Joseph Lionel Roy v. Minister of National Revenue, [1980] CTC 2007, 80 DTC 1005

John B Goetz:—This appeal is from a reassessment mailed to the appellant on November 28,1975, in respect of his 1974 taxation year. There are two facets to this appeal. The first issue is whether certain amounts paid to the appellant by the International Nickel Company of Canada Limited (hereinafter referred to as “INCO”) are, by virtue of subsection 6(3) of the Income Tax Act deemed to be remuneration for services rendered during employment and thus properly included in the computation of income pursuant to subsection 5(1) of the Act, or did such payments flow from a breach of the appellant’s employment contract. The second issue is whether the appellant was entitled to deduct, in his 1974 taxation year, the sum of $1,000 as being a contribution to registered home owners savings plan (hereinafter referred to as “RHOSP”) pursuant to paragraph 146.2(1 )(f) of the Income Tax Act.

The appellant was employed by the International Nickel Company of Canada Limited (hereinafter referred to as “INCO’) on September 30, 1936, carrying out duties as a lab assistant, foreman and safety supervisor. He ultimately acquired his Bachelor of Science degree and Business Administration in 1971 from the University of California, in Los Angeles. He holds a certificate of industrial relations and professional certificates in data processing, from the American Society of Safety Engineers and Professional Society of Systems Management.

In July 1973 the appellant’s manager, a Mr Kossatz, called him into his office and advised him that his position was no longer available but that he could be retained in the employment of the Company as a security guard with a substantial reduction in salary. Shocked by the perfunctory dismissal, he contacted his son in Toronto, who is a practising lawyer. He then went to see Wilfrid Digby who held the position of superintendent of compensation for INCO. Among his duties in this position, Mr Digby has responsibility for the administration of a program of termination of employment. Part of this program involved a “redundancy program”. Between 1971 and 1973 he held the position of superintendent of benefits and employment and during this period of time he states that the company was reducing non-union staff because of curtailment of production and reduction of work load relating to administration. The redundancy program was a “planned program to take care of people to be released”. The factors considered in dismissing an employee involved a formula under the redundancy fund which considered length of service, existing salary level, age and number of years to pension age, insurance, etc. The reason for the formula was for settlement after termination. If the appellant had remained in the employ of the company, he would have received a higher pension at age 65 as well as greater insurance benefits.

On October 26, 1973, the appellant received a separation certificate indicating that he was to receive $23,713.68 to be paid over a period of time up to January 1, 1980.

He discussed this settlement with his son who, in his legal capacity, advised his father that the amount seemed to be comparable to what the appellant would receive if he had sued INCO in Court. As a result of this advice, the appellant accepted the settlement made by his former employers and did not threaten legal action.

There was no evidence that the settlement related to a bargaining agreement but rather that it was paid out of the redundancy fund because the appellant was a non-union employee.

As a result of his dismissal the appellant sought employment with the Technical Services Council in Toronto, and in British Columbia with provincial and municipal bodies (relating to his data processing ability) but nothing came of these overtures or attempts to obtain employment by the appellant. On January 4, 1974 he set up a data processing centre in Malaysia as an employee of the Sabah Plant Development Board in Malaysia.

Dealing with the first aspect of this appeal, it should be noted that the contract of employment was a verbal contract and that the appellant had been in the employ of INCO for 37 years at the time of his peremptory dismissal in July 1973, at which time the appellant was 59 years of age.

The payment to the appellant of the sum of $23,713.68 did not merely relate to salary simpliciter in lieu of notice and according to Mr Digby of INCO it included many other factors in the formula of setting up the redundancy fund whereby, obviously, the company, anticipating dismissals of various employees of long tenure, could, by the establishment of such redundancy fund, possibly and likely avoid legal action against the company. The payment was not for salary for a period coincident with the period of reasonable notice which would have prevented an action, possibly for damages for wrongful dismissal, or that it was payment of liquidated damages in advance of action. The settlement involved several factors whereby the payments were made to the former employee over the period of years as opposed to a lump sum payment in full settlement of any claim he may have claimed in court relating to his dismissal by INCO.

The relevant sections of the Income Tax Act to be considered in resolving this issue are embraced under subsections 5(1) and 6(3) which reads as follows:

5. (1) Subject to this Part, 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.

6. (3) Payments by employer to employee. An amount received by one person from another

(a) during a period while the payee was an officer of, or in the employment of, the payer, or

(b) on account or in lieu of payment of, or in satisfaction of, an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer,

Shall be deemed, for the purposes of section 5, to be remuneration for the payee’s services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received

(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(d) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(e) in consideration or partial consideration for a covenant with reference to what the officer of employee is, or is not, to do before or after the termination of the employment.

The formula under the redundancy fund was carefully calculated and motivated by the company to preclude litigation or threat thereof by an employee who was dismissed. The payments made to the appellant under its redundancy fund were not benefits received by virtue of the contract of employment of the appellant but rather they arose under an arrangement subsequent to the termination of the employment contract. The payment to the appellant should be considered as a compromise settlement or as a damage payment agreed to without a formal damage judgment and, in my view, neither would be included in the meaning of section 6. Payments out of the redundancy fund to the appellant were anticipated by INCO vis-à-vis the appellant as an attempt to place the appellant in the same position as if he had obtained an award in damaaes for hreach nf nn mada nie suant to legal action. See Wertheim v Chicoutimi Pulp Company, [1911] AC 301 at 307, Lord Atkinson said:

And it is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed. That is a ruling principle. It is a just principle.

There is no material distinction to be drawn between the facts in this case and those considered by the Federal Court in Her Majesty The Queen v Robert B Atkins, [1975] CTC 377; 75 DTC 5263; [1976] CTC 497; 76 DTC 6258. In that case the former Chief Justice, in considering section 25 of the Income Tax Act (predecessor of the present subsection 6(3)), stated at 499 and 6259 respectively:

In so far as section 25 of the Act is concerned, on the facts, it cannot be contended with any seriousness that the amount in question can reasonably be regarded as falling within paragraph (i), (ii) or (iii) of that section.

I might point out that I have given careful consideration to the decision in Thomas G Quance v Her Majesty The Queen, [1974] CTC 225; 74 DTC 6210, and to that of my learned colleague, Mr Delmer E Taylor, CA, in Raymond Brackstone v MNR, [1979] CTC 2277; 79 DTC 284.

In the reply to notice of appeal the respondent alleged, among other things, that the monthly sum of $2,942.72 was income of the appellant in his 1974 taxation year because it was a retirement allowance. Having found that the monies paid to the appellant were paid in lieu of damages, there could be no retirement allowance because the appellant was dismissed.

I turn to the second issue. On assessment the respondent disallowed a deduction of the sum of $1,000 claimed by the appellant under subsection 146.2(4) of the Act. The respondent contended that the appellant was the owner and occupier of an owner-occupied home within the meaning of that expression in paragraph 146.2(1)(f). For a number of years prior to 1973 the appellant lived in and rented a house owned by Nickel Basins Properties Limited (hereinafter referred to as ‘‘Nickel Basins’’), located in the town of Copper Cliff. On October 16, 1973 Nickel Basins sold the building to the appellant and to the appellant’s wife. The sale was treated by the parties as the sale of a chattel. A bill of sale was delivered by Nickel Basins to the appellant and his wife. It was not until April 12,1977 that the land on which the building was located was conveyed to the appellant and his wife. After the appellant was fired by INCO he left Sudbury in 1973 to take up work in Malaysia.

When ownership of the house rented by the appellant was transferred to him in October 1973, the appellant and his spouse became owners of a housing unit as defined in paragraph 146.2(1 )(f) of the Income Tax Act and consequently could not qualify for a deduction under a registered home ownership savings plan by virtue of the disqualification for deduction under subsection 146.2(5) of the Act which reads as follows:

No amount may be deducted by a taxpayer under subsection (4) for a taxation year in which

(a) he had an owner-occupied horn as defined in paragraph (1)(f) if that paragraph were read without reference to the phrase “or within 60 days after the end of the year’’ where it appears therein;

(b) he owned, whether jointly with another person or otherwise, real property in Canada, any portion of which was used in the year as a dwelling place by any individual; or

(c) he had an interest in a partnership that owned, whether jointly or otherwise, real property in Canada, any portion of which was used in the year as a dwelling place by any individual.

I therefore disallow this portion of the appellant’s appeal but allow his appeal with respect to payment to him of a settlement under INCO’s redundancy program and refer the matter back to the Minister for reconsideration and reassessment accordingly.

Appeal allowed in part.