James A. Jastrebski v. Her Majesty the Queen, [1994] 2 CTC 136

Linden J.A.:—The issue in this application for judicial review is whether wage loss replacement amounts received by the applicant in 1990 and 1991 were payable to him in respect of a loss in consequence of an event occurring before 1974. If so, he need not include the amounts when calculating his income from office or employment. If not, he must pay tax on the payments he received.

Facts

The applicant became a member of the Ontario Provincial Police (OPP) in October 1966, and was posted to Kapuskasing. In March 1969, the applicant was transferred to the Moosonee Detachment and was designated to Moose Factory Island where he lived and worked with one other RCMP officer. The applicant found work stressful in Moose Factory.

In August 1969, the applicant was suddenly transferred to the South Porcupine detachment. The transfer was scheduled to take place the day before the applicant's wedding, which was supposed to be in Kapuskasing and despite the fact that the applicant's fiancée had taken a job in Moose Factory and had moved her belongings there. The applicant was not told why he was being transferred so suddenly. He felt nervous because he perceived himself to be under intense scrutiny at work and he became depressed.

His psychological difficulties increased after he was involved in an accident with a motorcycle while driving a police cruiser on June 6, 1972. Some months later, the applicant agreed to visit a psychiatrist at the suggestion of his senior officer. The applicant was diagnosed with severe depression, more particularly a condition called unipolar affective disorder. He was hospitalized until January 1973, during which time he received medication and counselling. The applicant then became an outpatient, and he returned to work in March 1973.

Upon the applicant’s return to work, he felt harassed over errors and he transferred to the Hornepayne detachment were he worked without a problem for four years.

In the autumn 1977, the applicant transferred to Matheson where he experienced renewed problems. His marriage underwent difficulties, and he became very depressed. He worked in Matheson until March 1982 when he was taken by fellow officers to see a psychiatrist in Timmins. The applicant was immediately made an outpatient and put on medication. He was hospitalized twice for short periods of time. He attempted to return to work in the fall of 1983, but found it to be too stressful. He stopped working in March 1983 by reason of disability.

The applicant was retired in 1983 and put on a wage loss replacement plan. In 1990 and 1991, the applicant received payments under this disability plan which he did not include in his income on his tax returns. The Minister assessed the applicant and included these amounts in income from office or employment under paragraph 6(1 )(f) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The applicant appealed the Minister’s assessment to the Tax Court of Canada using the informal procedure on the basis that, according to subsection 19(1) of the Income Tax Application Rules, paragraph 6(1 )(f) of the Income Tax Act did not apply to these payments.

Relevant legislation

Paragraph 6(1 )(f) of the Income Tax Act, S.C. 1948, c. 52, as amended, reads: 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) 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

(i) a sickness or accident insurance plan,

(ii) a disability insurance plan, or

(iii) an income maintenance insurance plan. .. . .

This section was added to the Income Tax Act in 1971, before which income replacement payments under disability insurance plans were not taxable.

Subsection 19(1) of the Income Tax Application Rules, 1971, Part III of the Income Tax Amendment Act, 1971, S.C. 1970-71-72, c.63, is as follows:

19(1) Notwithstanding section 9, paragraph 6(1)(f) of the amended Act is not applicable in respect of amounts received by a taxpayer in a taxation year that were payable to him in respect of the loss, in consequence of an event occurring before 1974, of all or any part of his income from an office or employment, pursuant to a plan described in that paragraph that was established before June 19,1971.

Section 9 of the Rules, referred to in subsection 19(1), makes the 1971 amendments to the Income Tax Act applicable to the 1972 and subsequent taxation years.

Also relevant to this application for judicial review is the following portion of Revenue Canada's Interpretation Bulletin 428:

It is to be noted that, for 1974 and subsequent taxation years, the exemption in section 19 of the ITAR is applicable only if the amounts received by a taxpayer are attributable to an event occurring before 1974. In this context, the word "event" has reference to the thing that caused the disability. In the case of an accident, for example, although the effect on the taxpayer's health may not have become noticeable or serious until 1974 if the accident took place before 1974 and the later disability was directly attributable to the accident. Similarly, in the case of a degenerative disease such as muscular dystrophy, the “event” is the onset of the disease however much later the incapacity occurs. On the other hand, a recurring disease, such as a seasonal allergy or chronic tonsillitis would qualify as an "event" only for the particular period of one attack.

Judgment below

The applicant's appeal of the Minister's assessment was heard before the Tax Court of Canada sitting under the new informal procedure. The applicant relied in his appeal on Interpretation Bulletin 428, which defines "event" in subsection 19(1) as "the thing that caused the disability” and uses the onset of a degenerative disease as an example of an "event".

The Tax Court judge stated that it would not be appropriate for the Court to take a generous approach to the term "event" in an appeal under the specific terms of the Income Tax Act. He held that he was not satisfied that the onset of a disease qualified as an "event" for the purposes of subsection 19(1) of theRules. In reaching this conclusion as to the meaning of "event", the Tax Court judge relied on his own earlier decision in Gabrielle v. M.N.R., [1984] C.T.C. 2722, 84 D.T.C. 1635 (T.C.C.), in which he held that "event" meant an occurrence rather than a condition. He stated at page 2846:

In my view the comments in Gabrielle, supra, questioning the alleged interpretation to be placed on the word "event" arising out of 1.B. 428 are substantial and correct. While it may be perfectly proper for Revenue Canada to assess a taxpayer with such a generous interpretation of "event", I am not persuaded that it is appropriate for this Court to follow the same practice when dealing with an appeal under the specific words of the Act. I am not satisfied that the “onset of a disease” qualifies as an "event".

The Tax Court judge also stated that, even if the onset of a disease could qualify as an "event" under subsection 19(1) of the Rules, "the evidence did not support the 'onset of the disease’ at any particular time—1977 or 1982 might be equally eligible, although I do not need to review that" (page 2846).

The Tax Court judge accordingly dismissed the applicant's appeal.

Standard of review

This application for judicial review comes before this Court pursuant to section 18.24 of the Tax Court of Canada Act, R.S.C. 1985, c.T-2, as amended [1992, c. 24], which reads:

18.24 A judgment of the Court on an appeal referred to in section 18 is final and conclusive and is not open to question or review in any court except the Federal Court of Appeal in accordance with section 28 of the Federal Court Act.

In their submissions, the parties acted on the assumption that the standard of review on questions of law raised in such an application for review of the new informal procedure is correctness. In its recent decisions, this Court has acted as if the standard of review in cases such as these is correctness, without saying so. (See, for example: Li v. Canada, [1994] 1 C.T.C. 28, 94 D.T.C. 6059 (EC.A.); Canada v. Kayelle Management (Yukon) Inc., [1994] 1 C.T.C. 271, 94 D.T.C. 6116 (F.C.A.); and Thibaudeau v. Canada [1994] 2 C.T.C. 4, 94 D.T.C. 6230 (F.C.A.)). In this case, we expressly adopt that position.

Section 18.24 grants this Court the power to review these informal Tax Court decisions on the same basis as it reviews the decisions of other federal boards, commissions or other tribunals, the grounds of which include where they "erred in law in making the decision. . . ." While there may be reasons for treating questions other than errors of law differently, I can see no reason to limit the scope of review in cases such as this. No legislative direction requires us to do so. There is no policy which should impel this Court on legal questions to differentiate the standard of review for the Tax Court in cases that are appealed after a regular trial from those which seek review after employing the informal procedure. Quite the contrary; it seems to me that the standard of review should be the same, unless strong reasons exist for adopting a different approach.

The legal issues involved in both situations of review are the same, the decision-making body being appealed from is the same and the supervising Court is the same. The only difference is the new informal procedure. Whereas it might make sense in some situations, in cases such as these, it would make no sense to have two different standards of review, depending only on the procedure utilized. The legislation being interpreted in these cases is tax legislation, where consistency is particularly necessary. This Court could not allow conflicting decisions of Tax Court judges under the informal procedure on matters of law to stand, even though the legislation indicates that such decisions are not to be “treated as a precedent for any other case". (See section 18.28, Tax Court of Canada Act. The doctrine of curial deference should not be employed to achieve such a dysfunctional result. Correctness, therefore, is the standard of review to be applied in cases where the informal procedure has been employed in the Tax Court, where the basis for the complaint is error or law.

Analysis

Taxing statutes are to be interpreted in the same manner as other statutes. The Interpretation Act, R.S.C. 1985, c.l-21, applies to the Income Tax Act. According to section 12 of the Interpretation Act, the Income Tax Act is deemed remedial and should be given “such fair, large and liberal construction and interpretation as best ensures the attainment or its objects.” The strict construction of taxing provisions has been set aside in favour of the plain meaning rule which is applied purposively (Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305). One must look to the purpose of a provision, therefore, and determine the plain meaning of the provision in light of that purpose.

Any interpretation of subsection 19(1) of the Income Tax Application Rules must take into account the purpose of the subsection, which was to provide a transitional period for the applicability of the new paragraph 6(1 )(f) of the Income Tax Act which, for the first time, mandated the taxation of income maintenance or disability benefits. The heading in the text of the Rules reads, SPECIAL TRANSITIONAL RULES. Thus it is reasonable to conclude that the purpose of subsection 19(1) was to furnish a transitional regime to mitigate any unfairness that might result from the new scheme. The intent of subsection 19(1), as far as can be determined from the language of the subsection itself, was to ensure that people receiving wage replacement or disability benefits before the new legislation came into force would continue to receive those payments free of federal income tax. Further, subsection 19(1) delayed the application of paragraph 6(1 )(f) from 1971 (when the amendment came into force) to the year 1974, presumably in order to allow some time for taxpayers and insurers to adjust to the new taxing provisions. Moreover, Parliament made a further concession by not requiring these payments actually to have begun prior to 1974 in order to be exempt; an exemption was also permitted for payments that were received after 1974 in respect of a loss in consequence of an event occurring before 1974.

Against this background, it is necessary to examine closely subsection 19(1) of the Income Tax Application Rules, to determine the meaning of the word "event". Taking the approach mandated by section 12 of the Interpretation Act, it would seem inadvisable to adopt the Tax Court udge’s approach and to limit the definition of the "event" causing the loss or employment income to sudden or traumatic occurrences in the nature of accidents. According to that approach, paragraph 6(1 )(f) might not tax disability payments received by someone who was disabled in an accident but might tax amounts paid to someone who suffered a disabling illness. Such unequal treatment should be avoided, if the language allows.

Such a restrictive definition of subsection 19(1) might also defeat one of the purposes of the subsection, that is, maintaining the tax-free status of benefits received by someone becoming disabled so as to be unable to work prior to 1974 in any way other than an accident. Such a discriminatory result should also be avoided.

Counsel for the Crown appears, in the argument, to have recognized that "event" cannot be defined so restrictively, and has not argued that the Tax Court judge was correct in concluding that the occurrence of a disease could never be an "event" for the purposes of subsection 19(1) of the Rules. Indeed, the Crown has not disputed the correctness of its own Interpretation Bulletin 428 which defines "event" generally as "the thing that caused the disability" and which uses as an example the onset of a degenerative disease as the event "however much later the incapacity occurs".

To isolate the "event" with respect to the occurrence of diseases is easy if the loss of employment income happened prior to 1974. If so, the "event" can oe said to be the taxpayer becoming so disabled that he or she can no longer work. However, the problem with which the Tax Court judge had to grapple in his earlier reasons in Gabrielle, supra, as well as in the current application, is whether Parliament intended that an event occurring before 1974 resulting in incapacity after 1974 should fall within subsection 19(1). This is a more difficult enterprise.

There is one decision of the Tax Court which has held that a taxpayer falls within the terms of subsection 19(1) where the incapacity arises after 1974 as a consequence of an event occurring before 1974. In Phillips v. M.N.R., [1990] 2 C.T.C. 2495, 90 D.T.C. 1899, Couture, CJ.T.C.C. held that damage to the taxpayer's lower back suffered in a fall down a flight of stairs in 1972 was the event in consequence of which she suffered a loss of employment income beginning in 1984. Unfortunately, in that case arguments on the gap in time between the accident and the incapacity centred solely on the issue of factual causation. The Tax Court judge appears to have relied on Interpretation Bulletin 428 which takes the position that as long as the event occurs before 1974, the incapacity can arise thereafter: in his view, all that matters is proof of causation.

If the Phillips case is correct, however, how would one identify the pre-1974 "event" where a cumulative process such as the progress of a disease is concerned? Would the fact that a disease was contracted prior to 1974 suffice? Given the advances in our knowledge of genetics, would identification of a genetic predisposition to a certain condition be enough? The Interpretation Bulletin describes the event as the onset of the disease, but this seems unhelpful in its vagueness. The dictionary definitions are of little assistance. The more one looks at now difficult it would be to define the "event" under circumstances where a post-1974 incapacity is the result of a pre-1974 cumulative process such as a disease, the less likely it appears that Parliament so intended. It should be recalled that we are not concerned here with fair compensation for a disability which results from various causes over a period of years but with the taxation of payments received because of a disability. A different approach might well be in order in these two different situations.

The purpose of subsection 19(1) of the Rules was to prevent the unexpected taxation of disability benefits of recipients who before 1974 were receiving those payments under plans not structured to account for taxation in the recipients’ hands and to allow a grace period for insurance schemes to be altered so as to compensate for the new tax. Where the incapacity occurs after 1974, the recipient would then be receiving benefits under a plan devised to account for taxation of benefits in the recipient’s hands and would no longer fall within the purposes of subsection 19(1) of the Rules. The purpose of the legislation was not to give a windfall to those in receipt of payments who could trace them back to a pre-1974 accident or disease. I conclude that the Interpretation Bulletin is not correct in its assumption that the incapacity resulting in the loss of employment income can occur after 1974. I am also of the view that the Phillips case should not have accepted the Interpretation Bulletin’s analysis.

Therefore, the "event" that must occur before 1974 is the actual disability which prevents someone from working at full capacity, resulting in a loss of employment income as a consequence of that disability. As I read the words of the legislation, that is its proper interpretation. It states clearly that no tax is payable "in respect of amounts received by a taxpayer. . . that were payable to him in respect of the loss, in consequence of an event occurring before 1974. . . ." The loss suffered is the loss of income. The event is the disability which occurred leading to this loss of income. Both of these must occur prior to 1974 for the exemption to apply. This meaning is consistent with the purpose of the legislation. It is in harmony with the aim of Parliament to reduce unfairness during a transitional period. It treats equally all those who are disabled by accident and disease. And it avoids the confusion involved in the determination of when there is an onset of a disease. That it is not consistent with Information Bulletin 428 is unfortunate but unavoidable.

One final question remains. How is one to treat the recurrence of a disability that, on its first appearance, may have qualified as an "event" for the purposes of ‘subsection 19(1). This question is squarely asked by the facts of the present application in which the applicant went back to work full-time after his treatment in 1972 and 1973, and was able to work again despite his illness until 1982. In effect, for the purposes of subsection 19(1) of the Rules, the recurrence of a pre-1974 disability after a period during which the taxpayer was not incapacitated is no different than if the first incapacity appeared after 1974. On this point, I agree with Interpretation Bulletin 428: "[A] recurring disease, such as a seasonal allergy or chronic tonsillitis would qualify as an 'event' only for the particular period of one attack.” The question of causation in fact between a pre-1974 event and a current disability is irrelevant to the applicability of subsection 19(1) of the Rules where there has been an interruption in the loss of employment income. As a matter of law, in such circumstances, the recurrence is itself the only relevant event in determining the liability to taxation of any payments.

Conclusion

The Tax Court judge found that the applicant’s mental illness was of a recurring nature, from which it must be inferred that the period of incapacity beginning in 1982 was the only relevant "event". Therefore, his conclusion, though not all of his reasoning, was legally correct. The evidence did not support the existence of a pre-1974 "event", which would justify an exemption.

The section 28 application will, therefore, be dismissed.

Application dismissed.