Juan L Escudero v. Minister of National Revenue, [1981] CTC 2340, 81 DTC 301

The Chairman:—The appeal of Dr Juan L Escudero is from tax assessments in respect of the 1975, 1976 and 1977 taxation years by which the Minister disallowed amounts of $10,057.22, $46,102.08 and $29,657 respectively, claimed by the appellant as business losses from the operation of a kennel.

Issue

The issue is whether or not the appellant’s kennel operations have a reasonable expectation of profit. It is the appellant’s submission that the Minister’s reassessment of the first three years of operations does not justify the conclusion that the operation of the kennel has no reasonable expectations of profit. He submits that profits from dog-breeding kennels cannot be expected before a period of from 5 to 6 years of operations and that the Minister’s assumptions on which he reassessed the appellant for 1975, 1976 and 1977 are premature.

The respondent’s position is that the restricted market for purebred St Bernards, the size of the dog and the cost of feeding it render the operation unprofitable and he concludes that the appellant’s breeding kennel operations do not have a reasonable expectation of profit.

Summary of Facts

The appellant is a practicing physican and derives a substantial income from his medical practice. In 1975 the appellant, of Spanish origin, who had as a boy some experience in breeding horses, began the operation of a kennel under the name of Zigyson Kennels, Reg’d for the purpose of breeding and selling purebred St Bernard dogs. The kennels were constructed at the rear of the appellant’s residence.

As a physician, the appellant’s knowledge of genetics could serve usefully in the breeding of the dogs. The evidence is that the appellant himself works in the kennels on a regular basis and his wife keeps the registry of the animals, as required by Breeding Associations and Kennel Clubs. Proper accounting records of the operations are kept and reviewed

The appellant was aware of that clause and an admission was made that the appellant had for some time expected to be dismissed and had in fact been given two weeks’ notice prior to the termination of his employment.

Whether or not the three working days’ notice provided for in paragraph 23.16 of the collective agreement was meant to cover the termination of all of Railwest’s operations in Squamish (the appellant claims it did not), it nevertheless constitutes, in my opinion, a formal and legal notice of separation agreed to by both parties to the collective agreement. It is also the appellant’s contention that the two weeks’ notice given him of the termination of his employment with Railwest was unreasonable because of the pending complete shutdown of the plant. In my view, for whatever reason the appellant’s employment was terminated, Railwest was legally bound to give but three days’ notice. The employer in fact gave the appellant two weeks’ notice which, in my opinion, cannot be considered as unreasonable or insufficient notice.

Contrary to the facts in Atkins (supra) where no notice of termination of employment had been given to Atkins, the appellant in the instant appeal was given notice beyond that which the employer was legally bound to give. In my view, there was no breach by Railwest of the appellant’s employment contract under the collective agreement.

Although the union instituted legal action in the Supreme Court of British Columbia on behalf of its members, employees of Railwest including the appellant (Exhibit R-1), it discontinued the action so that the Supreme Court did not make a finding that Railwest had breached its employees’ employment contract nor did it award any amount for damages.

The appellant alleges that the advertisement made by Railwest with respect to employment in Squamish and the promises made to him by officers of the company had led him to believe that he was being offered long-term employment. The appellant did not adduce any evidence to substantiate these allegations nor did he, at any time, personally institute any action against Railwest based on these allegations.

The appellant did not satisfy the onus of establishing that Railwest had breached any aspect of his employment contract and failed to show how and why he considers himself to have been wrongfully dismissed.

It is the appellant’s further contention that the amounts paid by Railwest, under the agreement Exhibit R-3, were paid as damages to avoid legal action.

The evidence does not support the appellant’s conclusion. The agreement dated October 28, 1977 (Exhibit R-3) and signed by Railwest and the trade union representatives on behalf of all employees of Railwest, including the appellant, refers to the payment of $1,800 not as damages but as a termination allowance.

Clause 2 of the agreement (Exhibit R-3) reads as follows:

2. It is understood that the payments referred to in clause 1 of this agreement include any and all amounts due under the collective agreement between the parties hereto effective August 1, 1975 to July 31, 1977, or any previous or subsequent collective agreements between the parties hereto. No rights, obligations or terms of any collective agreement between the parties hereto will survive beyond the date of this agreement.

In the release given by the union to Railwest dated October 28, 1977 (Exhibit R-4), the union itself refers to “alleged” breach of contract:

AND IT IS AGREED that we have read this document and fully understand the terms of this settlement and that we voluntarily accept this sum for the purposes of making a full and final compromise and settlement of all claims against Railwest, their heirs, executors, administrators and assigns which we now have or which we may have arising out of the alleged breaches of contract of employment or otherwise, noted above.

AND IT IS AGREED that neither the payment of the sum or anything herein contained shall be deemed to be an admission of liability on the part of Railwest.

There is no hard evidence before the Board that the payment by Railwest to its employees was in fact damages for wrongful dismissal. The wording of the release gives one a fairly good insight as to why the union discontinued its legal action against Railwest.

In summary, the evidence does not establish that Railwest was guilty of a breach of the appellant’s employment contract; that the appellant was in fact or in law wrongly dismissed or that the amount of $1,800 was paid to the appellant as damages for wrongful termination of a contract of employment.

On its facts, this appeal is distinguishable from that of Atkins (supra) and my conclusion that the payment received by the appellant was not for damages for breach of employment contract and for wrongful dismissal leads me to dispose of the appeal by dismissing it.

In so doing, I am painfully aware that my decision goes counter to the decision in Beck v MNR, [1980] CTC 2851; 80 DTC 1747, rendered by my learned colleague Mr M J Bonner. That cases are often distinguishable on their facts cause no surprise; that cases whose basic facts are identical can at times be distinguishable is a little more surprising but nevertheless possible.

In both the Beck case and the instant appeal, the issue and the facts are the same, being whether the amounts of $1,800 received by Beck and the appellant as employees of Railwest after permanent closure of the plant were payments of damages for breach of contract and wrongful dismissal. Although the basic facts in the Beck case and in the appeal presently before the Board are identical, stemming from the same source and under exactly Similar circumstances, the conclusions are different because the evidence was presented differently in each case. In the Beck case, although reference was made to the action commenced in the Supreme Court of British Columbia and the writ brought in evidence, the Minutes of Settlement and the release signed by representatives of the union after the action had been discontinued and produced in the instant appeal as Exhibits R-3 and R-4, which in my opinion constitute very pertinent evidence in determining a question of fact, they were not brought into evidence before my learned colleague in the Beck case.

My learned friend as well as I must determine the issue in our respective but identical cases on the basis of the evidence brought before us and although there may be between us no disagreement as to the applicable law, differences and/or omissions in the evidence adduced can, as it did in this instance, result in an unavoidable but understandable contrary finding.

Having concluded in the instant appeal that the payment made to the appellant by Railwest was not for damages for wrongful dismissal, it might perhaps be useful to attempt here to see if the nature of the $1,800 can be more clearly identified.

In my opinion, Railwest was under no legal obligation to pay any amount to its employees on terminating their employment. However, although there may not have been any legal breach of employment contracts or any wrongful dismissals in a legal sense, the circumstances surrounding the termination of employment i.e. permanent closure of the plant, legal but short notices of layoffs and the relatively small labour market in Squamish and the necessity of seeking work elsewhere may well have caused unusual hardship to employees which was apparently recognized by the employer.

The minutes of settlement and the release of Exhibits R-3 and R-4 indicate to me that, without admitting or having any legal liability to do so, Railwest agreed to make an “ex gratia” remuneration (referred to as “Termination allowance”) for its employees to help finance them while seeking other employment under unusual and difficult circumstances.

These payments were not for damages; they were not bona fide retiring allowances under subparagraph 56(1 )(a)(ii) of the Act nor were they personal gifts. In my opinion, the ex gratia payments were made by the employer and received by the employees in respect and by virtue of their contract of employment.

In support of this opinion, I refer to a decision of the Exchequer Court of Canada in George Smith Buchanan v MNR, [1966] CTC 317; 66 DTC 5257.

Although the facts in Buchanan are different from those of the appeal presently before the Board, the principles enunciated by the Learned Mr. Justice Cattanach with respect to the nature of a payment made “as a matter of grace” are applicable and indeed very helpful in determining the issue in this appeal.

In Buchanan (supra), the taxpayer received in semi-monthly instalments amounts of $1,903 after being dismissed without notice from a firm of solicitors. The payments were made by the firm voluntarily in order to provide the taxpayer financial assistance to enable him to seek further employment elsewhere. The taxpayer objected to the amounts being considered by the Department of National Revenue as income from employment, contending that they were personal gifts. His appeal to the Tax Appeal Board failed and he then appealed to the Exchequer Court where he also failed.

In dismissing the appeal, Mr. Justice Cattanach in his reasons for judgment states at 322 [5261]:

While the legal firm paid the appellant an amount equivalent to three months’ salary at $750 per month (less income tax thereon) it was under no legal obligation whatsoever to do so and the payment of that amount was purely voluntary. But a payment may be liable to income tax even though it was voluntary on the part of the person who made it.

At 323 [5262] Mr. Justice Cattanach says:

An employer, for the purpose of assisting an employee whom he did, in fact, remunerate for his services, cannot relieve the employee from his obligation to pay income tax by saying that it was intended as a personal gift and not remuneration.

and further on 323 [5262], the learned justice adds:

The payment was a gift in the sense that the legal firm was under no obligation to pay the appellant anything. But they did. The amount paid was identical to three months’ pay in lieu of notice, it was treated by the firm as remuneration and I cannot escape the conclusion that it was intended as such rather than as a gift personal to the appellant.

In my view it, therefore, follows that the payment was income in the hands of the appellant from an office or employment being a benefit received by the appellant in respect of, in the course of, or by virtue of the office or employment within the meaning of paragraph 5(1 )(a) of the Income Tax Act.

Neither do I think, the fact that the appellant’s employment had been terminated when the payment was made, prevents the payment being taxable income (see Cowan v Seymour (supra).

The principles enunciated in Buchanan and the decision rendered by Mr. Justice Cattanach are applicable to the facts of this appeal and I feel bound to follow that decision. Having concluded that payments of $1,800 were not for damages for wrongful dismissal, neither the decision in Atkins nor the remarks made by the Supreme Court of Canada in Cewe (supra) have an application in the determination of this appeal.

I hold therefore that the amount of $1,800 paid to the appellant by Railwest in 1977 was not for damages arising from a breach of employment contract and for wrongful dismissal but was an ex gratia remuneration received by the appellant with respect to and in virtue of the appellant’s employment and is taxable under subsection 5(1) and paragraph 6(3)(d) of the Income Tax Act.

The appeal is therefore dismissed.

Appeal dismissed.