Donald G. McKay v. Minister of National Revenue, [1990] 2 CTC 2519, 90 DTC 1926

Rip, T.C.J.: — Donald G. McKay ("McKay"), the appellant, appeals an income tax assessment for 1984 in which the Minister of National Revenue, the respondent, added to income an amount of $25,000 paid to him in 1984 by his employer, S & C Electric Canada, Ltd. ("S & C") purportedly in respect of a benefit arising from the cancellation of a stock option agreement on the termination of his employment. In his pleadings the Minister stated that in support of the assessment he relied, inter alia, upon paragraphs 6(1)(a), 6(3)(b), 7(1)(b) and 56(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”).

McKay commenced employment with S & C July 1, 1983 as its president. S & C is a wholly-owned subsidiary of S & C Electric Company, a corporation incorporated in Delaware, one of the United States of America ("Parent"). A letter of May 9, 1983 from S & C to McKay, confirming the terms of McKay's employment, refers to matters such as compensation, including salary, bonus and registered retirement savings plan contributions by S & C, the appellant's election to the Board of Directors of S & C, use of automobile, country club membership, housing loan, moving costs, and stock option plan.

McKay testified he did not consider the option agreement to be an important consideration in deciding to accept the position with S & C even though only senior employees of S & C were eligible to participate in the plan. He said he “did not know what the stock option meant. . .or what it was. . .". He insisted he would have gone to work for S & C without any stock option plan.

By written agreement ("option agreement") among S & C, the Parent and McKay dated September 15, 1983, S & C granted to McKay an irrevocable right to purchase from S & C 200 common shares of the Parent at a purchase price of US $1,400 per share ("option"). The option was to be exercisable on September 15, 1986 as to 50 common shares, on September 15, 1987 as to 50 common shares and on September 15, 1988 as to 100 common shares. The options were to expire and become non-exercisable on the tenth anniversary of the date of the option agreement. No shares were acquired by McKay in accordance with the option agreement.

The option agreement provided in part that:

This option shall cease to be exercisable in the event you cease being employed by the Company or any subsidiary; provided, however, if your employment terminates because of your retirement, this option shall remain exercisable until three

(3) months after date of such termination, and if your employment terminates because of your death while an employee of the company or any subsidiary, this option shall remain exercisable until twelve (12) months after the date of your death. . . .

In mid-October 1983 McKay "found out” that S & C intended to terminate his employment and he engaged the services of a lawyer to protect his interests with respect to his dismissal and the option agreement. From October on he did not report to his employer and was not paid a regular salary.

Sometime in January 1984, agreement was reached by the appellant and S & C for severance pay of $47,000 and contributions of $5,500 by S & C to McKay's registered retirement savings plan for each of 1983 and 1984. The form of release by McKay to S & C with respect to actions arising from his dismissal was not executed until February 16, 1984, the same day as the execution of the form release by McKay to S & C with respect to actions arising out of the purported breach of the option agreement ("option release"). The release whereby McKay released S & C from all actions and causes of action arising out of the employment with S & C was drafted in the usual terms of such releases. The release did not affect the rights of the appellant under a letter agreement dated February 14, 1984 from S & C's lawyer to the appellant's lawyer which was attached as Schedule "A" to the release. In the letter counsel confirmed it was S & C's intention to terminate McKay's employment effective February 17, 1984, and proposed amongst other things, that the effective termination date of McKay's employment “will be February 17th, 1984”. The payment of the severance pay by S & C to McKay was to be payable on February 17, 1984. Mutual releases were to be exchanged on February 17, 1984, in fact their executions were advanced one day.

The option release reads in part:

The Undersigned (hereinafter called the "Releasor" which term includes my successors, executors, administrators and assigns) in consideration of the payment of the sum of Twenty-Five Thousand Dollars ($25,000) and other good and valuable consideration hereby remise, release and forever discharge S & C Electric Canada Ltd. and S & C Electric Company (hereinafter called the "Releasees" which term includes their respective officers, directors, successors and assigns) of and from all actions, causes of actions and suits, whatsoever which the Releasor ever had, now has or may hereafter have against the Releasees or any of them for or by reason of or in any way arising out of their anticipatory or any breach of the irrevocable stock option granted to Mr. McKay under date of September 15, 1983 by the Releasees.

And It Is Further Agreed And Understood that the Releasees do not by the payment aforesaid or otherwise admit any liabilities or obligations of any kind whatsoever to the Releasor under the said stock option and such liabilities and obligations are in fact denied.

And for the said consideration the said Releasor agrees not to make any claim or take any proceedings in connection with any of the claims released by virtue of the preceding paragraphs hereof against any other person or corporation who might claim contribution or indemnity from the said Releasee by virtue of the said claim or proceedings.

McKay testified that when he learned S & C considered him to have lost his rights under the option agreement as a result of his dismissal, his lawyer approached S & C in January 1984 and was advised by S & C it would not honour the agreement. As late as February 14, 1984, two days prior to the execution of the releases, a lawyer for S & C wrote the appellant's lawyer confirming "your advice to us that Mr. McKay claims continued entitlement under an irrevocable stock option granted to him under date of September 15, 1983. S & C does not and will not accept any such obligation”. McKay was of the view the option agreement had not been terminated on the occasion of his dismissal and that even after February 16, 1984 he considered himself to have rights under the option agreement. McKay took the position that his discharge and the dispute with respect to the option agreement were two separate and independent matters.

In any event, notwithstanding their lawyer's letter of February 14, S & C agreed to pay McKay $25,000 and obtained the option release.

The appellant submitted the termination of his employment with S & C did not have the effect of terminating the option agreement, which was the position of S & C. In his view S & C repudiated the option agreement when it advised him it would not honour its rights under the option agreement; the repudiation, he submitted, was a breach of the option agreement which entitled him to sue for damages. Appellant's counsel submitted the reasons in The Queen v. Reynolds, [1976] C.T.C. 792; 77 D.T.C. 5044 (S.C.C.); affg [1975] C.T.C. 659; 75 D.T.C. 5393 (F.C.A.); affg [1975] C.T.C. 85; 75 D.T.C. 5042 (F.C.T.D.) support his position that he did not dispose of any rights under the option agreement in respect of any Parent shares to S & C within the meaning of paragraph 7(1)(b). The $25,000 he received was damages for breach of the option agreement, the appellant insisted.

When McKay's employment was terminated, he ceased to have any rights under the option agreement. The right to acquire shares under the option agreement was not exercisable immediately prior to his discharge by S & C; his right to acquire shares in the future was no longer capable of being exercised on the due dates since, according to paragraph 3(c) of the option agreement, such “options shall cease to be exercisable in the event [the appellant] cease(s) being employed by the Company . . .". The termination of the appellant's employment with S & C had the effect of putting to an end the option agreement; there was no breach by S & C of the option agreement and the $25,000 received by the appellant did not represent damages for any breach notwithstanding anything set out in the form of release.

Each of the releases appear to be executed on February 16, 1984; there has been no suggestion they were executed on another date. The letter of February 14, 1984, attached as a schedule to the release relating to the termination of employment provides for the termination to be effective February 17, 1984; various matters related to the termination are to take place on February 17 as well. I find it difficult to accept the appellant's argument that his employment with S & C terminated before he executed the option release and received $25,000. While McKay may have ceased performing his duties as an employee of S & C in October 1983, both he and S & C did not cease their employeeemployer relationship until February 16, at the earliest. There is no evidence which can lead me to conclude the release relating to the termination agreement and the option release were two separate transactions. The option agreement would not have existed in the first instance without McKay being employed by S & C. There was a relationship between the two releases; they were not arrived at independently of the other. I am satisfied that one would not have been executed without the other. The appellant executed the option release and received $25,000 while an employee of S & C.

Paragraph 6(1)(a) reads:

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:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit

(i) derived from his employer's contributions to or under a registered pension fund or plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy,

(ii) under an employee benefit plan or employee trust, or

(iii) that was a benefit in relation to the use of an automobile, except to the extent that it related to the operation of the automobile.

Appellant's counsel argued that the Federal Court of Appeal reaffirmed in The Queen v. Pollock, [1984] C.T.C. 353; 84 D.T.C. 6370; affg [1981] C.T.C. 389; 81 D.T.C. 5293 (F.C.T.D.) what it earlier stated in The Queen v. Atkins, [1976] C.T.C. 497; 76 D.T.C. 6258. In Atkins the Federal Court of Appeal held that moneys paid by a former employer in lieu of notice of dismissal to a taxpayer who was dismissed by the employer without notice could not be regarded as salary, wages or remuneration from an office or employment within the meaning of paragraph 6(1)(a). Accordingly, since the Federal Court of Appeal did not follow the obiter dictum of Pigeon, J. in Jack Cewe Ltd. v. Jorgenson, [1980] C.T.C. 314; 80 D.T.C. 6233, neither should this Court, in particular since the Cewe case was a civil case on wrongfull dismissal and not an income tax matter. In Cewe, at pages 315-16 (D.T.C. 6234-35), Pigeon, J. stated:

With respect to income tax, the Company's submission rests on the premise that respondent is not liable to income tax on the damages awarded. This is based on the judgment of the Federal Court of Appeal in The Queen v R B Atkins, [1976] CTC 497; 76 DTC 6258, affirming the judgment of Collier, J [1975] CTC 377; 75 DTC 5263. This judgment is contrary to the decision of Cattanach, J in T G Quance v The Queen, [1974] CTC 225; 74 DTC 6210, as to which Jackett, CJ said, speaking for the Federal Court of Appeal:

Having regard to the weight placed by the appellant on the decision of the Trial Division in Quance v The Queen, [1974] CTC 225; 74 DTC 6210, I deem it advisable to state in my own words what I regard as the basic fallacy in the appellant's position.

Once it is conceded, as the appellant does, that the respondent was dismissed “without notice”, monies paid to him (pursuant to a subsequent agreement) “in lieu of notice of dismissal" cannot be regarded as "salary", "wages" or “remuneration” or as a benefit "received "or enjoyed by him. . .in respect of, in the course of, or by virtue of the office or employment". Monies so paid (ie “in lieu of notice of dismissal”) are paid in respect of the “breach” of the contract of employment and are not paid as a benefit under the contract or in respect of the relationship that existed under the contract before that relationship was wrongfully terminated

I have grave doubt as to the validity of this reasoning. Damages payable in respect of the breach of a contract of employment are certainly due only by virtue of this contract, I fail to see how they can be said not to be paid as a benefit under the contract.

In my view, the present situation with respect to income tax on this award of “an identifiable sum for loss of earnings" must be considered legally insecure. This Court might well disagree with the conclusion reached by the Federal Court of Appeal in Atkins. In this respect, I will note that in that case consideration appears to have been given only to the question whether the damages for wrongful dismissal were income "from an office or employment" within the meaning of sections 5 and 25 of the Income Tax Act (RSC 1952). No consideration appears to have been given to the broader question whether they might not be income from an unspecified source under the general provision of section 3.

The reasons for judgment of Pigeon, J. in Ce we were concurred in by all the justices of the Supreme Court who heard the appeal. In Se//ars v. The Queen, [1980] 1 S.C.R. 527; 110 D.L.R. (3d) 629, Chouinard, J. cited with approval the following statement about obiter dicta made by a former Chief Justice of Ontario where, at page 530 (D.L.R. 632), he said:

In Ottawa v. Nepean Township et al., [1943] 3 D.L.R. 802, Robertson C.J.O. wrote for the Court of Appeal of Ontario, at p. 804:

What was there said may be obiter, but it was the considered opinion of the Supreme Court of Canada and we should respect it and follow it even if we are not strictly bound by it.

I must therefore decline the invitation of counsel.

I have considered earlier this year facts not wholly different from those at bar in Dundas v. M.N.R., [1990] 1 C.T.C. 2492; 90 D.T.C. 1529. Appellant's counsel has not convinced me that I ought to change my views based on the facts at bar. My opinion in Dundas expressed at pages 2503-508 (D.T.C. 1538-41), applies to this appeal. The sum of $25,000 is to be included in McKay's income for 1984 in accordance with paragraph 6(1)(a); the $25,000 was received by him by virtue of his office or employment.

I need not consider whether the $25,000 may be included in income under any other provision of the Act, in particular paragraph 7(1)(b).

The appeal is dismissed.

Appeal dismissed.