Her Majesty the Queen v. Wally Fries, [1986] 1 CTC 4, 85 DTC 5579

Collier, J.:—This is an appeal, on behalf of the Minister of National Revenue, from a finding of the Tax Review Board in favour of the defendant taxpayer, in respect of an income tax assessment made by the Minister for the 1979 taxation year. (See [1983] C.T.C. 2124).

The issue involves payment, by a union, of an amount of $880.80 to the defendant who was an employee of the Saskatchewan Liquor Board. He, and fellow employees, went out on a strike in support of other striking unionists. The $880.80 was equivalent to the defendant's normal net take home pay during the period he was on strike.

In 1979, there existed, in Saskatchewan, a somewhat complicated organization in respect of employer-employee relationships with the provincial government, its various departments and other entities. The employees of 47 departments, boards, commissions or other agencies, controlled or operated by the Saskatchewan government, were divided into bargaining units. Among them was the Liquor Board. There were approximately 500 members in that bargaining unit. The largest bargaining unit of the Saskatchewan Government employees organization was the Public Service Bargaining Unit with roughly 12,000 members. Their employer was the Public Service Commission.

All employees in the various bargaining units were members of the Saskatchewan Government Employees' Union S.G.E.U.). That union had a Provincial Executive of 28 members who came from 20 branches of the union.

The Provincial Executive did not participate in the bargaining process between the various bargaining units and their particular employers. That was done by the bargaining committee of each of the bargaining units.

The collective agreement between the Public Service Commission and the Public Service Bargaining Unit had expired on October 1, 1979. On November 17, 1979, that unit went out on a legal strike.

The collective agreement with the Liquor Board did not come up for renewal until March 1980.

The evidence discloses that any contract, reached with the Public Service Bargaining Unit, usually became a flagship contract, setting the pattern for other agreements with other bargaining units, and other employers.

The evidence indicates the negotiations, in what I will term the Public Service strike, were not proceeding satisfactorily from the union’s point of view. It was decided to bring pressure on the employer to speed up negotiations and to try and obtain better offers. Meetings were held between representatives of the Provincial Executive of the S.G.E.U. and representatives of the bargaining unit of the Saskatchewan Liquor Board. The defendant, Fries, was chairman of the Liquor Board Branch of the union. The first meeting discussed ". .. the question of taking Liquor Board Branch members off the job to escalate the Public Service/Government Employment strike". At a later meeting with the Tier 1 Committee, or Advisory Committee of the Provincial Executive, Fries is said to have stated he was prepared

subject to a guarantee that members would be provided pay loss for the days off the job and approval of the Executive of the Liquor Board Branch, to take a vote of the membership of the Liquor Board Branch on Saturday, November 24th regarding support for the Public Service/Government Employment Agreement group Strike.

The above excerpts are taken from minutes attached to an agreed statement of facts (Exhibit 2). At that stage, there was a recommendation by the Provincial Executive Advisory Committee that, if the Liquor Board union members went out in support, they be paid “pay loss for the duration of the time that they are out”. The Provincial Executive adopted the minutes of the Advisory Committee.

The Liquor Branch employees voted in favour of a supporting strike. The members knew there would be a recommendation that they be reimbursed their full loss of pay. A letter, dated November 23, 1979, from the Provincial Executive, addressed to the defendant, as "chairperson", and to all Liquor Board Branch members, read as follows:

This is to confirm that the Advisory Committee of the provincial Executive, on behalf of the provincial Executive, has agreed that in the event the employees of the Liquor Board agree to support the striking members of the Public Service/Government Employment Agreement, full pay loss will be paid to insure that Liquor Board members do not suffer any economic loss, including loss of pension benefits, etc.

From November 26, to December 17, 1979, a large number of Liquor Board employees, including the defendant, went on strike in support of the Public Service Bargaining Unit. The admission in the pleadings is as follows:

7. The Defendant withdrew his services from his employer, the Saskatchewan Liquor Board, for the period November 26 to December 17, 1979.

In the province of Saskatchewan, at that time, the strike by the Liquor Board employees was, in the circumstances, entirely legal, although their collective agreement with the Board did not expire until March 1980.

The defendant was paid the $880.80 out of the defence fund, or "strike fund", set up in the S.G.E.U. accounts. That fund, and other funds, came from union dues paid by the members, including the defendant.

The normal "strike stipend", the term used by the union, when any members were on strike, was usually $10 a week.

The Provincial Executive had the sole right to make the decision as to payment of strike stipend, and as to the amounts to be paid. Evidence was adduced to show that, in other cases, the Executive had authorized strike stipend payments of up to eighty per cent of gross pay. In this particular case, it authorized strike stipends of full take home pay.

The evidence was that in other situations, the Minister of National Revenue had never assessed any union members on the strike stipends received.

Mr Fries' case is a test case. Other striking employees of the Liquor Board received stipends or “strike pay” and, as I understand it, similar assessments have been made by the Minister against them.

I now turn to the law and to the arguments advanced by the parties.

The issues depend on the interpretation of paragraph 3(a) and paragraph 4(1)(a) of the Income Tax Act, as amended by S.C. 1970-71-72, c. 63. Paragraph 3(a) provides that a taxpayer’s income for the year is to be calculated by first determining, and I quote:

(a) . . . the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property.

The relevant portions of paragraph 4(1 )(a) read as follows:

(a) a taxpayer's income . . . for a taxation year from an office, employment, business, property or other source, or from sources in a particular place, is the taxpayer's income .. ., computed in accordance with this Act . . .

Counsel appearing on behalf of the Minister argued that the arrangement between the defendant and his union amounted to either a contract of services or, more probably, a contract for services; the payment received pursuant to that contract was therefore taxable. Alternatively it was argued that, in any event, the amount received constituted “income from a source" and was therefore caught by the earlier quoted provisions of sections 3 and 4 of the Act.

On the first argument, the plaintiff says that the S.G.E.U. approached the defendant to obtain assistance in the strike which was already in progress. Particular reliance was placed on the November 23rd letter, to which I have referred. This was characterized as an agreement by the Provincial Executive on behalf of the union to pay the defendant and his co-workers an amount of money in consideration of their going out on strike in support of the strike of the Public Service Bargaining Unit. The classic case of Carlill v. Carbolic Smoke Ball Company, [1893] 1 Q.B. 256, was invoked. That case established the principle that in certain circumstances binding legal contracts can be created where an offer is made to the public generally, or to a class of persons, and where individuals, who are part of the group to whom the offer is addressed, act in conformity with the terms of the offer. In those cases, conforming to the conditions of the offer constitutes acceptance; such acceptance need not be communicated before performance, where it is apparent from the circumstances that the offeror would not require previous acceptance.

The defendant replies, however, that he is not the person who decided to go on strike, but rather the Liquor Board Employees Agreement Group collectively, as the result of a majority vote of that group; that he, under the constitution of the S.G.E.U., was obliged to go on strike as a member of that group. The offer, in other words, was that of the Provincial Executive of the union; the acceptance can only be considered as coming from the Liquor Board Employees Agreement Group. The defendant further argued that as both the Provincial Executive and the Liquor Board Employees Agreement Group are members of the same legal entity, namely the S.G.E.U. and since, with reference to the strike, they each could contract only on behalf of the same principal, no contract could exist at law. It is of course trite law and, indeed, common sense that a legal person cannot contract with himself or itself.

The case of Goldman v. M.N.R., [1953] 1 S.C.R. 211; [1953] C.T.C. 95 touches upon the issue of whether a legally enforceable contract is required in order to make a sum received, taxable as the income of the payee for services rendered. Kellock, J., (the Chief Justice, Locke and Fauteux JJ, concurring) approved this statement of the law in the English case of Herbert v. McQuade in the following terms (S.C.R. 214; C.T.C. 99):

In Herbert v. McQuade (2), the question for consideration arose under Schedule E, of the Income Tax Act, 1842, which imposed tax on “the persons respectively having, using or exercising the offices or employments of profit” in Schedule E for “all . . . profits whatsoever accruing by reason of such offices, (or) employments. . .”. Collins M.R., at p 649, referring to an earlier decision said that,

a payment may be liable to income tax although it is voluntary on the part of the persons who made it, and that the test is whether from the standpoint of the person who receives it, it accrues to him in virtue of his office; if it does, it does not matter whether it was voluntary or whether it was compulsory on the part of the persons who paid it.

In my view this reasoning is equally applicable to payments made to a person “in connection with” an office or employment.

Rand, J., who agreed with the result in the case, but wrote separate reasons, had this to say (S.C.R. 217-18 C.T.C. 102):

That both parties intended the money to be paid and received as remuneration for services rendered by Goldman as committee chairman is not open to doubt. The solicitor became in fact a conduit between the company and Goldman. It was urged that the payment was voluntary. Apart from the question of a declared trust, it can be assumed that the solicitor was not legally bound to make the payment; but that he was bound by the common understanding, whatever it may be called or whatever its nature, is equally beyond doubt. He voluntarily undertook the obligation at least of his word given in an economic relation; but voluntariness of his consequent action is not to be confused with that present in gift.

The Goldman case was under the Income War Tax Act. It, nevertheless to my mind, establishes the proposition that, in order for an amount to be taxable as income for services rendered, the existence of a legally enforceable contract between the payor and the payee is not required.

In Campbell v. M.N.R. (1958), 21 Tax A.B.C. 145; 59 D.T.C. 8 the Tax Appeal Board, applying the Goldman and McQuade decisions, held that a gratuitous payment of $5,000 by a newspaper to a professional swimmer for her praiseworthy attempt to cross Lake Ontario was income to her resulting from services rendered. This, though there was no legal obligation on the part of the newspaper to pay the sum as the swimmer had not succeeded in crossing the lake.

In the case of Ferris et al. v. M.N.R., [1977] C.T.C. 2034; 77 D.T.C. 17 the Tax Review Board stated (although it appears to be obiter dictum) that basic strike benefits are taxable. My colleague, Walsh, J., in a recent decision, O'Brien v. The Queen, [1985] 1 C.T.C. 285, 85 D.T.C. 5202 disputed that view expressed in the Ferris case. In the O'Brien case several unions, in order to provide funds to support a newspaper strike and generally increase the strike fund, opened and operated during the strike, a newspaper which produced profits. Ordinary strike benefits and supplemental benefits were paid to the striking newspaper employees in accordance with a set formula contained in the constitution of the union. The formula was based on a percentage of the salary which each member earned before the strike. The amounts received bore no relationship whatsoever to the hours worked on the newspaper during the strike. The only persons excluded from these benefits were those who refused to perform picket duty or to do any work during the strike. The plaintiff’s strike benefits were, in those circumstances, held not to be taxable.

In the O'Brien case, it was found as a fact, the unions operated the newspaper for profit purposes, on their own, and not as agents for the union members.

It was further found there was no agreement with the union members as to how the profits of the newspaper would be distributed.

This certainly cannot be said of the case before me. There was a distinct understanding by the Liquor Board employees with the S.G.E.U. that, unlike the members of the Public Service Bargaining Unit, they would receive the equivalent of full take home pay as strike stipends.

In any event, in the circumstances of the present case, I am prepared to hold there was an enforceable contract in existence. Not one between the Liquor Board Employees Agreement Group, of which the latter formed a legal component. But one between the S.G.E.U. and the individual members employed by the Liquor Board. Once the S.G.E.U. had offered to pay the employees of the Liquor Board their full take-home pay in return for their withdrawing their own services from the Liquor Board, and once the employees had complied, there existed an obligation by the S.G.E.U. to pay that money to each of the employees. That obligation became legally enforceable by each such individual against the S.G.E.U.. What was merely an arrangement or unenforceable agreement between the S.G.E.U. and the Liquor Board Employees Agreement Group, once made and communicated to the employees themselves, became an offer to pay in consideration of a service rendered. The principles of the Carbolic Smoke Ball case would apply. Although the contract did not constitute what is commonly known as either a contract for services or a contract of services, since no actual work was done, by going on strike the employees of the Liquor Board were undoubtedly rendering a service to the S.G.E.U., by re-enforcing the strike action of the members of its Public Service Bargaining Unit.

This leads to the question whether, in order to constitute income, there must be actual work done or services rendered requiring the expenditure of labour, the performance of some activity or the employment of some degree of skill, expertise, thought or energy on the part of the payee which relates somehow to the money received. In that sense, the only service rendered by the plaintiff would appear to be the performance of regular picket duties during the strike. That service, of course, would be minimal when compared to the benefit derived by the S.G.E.U. from the plaintiff withdrawing his labour from the Liquor Board or, in other words, doing nothing.

The nature of the word “income", as used in the Income Tax Act, was considered by the Supreme Court of Canada in the case of Curran v. M.N.R., [1959] S.C.R. 850; [1959] C.T.C. 416. The facts are not at all similar to the present case. The Curran decision involved the payment of some $250,000 in consideration of the taxpayer resigning from one company and accepting employment with a firm in which the payor was interested. The question in issue was whether this was a capital or an income receipt. In its decision, the Court held that, as there was no extensive description of “income" in the 1948 Income Tax Act, the word had to be given its ordinary meaning, bearing in mind the distinction between capital and income, and the ordinary concepts and usages of mankind. Kerwin, C.J.C., with whom Locke and Judson, JJ. concurred, said at 854-55 (C.T.C. 421):

As has been pointed out in the recent judgment of this Court in Bannerman v. Minister of National Revenue, there is no extensive description of income such as appeared in The Income War Tax Act. The word must receive its ordinary meaning bearing in mind the distinction between capital and income and the ordinary concepts and usages of mankind. Under the authorities it is undoubted that clear words are necessary in order to tax the subject and that the taxpayer is entitled to arrange his affairs so as to minimize the tax. However, he does not succeed in the attempt if the transaction falls within the fair meaning of the words of the taxing enactment.

Martland, J., in coming to the same conclusion on the appeal, did not deal directly with the meaning of the word “income”.

In my view, where amounts, in this case money, are received by a person for his or her own benefit, those amounts, generally speaking, must be considered either as a receipt of a capital nature or as an income receipt. I know of no other categories; all tax cases appear to place such receipts in either one category or the other, unless, perhaps, the amounts are some kind of mere reimbursement. Gifts may, perhaps, be in a separate category

— à kind of no-man’s land.

In the circumstances of the present case, when applying the ordinary concept and usage of the word “income”, I cannot conceive the moneys received as being anything else but a receipt of income as opposed to a Capital payment. They were neither a gift nor a windfall, nor payment for an asset or benefit of a permanent or semi-permanent nature. On the contrary, they were directly and solely related to the length of time over which the defendant payee acted (or refused to act) and the time during which the payor benefited from what the payee agreed to do.

The defendant, and his compatriots, received amounts similar to those normally received from their employer. The monetary calculation was based on their usual salaries. During the period of issue, the stipend amounts were paid from a new source, other than the employer. The Liquor Board employees exercised their then right to provide or withdraw their services to or from their employer, for tactical purposes, in union vs. management strategies.

While the test is not: if it is not capital, then it must inevitably be income, the amounts here received smack of income, rather than something else.

All “income” is obviously not taxable under the Income Tax Act. There are exceptions covering certain persons, corporations or organizations and also certain types of income depending on its source or nature. Paragraph 3(a) of the Act provides that “income . . . from a source inside or outside Canada” is taxable. The source in the present case was the S.G.E.U. and more particularly the strike fund of the S.G.E.U.. I can find nothing in the Act which makes payments from a strike fund exempt from taxation. As to the beneficiary of the payment as well as to the nature of the payment, again, I can find nothing in the Act, nor in any relevant legislation, which would lead one to conclude the defendant, by the mere fact that he was on strike, would be exempted from payment of tax on amounts received. Nor can I conclude the payments made in the context of the present situation would somehow be exempt.

Evidence was led to the effect it has been the consistent policy of the Department and of assessing officers not to assess, for taxation, any ordinary strike benefits received by a taxpayer and paid as a result of a labour dispute. I fully accept that evidence. But it can have no real bearing on the issue here. The manner in which the provisions of a statute are applied, by officers charged with their implementation, can never change or affect the substance or meaning of those provisions. The administratative decision to refrain from taxing ordinary strike benefits might well have been taken for no reason, other than it was politically less controversial.

I cannot concur in the reasoning of the presiding Tax Review Board member, nor in his result.

I am driven to the conclusion the amounts received by the defendant were income, and not exempt from tax.

I add this. Those of us brought up in the common law tradition normally rely so heavily on precedents, that an administrative practice applied over a prolonged period can frequently create the impression that it, in fact, conforms to substantive law. It may be Parliament should stipulate whether or not ordinary strike pay and any supplementary or extraordinary strike benefits should or should not be taxable. It appears this question was in fact raised, but never actually dealt with, when amendments to the Income Tax Act were enacted. On this subject, I quote from paragraph 26,460 of Income Taxation in Canada, Vol. Il, published by Prentice-Hall Canada Inc.:

Strike pay is an anomaly. The amounts (union dues) from which strike pay is paid are fully deductible in the hands of employees, as are, for example, unemployment insurance premiums. By contrast, however, unemployment insurance benefits are taxed. On the assumption that strikes are voluntary and unemployment is involuntary, if there was to be an exception, one would have thought it might be unemployment benefits that were exempt. This anomaly, clearly, occurred at the cabinet table, as the first tax reform bill showed "strike pay” as a marginal note for amounts to be included in income, but without the corresponding legal language.

The appeal is allowed. The assessment is confirmed. The plaintiff is entitled to costs.

Appeal allowed.