G. Beesley v. Minister of National Revenue, [1986] 2 CTC 2018, 86 DTC 1498

Couture, C.J.T.C.:— This is an appeal against an assessment dated March 17, 1981 in respect of the taxation year 1979.

The appellant acted on his own behalf and his evidence disclosed the following facts:

From May 1971 the appellant worked in Thunder Bay for a company controlled by a Captain Roland B. Mann, and for the sole purpose of identification, I shall refer to this company as Landorship Ltd. Captain Mann controlled a number of companies and some time before May 20, 1977, the exact date is immaterial for the purpose of this appeal, he sold some of the companies included in the group that he controlled.

On May 20, 1977 the appellant was informed that his employment had been transferred to a company known as Selkirk Terminals Ltd. (Selkirk), and he continued to be employed by that company until his employment was abruptly terminated without any prior notice on April 27, 1979.

The appellant was advised of such termination by letter of even date and enclosed with the letter was a cheque in the amount of $1,612.77 purporting to be his salary for the month of May after applicable deductions.

The letter reads:

PRIVATE AND CONFIDENTIAL

APRIL 27TH 1979.

Captain G. Beesley,

Thunder Bay, Ont.

Dear Captain Beesley,

We are very sorry to advise you that since Selkirk Terminals has no firm commitments for general cargo during the 1979 shipping season the directors have given instructions to request your resignation effective immediately.

A cheque in the amount of $1612.77 covering your salary, with the usual deductions, for the month of May is attached and the company will make the necessary arrangements for your full vesting rights in the pension plan.

Subject to your signing the attached release the directors have also authorized a lump sum payment of $16,000.00.

Yours very truly,

SELKIRK TERMINALS LIMITED

G. TURNER

Director.

Before signing the release in question, the appellant consulted his lawyer and upon returning the said release duly signed on April 28, 1979 he was remitted the amount of $16,000.

According to his evidence, he was advised by his lawyer that under the legislation in force at that time and the existing jurisprudence the amount of $16,000 was not taxable. Consequently he did not report the said amount when he filed his income tax return for the taxation year 1979 but did include the amount that was purported to be his salary for the month of May which he had received with the letter of termination. However, in April 1980 the accounting department of Lakehead Shipping (1977) Co. Ltd., a company affiliated to Selkirk, and which acted as payor for the companies of the group, forwarded a form T-4A to Revenue Canada showing an amount paid in 1979 to the appellant of $16,000 with the notation on the form “severance.”

The receipt of this T-4A form by Revenue Canada triggered correspondence between the appellant and the Department which culminated with an assessment dated March 17, 1981 whereby the amount of $16,000 was added to his declared income. A notice of objection dated April 8, 1981 was filed by the appellant and the assessment was confirmed by notification of confirmation by the Minister on August 14, 1981.

A brief summary of the legislation in force for the taxation year 1979 as it applied to the assessment is required in order to better understand the contentions submitted to the Court by the appellant in support of his appeal.

As mentioned before, he had received legal advice in April 1979, that under the existing legislation and jurisprudence an amount received by a taxpayer following the termination of his employment was not taxable. This interpretation of the then legislation had been confirmed in a judgment of the Appeal Division of the Federal Court of Canada in the case of The Queen v. Robert B. Atkins, [1976] C.T.C. 497; 76 D.T.C. 6258.* [1]

However, in December 1979 the legislation was amended in the following manner:

a) by adding a definition of the expression "Termination payment” to subsection 248(1) (Statutes of Canada 1979, c. 5, s. 66(8));

b) by adding a reference to the expression “Termination payment" in subparagraph 56(1)((a)(viii) (Statutes of Canada 1979, c. 5, s. 15(1));

c) by adding a reference to subparagraph 56(1 )(a)(viii) to paragraph 61 (2)(e) (Statutes of Canada 1979, c. 5, s. 18(2)).

As a result of these additions to the provisions of the legislation an amount received by a taxpayer in respect of the termination of his office or his employment had to be included in computing his income, within the statutory limitation, for a taxation year pursuant to the new subparagraph 56(1)(a)(viii), and under the provisions of the new paragraph 61(2)(e) was eligible for the purchase of an income-averaging annuity.

It must also be mentioned that chapter 5 of the 1979 Statutes of Canada subsections 66(8), 15(1) and 18(2) received Royal Assent on December 6, 1979 but were made applicable to amounts received by taxpayers after November 16, 1978.

The appellant’s submissions before the Court may be summarized as follows:

a) that the amount of $16,000 be considered as damages, as it was intended to be, and the retrospective application of the amendments to the Act should be disregarded;

b) that the amount of $1,612.77 which he received as alleged salary for the month of May 1979 be also treated as non-taxable damages, and again notwithstanding the retrospective application of the amendments to the Act;

c) that in the event that the Court should decide that the amounts of $16,000 and $1,612.77 were termination payments, therefore taxable, that he be allowed to purchase an income-averaging annuity with the aggregate of these amounts;

d) finally, that in the event that the Court should reach the conclusion that the amounts he received in April 1979 were taxable, the respondent has not computed the taxable portion of these amounts in accordance with formula prescribed in subsection 248(1) (definition of “termination payments").

Atkins not having been expressly overruled, I agree with the advice that the appellant received in April 1979 from his legal adviser that based on the legislation in force and the jurisprudence existing at that time the amount of $16,000 would not have been taxable in the said taxation year. However, on November 16, 1978 the then Minister of Finance had delivered a budget in which he had announced proposed amendments to the Act. Amounts received by employees in respect of the termination of their employment, which otherwise would not have been taxable, would have, from then on, to be included in computing their income, within the statutory limitation, for the taxation year in which they were received. Furthermore, on December 19, 1978 a Notice of Ways and Means Motion was tabled in the House of Commons and section 14 recited the proposed technical amendments to the Act dealing with the taxability of such amounts and in subsection 14(5) it was clearly stated that such amendments would be made effective as of November 17, 1978.

Retrospective application of legislative enactments is normally an exception in the legislative process in Canada but is well within the authority and the jurisdiction of Parliament. However, in enacting fiscal legislation, Parliament will often make a provision of the statute applicable from the day it was announced in a budget speech by a Minister of Finance.

In Gustavson Drilling (1964) Limited v. M.N.R., [1976] C.T.C. 1; 75 D.T.C. 5451 Dickson, J., (as he then was) in delivering the majority judgment of the Supreme Court of Canada said at 6-7 (D.T.C. 5454):

The general rule is that statutes are not to be construed as having retrospective operation unless such a construction is expressly or by necessary implication required by the language of the Act. An amending enactment may provide that it shall be deemed to have come into force on a date prior to its enactment or it may provide that it is operative with respect to transactions occurring prior to its enactment. In those instances the statute operates retrospectively.

Professor Peter W. H. Hogg in his Constitutional Law of Canada, second edition, says at page 775:

Apart from s. 11(g)*, [2] Canadian Constitutional Law contains no prohibition of retroactive (or ex post facto) laws. There is a presumption of statutory interpretation that a statute should not be given retroactive effect!, [3] but, if the retroactive effect is clearly expressed, then there is no room for interpretation and the statute is effective according to its terms. Retroactive statutes are in fact common. For example, a taxation law is often made retroactive to the budget night, when the law was publicly proposed; otherwise, there would often be room for avoidance action by taxpayers during the hiatus between the budget and the enactment of the law.

It is unfortunate that the appellant was left under the misapprehension at the time he received the said amount that it was not taxable, but had he been made aware of the provisions of the proposed amendments to the Act, he would have readily realized that barring any unforeseen circumstances the probability was that the legislation would be changed and would apply to him.

In the light of the above comments, the Court cannot agree with the appellant’s submission that the amount of $16,000 which he received on April 28, 1979 be treated as non-taxable damages, that is as the law in force at that time applied to such payments. The amendments to the legislation even if given retrospective application had been validly enacted and consequently the said amount was accordingly taxable.

The second issue raised by the appellant dealt with the amount of $1,612.77 he received on April 27,1979 from his former employer as alleged salary for the month of May, that is the month following the termination of his employment. It was contended by the appellant that the said amount was of the same nature as the amount of $16,000 which he received the following day, that is damages and again not taxable even though he had voluntarily included it in his income on his income tax return for 1979.

The fact that the amount of $1,612.77 was originally treated as salary by both the former employer and the appellant is not fatal to the latter. What the Court has to determine is the true nature of an amount under the Act irrespective of whatever description has been assigned to it by interested parties.

Under the circumstances which gave rise to the termination of employment of the appellant and having regard to the jurisprudence at the time in the case of Robert B. Atkins referred to before, I am of the opinion that the amount of $1,612.77 together with the amount of the deductions withheld were equally in the nature of damages, and not salary as alleged by the appellant’s former employer. Support for this conclusion is found in the comments of the then Chief Justice of the Federal Court of Canada who wrote the unanimous judgment of the Court in Robert B. Atkins in which he expressed himself as follows:

Damages for breach of contract do not become “salary” because they are measured by reference to the salary that would have been payable if the relationship had not been terminated or because they are colloquially called “salary”. The situation might well be different if an employer was dismissed by a proper notice and paid “salary” for the period of the notice even if the dismissed employee was not required to perform the normal duties of his position during that period.

However, in the same manner as the amended legislation applied to the amount of $16,000 and converted it into a “termination payment” within the definition of this expression in the Act and thereby taxable, the said amount of $1,612.77 plus the deductions withheld by the payor must be treated as "termination payment”.

The third contention submitted by the appellant dealt with the computation of his “termination payment” by the respondent.

In assessing the appellant the respondent treated the full amount of $16,000 as a “termination payment” and as mentioned before the appellant had included the amount of $1,612.77 (net of deductions) in his income.

The formula prescribed in subsection 248(1) to arrive at the quantum of a "termination payment” provided roughly that it was the lesser of the amount received by the taxpayer in respect of a termination of an employment and 50 per cent of his salary, wages and other remuneration from employment for the 12 months preceding the date of termination.

Counsel for the respondent admitted in her amended reply to notice of appeal that the assessment was wrong in so far as the quantum of the "termination payment” taxed by the assessment and submitted a computation which was also challenged by the appellant. She submitted that the amount taxable should be computed as follows:

The amount of $13,050 included the amount of $1,216.77 together with the deductions effected by the payor and because of my conclusion regarding this latter amount that it was not salary but a "termination payment” it must be deleted from this computation.

The appellant submitted that his salary for the 12 months preceding the date of termination was as follows:

The above amounts submitted by the appellant correspond to the amounts shown as salary paid to him on the pay statements issued to him by the payor, of which copies were filed with the amended notice of appeal.

The assessment should therefore be varied accordingly as the "termination payment” should have been established at $13,350.

The appellant’s last submission that he be allowed to purchase an income-averaging annuity in 1986 with the “termination payments” he received in 1979 cannot be entertained by the Court.

The provisions of subsection 61(1) of the Act provide clearly that an income averaging annuity must be purchased with an eligible amount within 60 days from the end of the taxation year in which such amount was re- ceived. As the 60-day period with respect to the taxation year 1979 has lapsed many years ago the appellant cannot benefit by the application of the said section.

For the above reasons the appeal is allowed and referred back to the respondent so that the "termination payments” received by the appellant in 1979 be reduced from $16,000 as assessed to 13,350 in accordance with these reasons. The appellant is not entitled to costs as he has not substantially succeeded in his appeal.

Appeal allowed in part.