allowance for purposes of the Act, it was still taxable as remuneration under subsection 5(1) as a benefit from an officer or employment pursuant to the provisions of paragraph 6(1)(a). Therefore no deduction could be made for this amount for the taxation year in question.

With regard to the respondent's argument that the $2,000 which the appellant received in 1977 was taxable only in 1982, I cannot accept this submission. This amount was paid to him pursuant to a contract of employment, without any conditions or restrictions on the part of his employer at the time, and, furthermore, the appellant as an employee was taxable on a cash basis under the Act, in other words, on the income he in fact received in the taxation year.

With regard to the appellant’s submission to the effect that the $5,923.87 which he was paid by the CEGEP as interest pursuant to the Superior Court's judgment was in the nature of damages and therefore deemed not to be taxable, this issue has been the subject of numerous decisions, including the decision of the House of Lords in Riches v. Westminster Bank Ltd., [1947] A.C. 390; [1947] 1 All E.R. 469, in which it was confirmed that interest on a debt awarded by a court of law constituted income for the recipient even if this amount could also be considered damages.

For these reasons the appeal is allowed and the assessment is referred back to the respondent so that he may reduce the appellant's income for 1982 by the $2,000 he received in 1977.

The appellant is not entitled to costs since he has not substantially succeeded in the appeal.

Appeal allowed in part.