Wilhelm J Kok v. Minister of National Revenue, [1980] CTC 2903, 80 DTC 1762

The Chairman:—The appeal of Mr Wilhelm J Kok is from an income tax assessment by which the respondent added to the appellant’s income for 1978 an amount of $6,128.55 as income from employment, whereas the appellant contends that the said amount was received as damages for wrongful dismissal. The notice of appeal also contained a claim for $1,000 pension deduction. However by notice of reassessment dated March 7, 1980, the pension claimed was allowed and that issue has been resolved.

issue

The sole issue in this appeal therefore is the nature of the amount received by the appellant in the 1978 taxation year.

The Facts

The appellant was an employee of Computing Devices Company, 95% of the shares of which were owned by Control Data Limited. On December 2, 1977, the appellant was advised by Mr deSouza the manager of Computing Devices Company, that his employment would be terminated as of December 16, 1977. (Exhibit R-1)

Exhibit R-1 reads as follows:

COMPUTING DEVICES COMPANY

a division of Control Data Canada, Ltd.

CONTROL

DATA

1st December, 1977

Mr Wilhelm J Kok

6E Arnold Drive

Ottawa, Ontario

K2H 6V0

Dear Bill:

As you are aware there has been a considerable reduction in the workload, causing severe constraints on our budgetary position. It is with regret, therefore, that we must advise you that the Company finds it necessary to retrench and, as a result, your services will no longer be required as of 2nd December, 1977. As communicated by you to Mr T Rimmer, you do not wish to relocate outside Ottawa, and therefore, alternative avenues of employment within the Control Data family are not explored.

In recognition of your length of service with the Company, you will be allowed the equivalent of up to fourteen weeks pay which will include payment in lieu of two weeks notice. Your name will be retained on the payroll until 10th March, 1978, unless you are successful in relocating yourself prior to that date. Even if you succeed in finding a new position right away, you will be paid your salary until 16th December, 1977. It is understood, however that if you start work after the 16th December, 1977, prior to the 10th March, 1978, you will notify the Company and your termination will be finalized at that time. This payment will be made to you on regular pay days only (every two weeks) up to a miximum of fourteen weeks or until you secure other employment.

During the period in which your name is retained on the payroll, the existing benefits will remain in force. Your vacation entitlement will be calculated as at the 2nd December, 1977, and this, together with any outstanding vacation entitlement, will be paid to you at such time as you leave the payroll. In the meantime, we will be pleased to do anything we can to assist you in relocation, and sometime in the future, we will be happy to discuss the alternatives available to you with respect to the Company Pension Plan. If there are any further questions please do not hesitate to give me a call—596-2821.

Yours sincerely,

R deSouza

Manager, Employee Relations

RdS/CSC

PO Box 8508, Ottawa, Ontario, Canada K1G 3M9 Telephone (613) 596-3810. TWX 610-563-1632. Telex 053-4139

On the appellant’s T-4 1978 slip (Exhibit A-1), issued by Control Data Canada Ltd, the amount of $6,128.55 is shown as total earnings. The employee’s pension contributions, unemployment insurance and registered pension plan contributions were deducted and an amount of $108.55 was received as a benefit. The appellant was effectively kept on the company payroll until March 10, 1978, as stated in Mr deSouza’s letter. (Exhibit R-1)

Submissions

The appellant contends that he was not an employee or an officer of either Computing Devices or its parent company Control Data Limited as of December 16, 1977 and rendered no services to either company from December 16, 1977 to March 10, 1978 (Exhibits A-2 and A-3), and that the amount of $6,128.55 was not income from employment and should not be taxed. The respondent on the other hand contends that in fact and in law the said amount was taxable income from employment.

The Facts

The evidence established that the appellant by letter dated December 1, 1977, was advised that his services would no longer be required as of December 2, 1977. However, the appellant was paid his regular salary until December 16,1977, even though he may in the meantime have succeeded in obtaining another employment. The appellant did not find another employment and was in fact kept on the employer’s payroll until March 10,1978, as indicated in the employer’s letter (Exhibit R-1), and he received $6,128.55 in that year.

In deciding whether the amount received by the appellant in 1978 is income from employment or damages for wrongful dismissal, the appellant is begging the question when he affirmed that he was not in the employ of Computing Devices Company or Data Processing Ltd after December 16, 1977. I am also satisfied on the basis of Exhibit A-1 (T-4 1978 slip) and Exhibit R-3 (T-4 1977 slip), that the appellant for whatever company he may have actually worked for received his pay from the Parent Company, Control Data Canada Ltd. The appellant offered no solid evidence to the contrary.

Though the facts in this appeal are clear, there now appears to be some confusion as to the interpretation to be given to the pertinent sections of the Income Tax Act, viz subsection 6(3), paragraph 56(1 )(a) and section 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The decisions of the Trial Division and that of the Appeal Division of the Federal Court, confirming the decision of the lower court in dismissing the appeal in Her Majesty the Queen v Robert B Atkins, [1975] CTC 377; 75 DTC 5263, and [1976] CTC 497; 76 DTC 6258, were cited by counsel for the respondent as being the present state of the law.

Both the Trial Division and the Appeal Division of the Federal Court held in that case, that the taxpayer had been dismissed without reasonable notice and that the $18,000 he had received from his employer, was made in lieu of reasonable notice of dismissal and constituted a settlement of damages for breach of an employment contract and was not taxable.

I am quite convinced that the facts of the present appeal differ substantially from the Atkins (supra) case in that;

1. the appellant was dismissed by his employer.

2. that he was given in the circumstances a reasonable notice of dismissal.

It appears to me that in most of the employer/employee relationships, a notice of dismissal though often not specifically referred to in an employment contract, is generally accepted as a necessary requirement to prevent an employer from arbitrarily dismissing an employee, without giving him any opportunity of finding some other employment. In the instant appeal, the appellant’s letter of dismissal contained the employer’s voluntary commitment to keep the appellant on its payroll until December 16, 1977 (14 days), or until the appellant had succeeded in obtaining another employment up to March 10, 1978.

In my view, the whole purpose of giving notices of dismissal was generously met by the employer. The amount he received from December 2, 1977 to March 10, 1978, was in my opinion directly related to appellant’s continuing status of employee, rather than as damages for wrongful dismissal or breach of an employment contract. It is worthy of noting in this contract, that no evidence was produced to indicate the existence of any employment contract which stipulated the duration of the appellant’s employment, or the time in which the notice of dismissal must be given. Nor in the circumstances can I find any damages or prejudices caused to the appellant for wrongful dismissal, for which the appellant might have been successful in a court action for damages. I must conclude that the amount received by the appellant, was not for damages for wrongful dismissal nor even payment in lieu of reasonable notice, but was income arising from his status of employee.

Counsel for the respondent also cited the unanimous decision of the Supreme Court in an action inter alia for wrongful dismissal in the case of Jack Cewe Ltd v Gary William Jorgenson, [1980] CTC 314; 80 DTC 6233.

In his reasons for judgment, the Learned Justice Pigeon of the Supreme Court of Canada referred to the Federal Court decisions in the Atkins case [1976] CTC 497; 76 DTC 6258, which affirmed the decision of Mr Justice Collier of the Trial Division, [1975] CTC 377; 75 DTC 5263. The Learned Justice noted that the judgment in the Atkins case was contrary to the decision of Mr Justice Cattanach in Thomas G Quance v Her Majesty the Queen, [1974] CTC 225; 74 DTC 6210.

In his reasons for judgment, Mr Justice Pigeon expressed grave doubts as to the validity of the reasoning of the Learned Chief Justice of the Federal Court in the Atkins case, [1976] CTC 497; 76 DTC 6258, where the Learned Chief Justice Jackett stated at 497 and 6258 respectively:

Having regard to the weight placed by the appellant on the decision of the Trial Division in Quance v The Queen, [1974] CTC 225; 74 DTC 6210), I deem it advisable to state in my own words what I regard as the basic fallacy in the appellant’s position.

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 (ie, “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. . ..

In expressing his reservations on the above statement Mr Justice Pigeon Stated:

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 Livesley v Horst, [1924] SCR 605 Duff, J said, speaking for the Court (at p 607):

In principle, it is difficult to discover a solid ground for refusing to classify the right to damages for breach of contract with other rights arising under the proper law of the contract, and recognizable and enforceable as such.

Mr Justice Pigeon also stated:

The basic principle governing the award of damages for breach of contract is that ‘the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed’. I fail to see any reason why this would not hold true towards the tax collector as well as towards the parties to the contract.

As stated earlier, the facts of the instant appeal are significantly different from those of the Atkins (supra) case. Reasonable notice was given to the appellant that his employment which evidently was not a perpetual contract would be terminated. There was no breach of contract which could have given rise to damages for wrongful dismissal and the appellant was kept on the payroll sufficiently long for him to find another employment and was in the same position as he would have been if the contract had been performed.

Further on, Mr Justice Pigeon stated:

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.

In my opinion, the above statement of the Learned Justice would have had an even more direct and more important bearing on my decision had I found that the appellant had not been given a reasonable notice of dismissal and that the amount received by him was damages for wrongful dismissal. Even though the Supreme Court did not reverse the decision in the Atkins (supra) case, it has expressed unanimously a principle which the Board could not have ignored.

For purposes of this appeal, the facts are sufficiently distinguishable from those of the Atkins (supra) case, to permit the Board to arrive at a conclusion different from that of the decision of the Federal Court in the Atkins (supra) case.

The principles enunciated by the Supreme Court in the Cewe (supra) case, facilitate my decision in the instant appeal by inviting the courts to consider not only whether the damages for wrongful dismissal were income “from an office or employment” but to consider the broader question as to whether the income might not be from an unspecified source under general provisions of section 3 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Although there did exist at one time an employer/employee relationship between the appellant and the employer, whatever hesitation I may have had in concluding that the amount of $6,128.55 received by the appellant after he had been dismissed from office was income from employment, completely disappears when section 3 of the Act is considered in conjunction with subsection 6(3) of the Income Tax Act, 1970-71-72, c 63, as amended. (Section 25 of the old Act, RSC 1952, c 148, as amended.)

Subsection 6(3) of the Act reads as follows:

(3) Payments by employer to employee. 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 employment.

In my opinion, on the basis of the Supreme Court decision in the Cewe case, I would have to arrive at the same conclusion, whether I found that the amount received by the appellant was income from employment and had been paid in lieu of notice or received as damages for wrongful dismissal Since in each instance the payments constitute income from an unspecified source but directly related to the taxpayer’s employment.

For these reasons, the appeal is dismissed.

Appeal dismissed.