Bernard N. Pollock v. Her Majesty the Queen, [1981] CTC 389, 81 DTC 5293

Dubé, J:—The issue to be decided in this appeal is whether the sum of $52,000 — $50,000 plus $2,000 being the value of a 1974 automobile — given to the plaintiff following his dismissal constitutes non-taxable damage as claimed by him, or taxable income as determined by the Minister of National Revenue.

The material facts were agreed to by the parties. The plaintiff had been an employee of GTE Sylvania Canada Corporation (“Sylvania”) for twenty years, without any written contract of employment. On September 15, 1976, the plaintiff, then Divisional General Manager, was called in by the President of the parent company of Sylvania and dismissed, without prior notice.

The plaintiff refused an offer of $42,500 and consulted his attorneys. After some discussions and representations, Sylvania agreed to pay him the consideration in issue and signed a waiver and release forever discharging Sylvania from any liability “by reason of his summary dismissal”.

Both parties also agree that the facts in this case are substantially similar, for income tax purposes, to the facts in The Queen v FR B Atkins case, [1975] CTC 377; 75 DTC 5263, wherein my brother Collier held that such a payment ought not to be treated as income. That decision was confirmed by the Federal Court of Appeal, [1976] CTC 497; 76 DTC 6258. The then Chief Justice said at 498 [6258]:

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 (i.e., “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. The situation is not altered by the fact that such a payment is frequently referred to as so many months’ “salary” in lieu of notice. Damages for breach of contract do not become “salary” because they are measured by reference to the salary that would have been payable if the relationship had not been terminated or because they are colloquially called “salary”. The situation might well be different if an employee was dismissed by a proper notice and paid “salary” for the period of the notice even if the dismissed employee was not required to perform the normal duties of his position during that period. Having regard to what I have said, it is clear, in my view, that the learned Trial Judge was correct in holding that the payment in question did not fall within section 5 of the Income Tax Act as applicable to the taxation year in question.

In so far as section 25 of that Act is concerned, on the facts, it cannot be contended with any seriousness that the amount in question can reasonably be regarded as falling within paragraph (i), (ii) or (iii) of that section.

The appellant did not make in this Court the argument made in the Trial Division that the amount in question was a “retiring allowance”.

With reference to the further contention in this Court that the payment was income even if not income from an office or employment, this contention was based upon a line of cases which, in so far as relevant, held that remuneration for serv ices is income. In my view, such authorities have no application to damages for wrongful dismissal.

Naturally, I feel bound by that decision and presumably the Crown would not have opposed the instant appeal were it not for an obiter dictum uttered by Pigeon, J in a recent decision of the Supreme Court of Canada, Jack Cewe Ltd v Gary William Jorgenson [1980] CTC 314; 80 DTC 6233. That case was not strictly an income tax case, but dealt with the quantum of damage payable to Jorgenson following his wrongful dismissal. The Crown referred to the Atkins case and cast doubt as to its validity in these words (at 315 [6234], 315 [6235] and 317 [6236]:

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. They clearly have no other source.

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 ss 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.

Furthermore, it appears that damages for wrongful dismissal are “earnings” for unemployment insurance purposes, being defined by the Unemployment Insurance Regulations as income “arising out of employment”. In Attorney General of Canada v Walford (1979, 1 FC 768) the Federal Court of Appeal reversed an Umpire’s decision holding that a payment of damages for wrongful dismissal was not income. The judgment in The Queen v Atkins was held not to be an authority in the interpretation of the Unemployment Insurance Regulations. The anomaly of considering damages for wrongful dismissal as income for unemployment insurance purposes but not for income tax purposes is an additional reason for doubting the correctness of the decision in Atkins.

Counsel for the Crown invites me to consider that obiter dictum as valid ground for ignoring the Federal Court of Appeal decision, and to leap boldly towards the adoption of a new principle governing the taxation of damages for wrongful dismissal. As I informed him from the bench, I was not about to accept that invitation.

The doctrine of stare decisis is well known. As expounded by L P Pigeon in his “Interprétation des Lois’, it applies only to the ratio decidendi, not to an obiter dictum. He wrote at 46:

La ratio decidendi s’oppose à \’obiter dictum. L’obiter dictum, c’est l'opinion qu’un juge exprime en passant. Autrement dit, c’est l’interprétation qu’un juge propose sans statuer. L'obiter dictum n’est pas binding. On considère comme obiter dictum tout ce qui n’est pas impliqué dans la décision.

In Prudential Exchange Company Ltd v Sherman Edwards [1939] SCR 135, a 1939 Supreme Court decision, Duff, C J quoted Lord Dunedin in support of his view that learned dicta from eminent judges do not constitute a binding authority. Lord Dunedin said in Davidson v McRobb:

My Lords, I apprehend that the dicta of noble Lords in this House, while always of great weight, are not of binding authority and to be accepted against one’s own individual opinion, unless they can be shown to express a legal proposition which is a necessary step to the judgment which the House pronounces in the case.

Undoubtedly, the principle expounded by the Federal Court — from both of its divisions — in the Atkins case now lies “legally insecure” in the present state of the jurisprudence. Its shaky position will have to be shored up, or demolished with a final blow. Because of the doctrine of stare decisis, the operation, be it salvage or demolition, will have to be performed from above.

I therefore find that the sum of $52,000 constitutes non-taxable damage and allow the appeal. Pursuant to prior agreement, there will be no costs.

Appeal allowed.