John F Heggie v. Minister of National Revenue, [1985] 1 CTC 2417, 85 DTC 357

Christie, ACJTC:—This appeal relates to the appellant’s 1981 taxation year. In that year he received $48,055.40 from Gainers Inc (“Gainers”) which he excluded in the computation of his income under the Income Tax Act (“the Act”). By notice of reassessment dated October 4, 1982, the respondent added the $48,055.40 to the appellant’s total employment earnings for 1981. That led to this appeal.

On November 5, 1979, the appellant was employed as president and chief executive officer of Swift Canadian Co Limited (“Swift”) which was a wholly- owned subsidiary of Swift & Company of Chicago (“Swift US”) which, in turn, is owned by Esmark Inc. Prior to that date the appellant was senior vice- president of Andres Wine Limited. At the time he was employed by Swift it was the appellant’s expectation and he believes that of his employer that the employment would be for the duration of his career. By May 1980, however, the appellant had information indicating that Swift was for sale.

On October 13, 1980, Pocklington Financial Corporation Ltd of Edmonton (“Pocklington”) wrote Swift US to confirm its intention to “purchase all of the outstanding shares of stock in a Canadian dominion company” which is not identified in the letter, but was identified at the hearing as Gainers. Pocklington is described as the “Purchaser”. The letter goes on to say that Swift US which is described as the “Seller” would transfer all of the assets and liabilities of Swift to Gainers subject to specified exclusions. The shares of Swift were to be sold to Pocklington. A number of matters are then dealt with such as price, closing, etc. Clause 3(c) and Clause 4 provide:

3. Conditions

While the foregoing represents the understanding of Purchaser and Seller, consummation of this transaction contemplated hereby shall be conditioned upon the following:

(c) That no separation pay, retirement or other employee benefit will be due by Seller to employees of the businesses being transferred as a result of the transfer of assets from Swift Canadian Co, Limited, or the sale of stock since the Purchaser intends to employ present employees (other than those of the excluded businesses and except John Heggie, C A Fletcher and D Somerville) of said Swift Canadian Co, Limited on substantially the same terms and conditions of employment.

4. Purchase Agreement

This Agreement in principle is subject to the preparation and execution by the parties of a Definitive Agreement of Purchase and Sale relating to the shares of stock to be transferred, which Agreement will include details regarding the property to be transferred.

While copy of the Definitive Agreement was not produced at the hearing the appellant had been given an opportunity to study it and he said that it contains a clause which is the same or substantially the same as paragraph 3(c). Mr Fletcher was senior vice-president in charge of finance and administration and Mr Somerville was senior vice-president in charge of the edible oil division of Swift. The appellant, Fletcher and Somerville formed a partnership for the purpose of purchasing Swift, but they were unsuccessful.

By October 30, 1980, the appellant and Swift US had settled the basic terms of compensation for the former in contemplation of the termination of his employment upon the sale of the shares of Swift and the transfer of its assets. On November 10, 1980, Mr J P Sullivan, president and chief executive officer of Swift US, wrote the appellant to confirm their understanding. The second paragraph of the letter reads:

The decision to redeploy assets, which has resulted in our agreement in principle with Pocklington Financial Corporation, Ltd, to sell the Canadian food business, has resulted in a mutual desire to reach an understanding with respect to an orderly phaseout of your current responsibilities so that you will be free to concentrate on your personal future plans. Because we appreciate the professional commitment and effort that you have given to the business in the past and your ongoing assistance in facilitating a smooth transition of the business to the purchaser, I have told you that Swift will.

Details of the settlement follow which include continuation of the appellant’s current salary “up to a termination date”. Three possible termination dates are listed, one of which is March 1, 1981. The letter goes on in part:

All of the foregoing is conditioned upon your continuing to display the total loyalty and faithful performance to the objective at hand that we have come to expect from you. In addition, we would expect that you will, like I, observe complete trust and confidence with respect to this understanding and not disclose it to anyone other than those in your immediate household.

By letter dated December 9, 1980, from Sullivan to the appellant the terms of the settlement were amended, but not in a manner germane to this appeal. On November 11, and December 18, 1980, the appellant in a footnote to each of Sullivan’s two letters “Accepted and agreed” to what was said therein. On January 14, 1981, the Definitive Agreement previously mentioned was entered into between Pocklington and Swift US. The payments of continued salary by Swift to the appellant under the terms of the settlement ended on February 28, 1981.* [1] The appellant’s role in the sale of the shares of Swift and the transfer of its assets was carried out in accordance with instructions from Swift US and was confined to this. First, he ensured that information in the hands of Swift was available for the purposes of the disposition of the shares and the transfer of assets. Second, in company with the man who had been in charge of employee relations at Swift and a senior vice-president of Swift US, he travelled from coast to coast with Mr Percy Gibson, president and chief executive officer of Gainers, to introduce Gibson to employees formerly under the jurisdiction of the appellant. This was accomplished in late January and in the first half of February 1981. An aircraft supplied by Esmark Inc was used for this purpose.

While the appellant continued to be paid until February 28, 1981, his services to Swift US had in fact ended around the middle of that month. At this time, while he was preparing to vacate what had been his office and which was to be occupied by Gibson, the two had a conversation the details of which were related by the appellant. Counsel for the respondent expressly waived any objection to this. This is the substance of what was said. The appellant told Gibson that, although he was being paid until February 28, he had spoken to his superior in Chicago and told him that his work was completed. In the circumstances the appellant told Gibson that he regarded it to be in the best interests of all concerned if he vacated the premises at once which he did on that day. In answer to a query by Gibson the appellant told him that he had received a generous termination settlement, but he did not disclose the amount. Gibson then indicated a desire to do something for the appellant. He asked him how much he had been earning as president of Swift and when told, Gibson said he would pay the appellant an equivalent sum for an indefinite period although he expressed doubt regarding how long this could go on. He said it could last at least until July 31, 1981, if prior to that time the appellant had not found other employment. The appellant asked what he was expected to do in return. Gibson replied: “Nothing”. When Gibson was about to leave he asked the appellant about his car. He replied that Sullivan had told him to “wait until all the dust was settled” and then he, Sullivan, would make a decision. Gibson said that the car now belonged to Gainers and that the appellant could continue to use it until further notice. Payments were made to the appellant by Gainers at the rate mentioned from March 1 until July 31, 1981, and he continued to use the car during that period.

In the course of being examined in chief by his counsel the appellant particularized the lack of any employment relationship between Gainers and himself arising out of the conversation with Gibson. The appellant denied that there was ever any suggestion that he was an employee or would become an employee of Gainers; that he ever was an employee of Gainers; that he was requested to do or refrain from doing anything by Gainers; that he was in any way precluded from accepting any offer of employment or that he was entitled to receive remuneration from Gainers. Nothing in writing passed between the appellant and Gainers and the former did nothing for the latter.

In 1981 Gainers issued two Statements of Remuneration Paid (form T-4) in which the appellant is designated the employee. One pertains to the payments made by Gainers and showed total earnings of $45,833.30, deductions for Canada Pension Plan, unemployment insurance and income tax. The other relates to the car and shows taxable allowances and benefits of $2,222.10. This totals $48,055.40.

The appellant was the only witness called at the hearing. He gave his evidence in an unhesitating and forthright manner. What he said in examination in chief was not impugned in any way by cross-examination. There is no reason to disbelieve him and I accept his evidence. I emphasize this because prima facie at least one would expect that there must have been a quid pro quo for the $48,055.40.

As I understand it from the reply to notice of appeal taken in conjunction with the argument at the hearing, the respondent in the last analysis relies on three grounds in support of his reassessment. The first is that subsection 5(1) applies. It provides that, subject to Part I of the Act, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year. The second is that what the appellant received from Gainers was supplementary to the termination settlement he received and should have been included in computing his income under subparagraph 56(l)(a)(ii) and subsection 248(1) of the Act. The third is that the $48,055.40 should have been included in computing the appellant’s income as a benefit received by him in respect of employment within the meaning of paragraph 6(l)(a) of the Act.

The evidence disposes of the first ground. There never was an employeremployee relationship between the appellant and Gainers and it was never intended that there would be. The appellant did nothing for Gainers and he was not expected to. The respondent says that what was received by the appellant was “salary”. The only connection that what the appellant received from Gainers has with salary is that the payments were measured by reference to what the appellant had been receiving by way of salary from Swift. This does not make those payments salary: The Queen v Atkins, [1976] CTC 497; 76 DTC 6258.

The second ground, that Gainers was supplementing the appellant’s termination settlement, also flies directly in the face of the evidence. While, as previously mentioned, Gibson was aware that a termination settlement had been agreed to by Swift US and the appellant, the appellant did not disclose the amount and he said he had no indication that anyone connected with Gainers knew the figure. It is difficult to envisage Gibson intending to correct a deficiency in respect of an amount which was unknown to him.

The third ground is based on the proposition that the $48,055.40 was received “as a result of the appellant’s former employment”. That is to say, if the appellant had not been president and chief executive officer of Swift, the chain of events which led to the conferring of the benefits on him by Gainers would not have transpired. This, says counsel for the respondent, brings the appellant within the ambit of paragraph 6(l)(a) of the Act, the $48,055.40 being a benefit received by him in respect of employment. What is relevant to this appeal in the paragraph reads:

6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment, . . . .

The sweep of paragraph 6(l)(a) is undoubtedly extensive. This is clear from the judgment of the Supreme Court of Canada in The Queen v Savage, [1983] CTC 393; 83 DTC 5409, which is relied on by the respondent. Nevertheless it has an outer limit and, in my opinion, the contention of counsel for the respondent transcends that limit.

In Savage the appellant, while employed by a life insurance company, voluntarily and successfully took three Life Office Management Association courses to improve her knowledge of life insurance. She received $300 ($100 per course) for this. Dickson, J (as he then was) in delivering the reasons for judgment of the majority held that the payments brought the appellant within paragraph 6(l)(a) of the Act. At 399 (DTC 5413-14) His Lordship cited this passage from the judgment of Thurlow, ACJ (as he then was) in Estate of Phaneuf v The Queen, [1978] CTC 21 at 27; 78 DTC 6001 at 6005:

While the language of the statutes differ, the test expressed by Viscount Cave, LC in Seymour v Reed, [1927] AC 554 at 559, appears to me to express, as well as it can be expressed, the essence of what falls within the taxing provision of the Income Tax Act. Is the payment made “by way of remuneration for his services” or is it “made to him on personal grounds and not by way of payment for his services”? It may be made to an employee but is it made to him as employee or simply as a person? Another way of stating it is to say is it received in his capacity as employee, but that appears to me to be the same test. To be received in the capacity of employee it must, as I see it, partake of the character of remuneration for services. That is the effect that, as it seems to me, the words “‘in respect of, in the course of, or by virtue of an office or employment” in paragraph 6(l)(a) have.

Dickson, J then went on:

With great respect, however, I do not agree with the latter part of the passage last quoted and in particular the statement that, to be received in the capacity of employee, the payment must partake of the character of remuneration for services. Such was the conclusion in the English cases but based on much narrower language. Our Act contains the stipulation, not found in the English statutes referred to, “benefits of any kind whatever . . . in respect of, in the course of, or by virtue of an office or employment”. The meaning of “benefit of whatever kind” is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of “benefit”. Further, our Act speaks of a benefit “in respect of’ an office or employment. In Nowegijick v The Queen, [1983] CTC 20; 83 DTC 5041 this Court said, at 25 [5045], that:

The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of’ is probably the widest of any expression intended to convey some connection between two related subject matters.

See also Paterson v Chadwick, [1974] 2 All ER 772 (QBD) at 775.

I agree with what was said by Evans, JA in R v Poynton, [1972] 3 OR 727 at 738, speaking of benefits received or enjoyed in respect of, in the course of, or by virtue of an office or employment:

I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, eg, loan or gift, then it is within the all-embracing definition of s 3.

It is difficult to conclude that the payments by Excelsior to Mrs Savage were not in relation to or in connection with her employment. As Mr Justice Grant (who presided at the trial in the Federal Court-Trial Division) said, the employee took the course to improve his or her knowledge and efficiency in the company business and for better opportunity of promotion.

As Crown counsel submits, the sum of $300 received by Mrs Savage from her employer was a benefit and was received or enjoyed by her in respect of, in the course of or by virtue of her employment within the meaning of paragraph 6(1)(a) of the Income Tax Act; it was paid by her employer in accordance with company policy upon the successful completion of courses “designed to provide a broad understanding of modern life insurance and life insurance company operations” and “to encourage selfupgrading of staff members”; the interest of the employer” was that the courses would make her a more valuable employee”; Mrs Savage took the courses to “improve [her] knowledge and efficiency in the company business and for better opportunity for promotion”.

The appeal however was dismissed on the ground that the $300 was exempt from taxation by operation of paragraph 56(l)(n) of the Act, being ‘‘a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer”.

In relating Savage to the case at bar these dicta of the Earl of Halsbury, LC in Quinn v Leathem, [1901] AC 495 at 506 are worth remembering:

Now, before discussing the case of Allen v Flood, [1898] AC 1, and what was decided therein, there are two observations of a general character which I wish to make, and one is to repeat what I have very often said before, that every judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found. The other is that a case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may seem to follow logically from it.

This applies as well to what was said by Evans, JA (as he then was) in delivering the judgment of the Ontario Court of Appeal in Poynton which is cited with approval by Dickson, J. Poynton involved the prosecution of a former employee of Milne and Nicholls Limited, a general building contractor, for making false or deceptive statements in his income tax returns for 1967 and 1968 and wilfully evading payment of income taxes. This is what was before the Court for determination. In computing his income was the accused required to include

(i) moneys which he had stolen from his employer by way of obtaining kick- backs from sub-contractors of the employer; and

(ii) the value of certain benefits conferred on him by way of improvements to his residence which, by virtue of his fraudulent conduct, had been paid for by funds appropriated unlawfully from his employer?

The Court said yes. It was not suggested in Poynton that what the accused did was not in respect of or in the course of his employment. Obviously it was. The debate in the case revolved around an entirely different question, namely, whether stolen or embezzled funds can properly be regarded as income in the hands of the thief or embezzler under the Act. Funds of that kind are not the property of the thief or embezzler, but of his victim. The Court was of the view that nevertheless the funds could properly be regarded as income. The test is whether the thief or embezzler had in fact the actual use and enjoyment of the funds and it is not concerned with their ownership.

In Savage there was a contract of employment between the appellant and Excelsior Life and a clearly discernible and uninterrupted relationship prevailed regarding the receipt of the $300 by Mrs Savage and her employment. The payment and receipt of the $300 was interwoven with that employment. As Dickson, J observed, a reciprocal interest existed between Mrs Savage and her employer, qua her employment, in making the courses available to her with monetary inducement on the one hand and their successful completion by her on the other. These kinds of things are not present in the case at hand. While the evidence does not disclose exactly what motivated Gibson in arranging for the benefits to be conferred upon the appellant by Gainers, the fact that he said they would be provided until at least July 31, 1981, if prior to that time the appellant had not found other employment strongly suggests that it was the appellant’s anticipated unemployment rather than his prior employment with Swift that is the real and proximate root of the benefits he received from Gainers. I regard the appellant’s prior employment as extraneous to his liability to tax. By his testimony the appellant has established the existence of facts showing that the basis upon which the respondent’s reassessment rests is in error. This entitles him to succeed.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that the $48,055.40 which the appellant received from Gainers in 1981 is not to be included in the computation of his income in that year. The appellant is entitled to party and party costs.

Appeal allowed.