Serafini v. MNR, 89 DTC 653, [1989] 2 CTC 2437 (TCC)

Sarchuk, T.C.J.: —Mr. William Serafini appeals from reassessments of income tax made by the Minister of National Revenue for the 1985 and 1986 taxation years. In issue is the respondent's refusal to treat certain sums received by the appellant in those taxation years as retiring allowances as defined by subsection 248(1) of the Income Tax Act (the Act). The facts giving rise to the Minister's reassessments follow.

The appellant was employed by Rockwell International of Canada Ltd. (Rockwell), which employment commenced on February 22, 1954. His most recent position was as a quality assurance manager. By way of letter dated August 30, 1985 Rockwell advised certain of its employees, including the appellant, of a voluntary early retirement programme which essentially had the following components: it provided an unreduced pension, that is the normal actuarial reduction associated with early retirement would not be imposed; it provided a separation period for 12 months; it was available on a voluntary basis to salaried employees 55 years of age and older in 1985 who were eligible for an immediate pension under the Rockwell salaried employee retirement plan and it required the appellant and others to elect to accept the programme prior to September 30, 1985 if they wished to participate.

On September 27, 1985 the appellant accepted Rockwell's programme and signed an agreement to that effect (Exhibit A-2). The relevant portions of this agreement read:

Based on the Programme coming into effect October 1st, 1985, you will:

— Take your outstanding vacation through October 30, 1985, with any remaining vacation at that point paid in lieu of time off.

— Receive your current monthly salary, full benefit continuance and credited service through October 30, 1986.

— Commence your retirement on November 1, 1988, with approximately 32.16667 years of credited service and a final average earnings of $37,043.45 per year for an estimated monthly payment of. . . from retirement date to age 65—$1,599.22; after age 65—$1,933.45.

The appellant filed his returns of income for taxation years 1985 and 1986 on the basis that his retirement took effect on October 30, 1985 and that he was entitled, pursuant to the programme, to a retiring allowance of $38,620 which was equal to his most recent annual salary and payable in equal monthly amounts up to and including October 30, 1986 and to a continuation of certain health benefits. The payments so made amounted to $6,066 in taxation year 1985 and $32,554 in taxation year 1986. The appellant included these amounts as income in his returns pursuant to subparagraph 56(1)(a)(ii) of the Act. He also contributed the same sums to his registered retirement savings plan and deducted the amounts so contributed from his income pursuant to paragraph 60(j.1) of the Act.

The Minister, by way of his reassessments, characterized the payments as income from employment and denied the deductions claimed by the appellant. In so doing the respondent took the position that the appellant was an employee at Rockwell until October 30, 1986 and that his retirement did not commence until November 1, 1986. The remuneration received from October 30, 1985 to October 30, 1986 was not an amount received in respect of a retiring allowance during those taxation years. That being the case the respondent properly disallowed the deduction of the contributions and properly limited the deduction of contribution to the registered retirement savings plans pursuant to paragraph 60(j.1) and subsection 146(5) of the Act.

The sole issue to be determined is whether the amounts paid to the appellant by Rockwell during the period October 30, 1985 to October 30, 1986 constitute a "retirement allowance" within the meaning of paragraph 60(j.1) of the Act. A retiring allowance is defined in subsection 248(1) of the Act as follows:

“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

(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal

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

Counsel for the appellant supported his submission that the allowance paid to the appellant was a retirement allowance within the meaning of the Act by reference to several cases. John E. Doyle v. The Queen, [1983] C.T.C. 339; 83 D.T.C. 5383 was cited for the proposition that the minimum test of whether an amount is a retirement allowance is whether or not there is genuine retirement from office. In another decision, Charles A. Specht v. The Queen, [1975] C.T.C. 126; 75 D.T.C. 5069, the Federal Court of Canada, in determining whether a payment was made on retirement, held that the ordinary meaning of the words "retire" and "retirement" must be considered. The Court quoted in part from the Shorter Oxford English Dictionary which defines "retirement" as a “withdrawal from occupation or business activity”.

It was submitted that retirement implies a complete cessation of one's profession or business (per Grant, J. in Francis Lorenzen v. The Queen, [1981] C.T.C. 377; 81 D.T.C. 5251). Counsel for the appellant argued that two pieces of evidence establish that there had been a complete cessation of employment by the appellant. The first is a document captioned "Rockwell International Voluntary Early Retirement Programme, Terms and Conditions" (Exhibit A-3) which, according to counsel, formed part of the agreement executed by the parties (Exhibit A-2). Counsel argued that this document provided, among other things, that an employee electing to retire under the programme was required to:

(a) Leave work as of September 30, 1985, and

(b) Take any unused vacation, and

(c) Retire under the Rockwell Salaried Employee Retirement Plan on the last day of the month in which the employee completes any whole calendar months of unused vacation . . .

and that it effectively terminated an employee's occupational activity with Rockwell.

Secondly counsel referred to Mr. Serafini's testimony regarding the steps taken by Rockwell in or about August and September of 1985 in an effort to encourage those employees eligible to accept the programme. At least one meeting was held at which an independent financial consultant was available to explain income tax consequences and considerations as well as the merits of investing in deferred annuities and/or registered retirement savings plans. According to Mr. Serafini the consultant advised all of the candidates for early retirement on the various options open to them. Rockwell also made a human resources specialist available to give advice to any employee who was interested in seeking employment and to assist in the preparation of a resume. The appellant says he availed himself of that assistance, prepared a resumé, but then chose not to seek other employment, preferring to maintain his "retired status". It was Mr. Serafini's recollection that Rockwell not only would have permitted the “retiring employees" to take other employment but encouraged them to do so. His counsel argued that this was consistent with the appellant's position that there had been a complete cessation of employment with Rockwell.

It was contended that the continuation of benefits and the contributions made by the appellant to Rockwell's pension plan did not convert a retirement allowance into employment income. These payments did not alter the nature of the arrangement between the parties from one governing retirement to one governing employment. Counsel argued that benefits respecting health and pensions may coexist while the nature of the agreement essentially remains one respecting retirement.

Counsel's second submission was that during the period October 30, 1985 to October 30, 1986 the appellant was not bound by contracts of employment, oral or written, with Rockwell. The terms and conditions of the agreement signed by the parties did not constitute a contract of employment since the programme did not provide for the exchange of labour for salary or for the exchange of mutual obligations for future performance. Rather, the agreement executed by the parties required the appellant to leave work as of September 30, 1985. That being the case, it was readily apparent that the appellant retired completely from work in exchange for a retirement allowance and the continuation of certain benefits for a one-year period. On this basis counsel submitted that the moneys paid to the appellant were a retirement allowance within the meaning of the Act and his appeal should be allowed.

The respondent's position is that the early retirement programme accepted by the appellant is set out clearly and unambiguously in the agreement executed by the appellant which states quite precisely that the appellant was to commence his retirement on November 1, 1986. Counsel contended that the appellant does not deny that the terms set out in this agreement were operative for the full year prior to November 1, 1986 at which point of time he commenced to receive his pension payments.

I am satisfied that the respondent's position is correct. Subsection 248(1) of the Act defines "retiring allowance" as:

‘retiring allowance’ means an amount . . . received

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

by the taxpayer. _. .

Counsel for the respondent submitted that it is the agreement which must govern the situation. He referred the Court to Viau v. M.N.R., [1986] 1 C.T.C. 2570; 86 D.T.C. 1437 which he suggested, while not on all fours with the present appeal, provided some assistance in determining the issue herein. In Viau the taxpayer was dismissed from his employment and on November 11, 1981 he and his employer entered into an agreement which provided that his employment would terminate on January 4, 1982 and the employer would pay $60,000 to the taxpayer on that date in return for a full release of any claims. The taxpayer left for Florida on November 12, 1981 and returned on January 4, 1982. He was paid his regular salary up to January 4, 1982 on his return. Sometime thereafter the $60,000 was paid to him. He included one-half of that amount in his income as a "termination payment" on the basis that he was dismissed on November 11, 1981 prior to amendments which, effective November 13, 1981, made damages for loss of employment fully taxable as a "retiring allowance". The Minister assumed that the taxpayer's employment was terminated on January 4, 1982 and accordingly included the entire amount in the taxpayer's income. The Court found that the written agreement expressed the date of termination clearly and unambiguously and that fact was not altered by evidence that the taxpayer had left his employment on November 11,1981 and had returned only to pick up his cheques. That taxpayer's submissions that he did not occupy his position as of November 12, 1981 was disposed of by the Court in the following manner:

The Court is of the view that someone can “hold a position” within the meaning of the Income Tax Act without necessarily being physically present at his work for a certain period of time. This is especially true in the present case since even the appellant's employer did not wish to see him on the premises and preferred to know that he was far away during the period following November 11.

What is apparent from the agreement (Exhibit A-2) is that the appellant's employment relationship was not intended to terminate prior to October 31, 1986. In my view, it would be abusing the language of that agreement to find otherwise. Counsel for the appellant submitted that the terms and conditions set out in the agreement (and according to him the other documents) did not constitute a contract of employment. I do not agree. The agreement executed by the appellant is, in my view, an amendment to the employment contract by virtue of which the appellant agreed to change his date of mandatory retirement and which particularized the duration of his ongoing monthly salary, continuance of full benefits, continuation of credited service for pension calculation and specified that the commencement of his retirement would henceforth be November 1, 1986.

With respect to the document filed by the appellant captioned "Rockwell International Voluntary Early Retirement Programme" (Exhibit A-3), it is not disputed that it was circulated to all eligible employees to advise them in general manner of the corporation's proposed early retirement programme and conditions attached thereto. However, although certain essential elements found in that proposal were, in a form adapted to the appellant's particular circumstances, ultimately included in the agreement executed by him and Rockwell, the proposal itself did not form part of the agreement. It is the latter alone which must be looked at as establishing the rights of the parties.

As to the authorities cited by counsel for the appellant, I note that in Charles A. Specht, supra, the taxpayer did not retire in the ordinary sense of that word. What he did was, by agreement, resign. The payment he received was for relinquishing his future rights to a pension. The facts in the appeal before me do not support the same conclusion.

The present appeal is also distinguishable from John E. Doyle v. The Queen, supra, and Francis Lorenzen v. The Queen, supra. In each of those cases there was a corporate restructuring and a subsequent continuation of employment in the same or similar capacity with the newly formed corporation. In each case the role of the taxpayer remained essentially the same. In each the Court held that certain payments received by each of the taxpayers from the former employer were not a “retiring allowance". Counsel, however, submitted that two propositions of general application are found in these cases, first that retirement implies a complete cessation of one's profession or business, and second that in cases of this type the Court must concern itself with whether or not there was a genuine retirement from an office. These propositions are reasonable and acceptable. However, I hasten to add that in my view it is quite possible for a person to be an employee without actually working. The fact that Mr. Serafini was no longer required to report for work and was no longer required to perform any duties is not per se determinative of the issue. If his situation requires characterization it can be likened to a pre-retirement leave with full pay and benefits. An attempt by Rockwell to deprive him of any employee benefits during that period would have, in my view, entitled him to sue for breach of his employment contract. It is neither unusual nor infrequent that one can remain employed without actually working. Instances quickly come to mind such as sabbatical leave enjoyed by tenured university professors; leaves of absence, both with and without pay, for educational purposes; collective agreements permitting the utilization of excess sick leave as pre-retirement or vacation leave and so forth.

A number of facts lead to the conclusion that Mr. Serafini did not retire until November 1, 1986. The company continued to make contributions to the pension plan and Mr. Serafini benefited substantially from those continued contributions. Furthermore, the acceptance of retirement as of November 1, 1986 meant that his pension would be calculated on the basis of approximately 32 years of credited service. Had he retired on October 30, 1985 he would have had one year less credited service. Mr. Serafini himself made contributions to the company pension plan during that year, which contributions were also deducted by him pursuant to the provisions of paragraph 8(1)(m) of the Act. At all relevant times Rockwell treated those contributions as an employee deduction in filing T4 Forms with Revenue Canada. Furthermore, Mr. Serafini had the continued benefit of extended health care which amounts were also included as taxable employees benefits on T4A Forms prepared by Rockwell.

I am satisfied that the appellant did not retire until November 1, 1986 and that the payment he received were not amounts received in respect of a retiring allowance during the 1985 and 1986 taxation years. That being the case, the respondent's assessments are correct and the appeals are dismissed.

Appeals dismissed.