Date: 20020326
Docket: 1999-4707-IT-G
BETWEEN:
THE ESTATE OF MARILYN JOHNSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Rip, J.
[1]
The trustee of the Estate of Marilyn Johnson, deceased, appeals
from reassessment of tax levied against the late Marilyn Johnson
for 1995. The appellant claims that no amount received by Mrs.
Johnson in 1995 from The Mutual Life Assurance Company of Canada
("Mutual Life") ought to be included in her income for
the year as a disability benefit within the meaning of
paragraph 6(1)(f) of the Income Tax Act
("Act").[1]
[2]
Mrs. Johnson died on June 5, 1998.
[3]
Mrs. Johnson was a special education teacher since 1963. In 1993,
Mrs. Johnson was employed as a teacher by the East Parry
Sound Board of Education ("School Board"). During 1993
the School Board maintained a group policy of disability
insurance with Mutual Life to which the School Board made
contributions ("Policy"). Mutual Life contracted to
provide wage replacement benefits for employees of the School
Board; in the event of the total disability of an employee,
Mutual Life would pay benefits to the employee on a periodic
basis.
[4]
Since 1967 Mrs. Johnson had been suffering from degenerative disk
disease and experienced intermittent pain, according to her
husband, Mr. Fred Johnson. She had been "on and
off" medication for several years and had been examined by
numerous medical specialists. However, in January 1993 she
sustained a compression fracture to one of her mid-thoracic
vertebrae and her prior symptoms worsened substantially.
Mr. Fred Johnson described the resulting pain as
"terrible". By November 1993, Mrs. Johnson was unable
to continue working as a teacher and applied for wage replacement
benefits under the Policy. The School Board stopped paying her
salary once her accumulated sick days expired in January 1994.
The Policy required a 70 day waiting period before benefits were
to start.
[5]
Mutual Life denied Mrs. Johnson's claim in March 1994.
[6]
Notwithstanding her disability, due to economic needs of her
family and contrary to the advice of her physician, Mrs. Johnson,
according to her husband, was compelled to resume teaching in May
1994.
[7]
On November 22, 1994, Mrs. Johnson commenced legal action in
the Ontario Court of Justice (General Division), (as it was then
known), claiming, among other things, $500,000 in damages for
breach of contract; $100,000 in aggravated, punitive and
exemplary damages and a declaration that she was entitled to
disability benefits for loss of income from employment pursuant
to the Mutual Life Policy. In her Statement of Claim, Mrs.
Johnson disclosed that in May 1994 she continued her employment
with the School Board. In fact, she continued to work for the
School Board until the end of the 1995 school year, that is,
June 30th. Mr. Fred Johnson testified that his
wife may have been paid by the School Board until August 1995,
just before the next school term was to start. The Statement of
Claim was filed by the law firm of Loopstra, Nixon &
McLeish.[2] Mrs.
Johnson's lawyers were of the view that on the basis of
Adams v. Confederation Life Insurance Co.,[3] Mrs. Johnson's case
"was a bad faith case" and that the conduct of Mutual
Life was "outrageous". Therefore there were grounds to
sue for aggravated, punitive and exemplary damages.
[8]
In February 1995, Mutual Life served its Statement of Defense to
Mrs. Johnson's claim, denying she was totally disabled
within the meaning of the Policy. Mutual Life denied knowledge of
Mrs. Johnson's employment with the School Board in May
1994.
[9]
Thereafter, Ms. Catherine Motz, in-house counsel for
Mutual Life at the time, and Mrs. Marilyn Johnson's
solicitors exchanged correspondence. In a letter dated March 22,
1995, Mrs. Johnson's solicitor, Mr. John A. McLeish,
sent results of the magnetic resonance imaging ("MRI")
to Ms. Motz and advised that he was prepared to recommend
settlement of the action on the basis that his client be paid
arrears of long-term disability benefits to date plus interest,
Mrs. Johnson's long-term disability benefit be
reinstated immediately and that she receive agreed costs and
disbursements. On April 17, Mr. McLeish withdrew his offer
of settlement. Then, on April 12, 1995, Ms. Motz sent an
offer of settlement to Mr. McLeish. The offer set out the
amount of payment, that the amount was calculated to include
retrospective benefits from March 22, 1995, with interest therein
in one amount ("lump sum") and future benefits by
monthly cheques thereafter. Ms. Motz testified Mutual Life
changed its position only when it received the MRI.
[10] In the
letter of April 12, Ms. Motz asked Mr. McLeish to
confirm whether or not Mrs. Johnson "is entitled to,
has applied for or is in receipt of any categories of
monies" that would reduce the Policy's benefits.
Excerpts of the Policy under the heading "Amount of Monthly
Disability Benefit" were enclosed with the latter.
Mr. McLeish did not reply to this question and Ms. Motz
did not pursue the matter at the time.
[11]
Mr. McLeish and Ms. Motz exchanged further
correspondence during April and May 1995 in which the
calculations of the settlement amount were reviewed. The amount
of the "lump sum" was $52,846.66. Mr. McLeish, in a
letter dated May 11, 1995, acknowledged that the cheque of
$52,846.66 represented arrears of benefits, interest and costs.
The full and final release also describes how the settlement
amount was determined ("May Settlement").
[12] Mutual
Life calculated the $52,846.66 amount payable to
Mrs. Johnson as follows:[4]
disability benefits from March 28, 1994 to April 28, 1995
($4,186 per month x 13
months)
$54,418.00
+ interest at 2.8% per
annum
1,512.72
- pension contribution (paid directly to pension
plan)
-4,584.06
+ legal
fees
1,500.00
$52,846.66
[13]
Ms. Motz insisted that Mutual Life made no payment for
punitive damages or for breach of contract.
Mr. John Johnson acknowledged that in its
correspondence to his firm, Mutual Life referred only to
disability payments to his mother.
[14] Mr.
Fred Johnson testified that he and his wife were not much
interested as to how the settlement amount was calculated by
Mutual Life; they were interested in the lump sum amount she was
to receive, that is, the $52,846.66. Their son confirmed that how
Mutual Life characterized the payment was not important; his
mother wanted the money.
[15]
Subsequent to the May Settlement, Mutual Life discovered
Mrs. Johnson had been working and refused to pay any further
disability benefits. Mutual Life's position was that
according to the Policy it could terminate Mrs. Johnson's
claim for disability insurance and seek full reimbursement of all
monies paid in respect of the claim. Mutual Life ceased paying
monthly benefits to Mrs. Johnson as of April 29, 1995.
Rather than enforcing its rights under the Policy, Ms. Motz
advised Mrs. Johnson's solicitor on June 22, 1995, that
Mutual Life was "prepared to regard Mrs. Johnson's work
activity from May 24, 1994 through June 1995 as a rehabilitation
program approved by it . . .". A Policy excerpt sent to
Mr. McLeish by Ms. Motz with her letter of April 12,
1995 included provisions relating to the rehabilitation program
that had to be approved by Mutual Life. The disability benefit
would be abated depending on the insured's income.
Ms. Motz suggested the rehabilitation program, she
testified, "to avoid an all or nothing confrontation".
She could not recall when the rehabilitation program with respect
to Mrs. Johnson was first raised by Mutual Life or by whom
copies of monthly rehabilitation calculation sheets showing the
statement were sent to Mr. McLeish in June. Mrs. Johnson
would have to return any overpayments.
[16] During
the trial of the appeal at bar, Ms. Motz indicated quite clearly
that while she may have read the Statement of Claim when
originally served on Mutual Life and may have read the allegation
that Mrs. Johnson returned to work as a teacher in May 1994, once
the Statement of Claim was filed away, she no longer referred to
it. It was "out of sight, out of mind". She did not
refer to the Statement of Claim when Mutual Life was
"calculating" the benefit payable to Mrs. Johnson.
Further, Ms. Motz' attitude was that the statement in the
Statement of Claim that Mrs. Johnson returned to work was
"only an allegation" without any particulars, for
example, as to the duration of employment.
[17] In August
1995 Mrs. Johnson's solicitors served a Notice of Motion on
Mutual Life for judgment in the terms of the May Settlement,
among other related matters. Mutual Life made a cross-motion for
rectification of the May Settlement agreement.
[18] On
October 25, 1995, Hawkins J. of the Ontario Court of Justice
(General Division), dismissed Mrs. Johnson's motion and
ordered that the May Settlement be rectified to reduce the lump
sum payable to Mrs. Johnson by the amount of $15,011.30 to
account for disability benefits paid to her while she was working
for the School Board in 1994 and 1995. He also ordered Mrs.
Johnson to pay costs to Mutual Life of $1,500.
[19] In his
Reasons for Judgment Mr. Justice Hawkins stated that:
Ms. Motz clearly
forgot (if she ever consciously "knew") that
Ms. Johnson had worked as a teacher for some period from and
after May 1994 (as disclosed in the statement of claim). The most
charitable reading one can give is that Mr. McLeish either forgot
the fact that his client had worked and been paid for part of the
period for which she subsequently received benefits under the
policy or that he remembered that fact but was unaware of its
relevance. One might also charitably conclude that Ms. Johnson
was unaware that the wage loss arrears being paid to her included
periods of time when she was working and being paid. It is beyond
question that she is not entitled under the policy to be paid a
wage loss benefit for periods when she is working and receiving
wages.
[20] He later
added:
In my view it would be
unconscionable in the extreme to allow Ms. Johnson to retain
money paid to her as wage loss compensation in respect of a
period of time when she was in fact working and being paid.
[21]
Mrs. Johnson appealed the order of
Mr. Justice Hawkins to the Ontario Court of Appeal but
abandoned the appeal as part of a subsequent settlement with
Mutual Life in December 1995 ("December
Settlement").
[22] Under the
terms of the December Settlement, Mutual Life agreed to pay to
Mrs. Johnson an additional $10,632.44 in disability benefits.
Mutual Life computed the amount of $10,632.44 as follows:[5]
disability benefits from April 29, 1995 to December 28,
1995
($3,833.38 per month) not previously
paid
$30,667.04
- Court ordered payment to Mutual
Life
-15,011.30
- ½ of total rehabilitation earning deduction
applicable to May and
June
1995
- 3,523.30
- Court ordered costs payable to Mutual
Life
- 1,500.00
$10,632.44
[23]
Mrs. Johnson received $10,632.44 from Mutual Life in
December 1995. Mutual Life issued a T4A slip to Mrs. Johnson in
February 1996 stating that it had paid wage loss replacement plan
benefits to Mrs. Johnson during the 1995 taxation year totalling
$69,018.78 computed as follows:
disability benefits from April 29, 1995 to December 28,
1995
$30,667.04
($3,833.38 x 8 months)
disability benefits from March 28, 1994 to April 28,
1995
54,418.00
Less: court ordered payment to Mutual
Life
(15,011.30)
Less: ½ of total rehabilitation earning deduction
applicable
to May and June
1995
(3,523.30)
Net Payment to Mrs.
Johnson
$66,550.44
amount paid to pension
plan:
$2,468.34
(April 29, 1995 to December 28, 1995)
Amount reflected in T4A for
1995
$69,018.78
[24] The
amount of $69,018.78 included amounts of $4,584.06 and $2,468.34
paid to Mrs. Johnson's pension plan. In reassessing Mrs.
Johnson in September 1999, the Minister reduced the amount of
$2,468.34 from Mrs. Johnson's income. Counsel for the
respondent acknowledges that the amount of $4,584.06 also ought
to have been deducted in computing Mrs. Johnson's income for
the year in accordance with paragraph 8(1)(m) of the
Act. I agree.
[25] The
remaining issue now before me is whether the lump sum payments
made by Mutual Life to Mrs. Johnson, less the amount ordered
by the Ontario Court to be repaid to the insurer, is to be
included in Mrs. Johnson's income pursuant to paragraph
6(1)(f) of the Act. Paragraph 6(1)(f)
provides that there shall be included in a taxpayer's
income for a year as income from employment or an office, among
other things:
(f) the aggregate of amounts received by him in the
year that were payable to him on a periodic basis in respect of
the loss of all or any part of his income from an office or
employment, pursuant to
. . .
(ii) a disability insurance plan,
. . .
to or under which his employer has made a contribution . .
.
[26] The issue
before me is to determine what amounts were paid in 1995 to
Mrs. Johnson on a periodic basis pursuant to a disability
insurance plan under which the School Board made a contribution
and what amounts, if any, were paid to her by Mutual Life other
than pursuant to a disability insurance plan.
[27] I do not
accept the appellant's position that the $69,018.78 was paid
to Mrs. Johnson for breach of contract or as punitive
damages. The evidence is to the contrary. There is no obligation
for an insurer to accept at face value any claim by an insured
without evidence supporting the claim. In the appeal at bar, the
insurer was prepared to honour its obligations under the Policy
once it received the MRI. The fact that the insured sued the
insurer before providing the MRI to the insurer ought not, in
most circumstances, change the payment of arrears of benefits to
the payment of something else once the litigation is settled.
[28] The
payment in May 1995 by Mutual Life terminated the initial
litigation. However, the payment was not the insurer's final
or full liability under the Policy, as in Peel v.
M.N.R.,[6] or
Tsiaprailis v. The Queen[7] for example. The payment was simply the
aggregate of arrears of amounts that were payable on a periodic
basis under the Policy, plus interest and costs. The insurer paid
what it ought to have paid under the Policy had it accepted
Mrs. Johnson's application in March 1995, or earlier,
and Mrs. Johnson received the arrears to which she was
entitled under the Policy. Prior to the settlement, counsel for
Mrs. Johnson and Mutual Life were "number
crunching" to ensure that the lump sum amount aggregated the
amounts she should have received had Mutual Life accepted her
application when made, plus interest and costs of $1,500.
Further, the Policy continued and Mrs. Johnson was to
continue to receive monthly benefits. The insurer honoured the
Policy and paid what it ought to have paid on a periodic basis.
Mrs. Johnson relinquished no rights under the Policy to
claim future benefits. Thus, under ordinary circumstances, the
amounts received under the May Settlement ought to be included in
Mrs. Johnson's income for 1995.
[29] But these
were not ordinary circumstances. Subsequently, Mutual Life
realized - since it had been previously informed -
that Mrs. Johnson was employed by the School Board since May
1994. Thus, in Mutual Life's view, its calculation of
benefits to Mrs. Johnson according to the May Settlement was
too high. Mutual Life wanted a return of the excess amounts. Mrs.
Johnson moved for the May Settlement to be confirmed and Mutual
Life cross-moved for rectification of the May Settlement. A
settlement was reached in December 1995 pursuant to which Mutual
Life paid Mrs. Johnson arrears of $10,632.44 and agreed to
continue paying future benefits.
[30] It is
obvious Mrs. Johnson was paid benefits for the period May
1994 up to and including June 1995; under the Policy she was not
entitled to benefits if she was employed. I do not share Mutual
Life's view that the benefits paid with respect to the time
Mrs. Johnson was working were rehabilitation earnings. There
is no evidence that when Mrs. Johnson started again to work
for the School Board, Mutual Life and the School Board considered
the employment to be rehabilitation for purposes of the Policy.
The rehabilitation clause in the Policy was resorted to in order
to arrive at a settlement with Mrs. Johnson, as a way to
calculate an amount that would be payable to her. In particular,
it is apparent the characterization was made for Mutual
Life's own internal purposes to justify a payment in addition
to monthly long-term disability payments. In my view the
rehabilitation payments were a fiction and were a means used to
terminate litigation. The Canadian Customs and Revenue Agency
ought not to have "bought" Mutual Life's treatment
of the payment; a little more effort on the Agency's part
would have indicated a different treatment was more realistic. I
accept Mr. Johnson's evidence that Mrs. Johnson returned
to work with the School Board because of financial pressure on
the family and for no other reason. There was no rehabilitation
program.
[31] Mrs.
Johnson was employed by the School Board during the period May
1994 to June 1995. That portion of the lump sum payment
attributable to the period of employment of May 1994 to June
1995 cannot be said to have been paid, therefore, in respect of
the loss of all or any part of her income from employment, she
did not lose any employment income for the time she worked. How,
then, can any payment by Mutual Life with respect to this period
be for loss of employment income? No portion of any payment by
Mutual Life attributable to the period May 1994 to June 1995, or
later, for the time she was paid by the School Board is to be
included in income of Mrs. Johnson pursuant to paragraph
6(1)(f) of the Act.[8] Only the portion of the payment for arrears
with respect to the periods March and April 1994 and the months
after June 1995 that the School Board ceased paying salary to
Mrs. Johnson to December 1995 are to be included in
income by virtue of paragraph 6(1)(f). (And income will be
further reduced by the pension contribution of $4,584.06).
[32] I agree
with counsel that paragraph 6(1)(a) of the Act is
of no assistance to the facts at bar. Both my colleagues
Associate Chief Judge Bowman and Judge Lamarre have held
that paragraph 6(1)(a) is a general provision and it is
not intended to fill in all the gaps left by paragraph
6(1)(f).[9]
Any amount of money Mrs. Johnson received from Mutual Life was as
an insured and not as an employee of the School Board, which
would be required if paragraph 6(1)(a) were to apply. The
appeal depends on the application of paragraph 6(1)(f)
alone.
[33] The
appeal will therefore be allowed, with costs.
Signed at Ottawa, Canada, this 26th day of March 2002.
"Gerald J. Rip"
J.T.C.C.
COURT FILE
NO.:
1999-4707(IT)G
STYLE OF
CAUSE:
The Estate of Marilyn Johnson v. The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
January 15 and 16, 2002
REASONS FOR JUDGMENT BY: The
Honourable Judge G.J. Rip
DATE OF
JUDGMENT:
March 26, 2002
APPEARANCES:
Counsel for the Appellant: Richard G. Fitzsimmons
Counsel for the
Respondent:
Elizabeth Chasson
COUNSEL OF RECORD:
For the
Appellant:
Name:
Richard G. Fitzsimmons
Firm:
Fitzsimmons & Company
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-4707(IT)G
BETWEEN:
THE ESTATE OF MARILYN JOHNSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 15 and 16, 2002 at
Toronto, Ontario, by
the Honourable Judge Gerald J. Rip
Appearances
Counsel for the
Appellant:
Richard G. Fitzsimmons
Counsel for the Respondent: Elizabeth
Chasson
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1995 taxation year is allowed, with costs, and the matter
is referred back to the Minister of National Revenue for
reassessment and reconsideration on the basis that no amount of
money received from Mutual Life with respect to the period
Mrs. Johnson was employed by the East Parry Sound Board of
Education be included in her income in 1995 and that the amount
of $4,584.06 paid on her account as a contribution to a
registered pension plan be deducted in computing her income for
1995.
Signed at Ottawa, Canada, this 26th day of March 2002.
J.T.C.C.
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