Blanchard v. The Queen, 92 DTC 6585, [1992] 2 CTC 403 (FCTD)

Jerome, A.C.J.:— This is an appeal by the plaintiff from a reassessment of the Minister of National Revenue in respect of the plaintiff's 1984 taxation year.

Facts

The parties have agreed upon the facts and the relevant documentation to be submitted to the Court as evidence. The agreed statement of facts relied upon by the parties, provides as follows:

1. Syncrude Canada Ltd. ("Syncrude") is the agent of Canadian Occidental Petroleum Ltd., Gulf Canada Resources Ltd., Esso Resources Canada Ltd., Her Majesty the Queen in Right of the Province of Alberta, Alberta Energy Company Ltd., PanCanadian Petroleums Ltd., HBOG—Oil Sands Ltd. Partnership, and PetroCanada Inc. (hereinafter referred to collectively as the "Owner") or their predecessors in interest with respect to the planning, construction and operation of a plant with related facilities for the extracting and processing of synthetic crude oil from bituminous sands located at Mildred Lake, Alberta. 2. Northland Developments Ltd. ("Northward") was and is the nominee of Syncrude for the purposes of administering Syncrude's housing policy, the original of which is reflected in Agreed Documents #1 and #2. This program, instituted by Syncrude and implemented through Northward, was designed to ensure that adequate accommodation was available in Fort McMurray, at an affordable cost, to attract and retain staff.

3. The plaintiff was at all times material to this action and continues to be an employee of Syncrude. He was employed by that company to work at its site near Fort McMurray, Alberta. Agreed Document #19 represents the plaintiff's contract of employment with Syncrude. The plaintiff moved to Fort McMurray to accept the employment, at which time, Fort McMurray was a remote and isolated mining town, in which the plaintiff could not acquire housing equivalent to that which he owned in his previous location at an equivalent cost.

4. On November, 1, 1978 the plaintiff and his wife, Martha Agnes Blanchard ("Mrs. Blanchard"), entered into two agreements (Agreed Documents #1 and #2) with Northward and Syncrude, respectively, with respect to lands and premises located in the Province of Alberta, legally described as follows:

PLAN 5034 N.Y.

BLOCK SEVEN (7)

LOT FORTY NINE (49)

(FORT MCMURRAY—R.L.S. 16-17-18-19

FORT MCMURRAY SETT

EXCEPTING THEREOUT ALL MINES AND MINERALS

and municipally described as:

13 MAY CRESCENT, FORT MCMURRAY

(“the lands”)

5. Located on the lands is a housing unit ordinarily inhabited by the plaintiff and Mrs. Blanchard which was and is their principal residence as defined in Paragraph 54(g) of the Income Tax Act. This housing was not an improvement over the housing which the plaintiff occupied previously.

6. The plaintiff and Mrs. Blanchard could not have acquired the lands from Northward in 1978 without entering into the agreements evidenced In Agreed Documents #1 and #2. The terms of the plaintiff's employment were not affected by his entering into the housing arrangement. The offering of the program was an important factor in the plaintiff's decision to accept the employment. He would not have accepted the employment in the absence of the program or some equivalent. Not all employees, however, entered into the program.

7. In 1984, a further housing program referred to as the "ETAP" Program (as reflected in Agreed Documents #7 and #8) was developed to assist Northward to withdraw from the housing business. This ETAP Program had not been contemplated when the original housing policy reflected in Agreed Documents #1 and #2 was developed.

8. On October 30, 1984, the plaintiff and Mrs. Blanchard entered into the two agreements (Agreed Documents #7 & #8) pursuant to this ETAP Program with Northward and Syncrude. Pursuant to these agreements, the plaintiff and Mrs. Blanchard were paid $7,240. At the same time, by a Transfer of Land dated October 12, 1984 and registered on October 29, 1984 at the Northern Alberta Land Registration District, the legal title to the lands and premises was transferred from Northward to the plaintiff and Mrs. Blanchard. As well, Northward and Syncrude were released from any liability to “ buy-back” the property from the plaintiff.

9. The payment of $7,240 made to the plaintiff and Mrs. Blanchard under the ETAP Program was calculated on the basis of 7% of the first $100,000 and 3% of the balance of the appraised value of the home at the time the plaintiff and Mrs. Blanchard entered into the ETAP Program, to represent the equivalent of any real estate commission which the plaintiff and Mrs. Blanchard might now have to pay on any sale of the property which would not have been payable if the "buy-back" by Northward was available. The percentages used were the prevailing Multiple Listing real estate commission, and the formula was chosen for that reason. The appraised value of the lands at the time of calculation was $108,000.

10. It was the option of the plaintiff and Mrs. Blanchard as to what they did with the $7,240.

11. The plaintiff's decision to enter into the ETAP Program was also at his option, and did not affect his employment with Syncrude. Not all persons who were otherwise entitled to enter into the ETAP Program did so. The payment of the $7,240 did not affect the plaintiff's regular remuneration for services rendered.

12. By Notice of Reassessment dated March 14, 1986 (the Reassessment") the Minister of National Revenue, Taxation (the"Minister") reassessed the plaintiff in respect of his 1984 taxation year and alleged that the $7,240 should be included in the plaintiff's taxable income.

13. The plaintiff appealed the Reassessment directly to the Federal Court of Canada, waiving any reconsideration on objection to the Reassessment.

Essentially then, in 1977 Mr. Blanchard entered into a contract of employment with Syncrude. In 1978, the plaintiff and his wife purchased their home through the original housing program offered by Mr. Blanchard's employer. They did not acquire legal title to the home, but rather entered into a longterm agreement for sale with Northward, in whose name the title would remain registered until the entire purchase price had been paid. The agreement required the Blanchards to make monthly payments to Northward and contemplated the purchase price for the lands to be paid over a period of 25 years, after which legal title would be transferred to the plaintiff and his wife.

In 1984, when Syncrude and Northward no longer wished to maintain any involvement in housing, the Blanchards were given the opportunity to enter into another program, called the early termination of agreement program or "ETAP". The program was implemented to enable Northward to withdraw from the housing market by eliminating its contingent obligation to buy back the Blanchard's home. As a result of their participation in the program, the plaintiff and his wife were paid by an agent of the employer, the sum of $7,240 in the 1984 taxation year, as part and parcel of the package agreement whereby they obtained title to their home. The sum was calculated with reference to existing MLS listing rates for the area and was intended to compensate for the commission fees which would not have been payable under the 1978 agreement.

Legislative provisions

The issue in this case is whether the amount of $7,240 should be included in the plaintiff's income for the 1984 taxation year. The Minister's reassessment is based on sections 5 and 6 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), the relevant provisions of which provide as follows:

5(1) Income from office or employment. — 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(1) Amounts to be included as income from office or employment. — There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) value of benefits. — the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment

(b) personal or living expenses.—all amounts received by him in the year as an allowance for personal or living expenses or an allowance for any other purpose

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

The Minister’s reassessment

The Minister's reassessment in this case is based on three grounds. First, it is contended the ETAP payment was properly included in the plaintiff's income in accordance with paragraph 6(1)(a) of the Income Tax Act, in that the amount constitutes a benefit received by Mr. Blanchard in the year either, in respect of, in the course of, or by virtue of his employment. The application of paragraph 6(1)(a), it is submitted, is dependent upon two essential findings of fact: first, was there a benefit conferred upon the taxpayer and second, was the benefit received by virtue of or in respect of employment. In the present case, the defendant maintains the payment in issue conferred a clear economic benefit on the plaintiff and was inextricably linked to his employment so as to bring the moneys within the parameters of paragraph 6(1) (a).

The defendant further argues the amount received by Mr. Blanchard is an allowance in respect of a personal expense pursuant to paragraph 6(1)(b) of the Act. The test of whether an amount paid to an employee represents an allowance for taxation purposes is whether it is paid without a requirement to account, and is arbitrarily set in that no actual expense need be shown. It is the Minister's position the $7,240 paid to the plaintiff satisfies this test because, while the amount is calculated in reference to an assumed real estate commission fee, such commission has not been incurred, nor may never be incurred. Indeed, according to the defendant, the expense will only be assumed in the unlikely event a sale of the plaintiff's house occurs in future, based upon both an identical price and an identical real estate commission fee.

Finally, the defendant submits the payment is also deemed to be remuneration from employment as a consequence of subsection 6(3) of the Income Tax Act. Since the amount was received by Mr. Blanchard during his period of employment, it satisfies the requirement of paragraph 6(3)(a). Such a payment can escape tax liability if it cannot reasonably be regarded as having been received for one of the three purposes set out in paragraphs 6(3)(c) to (e). The payment in issue, it is argued, falls within the stipulations contained in paragraphs 6(3)(c) and (d). Based on the facts, the defendant contends the inference is inescapable that one term of the plaintiff's contract of employment was that he become and remain a resident of the Fort McMurray district and the Housing Policy was offered by the employer as partial consideration for Mr. Blanchard agreeing to work in Fort McMurray. The documentary evidence in this case, according to the defendant, demonstrates the Housing Policy was an important consideration in employees agreeing to work in Fort McMurray, and in the case of the plaintiff, was a necessary precondition to his accepting employment.

Plaintiff's position

The plaintiff submits the payment is not taxable as income in that it does not constitute a benefit to Mr. and Mrs. Blanchard but rather, has compensated or reimbursed them for the loss of the buy-back right, which they enjoyed pursuant to the 1978 agreements. Furthermore, it is not a payment made “in respect of, in the course of or by virtue of . . .employment". The services rendered by the plaintiff to his employer, it is argued, were not the effective cause of the payment and it did not therefore, arise pursuant to his contract of employment. Instead, the effective cause of the payment was the series of housing agreements entered into by the Blanchards. The payment did not form a part of Mr. Blanchard’s normal remuneration but was intended to defray the additional costs of a real estate commission which the plaintiff and his wife would have to incur as a result of relinquishing certain rights under the employee agreement. For these reasons, there is no nexus between the payment and services rendered by Mr. Blanchard to his employer.

The plaintiff maintains the payment does not constitute a benefit as submitted by the defendant, because rather than enriching the Blanchards, the payment has merely compensated them, leaving them in the same position they would have been in before entering the early termination of agreement program. Nor does the payment constitute an allowance within the meaning of paragraph 6(1)(b) of the Income Tax Act since it was paid pursuant to a contractual obligation and therefore falls outside the scope of that legislative provision.

Finally, the plaintiff asserts the payment cannot be regarded as consideration for entering into the contract of employment or as remuneration under the contract of employment pursuant to paragraphs 6(3)(c) and (d) of the Act because the contract of employment is separate from the chain of agreements giving rise to the payment. Indeed, the ETAP program from which the payment arose had not even been contemplated at the time Mr. Blanchard entered into his contract of employment. The payment in question, therefore, was not derived from the plaintiff's employment but as a result of two other collateral and optional contractual arrangements in which the Blanchards were able to participate because of the plaintiff's employment with Syncrude. Neither the original housing agreements of 1978 nor the ETAP program of 1984 in any way affected Mr. Blanchard's remuneration or employment opportunities. The payment was made, not as remuneration for services rendered under the contract of employment, but instead as consideration for Mr. and Mrs. Blanchard surrendering certain contractual rights which they acquired in 1978 in relation to their home.

Analysis

Paragraph 6(1) (a)

After accepting employment with Syncrude, the plaintiff, along with his wife, entered into two agreements (the 1978 agreements) by which their home was acquired: an agreement for sale and an employee agreement. By the agreement for sale, the Blanchards acquired their interest in the home. The employee agreement, despite its title, did not deal with the plaintiff's employment, but imposed restrictions on both parties with respect to the home. These included an obligation on Northward to repurchase the home, the Blanchards, right to sell the home back to Northward without requiring them to pay real estate agent commission fees, calculation of the price they would receive in the event of a buy-back, or any increase in market value if they did not sell.

In any event, the payment in question was not made pursuant to the 1978 agreements, but only upon execution of the two 1984 agreements. The transfer and loan agreement amended the 1978 agreement for sale to make the moneys owing under the agreement for sale due and payable on November 1, 1984, and provided for transfer of title to the Blanchards upon payment of the moneys. The master agreement effected a termination of the so-called employee agreement of 1978. It recites Syncrude's desire to terminate the employee agreement and to end the obligation on Syncrude to cause Northward to buy back the lands from participants in the housing program. As with the original 1978 housing program, entry into the ETAP program was optional to all employees who had participated in the earlier housing program, and not all employees who were eligible to participate chose to do so.

The purpose behind paragraph 6(1)(a) of the Act was considered by this Court in McNeil] v. The Queen, [1986] 2 C.T.C. 352, 86 D.T.C. 6477, wherein Rouleau, J. stated at page 363 (D.T.C. 6485):

I think it is clear that the purpose of paragraph 6(1)(a) is to include in the taxable income of a taxpayer those economic benefits arising from his employment which render the taxpayer's salary of greater value to him

I am of the view that paragraph 6(1)(a) is in the Act to provide a method to tax all those individuals who receive perks in addition to their salaries. Employers may offer a wide variety of inducements ranging from pensions and death benefits to liberal expense accounts and allowances, to more immediate advantages, such as country club facilities and the use of company cars, boats and other property. It is only fair that these items be added to income and taxed.

In The Queen v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409, the taxpayer, a research assistant for a life insurance company, received the sum of $300 from her employer as an award for passing three life insurance courses which she had taken voluntarily. The Minister included this amount in the taxpayer's income as a benefit in respect of employment. The Supreme Court of Canada in examining the meaning of the words “benefit” and "in respect of", came to the following conclusion at page 440 (C.T.C. 399, D.T.C. 5414):

I do not agree with. . .the statement that, to be received in the capacity of employee, the payment must partake of the character of remuneration for services. Such was the conclusion in the English cases but based on much more narrower language. Our Act contains the stipulation, not found in the English statutes referred to,” benefits of any kind whatever. . .in respect of, in the course of, or by virtue of employment". The meaning of "benefit of whatever kind" is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of "benefit". Further, our Act speaks of a benefit "in respect of" an office or employment. In Nowegijick v. The Queen, [1983] C.T.C. 20, 83 D.T.C. 5041 this Court said, at page 25 (D.T.C. 5045), that:

The words “in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to”, or “in connection with”. The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.

However, where a payment, such as the one in issue in this appeal, is made by virtue of an agreement separate and apart from the contract of employment and is motivated by considerations extraneous to employment, it does not fall within the parameters of paragraph 6(1)(a). This principle was elaborated in McNeil], supra, at page 362 (D.T.C. 6484):

. . though some relation between the payment and employment are inevitable, the primary purpose of the allowance, in order to qualify as exempt, must be completely extraneous to the employment and the amount should not constitute a benefit either to the employer or to the employee in relation to the employment. In the case before me, the payment was to the taxpayer in his capacity as a person The payment of this sum cannot be related to company policy, to providing greater understanding of air traffic control or better understanding of company operations, to upgrading the staff member, to making the taxpayer a more valuable employee nor did it create an opportunity for promotion.

Here, the ETAP payment like the one in McNeil], was made as a result of contracts extraneous to the plaintiff's employment; contracts relating to the ownership of land which were not prerequisites of the plaintiff's employment and did not affect or change his employment. The purpose of the ETAP program was to facilitate Northward's withdrawal from the housing market in Fort McMurray. The effect of the master agreement was to release Northward from its contingent liability to repurchase the Blanchard's house which resulted in the plaintiff and his wife losing certain rights which they otherwise enjoyed pursuant to the 1978 agreements. The ETAP program and the payment did not have any connection with the plaintiff's employment other than that it was paid by an agent of the employer; it did not upgrade him or make him a more valuable employee, nor did it create an opportunity for promotion.

I therefore conclude the payment of $7,240 to the plaintiff, is not taxable pursuant to paragraph 6(1)(a) of the Income Tax Act because the moneys were not received by Mr. Blanchard in respect of, in the course of, or by virtue of an office or employment".

Paragraph 6(1)(b)

The Act also includes in the definition of income from office or employment "amounts received by [the taxpayer] in the year as an allowance for personal or living expenses or as an allowance for any other purpose

The defendant relies on the definition of the word "allowance" in Ransom v. M.N.R., [1967] C.T.C. 346, 67 D.T.C. 5235, wherein the Court stated at page 361 (D.T.C. 5244):

An allowance is quite a different thing from reimbursement. It is, as already mentioned, an arbitrary amount usually paid in lieu of reimbursement. It is paid to the employee to use as he wishes without being required to account for its expenditure. For that reason it is possible to use it as a concealed increase in remuneration and that is why, I assume, "allowances" are taxed as though they were remuneration.

In The Queen v. Pascoe, [1975] C.T.C. 656,75 D.T.C. 5427, the Federal Court of Appeal provided further clarification of the meaning of the word "allowance" in the Income Tax Act, stating at page 658 (D.T.C. 5428):

An allowance is, in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense; its amount is determined in advance and, once paid, it is at the complete disposition of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expense.

[Emphasis added.]

The concept of an allowance, as defined above, is simply not applicable to the ETAP payment in the present case. The moneys were paid in satisfaction of a contractual obligation on Syncrude arising from the 1978 master agreement and was not intended for the employee's personal gain or to underwrite personal extravagances. It represents the consummation of a business arrangement reflected in the 1984 agreements. Under the master agreement, the plaintiff and his wife enjoyed certain rights which they then gave up upon entering the ETAP program. The ETAP payment was designed to reimburse them for the loss of those rights and as such does not constitute an allowance for the purpose of paragraph 6(1)(b).

Subsection 6(3)

The defendant contends that payment was made as consideration for entering into the contract of employment or as partial remuneration for services rendered under the contract of employment since one of the terms of the contract was that the plaintiff be a resident of Fort McMurray so the housing policy was partial consideration for agreeing to move there.

I reject the argument for three reasons. First, there is nothing in the evidence to suggest that the payment was made as remuneration for services under the contract of employment pursuant to paragraph 6(3)(d). Mr. Blanchard's contract of employment was separate entirely from the housing transaction and he was separately and fully remunerated for his services. The ETAP payment had no effect on his remuneration. Second, the 1978 agreement and the contract of employment are two entirely separate and unrelated documents. Third, even if I were in doubt on the first two issues, and I am not, the defendant fails in this submission for another reason. The payment was not made pursuant to the employee agreement which the plaintiff entered into in 1978. Rather, it was made pursuant to the 1984 agreement which was executed for the purpose of releasing the employer from the original housing agreement.

The evidence does not suggest that the payment was made as remuneration for services rendered under the contract of employment pursuant to paragraph 6(3)(d) of the Income Tax Act. The rendering of services by the plaintiff in accordance with the terms of his contract of employment was not a part of the business transaction which resulted in the ETAP payment. Mr. Blanchard was separately and fully remunerated for his services and the ETAP payment did not affect his regular remuneration.

I do not consider it necessary to deal with the alternative argument made by the plaintiff that if the ETAP payment is taxable, it should be characterized as a disposition of capital property for income tax purposes. This assumption did not form part of the Minister’s reassessment now under appeal, nor did the defendant vigorously pursue this argument in its submissions. Under the circumstances, it would be inappropriate to make any ruling on that question.

Conclusion

For these reasons, the plaintiff's appeal from the Minister's reassessment of March 14, 1986 is allowed with costs.

Appeal allowed.