Viacheslav Galanov v. Minister of National Revenue, [1987] 2 CTC 2353, 87 DTC 647

Taylor, T.C.J.: —This is an appeal heard in Calgary, Alberta, on August 31, 1987, against an income tax assessment for the year 1978, in which the Minister of National Revenue taxed as income an amount of $19,000 received from George N. Jackson Limited ("Jackson Limited”). The position of Mr. Galanov was that the amount represented "damages" as a result of his unwarranted dismissal as an employee of Jackson Limited. Certain extracts from the notice of appeal serve to set out the dispute:

I was employed by George N. Jackson Limited for 14 years, following a career in a specific field in an industry which is limited in Canada. After a joint venture between George N. Jackson and E.R. Carpenter, U.S.A., in 1977 I was transferred to Calgary, with no other options as my position was being eliminated. I was given mortgage assistance in the sum of $19,000.00 due to the high cost of homes in Calgary. After working for 10 months in Calgary, I was fired peremptorily, without notice. In lieu of 6 months severance pay, my repayment of the mortgage was cancelled (exhibit 'H') in essence I received $19,000.00 severance pay.

I was fired peremptorily, without notice and without cause, that was breach of contract.

. . . This was not in accordance with the term of a contract which states (Exhibit 'G') the term of employment hereunder may be terminated by the company without cause with payment of four months severance pay accompanied by 14 days prior written notice.

For the Minister from the reply to notice of appeal, the situation appeared:

— the terms of the contract of employment between the Company and the Appellant provided for termination of employment without cause with the payment of four months severance pay;

— on September 11, 1978 the Appellant was notified of the termination of his employment in Calgary with the Company without cause effective that day;

— the Company offered the Appellant three alternatives relating to his contract of employment being:

(1) continued employment with the Company in Winnipeg;

(2) six months severance pay combined with an arrangement for the Appellant to repay the Company held $19,000 mortgage on his home;

(3) one month's severance pay and a discharge of the mortgage;

— the Appellant by release dated November 15, 1978 and pursuant to an employment agreement dated November 4, 1977 chose to accept one month's severance pay and a discharge of the $19,000 mortgage in satisfaction of his rights under the contract of employment.

The Respondent relies, inter alia, on Sections 3 and 6(3) of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C. 1970-71-72, c. 63, s. 1 applicable to the 1978 taxation year of the Appellant.

Mr. Galanov submitted certain documentation:

A-1 — Employment Agreement — November 4, 1977, clause 8 therefrom reads:

8. Termination of Employment. The term of Employment hereunder may be terminated by the Employee at any time, with or without cause, on 14 days prior written notice to the Company. The Term of Employment hereunder may be terminated by the Company at any time, with or without cause, on 14 days prior written notice or payment of one-half month's severance pay accompanied by such notice*. In any event, the Term of Employment shall terminate upon the death of the Employee.

Or without cause with payment of four months severance pay accompanied by such notice.

A-2 — Letter to Revenue Canada from R.B. Jackson — President of Jackson Ltd. — December 17, 1980:

Revenue Canada Taxation,

220-4th Avenue, S.E.,

Calgary, Alberta.

T2G 0L1.

Attention: R. Dyck,

Room 320 Re: File 231-4325

Viacheslav Galanov.

Dear Sir:

The information you requested in your letter of December 5th is as follows:

1. The Date of Termination was September 11th, 1978.

2. The Date of Notice of Termination was the same date.

3. The termination was done in person, and there was no Termination of Employment Letter.

4. The termination was without cause.

5. The severance pay covered in clause 8 of the employment agreement, which is six months rather than four months as covered in your letter, was termination allowance in view of the length of his prior service. As covered in the contract it was an alternative to six months notice of termination.

6. The alternatives given to Mr. Galanov at the time were verbal and we have no written record of them precisely. As I recall he was offered either:

(a.) Continued employment with a return to Winnipeg, expenses paid.

(b.) Payment of the six months severance pay, with some program for his repayment of the mortgage.

(c.) One month's severance pay only and cancellation of the mortgage.

7. The one month's severance pay was paid in the amount of $2,935.83, included in a cheque to him of September 29th,which also included an amount for Vacation Pay and a deduction of $542.00 for days which previously had been paid which were beyond the separation date. These amounts were included in the T4 which totalled $30,232.71.

I trust this is the information you require.

Yours truly,

R.B. Jackson,

President.

c.c. V. Galanov.

A-3 — Termination Agreement — November 15, 1978.

THIS AGREEMENT made in duplicate this 15 day of November, 1978.

BETWEEN:

CARPENTER-JACKSON LTD. and

GEORGE N. JACKSON LIMITED,

(hereinafter called ‘Jackson’)

OF THE FIRST PART,

and

VIACHEFSLAV (sic) GALANOV, of the

City of Calgary, in Alberta,

(hereinafter called 'Galanov')

OF THE SECOND PART.

WHEREAS Galanov has been employed by George N. Jackson Limited and latterly Carpenter-Jackson Ltd. collectively called Jackson under a certain employment agreement dated the 31st of January, 1978.

AND WHEREAS Jackson has assisted Galanov in moving his place of employment to Calgary, Alberta, and in particular assisted Galanov in the purchase of 527 Brookpark Drive S.W., Calgary, Alberta, in various ways, including the advance of the sum of NINETEEN THOUSAND ($19,000.00) DOLLARS secured by mortgage from Galanov and Galanov's wife, which said mortgage is numbered 771173715 registered in the Sourth Alberta Land Registration District Office against the said property, which is officially numbered in said office as Certificate of Title No. 771173714.

AND WHEREAS for various reasons the parties have agreed to the termination of the employment of Galanov by Jackson on certain terms and conditions.

NOW THEREFORE THIS AGREEMENT WITNESSTH that in consideration of the terms and of the reciprocal covenants hereinafter set forth that the parties covenant and agree with each other as follows:

1. Galanov ceased to be and shall deem to have ceased to be an employee of Jackson as of the 11th day of September, 1978.

2. Jackson shall forthwith arrange to file a full and complete discharge of mortgage no. 771173715 of record in the Land Titles Office for the South Alberta Land Registration District.

3. Jackson shall forthwith pay to Galanov the sum of TWENTY-NINE HUNDRED AND THIRTY FIVE ($2,935.83) [sic] DOLLARS AND EIGHTY-THREE CENTS for Galanov shall accpet the complete discharge of said mortgage No. 771173715 and payment of the said sum of TWENTY-NINE HUNDRED AND THIRTY-FIVE ($2,935.83) DOLLARS AND EIGHTY-THREE CENTS in full and complete settlement of all claims, demands and rights against Jackson of every nature and description arising out of his employment with Jackson and any payments and rights connected therewith, including all claims relating to the termination of his employment by Jackson and the said contract of employment.

4. This agreement shall enure to the benefit of and be binding upon the respective parties hereof and their respective heris, executors, administrators, successors and assigns.

IN WITNESS WHEREOF Jackson has caused this agreement to be duly executed and delivered by its officers duly authorized and Galanov has duly executed under seal and delivered this agreement as of the date first above written.

CARPENTER-JACKSON LTD.

By signed

Title signed

GEORGE N. JACKSON LIMITED

By signed

Title Vice President

Witness as to signature of Viachefsalv (sic) Galanov

Viachefslav (sic) Galanov

A-4 — A "To whom it may concern" letter of recommendation from Jackson Limited (signed by R.B. Jackson, Vice President) — September 20, 1978, which did contain the sentence

In the battle of political politics that followed this, Mr. Galanov was released from his position.

He also testified that he had been notified in person, by his superior, on September 11, 1978 that his services were terminated, and he had been physically escorted from the company’s premises. According to Mr. Galanov, there had been no other exchanges of information, or references at the meeting with his superior — simply that he was dismissed. About two days later — when Mr. R.B. Jackson returned to Calgary from a business trip, he called Mr. Galanov, had him come to the company office and discussed with him financial arrangements with regard to the termination.

Certain documentation was filed by the Minister — as counsel cross- examined Mr. Galanov:

R-1 — Letter from R.B. Jackson to Mr. and Mrs. Galanov, November 25, 1977:

Mr. & Mrs. V. Galanov

November 25,1977

We have advanced to you $19,000.00 towards the down payment of a house in Calgary, against which we have registered a Demand Mortgage against the property.

This letter is to confirm our understanding that demand will not be made unless one of the following actions should take place:

1. Mr. Viacheslav Galanov leaves the employment of Carpenter-Jackson Ltd.

2. Mr. Viacheslav Galanov is transferred to another city while in the employ of Carpenter-Jackson Ltd.

3. Mr. and Mrs. Galanov sell the house.

4. The house is destroyed by fire or other peril.

Should any of these actions take place, then the mortgage shall be demanded immediately.

Yours truly,

R.B. Jackson

Vice-President

R-2 — Letter from R.B. Jackson to Mr. Galanov, October 2, 1978.

Mr. Viacheslav Galanov,

527 Brookpark Drive, S.W.,

Calgary, Alberta.

T2W 2W9.

October 2nd, 1978

Dear Slav:

Per our discussions, you have termination pay coming equal to six months salary, but we are holding a second mortgage on your home which became demandable upon termination.

Amongst the alternatives that we discussed, was our offer to forgive repayment of the mortgage, and in return to reduce the termination pay from 6 months pay to 1 month's pay. You indicated in our telephone conversation that this is the alternative that you would prefer.

To proceed with the accomplishment of this I am enclosing a simple agreement signed by us to this effect. Will you please add the appropriate signatures, and return the original to us.

Upon receipt of this, we will complete the Discharge of the Mortgage, and send the Discharge Documents to you.

Yours truly,

R.B. Jackson,

President.

R-3 — Letter from R.B. Jackson to Mr. Galanov, November 22, 1978.

Mr. V. Galanov,

527 Brookpark Drive, S.W.,

Calgary, Alberta.

T2W 2W9.

November 22nd, 1978.

Dear Slav:

Thanks for the return of the signed Agreement.

We are enclosing the original copy of the Mortgage along with one copy of the cancellation of it.

I was pleased to hear that you had found other employment, and I sincerely hope that it works out well for you.

Yours truly,

R.B. Jackson,

Vice President.

Ends.

P.S. It is essential you register the enclosed Discharge with the Land Titles Office in Alberta to ensure ultimate clear title to your house.

Mr. Galanov insisted that he had not been offered a position in Winnipeg, as Exhivit A-2 stated. He also stated that he had not contacted a lawyer, or sought other advice after that which he called his “dismissal without notice or without cause". He was aware that an immediate demand could be made on him by the company for payment of the outstanding mortgage of some 19,000.

The taxpayer, in argument, relied on the decision favourable to the appellant in Bernard N. Pollock v. The Queen, [1981] C.T.C. 389; 81 D.T.C. 5293 (F.C.T.D.) and The Queen v. Bernard N. Pollock, [1984] C.T.C. 353; 84 D.T.C. 6370 (F.C.A.). I do not see that this jurisprudence is of assistance to Mr. Galanov — the issue with Pollock (supra), was whether an amount of $52,500 received from his former employer — following his dismissal — and after consultation with his lawyer was "remuneration" under the contract of employment. The determination of the Court therein was that the amount at issue was not "remuneration" and therefore caught as income under subsection 5(1) of the Act — the section relied upon by the Minister at that trial. In the instant case, I do not have the same problem — the section of the Act at issue in this appeal is subsection 6(3), and, if all other provisions of that section are adequately fulfilled, the amount "shall be deemed, for purposes of section 5, to be remuneration . . .”. Simply put, I do not need to determine if the amount is “remuneration”.

Counsel for the Minister submitted for the Court's review the following jurisprudence:

Raymond A. Greiner v. The Queen, [1984] C.T.C. 92; 84 D.T.C. 6073, (F.C.A.);

Thomas G. Quance v. The Queen, [1974] C.T.C. 225; 74 D.T.C. 6210 (F.C.T.D.);

Dennis B. Kanten v. M.N.R., [1985] 2 C.T.C. 2251; 85 D.T.C. 575 (T.C.C.);

William Unaitis v. M.N.R., [1978] C.T.C. 2279; 78 D.T.C. 1193 (T.R.B.);

Aurelio D. Vasconcelos v. M.N.R., [1978] C.T.C. 3110; 78 D.T.C. 1826 (T.R.B.);

Jean-Pierre Vinette v. M.N.R., [1984] C.T.C. 2257; 84 D.T.C. 1237 (T.C.C.).

Counsel noted:

. . . The Quance (supra) decision was followed in Unaitis (supra) — I'm not going to quote from the cases, and Kanten (supra).

Accordingly it is submitted that the one month's severance pay and the $19,000 discharge of mortgage received by the appellant from the company was on account or in lieu of payment or in satisfaction arising out of an agreement made by the company and the appellant as a result of the employment relationship within the meaning of Section 6(3)(d) of the Income Tax Act. Therefore, the amount should be deemed to be remuneration and brought into income.

Analysis

Subsection 6(3) of the Act, as it relates to this appeal reads:

6.(3) Payments by employer to employee. An amount received by one person from another

(b) on account or in lieu of payment of, or in satisfaction of, an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer,

shall be deemed, for the purposes of section 5, to be remuneration for the payee's services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received

(d) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(e) in consideration or partial consideration for a covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.

First, I would suggest there was little evidence the $19,000 at issue was "for services" (paragraph 6(3)(d)) upon which counsel relied very heavily. Thus, the payment, in my view might escape inclusion as remuneration, under that particular part of the section. But, I would make reference to the last five paragraphs of Exhibit A-3 — the Termination Agreement. It is quite clear that Mr. Galanov did "covenant" (the word used in Exhibit A-3, and in paragraph 6(3)(e) of the Act), in effect, to turn the money back to the company — (granted by way of discharging his mortgage obligation), but nevertheless, it cannot be said that the $19,000 at issue was his to do with exactly as he wished. It would appear to me that from the evidence, particularly the exhibits noted above, that Jackson Limited would not have agreed to settle any outstanding termination payment arising out of clause 8 of the employment contract, without an agreement from Mr. Galanov to use the funds in payment of the mortgage. I am aware that the amount represented a calculation based on clause 8 of the employment contract (see Exhibit A-2). But the calculation of an amount owing under that clause, even the acceptance by Jackson Limited of an obligation in that amount, does not diminish the impact of the clause “it cannot reasonably be regarded as having been received”. I do not see that Mr. Galanov would have received the amount without the covenant he undertook. It is quite understandable that the "covenant" referred to in subsection 6(3), would in many circumstances be a form of “non-competition clause”, but I see no reason to restrict it to such a limited definition. Therefore, I would simply note that while counsel's reliance on paragraph 6(3)(d) of the Act, may be questioned, there is no difficulty in my mind to conclude that the amount at issue is "remuneration" (and therefore taxable under section 5 of the Act) because it does not escape the provisions of subsection 6(3), by virtue of any of the relief clauses — (c),

(d) or (e), — particularly (e).

Before finalization I would also recognize that the appellant relied heavily on clause 8 "Termination of Employment" in the "Employment Agreement” (Exhibit A-1).

8. Termination of Employment. The Term of Employment hereunder may be terminated by the Employee at any time, with or without cause, on 14 days prior written notice to the Company. The Term of Employment hereunder may be terminated by the Company at any time, with or without cause, on 14 days prior written notice or payment of one-half months severance pay accompanied by such notice*. In any event, the Term of Employment shall terminate upon the death of the Employee.

Or without cause with payment of four months severance pay accompanied by such notice.

In effect, Mr. Galanov held that his interpretation of that clause was that he was entitled to 14 days "notice", and the four months' severance pay (later amended to six-months' severance pay) before termination could be effected. Counsel for the Minister did not agree with this interpretation, — but in my opinion, whether Mr. Galanov was entitled to separate “notice”, does not affect the basis above, upon which I have reached my own conclusion. Subsection 6(3) of the Income Tax Act is very broad, and, as I see it, not reduced by such technical points.

The appeal is dismissed.

Appeal dismissed.