Rendell W Beck v. Minister of National Revenue, [1980] CTC 2851, 80 DTC 1747

M J Bonner:—This is an appeal from an assessment of income tax for the 1977 taxation year. On assessment the respondent included in the computation of the appellant’s income the sum of $1,800 paid to the appellant in November of 1977 by British Columbia Railway (hereinafter called “BCR”). On appeal the appellant contested the inclusion, asserting that the payment was one of “damages”.

The appellant was the only person to give evidence at the hearing. He did so with care and candour. There is no reason to doubt any of it.

From October of 1975 to July 1977 the appellant was an hourly rated employee of BCR, working at its Railwest Manufacturing plant. His employment was terminated on three days’ notice. It was not suggested that the termination was for cause. It resulted from the decision of the employer to close the Railwest plant.

The appellant stated that personnel officers of BCR made a practice of advising prospective employees that they might expect employment for a period of at least five years. They asserted that the plant had a backlog of orders which would take that long to fill. Although the appellant could not remember what was said when he was hired clearly enough to say with certainty that a promise of five years’ work had been made to him, he understood that such promise had been made to many of his fellow employees.

The collective agreement which governed the appellant’s employment provided in part:

23.16 When it becomes necessary to make a reduction in staff, at least three (3) working days’ notice shall be given to the men affected before reduction is made, and lists shall be furnished to the Local Union and the General Chairman.

The appellant explained, in effect, that he felt that paragraph 23.16 of the collective agreement did not apply to fix the period of reasonable notice because he was discharged in the course of the elimination of all staff and not laid off in the course of a reduction of staff.

In July of 1977 the Union to which the appellant belonged commenced an action in the Supreme Court of British Columbia. The defendants named were BCR, Railwest Manufacturing Company and BCR doing business as Railwest Manufacturing Company. The endorsement on the Writ read as follows:

... the Plaintiff, the Brotherhood of Railway Carmen of the United States and Canada, representing all past and present members of Garibaldi Lodge 1419, who were or are employees of the Defendants, one or both, claim special and general damages for economic loss suffered by the Plaintiffs, as a result of the Defendants’, one or both, breach of contract of employment, or in the alternative breach of verbal representations inducing employment, or in the further alternative, damages for misrepresentations made with respect to the offer of employment.

The action was apparently settled. No written minutes of settlement were entered in evidence. The appellant testified, however, that in October of 1977 all hourly rated employees who were on the payroll at the time of the closing of the Railwest plant were paid the same amount, $1,800, regardless of seniority or job classification.

The respondent pleaded:

2. The Respondent made the disputed assessment on the assumption that the termination of the Appellant’s employment did not involve a breach of contract or wrongful dismissal since he was given the notice provided for in the collective agreement then in force between the Union, of which he was a member, and his employer.

He argued that whether the $1,800 was damages or not, it was income from employment. He relied on subsection 6(3) of the Income Tax Act.

The respondent argued further that the payment was a “retiring allowance’’ within the meaning of subsection 248(1) of the Act. Counsel’s submission was that what happened amounted to an involuntary retirement. I will deal with that argument first. It was obvious that the appellant had not reached anything even approaching what is generally regarded as retirement age. After it became apparent to the appellant that he had no chance of being re-employed by BCR because the Railwest plant was not to be reopened he obtained employment elsewhere. There was no withdrawal from occupation. Having regard to the remarks of Collier, J, in Charles A Specht v Her Majesty the Queen, [1975] CTC 126; 75 DTC 5069, the payment cannot be regarded as a retiring allowance. There was no retirement.

I turn next to the more serious contention of the respondent, namely that the payment falls to be included in income by virtue of section 6 of the Act as a “... benefit of any kind . . . received or enjoyed . . . in the year in respect of, in the course of or by virtue of an office or employment . . it is plain that the payment in issue is one which resulted from the assertion by the Union, on behalf of the appellant and his fellow employees, of a claim for damages for breach of contract of employment. Because the direct and immediate result of the lawsuit was the payment in question here I can only conclude, in the absence of evidence to the contrary, that the payment was made to the appellant in respect of the breach alleged.

Counsel referred to a number of cases which include Thomas G Quance v Her Majesty the Queen, [1974] CTC 225; 74 DTC 6210, and Jack Cewe Ltd v Gary William Jorgenson, [1980] CTC 314; 80 DTC 6233. She quite properly referred, as well, to Her Majesty the Queen v Robert B Atkins, [1975] CTC 377; 75 DTC 5263 (aff’d [1976] CTC 497; 76 DTC 6258) and Paul Girouard v Her Majesty the Queen, [1980] CTC 284; 80 DTC 6151. All those decisions were made by Courts superior to this Board and, as a result of the doctrine of stare decisis, I am bound to follow them.

The decision of the Federal Court of Appeal in Atkins is, in my respectful view, impossible to reconcile with the decision of Cattanach, J, in Quance. Thus, subject to any question whether Atkins has been overruled, I need not consider Quance further.

In Atkins the taxpayer was dismissed without notice. As a result of negotiations between the taxpayer’s solicitor and the employer a settlement was reached. One of the terms of the settlement called for payment to the taxpayer of an amount, the taxability of which was in issue. I can find no material distinction between the facts in Atkins and the facts in the case at bar. Here, as in Atkins, the appellant was wrongfully dismissed. No meaningful distinction exists, for present purposes, between cases of no notice and cases of inadequate notice. In Atkins Jackett, CJ, stated:

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.

In Cewe Pigeon, J, speaking for the Court, expressed grave doubt as to the validity of the reasoning in the passage set forth above, He said:

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 clearly have no other source. In Livesley v Horst (1924, SCR 605) Duff, J said, speaking for the Court (at p 607):

In principal, it is difficult to discover a solid ground for refusing to classify the right to damages for breach of contract with other rights arising under the proper law of the contract, and recognizable and enforceable as such.

The basic principle governing the award of damages for breach of contract is that “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”. I fail to see any reason why this would not hold true towards the tax collector as well as towards the parties to the contract.

The decision in Atkins cannot be regarded as having been overruled by the Supreme Court. In Cewe the Court was dealing with a case in which the issue was whether income tax should be deducted in the computation of the quantum of damages to be awarded in an action for wrongful dismissal. Although Pigeon, J, stated:

. . _. the present situation with respect to income tax on this award of “an identifiable sum for loss of earnings” must be considered legally insecure.

the Atkins decision was not overruled. It is therefore my duty to follow the decision in Atkins which, as I have already said, I regard as being indistinguishable. The respondent’s contention that the payment here falls within the “deeming” provisions of subsection 6(3) of the Act meets the same fate as the similar contention advanced in Atkins (under former section 25).

This appeal will therefore be allowed and the assessment referred back to the respondent for reconsideration and reassessment on the basis that the sum of $1,800 formed no part of the appellant’s income for the year.

Appeal allowed.