Douglas G Barrett v. Minister of National Revenue, [1979] CTC 2597, 79 DTC 567

The Assistant Chairman:—With his 1976 income tax return, the appellant filed a T-4 slip from each of his two employers in that year, which slips totalled $32,105,83. From this amount he deducted an amount of $8,000, that he classified as a capital receipt, and computed his tax accordingly. The respondent did not agree with the appellant’s deductions, and computed his tax on the premise that his total earnings for the year were $32,105.83. The issue in the appeal is to determine whether or not the said $8,000, in the circumstances of this case, was an income receipt as contended by the respondent, or a capital receipt as contended by the appellant.

The appellant was a native of England and received, I believe, the majority of his academic education in that country. Before becoming the Executive Director of the Children’s Aid Society, City of St Thomas and the County of Elgin, Inc (hereinafter referred to as the “Society”) in 1966, he was, for about six years, a Regional Director of the Canadian Arthritis and Rheumatism Society. He applied for the position with the Society when he was asked to do so by the Director of Child Welfare for the Province of Ontario. While with the Society, he was the administrator and reported to the Society’s Board. The Board, I believe, consisted of a number of people, some of whom were elected by the members and others who were appointed by the City of St Thomas and the County of Elgin. When he started with the Society in 1966, the appellant believed there were about 9 employees on the staff, and in 1975 there were about 18. As it seems is not unusual, administering any organization is not free from difficulties and friction. When he became an employee of the Society there was no union. A few years later a union organized some of the staff. The appellant believed that social workers could belong to a professional association, but not to a union because of the duties they performed. He did believe he had advised the Board of his opinion in this respect. His position and other events brought him into conflict with one social worker. In addition, there had been an investigation into the Society following a complaint by a Family Court Judge. The report (the Irving Report) following this investigation, released in the latter part of 1974, was critical of the appellant. The report became public even though it was supposed to be private and confidential. A report by the president of the Board of Directors of the Society on March 5, 1975, advised the general meeting of the Society that the Irving Report was very critical of the appellant and that, with courage, he continued to do his work. Following a series of meetings, the president advised that meeting that the Board rejected the report in its entirety. There were, in 1975, problems with employees of the Board. The personnel committee of the Board supported the appellant’s action of dismissing a female employee. As to another employee, who had given false references, he gave his opinion to the Board as to what should be done and all members of the Board, with two exceptions, supported him. The president stated in his report to the Society on March 5, 1975, .. Mr Barrett was able to refute each point with over whelming documentary evidence . . It would seem that, having refuted the Irving Report and having the majority of the Board supporting him, there would be relatively smooth sailing ahead for Mr Barrett, but such was not to be the case.

On September 12, 1975, the appellant was going to England for about a month on holidays. He and his wife had been under a considerable strain because of the events of the past year or so and they were looking forward to the rest and change. About 2 pm on September 9, 1975, Mr State, the president of the Board, together with two members, a Mrs Porter and a Mr Liddle, attended Mr Barrett and handed him a handwritten letter (Exhibit A-1) which was dated 9/9/75. That exhibit is reproduced herein:

We are here as your friends & we know that the agency is in terrible strain and this has been very hard on you & your family. We, the board have been sitting back and see you burn yourself out, aggravate yourself as the situation here deteriorates to such an extent we felt it necessary to call a Special Board Meeting last night. We know your work over past year has not been pleasant, and have had a minimum amount of co-operation from your staff. Also I’m sure you are aware of their lack of confidence in you and we felt we had to make some firm decisions in the interest of the society and in your interests. At that special meeting a motion was made, passed, and I have the very unpleasant task of asking for your resignation, effective on your return from your holidays, or any other method in which you care to leave the society, which of course would have to be satisfactory to the board. It was also decided that the board protect you, your pension and other benefits as much as possible, and any suggestion from you for your own protection re the pension etc will be very carefully considered. We sincerely hope you will not be too upset with this decision, but I’m sure you are, we have only your best interests in heart as well as the Societys, and we want to help you in any way we may be able to do so.

We know this is going to upset your wife considerably, and perhaps you should hold off letting her know at this time, and have the month while you are away to reach some decision. Perhaps on your return, you may say to your wife I’m not going back to that building. I’m going to quit—which may be of great relief to her, and at that time you can give us your resignation & retain your dignity. This resignation will be kept in the most strictest confidence by the board and the staff will only hear of this from you yourself on your return. I want you to know how much I & the board admire you & your capabilities, but it was the rule of the board that I have to ask for your resignation.

The appellant endeavoured to find out why the Board wanted his resignation, but he was unsuccessful. He was told his pension would be protected and he would be helped in securing another position. The events of the previous year or two were discussed, but no substantial reason was given to him for the request. On September 10,1975, he asked these same people with another member to meet him at his home. His wife was present with him when they came. The background was discussed once more and, if I understood the evidence correctly, all the members present were a little harder on the appellant than they had been the previous day. At one point, according to the appellant, Mr State said: “I could fire you if I didn't like your tie” and at this the appellant’s wife collapsed and the meeting was over. Within the next couple of days the appellant saw and spoke to the solicitor for the Board about the situation, wrote to his solicitor, Mr Poole in London, and saw a heart specialist about his condition. As had been previously arranged, he went to England for his holiday. While there he applied for a number of jobs but without success as his age and training (basically Canadian) were against him.

On his return, he attended the president (State), the solicitor (Sanders) and the secretary of the Society (Bodkin). The president stated—resign or be fired. He later talked the matter over with State and Sanders and, following that meeting, Sanders drew up a press release indicating that the appellant was retiring for health reasons. He then drew up a resignation for the appellant (Exhibit A-17) and an agreement (Exhibit A-5) between the appellant and the Society dated October 17, 1975, which was signed by both. The resignation (Exhibit A-17) reads as follows:

October 16th, 1975

TO: The Children’s Aid Society of

the County of Elgin and City

of St Thomas

27 Southwick Street

St Thomas, Ontario

Attention: Mr Jack State, Chairman

Dear Mr State:

I hereby tender my resignation as Executive Director of the Children’s Aid Society of the County of Elgin and City of St Thomas to be effective on the 1st day of November, 1975 as I have been advised for medical reasons that I should not retain this position on a full time basis.

(signed) Douglas G Barrett.

The substance of the agreement (Exhibit A-5) was that the appellant would be a “Special Consultant to the Board . . for one year from November 1, 1975, and his salary would be $25,000 per annum. This was approximately the same salary as he had been receiving. The Society would not terminate the contract prior to November 1, 1976, unless the appellant secured Suitable alternative employment (as defined) and then the Society could terminate the contract. The suitable employment was:

(a) ‘Suitable alternative employment’ is to be interpreted as being employment acceptable to you and providing for salary of at least $18,500 annually.

(b) If suitable alternative employment is accepted by you and the Society terminates your services, the Society would not be responsible to pay to you the remuneration set forth in 1 and 2 above but would pay to you:

a—Any deficiency between the salary of such employment and employment based on a salary of $25,000 annually until November 1st, 1976.

b—the full amount payable to OMERS on an annual salary basis of $25,000 (both that portion normally payable by the Society and by yourself) until July 1st, 1976, unless the position you obtain provides for your rights to benefits being maintained with OMERS in which event the Society will only be responsible to pay any deficiency therein to ensure your pension rights being maintained on the present basis until July 1st, 1976.

The agreement contained another clause which should be noted:

4. Your duties as a Special Consultant will be such as are directed to you by the Board from time to time and will not require your attendance at the offices of the Society except as may be directed and will be subject to your reporting to the Board, as may be directed.

The appellant stated he thought the payment was for loss of job and defamation of character. He received the payments regularly until April of 1976 and not only did he not perform any services but he was not asked to do so. In this period he had applied for many jobs but without success. Of course, when the Irving Report became public knowledge there was considerable publicity given to it in the media in St Thomas and London. After a period of time the publicity died down but was revived when his resignation was linked to the Irving Report. The annual meeting of the Society in March 1976 brought more attention to the finances of the Society and the size of its budget.

In April 1976, the appellant, on his own, wrote to the president of the society (now Bodkin) suggesting an end to the agreement so that his entire relationship with the Society would be terminated. He did not, at this time, consult with a lawyer. A draft agreement was prepared but not executed. In the same month he discussed his position with his solicitors, Browne and Burgard, and the question of wrongful dismissal and defamation was prominently mentioned. Subsequently an agreement was reached between the appellant and the Society and reduced to writing by memorandum dated April 30, 1976. That agreement (Exhibit A-11) reads as follows:

MEMORANDUM OF AGREEMENT made this 30th day of April, 1976

BETWEEN:

THE CHILDREN’S AID SOCIETY OF THE CITY OF ST THOMAS AND THE COUNTY OF ELGIN

hereinafter called the SOCIETY

OF THE FIRST PART

— and —

DOUGLAS G BARRETT, of the City of St Thomas, in the County of Elgin,

hereinafter called BARRETT

OF THE SECOND PART

WHEREAS the SOCIETY has entered into a contract of employment with BARRETT dated October 17th, 1976; (sic)

AND WHEREAS BARRETT had requested this be terminated and that the parties enter into this Agreement;

AND WHEREAS the SOCIETY has agreed thereto;

NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the mutual covenants herein contained and other good and valuable consideration, the parties hereto mutually covenant and agree each with the other of them as follows:

1. The SOCIETY shall:

(a) Pay to BARRETT the sum of EIGHT THOUSAND DOLLARS ($8,000) on the date hereof;

(b) Pay to OMERS as they fall due all contributions (both employer and employee) with respect to the Pension for BARRETT based on an annual salary of $25,000 to and including June 30th, 1976.

2. BARRETT shall not be required to perform any services for the SOCIETY after June 30, 1976.

3. BARRETT acknowledges having received full remuneration for all services to and including June 30th, 1976 and shall not be entitled to any further sum by way of expenses or other fringe benefits after April 30th, 1976 save and except as herein provided.

4. The memorandum of Agreement dated October 17th, 1975 in so far as it is varied by this Agreement is deemed to be no longer in effect with respect to any further performance by either party save and except as herein specifically provided.

5. The Parties hereto mutually release and forever discharge the other of them of and from all causes of action, claims and demands whatsoever which either of them has against the other of them for or by reason of any act, matter, cause or thing whatsoever up to and including the date hereof.

About this time (April 1976) he had the chance of a position at Fanshawe College of London which also had a campus in St Thomas. He had been offered an appointment and tried it on an exploratory basis, but was not then hired. He was hired by Fanshawe on May 1, 1976, at a rate, I believe, of $20,500 per annum. The appellant said his action in April 1976 in writing to the president was due to an upcoming meeting of the Society and what it would undoubtedly mean in so far as he was concerned. The payment to him would be queried and the harassment would start anew.

The appellant wrote to the Society on April 21,1976. There was no indication in that letter that he had received legal advice although he met a solicitor, Mr Edward R Browne, for the first time concerning his position on April 12, 1976. The appellant turned over to his solicitor a copy of the draft agreement which had been prepared after April 12. Mr Browne gave evidence and stated that he and his client discussed his client’s position with the Society, and the possibility of suit for defamation of character, libel and wrongful dismissal. The wrongful dismissal would relate to the events which transpired in September 1975. Mr Browne wrote at least one letter to the solicitor for the Society pointing out that the draft agreement could be interpreted, if executed, as a release not only of the employment contract of October 17,1975 (Exhibit A-5) but also “of any other matters that might be outstanding”. Some suggestions were made and an agreement (Exhibit A-11) dated April 30, 1976, was signed sometime in July 1976.

As to the payment to the appellant, evidence was led to indicate that the consultation contract was done in that form (for one year at $25,000) as the budget provision had no other means of providing the money. Notwithstanding that his actual resignation stated he was resigning for reasons of health, the oral evidence indicated he would be summarily dismissed if he did not resign.

Both counsel agree that, if the $8,000 received by the appellant from the society in 1976 was received as damages for wrongful dismissal or for defamation, the sum is not taxable as income. Of course, appellant’s counsel submits that the sum received was for such wrongful dismissal, while the respondent’s position is the opposite. While there is no doubt the appellant had had difficult times in his position as Executive Director of the Society, as I understand the evidence, it would appear that around September 1,1975, the worst was over and his position was secure in so far as past events were concerned. My recollection of the facts is that the meeting the appellant had on September 9,1975, with three members of the Board who presented him with a request for his immediate resignation (Exhibit A-1) was, with respect to the appellant, completely unexpected. About a month previously he had been supported by virtually all of the members of the Board of the Society in a decision he had made with respect to a probationary employee. He could not find out then, or the next day, why he was told to take his holidays and on his return from them to resign. On his return he did resign and virtually concurrently signed a consulting contract pursuant to which he was to do nothing unless called upon by the Society to perform some function. The resignation and the consulting contract were both effective on the same day, November 1, 1975. The appellant submits that for budgetary reasons the “damages” were paid for in this fashion, which damages arose as a result of the “firing” on September 9, 1975. Counsel also submitted in her written submission, although it was not mentioned in the Notice of Appeal, that not only was the $8,000 not income but none of the money received pursuant to the consulting agreement was income.

In this latter respect reference should be made to the case of MNR v Gordon W Pannell, [1973] CTC 81; 73 DTC 5038, a decision of Mr Justice Gibson of the Federal Court—Trial Division. The case is similar to the present case inasmuch as the issue there revolved around a “consulting contract” and the respondent in that case was to be paid a stated sum per year. The learned Justice at pages 83 and 5039 stated:

It is also admitted in argument that the contracts which were entered into by the relevant parties hereinbefore referred to, were binding on all the parties at all material times and that at no time would any party thereto have been successful in setting aside or amending such contracts during their currency or now, if any action was taken in the ordinary courts for such purpose.

At pages 83 and 5040, Mr Justice Gibson concludes:

After a careful consideration of the whole of the evidence, and of the submissions of counsel, I am of the view that, notwithstanding the said charade in respect of certain of the letters of request and reply for consulting services, this is not a case where the evidence establishes that the Court should make any findings of fact for income tax purposes different or contrary to the expressed intention of the parties in the said contracts, and as carried out.

While in the instant appeal there was no admission that the contract of October 17,1975 was binding, there was no suggestion that it was a nullity. As a matter of fact, it was specifically referred to in the agreement of April 30, 1976, which resolved all issues between the parties. Consequently, in any event the amounts paid pursuant to the contract of October 17, 1975 until the end of April 1976 are income to the appellant.

It is alleged that the appellant was dismissed without notice and the amount of $8,000 was damages for wrongful dismissal, with the result that it is not income to the appellant. The question is, was the appellant dismissed without notice, or even, was the appellant dismissed? Exhibit A-1 contains the phrase .. and I have the very unpleasant task of asking you for your resignation effective on your return from your holidays ..

Nowhere in the documentary evidence passing between the appellant and the Society was there any reference to the appellant being fired. All use of that word was in oral testimony. It was, “resign or be fired”. The appellant was given an alternative to being fired—he was given the choice of resigning or being fired. What did he do? He resigned. Not only did he resign but, in effect, concurrent with his resignation he was engaged for one year as a consultant. As mentioned previously—Was the appellant dismissed, let alone dismissed without notice? The date stated to be the date of dismissal was September 9, 1975. If he were dismissed on that date, then why would he have resigned on October 16, 1975, effective November 1, 1975? In the result I cannot find that the appellant was dismissed by the Society and consequently I cannot hold that the $8,000 he received was damage for wrongful dismissal.

The Minister submitted that the $8,000 was not received as damages for wrongful dismissal, but was a payment within the ambit of subsection 6(3) of the Income Tax Act after tax reform and so income within section 5 of the said Act. The submission also contended that the payment was not within one of the exempting provisions in that section.

Subsection 6(3) reads as follows:

(3) 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 of 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 or employee is, or is not, to do before or after the termination of the employment.

Since I have held the payment of $8,000 was not for damages for wrongful dismissal, and since it was made by an employer to an employee during a period of employment, I hold it to be income within section 5 of the said Income Tax Act. I now must decide whether or not that payment “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 or employee is, or is not, to do before or after the termination of the employment.’’

It clearly was not a payment within the meaning of (c) above, as it was a payment made six months after he entered into the contract of employment. Likewise, it is not within (d) above, as it was not only not mentioned at the time the contract of employment was entered into, but it was not even contemplated. The payment, in so far, as (e) above is concerned, clearly had no reference as to what he was to do or not do before the termination of the employment, but did it have reference to what he was to do or not do after the employment was terminated. The payment was concurrent with Exhibit A-11, the agreement dated April 30, 1976. That agreement required the appellant to do nothing with respect to his former employer, the Society. In effect that agreement (Exhibit A-11), with the payment of $8,000, nullified the agreement of October 17, 1975, and released the parties from their obligation. Hence it required nothing of the appellant after the employment was terminated. As I view subsection 6(3), the sum of $8,000 received by the appellant cannot reasonably be regarded as having been received for any of the reasons in paragraphs (c), (d) or (e) of subsection 6(3) of the said Act and therefore the sum is not remuneration within section 5 of the said Act.

Consequently, judgment will go allowing the appeal and remitting the assessment to the respondent for variation to delete from the taxable income of the appellant the sum of $8,000.

Appeal allowed.