Thomas E Kierans v. Minister of National Revenue, [1980] CTC 2627, 80 DTC 1534

M J Bonner:—This is an appeal from an assessment of income tax for the 1974 taxation year. On assessment the Minister included in the computation of the appellant’s income the sum of $45,000 paid to the appellant by Nesbitt, Thomson and Company, Limited, on the occasion of the appellant’s departure from the company. The Minister relied on sections 5 and 6 of the Income Tax Act. The appellant’s position was that the payment was capital because it was received as or on account of damages for wrongful dismissal, or as a payment similar in substance.

The only witness called at the hearing of this appeal was the appellant. He was first employed by the company in 1963. He made rapid progress. At the time of his departure from the company in November of 1974 he was its Vice-President, Director and a “principal contributor of capital”. The latter phrase is used by the stock exchange to designate a person holding a substantial block of shares in one of its member companies.

The appellant’s departure from the company was the result of personal and policy differences between the appellant and one A Deane Nesbitt. Mr Nesbitt was, at least in 1974, the President and chief executive officer of the company. He was the son of one of its founders, generated much of the company’s business and held a substantial block of shares. The appellant Stated that Mr Nesbitt “controlled” the Board of Directors of the company.

The appeal was approached by both parties on the basis that the company had no cause for dismissing the appellant and that the appellant, though an officer of the company, was in the same position as an employee in relation to discharge.

I should add, however, that a resolution of the Board of Directors was necessary in order to discharge the appellant. Such was the evidence of Mr Kierans.

The differences between Mr Nesbitt and the appellant came to a head in the autumn of 1974. The two met and Mr Nesbitt told the appellant that one of them would have to go, but that it was the appellant who ought to go. Mr Nesbitt indicated to the appellant that he was prepared to take the matter up with the Board of Directors. The appellant was of the view that had Mr Nesbitt done so he, the appellant, would have been fired. He told Mr Nesbitt that he required time to think and consult.

The appellant then considered his options and consulted his father. He met with Mr Nesbitt for a second time a week or so later. The appellant told Mr Nesbitt that if he had to go, he wanted a named price for his shares in the company and the payment of $45,000.

In a memorandum to Mr Nesbitt dated November 6, 1974, the appellant described the $45,000 sum as a “severance payment”. It was, the appellant said, a figure he had arrived at after considering what he required to leave him reasonably whole in the departure from the company. It was also an amount equal to one year’s salary.

At the second meeting, after a heated exchange on the price to be paid for the appellant’s shares, the appellant told Mr Nesbitt that he would stay and he started to walk out of the meeting. Mr Nesbitt thereupon offered more for the shares and agreed to pay the $45,000. Thus, the deal was struck.

Following the second meeting the appellant returned to his office in Toronto. He signed a resignation effective November 9, 1974, the day following the closing of the sale of his shares.

At no time was the appellant given notice or told that he was fired without notice. The Board of Directors of the company did not meet before November 9, the effective day of the resignation, and Mr Nesbitt did not have the authority to fire the appellant.

Legal action was never threatened by the appellant. He had consulted a lawyer some time before the first meeting with Mr Nesbitt, but he could not say that Mr Nesbitt was even aware of this action. Strictly speaking then, the payment in question was made and received to induce the appellant to resign. No lawsuit was taken or threatened so as to form the foundation of a claim that the payment was a payment of or in respect of damages which might be awarded.

The appellant accepted the payment in the belief that had he continued his refusal to resign he would have been fired. As I noted previously, the appellant believed that Mr Nesbitt controlled the Board of Directors.

Counsel for the appellant argued that in substance the appellant was dismissed without cause and without notice. The departure, he said, took the form only of a resignation with a contemporaneous payment of damages for wrongful dismissal. The payment, it was said, was compensation for the loss of the contract of employment in circumstances which made that loss involuntary. Counsel referred to Thiessen v The Town of Leduc, [1975] 4 WWR 387, as authority for the proposition that events which take the form of a resignation may, in substance, be a dismissal and give rise to an entitlement to damages for wrongful dismissal. In the Thiessen case I note that want of authority to dismiss was not in issue.

While I quite agree that it is the substance of what happened which governs liability to tax and not the form or some word used by the parties which inaccurately reflects the realities, I cannot see, having regard to the facts here, that that principle justifies looking at the payment in question as one of damages as opposed to one made to induce the Appellant to agree to voluntarily resign.

It follows then, that the judgment of the Federal Court of Appeal in Her Majesty the Queen v Robert B Atkins, [1976] CTC 497; 76 DTC 6258, is one made on a factual basis different from the case here. The Court there dealt with a payment made and agreed upon after there was a wrongful dismissal. It follows, too, that the judgment of the Federal Court of Appeal in Paul Girouard v Her Majesty the Queen, [1980] CTC 284; 80 DTC 6151, was also made on a factual basis different from this case. There the Court dealt with a payment made pursuant to a contract calling for that payment as liquidated damages. In Girouard the Court expressly followed Atkins on the question whether the payment fell within subsection 5(1) and paragraph 6(1)(a) of the Income Tax Act.

I note that great doubt has been cast on the reasoning of the Federal Court of Appeal in Atkins by the Supreme Court of Canada in Jack Cewe Ltd v G GW Jorgenson, [1980] CTC 314; 80 DTC 6233. There Pigeon, J, delivered the unanimous judgment of the Court in an appeal from a judgment which held that income tax is to be deducted in the quantum of damages for wrongful dismissal. The appellant relied on the decision in Atkins. Pigeon, J, speaking for the Court, did not expressly overrule Atkins, but he did say as follows:

This judgment is contrary to the decision of Cattanach J in Quance v The Queen (74 DTC 6210) as to which Jackett, CJ said, speaking for the Federal Court of Appeal:

“Having regard to the weight placed by the appellant on the decision of the Trial Division in Quance v The Queen, (74 DTC 6210), [1974] CTC 225, I deem it advisable to state in my own words what I regard as the basic fallacy in the appellant’s position.

Once it is conceded, as the appellant does, that the respondent was dismissed ‘without notice’, monies paid to him (pursuant to a subsequent agreement) ‘in lieu of notice of dismissal’ cannot be regarded as ‘salary’, ‘wages’ or ‘remuneration’ or as a benefit ‘received or enjoyed by him . . . in respect of, in the course of, or by virtue of the office or employment’. Monies so paid (ie, ‘in lieu of notice of dismissal’) are paid in respect of the ‘breach’ of the contract of employment and are not paid as a benefit under the contract or in respect of the relationship that existed under the contract before that relationship was wrongfully terminated. . .

I have grave doubt as to the validity of this reasoning. Damages payable in respect of the breach of a contract of employment are certainly due only by virtue of this contract, I fail to see how they can be said not to be paid as a benefit under the contract. They certainly have no other source.

I need not decide on what the position would be here had the payment been one of damages.

The appellant’s counsel relied heavily on the decision of the Court of Appeal of Great Britain in Henley v Murray, Inspector of Taxes, [1950] 1 All ER 508, in support of his contention that the payment was one of or on account of capital. In that case the Court dealt with liability for tax under Schedule E of the United Kingdom legislation. Schedule E imposes a charge “in respect of any office or employment on the emoluments therefrom”. Paragraph 6(1 )(a) of the Income Tax Act requires the inclusion in income from office or employment of “benefits of any kind whatever . . . received or enjoyed . . . in respect of ... or by virtue of an office or employment”. The net cast by those words is, I believe, much wider than that cast by the United Kingdom legislation under consideration in the Henley v Murray case. The words of our Act are sufficiently broad in import as to include a payment made to bring about a voluntary resignation. The right which the appellant had to continued employment, at least until expiry of a reasonable notice period, was one which he earned by continued performance of the duties imposed on him by the contract of employment. In my view that right, when exchanged for a payment, must be regarded as a benefit received by virtue of employment.

In rejecting the contention that the payment was one of capital I follow the decision of Sheppard, DJ, in Yvon A Alexander v MNR, [1973] CTC 405; 73 DTC 5321, a case which I find to have arisen on facts which are indistinguishable, in any material way, from those of the present case.

The appeal is therefore dismissed.

Appeal dismissed.