Robert Peel v. Minister of National Revenue, [1987] 1 CTC 2373, 87 DTC 268

Taylor, T.C.J.:—This is an appeal heard in Toronto, Ontario on December 12, 1986, against an income tax assessment for the year 1983, in which the Minister of National Revenue taxed as “income" an amount of $90,000 received from Constellation Life Assurance Company of Canada (hereinafter “Constellation Life”). The appellant was born in 1928, and had been employed previously by the firm of Thorne, Stephenson and Kellogg as a management consultant. The main factors of the situation as agreed upon by the parties were:

From the Notice of Appeal:

4. The Appellant’s employer maintained a group insurance plan (hereinafter referred to as "the Plan’) for the benefit of all of its employees, including the Appellant. This Plan involved a group insurance policy which provided for payments to employees who, because of sickness or accident or other disabling event, were prevented from working. The insurance policy was with the Constellation Life Assurance Company of Canada (hereinafter ‘Constellation Life’) and provided for monthly benefits in amounts equal to 75% of the employee's monthly income before he ceased working, such benefits to continue until the employee was able to start working or reached 65 years of age, whichever happened first.

5. As of September 1, 1981, the Appellant claimed monthly benefits under the said plan from Constellation Life in the amounts of $2,312.50 per month, this being 75% of his monthly income before he ceased working.

6. When Constellation Life denied liability to the Appellant under the plan, the Appellant sued Constellation Life in the Supreme Court of Ontario. In his Statement of Claim, issued March 12, 1982, the Appellant claimed

(1) a declaration that he was ‘totally disabled’ within the meaning of the Plan;

(2) an order directing Constellation Life to pay him $2,312.50 per month until he ceased to be totally disabled or until he reached age 65, which ever happened first;

(3) pre-judgment interest; and

(4) his costs of the action.

7. Constellation Life denied the Appellant’s claim. In its Statement of Defence filed in the Supreme Court of Ontario, Constellation Life denied that the Appellant was ‘totally disabled’ within the meaning of the Plan and put the Appellant to the proof thereof.

The appellant relied inter alia, on subsections 3(a), 5(1), paragraphs 6(1 )(a) and 6(1 )(f), subparagraphs 54(c)(ii)(B), subsection 248(1), 38(a) and paragraph 39(1)(a) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended (hereinafter referred to as “the Act”).

The appellant contended:

14. The $90,000 amount in issue was not governed by paragraph 6(1 )(f) of the Act in that the amount was not payable "on a periodic basis"" and was not paid "pursuant to"" the Plan. Rather, the amount was payable in one payment pursuant to the settlement agreement.

15. The amount in issue was compensation for the surrender of whatever claims the Appellant had under the Plan. This compensation was a benefit the Appellant derived from his employer's contributions to the Plan. As such, the compensation was excluded from the Appellant's income from employment by subparagraph 6(1)(a)(i) of the Act and was not includable in his income under any other provision of the Act.

16. In the alternative, the settlement agreement entailed a disposition by the Appellant of a capital property, namely, the cancellation of his rights under the Plan. The compensation therefor was a capital receipt and one half of it should have been excluded from the Appellant's income, by virtue of subsection 38(a) of the Act.

17. In the further alternative, the amount in question cannot properly be included all in the Appellant's 1983 income.

The Minister of National Revenue agreed that Mr. Peel had been employed by the firm until August 1980 — “when he was unable to continue working as a result of a disability . . .” Further the Minister contended that “the parties agreed to settle the matter and that, by agreement dated October 24, 1983, Constellation Life Assurance Company of Canada (hereinafter "Constellation Life') agreed to pay the Appellant $90,000.00 as the full liability of Constellation Life now and in the future under the disability insurance plan plus $8,000.00 on account of costs".

The respondent relied inter alia, upon section 3, paragraph 38(a) and paragraphs 6(1)(f) and 39(1 )(a) of the Income Tax Act, R.S.C. 1952, Chapter 148 as amended (the ""Act").

The respondent submitted that, ""as the amount of $90,000.00 is a payment to the appellant in lieu of periodic payments in respect of the loss of his income from employment pursuant to a disability insurance plan, the $90,000.00 is properly included in the income of the appellant pursuant to paragraph 6(1)(f) of the Act”. In the alternative the respondent submitted that the amount is “a taxable gain and properly included in income pursuant to section 3, paragraph 38(a) and paragraph 39(1)(a) of the Act”.

As a result of certain questions raised by the Court at the conclusion of the hearing, the following “Joint Statement of Supplementary Facts and Submissions” was filed with the Court.

I. When did the Appellant cease working for Thorne, Stephenson and Kellogg? When did the "separation" occur?

A. AGREED SUPPLEMENTARY FACTS

(1) The Appellant worked full-time for Thorne, Stephenson and Kellogg (hereinafter “TSK”) until May, 1980; he worked part-time from then until August, 1980; and he stopped working as of September 1, 1980 because of his disability.

(2) Since September 1, 1980, the Appellant has not performed any duties of any kind for TSK and TSK has not requested him to perform any such duties.

(3) TSK continued to pay the Appellant his regular salary and benefits until August 31, 1981.

(4) Since September 1, 1981 TSK has continue to make contributions on behalf of the Appellant to its Deferred Profit Sharing Plan and to pay his provincial health insurance premiums.

B. SUBMISSIONS

(1) The Appellant respectfully submits that he ceased to be employed by, and that he “separated” from TSK as of August 31, 1980. The benefits he received from TSK thereafter were benefits from his former employment.

(2) The Respondent respectfully submits that, in these circumstances, the Appellant would be considered to have “separated” from his employment with TSK on September 1, 1981, when TSK ceased to pay his regular salary and benefits. Notwithstanding that the Appellant ceased to be employed by TSK as of that date, TSK's contributions to its Deferred Profit Sharing Plan and the payments of the provincial health insurance premiums, thereafter, were benefits received by the Appellant in respect of or by virtue of his employment with TSK. Similarly, the lump sum amount of $90,000 paid by Constellation pursuant to the disability insurance plan was a benefit received by the Appellant by virtue of his employment with TSK.

(3) In reply, the Appellant respectfully submits that whether he ceased to be employed by TSK in 1980 or in 1981, the important point is that he was not an employee of TSK in 1983 ,and the parties are now agreed on this point. The Appellant denies that the $90,000 was paid pursuant to the disability insurance policy. The evidence is that Constellation refused to pay anything pursuant to the policy and that the $90,000 was paid pursuant to the settlement agreement.

II. Why did the Appellant not sue TSK?

A. AGREED SUPPLEMENTAR Y FACTS

(1) TSK assisted the Appellant in seeking to enforce his claims against Constellation Life by making representations to Constellation Life in support of his claim, by making their staff available to assist him in his law suit against Constellation Life, and by paying most of the legal costs he incurred in the law suit.

(2) The Appellant considered that the arrangement for disability benefits had been made by TSK with Constellation and that TSK had done everything he could have reasonably expected it to have done concerning his entitlement to disability benefits.

(3) It did not occur to the Appellant that he might have had a claim against TSK in this respect, and his legal counsel at the time did not raise this possibility with him.

B. SUBMISSIONS

(1) The Appellant respectfully submits that the possibility that he may have had a cause of action against TSK does not alter the character of the $90,000 amount in issue in this appeal.

(2) The Respondent respectfully submits that he agrees with the foregoing submission but he adds that TSK's commitment to the Appellant in assisting him in receiving the disability benefits indicates that the lump sum amount of $90,000 paid by Constellation was a benefit received by the Appellant by virtue of his employment with TSK.

(3) In reply, the Appellant respectfully submits that it does not follow, from the fact that TSK was willing to help the Appellant in his action against Constellation, that the $90,000 was an employment benefit. TSK's willingness to help indicates no more than TSK's sympathy for the Appellant’s plight or TSK's desire that his action succeed. In any event, the Appellant did not in fact receive any disability benefits from Constellation.

III. What is the significance of the fact that the Order (Exhibit A-1(6)) states that the Appellant's action against Constellation Life was dismissed?

A. AGREED SUPPLEMENTARY FACT

(1) In support of his application for the dismissal of his action, the Appellant filed a Consent dated January 20, 1984 which was signed by counsel for both parties. A true copy of the Consent is attached hereto and marked as Appellant’s Exhibit A-2.

B. SUBMISSIONS

(1) The Appellant respectfully submits that the foregoing facts make it impossible to say that the $90,000 in issue was paid “pursuant to" the Constellation Life insurance plan, within the meaning of paragraph 6(1 )(f) of the Income Tax Act.

(2) The Respondent respectully submits that the form and content of the final Order is not determinative of the character of the $90,000 payment for income tax purposes. It is the settlement document dated October 24, 1983 (Exhibit A-1-5) which should be considered in determining this question. The settlement document indicates that the parties intended that the $90,000 payment be in satisfaction of Constellation’s liability "under the policy of insurance”. As such, the amount was paid pursuant to a disability insurance plan within the meaning of the Income Tax Act.

The Consent attached hereto is a consent as to the form and content of the Order which, as the parties had settled the action and the amount had been paid to the Appellant, was the most convenient and efficient procedure for the parties to dispose of the action.

(3) The Appellant respectfully replies that whether the wording of the final Order is or is not determinative of the character of the $90,000 for tax purposes, the existence of the final Order and the parties’ consent to its wording are significant facts which cannot be ignored. These facts do not support the view that the $90,000 was a payment pursuant to an insurance policy; rather, they support the view that the $90,000 was a payment for the Appellant's consent to the dismissal of his law suit. Further, there is no evidence to support the Respondent's assertion that the Order was the most convenient and efficient procedure for the parties to dispose of the action. This is unsupported speculation on the Respondent's part. It might well have been more convenient for the Appellant to have done nothing once he received the $90,000.

The general testimony of Mr. Peel was with respect to his responsibilities at the firm, the nature of his disability and his original efforts to settle the matter with Constellation Life without reverting to legal procedures. He pointed out that at the Court hearings he had provided expert medical evidence and testimony regarding his “total disability"', which evidence to the best of his recollection had not been seriously challenged by Constella- tion Life. The amount at issue in this appeal, was the amount his lawyers advised him to take, whereas he had rejected earlier offered lesser amounts for Constellation Life. Copies of the critical documents underlying the legal procedures were filed with the Court. Certain significant clauses are quoted therefrom:

(A) From the Policy with Constellation Life:

Definitions:

‘Elimination period’ — means, subject to the provisions of Section V, Clause 5 of this policy, a period of consecutive days of total disability, commencing with the first day thereof, for which no monthly benefit is payable. The duration of such period is specified in the application.

Continuation of Insurance:

Disability — During periods of disability, an insured employee will be considered as still employed on a full-time basis, if the policyholder, acting on a basis precluding individual selection, continues that employee’s insurance.

Benefit Provisions:

Clause 1.

Definition of Total Disability:

'Total disability’ during the elimination period and for a period of 36 months thereafter means the complete and continuous inability of an insured employee to perform any and every duty of his regular occupation as a result of sickness or injury. Thereafter, ‘total disability’ means the inability of an insured employee to perform any and every duty of any occupation for which he is reasonably fitted by training, education or experience.

Clause 2.

Commencement and Termination

Upon receipt of evidence satisfactory to the company that an insured employee has become totally disabled by injury or sickness and requires the regular and personal attendance of a legally qualified physician the company will, provided that he is still an insured employee at the end of the elimination period, pay that employee a monthly benefit as provided in this policy, less any reduction applicable under Section V, Clause 4 (Integration of Benefits) during the continuance of such total disability in accordance with the benefit design section of the application. Benefit payments shall be at monthly intervals computed from the end of the elimination period, subject to the receipt of satisfactory evidence of continuing total disability. Payments of benefits for part of a month shall be computed at the rate of 1/30th of the monthly benefit multiplied by the number of days of total disability during that month.

Benefits will terminate at the earliest of:

(a) the date the insured employee ceases to be totally disabled;

(b) the date the insured employee engages in any occupation for wage or

profit except as permitted by the rehabilitative employment provision;

(c) the date the maximum benefit period specified in the application is attained;

(d) the date the insured employee attains age 65, except that if the elimination period is completed during the 12 months preceding the employee’s 65th birthday, benefits will be payable for the period of total disability, but not exceeding 12 consecutive monthly payments;

(e) the date the company deems the insured employee has failed to furnish satisfactory evidence of the continuance of total disability, or fails to submit to medical examinations as required by the company;

(f) the date the insured employee is no longer receiving regular and personal medical supervision and treatment considered satisfactory by the company by a legally qualified physician;

(g) the date the insured employee dies;

(h) the date the insured employee refuses to work at any rehabilitative employment which is reasonably considered by the company and its medical advisors to be appropriate.

(B) From the Supreme Court Writ of Summons:

The Plaintiff’s claim is

For breach of contract against the Defendant for failing to pay under a Group Long-Term Disability Plan under Policy No. 40903.

The Plaintiff therefore claims:

(a) A declaration that the Plaintiff is totally disabled within the meaning of the Policy

(b) An order directing the Defendant to pay the Plaintiff the sum of $2,312.50 monthly commencing with the 1st day of September 1982 and to continue the said monthly payments until the Plaintiff ceases to be totally disabled or until the Plaintiff reaches the age 65 whichever event shall first occur.

(c) Pre-judgment interest pursuant to Section 38 of the Judicature Act, R.S.O. 1970 chapter 228 on each monthly payment commencing with the 1st day of September 1981.

(d) His cost of this action

(e) Such further and other relief as this Honourable Court shall deem just and proper.

(C) From the Statement of Defence:

(2) Clause 1, Section 5, of the insurance policy defines a total disability as follows:

‘Total disability during the elimination period and for a period of 36 months thereafter means the complete and continuous inability of an insured employee to perform any and every duty of his regular occupation as a result of sickness or injury. Thereafter, total disability shall mean the inability of an insured employee to perform any and every duty of any occupation for which he is reasonably fitted by training, education or experience’.

The defendant denies that the plaintiff was totally disabled as defined, and puts the plaintiff to the strict proof thereof.

(D) The Hand-written settlement reached during the Court Proceedings:

Peel v. Constellation Life

The parties agree to settle the issues herein as follows:

Payment by the defendant to the Plaintiff in the sum of $90,000.00 including interest, said amount to be the full liability of the defendant now and in the future under the policy of insurance plus $8,000.00 on account of costs.

October 24, 1983

Solicitor for the Plaintiff

Solicitor for the Defendant

Robert Peel

(F) Order of the Supreme Court of Ontario dated January 23, 1984

ORDER

UPON the application of the Plaintiff for an Order dismissing this action without costs, and upon reading the Consent of all parties, filed:

1. IT IS ORDERED that the within action be and the same is hereby dismissed without costs.

The argument of counsel for the appellant was detailed and complete, and while he properly expanded on the points raised, the “Outline” he provided the court was very useful as follows:

APPELLANTS MEMORANDUM OF POINTS OF ARGUMENTS AND LEGAL AUTHORITIES

1. The reassessment under appeal was based on paragraph 6(1)(f) of the Income Tax Act as it applied to the Appellant’s 1983 taxation year.

Notice of Appeal, s. 12;

Reply, s. 1;

The Income Tax Act, S.C. 1970-71-72, c. 63, as amended (hereinafter "The Act’).

2. The Appellant submits that paragraph 6(1)(f) of the Act did not apply to the amount in question for 3 reasons.

(1) This amount was not ‘payable to him on a periodic basis’. It was payable to him in one lump sum.

(2) This amount was not payable ‘in respect of the loss of all or any part of his income from an office or employment'. It was payable in respect of the settlement of his present and future claims against Constellation Life.

(3) This amount was not payable ‘pursuant to' any insurance plan to which his employer had made a contribution. It was payable pursuant to his settlement agreement with Constellation Life.

The Act, para. 6(1 )(f).

3. It is submitted that where a taxpayer receives a lump sum in exchange for the final surrender of whatever claims he may have to periodic payments under an insurance plan, he cannot be said to have received the lump sum ‘pursuant to' the insurance plan.

MNR v. Armstrong, 56 DTC 1044 (S.C.C.);

McGuire v. MNR, 82 DTC 1813 (T.R.B.)

Compare: Ouimet v. MNR, 79 DTC 16 (T.R.B.)

and: The Queen v. Sills, 85 DTC 5096 (F.C.A.)

4. In the hands of a person who is permanently disabled, the right to long-term disability paryments is a capital asset of enduring benefit, and any compensation or damages he receives for the surrender or cancellation of that right is not taxable as income.

Parsons-Steiner Limited v. MNR, 62 DTC 1148

The Queen v. Goodwin Johnson (1960) Ltd., 86 DTC 6185.

5. The amount an accident victim receives as compensation for the impairment of his earning capacity is recognized as non-taxable. It is submitted that the amount in question in this appeal should also be recognized as non-taxable, since both amounts represent compensation for the loss of expected future income.

Cirella v. The Queen, 77 DTC 5442 (F.C.T.D.).

6. The settlement or cancellation of the right to receive amounts under an insurance policy is a "disposition of property', but the gain from such a ‘disposition’ is expressly excluded from taxation as a capital gain.

The Act, subparagraphs 54(c)(ii)(B) and 39(1)(a)(iii).

7. In the alternative, if the amount in question was not a tax-free capital receipt, it was taxable as a capital gain, not as income.

The Queen v. Pollock, 84 DTC 6370 (F.C.A.).

8. In the further alternative, if the amount in question was income rather than a capital receipt, the Appellant submits that only a fraction of the amount was includable as income from 1983.

McDade v. MNR, 71 DTC 684 (citing Wheatcroft, The Law of Income Tax, Surtax & Profits Tax, at 685).

With equal effort, counsel for the respondent put forward the Minister's position, from which the following quotations which to me were particularly critical provide a general concept:

I will give you a summary of the theory which I intend to submit to you. First of all, if the Appellant had received these amounts, these monthly benefits, in ac- cordance to the long term disability plan, they would have been taxable under 6(1)(f). Secondly, if he had successfully litigated his claim against Constellation and received judgment from the Court, he would have received a lump sum which would have been paid in respect of the unpaid monthly benefits up to the time of the judgment from September 1, 1981 and this lump sum payment would have been taxable as well under 6(1)(f), or possibly, in the alternative, under section 3. All the future monthly benefits that he would have received would have also been taxable as in my first proposition under 6(1)(f) and any pre-judgment interest that he would have been awarded would also have been taxable under 12(1)(c).

The third proposition is the fact that the claim was settled to the satisfaction of the Appellant on the eve of judgment does not change the characterization of the payment. No damages were claimed by the Appellant and the settlement was for the liability of Constellation and that was limited to the four corners of the insurance policy.

. There is no provision in the Income Tax Act which specifically deals with the taxability of a settlement in this [sic] circumstances. For the guiding principles we have to look to the case law. Specifically there is no case that deals with this issue. For the amount to be taxable it must be capable of being characterized as: (1) income from a source such that it is caught by section 3; (2) income from an office or employment such that it is caught by section 5; (3) profit from a business or property under section 9 and we concede that it is not profit from a business or property; or (4) a capital receipt, section 38 and section 39.

If the Appellant had continued in the course of the trial until its completion and had received judgment, he would have received a lump sum payment at judgment which would have constituted an aggregate of all the past monthly payments that would have been unpaid to the date of judgment. The fact that they are in a lump sum payment does not change the character of the payment. It is submitted that it would have been an amount received by him, payable to him on a periodic basis in 1983 and would have been taxable as such.

The third perspective is the actual facts of this particular case, and that is the situation where a payment has been received by the Appellant by way of settlement. To determine the proper treatment it is necessary to look at the case in respect to the receipts for non-performance of business contracts, personal injuries, and for termination of employment. First of all, dealing with nonperformance of business contracts. Depending on the certain fact situations, the amount received by a taxpayer in lieu of the performance of the terms of a business contract will either be income or capital receipt. The general principle is that if the receipt relates to the loss of an income producing asset then it is a capital receipt, and if it is compensation for lost income it is business income.

. . . the case of Atkins* [1] does not purport to be an authority for the proposition that damages or an amount paid to settle a claim for damages cannot be income for tax purposes.

In consideration of all these facts, the true nature of the payment of the $90,000.00 can only be ‘a surrogatum’ of monthly benefit payments which had been not paid prior to the date of settlement and which would be lost in the future and any incidental interest thereto. If these amounts had been received they would have constituted employment income by virtue of paragraph 6(1)(f). If the Appellant had received judgment, it is submitted, the amount similarly would have been included in income by virtue of paragraph 6(1)(f).

He went into court and he got what he wanted, but he did not get it by way of judgment. The fact that the parties settled the claim on the eve of judgment does not alter the characterization of the payment.

. . . The settlement document is specific. It deals with the liability of the insurance company under the plan and that satisfaction of the liability. This is not a payment just for a release per se.

Counsel dealt at length with case law which related to damages for termination of employment, breach of warranty, on cancellation of contracts. In my view while informative, they do not assist greatly in a determination of this matter.

In response counsel for the appellant stated:

My friend made the observation at the outset of her argument that there does not seem to be a provision in the Income Tax Act which covers this situation and went on to say that therefore we must look to the case law to see some way to justify taxing it. In my submission, if there is nothing in the Act which covers it, then it is tax-free.

. . . My friend says that he did not dispose of an insurance policy, he disposed of his rights under the policy. What is an insurance policy if not the sum total of rights to be paid certain amounts in certain circumstances? That is what an insurance policy is, a bundle of rights. Those rights were capital in his hands. He disposed of them and in my submission that was a capital receipt and it cannot be included as a capital gain, taxed as a capital gain, because of 39(1)(a)/(iii).

Analysis

The Court can agree with both parties that there does not appear to be any clearly defined pathway in either the legislation or the case law for one to follow in this matter in search of a solution. I have purposely kept the references to case law in the body of this judgment to a minimum for that very reason. Each counsel in a completely competent manner referenced several cases — and all with some possible bearing on the outcome. With the greatest of respect to these arguments, it seems to be that the further the parties ended up away from paragraphs 6(1)(a) and 6(1)(f) of the Act, the weaker, and more tangential the propositions became, and I have decided to simplify the plethora of questions and propositions put to the Court by dealing with that aspect of the matter only — whether or not the assessment as struck can be seen to be correct, or whether that basis has been seriously damaged by the appellant. It is quite clear to me that not only was there a reluctance on the part of Constellation to pay "according to the contract”, there was a continued reluctance in arriving at the words in the "Settlement”, to even make much reference to the contract. For whatever reasons that both parties agreed upon the words which were used, it is nevertheless the critical document as I see it, and must be interpreted to mean precisely what the words say, to whatever degree that is possible. I am quite satisfied that in assessing Mr. Peel, the Minister of National Revenue concluded two things — first that the receipt of $90,000 had its origin somehow in the terms of his employment contract; and second that it probably could be considered as having arisen out of the contract with Constellation Life. Dealing with the second part of that foundation — the contract with Constellation Life, I am unable to find that it can be said that the “amounts received by him in the year were payable to him on a periodic basis”. Counsel for the Minister made a valiant effort to dissect the $90,000 amount into some component parts which then could relate at least to the appellant’s claim against Constellation Life of $2,312.50 per month. To do so it was the position of counsel for the Minister that from August 31, 1981 (the termination of the “elimination” period) until the date of settlement the appellant was entitled to this $2,312.50 per month. In this argument counsel relied to a substantial degree on the insertion of the word “including interest". I agree these words are troublesome, but does their inclusion in the "Settlement" establish that there was indeed interest due? I do not think so. I would suggest that as good an argument can be made that the full words could be "including interest, if any", as the argument proposed by the Minister that they assure there was interest owing on that date. Whatever may have been the “liability now" to which Constellation Life agreed in the "Settlement", I have no reason to accept that it was recognized by both parties, or even one party as extending back to August 31, 1981, or to any period prior to "now" (October 24, 1983). I understand that it is logical that the parties might have had some calculation or basis for calculation in their minds, but that is not sufficient to impose tax thereon under the terms of paragraph 6(1)(f) of the Act. A very critical term — "payable on a periodic basis” has not been fulfilled as I see it.

However, there can have been only one basis for any liability to which Constellation Life agreed on October 24, 1983, and that would have been the contract under which Mr. Peel was a beneficiary. In order that the proceeds arising out of a liability under any such contract should become taxable under section 6(1 )(a) of the Act, a connection thereto must be found, as I see it, with the contract of employment. As indicated in the "Joint Statement" reproduced above, both parties agree that Mr. Peel was not an employee in 1983 — when the amount was received. Since — immediately above — I have reached the conclusion that the evidence was not presented to show a financial "liability" to Mr. Peel before October 24, 1983, I am not aware of a rationale which would position the receipt in 1983 of the $90,000 into a period of time when he was an employee. Under the contract, even as an employee, Mr. Peel was not entitled to benefits — he had no rights to benefits — until "evidence satisfactory to the company" (supra) had been received by Constellation Life. It might be agreed that the evidence — expert medical testimony — presented by Mr. Peel in the Supreme Court of Ontario proceedings should have persuaded Constellation Life, perhaps it had persuaded the solicitors for Constellation Life, and indeed it might have persuaded the Court. But I see no evidence that Constellation Life had accepted that proof as satisfactory evidence — or that the "Settlement" was based in any way upon the understanding by Constellation Life that such was acknowledged to be the case. The only “enforceable rights" to which Mr. Peel could ever become entitled under the contract would have been established after the acceptance of such evidence by Constellation Life and that set of circumstances did not result. It should be noted that it is a moot point, whether Constellation Life could be said to have been in "breach" of the contract during the period August 31,1981 to October 24, 1983 — they had not admitted to that date that they had received satisfactory evidence of total disability. I would make reference to a recent appeal Violette Motors Limited v. M.N.R., [1987] 1 C.T.C. 2205; 87 D.T.C. 136 in which a not dissimilar point arose, and I quote:

. . . I do not read the decision of Judge Léger to indicate that in addition to giving a declaration that the appellants had the right to haul the vehicles, (which right I accept could be a capital asset), he also decided that such a right had in any way been impaired by virtue of Ford’s refusal to recognize it during the relevant years when the charges were being paid under protest. That right, it appears to me, survived intact and unsullied right up to the time it was extinguished (as described to the Court) by the death of Mr. W.H. Violette (I note that both parties accepted without challenge that the right to so haul from Ford did cease with the death of Mr. W.H. Violette and the Court makes no further comment on that situation). It was not demonstrated to the Court that continuing to pay the charges from Ford (even though considered to be illegal by the appellants) was the factor in itself or indeed even one of the factors, that persuaded the Court of Queen’s Bench that the appellants had the right to haul the vehicles. Rather, it would seem to me that the position taken by Ford was that unless the charges were paid, the appellants could not buy automobiles, and that Ford simply rejected the assertions of the appellants regarding such right to haul the vehicles, until it was settled by the Court.

What then about the “liability” referenced in the “settlement”agreement — as noted — “under the policy of insurance?” In my view, the only right — (to use the term referenced by Mr. Fitzsimmon) — was not a monetary one at the outset, but it was available to Mr. Peel from the contract to take legal action. This he did. I do not believe that up to the date of “settlement” Mr. Peel's rights extended beyond that — a right I suppose inherently available to any. party to a contract. To what degree Constellation Life considered that a “liability” is not for me to examine — that just happens to be the word he used in the settlement.

In summary therefore, on this point — Mr. Peel could sue Constellation Life to obtain a judgment, perhaps establishing his right to disability insurance, perhaps even the amounts he claimed, perhaps both —, and it can be that “right”, and only that right, as I see it, that the Minister must be able to posit as a “benefit” under paragraph 6(1)(a) of the Act.

Had Mr. Peel been finally successful in the Court Action, and been awarded the $2,312.50 per month on the basis that he was totally disabled, the result with respect to the income tax liability thereon, might be different. But that is not the point before this Court, even though it was the claim originally placed before the Supreme Court of Ontario. On the basis of that which has been brought before me I am not prepared to find that the fact Mr. Peel could sue to obtain his “rights” under the insurance contract constituted a “benefit” which should be included “in respect of” his employment contract. I have read the legal opinions expressed by both counsel regarding the fact that Mr. Peel did not sue his former employer (or join that employer in the suit), but I am not prepared to agree that the mere fact his former employer simply allowed Mr. Peel to exercise his right to sue Constellation should be seen as a “taxable benefit” emanating from that employer. Paragraph 6(1)(a) does not serve the Minister's purpose.

It is clear from the presentations made by counsel that there was a certain desire for this Court to proceed beyond that point (if it became necessary) and review the “capital” nature of the settlement amount. I have not found the arguments presented by either party, particularly persuasive on that possible aspect of the matter, and I have decided (as I indicated earlier) that it should not be pursued in determining this appeal. In the light of this judgment, the possibility for the Minister to recover or to reassess on some “capital” basis may be available to him, as well as the other normal courses of action but I leave that to the Minister. The assessment under attack was not founded on some “capital” construction.

The appeal is allowed on the basis that the amount at issue $90,000 received by Mr. Peel in the year 1983 is not “income” of that year as assessed, under section 6 of the Income Tax Act. The appellant is entitled to party and party costs.

Appeal allowed.