Collier, J:
1 The Minister of National Revenue assessed the plaintiff's income tax for the year 1969 on a total amount of $40,000 received by him, a non-resident, in that year from a Canadian company. The plaintiff's position is that the moneys received were a “pension” within Article VIA of the Canada-US Tax Convention, and therefore exempt from taxation in Canada. The Tax Review Board confirmed the Minister's assessment. This appeal followed.
2 The plaintiff is a business consultant and executive. He was born July 30, 1914. He is and has always been a citizen of the United States. Prior to September 1963 he had been president and chief executive officer of a large American company. On September 5, 1963 he became president and chief operating officer of MacMillan, Bloedel and Powell River Limited (“MacMillan Bloedel”) a large well-known Canadian company. A written employment contract was entered into. The preamble sets out that the plaintiff was president; that “The Company desires that Mr. Specht shall continue in its employ in the capacity of President or such other capacity or capacities as the Company may from time to time deem to be in its best interest”; that the plaintiff was prepared to agree he would retire at 65, he would not termi nate his employment without the consent of the board of directors, and after termination he would not engage in business or be employed without MacMillan Bloedel's consent and approval.
3 The mutual covenants in the contract did not refer to any particular office or position held or to be held by the plaintiff. Generally speaking, the term “employment” was used. The salary to be paid was not set out.
4 I summarize the main covenants.1. The plaintiff agreed to retire at 65. An extension could be mutually agreed upon.
- 2. If the plaintiff's employment was
(a) terminated by him with the consent of the Board or
(b) terminated by MacMillan Bloedel (other than for cause or pursuant to the retirement clause) or
(c) terminated by retirement at age 65, or later
3. On termination of his employment, the plaintiff was not to conduct himself or be engaged in any activity “harmful to the interests” of MacMillan Bloedel; he agreed to be available to give his opinion and advice on corporate matters.
4. The plaintiff agreed, that after termination of his employment and “while entitled to any benefit under this agreement” not to engage in any business or take any employment without the consent of the company. Such consent was not to be unreasonably withheld. This provision was to be inapplicable if the plaintiff at any time surrendered his rights, including those of his widow, under the agreement.
5. If the plaintiff died while still in the employ of the company, his widow, while remaining unmarried, was to be paid certain sums during her life.
6. If the plaintiff was in breach of any term of the contract, and, on notice to remedy, failed to do so, then the agreement was at an end and “the Company shall be under no further obligation to make any payment hereunder” either to the plaintiff or his widow.
5 The plaintiff continued as president until April 30, 1968. He was a director, and a member of the Executive Committee of the board of directors. He was paid $120,000 per year. MacMillan Bloedel had several pension plans, schemes, or funds covering many of its employees. The plaintiff was not covered by, nor was he a participant in, any of those plans or schemes. In the spring of 1968 the plaintiff was asked to vacate the position of president and become the Chief Financial Officer. He refused to accept this post. He felt it to be something of a demotion, and if he had accepted the change, a black mark on his business career. When he started with MacMillan Bloedel he had hopes of becoming the Chief Executive Officer on the retirement of the incumbent. Among other things, the Chief Executive Officer had not retired when expected. The plaintiff's salary as Chief Financial Officer was to be the same.
6 As a result of the disagreement and impasse the plaintiff and MacMillan Bloedel came to the following agreement dated April 29, 1968 (Exhibit 2):
You [the Plaintiff] undertake to:(a) Resign as a full time employee of the Company, effective as of April 30. This will give you the freedom of action which you will require in order to make other arrangements.
(b) Continue as a member of the Board of Directors and a member of the Executive Committee until such time as you, or the Company, may decide otherwise. You will be reimbursed for your expenses but will receive no fees or salary for these particular services in view of the fact that you will be receiving $40,000 per annum for five years as hereinafter provided. The receipt of such sum, however, does not obligate you to remain on the Board of the Executive Committee.
(c) Provide me with an undated resignation from the Board of Directors and the Executive Committee.
The Company undertakes to:(a) Pay to you at the customary intervals, your salary at the present rate to the end of August 1968, irrespective of whether you obtain other employment.
(b) Pay you as from September 1, 1968, at the customary fortnightly intervals, at the rate of $40,000 per annum for the five years ending August 31, 1973, making $200,000 in total. These amounts will be paid irrespective of whether or not you accept employment elsewhere. In the event of your death during such five-year period any balance remaining unpaid of the $200,000 will be paid to your estate. In the event of your resignation from the Board of Directors or the Executive Committee the Company will pay to you at that time the balance remaining unpaid of the $200,000 in such instalments as may be mutually agreed upon. It goes without saying that you will at all times scrupulously refrain from disclosing any confidential information now within your knowledge as President of this Company.
(c) Remunerate you on a mutually agreeable basis for any special services which you may be asked to provide and which you may be willing to undertake in the form of consultation or otherwise.
Clause (b) of the company's undertakings was, in September of 1968 by agreement, varied slightly (Exhibit 3). The $40,000 payments were to commence January 1, 1969 and end December 31, 1973. Quarterly payments of $10,000 were to be made.7 The plaintiff testified that, while the $200,000 figure was an arbitrary one, it was intended to be a settlement of “my pension rights”. Mathematically at least, the annual sums for five years, were one-third of the salary he had been receiving before his resignation, or the termination of his employment.
8 The plaintiff in July of 1968 established residence in the United States and has been a resident there since. He disposed of his house in Vancouver in September 1968. He became the president and Chief Executive Officer of an American company following his resignation set out in Exhibit 2. He remained a director of MacMillan Bloedel and a member of the Executive Committee of the board, attending regular meetings each year, until 1972. In that year, because of a conflict of interest, he did not stand for re-election as a director.
9 In 1969, pursuant to Exhibits 2 and 3, he received in the United States the sum of $40,000. He included that amount in his return filed with the income tax authorities in the US. He was requested to file a return in Canada in respect of the receipt of the $40,000. He reluctantly, and under protest, did so. The assessment under appeal resulted.
10 In the defence it was pleaded alternatively that the payment of $40,000 in 1969 was made to the plaintiff by virtue of his office as a director of MacMillan Bloedel and a member of the Executive, or for his services as such, and was therefore taxable on those grounds alone. That position was abandoned in argument and I think rightly so. The moneys received had, on the evidence, nothing whatever to do with the plaintiff's position as a director or for any services he may have rendered as a director or member of the Executive Committee.
11 The defendant's main submission is that the payment falls within section 31A of the Income Tax Act, RSC 1952, c 148 and amendments, and particularly paragraph (d). The plaintiff disagrees, and says that in any event, the exemption in Article VIA of the Convention applies. The defendant replies that the payment, whatever it was, was not a “pension” within the meaning of the Article and section 7 of the Protocol.
12 I shall set out the relevant portions of section 31, section 31A, the Convention, the Protocol, and the Canada-United States of America Tax Convention Act, 1943.
31. (1) For the purposes of this Act, a non-resident person's taxable income earned in Canada for a taxation year is31A. Where, in a taxation year, a payment is made by a person resident in Canada to an individual who is not resident in Canada and who during the 5 years immediately preceding the year in which the payment is made(a) was resident in Canada, or
(b) was employed in Canada
- (c) a payment
(i) out of or pursuant to a superannuation or pension fund or plan,
(ii) upon retirement of an employee in recognition of long service and not made out of or under a superannuation fund or plan,
(iii) pursuant to an employees profit sharing plan in full satisfaction of all rights of the payee in or under the plan, to the extent that the amount thereof would otherwise be included in computing the payee's income for the year in which the payment was received if the payee had been resident in Canada throughout the taxation year in which the payment was received, or
(iv) pursuant to a deferred profit sharing plan upon the death, withdrawal or retirement from employment of an employee or former employee, to the extent that the amount thereof would otherwise be included in computing the payee's income for the year in which the payment was received if the payee had been resident in Canada throughout the taxation year in which the payment was received, or
(d) a payment made by an employer to an employee or former employee upon or after retirement in respect of loss of office or employment,
Canada-US Tax Convention:
Article VIA
Pensions (including Government pensions) and life annuities derived from within one of the contracting States by a resident of the other contracting State shall be exempt from taxation in the former State.
Protocol
7. The term “pensions” referred to in Article VIA of this Convention means periodic payments made in consideration for service rendered or by way of compensation for injuries received.
Canada-United States of America Tax Convention Act, 1943:
3. In the event of any inconsistency between the provisions of this Act or of the said Convention and Protocol and the operation of any other law, the provisions of this Act and of the Convention and Protocol shall, to the extent of such inconsistency, prevail.
13 I find it necessary, as well, to consider other sections of the Income Tax Act and to refer briefly to that elusive word “income” as used in the statute. The plaintiff and the payment made to him are not caught by the general charging provision, subsection 2(1); the plaintiff was not a resident of Canada. At first blush, subsection 2(2) does not apply; the plaintiff was not, in 1969, employed, in the popular sense, in Canada, nor did he carry on business here; reference however has to be made to Division D of the Act. Section 31 is the general section in respect of the computation of a non-resident's taxable income earned in Canada. It is, as applied to this case, “... his income for the year from all duties performed by him in Canada ...”.
14 As has been said over and over again, the statute does not define “income”. I shall assume the payment in issue is embraced by the word “income”, in its widest sense and in its popular meaning.[FN1: <ul>I have not overlooked the line of authority summarized by Martland, J in<em>Curran</em>v<em>Minister of National Revenue</em>, [1959] S.C.R. 850, [1959] C.T.C. 416, 59 D.T.C. 1247, where he said at page 860 [426, 1252]:<li><p>All of these are cases in which the money payments to an employee have been held not to constitute taxable income because they were not made in respect of the performance of services by the employee, but rather in order to acquire from him rights which he had previously held against the employer.</p></li></ul><ul>I have followed the direction given by Kerwin, CJ in the same case, at page 854 [421, 1249], as to the meaning to be given to income:<li><p>The word must receive its ordinary meaning bearing in mind the distinction between capital and income and the ordinary concepts and usages of mankind. Under the authorities it is undoubted that clear words are necessary in order to tax the subject and that the taxpayer is entitled to arrange his affairs so as to minimize the tax. However, he does not succeed in the attempt if the transaction falls within the fair meaning of the words of the taxing enactment.</p></li></ul>] For the purposes of that assumption, I have put aside for the moment the effect or implications of such sections of the statute (dealing with residents) as 6(1)(a)(iv) and 139(1)(ar), 6(1)(a)(v) and 139(1)(aj), 36, and section 31A.[FN2: <p>Subparagraph 6(1)(a)(iv) requires residents to include, in computingincome, superannuation or pension benefits. They are defined in 139(1)(ar).Subparagraph 6(1)(a)(v) requires residents to include, in computing income,retirement allowances. They are defined in 139(1)(aj). Section 36 permits akind of averaging in respect of,<em>inter alia</em>, certain payments out of superannuation or pension funds or plans, or on retirement in recognition of long service or in respect of loss of office or employment.</p>] (Section 31A applies to non-resident taxpayers.) Even if the $40,000 sum can be said to be “income”, the plaintiff is not taxable on it (forgetting section 31A) because it was not “income ... from ... duties performed by him in Canada ...” (para 31(1)(a)).
15 I turn now to section 31A. This is a “deeming” section. Certain payments made to non-residents (which for various reasons might not otherwise be “income”) are deemed to be (under certain conditions) income from duties “deemed to have been performed” by the non-resident in Canada in the taxation year. Thus they fall within the general charging provision of paragraph 31(1)(a). Counsel for the defendant did not seek to bring the payment in issue within any of the subparagraphs of paragraph 31A(c). As stated early in these reasons, the defendant contends the $40,000 sum is covered by paragraph (d); that this was a payment made to the plaintiff upon or after his retirement in respect of loss of office or employment.
16 In my view, the payment here was not made upon or after the plaintiff's retirement. The plaintiff did not retire or go into retirement from his occupation with MacMillan Bloedel within the ordinary meaning of “retire” or “retirement”. That is, he did not withdraw from his employment because he had reached a mutually stipulated age, or generally withdraw from his occupation or business activity. I have obtained some assistance on this point, in endeavouring to ascertain the ordinary meaning of “retirement”, from dictionary definitions:
The Shorter Oxford English Dictionary (3rd ed rev): “withdrawal from occupation or business activity”
The Living Webster (1st ed) “retire”—“to withdraw from business or active life”
17 The contract of employment in this case (Exhibit 1) uses the words “retire” and “retirement” in clauses 1 and 2. Age 65 was stipulated, but extensions could be agreed upon. In my view, “retirement” was used by the parties in its ordinary meaning as set out above: a cessation of or withdrawal from work because of an age stipulation or because of some other condition agreed between employer and employee. What the plaintiff did here was, by agreement, resign. He did not, as I see it, retire.[FN3: <p>In<em>J A Jackson</em>v<em>Minister of National Revenue</em>, [1951] Ex. C.R. 52, [1951] C.T.C. 9, 51 D.T.C. 447, the taxpayer endeavoured to draw a distinction between retirement and resignation in order to escape taxation of a judicial pension. I do not find the case of assistance because the facts and point at issue are so dissimilar.</p>]
18 Further, in my opinion, the payments agreed upon were not made by MacMillan Bloedel “in respect of loss of office or employment.[FN4: <p>Retiring allowances, as defined in paragraph 139(1)(aj) seem to be forpractical purposes the same as the payments specified in subparagraph c(ii)and paragraph (d) of s. 31A. The cases which have considered the term“retiring allowance” are therefore of some assistance. If it werenecessary to decide, it is my opinion the payment in issue here was notwholly, or part of, a “retiring allowance.”</p>] I do not propose to attempt any all-encompassing statement as to the meaning to be given to that phrase. Speaking generally, it envisages a payment made for loss of a source of income, on or after withdrawal from usual business activity or employment or after withdrawal by reason of the elimination or expiration of the particular office or employment.
19 The plaintiff here, if he had remained with the company until age 65, or later, was entitled to certain benefits for life. They can be described in ordinary parlance as a “pension” or as “superannuation benefits”. That did not happen. He was requested to fulfil a different office or position at the same salary. He would not agree. If the company had then dismissed him for cause (as I think it might) the plaintiff would not have been entitled to the benefits provided in clause 2. The plaintiff could, however, have bowed to the company's wishes, accepted the new post and any lesser posts the board of directors in the future dictated, remained until age 65, and then drawn, for life, sums calculated pursuant to clause 2. But one cannot close one's eyes to the realities of power and other struggles in the board room. I have little doubt that a determined corporate management group could eventually have engineered the termination, by the plaintiff, of his employment, without the consent of the board of directors to that termination. The plaintiff would then have been disentitled to the benefits provided in clause 2. The other alternative in the disagreement which had developed between the plaintiff and the company was for the latter to dismiss (fire) the plaintiff (but not for cause). The company would then have been liable to pay him (provided all other terms of the contract were complied with) the benefits provided in clause 2. The company did not elect to follow this last course.
20 In my view, a compromise was reached the essence of which was the benefits or “pension rights” otherwise payable under clause 2 for life were reduced to a five-year period. An arbitrary dollar figure was agreed upon. The plaintiff resigned. He did not withdraw, or retire from the company, or generally from his business consultant and executive occupation. His employment with MacMillan Bloedel was terminated by consent. By resigning, he surrendered or relinquished certain rights, on the undertaking by him to accept, and the undertaking by the company to pay, something less than possible life-time benets. The rights under clause 2 were, to my mind, rights to a pension payable on retirement at age 65 or later, or when his employment with the company (under certain conditions) earlier ceased. On that earlier cessation or termination, there were certain restraints and obligations placed on any future activities by the plaintiff. In my view, therefore, the $40,000 sum does not fall within paragraph 31A(d).
21 As I see it, that conclusion is sufficient to dispose of this appeal. The plaintiff, however, contends that quite apart from section 31A, the payment is exempt by reason of Article VIA of the Convention; it is a pension. I agree with that submission.
22 If the plaintiff had remained with MacMillan Bloedel and retired at 65 or later, any payments to him under clause 2, in my view, would have been a pension within the meaning of Article VIA of the Convention, as well as a payment within the meaning of subparagraph 31A(c)(i);[FN5: <p>If the plaintiff were then a resident of Canada the payments, in myopinion, would be “superannuation or pension benefits” withinsubparagraph 6(1)(a)(iv).</p>] the moneys would have been paid pursuant to a superannuation or pension plan. The particular plan in this case embraced one person only, the plaintiff. It was obviously part of the incentive for him accepting employment in the first place, and for remaining with the company. The employment contract provided for payment of identical benefits in the event the plaintiff ceased to be employed with the company prior to age 65. (I have earlier set out those eventualities and I am now to some extent repeating some earlier remarks.) Merely because the payments might have become payable before so-called normal retirement age, and while the plaintiff was still able and likely to find other employment (as permitted by the contract), does not, as I see it, make them any less a pension, or payments pursuant to a pension plan. The agreement of April 29, 1968 (Exhibit 2) was a compromise in respect of potential pension entitlement set out in an individual pension scheme or plan. Instead of the right to life-time payments, the plaintiff agreed to accept “periodic payments in consideration for services rendered” of a lesser total amount, and of course over a lesser period of time, than he might have been entitled to insist upon. The word “pensions” as used in the Convention should, I think, be liberally interpreted. In that regard, one of the definitions of “pensions” in The Shorter Oxford English Dictionary (3rd ed rev) is, I consider, applicable to the facts in this case and to Article VIA: “An annuity or other periodical payment made, esp by a government, a company, or an employer of labour, in consideration of past services or of the relinquishment of rights, claims or emoluments.”
23 The appeal is therefore allowed. The assessment by the Minister is set aside. The plaintiff is entitled to his costs.
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