Romeo Godbout and Thérèse Godbout v. Minister of National Revenue, [1986] 2 CTC 2124, 86 DTC 1583

Tremblay, T.C.J. [Translation]These appeals were heard on common evidence on April 11, 1986 at Sherbrooke, Quebec.

1. Issue

The issue is whether the appellants, both shareholders and employees of the restaurant Au Fin Gourmet Asbestos Inc. (hereinafter called the “Fin Gourmet"'), are correct in not including $10,110.74 in their respective incomes for the 1981 taxtion year. The Fin Gourmet received $118,619 and each appellant $20,221.58 in compensation for the takeover by John’s Manville Canada Ltée (hereinafter called “John’s Manville") of the building in which the Fin Gourmet was a tenant.

The respondent views the amounts received by the two appellants as termination payments for the employment they lost on the closing of the restaurant. Accordingly, because of the wording of the Act in force in April 1981, the respondent maintains that half the amount received should be included in the appellants’ income. The appellants argue that John’s Manville was not their employer, and that no amount is taxable.

2. Burden of Proof

2.01 The appellants have the burden of showing that the respondent's assessments are incorrect. This burden of proof results not from a particular section of the Income Tax Act, but from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

The appellants at first disputed this burden but subsequently accepted it.

2.02 The facts presumed by the respondent are set out in subparagraphs (a) through (g) of paragraph 4 of the reply to the respondent's notice of appeal. This paragraph reads as follows:

4. In reassessing [the appellants] for the 1981 taxation year, the Minister of National Revenue relied, inter alia, on the following facts:

(a) During the 1981 taxation year, Mr. Roméo Godbout and Mrs. Thérèse Godbout (his wife) were employees and shareholders of the restaurant Au Fin Gourmet Asbestos Inc. (hereinafter named the “Restaurant’’);

(b) In 1980, Mr. Roméo Godbout and Mrs. Thérèse Godbout both declared income from employment paid by the “Restaurant” in the amount of $20,221.58;

(c) On or about April 9, 1981, John’s Manville Canada Ltée took over the premises then occupied by the “Restaurant” and agreed to pay the following amounts:

to the Restaurant	$118,619.00
to Roméo Godbout	$ 20,221.58
to Thérèse Godbout	$ 20,221.58

(d) Because of the takeover of the “Restaurant”, Mr. Roméo Godbout and Mrs. Thérèse Godbout ceased to be employed by the “Restaurant” at Asbestos;

(e) Mr. Roméo Godbout and Mrs. Thérèse Godbout each received the $20,221.58 as agreed;

(f) The “Restaurant” duly included the $118,619.40 (sic) in its 1981 taxable income and was at no time considered the owner of the amounts received directly by Mr. Roméo Godbout and Mrs. Thérèse Godbout;

(g) The $20,221.58 amounts received by Mr. Roméo Godbout and Mrs. Thérèse Godbout respectively represent termination payments.

3. Facts

3.01 The facts are not in dispute. The facts alleged above in subparagraphs (a) through (f) of paragraph 4 of the reply to the notice of appeal are substantially the same facts testified to by Mr. Godbout. Counsel agreed that if Mrs. Godbout were to testify, her testimony would be in the same vein.

3.02 Mr. Gérard A. Piché, a former employee of John’s Manville who is now retired, testified as follows:

(a) in 1981, he was vice-president and secretary of John’s Manville;

(b) for more than ten years he had purchased properties in Asbestos to accommodate the expansion of John’s Manville and had determined Ithe amount of compensation to be offered;

(c) he was in charge of setting compensation for the Fin Gourmet and for Mr. and Mrs. Godbout. The calculations on which the amount of compensation was based, photocopies of the cheques issued to the appellants and the appellants’ 1980 T-4 forms were produced in evidence and entered as Exhibit 1-1. According to the last item, each appellant reported his gross income from employment as $20,221.58;

(d) with respect to the appellants, page 1 shows:

On the photocopy at page 4 of the two cheques issued to the appellants on April 9, 1981 there appears:

Compensation re: Closing restaurant Au Fin Gourmet Asbestos Inc.;

(e) compensation was paid in this fashion to allow the shareholders of Fin Gourmet to relocate without having to touch the capital amount paid to the business. Their share of the compensation was calculated on the basis of the preceding year’s salary or $20,221.58;

(f) in the compensation package for the Fin Gourmet, John’s Manville included an amount of $3,420.40 representing "compensation in lieu of earnings for reasonable notice of termination" for five employees of the Fin Gourmet;

(g) compensation was paid directly to the appellants because they were shareholders.

4. Act — Case law — Analysis

4.01 Act

The Income Tax Act provisions at issue in this appeal are subparagraph 56(1 )(a)(viii) and the definition of “termination payment" in subsection 248(1). These provisions read as follows:

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,

(viii) a termination payment;

248. (1) In this Act,

“Termination payment” for a taxation year, means an amount equal to the lesser of

(a) the aggregate of all amounts each of which is an amount received in the year in respect of a termination of an office or employment, whether or not received pursuant to an order or judgment of a competent tribunal, other than

(i) an amount required by any provision of this Act (other than subparagraph 56(1 )(a)(viii) to be included in computing the income of a taxpayer for a year,

(ii) an amount in respect of which an election has been made under subsection

40(1) of the Income Tax Application Rules, 1971, and

(iii) an amount received in the year as a consequence of the death of an employee, and

(b) the amount by which 50% of the aggregate of all amounts each of which is the amount that may reasonably be considered to be the employee’s salary, wages and other remuneration from an office or employment for the 12 months preceding the date that is the earlier of

(i) the date on which the office or employment was terminated, and

(ii) the date on which an agreement, if any, in respect of the termination was entered into

exceeds the amount determined under paragraph (a) for each previous year in respect of that termination

whether the recipient is the officer or employee whose office or employment was terminated or a dependant, relation or legal representative of the officer or employee;

4.02 No authorities were submitted since the parties knew of no case law bearing on this issue. The Court was referred, however, to the following works:

1. Richard De Boo Limited, Budget 1978 (2) Special Release, Item 16 Termination Payments: Editorial Comments;

2. CCH Canadian Ltd., Canadian Master Tax Guide, 1980, Paragraph 1127 Termination payments;

3. Interpretation Bulletin IT-365R of March 9, 1981.

4.03 Analysis

4.03.1 The essence of the problem is whether compensation received by (from)* [1] someone other than the employer can be considered a “termination payment” within the meaning of subparagraph 56(1 )(a)(viii) and subsection 248(1) cited above.

The respondent claims that nothing in the aforementioned sections provides that the payment must be made by the employer and therefore any payment received by another person to the same effect is a termination payment.

4.03.2 It should be noted that, like the definition of “termination payment”, subsection 56(1) can be called “a charging section” in the same sense as section 3 to which subsection 56(1) alludes at the outset.

How is a charging section to be interpreted?

First of all, it is agreed that the Income Tax Act is a public law statute which must be strictly construed. In the case of a charging section, the canons of strict construction require that if the section is unclear, there can be no taxation. This is true not only of provisions in a taxing statute but of any obligation required of the citizen by Parliament. The general principle requires that any provision that affects the liberty of the citizen must be clearly stated or there is no obligation. In the case at bar, the respondent argues that a payment received by (from)t [2] someone other than an employer could be regarded as a termination payment.

On the other hand, the very nature of a termination payment would seem to involve a payment by the employer, and if Parliament had wanted to tax a taxpayer who received an amount from another person, it should have said so clearly.

4.03.3 Since the introduction into the Act on November 16, 1978 of the provisions defining a termination payment and imposing tax on 50 per cent of such payments, the latter may be considered income from employment just as was the retiring allowance under subparagraph 56(1 )(a)(ii). The same holds true for the salary pursuant to subsection 5(1), benefits received by virtue of an employment in paragraph 6(1 )(a) and any other payments made by an employer to an employee under subsection 6(3). All such income derives from the employer-employee relationship. It seems to me that since the sections are mutually interdependent, it is correct to apply this principle to subparagraph 56(1 )(a)(viii).

Interpretation Bulletin IT-365R of March 9, 1981 issued by Revenue Canada is clear on this point. Paragraph 2 reads as follows:

Receipts in Respect of Termination of Employment

2. An amount that a taxpayer receives in respect of a termination of employment by his employer under the expressed or implied terms of an employment contract is to be included in computing the taxpayer's income from an office or employment, normally under Section 5, 6 or paragraph 56(1)(a) (other than subparagraph 56(1 )(a)(viii). As a rule, these taxable amounts include payments of salaries, wages, compensation for accrued vacation or sick leave credits, retiring allowances, payments in lieu of earnings for the period of a reasonable notice, or any other payments made by virtue of the terms of his employment (explicit or implied). However, if any payment received in respect of a termination of employment is not required to be included in income under any other provision of the Act such a payment will, if received in respect of a termination after November 16, 1978, be included in computing income under subparagraph 56(1)(a)(viii) to the extent it represents a “termination payment" as described in 3 and 4 below.

Moreover, in subsection 4 of this Bulletin, the writer uses the term "employer" in attempting to characterize the nature of “an amount received in respect of a termination of an office or employment". He writes: "The employer must not have agreed voluntarily at any time to compensate the employee."

4.03.4 I have no hesitation in finding that the said amount must be paid by the employer. An amount received as compensation by a third person even for loss of employment cannot be considered as a "termination payment" within the meaning of subparagraph 56(1)(a)(viii) and subsection 248(1).

4.03.5 In his testimony in the case at bar, Piché offered a very good explanation of the reasons for paying compensation to the appellants (para. 3.02e). The basis on which compensation was determined was their 1980 salary. This circumstance can in no way influence the nature of the payment received as compensation "to allow the shareholders of the Fin Gourmet to relocate without having to touch the capital amount paid to the business” (para. 3.02e).

Finally, the amount received by the appellants from John’s Manville did not prevent the Fin Gourmet from paying the said appellants a similar amount as a termination payment, which would have come under subparagraph 56(1)(a)(viii) and subsection 248(1).

It perhaps should be added that the tax imposed on November 16, 1978 on 50 per cent of such payments existed only until November 12, 1981. After that date, any payment of that sort must be considered a retiring allowance and the whole amount is taxable according to subparagraph 56(1)(a)(ii) and the new definition of “retiring allowance" in subsection 248(1).

5. Conclusion

For these reasons, the appeals in respect of the 1981 taxation year are allowed and the matter referred back to the respondent for reconsideration and reassessment.

Appeals allowed.