William Unaitis v. Minister of National Revenue, [1978] CTC 2279, 78 DTC 1193

Delmer E Taylor:—This is an appeal against an income tax assessment for the year 1973 in which the Minister of National Revenue increased the reported taxable income of the appellant by an amount of $15,570, allegedly received by him as severance pay. The respondent relied, inter alia, upon section 3, subsections 5(1) and 6(3) of the Income Tax Act, SC 1970-71-72, c 63.

Facts

On March 31, 1971 the appellant commenced employment with General Steel Wares Limited, Toronto, Ontario (hereinafter referred to as “GSW”). On or about April 5,: 1971 GSW and the appellant entered into a written employment agreement (the “April agreement”). The April agreement provided that the appellant was “employed to perform the services of Manager of Manufacturing Engineering at an annual salary of $23,500 plus normal increments thereto in accordance with the salary policy, from time to time, of the company”. The April agreement further provided that “on January 1 in each and every year, the term of employment will be extended to run for a term of three years from such date unless notice to the contrary has been previously given by either party to the other”. The April agreement further provided that either party ‘‘may terminate the agreement by giving the other one year’s notice of termination”.

On or about December 29, 1971 the appellant and GSW entered into a new employment agreement (the “December agreement”) to replace the April agreement. The essential difference between the two agreements was that the December agreement was for an indefinite term “provided that either party may terminate the agreement by giving the other one year’s notice of termination’’.

On December 11, 1972 GSW wrote to the appellant advising him that it “is the policy of the Company to reduce the number of written employment contracts to executives, and, accordingly, we give you notice that your present contract will terminate December 15, 1973”. Such notice was acknowledged by the appellant.

By an agreement dated January 23, 1973 the appellant ceased his association with GSW, effective January 31, 1973, and the issue in this appeal arose from the settlement of $15,570 which formed part of that agreement.

Contentions

The appellant asserted that he was wrongfully dismissed from his employment in that pursuant to the agreement dated December 29, 1971 he did not receive the one year’s notice of termination to which he was entitled. The $15,570 received by him from GSW therefore represents damages for breach of contract and are therefore not taxable.

It was the position of the respondent that the appellant was not wrongfully dismissed from his employment with GSW, but in 1973 received the amount in question from GSW during a period while he was in the employment of GSW, or on account or in lieu of payment of, or in satisfaction of, an obligation arising out of the agreement made by GSW with the appellant. The $15,570 was received by the appellant as remuneration or partial remuneration under his contract of employment.

Evidence

In general the appellant corroborated the information provided in his notice of appeal:

In April of 1971 the appellant reported to Mr Jack Vincent who was Director of Manufacturing of the Moffat Division. The appellant continued to report to Mr Vincent until June 1972 when a Mr K Pifer became Director of Manufacturing and acting Plant Manager. In October of 1972 Mr Pifer ceased to be acting Plant Manager and Mr L Rintoul became Plant Manager.

By late November 1972 the appellant became aware that Mr Pifer was seeking a replacement for him even though at that time the appellant was reporting to Mr Rintoul. In early December 1972 the appellant sought legal advice with respect to his position at GSW.

In mid-December 1972 Mr Rintoul advised the appellant that a replacement had been hired for him and offered him a position as assistant to the Manufacturing Manager while the appellant sought other employment. On January 12, 1973 the appellant advised Mr Rintoul that he would accept the position of assistant to the Manufacturing Manager while he sought other employment.

Notwithstanding the arrangement entered into between Mr Rintoul and the appellant, and the notice given by GSW to the appellant dated December 11, 1972, Mr Piter, in January 1973, terminated the appellant’s employment and ordered him to be out of the plant within a short period of time and offered the appellant no compensation whatsoever.

The appellant then called Mr F W Hanna, Director. of Industrial Relations for GSW, and advised him as to what had happened. He advised Mr Hanna that he had sought and received legal advice and threatened legal action in respect of the amounts. owing to him by virtue of his contract.

The appellant subsequently discussed this situation with Mr Rintoul who offered 6 months’ salary as a settlement of the appellant’s legal rights. This was rejected by the appellant and the parties eventually agreed upon the amount of $15,570. As a result the parties entered into an agreement, dated January 23, 1973, whereby they “agreed to terminate the employment agreement dated December 29, 1971” effective January 31, 1973, and that “a settlement of $15,570.00 will be paid to the employee on January 31, 1973, in satisfaction of all claims which the employee may have arising out of his employment or its termination”.

During examination and cross-examination the appellant identified the following documents which were submitted as evidence:

Exhibit A-1—Copy of an agreement dated April 5, 1971 between

GSW and the appellant;

Exhibit A-2—Copy of an agreement dated December 29, 1971, between

GSW and the appellant;

Exhibit A-3—Copy of a letter from the appellant to W MacGregor,

Esq, dated December 11, 1972;

Exhibit A-4—Copy of a memorandum to L D Rintoul from the appellant,

dated January 12, 1973;

Exhibit A-5—Copy of a memorandum to the appellant from P O

Price, K E Pifer and L D Rintoul, dated December 11, 1972;

Exhibit A-6—Copy of a settlement dated January 23, 1973, between

GSW and the appellant, effective January 31, 1973;

Exhibit R-1—Copy of a letter from D McKean, Sales Tax Manager of

GSW, to Revenue Canada Taxation, dated May 27, 1975.

Argument

Counsel for the appellant relied upon the fact that the appellant had been dismissed, and that the amount of $15,570 in question should not be taxed, since the decision of this Board should follow those in Her Majesty the Queen v Robert B Atkins, [1976] CTC 497; 76 DTC 6258, and Larry Grozelle v MNR, [1977] CTC 2432; 77 DTC 310.

Counsel for the respondent based his argument on Quance v Her Majesty the Queen, [1974] CTC 255; 74 DTC 6210, and distinguished both Atkins and Grozelle (supra) from the perspective that in the instant case the appellant had not been wrongfully dismissed prior to making the agreement entered as Exhibit A-6.

Findings

The point at issue, in my view, is if and when the contract of employment was terminated. In effect, counsel for the appellant proposed that the appellant had been wrongfully dismissed (contract terminated) in January 1973 by Mr Pifer. The basis of the position of counsel for the respondent was that notice was given on December 11, 1972, according to proper terms that the contract was to be terminated. To examine these propositions, the Board reproduces Exhibits A-2, A-5 and A-6 which are significant:

Exhibit A-2:

THIS AGREEMENT made in duplicate this 29th day of December, 1971.

BETWEEN:

GSW APPLIANCES LIMITED

hereinafter called “the Company”

OF THE FIRST PART

—and—

W P UNAITIS

hereinafter called “the Executive”

OF THE SECOND PART,

THIS AGREEMENT WITNESSETH that, in consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree each with the other as follows:

1. The Company hereby employs the Executive for a term commencing on—January 1, 1972—to perform the services of—MANAGER OF MANUFACTURING ENGINEERING—and/or such other services as may be determined by the Board of Directors of the Company. The Executive hereby enters into such employment and shall well and faithfully serve the Company and any and all of its subsidiaries and associated companies and perform all the duties of such employment lawfully assigned to him, and shall use his best efforts to promote the Company and all of its Subsidiaries and associated companies. If and so long as the Executive is elected and appointed as a Director and/or officer of the Company or any of its subsidiaries or associated companies, the Executive shall also perform the duties of such offices without remuneration additional to that set out below.

2. The Company shall pay to the Executive—

(a) An annual salary of $23,500.00 per year,, plus normal increments thereto, in accordance with the salary policy from time to time of the Company.

(b) Normal benefits as may be available from time to time to employees of the Company.

3. The Company shall reimburse the Executive for reasonable and authorized expenditures incurred by the Executive on behalf of the Company, and in respect of which, vouchers have been submitted not later than the last day of the month following the month of expenditure.

4. The term of employment may be terminated and the contract of employment brought to an end by either party giving to the other, one year’s notice of such termination.

Notwithstanding the foregoing, the term of employment shall cease upon the Executive attaining normal retirement age, as provided from time to time by published Company Policy, and all contractual arrangements shall* at such date be at an end.

IN WITNESS WHEREOF the parties have executed this agreement.

Exhibit A-5:

December 11, 1972

TO: W P UNAITIS

It is the policy of our Company to reduce the number of written employment contracts to executives, and accordingly, we give you notice that your present contract will terminate December 15, 1973.

Sincerely,

(Signature)

F O Price,

Group Vice President.

(Signature)

K E Pifer,

Director of Manufacturing.

(Signature)

L D Rintoul,

Manager of Manufacturing.

(Signature)

W P Unaitis

Exhibit A-6:

THE UNDERSIGNED PARTIES HAVE AGREED. TO TERMINATE THE EMPLOYMENT AGREEMENT DATED DECEMBER 29, 1971

BETWEEN:

GSW APPLIANCES LIMITED

“the Company”

AND

MR W P UNAITIS

“the Executive”

SUCH TERMINATION SHALL BE EFFECTIVE JANUARY 31, 1973.

A SETTLEMENT OF $15,570.00 WILL BE PAID TO THE EMPLOYEE ON JANUARY 31, 1973 IN SATISFACTION OF ALL CLAIMS WHICH THE EMPLOYEE MAY HAVE ARISING OUT OF HIS EMPLOYMENT OR ITS TERMINATION.

DATED THE 23rd DAY OF JANUARY 1973.
(Signature)	(Signature)
Witness	Employee’s signature
	(Signature)
	Company. Representative

In my view, the company had only three options under Exhibit A-2— to employ the appellant until his date of retirement; to give him proper notice of termination in one year; or to dismiss him. The route chosen is obvious—but it was not dismissal, wrongful or otherwise, it was notice of termination.

In addition the Board has no evidence that Mr Pifer had authority designated from the company to “fire” the appellant, although he apparently made some attempts to do so, and the evidence generally suggests that he did have some substantial responsibility for the company employees who reported to him. No exact date was given by the appellant “in January 1973” when Mr Pifer allegedly “ordered him to be out of the plant within a short period and offered the appellant no compensation whatsoever”; but it must have been before January 23, 1973. Mr Unaitis, by this time, sought legal advice and probably had received some opinion in response at least (although the evidence is not clear on this point). The significant thing, in my view, though, is the appellant’s reaction to whatever threats or demands were made by Mr Pifer—the appellant did not leave the plant when ordered to do so by Mr Pifer. There is no basis in this situation upon which I can conclude that Mr Pifer “wrongfully dismissed” the appellant or that the appellant accepted Mr Pifer’s action as “dismissal” of any kind. The employment contract was terminated early, effective on January 31, 1973 (Exhibit A-6), and was an act by both parties, not just one party, and is totally outside the termination clause in the employment contract. At that date the appellant was assured that his salary would continue up until December 15, 1973, almost 11 months in the future, and. would have amounted to nearly $22,000.

The $15,570 in Exhibit A-6, in my view, is the amount agreed upon by the two parties in lieu of the balance of that salary, after notice of termination had been given on December 11, 1972. Substantial emphasis was placed by counsel for the appellant, on the phrase in Exhibit A-6, “IN SATISFACTION OF ALL CLAIMS WHICH THE EMPLOYEE MAY HAVE ARISING OUT OF HIS EMPLOYMENT OR ITS TERMINATION”. Since the appellant, according to his evidence, had no claim arising from his employment, ie past salary, the amount represented settlement of the claim arising from the wrongful termination of his employment, according to counsel. This interpretation would only be viable if the appellant had been dismissed prior to January 23, 1973, and the Board has no evidence of that. Even then, it would be necessary to establish wrongful dismissal. The evidence is that there was no dismissal—but that an understanding was reached between the parties to terminate the agreement. I would suggest the words “or its termination” make reference indeed to the termination of the appellant’s employment, which termination was concurrent with the termination of the employment agreement—effective ‘January 31, 1973. I do not see evidence that there were two terminations—one of the employee before January 23, 1973 and one of the employment agreement, on January 31, 1973.

This matter should be viewed within the parameters provided in Quance (supra) not Atkins or Grozelle (supra).

Decision

The appeal is dismissed.

Appeal dismissed.