Boris Krivy v. Minister of National Revenue, [1979] CTC 2108, 79 DTC 121

Roland St-Onge:—The appeal of Mr Boris Krivy came before me on October 18, 1978, at the City of Toronto, Ontario and it deals with his 1975 taxation year.

In his reply to the notice of appeal, the respondent has admitted the following facts of the notice of appeal:

1. I am a resident of the Municipality of Metropolitan Toronto.

2. I was employed by The Carswell Company Limited, 2330 Midland Avenue, Agincourt, Ontario, from about November 10, 1965, until July 31, 1975. From August, 1967, until the termination of my employment I was employed as Executive Editor of The Carswell Company Limited (referred to hereinafter as “the company”).

3. On or about July 16,1975,1 was requested by the Secretary-Treasurer and by the General Manager of the Law Book Division of the company to submit my resignation forthwith and I did so on July 23, 1975. The last day on which I attended at the premises of the company and performed my normal duties was July 16, 1975.

4. Between July 16, and 23, 1975, an agreement was negotiated whereby the company agreed to pay to me the sum of $2,212.50 per month for a period of nine months from August 1, 1975, together with an additional amount not to exceed 15% of $26,550 following the calculation of the profit position of the company for the fiscal year 1975.

5.1 submitted my resignation to the company on July 23,1975, to become effective on July 31, 1975. Payments totalling $4,425 were made to me by the company pursuant to the said agreement for the months of August and September, 1975.

7. In the month of October, 1975,1 secured employment with another firm, a condition of which was that I was required to terminate all relationships with the company. Accordingly, by agreement dated October 15, 1975, the company agreed to pay and did pay to me the sum of $17,000 in lieu of the said monthly payments and the additional amount referred to in paragraph 4 hereof. The consideration for the said agreement was that the company would be released from all claims I might have against it either as a result of my former employment by the company and/or in respect of the agreement referred to in paragraph 4 hereof, or any other claims whatsoever.

At the hearing the appellant testified as follows: he is a lawyer by profession and, as already mentioned, he had worked for The Carswell Company Limited for a period of ten years when he was dismissed around July 16, 1975, without being given any reason. He thought he had a long range and permanent career with the said company and he had no reason to believe that his position was in jeopardy.

His salary had been reviewed and increased every year. In January 1975 his employee benefits were:

1. pension benefits paid half by the company and half by the appellant;

2. life insurance benefits, three times the salary;

3. long term disability, six months paid by the company;

4. short term disability, a small premium paid by the company and

5. a bonus plan, 15% of the gross salary of the previous year.

In 1974 he was paid a bonus of 15% on a salary of some $23,000 and he had been paid a bonus every year since the profit position of the company had improved every year.

On July 16, 1975, Mr Hibbett, general manager of law book division and his immediate superior asked him to come to the office of Mr Bowering who was the secretary-treasurer of the company and he was told that he was being dismissed without notice. They did not give him any reason for his dismissal but he was told that he would receive his salary for the following six months.

On the same day the appellant went to see his lawyer, Mr Stanley Fisher, and was told that his dismissal was wrongful; that having been ten years with the company, he should have received a year’s notice. He was advised not to resign. Thereafter, the appellant took a two-week vacation and was paid his salary. Therefore, on July 23, 1975, he wrote to Mr Bowering and gave him his resignation from The Carswell Company. The appellant explained that this letter, which was a very polite one, was written to save face and to show that he was not fired. This letter was written after the appellant had a meeting with Mr Bowering, during which meeting it was agreed that the appellant was to receive nine months’ salary.

Then, on July 24, 1975, Mr Bowering wrote to the appellant

(1) to accept his resignation;

(2) to accept his verbal offer to remain as an employee in an advisory capacity to assist in an orderly transfer of his duties and responsibilities and this for a period of nine months at his current rate of remuneration (including bonus payments and the present employee benefits);

(3) not to object if the appellant becomes engaged in the nine-month period in any other commercial activity as an employee, partner or sole proprietor, provided it does not interfere with his duties to the company under this agreement;

(4) if the appellant becomes employed during the nine months, all employee benefits shall forthwith be terminated.

The appellant also explained that this agreement to keep him in an advisory capacity was made for the same purpose as the letter of resignation, namely to save face so that nobody would know that he had been fired.

Some two months later, he had an opportunity to work for another publishing company, so he telephoned Mr Bowering to cancel the July 24 agreement in consideration of a lump sum payment of $17,000. On October 3,1975, the appellant wrote to Mr Bowering to confirm his conversation and meeting and to fully discharge the company and to put aside the agreement of July 24, 1975. On October 15, 1975, Mr Bowering answered the appellant’s letter by accepting all the appellant’s requests.

The appellant also explained that following the July 24 agreement, he never went to the office of the company during office hours; never acted in an advisory capacity for the company, but received just two telephone calls from his former assistant, Mr Turnbull, with respect to two files he had worked on; that he never quarrelled with anyone in the company and if there was any dissatisfaction with respect to his work, he was never told by anyone.

Mr Stanley Fisher testified that in July 1975, he was consulted by the appellant and, on the information given him by the latter, he advised him not to resign, that his dismissal was wrongful; that the compensation of six months’ salary was inadequate and should have been a year’s salary. Ina telephone conversation with the lawyer for the company, Mr Fisher insisted that the appellant should obtain a year’s salary as damages with paid-up benefits and bonus to be negotiated. It was after this telephone call that the appellant negotiated the July 24 agreement with Mr Bowering.

Mr Bowering was heard on behalf of the respondent and testified as follows: in July 1975 the company received a letter from Mr Allsop, the company executive in London, England, advising Mr Hibbett that “the services of Mr Krivy must be terminated immediately for the reasons that I have discussed with you very often before’’. Mr Bowering explained very clearly that Mr Krivy was fired; that after that date, he was no longer an officer or an employee of the company; that the letter of resignation and this question of being retained in an advisory capacity were only a face-saving device; that his instructions from Mr Allsop was to fire the appellant immediately and not to enter into any agreement to retain his services. He also explained that the firing of the man, a lawyer who had been with the company for ten years, to replace him with a non-lawyer employee was very difficult; that having been with the company for three years, he himself was in a very embarrassing situation, having to tell such an employee that he was fired without notice and this is the reason why he took upon himself to negotiate some agreement that would save face and keep some good will between the appellant and the company.

Counsel for the appellant argued that the appellant was fired without notice; that the sum of $21,425 was not taxable because it was received in lieu of notice and for damages or compensation for improper dismissal; that Mr Allsop himself offered some compensation because he felt that the dismissal was improper; that the letter of resignation as well as the agreement to act in an advisory capacity were only a face-saving device and that the appellant never performed any duty in that capacity. He referred the Board to ten cases, but according to him, the two most important were firstly IRC v Wesleyan and General Assurance Society, [1948] All ER 555 at 557. With respect to that case, he said to know the true nature of a payment, we should look at the substance rather than the form of the transaction.

In the second case, Her Majesty the Queen v Robert B Atkins, [1976] CTC 497; 76 DTC 6258, the company agreed to give its employee severance allowance for ten months at $1,800 a month. This payment of $18,000 was not taxable because it was made in lieu of reasonable notice of dismissal. It was therefore in settlement of a breach of the employment contract and not a benefit under it.

Counsel for respondent argued that the arrangement was beneficial to both Carswell Company Limited and the appellant; that the $17,000 was paid pursuant to the July 24th agreement and should be included as income by virtue of paragraph 6(1 )(a); that to succeed, the appellant must prove that it does not fall under sub-paragraphs 6(3)(b) and (d); that the appellant had no cause of action against Carswell Company Limited for damages for wrongful dismissal except a possible cause of action to enforce his right to be compensated in lieu of reasonable notice being given to him prior to the termination of his employment.

Counsel for respondent referred the Board to some thirteen cases, the most important being Thomas G Quance v Her Majesty the Queen, [1974] CTC 225, 74 DTC 6210. In that case, the appellant was hired under a verbal contract. Ten years later, he was fired without notice. He was offered nine and one half months’ salary in lieu of reasonable notice. He refused this but did not take any action in court. Then the company paid the amount offered and the Minister included that as income. It was decided that payment of salary for a period coincident with a period of reasonable notice would prevent the dismissal from being wrongful.

According to the evidence adduced, it is obvious that the appellant was fired without notice. In spite of the fact that he sent a letter of resignation and was kept as an advisor, he never acted as such and his letter of resignation was sent after he was fired. This shows clearly that what was done after his dismissal was purely face-saving. One does not fire an employee of ten years’ service in the manner it was done without causing him considerable damages. It would have been different if the appellant had been told: “You have six to nine months to find another position. Whether you come to work or not, you will be paid.’’ But this is not the case. He was fired without notice and it is only after the intervention of lawyers and numerous negotiations between the appellant and Mr Bowering that the company accepted to pay him $24,425.

I agree with the appellant’s lawyers. The appellant had a good cause in damages for wrongful dismissal against the company. Herein, the Board must give more importance to the substance rather than to the form of the negotiations to know the true nature of the payments.

Also, the Board prefers to rely on a more recent decision of the Federal Court of Appeal to say that because the appellant was dismissed without notice, monies paid to him in lieu of notice of dismissal cannot be regarded as salary 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 are in respect of the breach of the contract of employment and are not paid as a benefit under the contract.

The fact that he was paid the equivalent of nine months’ salary is only a yardstick to fix the amount of damages.

Why was the appellant fired without notice? We do not have the answer and this opens the door to all kinds of speculations and, at the same time, to an action in damages. Consequently the payment in question does not fall within the following paragraphs and sub-paragraphs of the Income Tax Act:

paragraph 5(1); paragraph 9(1); paragraph 248(1); subparagraph 6(1)(a); sub-paragraphs 6(3)(b) and (d).

For these reasons the appeal is allowed.

Appeal allowed.