The Queen v. Albino, 94 DTC 6071, [1994] 1 CTC 205 (FCTD)

Rothstein, J.:— The issue in this case is whether the amount of $603,753.90 received by the defendant from his former employer Rio Algom Ltd. (formerly Rio Algom Mines Ltd.) on or about June 30, 1988, was a "retiring allowance” as that term is defined in subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, or whether it was "remuneration" under paragraph 6(3)(b) of the Income Tax Act. If it was a “retiring allowance”, because the defendant was a non-resident, the amount received would be subject to a 25 per cent withholding tax pursuant to paragraph 212(1 )(i.1 ) of the Income Tax Act. If it was "remuneration", the amount received would be subject to the marginal rate of tax applicable to the defendant.

Relevant statutory provisions

Subsection 5(1) of the Income Tax Act states:

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.

Subsection 6(3) states in part:

6(3) An amount received by one person from another

(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. . . .

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

Subparagraph 56(1 )(a)(ii) states:

56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,

(ii) a retiring allowance, other than an amount received out of or under an employee benefit plan, a retirement compensation arrangement or a salary deferral arrangement,

Paragraph 212(1)(j.1) states:

212(1) Every non-resident person shall pay an income tax of 25 per cent on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,

(j.1) a payment of any allowance described in subparagraph 56(1)(a)(ii), except

Subsection 248(1) contains the definition of “retiring allowance”:

248(1) In this Act

"retiring allowance” means an amount (other than a superannuation or pension benefit or an amount received as a consequence of the death of an employee) received

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his long service, or,

by the taxpayer or, after his death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer;

The facts

The defendant commenced employment with Rio Algom Mines Ltd. in November 1964. He rose through the ranks of the company becoming Executive Vice-President and Chief Operating Officer, President and Chief Operating Officer and finally, in 1981, President and Chief Executive Officer.

The defendant's employment with Rio Algom Mines Ltd. was terminated by the company on October 30, 1987. On or about June 30, 1988, he received the sum of $603,753.90 pursuant to an incentive performance plan in which he participated. In his income tax return for the calendar year 1988, the defendant, who ad, in 1988, become a non-resident of Canada, treated the sum of $603,753.90 as a “retiring allowance” subject to a 25 per cent withholding tax under paragraph 212(1 )(j.1 ) of the Income Tax Act. The plaintiff, Her Majesty the Queen (the Minister of National Revenue), reassessed the defendant treating the sum of $603,753.90 as "remuneration" under paragraph 6(3)(b) of the Income Tax Act subjecting it to the full marginal rate of tax applicable to the defendant.

The defendant appealed to the Tax Court of Canada. By decision dated August 16, 1991 (unreported), Brulé, J.T.C.C. found in favour of the defendant, determining that the sum was a "retiring allowance”. The Minister now appeals that decision to this Court by way of appeal de novo.

The incentive performance plan which gave rise to the payment to the defendant, was adopted by the Board of Directors of Rio Algom on February 23, 1973, and was approved by the shareholders of the company on April 13, 1973. The defendant was invited to participate in the plan on June 11, 1973, and agreed to participate on June 14, 1973. He continued to participate until his termination on October 30, 1987.

Analysis

Section 1 of the plan set forth its purpose:

1. Purpose

The purpose of this Plan is to provide an incentive, apart from salary, to those employees of Rio Algom Mines Limited and its subsidiaries who make major contributions to the success of the company, to remain with the company and to devote their energies to achieving its continued growth. To accomplish this, the plan provides for the issue to them of share equivalent units upon and subject to the terms and conditions set forth in the plan.

It appears from section 1 that the plan had two complementary objectives. One was to provide an incentive for employees who made major contributions to the success of Rio Algom to remain with the company. The other was to provide an incentive for such employees to continue to devote their energies towards the continued growth of the company.

Section 6 of the plan dealt with vesting. Subsection 6.01 dealt with unusual circumstances such as death, disability, retirement prior to the normal retirement date with the consent of the company and normal retirement being reached prior to the ninth anniversary of the making of an award to an employee. The general vesting provision, subsection 6.02, provided that no amount under the plan vested prior to the fifth anniversary date of the making of an award under the plan to the employee. Thereafter, there was a vesting of 20 per cent of total credits to an employee after the fifth anniversary date, 40 per cent after the sixth anniversary date, 60 per cent after the seventh anniversary date, 80 per cent after the eighth anniversary date and 100 per cent after the ninth anniversary date. Subsection 6.02 of the plan encouraged participating employees to remain with the company by deferring vesting of 100 per cent of benefits under the plan until after the ninth anniversary of the making of awards under the plan in respect of that employee.

Section 7 of the plan dealt with payments. Payment under the plan would only take place upon a participant ceasing to be an employee of the company. Thus, in the ordinary course of events, an employee would not be entitled to 100 per cent of benefits under the plan until he had been with the company for nine years and would not receive any payment out of the plan until he ceased to be an employee of the company. Indeed, the only two participants in this plan, the defendant and his immediate predecessor, Robert Armstrong, had been with the company, in the case of the defendant since 1964, and in the case of Mr. Armstrong, since 1965. Mr. Armstrong received payments under the plan when he retired in 1981 after being with the company for 16 years. The defendant received his payment upon leaving the company after 23 years of service. I am satisfied that the scheme of the plan was to encourage employees to remain with the company and that the amount to be paid to employees would be reflective of their long service with the company. In this respect, I distinguish Choquette v. The Queen, [1974] C.T.C. 742, 74 D.T.C. 6563 (F.C.T.D.), in which Décary, J. found that 29 months did not constitute long service.

Mr. Armstrong, a witness for the plaintiff, testified that the plan was intended to create an incentive for senior employees to identify with shareholders of the company so as to encourage senior employees to have regard for the continued success of the company and the interest of the shareholders. Awards under the plan were based on dividends issued by the comp-any and the market price of the company stock. Plaintiff's counsel argued that a payment under a plan which provided an incentive for an employee to contribute to the success of the com- pany was ''remuneration" under paragraph 6(3)(b) of the Income Tax Act and not in respect of long service within the definition of “retiring allowance” in subsection 248(1) of the Act.

I have said that, in my view, the purpose of the plan was twofold: to provide an employee with a payment for long service and for contributing to the success of the company. Does the fact that the plan had two objectives, only one of which was to encourage long service, render a payment under the plan "remuneration" under paragraph 6(3)(b) and not a “retiring allowance" as defined in subsection 248(1)?

In the submission of counsel for the plaintiff, the amount received by the employee must be solely in respect of long service and nothing else. I agree with her to the extent that if long service was only incidental and that an entirely different purpose was the principal reason for a payment under an agreement with an employee, the payment might not be considered a "retiring allowance”. But that is not the case here. Here, the purpose of the plan was to encourage senior employees to contribute to the growth of the company and to remain with the company. The two objectives were complementary. The encouragement of long service with the company could not be said to be only incidental.

From the employee's point of view, the longer he stayed with the company and the more successful it was, the higher would be his payment under the plan. It is true that his payment would be influenced by factors that, to some extent, were beyond the control of the employee, e.g., economic factors that affected the market price of the company’s stock or the dividends the company issued, but all other things being equal, the employee's payment would increase the longer he stayed with the company and the more his efforts contributed to the success of the company. It is clear that the plan gave the employee an incentive to stay with the company, especially having regard to its vesting provisions.

Plaintiff's counsel argued that for a payment to qualify as a "retiring allowance", it could not reflect contributions by an employee to the employer's business success. This argument, however, puts a very narrow interpretation on the words ”. . .. amount. . . received ... in recognition of his long service" in the definition of "retiring allowance” in subsection 248(1) of the Income Tax Act. In my view, it is implicit in an employee remaining with an employer for a period long enough to be recognized for his or her long service that his or her efforts for the employer must have been at least satisfactory if not better. It would be unrealistic to assume that an amount paid in respect of long service could never also be intended to recognize the contribution of the employee to the employer's business success. In my view, the fact that a plan expressly encourages long service and also expressly encourages an employee to make contributions to the success of the employer’s business, does not prevent the amount paid under the plan after retirement from being a “retiring allowance".

An amount does not have to be gratuitously paid to qualify as a “retiring allowance". Nothing precludes a "retiring allowance" from being provided for in an agreement for consideration and indeed, plaintiff's counsel did not advance such an argument. Section 7 of IT-337R2 states in part:

Payment of an amount pursuant to a contractual obligation is not disqualified for treatment as a retiring allowance.

The payment in this case is not disqualified from being a "retiring allowance” simply because it was provided for in an agreement for consideration.

Mr. Robert Armstrong testified, amongst others things, that:

(a) when the plan was instituted in 1973, the employment market was strong. I infer from this statement that the intention of the company was to use the plan for the purpose stated in section 1, as a means of encouraging long service by the employees who were allowed to participate in it.

(b) the plan was not a scheme to defer income tax.

(c) there was no option available to employees to receive amounts before retirement under the plan or in lieu of it.

This evidence lends support to the view that the amount received under the plan by the defendant was in respect of long service and that it may reasonably be considered to be a "retiring allowance”.

During the course of argument, I requested assistance from plaintiff's counsel in reconciling whether an amount received is "remuneration" under paragraph 6(3)(b) or a “retiring allowance” under subparagraph 56(1 )(a)(ii) and as defined in subsection 248(1). It appeared to me that the term "remuneration" was wide enough to include a "retiring allowance” and that there was an overlapping between paragraph 6(3)(b) on the one hand and subparagraph 56(1)(a)(ii) and subsection 248(1) on the other. I appreciated the candour of plaintiff’s counsel on this issue in view of her position in this case. She submitted that the rule of interpretation generalia specialibus non derogant should guide the Court. Where statutory provisions overlap, the specific overrides the general: see E. A. Driedger, Construction of Statutes, (2d. ed. 1983), at page 235. A “retiring allowance” is specifically defined in subsection 248(1) and applied in subparagraph 56(1 )(a)(ii). However, a "retiring allowance” might also be considered to be within the more general term "remuneration" in paragraph 6(3)(b). Applying the rule generalia specialibus non derogant, a "retiring allowance” would not be included in "remuneration" in paragraph 6(3)(b). This approach is consistent with section 7 of IT-337R2 which states in part:

7. . . . A payment received upon or after retirement or loss of employment by reason of a contractual arrangement with a former employer is generally viewed as remuneration from the former office or employment, either in the normal sense or by virtue of the extended meaning given under paragraph 6(3)(b). However, when the circumstances are such that the receipt can also reasonably be regarded as being in recognition of lon service or as compensation for loss of office (see 5 and 6 above), the provisions of subparagraph 56(1)(a)(ii) may be considered to take precedence over the terminology found in subsections 5(1) and 6(3).

The appeal is dismissed.

Appeal dismissed.