[OFFICIAL ENGLISH TRANSLATION]
Date: 20020516
Docket: 2000-2021(IT)I
BETWEEN:
RAYMOND LAQUERRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(delivered orally from the bench on
January 10, 2002, at Trois-Rivières,
Quebec)
Archambault, J.T.C.C.
[1] Raymond Laquerre is disputing
a notice of assessment made by the Minister of National Revenue
(Minister) concerning the 1998 taxation year. The Minister
included two large amounts in the taxpayer's income: a
retirement benefit of $27,223.20 and an amount of $59,165.85
received as a disability insurance benefit within the meaning of
paragraph 6(1)(f) of the Income Tax Act
(Act).
[2] Mr. Laquerre disputes only
the inclusion of the disability insurance benefit of $59,165.85.
The Minister moreover allowed him a deduction of $13,506 for
legal expenses. Mr. Laquerre acknowledges that he is not
entitled to an amount greater than that.
Mr. Laquerre's Position
[3] Mr. Laquerre submits the
following reasons in support of his objection. First of all, he
contends that the amount of the disability insurance benefit was
not paid on a periodic basis. Second, he says, the benefit was
not payable on a periodic basis in respect of the loss of all or
any part of income from an office or employment but was an amount
paid to buy peace. Third, he claims that the tax treatment of
amounts paid here compared with those paid by a government agency
such as the CSST was unfair.
Respondent's Position
[4] The respondent contends that the
Minister wrongly allowed the amount of $13,506 because
paragraph 8(1)(b) of the Act acknowledges the
right to deduct legal or extralegal expenses incurred solely to
collect salary or wages, that is to say when a collection
proceeding is instituted against an employer. In the
respondent's view, the person sued in this instance was an
insurer, not the employer. She admits, however, that this Court
did not have jurisdiction to increase the amount of tax disputed
by Mr. Laquerre.
The Facts
[5] Mr. Laquerre was an officer
of the Royal Canadian Mounted Police (RCMP) for
approximately 24 years. The social benefits provided by his
employer included a long-term disability insurance plan
(plan), which entered into effect on October 1, 1975,
under which he could receive a benefit equal to 75 percent
of his salary, reduced by the amount of his pension income.
[6] Mr. Laquerre did not file
copies of the plan's conditions or any brochure summarizing
its terms. No witness was able to inform the Court about those
terms except Mr. Laquerre, who stated that under the plan,
he could receive long-term disability benefits for two years
after his dismissal by the RCMP. At the end of that period, the
Great-West Life Assurance Company (GW) could ask him
to undergo a medical examination to determine whether the
beneficiary, Mr. Laquerre, was still unable to find
equivalent employment with another employer. The RCMP and
Mr. Laquerre paid GW premiums in the proportion of
60 percent and 40 percent respectively.
[7] In 1994, the RCMP sent
Mr. Laquerre a notice of intent to dismiss for reasons of
illness, to which he objected before the competent authorities of
the RCMP. His objection was dismissed at the first level in the
fall of 1994, and Mr. Laquerre appealed from that decision
to a higher authority. At the same time, he asked GW to confirm
that he would be eligible for disability benefits. GW then asked
a physician it chose to conduct an assessment of
Mr. Laquerre's condition. The medical report bears the
date of December 12, 1994. According to GW's insurance
officer, Mr. Laquerre was not eligible for benefits under
the plan. Contrary to the instructions contained in the medical
report, a GW representative forwarded it to the RCMP, which
prepared a memorandum dated December 14, 1994, informing
RCMP staff that Mr. Laquerre was dangerous, and a photograph
of him was posted in certain public locations.
[8] On February 1, 1995,
Mr. Laquerre discontinued his objection to the notice of
intent to dismiss, as a result of which his employment with the
RCMP was terminated. Mr. Laquerre subsequently began
receiving his pension from the RCMP pension fund based on the
number of years of service he had accumulated to that point.
[9] Since GW continued to refuse to
pay him long-term disability benefits, despite an RCMP
committee's recommendation that he be paid, Mr. Laquerre
retained the services of a lawyer in September 1997 to sue GW. A
formal demand was sent for the 32 disability benefit
payments that were outstanding at that time. In his statement
dated January 20, 1998, counsel for Mr. Laquerre
claimed the 36 monthly disability benefit payments that GW
had hitherto refused to make, for a total amount of $49,343.55.
He also claimed damages of $250,000 from GW for unlawfully
forwarding the medical report to the RCMP, thus causing
Mr. Laquerre serious prejudice, in particular by forcing
him, as he contends, to discontinue contesting his dismissal. A
sum of $100,000 was also claimed as exemplary damages.
[10] The statement filed before the Superior
Court reads as follows, at paragraph (4):
[TRANSLATION]
The medical board consisting of J. Robinson, M.D.,
Chairman, and J. Binet, M.D., and Grégoire, M.D.,
members, concluded that the applicant's medical condition was
chronic and irreversible, and, furthermore, another of the
findings of the said board's unanimous report was that
returning to work in the service of the RCMP would aggravate the
applicant's medical condition, as appears from the report
entitled "MEDICAL BOARD - FINDINGS AND RECOMMENDATIONS OF
THE MEDICAL BOARD" of the said tripartite board communicated
to the respondent as Exhibit P-1 by means of a
copy provided upon service of this statement.
[11] According to Mr. Laquerre,
negotiations to settle the suit against GW commenced in earnest
when he began to request information from the RCMP concerning the
RCMP staff who had had access to his medical report. In April
1998, GW made an initial oral offer of $27,000, which
Mr. Laquerre rejected. He continued his efforts to gain
access to his file at the RCMP. His solicitor apparently told him
that satisfactory progress was being made in the negotiations,
without giving him further details on the matter.
[12] In June 1998, Mr. Laquerre was
called to a meeting with his lawyer, who informed him that he had
settled the case, then handed him thirty-four $1,000 bills
and one $100 bill. Mr. Laquerre immediately had to sign the
contract of transaction and release, which had the following
stipulations:
[TRANSLATION]
1. In
consideration of the payment by THE GREAT-WEST LIFE ASSURANCE
COMPANY of an amount of $58,710.65 and for good and valuable
consideration which the plaintiff, RAYMOND LAQUERRE,
ackowledges having received from the defendant, THE GREAT-WEST
LIFE ASSURANCE COMPANY, the plaintiff, RAYMOND LAQUERRE,
hereby grants full and final release to the defendant in this
case, THE GREAT-WEST LIFE ASSURANCE COMPANY, and to its agents,
shareholders, directors, officers, subsidiaries, officials,
employees, representatives, insurers and assigns, past, present
and future, from any claim, demand or cause of action of any kind
that he has or might have against the defendant, including
principal and interest, arising directly or indirectly from the
facts alleged in the statement attached to the writ of summons in
the file of the Superior Court of the District of Montreal
bearing number 500-05-038835-987;
. . .
3.
Furthermore, the plaintiff, RAYMOND LAQUERRE, waives
retroactively the benefits of the insurance coverages issued by
the defendant, THE GREAT-WEST LIFE ASSURANCE COMPANY, and held by
the Royal Canadian Mounted Police, bearing number 24892 LTD,
and acknowledges that his inclusion in the policy held by the
Royal Canadian Mounted Police is cancelled retroactively for all
legal purposes;
4. The
plaintiff, RAYMOND LAQUERRE, acknowledges that he is not at
present, nor will he be in future, eligible for the benefits and
coverages of the group insurance policy issued by the defendant,
THE GREAT-WEST LIFE ASSURANCE COMPANY, and held by the Royal
Canadian Mounted Police, bearing number 24892 LTD, and
waives any such claim against the defendant, THE GREAT-WEST LIFE
ASSURANCE COMPANY, its agents, shareholders, directors, officers,
subsidiaries, officials, employees, representatives, insurers and
assigns, past, present and future;
5.
. . .
It is understood that the aforementioned settlement in no way
constitutes an admission of liability on the part of the
defendant, THE GREAT-WEST LIFE ASSURANCE COMPANY, and that it was
reached for the sole purpose of disposing informally of the
dispute between the two parties and avoiding additional
costs.
[13] In addition to the sum of $58,710.65,
GW paid Mr. Laquerre's solicitor the sum of $455.20 for
legal expenses. Mr. Laquerre's solicitor did not come to
testify to explain the nature of the amounts paid by GW or, in
particular, to indicate the purpose of the amount of $58,710.65
or the basis of his agreement with GW's lawyer. The absence
of Mr. Laquerre's lawyer may perhaps be explained by the
fact that Mr. Laquerre had had to file a complaint against
him with the Barreau du Québec to obtain payment of a
portion of the amount this lawyer had unjustly retained. A copy
of the arbitration award of January 26, 2000, was filed in
evidence. That document states, inter alia, that the
damages claimed for prejudice resulting from the violation of the
confidentiality of Mr. Laquerre's medical report had not
been the subject of negotiations between Mr. Laquerre's
lawyer and that of GW. Mr. Laquerre stated that his lawyer
had lied throughout the hearing of his complaint before the
Barreau du Québec and that he did not believe that version
of the facts. However, Mr. Laquerre did not see fit to
summon GW's lawyer, who could have enlightened the Court,
even though he had stated in his notice of appeal that he would
have many witnesses to be heard and had asked the Court to
explain to him the procedure for summoning them to appear.
[14] Mr. Laquerre stated that he had
never been re-examined by another physician at GW's
request two years after accepting his dismissal, and GW was
thus unable to determine whether he was able to hold equivalent
employment elsewhere than at the RCMP. In his view, he would have
been able to do so. However, out of personal preference, he
decided not to look for such employment, being content with his
pension and the amount of the settlement received from GW. Even
though he attached to his 1998 income return the information
slips relating to the amount of $27,223 paid as pension and the
amount of $59,165 paid by GW as an indemnity, Mr. Laquerre
did not add those amounts to his income. In testifying, he
admitted that he had been concerned during the negotiations with
GW about the tax treatment of the amount GW would pay him and
said that he spoke to his lawyer about it.
Analysis
[15] The relevant provision, and the only
provision referred to by the respondent in support of her
assessment, is paragraph 6(1)(f) of the Act,
which is reproduced below:
6(1) 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:
. . .
(f) Employment insurance benefits - the total of
all amounts received by the taxpayer in the year that were
payable to the taxpayer on a periodic basis in respect of the
loss of all or any part of the taxpayer's income from an
office or employment, pursuant to
(i) a sickness or accident insurance plan,
(ii) a disability insurance plan, or
(iii) an income maintenance insurance plan . . .
One of the conditions of application of
paragraph 6(1)(f) is that the total of all amounts
received in the year must have been payable on a periodic basis
in respect of the loss of all or any part of income from
employment.
[16] In a very recent decision dated
December 20, 2001, in Tsiaprailis v.
The Queen, 2001 CarswellNat 3029, Associate Chief
Judge Bowman ruled on an appeal in which the facts were
quite similar to those of the instant case. There, too, GW had
refused to pay disability insurance benefits. It was a case in
which the employee had become disabled as a result of an
automobile accident and had lost her job. The lump-sum amount of
$105,000 paid as a result of the out-of-court settlement had
included both a payment of arrears and an amount in respect of
future payments.
[17] In the instant case, it seems to me
that the amount paid by GW was essentially equal to the amount of
the arrears. (By my own calculations, I come to an amount of
approximately $56,433, which yields a surplus of $2,777.)
Unfortunately, there is no express indication as to how that lump
sum was established. It may be believed that the sum of $2,777
might represent interest or damages for failure to comply with
the obligation of confidentiality or a payment in respect of fees
for the solicitor representing Mr. Laquerre.
[18] In Tsiaprailis, Associate Chief
Judge Bowman found that the condition stated in
paragraph 6(1)(f), supra, that the amount be
payable on a periodic basis was not met. He writes as follows at
paragraph 18 of his decision:
Whether the Crown relies on paragraph 6(1)(f) or not it
has no application. The lump sum payment arrived at after a law
suit was commenced and negotiated as a compromise cannot on any
basis of statutory interpretation be described as an "amount
. . . payable to the taxpayer on a periodic
basis".
[19] In my view, the scope of Associate
Chief Judge Bowman's statement must be qualified. Not
all lump-sum amounts made in payment of arrears lose the
character of being paid on a periodic basis. On this matter, I
rely in particular on the decision rendered by the Federal Court
of Appeal in The Queen v. Sills, [1985] 2 F.C.
200, 85 DTC 5096. The headnote to that decision in
the DTC version (at page 5096) contains the following
statement of facts:
Under the terms of a written separation agreement the taxpayer
was to receive a defined monthly payment from her husband. The
taxpayer actually received three lump sum payments at random
times during the taxation years in issue.
[20] The following is specifically how the
trial judge described the facts and outlined his reasoning. This
passage is quoted by the Federal Court of Appeal at
pages 203 and 204 (F.C.) (page 5098 DTC):
Returning then to the facts of the present case, the 1974
agreement calls for payments of $300.00 per month while the
situation remains as it was at the time of the agreement. The
obligation to make the 1976 payments obviously springs from the
1974 agreement, but there is otherwise no relationship whatever
between the terms of the agreement and these payments which were
made at random times during 1976, and in varying amounts. I
therefore confirm the disposition made in this matter by the Tax
Review Board.
[21] The Tax Review Board had allowed the
taxpayer's appeal. In the reasons for its decision allowing
the respondent's appeal, the Court of Appeal made the
following comment on the trial judge's decision (at
pages 204 and 205, F.C., page 5098 DTC):
. . . On these facts, the $3,000 received by the
Respondent from LaBrash was clearly paid by him and received by
her to carry out the terms of the separation agreement. Some of
the money was payable to the Respondent as alimony, the remainder
was payable to her as maintenance for the dependant children. All
of it was payable on a monthly basis as stipulated in the
separation agreement. Where the Trial judge erred, in my view,
was in not having due regard to the use of the word
"payable" in the subsection. So long as the agreement
provides that the monies are payable on a periodic basis, the
requirement of the subsection is met. The payments do not
change in character merely because they are not made on
time.
[My emphasis.]
[22] However, the situation is entirely
different if the lump-sum amount is paid in consideration of a
release from a past and future obligation to pay amounts on a
periodic basis. A relevant analysis is presented by my colleague
Judge Lamarre in MacBurnie v. The Queen,
95 DTC 686, at pages 688 and 689. I refer to
her comments on alimony at length. In my view, that
analysis is equally valid with respect to disability benefits
paid on a periodic basis. I agree with that analysis for the
purposes of this appeal:
In his argument, Counsel for the Appellant made it clear that
the issue turned around the question of how to qualify the amount
of $27,500 paid to the Appellant by her ex-spouse. If it is
qualified as being paid on account of past periodic payments due
under the Separation Agreement, then the amount should be taxable
in the hands of the Appellant under
paragraph 56(1)(b) and 56(1)(c) of the Act.
If, on the other hand, the payment is qualified as a lump sum
payment in return of a release from future obligations or future
liabilities, then this payment of $27,500 should not attract
tax for the Appellant under the Act. As a matter of fact, Counsel
for the Appellant relied on the decision of the Supreme Court of
Canada in M.N.R. v. Armstrong, S.C.R. 446. In that
decision, a divorce decree provided for monthly payments. The
payments were made for two years and then the wife accepted
a $4,000 lump sum in full settlement of all payments due or to
become due. Kellock, J. said at page 448:
In my opinion, the payment here in question is not within the
statute. It was not an amount payable "pursuant to" or
"conformément à" (to refer to the French
text) the decree but rather an amount paid to obtain release
from the liability thereby imposed. . . . Such
an outlay made in commutation of the periodic sums payable under
the degree is in the nature of a capital payment to which the
statute does not extend.
Counsel for the Appellant also relied on a decision of this
Court in Jean-Guy Dubreuil v. M.N.R., 93 DTC
542, where Couture, J. found out that "indisputable
that the payment in question was made by the appellant in
order to terminate his obligations to his former wife under the
judgment of the Superior Court, and not as alimony or other
allowance." In that case, the taxpayer agreed to pay to his
former wife a sum of $10,000 under a subsequent agreement to his
former wife as "lump sum alimony" in return for
which the former wife gave the taxpayer a full and final
discharge. This payment was therefore treated as a capital
payment for which the legislation does not authorize a
deduction and therefore does not impose inclusion as income for
the recipient.
Counsel for the Respondent relied on a decision of this Court
in Norman C. Soldera v. M.N.R., 91 DTC
987, where he contended the situation was the same as in the
present case. In Soldera, the taxpayer was ordered
pursuant to a decree nisi of divorce to pay monthly
support. The taxpayer fell into arrears and there was a second
order which varied the first order. The second order specifically
fixed the arrears of maintenance at $7,500. Garon, J. held
that the second order did not change the nature of the
taxpayer's liability but simply reduced the amount. In
essence, the $7,500 represented a portion of the arrears which
was an allowance payable on a periodic basis under the first
order. The Court however noted that the second order did not have
a "provision whereby the Appellant is released in express
terms from any existing or future liability in respect of the
maintenance of his children."
The principles laid down in determining the deductibility (or
inclusion in income for the recipient) of lump sum payments made
by a taxpayer to a spouse or former spouse in the context of the
Act, have been reviewed by the Supreme Court of Canada in
Armstrong, supra. The Chief Justice in that case
said at page 1045:
The test is whether [the lump sum] was paid in pursuance of
a decree, order or judgment and not whether it was paid by reason
of a legal obligation imposed or undertaken.
In that case, the divorce decree provided the payment of $100
monthly to the taxpayer's wife for the maintenance of their
daughter. The payments ordered were made until that time where
the wife accepted a lump sum of $4,000 in full settlement of all
amounts payable in the future. In concluding that the payment of
$4,000 did not fall within the terms of
paragraph 60(b) of the Act, the Court relied on the
fact that "there was no obligation on the part of the
[taxpayer] to pay, under the decree, a lump sum in lieu of the
monthly sums directed to be paid" (page 1045).
The Federal Court of Appeal distinguished the Armstrong
case in The Queen v. Barbara D. Sills, 85 DTC
5096. In this latter case, there was a written separation
agreement under which the taxpayer was to receive monthly
payments from her husband. In fact, she received three lump sums
at random times during the taxation years in issue. After
analyzing dictionary meanings of the word "pursuant"
and the use of the word "payable" in
paragraph 56(1)(b) of the Act, Heald, J.,
speaking for the Federal Court of Appeal, held that the
payments were received pursuant to the separation agreement.
He stated at page 5098:
So long as the agreement provides that the monies are payable
on a periodic basis, the requirements of the subsection are met.
The payments do not change their character merely because they
are not made on time.
He then commented on the Armstrong case as follows at
page 5099:
There is a clear distinction between the facts in
Armstrong and those in the present case. In
Armstrong . . . clearly the $4,000 was
not paid pursuant to the divorce decree but in lieu thereof.
However, in the case at bar, all monies were paid to carry out
the terms of the separation agreement. The consequence and
result of these payments was not to finally release the
husband from his liabilities to his wife and children under
the separation agreement as was the case in
Armstrong . . .
In the present case, it seems obvious that the payment of
$27,500 was made pursuant to the judgment of
Soublière, J. dated September 19, 1992
incorporating the Minutes of Settlement agreed upon by the
parties, and not pursuant to the terms of the previous Separation
Agreement. Indeed, the payment was made in October 1992 in
conformity with the judgment of Soublière, J. In
my view, the payment was clearly made by Mr. Eyre in order
to obtain a release from his liability under the Separation
Agreement and to terminate his obligations to the Appellant
under that Agreement. The wording of the judgment of
Soublière, J. is supporting that conclusion in that
it was clearly stated therein that Mr. Eyre would have no
further or other obligation towards the Appellant after the
payment of the sum of $27,500 and that the Appellant released
Mr. Eyre from all obligations to provide her with support,
maintenance and alimony.
Judge Lamarre goes on to say:
. . . Obviously, the judgment terminated
Mr. Eyre's obligation to provide spousal support to the
Appellant. On that aspect, the present situation is
distinguishable from the one in the Soldera case.
Moreover, I accept the explanation given by Mr. Braidek that
the words "in full and final satisfaction
of . . . and all arrears of support", were
added to give Mr. Eyre a measure of comfort and that
there was no intention to pursue him for any past arrears.
Even if the evidence showed that Mr. Eyre owed more than
$27,500 to the Appellant at the time of signing the Minutes of
Settlement that were incorporated in the Judgment of
Soublière, J., I am of the opinion that the Appellant
and Mr. Eyre finally settled for the payment by the latter
of an outlay that was in commutation of the periodic sums
payable under the Separation Agreement. Such an outlay is in the
nature of a capital payment as stated by the Supreme Court of
Canada in Armstrong, which amount did not have to be
included in the computation of the Appellant's income as it
was not an alimony or maintenance payment within the meaning
of paragraphs 56(1)(b) and 56(1)(c) of the
Act.[1]
[23] Here it must be recalled that
paragraphs 3 and 4 of the contract of transaction and
release stipulate that the disability insurance contract is
cancelled retroactively and confirm that Mr. Laquerre was
not entitled to any amounts in the future. For example,
paragraph 4 states:
[translation]
The plaintiff RAYMOND LAQUERRE acknowledges that he is
not at present, nor will he be in future, eligible for the
benefits and coverages of the group insurance policy issued by
the defendant THE GREAT-WEST LIFE ASSURANCE COMPANY and held by
the Royal Canadian Mounted Police, bearing number 24892 LTD,
and waives any such claim against the defendant THE GREAT-WEST
LIFE ASSURANCE COMPANY . . .
[24] As I mentioned at the hearing, I find
it quite surprising that that contract stipulated that the
disability insurance plan was cancelled retroactively. It is hard
to understand how two parties can retroactively cancel a contract
that has in fact existed. The reason behind the clause may have
been Mr. Laquerre's tax considerations or GW's fear of
being seen as having acted unethically by disclosing the medical
report. This wording probably suited both parties.
[25] In my view, the effect of the contract,
if not the parties' actual intention, was to release GW from
any obligation arising from the disability insurance plan. In
those circumstances, the principles stated by the Supreme Court
of Canada in Armstrong and by the Tax Court of Canada in
MacBurnie and Tsiaprailis apply here and the amount
in question was therefore not an amount "payable on a
periodic basis" but rather an amount paid to release GW from
its past, present and future obligations under the disability
insurance plan. Paragraph 6(1)(f) of the Act
therefore does not apply in the instant case.
[26] Having regard to these conclusions,
there is no need to comment on the other reasons given by
Mr. Laquerre.
[27] Consequently, Mr. Laquerre's
appeal is allowed with costs of $20, and the assessment is
referred back to the Minister for reconsideration and
reassessment on the basis that the sum of $59,165.85 does not
constitute income for Mr. Laquerre. Since the Minister has
previously excluded the sum of $13,506, which was mistakenly
deducted as a legal expense, the amount of the reduction of
Mr. Laquerre's income resulting from this decision is
therefore $45,659.
Signed at Ottawa, Canada, this 16th day of May 2002.
J.T.C.C.
Translation certified true
on this 26th day of August 2003.
Sophie Debbané, Revisor
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