Paul Girouard v. Minister of National Revenue, [1977] CTC 2588, 78 DTC 1011

Guy Tremblay [TRANSLATION]:—The case at bar was heard at Montreal, Quebec on March 7, 1977.

1. Summary

The question here is whether a sum of $5,000 received by the appellant in 1970 as liquidated damages because of a breach of contract is taxable in the same manner as salary.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results not from any provision of the Income Tax Act, but from several decisions of the Supreme Court of Canada rendered in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1. On May 3, 1968 the appellant signed an employment contract with a private hospital as president and director of finance at a salary of $15,000. This contract was filed as No A-1.

3.2. On January 10, 1969, however, another contract was signed, amending that of May 3, 1968. This contract was filed as No A-2. It added two clauses to the previous contract, the first providing for its automatic renewal every five years and the other for liquidated damages in the amount of $30,000 if the employer terminated the contract of its own accord. The clauses read as follows:

1. Clause 2 of the said employment contract is replaced by the following:

2. The engagement of PAUL GIROUARD shall be for a period of five (5) years commencing on May 1st, 1968 and ending on April 30, 1973. It will be renewed automatically “mutatis mutandis” for a period of five (5) years from April 30, 1973, and thereafter for additional periods of five (5) years each, unless one of the parties thereto notifies the other party by registered letter, at least six (6) months before the expiration of the present contract or any renewal thereof, of its intention to terminate it or to exact new conditions.

2. Clause 6 of the said employment contract is replaced by the following:

This contract may be cancelled or terminated before its date of expiration by notice in writing, in the following cases:

(a) At any time by mutual consent of the parties thereto;

(b) If, because of illness, accident or some other reason, PAUL GIROUARD is totally unable to perform his duties under this contract for a period of six (6) months;

(c) If, as a result of an accident or illness, PAUL GIROUARD has a permanent incapacity which, in the unanimous opinion of medical experts, one of whom shall have been chosen by PAUL GIROUARD, exceeds fifty per cent (50%);

(d) If PAUL GIROUARD commits a serious and wilful breach of any of the terms of this Agreement or of his duties hereunder or if he be adjudicated bankrupt or having a receiving order made against him.

Should the Company terminate this contract before its date of expiration for any reason other than those mentioned in subparagraphs (b), (c) and (d), PAUL GIROUARD will have the right in his entire discretion and without prejudice to any other recourse he could exercise, to demand that the Company pay him a sum of Thirty Thousand Dollars ($30,000) as liquidated damages.

3.3. The explanation given by the appellant for the employer’s willingness to sign such a contract was that he had done many favours for the employer, as described below.

(a) The appellant was responsible for the (private) hospital receiving from the government a per diem for 50 beds in 1965, for another 40 beds in 1966 and for yet another 100 beds in 1967. The hospital had a total of 223 beds.

(b) In 1965, the hospital was on the verge of bankruptcy. A permit to open a private hospital had been obtained in 1964, but on the condition that it would not ask the government for financial assistance. In 1965, only one and a half floors in the 13-storey hospital were occupied. It was decided that government help would have to be sought. The appellant was appointed to carry out this difficult task. He obtained the per diems mentioned above.

(c) Further, in 1968, the appellant succeeded in having the per diems increased from $15.50 to $27.50. According to the appellant, this was the highest per diem given to any private hospital at that time. The argument used was that the hospital was a pilot project. In addition to the per diems the government agreed to provide $15,000 a year to cover the salary of the director of finance.

3.4. Before signing the January 10, 1969 contract, the directors, according to the appellant, did not understand why the appellant wanted these amendments. After all he had done, it was obvious that he would remain in his position for the rest of his life. The contract was nevertheless signed.

3.5. Approximately a year and a half later, somewhere between August 12 and 17, 1970, the appellant was advised upon returning from his holidays that he was being laid off. The reason given was one of economy. The appellant was astonished. He knew that the government was paying his salary. He was 52 years old, and had done a great deal for the hospital.

3.6. According to the appellant, the reason for his dismissal was that he had asked that the hospital’s administrator be dismissed because this person had gone ahead and had his own salary increased without a resolution of the board of directors.

3.7. Following the verbal notice given to the appellant upon his return from holidays, the board passed a resolution to this effect on August 20, 1970. The resolution, filed as No A-3, reads as follows:

The Chairman informed the meeting that, for reasons of economy, it was felt that Mr Paul Girouard’s employment contract as Director of Finance of the Company should be terminated on August 31, 1970. He added that the sum of $30,000 Mr Girouard is entitled to claim from the Company in the event of termination of his contract before its date of expiration, should be paid to him in 24 equal consecutive monthly instalments commencing on September 30, 1970 and that the Company should enter into a written agreement with Mr Girouard to confirm the termination of his employment contract and the payment to him of the said sum of $30,000 on the basis outlined above. A draft agreement between the Company and Mr Paul Girouard was submitted to the meeting and discussed.

On motion duly made and seconded, it was unanimously resolved:

THAT the agreement between the Company and Mr Paul Girouard confirming the termination on August 31, 1970 of Mr Girouard’s employment contract as Director of Finance of the Company and confirming the payment to him by the Company of the sum of $30,000, such sum to be paid in 24 consecutive equal monthly instalments commencing on September 30, 1970, be and the same is hereby approved;

Someone was then authorized to sign the agreement.

3.8. On August 21, 1970 an agreement concerning the method of payment of the sum of $30,000 was signed. This agreement was filed as No A-4 and reads as follows:

WHEREAS by contract dated May 3, 1968, Paul Girouard was engaged to act as Director of Finance of (the company), for a period of five (5) years commencing on May 1, 1968, at a salary of fifteen thousand dollars ($15,000) per annum;

WHEREAS the provisions of the aforesaid contract relating to the term of employment and the termination of the contract were amended by Agreement dated January 10, 1969;

WHEREAS the said Agreement of January 10, 1969 provides for the payment to Paul Girouard of the sum of thirty thousand dollars ($30,000) in the event his employment contract is terminated before its date of expiration for a reason other than those set out in the said Agreement, namely, illness, accident, permanent incapacity, serious and wilful breach by him of the terms of his employment contract or of his duties thereunder, bankruptcy or the making of a receiving order against him;

WHEREAS the Company, for reasons of economy, wishes to terminate Paul Girouard’s employment contract on August 31, 1970, and Paul Girouard agrees to such termination provided the Company pays him the aforesaid sum of thirty thousand dollars ($30,000) as liquidated damages;

WHEREAS the Company is willing to pay Paul Girouard the said sum of thirty thousand dollars ($30,000) in twenty-four (24) equal monthly instalments commencing on September 30, 1970, provided no other claim is made by Paul Girouard against the Company;

NOW THEREFORE THE PARTIES HAVE COVENANTED AND AGREED AS FOLLOWS:

1. The employment contract dated May 3, 1968, between the Company and Paul Girouard as amended by Agreement dated January 10, 1969, will be terminated on August 31, 1970;

2. The Company hereby binds and obliges itself to pay to Paul Girouard the sum of thirty thousand dollars ($30,000) as liquidated damages, the said sum to be paid in twenty-four (24) consecutive equal monthly instalments, the first of which shall become due and payable on September 30, 1970 and thereafter on the last day of each month, provided no other claim is made by Paul Girouard against the Company;

3. Should the Company fail to pay two consecutive instalments when they become due, or should the Company be declared bankrupt or make a proposal to creditors under the Bankruptcy Act, all of the unpaid part of the said sum of thirty thousand dollars ($30,000) shall become exigible immediately and without notice;

4. The Company reserves the right to pay the full amount of thirty thousand dollars ($30,000) in less than twenty-four (24) months if and when it is in a position to do so.

5. For two years commencing on August 31, 1970, Paul Girouard undertakes not to work for or be associated with a private hospital in the Province of Quebec. He further undertakes not to make any statement or voice any criticism against (the Company) or any of its Directors, Officers or employees, which could be harmful or prejudicial to (the company).

6. Paul Girouard agrees not to transfer or assign this Agreement to anyone and the Company acknowledges that in the event of death of Paul Girouard, the unpaid part of the said thirty thousand dollars ($30,000) will be payable to his Estate in consecutive equal monthly instalments.

7. Paul Girouard undertakes to sign such documents as may be required to effect the transfer of any permits pertaining to the operation of (the company) which are in his name.

8. The Company agrees to deposit in the Savings account of Paul Girouard, at the Main Branch of Banque Canadienne Nationale, 500 Place d’Armes, Montreal, Que., the monthly instalments payable to him.

3.9. According to his testimony the appellant signed this agreement with much regret, fully realizing that he was losing a great deal of money. Moreover, after signing this agreement, the appellant was not even allowed to say good-bye to the employees, some of whom he had supervised for over five years. He had to leave the hospital “by the back door”, ‘like a common criminal’’, as he put it.

3.10. Following the signing of these agreements, the hospital began to send monthly payments. At the beginning of November 1970, however, the appellant had received only $1,442 instead of $2,500.

According to the evidence submitted, orders had been given to stop all payments to the appellant. The latter sent a letter to one of the hospital directors on November 5, 1970, advising him of what had happened. Payments were then sent out regularly until no money was left Owing.

3.11. In 1970 the total amount received was $5,000. This amount was not included in the appellant’s income tax return.

On June 9, 1971, the respondent assessed the return as filed.

3.12. On June 6, 1975, the respondent issued a notice of reassessment (No 464356) increasing the appellant’s net income by $5,000, that is, by the amount received from the hospital in 1970 as liquidated damages.

3.13. On July 18, 1975, a notice of objection was filed with the Department. The latter replied by sending a notice dated March 17, 1976 maintaining notice of reassessment No 464356.

3.14. On June 14, 1976, the appellant filed his notice of appeal with the Board.

4. Point at Issue

The issue is whether the amount of $5,000 received in 1970 as liquidated damages is taxable as income.

5. Act, Case Law and Comments

5.1. Act

Section 5 (the preamble), paragraph 6(1 )(a)(v) and section 25 of the Income Tax Act (RSC 1952, c 148 as amended) are applicable in this Case:

5. (1) Income for a taxation year from an office or employment is the Salary, wages and other remuneration, including gratuities, received by the taxpayer in the year plus . . .

6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

(a) amounts received in the year as, on account or in lieu of payment of, or In satisfaction of

(v) retiring allowances, or

25. 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 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 purpose 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

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

(ii) aS remuneration or partial remuneration for services as an officer or under the contract of employment, or

(iii) in consideration or partial consideration for covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.

5.2. Case Law

The Board has studied the cases cited by counsel for the respondent: Henry v Arthur Foster, 145 LT 225; Dale v de Soissons, [1950] 1 All ER 912; Junkin v MNR, [1971] Tax ABC 771; 71 DTC 530; Moss v MNR, [1963] CTC 535; 63 DTC 1359; The Queen v Atkins, [1975] CTC 377; 75 DTC 5263 (Federal Court); The Queen v Atkins, [1976] CTC 497; 76 DTC 6258 (Federal Court of Appeal).

The Board also examined the facts and principles involved in the following cases:

MNR v Donat Beaupré Estate, [1973] CTC 316; 73 DTC 5255; The Queen v Charles Guay, [1973] CTC 148: 73 DTC 5108; Needham v MNR, [1974] CTC 2078: 74 DTC 1057; Richstone v The Queen, [1974] CTC 155: 74 DTC 6129: Quance v The Queen, [1974] CTC 225; 74 DTC 6210; Choquette v The Queen, [1974] CTC 742; 74 DTC 6563.

5.3. Comments

First of all, it seems clear to the Board that the presumption in paragraph 25(b) of the Act operates against the appellant. An agreement concerning liquidated damages (payment of which began immediately after termination of employment) was signed by the appellant and his employer while the appellant was still an officer, or in the employment, of the latter. The final agreement, filed as No A-4, in which the method of payment of the sum of $30,000 was set out, was signed on August 21, 1970. while the appellant’s employment ended on August 31. 1970. Therefore, under paragraph 25(b), the $5.000 (part of the $30.000) received in 1970 is “deemed, for the purpose of section 5, to be remuneration for the payee’s services’’ as an officer.

This presumption can, however, be rebutted if the appellant can prove that all the conditions contained in paragraph (i), (ii) and (iii) of section 25 of the old Act do not exist in his case.

In accordance with the facts proven, especially those contained in paragraphs 3.5 to 3.7 inclusive of this judgment, the Board can only conclude that there was a unilateral breach of contract, of a most cavalier nature, on the employer’s part. To begin with, the formal notice sent on August 20, 1970 did not give the appellant a reasonable term of notice. Further, the reason given, namely that of economy, is untenable since the government was providing the funds to pay the appellant’s salary.

The unilateral dismissal was, however, confirmed by the bilateral agreement of August 21, 1970. which contains certain conditions tending to make the Board even more sceptical as to the employer’s attitude: for example, the condition preventing the appellant from working for any other hospital in the Province of Quebec for a period of two years. A hospital—even a private one—for which the government pays almost all the expenses, is not a competitive commercial enterprise, especially when one considers that few existed at that time. Further, the condition of not criticizing the employer or any of its directors to some extent confirms the appellant’s statement concerning the administrator, mentioned in paragraphs 3.6 and 3.9 of this judgment. It is true, however, that the Board has not heard appellant’s former employer’s version.

The appellant emphasized the distress and difficulty he had in resigning himself to signing the August 21, 1970 agreement.

The Board even wondered if the employer’s actions did not affect the content of this agreement. The Board must conclude that it did not.

The appellant has submitted no proof that one of the causes of nullity of a contract under Articles 991 et seq of the Quebec Civil Code existed in his case. The August 21, 1970 bilateral contract was valid, and the Board cannot ignore a clause of the January 10, 1969 amendment stating that the employment contract could be terminated “at any time by mutual consent of the parties thereto’’.

The Board therefore concludes that of the three conditions provided for under section 25 to rebut the presumption mentioned above, at least one cannot apply to the case at bar—that of paragraph (i), namely, that the amount received cannot reasonably be regarded as having been received “(i) as consideration or partial consideration for . . . entering into the contract of employment’’. The amount received was in fact part of that stipulated in the employment contract, should the contract be terminated, inter alia, by mutual agreement:

This contract may be cancelled or terminated before its date of expiration by notice in writing, in the following cases:

(a) At any time by mutual consent of the parties thereto;

(b) If, because of illness, accident or some other reason, PAUL GIROUARD is totally unable to perform his duties under this contract for a period of six (6) months;

(c) If, as a result of an accident or illness, PAUL GIROUARD has a permanent incapacity which, in the unanimous opinion of medical experts, one of whom shall have been chosen by PAUL GIROUARD, exceeds fifty per cent (50%);

(d) If PAUL GIROUARD commits a serious and wilful breach of any of the terms of this Agreement or of his duties hereunder or if he be adjudicated bankrupt or have a receiving order made against him.

Should the Company terminate this contract before its date of expiration for any reason other than those mentioned in subparagraphs (b), (c) and (d), PAUL GIROUARD will have the right in his entire discretion and without prejudice to any other recourse he could exercise, to demand that the Company pay him a sum of Thirty Thousand Dollars ($30,000) as liquidated damages.

Therefore, at least one condition of the three required to rebut the presumption does not apply. For the presumption to be rebutted, all three conditions must apply.

The principles laid down by the courts in the cases mentioned above support the Board’s position. No judgment relates facts where it is so clear that liquidated damages were provided for in the employment contract.

Further, the Board cannot ignore the fact that the addition of this clause covering liquidated damages in the employment contract is a result of the appellant’s immense help to the employer, as mentioned by the appellant himself during the investigation (paragraph 3.3).

In the case of Moss v MNR (supra), which is perhaps the closest to Mr Paul Girouard’s case, Mr Peter Moss’ employment contract provided that, as the company’s general manager, he would have the right to purchase all the company’s shares on the death of the majority shareholder. Mr Moss took out a $100,000 insurance policy on the life of the majority shareholder. The company paid the premiums, considering this payment to be part of Mr Moss’ salary. The employment contract also contained a clause stating that if, during the majority shareholder’s lifetime, the company wished to sell its shares to persons other than Mr Moss, he would have the right to purchase them for a sum equal to 90% of the sale price. This amount was to be stated in a notice giving Mr Moss 30 days to buy shares. At some point the company, having sold its shares, offered Mr Moss a lump sum of $34,600 to waive his right to repurchase the shares and to transfer to the company his rights to the insurance policy that he had on the life of the majority shareholder.

The Exchequer Court upheld the judgment of the Tax Appeal Board by deciding that the sum of $33,200 ($34,600 minus $1,400, the surrender value of the policy) should be considered taxable in the Same manner as salaries. The payment of the lump sum was in fact considered to be provided for in the employment contract since Mr Moss’ right to purchase the shares for 90% of their value was provided for in the employment contract. This purchase right was, according to the Court, as important a condition in his accepting the employment as the amount of the salary.

The agreement in which Mr Moss accepted the lump sum was reached while Mr Moss was an officer and in the employment of the company.

This ts identical to the case before the Court.

Since the presumption in section 25 has not been rebutted, the sum of $5,000 received by appellant (like the sum of $33,200 received by Mr Moss, as decided by the Exchequer Court) is “deemed, for the purpose of section 5, to be remuneration for the payee’s services’’.

6. Conclusion

The appeal is dismissed.

Appeal dismissed.