William Henry Walsh v. Minister of National Revenue, [1981] CTC 2966, 81 DTC 868

Guy Tremblay:—This case was heard in Montreal, Quebec, on May 14, 1981. It was taken under advisement on August 12, 1981, when the last document of the submissions was received by the Board.

1. The point at issue

The issue is whether the appellant, a former school principal, is correct in contending that the amount of $15,282 (a lump sum payment comprising sick-bank benefits accrued to December 31, 1971 while in the employment of the “Commission Scolaire Sainte-Croix”), received in 1978, should be computed in the income by applying the reduced rate formula asset provided in section 40 of the Income Tax Application Rules, 1971.

The respondent contends that the said section does not apply and therefore that the regular rate of 1978 must be applied.

2. The burden of proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumptions of fact on which the respondent based the assessment are also deemed to be correct. In the present case, in paragraph 2 of the reply to notice of appeal, the respondent described the facts on which he based his assessment:

2. In assessing the Appellant for his 1978 taxation year, the Respondent, the Minister of National Revenue, relied on the following assumptions of fact:

(a) Prior to June 1978, the Appellant was employed as a school principal by ‘Commission Scolaire Sainte-Croix’;

(b) In June 1978, the Appellant retired on pension from the aforementioned school commission;

(c) In his income tax returns for his 1978 taxation year, the Appellant declared the amount of $27,783.45 as representing his total income in his 1978 taxation year;

(d) The Appellant received in 1978, upon retirement, an additional lump sum payment from the school commission in the amount of $15,282;

(e) The lump sum payment received by the Appellant comprised of sick-bank benefits accrued to the 31 of December 1971, while in the employ of the aforementioned school commission;

(f) In assessing the Appellant’s total income for his 1978 taxation year, the Respondent added the accrued lump sum payment representing the reimbursement of sick-bank benefits to the total income as declared by the Appellant in his 1978 taxation year returns;

(g) The lump sum payment in the amount of $15,282 was included in the Appellant’s total income without applying the reduced rate formula as set out in section 40 of the Income Tax Application Rules, 1971, enacted as Part III of Chapter 63, SC 1970-71-72;

(h) The Appellant’s revised taxable income has been duly assessed by the Respondent in the amount of $31,917.00 and corresponding federal tax payable by the Appellant in the amount of $6,224.25 has been correctly calculated.

3. The facts

3.01 The facts indeed are not in dispute because the appellant admitted all the assumed facts of the respondent quoted above with the following distinction that the revised taxable income has not been duly assessed because the tax concerning the amount received should have been computed at the reduced rate formula.

3.02 It seems at first glance that there is an error if we consider the $27,783.45 alleged in subparagraph 2(c) plus the $15,282 of subparagraph 2(d) the total cannot be $31,917 as alleged in subparagraph 2(h). One must take note that $27,783.45 is the net income, and the $31,917 is the taxable income. The taxable income declared by the appellant in his 1978 income tax return was $16,591.12. If one adds the sum of $15,282, the total arrives at $31,873.12 and this substantially explains the $31,917 plus and minus regular adjustments in the computation of the taxable income.

4. Law — cases at law — analysis

4.01 Law

The main provisions of the Income Tax Act involved in this case are section 3, subsections 117(5) and 117(6) and subsection 40(1) of the Income Tax Application Rules, 1971 (enacted as Part III of c 63, SC 1970-71-72). They shall be quoted in the analysis if it is necessary.

4.02 Cases at law and doctrine

1. J Camille Hare/ v Deputy Minister of Revenue of the Province of Quebec, [1977] CTC 441; 77 DTC 5438;

2. Gerald Molleur v MNR, [1965] CTC 267; 65 DTC 5166;

3. Interpretation Bulletin IT-337R.

4.03 Analysis

4.03.1 The interpretation of subsection 40(1) of ITAR, 1971, is the crux of the matter. This provision reads as follows:

40. (1) In the case of

(a) a single payment

(i) out of or pursuant to a superannuation or pension fund or plan

(A) upon the death, withdrawal or retirement from employment of an employee or former employee,

(B) upon the winding-up of the fund or plan in full satisfaction of all rights of the payee in or under the fund or plan, or

(C) to which the payee is entitled by virtue of an amendment to the plan although he continues to be an employee to whom the plan is applicable,

(ii) upon retirement of an employee in recognition of long service and not made out of or under a superannuation fund or plan,

(iii) pursuant to an employees profit sharing plan in full satisfaction of all rights of the payee in or under the plan, to the extent that the amount thereof would otherwise be included in computing the payee’s income for the year in which the payment was received, or

(iv) pursuant to a deferred profit sharing plan upon the death, withdrawal or retirement from employment of an employee or former employee, to the extent that the amount thereof would otherwise be included in computing the payee’s income for the year in which the payment was received,

(b) a payment or payments made by an employer to an employee or former employee upon or after retirement in respect of loss of office or employment, if made in the year of retirement or within one year after that year, or

(c) a payment or payments made as a death benefit, if made in the year of death or within one year after that year,

the payment or payments made in a taxation year ending after 1971 and before 1974 may, at the option of the taxpayer by whom it is or they are received, be deemed not to be income of the taxpayer for the purpose of Part I of the amended Act, in which case the taxpayer shall pay, in addition to any other tax payable for the year, a tax on the payment or aggregate of the payments equal to the proportion thereof that

(d) the aggregate of the taxes otherwise payable by the employee under that Part for the 3 years immediately preceding the taxation year (before making any deduction under section 120, 121 or 126 or subsection 127(3) of the amended Act),

is of

(e) the aggregate of the employee’s income for those 3 years.

4.03.2 Appellant’s interpretation

The appellant’s interpretation is based on J Camille Harel v Deputy Minister of Revenue of the Province of Quebec, referred to above and given by the Supreme Court of Canada. It is useful to say that subsection 40(1) of ITAR, 1971 quoted above is similar to section 36 of the former Act and to section 45 of the former Quebec Income Tax Act. The facts and decision of the Hare/ case, [1977] CTC 441 at 441 and 442 are summarized as follows:

At the time of his retirement the taxpayer, a Montreal policeman, had a long period of unused sick leave, accumulated at the rate of 15 days per year over the period of his employment, in respect of which he received a cash settlement of $11,958. In issue was whether this amount could be classified as (1) a lump sum payment from a pension plan, (2) a payment on retirement in recognition of long service, (3) a payment on or after retirement for loss of office or (4) a death benefit, so as to be eligible for tax averaging under section 45 of the Act, as claimed by the taxpayer but denied by the Deputy Minister. It was brought out that for federal income tax purposes the taxpayer was accorded such beneficial treatment under the corresponding provision (section 36) of the pre-1972 Income Tax Act (Canada), and the Provincial Court, allowing the taxpayer’s appeal from his Quebec tax assessment, adopted the same position. That judgment was reversed, and the assessment restored, by the Quebec Court of Appeal, from whose judgment the taxpayer now appealed.

HELD (per curiam)-.

A payment for long service, within section 45 of the Act, did not necessarily imply a gratuitous payment but included equally a payment required by collective agreement. Moreover, the concept of long service would extend to the case of an employee who, by reason of not taking advantage of leave granted annually for periods of illness, contributed his services that much longer to his employer. The payment therefore fell within both the spirit and the letter of section 45. Appeal allowed.

The editorial note of the Harel case, [1977] CTC 441 at 442 and 443 may also be useful for the understanding of the case:

EDITORIAL NOTE:

Uniformity between federal and provincial tax legislation does not necessarily lead to uniformity in interpretation. This case illustrates Quebec’s restrictive interpretation of former section 45 of the Provincial Income Tax Act which contained provisions similar to those of former section 36 of the Income Tax Act (Canada) allowing lump sum payments to be taxed at a special rate.

The Supreme Court of Canada, reversing a unanimous judgment of the Quebec Court of Appeal which in turn had unanimously reversed a judgment of the Provincial Court now confirms the federal interpretation that a payment at retirement in lieu of unused sick leave accumulated by the employee prior to that time qualifies under section 45 even if such payment is made in satisfaction of an obligation of the employer arising under a collective agreement. This interpretation is important as it ensures that such payments will qualify for income-averaging annuity treatment under both federal and Quebec income tax legislation.

In confirming that such payments qualify as having been made “in recognition” of long service, the Supreme Court has restricted the meaning of the French word “reconnaissance” to coincide with that of the English version “recognition”; the same principle has been applied by the Federal Court of Appeal to the words “aliénation” and “disposition” in Compagnie Immobilière BCN Ltée v The Queen, [1976] CTC 282.

The judgment of the Supreme Court has also confirmed that such payments are to be regarded as being made for “long service”, the reasoning being that the employer benefits from longer service when the employees do not take advantage of sick leave which they are entitled to under their collective agreement. Dealing with the case of Choquette v The Queen, [1974] CTC 742, even though the Supreme Court noted that the question involved in that case was a different one, it would seem that it was not entirely in accord with the interpretation of the Federal Court in that case which held that 29 months did not constitute “long service”.

While the Supreme Court in the present case has not dealt with the issue of retirement, it is important to note that there is again in respect of this term a difference between the federal and provincial approach. Quebec’s interpretation of the term restricts its application to situations in which an employee withdraws from active life; such an interpretation would of course disqualify lump sum payments from income — averaging annuity treatment when a taxpayer merely changes employment. Judicial support for that interpretation and an illustration of the consequences whch may arise in the case of payments for wrongful dismissal can be found in Specht v The Queen, [1975] CTC 126, and The Queen v Atkins, [1975] CTC 377.

The Supreme Court’s obiter dictum relating to the administrative policy of the Revenue is most interesting. While confirming the view that administrative policy will not be a decisive factor when the text of the law is clear, the Court nevertheless indicated that in cases where the text of the law is at best ambiguous, it will look to administrative policy which may in such cases prove determinative. Thus in this case the Court stated that the fact that the provincial authorities were aware of the federal interpretation before enacting a similar provision using the same wording and that they followed the same interpretation until 1968 would, had the Court been required to consider it in reaching their decision, have been a decisive factor against the Crown. Such an attitude on the part of the Court may prove helpful when, on the mere basis of an interpretation bulletin, the taxation authorities announce a change of administration policy on particular subject matters.

4.03.3 Following this decision of the Supreme Court of Canada, the Quebec authorities passed on July 11, 1979, a regulation to reimburse income tax to taxpayers who had been taxed at the regular rate rather than at the reduced rate formula of section 45. The amounts received from their employers represent the reimbursements of sick-bank benefits (Order-in-Council AC 2048-79).

4.03.4 The appellant also referred to paragraph 4 of the interpretation bulletin IT-337R issued in November 1979 concerning retiring allowances. The said paragraph reads as follows:

4. To qualify for treatment as a retiring allowance a payment must be “in recognition of long service” or “in respect of loss of office or employment”. The term “long service” is usually considered to have reference to the total number of years in an employee’s career with a particular employer. A payment in respect of unused sick leave credits qualifies as a retiring allowance. On the other hand, when an employee terminates employment and a payment is made in respect of accumulated vacation leave not taken prior to the retirement, this payment is considered to be ordinary remuneration and included in the employee’s income in the year of receipt pursuant to subsection 6(3).

4.03.5 Respondent’s interpretation

The respondent referred to the Gerald Molleur v MNR case given in 1965 by Dumoulin, J of the then Exchequer Court of Canada.

He decided that the amount of $10,000 received by the taxpayer from his employer, which amount constituted his accumulated sick-leave credit under his employer’s sickness benefit plan, was in the nature of withheld salary and that subsection 36(1) had no application. This interpretation, however, was abandoned later on as in the Harel case.

4.03.6 The counsel for the respondent explained that the Minister of National Revenue did not adopt a policy of the same nature as the one adopted by the Province of Quebec in passing the regulation AC 2048-79. The federal statutory regulations covering such cases have not been amended. Therefore section 40 of ITAR, 1971 is fully applicable.

The reduced rate formula, however, is applicable only up to the taxation year 1973 as it appears from the said subsection 40(1) quoted above.

The Board shares the opinion of counsel for the respondent that “the only way a taxpayer could alleviate his fiscal burden upon receiving such a payment after his 1973 taxation year, would be via prescribed tax shelters such as RRSP, etc”.

The Board must construe the law as it is written. It cannot apply a regulation issuing from any Act other than the federal Income Tax Act.

Unfortunately for the appellant the assessment of the respondent must be maintained.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.