Frank S Hibbins v. Minister of National Revenue, [1980] CTC 2785, 80 DTC 1672

Guy Tremblay:—This case was heard in Toronto, Ontario, on June 29, 1979, and was taken under advisement on October 17, 1979.

1. Point at Issue

The point is whether the appellant is correct in not including the amount of $21,756 received from his former employer, Nisbet Lodge, during the year 1976. The appellant contends that the said amount was received in respect of a breach of contract. According to the respondent it was received as a benefit under the contract, or in respect of an employer-employee relationship.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions including the judgment delivered by the Supreme Court of Canada in fl W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 By a verbal agreement, the appellant agreed to be employed as the Administrator of the Nisbet Lodge nursing home in the City of Toronto, Province of Ontario, beginning on February 1, 1973, and for an indefinite term. He was to be paid an annual salary of $16,000, together with an annual automobile allowance of $1,500 and an annual pension contribution by the employer of 5% of his salary, or $800. (SN p 8 line 6 to p 11 line 24)

3.02 The appellant had been a member of the Calvary Church in Toronto for more than 25 years where he had become closely associated with the members of the Board of Directors of Nisbet Lodge, who were also members of the Church. In particular, the appellant was hired by Robert McClintock, an active Church member and the man instrumental in establishing Nisbet Lodge. (SN p 6 line 8 to p 8 line 5)

3.03 The appellant left his employment as Vice-President, marketing, of A AR Williams Machinery Division, to join Nisbet Lodge. His annual salary was about $18,000-$18,500 and he received the benefit of a group insurance plan, company car, and four weeks vacation. (SN p 4 line 3 to p 6 line 7)

3.04 On January 31, 1976, after a vacation in Florida, the appellant was asked to meet the directors of Nisbet Lodge at Calvary Church, more particularly in the pastor’s study. He was informed of a decision of the directors. This decision, which appears in the “Minutes of a special meeting of the Board of Nisbet Lodge held at Calvary Church on January 31,1976” (Exhibit R-1) reads as follows:

1. The Board unanimously agrees that Frank Hibbins did a sound job in setting up Nisbet Lodge. But in view of strained relationships with the Board, and continuing personnel problems, the Board who unanimously agreed that in the interests of all concerned Frank Hibbins should resign, not later than February 29, 1976. Severance pay will be six months’ salary together with all existing fringe benefits, with effect from March 1, 1976.

2. Mr N J Notley was appointed as Acting Administrator at the point of Frank’s departure.

3. The Executive together with Dr Tom Wright was requested to search for a replacement for the Administrator.

4. The Nominating Committee was asked to meet soon, prior to the AGM which is likely to be in April 1976.

5. It was also agreed that at the end of six months, if Frank Hibbins had not found suitable employment, the Board would continue to pay his salary month by month, to a maximum of a further six months. That is to February 28, 1977, OR until he finds suitable employment, whichever comes first.

3.05 On February 10,1976, the appellant received a letter (Exhibit A-1) from Mr Notley, Vice-Chairman of Nisbet Lodge, officially advising him of the contents of the resolution.

3.06 ‘‘The strained relationships with the Board” which are referred to in the 1st paragraph of the above resolution are described by the appellant and after by Mr Notley:

(a) By the Appellant

A. I would like to say that first of all, even at that point we had some difficulties in operation of the lodge, but when you have a new home with growing pains and new staff and new residents, as you would in any regular business, you are bound to have day-to-day operational problems and I don’t think anyone of them could have been overcome within the responsibilities of the management and yes, there were problems existing. One of the problems was with a Mrs Maxwell who was the nursing director at that time. There were frictions from her. She was closely related with the home physician and as is the case in many if not all homes for the aged, there is a professional jealousy between the professionals or administrator and the home physician because of a lack of medical information and because of the nursing director takes so many instructions from the home physician, there builds a little clique or kingdom within a home where this friction can develop that they are sort of at loggerheads with the administrator on many situations and the situation was developing there and I think given the support of the board, I could have resolved it. It would have been resolved if I had known that I had the support of the board. (SN p 17 line 21 to p 18 line 14)

(b) By Mr Notley

Q. In January of 1976. Can you tell us, Mr Notley, what the relations were like between Mr Hibbins and the board and the other employees?

A. Well, in the beginning as you have heard already, we were all new to the job and we have a great deal of enthusiasm and everything went well and Mr Hibbins did excellently on opening up the new home et cetera, partly of course because there wasn’t anybody on the board who had any experience at that except I myself had been on the building committee of the hospital at North York and other institutions of that kind, but I had never been part of a home for the aged and this went On over a period and of course he and we learned a great deal, but it was certainly true towards the latter end of 1975 the relations between Mr Hibbins and the board deteriorated greatly and it became embarrassing and uncomfortable in many ways. (SN p 70 line 17 to p 71 line 6)

3.07 The appellant sought legal advice regarding the matter of “severance pay” and was advised by his solicitor by telephone that he should seek one year’s salary. Mr McClintock was so advised and he agreed to provide this. Accordingly, the sum of $14,944.87 was received by the appellant on March 4,1976, being the sum of one year’s salary and pension benefit less deductions for income tax, Canada Pension Plan, Unemployment Insurance and personal use of an automobile, and calculated as follows:

(Exhibit A-2)

The appellant received the said amount “in satisfaction of all claims arising out of my employment by Nisbet Lodge and as agreed between us up to this date” (March 4, 1976) as it appears from “Statement of settlement.of termination of employment, effective February 29th, 1976”(Exhibit A-2).

According to Mr Notley the general terms of the settlement were known “to Mr Hibbins and to myself” before the end of February. “The arithmetic of course wasn’t until it was put down on paper, but the general terms were, yes.” (SN p 78). The appellant testified in the same way (SN p 26).

3.08 On March 11,1976, the appellant wrote to Nisbet Lodge (Exhibit A-3) to object to the deductions (income tax, CPP and UIC) of $6,410.33 because “This settlement then can be considered as damages rather than income and not subject to income tax.” He requested the reimbursement of the said amount of $6,410.33.

The said objection and requirement were done “on the counsel of Mr Bruce Binnings of Mathews, Dinsdale & Clark, Labour lawyers”.

3.09 Dated March 10, 1976 the following statement absolving Nisbet Lodge of all or any future responsibility was sent to the Nisbet Lodge with a letter dated March 11, 1976 (Exhibit A-3). This statement reads as follows:

KNOW ALL MEN BY THESE PRESENCE that ! Frank S Hibbins of the Municipality of Metropolitan Toronto in consideration of the payment to me of $21,354.80 inclusive of costs, do hereby remise, release and forever discharge Nisbet Lodge, its successors and assigns of and from all manner of actions, courses of actions, claims and demands whatsoever which against the said Nisbet Lodge I ever had, now have, or which my heirs, executors, administrators or assigns or any of them hereafter can, shall, or may have, for or by reason of any cause, matter or thing whatsoever existing up to the present time including the actions that I have against Nisbet Lodge for the wrongful dismissal of me from my employment with them.

AND I do further agree to indemnify and save harmless the said Nisbet Lodge against any and all liability, loss, damages or costs, that it may hereafter suffer, incur, be put to pay or lay out to the Minister of National Revenue by reason of the said payment and I declare that I fully understand the terms of this settlement and the effect of this release.

IN WITNESS WHEREOF, I have hereunto set my hand and seal this 10th day of March 1976

WI TN ESS:

(signed)

(Frank S Hibbins)

3.10 According to the appellant, no legal proceedings were instituted against his employer, no letter was sent and no direct communication was made between his counsel, Mr Bruce Binnings, and an administrator of Nisbet Lodge.

3.11 Mr Notley gave explanations for the change of six months severance pay to twelve months:

Q. Can you tell me how it came to be that the term was modified to be 12 months definite salary?

A. Well, as you have heard once again, Mr. Hibbins was insistent that the arrangement wasn’t sufficient, wasn’t good enough for him. By that time, I think that the board and probably Mr Hibbins too was getting a bit tired of the whole thing. We could not very well look for another administrator until we had tidied up the matter with Mr Hibbins. We were also very much aware that Mr Hibbins was upset about all of the circumstances. In fact he had said that he had spoken to a number of people in the Church and other people and was very upset.

We were also aware of his family and we had a high regard for his wife and son and I believe even now that we really tried to make it as easy as possible for Mr & Mrs Hibbins. They were known to a great number of us in different degrees and we have had a sense not only of responsibility, but a sense of willingness, to help as much as possible.

Q. Whose decision was it to modify these terms and allow for compensation to be paid on a one year rather than a 6 months definite and 6 months indefinite basis?

A. Well, as recorded in the minutes that you have, on January 31, the original intention was 6 months and 6 months partly for Mr Hibbins’ benefit and partly because it was very inconvenient for us to find that amount of money in one lump sum. But, it is true as you have heard that I discussed the matter with Mr McClintock, the chairman, and we had been given some latitude by the board because we were and still are the two senior members of the board and we arrived at that decision and then in due time I reported it to the board and the board approved and ratified it.

3.12 The appellant worked for A E LePage Limited, in the City of Kitchener as a shopping centre manager, beginning about ten weeks after his dismissal from Nisbet Lodge until about April 1977, at a salary of about $16,000, then worked as the Administrator of St. Hildas nursing home in the City of Toronto until about October 1978, at a salary of about $20,000 and then returned to the Standard-Modern Tool Company Limited as sales manager of tooling at a salary of about $22,000 where he works presently. (SN p 30 line 17 to p 36 line 24)

3.13 By notice of assessment dated September 9, 1977, the amount of $21,756 was included in the appellant’s income by the respondent.

4. Law—Cases—Comments

4.1 Law

The main sections of the Income Tax Act involved in the present case are 5(1) and 6(3) which read as follows:

5. (1) Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

6. (3) An amount received by one person from another

(a) during a period while the payee was an officer of, or in the employment of, the payer, or

(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

(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(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.

4.2 Cases

The following precedents were referred to the Board by both counsel:

1. Carter v Bell & Sons, [1936] 2 DLR 438;

2. Thomas G Quance v HMQ, [1974] CTC 225; 74 DTC 6210;

3. HMQ v Robert B Atkins, [1975] CTC 377; 75 DTC 6263;

4. HMQ v Robert B Atkins, [1976] CTC 497; 76 DTC 6258;

5. Thelma Bye v MNR, [1975] CTC 2039; 75 DTC 33;

6. IRC v Wesleyan and General Assurance Society, [1948] 1 All ER 555;

7. Gunter Gahrns v HMQ, [1978] CTC 651; 78 DTC 6436;

8. William George Burgess v MNR, [1976] CTC 2146; 76 DTC 1119;

9. Larry Grozelle v MNR, [1977] CTC 2432; 77 DTC 310;

10. Boris Krivy v MNR, [1979] CTC 2108; 79 DTC 121;

11. Peter Moss v MNR, [1963] CTC 535; 63 DTC 1359;

12. William Unaitis v MNR, [1978] CTC 2279; 78 DTC 1193;

13. Paul Girouard v MNR, 78 DTC 1011;

14. W G Gowling v MNR, [1978] CTC 2885; 78 DTC 1624;

15. Alan B Love v MNR, [1978] CTC 2880; 78 DTC 1630;

16. Raymond Brackstone v MNR, [1979] CTC 2277; 79 DTC 284;

17. Paul Girouard v HMQ, [1979] CTC 179; 79 DTC 5118.

4.3 Comments

4.3.1 It seems to the Board that the evidence to the effect that the appellant received the amount of $21,756 meets the requirements of paragraph 6(3)(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 on officer of, or in the employment of, the payer . . .

Paragraphs 3.04 and 3.07 indeed clearly show that the agreement between the appellant and Nisbet Lodge was made before the end of February 1976; hence before he left.

4.3.2 Consequently because of the fulfillment of paragraph 6(3)(b), the amount is deemed to be a remuneration for the purposes of section 5 and therefore taxable.

The presumption, however, can be reversed if the evidence shows that the amount “cannot reasonably be regarded as having been received” within the meaning of paragraphs 6(3)(c), (d) or (e).

4.3.3 It is obvious that the amount was not received within the meaning of paragraph 6(3)(c) (“for accepting office” or “entering into the contract of employment”) or paragraph 6(3)(e) (for doing or not doing something before or after the termination of employment).

4.3.4 Paragraph 6(3)(d) reads as follows:

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

According to the decision of the Board of Nisbet Lodge, dated January 31, 1976, the amount of the original six months salary (para 3.04) was extended to one year’s salary (para 3.14) and was paid as severance pay.

The Board’s original decision was to:

continue to pay his salary month by month, to a maximum of a further six months. That is to February 28, 1977, OR until he finds suitable employment, whichever comes first.

This Board does not see how all those payments could have been considered:

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

The appellant indeed would not have worked anymore for Nisbet Lodge.

This is the “something” and even more obvious it is not for remuneration if the given money (“severance pay”) is received in only one amount.

In fact, the amount was certainly not received for past services because the appellant had been paid for that. The fact that the decision of the Board of January 31, 1976 speaks about “salary” which is continued to be paid month by month does not necessarily mean that it would have been a Salary; it would have been a “severance pay”. The one year salary is only a scale to fix the “severance pay”. As Mr Justice Jackett said in the case of Atkins:

Damages 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”.

If Nisbet Lodge had given a one year’s notice, no severance pay would have been necessary.

4.3.5 The amount of $21,756 ‘‘cannot reasonably be regarded as having been received” according to paragraphs c, d, or e of subsection 6(3) of the Income Tax Act, and is not taxable.

5. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.