Loick Lemay v. Minister of National Revenue, [1987] 2 CTC 2305, 87 DTC 598

Tremblay, T.C.J. [Translation]:—This appeal was heard on October 17, 1986 in the city of Montréal, Quebec.

1. Issue

Pursuant to the introductory appeal procedures, the issue is whether the appellant was justified, when computing his income for 1982, in not including as income the sum of $11,363.65 received from his ex-employer as compensation or damages for his dismissal on June 5, 1981.

The appellant maintained that the Income Tax Act (the Act) as it existed in June 1981 did not provide for the taxation of a payment received as damages for an unjust dismissal.

The respondent maintained that the payment was a "termination payment" pursuant to provisions 56(1)(a)(viii) and 248(1) of the Act.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent's reassessment is incorrect. This burden of proof derives from a number of judicial decisions, including a judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

3. Facts

3.01 On June 5, 1981, the appellant was dismissed from his employment of 14 years as an insurance agent for the Sovereign Insurance Company. According to the insurance company, the employment termination date was June 1, 1981, as indicated in a letter dated August 14, 1984, filed as Exhibit 1-2. The appellant was 43 years of age at the time.

3.02 Following his dismissal, the appellant filed a first complaint with the Commission des normes du travail [labour standards commission] pursuant to the Act respecting Labour Standards and received a sum of $5,003.78.

3.03 Dissatisfied with the outcome of this first complaint, the appellant filed a second complaint, again pursuant to the Act respecting Labour Standards.

3.04 On April 27, 1982, an arbitration tribunal ordered the Sovereign Insurance Company to pay the appellant, and I quote [translation]: "as compensation, the complete equivalent of pay for six (6) months of work, plus interest at the rate prescribed by the Act" (Exhibit 1-1, p. 32).

3.05 The appellant later received a corresponding payment from his exemployer, but minus the required deductions for provincial and federal income taxes.

3.06 In short, the appellant received the following amounts from his exemployer in 1982:

3.07 In his income tax return for taxation year 1982, the appellant declared total income in the amount of $13,535, including $8,110.70, or $3,106.92 (pension) plus $5,003.78 (amount received following the first complaint).

3.08 In filing his 1982 income tax return, the appellant therefore included the above-mentioned amounts of $3,106.92 and $5,003.78.

The respondent added the sum of $11,363.65 in its assessment.

3.09 Gerard Toussignant, of the Revenue Canada Appeals Section [sic], explained how the sum of $16,367.43, included in the appellant's income for 1982, was computed.

To arrive at this sum, the witness used the formula set out in subsection 248(1) in order to determine the amount to be included as income in the case of a payment made in respect of a termination of an office or employment. In order to ensure better comprehension, the provision in question is cited below, before proceeding to the witness' calculation:

248(1) [. . . .]

"termination payment”, for a taxation year, means an amount equal to the lesser of

(a) the aggregate of all amounts each of which is an amount received in the year in respect of a termination of an office or employment, whether or not received pursuant to an order or judgment of a competent tribunal, other than

(i) an amount required by any provision of this Act (other than subparagraph 56(1)(a)(vii)) to be included in computing the income of a taxpayer for a year, [. . . .]

(iii) an amount in respect of which an election has been made under

subsection 40(1) of the Income Tax Application Rules, 1971, and

(b) the amount by which 50% of the aggregate of all amounts each of which is the amount that may reasonably be considered to be the employee's salary, wages and other remuneration from an office or employment for the 12 months preceding the date that is the earlier of

(i) the date on which the office or employment was terminated, and

(ii) the date on which an agreement, if any, in respect of the termination was entered into

exceeds the amount determined under paragraph (a) for each previous year in respect of that termination

whether the recipient is the officer or employee whose office or employment was terminated or a dependant, relation or legal representative of the officer or employee; [. . . .]

It is true that the inclusion of a termination payment in income is provided for under subparagraph 56(1)(a)(viii). Witness Gérard Toussignant explained the calculation used in a document filed as Exhibit 1-3. The document reads as follows: [translation]

Calculation of "termination payment" 56(1)(a)(viii) and 248(1) of the Income Tax Act

The lesser of the following amounts:

(a) the aggregate of all amounts received in the year in respect of a termination of an office or employment:

$ 5,003.78

$11,363.65

$16,367,43

(b) the amount by which 50% of the aggregate of all salaries, wages and other remuneration from an office or employment for the twelve months preceding June 5, 1981 exceeds the amount determined under paragraph (a) for each previous year in respect of that termination:

-according to the letter of August 14, 1984:

	$31,506.17
+	$ 1,501.03
	$33,007.20
X	50%
	$16,503.60
minus	NIL
	$16,503.60

- according to the T4-1980 and T4-1981 slips:

T4-1980

(June to December — seven months)

/i2 of $33,697.00 =

	$19,656.58
T4-1981	$17,941.81
	$37,598.39
X	50%
	$18,799.19
minus	NIL
	$18,799.19

Amount of “termination payment": $16,367.43.

This amount, which was derived from the calculation in paragraph (a), is the least of the three amounts.

4, Act, Case Law, Analysis

4.01 Act

The principal provisions involved in this appeal are sections 3.5 and 6, subparagraph 56(1)(a)(viii) and subsection 248(1) of the Income Tax Act.

4.02 Case Law and Scholarly Opinion

Counsel for the parties referred the Court to the following case law and scholarly opinion:

1. Beck v. M.N.R., [1980] C.T.C. 2851; 80 D.T.C. 1747 (T.R.B.);

2. Grozelle v. M.N.R., [1977] C.T.C. 2432; 77 D.T.C. 310 (T.R.B.);

3. Jack Cewe Ltd. v. Jorgenson, [1980] 1 S.C.R. 812; [1980] C.T.C. 314; 80 D.T.C. 6233;

4. The Queen v. Atkins, [1976] C.T.C. 497; 76 D.T.C. 6258 (F.C.A.);

5. The Queen v. Pollock, [1984] C.T.C. 353; 84 D.T.C. 6370 (F.C.A.);

6. Godbout et al. v. M.N.R., [1986] 2 C.T.C. 2124; 86 D.T.C. 1579 (T.C.C.);

7. Beesley v. M.N.R., [1986] 2 C.T.C. 2018; 86 D.T.C. 1498 (T.C.C.);

8. MacLean v. M.N.R., [1983] C.T.C. 2331; 83 D.T.C. 305 (T.R.B.);

9. Lawson v. The Queen, [1982] C.T.C. 368; 82 D.T.C. 6331 (F.C.T.D.);

10. The Queen v. Golden, [1986] 1 S.C.R. 209; [1986] 1 C.T.C. 274; 86 D.T.C. 6138;

11. Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] C.T.C. 294; 84 D.T.C. 6305;

12. Revue du Barreau [bar review], volume 41, No. 4, September—October 1981, p. 857, "Les paiements consécutifs à un congédiement en regard de la loi canadienne de l'impôt sur le revenu" [payments following a dismissal, in regard to the Canadian Income Tax Act], by Louis Leclerc.

4.03 Analysis

4.03.1 There is no question that the definition of “retiring allowance” in subsection 248(1) of the Act, as amended by 1980-81-82-83, chapter 140, subsection 128(10), does not apply.

This definition does, in fact, include, inter alia, all amounts received by a taxpayer as damages for the loss of an office or employment. The retiring allowance is taxable under subparagraph 56(1)(a)(ii).

Nevertheless, this new provision applies to all amounts received in respect of a termination of an office or employment which occurred after November 12, 1981.

4.03.2 The evidence in this appeal indicates that the appellant's employment was terminated at the beginning of June 1981 (paragraph 3.01).

4.03.3 The provision of the Act applicable between November 17, 1978 and November 12, 1981 is, in fact, subparagraph 56(1)(a)(viii), which includes as income the termination payment provided for under subsection 248(1) cited above (paragraph 3.09). Subparagraph 56(1)(a)(viii) reads as follows:

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received in the year as, on account or in lieu of payment of, or in satisfaction of, [. . .]

(iii) [sic] a termination payment [. . .]

4.03.4 The issue is whether a payment received as damages, as in the present case, is a termination payment. The appellant maintained that it is not, while the respondent maintained that it is indeed a termination payment.

4.03.5 The expression “termination payment" is not defined in the Act. Subsection 248(1) simply explains how such a payment should be computed.

The 1979 amendment, which applies to the period from November 17, 1978 to November 12, 1981, was made following the decision of the Federal Court of Appeal in Atkins on May 20, 1976.

As set out by Louis Leclerc (paragraph 4.02(12)) in chapter V, page 906, the legislator's intent was to prevent abuse and clarify the situation.

The Court is far from convinced that the situation was clarified. Scholarly opinion and case law are far from unanimous in their interpretation of the expression "termination payment", for which a definition is needed.

It is noted, moreover, that subparagraph 56(1)(a)(viii) of the Act is a taxation provision, and one of the characteristics required of such a section is clarity.

I, myself, cannot see how the expression “termination payment" can clearly include damages paid to an employee who was unjustly dismissed and who is not being rehired by the employer. The frustration, and so on, resulting from an unjust dismissal, for which damages are paid, cannot be a source of income, even if the amount of the damages is based on months of wages.

Furthermore, the legislator quickly perceived this lack of clarity, since a new amendment was made by 1980-81-82-83, chapter 140, subsection 128(10), clearly setting out the true intent.

It is therefore my opinion that the assessment should be amended.

5. Conclusion

The appeal is allowed with costs and the entire matter is referred back to the respondent for reconsideration and reassessment, in accordance with the reasons given above.

Appeal allowed.