Citation: 2009 TCC 209
Date: 20090507
Docket: 2008-2288(IT)I
BETWEEN:
CLARK D. SÉVÈRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
This appeal is for the
2006 taxation year. The issue is:
[translation]
7.
The issue consists in determining if, for the
2006 taxation year, the Minister was justified in adding $14,431 to the
Appellant’s income as employment income.
[2]
Only the Appellant
testified and said he worked for a Canadian company that operated in the region
of Montréal. This company was acquired by an American company.
[3]
Following the
transaction, the buyer announced that the Montréal office may eventually close
and that the company would invest in the Toronto
region to establish a new place of business in Toronto; the Appellant was
offered a position in Toronto, up to that day, he had worked in Montréal
and lived in the suburb of St‑Hubert.
[4]
He accepted the job in Toronto; he had to deal with the logistics related to the
transfer such as moving, the sale and purchase of property, etc.
[5]
The Appellant confirmed
arriving in Toronto in February; after having purchased a new
house in May, he was cavalierly dismissed in November of the same year, 2005.
[6]
Following his
dismissal, he had to initiate legal proceedings for compensation regarding
several issues, including mental distress, special damages, financial losses,
reimbursement for unpaid expenses, etc.
[7]
Following these
proceedings, a settlement was reached. The settlement covered several aspects
including the former employer’s obligation to reimburse the Appellant’s
employment insurance benefits and his legal fees; the settlement also covered
the $5,923 received for the dismissal as notice for all dismissals.
[8]
The Appellant said he
accepted the offer on the condition that the disputed amounts of the
assessment, which is being appealed, were not taxable.
[9]
Following the
settlement, the Appellant’s former employer, Cubic Field Service Canada
Limited, issued an amended T4 indicating total earnings for the 2006 taxation
year of $37,201, $14,431 more than the first T4.
[10]
Relying on sections 3,
4, 5, 6, 8 and subsection 248(1) and subparagraph 56(1)(a)(ii) of the Income
Tax Act (the Act), the Minister of National Revenue (the Minister) found
that the amounts were taxable.
[11]
The Appellant claims
that the $14,431 is not taxable because it is basically a reimbursement for his
expenses.
[12]
From the outset, I
would like to express my disapproval for the Respondent’s way of doing things. During
the hearing, the Minister said he had a new legal basis for the assessment. The
Appellant, who was not informed of this radical change until two days before
the hearing, therefore did not have much time to prepare his file for the
hearing. After verification, it was clear the Appellant was not adversely
affected, since his explanations remain the same regardless of the legal basis
for the assessment at the root of the appeal.
[13]
There are grounds to
dismiss the argument that the settlement was made and accepted on the condition
that the amount determined not be taxable.
[14]
The taxation of an
amount an individual receives is not subject to the will of the parties
involved in the transaction; it is a question for which the answer is found
within the provisions of the applicable law.
[15]
It is not simply
because the parties want a benefit to be free of fiscal consequences that the
said transaction should be treated as such. If, in such a situation, that were
the primary concern for the settlement, that might be a reason to cancel the
transaction, procedure or situation that has no effect on the Customs and
Revenue Agency, which is responsible for collecting all the taxes payable
pursuant to the Act, the will of the parties of a transaction not constituting
a relevant element. The fiscal consequences of a transaction are essentially
the outcome of the application of the Income Tax Act.
[16]
In other words, the
Customs and Revenue Agency is not bound by an arrangement between the parties
with respect to the fiscal consequences of a transaction.
[17]
The Appellant’s first
argument that the amounts obtained are not taxable as a result of the terms of
the settlement has no affect on the assessment he is challenging.
[18]
The Appellant also
maintains that the amounts that were added to the amended T4 are not taxable,
due to their nature and the reason the payment was made. Here he is making
reference to the per diems that were not reimbursed when he was
dismissed: the real estate agent’s commission, car rental fees, etc.
[19]
The explanation that make
up the Appellant’s evidence is thoroughly described in the letter that was his
Notice of Appeal. The contents of this letter read as follows:
[translation]
Dear Sir or Madam:
I would like to reiterate my decision to exercise my right to challenge
this Notice of Assessment.
I find it aberrant that when I was dismissed in 2005 by
this employer, I turned to the offices of Employment Standards and Human
Resources Canada, both of which refused to take my case stating they did not
have the authority to force or prosecute the company to reimburse my expenses
or losses, as the situation has nothing to do with my income when I was an
employee; all they could ask of the company was my 4%, which is what led me to
hire counsel ($9,000), and now that there was an out-of-court settlement
(2006), the government is reversing its position by taxing the reimbursements
incurred, a loss of money as income or a benefit.
The out-of-court settlement took place in three steps. The first
step was reimbursing my employment insurance ($8,260) from the total amount
received. The second step was with regard to the 4% ($5,384.61) and the lump
sum for unlawful dismissal ($17,386.16). The third step was payment of my
legal fees ($9,000) and for me to drop my action for damages covering my wife
and four children, the company agreed to reimburse the expenses and losses
incurred ($14,430.77) for which I submitted receipts.
As the Labour Standards and Human Resources Canada offices outlined,
I paid Revenue Canada for my
income, including my employment insurance, my 4% and the lump sum for my
unlawful dismissal. My action for damages, for which I alone covered the costs,
is not income nor a benefit, as it did not bring me any benefits or
supplementary income—they are costs I had to incur following damages caused by
the said company (Cubic Field Services Canada Ltd.), so it is like taxing me
twice on the same income.
Note the amended T4s from Cubic Field Services Canada Ltd., which
you refer to, were never sent to me by my employer as my employer knew I would challenge
them and cancel the agreement due to a breach of terms.
As previously mentioned, I am challenging this assessment under the
Informal Procedure; however, I paid the amount requested until the end of the
proceedings. You are claiming an amount of $2,797.52; considering my tax refund
for this year of $1,105.48, I made out a cheque for $1,692.04 to the Canada
Revenue Agency.
Sincerely,
[20]
The circumstances and
context, which are the opening of an office in Toronto and the planned closing
down of the Montréal office, are very useful elements in concluding that the
Appellant was actually a useful and appreciated employee of the employer, who,
in this case, benefited from maintaining the employment relationship with the
Appellant in terms of the company’s new direction.
[21]
Shortly after his
arrival in Toronto, the Appellant was cavalierly dismissed. The
evidence here is not explicit; however, the fact that legal proceedings were
undertaken following the dismissal and a settlement was eventually made are
sufficient for me to conclude that the employer-employee relationship was not
at its best; it is therefore not surprising that the Appellant’s former
employer submitted an amended T4 following the settlement that brought on the
desired outcome: a reassessment forcing the Appellant to defend his rights,
especially because it would seem he never received the amended T4.
[22]
It is likely this file
would never have been at issue from a taxation perspective if the work
relationship between the Appellant and his former employer had not deteriorated
to the point of taking legal action.
[23]
This appeal has to do
with the taxation imposed on the added amount of $14,431 that appeared on the amended
T4.
Analysis
[24]
To begin, it is not an
exaggeration to say the legal basis of the assessment subject to this appeal is
far from obvious; a few days before the hearing, the Respondent decided make
adjustments and submit that the legal basis of the assessment would now be
subparagraph 56(1)(a)(ii) meaning the amount at issue of $14,431 should
be taxed as an out-of-court settlement, the principal amount of which
represents a taxable benefit.
[25]
At the time of the
reassessment, the Respondent had all the evidence and information leading to
the reassessment being appealed. Why this important last minute amendment if
not for the clear unease with the legal basis held at the beginning?
[26]
This change of course
did not hurt the Appellant because his explanations in support of his appeal
remain unchanged. Essentially, the Appellant submitted that his employer
convinced him to come to Toronto under the pretence that the future of the Montréal
office was uncertain.
[27]
The former employer
therefore had a clear interest here and it is evident that it was getting an
experienced employee, qualified to start and prepare the foundations of the new
company in Toronto.
[28]
The Appellant explained
he that he did not economically benefit from the reimbursement for the expenses
he claimed from his employer that his employer had committed to repaying.
[29]
Not only did the
Appellant not benefit, it is clear he would actually have suffered financially
had he had to assume the reimbursement of these reasonable expenses resulting
from his employment.
[30]
Even though there seems
to be some incoherence with respect to the case law of this Court in the
matter, it would seem the situation is clear in terms of the tax treatment in
situations when the beneficiary benefits from a reimbursement constituting a
benefit; that makes it a taxable benefit.
[31]
However, if the benefit
obtained has a neutral effect on the beneficiary or, if the person concerned
does incurs a loss, the reasonable amounts paid by the employer, or former
employer in this case, the amounts at issue, are not taxable.
[32]
An amount paid to an
employee is considered a taxable benefit if its value represents an economic
benefit for the taxpayer; that is, if the value of the reimbursement of an
expense is greater than the actual expense incurred by the individual. These
were the comments of Chief Justice Bowman, as he was then known, in Rachfalowski:
17 Instead of trying to find a consistent common thread in
these and in the myriad of other employee benefit cases one may as well accept
that philosophical differences do exist among judges and that although the
expression “material acquisition conferring an economic benefit” used in many
of the cases has a fine and impressively judicial ring to it, its repetition is
no substitute for asking “just what did the employee get out of the alleged
benefit that ought to increase his or her income?”. This is a practical, common
sense sort of question that calls for a practical common sense answer.
…
21 … I think the principle that can be extracted from these
cases – Canada, United Kingdom and United States – is that a “benefit” is not
included in an employee’s income if it is primarily for the need or convenience
of the employer. From the passage from Lowe quoted in paragraph 15 above, this
is so even where it represents a material acquisition or something of value.
[33]
In Pezzelato,
Justice Bowman, as he was then known, discusses the purpose of the inclusion
described in section 6:
12 … Section
6 casts a very wide net (The Queen v. Savage, 83 D.T.C. 5409; The Queen v.
Blanchard, F.C.A. July 5, 1995, A-1532-92). The sole question is: was it a
benefit? The word in the French version is "avantage".
13 The
matter has been much litigated in this court and in higher courts. Before I
deal with the cases, I should like to approach the problem simply as a matter
of principle and of common sense. Notwithstanding the breadth of its wording
section 6 is not intended to create an artificial concept of income from
employment. Rather, it is designed to recognize the numerous and varied ways in
which an employee may be remunerated for his or her services and to bring them
within the net of taxation. It is not intended to expand beyond the ordinary
understanding of the word benefit (avantage) things that are not benefits at
all. In other words, the wide net that section 6 casts relates to the manner in
which the benefit is conferred, not to the definition of the benefit2. The point is easier to
illustrate by examples than to articulate. If an employer, to induce an
employee to move from a pleasant and low cost city in Southern Ontario (for
example, Guelph) to an expensive and high pressure metropolis like Toronto,
increases that employee's salary by 50% no one would doubt that the increased
salary is income even though the increase is designed in part to compensate him
or her for the increased cost of living and the diminution in the quality of
life. If, on the other hand, the employer brings the employee to Toronto for a month, pays for a hotel
room (or even a company owned apartment) and meals, no one would suggest that
this is a taxable benefit. Similarly if an employer moves an employee from one
city to another the reimbursement of the moving expenses is not taxable.
[34]
I find, on a balance of
probabilities, with respect to the reimbursement of expenses of $14,431 in the amended
T4, that they are legitimate and reasonable expenses and that the Appellant did
not benefit economically. As a result, the appeal is allowed and the file will
be referred back to the Minister for reconsideration and reassessment, on the
basis that the amount of $14,431 is not a taxable benefit.
Signed at Ottawa, Canada, this 7th day of May 2009.
“Alain Tardif”
Translation
certified true
on
this 25th day of June 2009.
Bella Lewkowicz, Translator
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