Brenda J Miller v. Minister of National Revenue, [1984] CTC 2478

Goetz, TCJ:—The appellant in filing her 1980 income tax return sought to deduct the amount of $62.51 received from her employer, the St James- Assiniboia, School Division No. 2, (hereinafter referred to as “the School Division”) as a payment on account of interest. The respondent on the other hand assessed the appellant with respect to the said $62.51 as being “salary, wages and other remuneration” or alternatively as a “benefit” resulting from her employment as school teacher with the School Division.

The appellant was a member of the St James Assiniboia Teachers Association No 2 of the Manitoba Teachers’ Society (hereinafter referred to as “the Teachers’ Association”). The bargaining agreement between the School Division and the Teachers’ Association thereof provided as follows:

This agreement and the articles contained herein shall come into force and take effect on January 1, 1979, unless otherwise agreed to, and shall remain in force until December 31, 1979, and shall thereafter automatically renew itself January 1st from year to year, unless either party gives the other a written notice by registered mail of a desire to terminate or amend the agreement not later than November 1st of the year in which such termination or amendment is desired. It is agreed that in such a case the parties will confer no later than fifteen days after receipt of such notice.

Due notice to amend the agreement was given before November 1, 1979 by the Teachers’ Association and negotiations were initiated and ultimately went to arbitration in October 1980. Meanwhile the teachers continued to work under the terms of the 1979 bargaining agreement. The arbitration decision was made on December 11, 1980 which, among many other matters, determined as follows:

2. The Board has considered the proposal of the Division for a two-year agreement, but, having regard to the time of year during which the arbitration process has been taking place, and insufficient evidence on 1980 and 1981 economic trends presented at hearing, it is agreed that the current agreement be for a one-year period commencing January 1, 1980.

3. In light of the foregoing considerations, the Board has determined that the salary schedule for the year 1980 shall be increased so as to give a 10.5% increase at all stages for the 1980, effective from January 1, 1980.

24. The Board of Arbitration determines that interest on retroactive pay for the 1980 agreement should be paid to members of the Association calculated from the date the salary was payable. The interest shall be computed on the net pay of the member (that is, the gross pay after deducting therefrom personal income tax, unemployment insurance and Canada Pension Plan deductions) and shall be computed at the lesser of eight per cent per annum or the average rate at which the Division borrowed funds during the twelve-month period from January 1, 1979 to December 31, 1979.

Each side to the negotiations had set up for negotiations a percentage increase in determining the salary schedule.

A bargaining agreement was entered into between the Teachers’ Association and the School Division and dated January 1, 1980. Article 17 of the agreement reads as follows:

For the year 1980, the Division shall pay the members of the Association interest on the net amount of any retroactive pay which may be paid to such members (that is, the gross pay after deducting therefrom personal income tax, unemployment insurance and Canada Pension Plan deductions), the interest would have been due, to the date of actual payment.

As can be readily seen the Article incorporates in essence Article 24 of the arbitration award.

The appellant in computing her taxable income claimed a deduction under section 110.1 of the Income Tax Act. Appellant’s counsel referred three cases to me in support of the appellant’s position, Perini Estate v The Queen, [1982] CTC 74; 82 DTC 6080, Trollope & Colls etc. v Atomic Power etc., [1962] 3 All ER 1035 (QBD); Riches v Westminster Bank, Ltd, [1947] 1 All ER 469 (HL).

The Perini case, a decision of the Federal Court of Appeal, involved the payment of cash on closing with respect to a purchase of shares with the promise that there be additional annual payments plus interest contingent upon future earning of the company. The Court held that, while the agreement created a contingent liability to pay the balance of the purchase price, that liability became absolute with retroactive effect to make the interest an ascertainable amount of compensation for the delayed receipt by the taxpayer of the total purchase price. Therefore, the “interest” accrued on a retroactively ascertained principal amount and accordingly was taxable interest.

Appellant’s counsel argued that the Perini case involved the contingency of the company making net profits before further annual payments plus would be pay- able, whereas in this appeal the contractual parties agreed that interest would be paid on its retroactive pay increase once agreed upon. In the Perini case the appellant contended:

Thus it is appellant’s contention that the amount paid pursuant to clause (v) of paragraph 1.3 of the agreement could not be said to have accrued day by day from the date of closing because there was no principal sum in existence on which it could accrue during the period between that date and the time the additional sum payable was determined by an audited financial statement.

In any event, given that such an effect is not clearly excluded by what we are able to ascertain from the cases of the common law concerning contingent liability, it is my opinion that it was open to the parties to the agreement of sale in this case to treat the occurrence of the contingency as having such effect, in so far as interest was concerned. Cf Trollope & Colls, Ltd et al v Atomic Power Constructions, Ltd, [1962] 3 All ER 1035, in which it was held that parties to a contract could give their contract retrospective effect.

In the Trollope case at 1039-40 Megaw, J states:

Logically this position is, I think, unassailable if, but only if, one has to assume that the acceptance of an offer cannot have retrospective effect so as to make the contract apply to things done earlier in anticipation of the contract. But, so far as I am aware, there is no principle of English law which provides that a contract cannot in any circumstances have retrospective effect, or that, if it purports to have, in fact, retrospective effect, it is in law a nullity. If indeed, there were such a principle, there would be many important mercantile contracts which would, no doubt to the consternation of the parties, be nullities. Frequently, in large transactions a written contract is expressed to have retrospective effect, sometimes lengthy retrospective effect: and this in cases where the negotiations on some of the terms have continued up to almost, if not quite, the date of the signature of the contract. The parties have meanwhile been conducting their transactions with one another, it may be for many months, on the assumption that a contract would ultimately be agreed on lines known to both the parties, though with the final form of various constituent terms of the proposed contract still under discussion. The parties have assumed that when the contract is made — when all the terms have been agreed in their final form — the contract will apply retrospectively to the preceding transactions. Often, as I say, the ultimate contract expressly so provides. I can see no reason why, if the parties so intend and agree, such a stipulation should be denied legal effect.

Counsel for the appellant argued that this was an apt description of the contractual process that took place between the Teachers’ Association and the School Division parties and that pending the ascertainment of the final principal amount the teachers were performing their duties as such under the terms of the 1979 agreement.

This was an action in which the appellant sued the judicial trustees and established a claim against the estate in the sum of £36,255 representing a debt. The judge added to this sum the amount of £10,028 as interest. The trustee paid the principal amount but paid only one half of the £10,028 claiming that this was taxable income.

The Court held that the additional sum was “interest of money’’ and in the case of Riches v Westminster Bank, Ltd, (supra), at 470 Viscount Simon stated:

The added amount may be regarded as given to meet the injury suffered through not getting payment of the lump sum promptly, but that does not alter the fact that what is added is interest.

In the present case the teachers continued working during negotiations on the same terms of the 1979 agreement. There definitely was a certainty of a salary increase having regard to the increase suggested by Division No 2 at the outset of negotiations. They had established their right to compensation for work per- formed in 1980. The exact amount of compensation was not finalized until the arbitration award in December 1980.

Counsel for the respondent stated that what was really in issue was whether that which was called “interest” was in fact interest. In Validity of Section 6 of the Farm Security Act, 1944, of the province of Saskatchewan, [1947] SCR 394 Rand, J stated at 411-412:

Interest is, in general terms, the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another.

But the definition, as well as the obligation, assumes that interest is referable to a principal in money or an obligation to pay money. Without that relational structure in fact and whatever the basis of calculating or determining the amount, no obligation to pay money or property can be deemed an obligation to pay interest.

The parties were operating under the terms of the 1979 agreement. There could be no reference to a principal amount and this has to be present in order that the payment in this case be deemed interest. The day-to-day accrual of interest seems to me to be an essential characteristic. As of January 1, 1980 there was no right to a principal sum certain. There was not even a formula tied to a fixed figure upon which interest could be calculated.

Paragraph 12(l)(c) of the Income Tax Act, SC 1970-71-72, c 63 as amended reads as follows:

12(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(c) any amount received by the taxpayer in the year or receivable by him in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as, on account or in lieu of payment of, or in satisfation of, interest.

This was dealt with in the case of R G Huston et al v MNR, [1961] CTC 414; 61 DTC 1233. The appellant made claim under the War Claims Fund and under regulation was to receive simple interest at the rate of 3 per cent from January 1, 1946 to the date an award was approved by the Treasury Board. The Court held that the interest calculation was to offset an income loss on a non-existent amount until approved by the Treasury Board when it came into being as a capital sum and therefore was not of an income nature and the amounts received were not “interest or received as interest”.

At DTC pages 1233, 1236, 1238 and CTC 418, 419 and 423 respectively Thurlow, J stated:

The question to be determined is whether these amounts were income for the purposes of the Income Tax Act. Section 3 of that Act declares that the income of a taxpayer for the purposes of Part I is his income for the year from all sources and, without restricting the generality of the foregoing, includes income for the year from all

(a) business, (b) property, and (c) offices and employments. Section 4 provides that, subject to the other provisions of Part I, income for a taxation year from a business or property is the profit therefrom for the year. And Section 6 provides that “without restricting the generality of Section 3 there shall be included in computing the income of a taxpayer for a taxation year . . . (b) amounts received in the year or receivable in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as interest or on account or in lieu of payment of, or in satisfaction of interest”.

In approaching this question, it may be observed that if amounts can be or become interest within the meaning of Section 6(1 )(b), now, 12( l)(c) merely by reason of what they are called, how they are computed and what they are intended to represent, there is no difficulty here, for the amounts were called interest, they were calculated at a yearly rate on a “principal” sum for a particular period of time, and they were obviously intended by Chief Justice Ilsley, and I think by every subsequent authority who dealt with the matter, to compensate the appellants in respect of their not having had the “principal” amount from January 1, 1946 until October 10, 1958. Moreover, if the intention of the payer or even that of the payer and receiver were conclusive, I would have little difficulty in reaching the conclusion that the sums in question were paid and received as interest.

In this connection, it may be noted that, while the House of Lords in Riches v Westminster Bank overruled Re National Bank of Wales, [1899] 2 Ch 629, it did not overrule CIR v Ballantine or Simpson v Executives of Bonner Maurice, both of which appear to me to be stronger cases in this respect than the present for attributing an income nature to the sums in question, since in these cases the taxpayer’s right to the sum to which “interest” was added arose prior to or at the, commencement of the period in respect to which the “interest” was computed. No case of which I am aware goes so far as to hold such an amount, call it interest or damages or compensation or any other name, to be interest or income when there was neither interest accruing in fact on the “principal” amount during the material period nor any right to the “principal” amount vested in the taxpayer during that period.

As of January 1, 1980 there was no obligation to pay on a contingent liability — a mere understanding that there would be an eventual increase in salary is not a contingent liability related to a fixed price as was in the Perini case. In the case at bar there was no contingent liability but merely an agreement to make retroactive to January 1, 1980 a salary increase as granted by the arbitration award. The so-called “interest” was in fact compensation for late payment of the negotiated annual salary increase calculated as and from January 1, 1980 to December 31, 1980.

I have narrated the contentions of counsel for the appellant and the respondent quite fully and have examined their very able arguments with due care and consideration. I accept the contentions of respondent’s counsel and dismiss the appeal.

Appeal dismissed.