Words and Phrases - "surrogatum principle"
6 July 2005 External T.I. 2005-0123311E5 F - paiement à employé pour règlement d'un litige
An employee was requested by his employer to exercise stock options (giving rise to a s. 7(1)(a) benefit of $5 per share, equaling the $10 FMV of the shares minus the $5 exercise price) and was requested to hold those shares, so that when he ultimately sold them, he received proceeds of $4 per share. He sued and received damages equaling his $6 per share loss or, alternatively, received damages computed as the difference between the purchase price of the shares ($5 per unit) and the sale price of such shares ($4 per share) plus the income tax payable due to the inclusion of the s. 7 benefit.
CRA applied the surrogatum principle to find that the compensation for the foregone capital gain or the loss sustained as compared to the exercise price was on capital account, but applied Gernhart to find that the compensation for taxes imposed on the s. 7 benefit was taxable as being in lieu of a s. 6 benefit.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Compensation Payments | compensation for capital loss on stock option shares amount was taxed on capital account | 175 |
Scott v. The Queen, 2017 TCC 224
In 1980, Nortel had established a health and welfare trust (the “HWT”) for its employees. Following its insolvency and filing under the CCAA (with the related CCAA proceedings being court-supervised), it made lump sum payments in 2011 to the four taxpayers, pursuant to a court-approved settlement agreement, in satisfaction of their entitlement to funding of life insurance premiums or to survivor death benefits. In characterizing such payments, and after noting that the surrogatum principle had been commonly expressed in the context of someone carrying on a business or having an adventure in the nature of trade, Sommerfeldt J quoted with approval the statement in Dumas, 2000 DTC 2603 regarding the surrogatum principle that:
The real question is to determine why the compensatory amount was paid.
and then stated (at para. 102):
In determining why the distributions were paid in 2011 by the HWT to the Appellants, I have concluded that the distributions were paid to Ms. Ellis and Ms. Kennedy as partial compensation for the termination of the Group Life Plan, and the distributions were paid to Mr. Scott and Ms. McCann as partial compensation for the termination of the monthly payment of their respective death benefits.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 89 - Subsection 89(1) - Paragraph 89(1)(a) | trust return not admitted at trial opening where no previous notice and not relied upon by CRA | 229 |
| Tax Topics - Income Tax Act - Section 107.1 - Paragraph 107.1(a) | s. 107.1(a) in effect produced a rollover on cash distribution of mooted benefits | 181 |
| Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | a distribution from a health and welfare trust to compensate for lost insurance coverage was not a taxable benefit as it did not come within s. 6(4) | 316 |
| Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(iii) | payment made as compensation for termination of monthly death benefits was paid, at the least, in lieu of a death benefit | 249 |
| Tax Topics - General Concepts - Stare Decisis | Supreme Court obiter accorded deference | 153 |
| Tax Topics - Statutory Interpretation - Specific v. General Provisions | termination payment that did not come within s. 6(4) should be treated as excluded from s. 6(1)(a) | 153 |
| Tax Topics - Income Tax Act - Section 6 - Subsection 6(4) | lump sum received as compensation for no longer benefiting from contributions to a group life insurance policy did not come within the terms of s. 6(4) | 334 |
Scott v. The Queen, 2017 TCC 224
In 1980, Nortel had established a health and welfare trust (the “HWT”) for its employees. Following its insolvency and filing under the CCAA (with the related CCAA proceedings being court-supervised), it made lump sum payments in 2011 to the taxpayers, pursuant to a court-approved settlement agreement, in satisfaction of their entitlement to payments under the HWT. Mr. Scott, had been the husband of a full-time non-unionized employee, and had been receiving monthly survivor income benefits following her death, that had been included in his income under s. 56(1)(a)(iii) as death benefits. Ms. McCann was similar.
After finding (at para. 102) that the 2011 distribution was paid to Mr. Scott as partial compensation for the termination of the monthly payment of his death benefits, and referring (at para 140) to the broad meaning accorded in Transocean to “in lieu of” (also appearing in s. 56(1)(a)(iii)), thereby rendering it unnecessary to refer to the surrogatum principle (see para. 129), Sommerfeldt J stated (at para. 141):
[I]f the distributions paid in 2011 by the HWT to Mr. Scott and Ms. McCann were not received by them on account of the death benefits that they were entitled to receive, I am of the view that those distributions were received by them instead of, in place of, or in lieu of, those death benefits, so as to come within the statutory phrase “any amount received … in lieu of payment of, … a death benefit.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 89 - Subsection 89(1) - Paragraph 89(1)(a) | trust return not admitted at trial opening where no previous notice and not relied upon by CRA | 229 |
| Tax Topics - Income Tax Act - Section 107.1 - Paragraph 107.1(a) | s. 107.1(a) in effect produced a rollover on cash distribution of mooted benefits | 181 |
| Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | a distribution from a health and welfare trust to compensate for lost insurance coverage was not a taxable benefit as it did not come within s. 6(4) | 316 |
| Tax Topics - General Concepts - Stare Decisis | Supreme Court obiter accorded deference | 153 |
| Tax Topics - Income Tax Act - Section 9 - Compensation Payments | surrogatum principle references "why the compensatory amount was paid," and not confined to business receipts | 207 |
| Tax Topics - Statutory Interpretation - Specific v. General Provisions | termination payment that did not come within s. 6(4) should be treated as excluded from s. 6(1)(a) | 153 |
| Tax Topics - Income Tax Act - Section 6 - Subsection 6(4) | lump sum received as compensation for no longer benefiting from contributions to a group life insurance policy did not come within the terms of s. 6(4) | 334 |
Goff Construction Limited v. Canada, 2009 DTC 5755, 2009 FCA 60
The taxpayer incurred expenses in obtaining a reversal of most of the costs that the Ontario Municipal Board had awarded against it. These expenses were capital expenditures but were deductible and deducted by it under s. 20(1)(cc). The taxpayer then received a settlement amount from the law firm that had acted for the OMB in respect of its negligence in having caused the OMB to impose the costs against the taxpayer. This $400,000 receipt was income to the taxpayer on the basis of the principle that the tax treatment of the receipt was to be determined by reference to the tax treatment of the expenditures that had been made, which had been deducted in computing its income. After quoting (at para. 26) the statement below that the "surrogatum principle should apply to maintain tax neutrality of damages," Ryer JA stated (at para. 28):
In the present circumstances, the compensatory payment was received by the appellant as a consequence of its having been required to make certain expenditures rather than its having failed to receive an expected amount. This factual distinction does not preclude the use of the surrogatum principle to characterize the compensatory payment that was received by the appellant. Thus, where the payment is intended to replace monies that have been expended by the recipient, the tax treatment to be accorded to that payment must be determined by reference to the tax treatment of the expenditures that were made. Hence, where an expenditure has been deducted in computing the income of the recipient of a compensatory payment, the amount received should be included in the income of the recipient.
Tsiaprailis v. Canada, 2005 DTC 5119, 2005 SCC 8, [2005] 1 S.C.R. 113
The taxpayer received a lump sum payment of $105,000 in settlement of her claim for wrongful termination of her long-term disability benefits. Although the portion of the settlement that was in respect of future disability benefits was not paid "pursuant to" the plan because there was no obligation on the part of the insurer to make a lump sum payment under the terms of the plan (para. 11), under the surrogatum principle, the portion of the lump sum payment that was intended to replace past disability payments was taxable to her under s. 6(1)(f). Charron J stated (at para. 15):
The determinative questions are: (1) what was the payment intended to replace? And ... (2) would the replaced amount have been taxable in the recipient’s hands? ... [I]t cannot be disputed on the evidence that part of the settlement monies was intended to replace past disability payments. It is also not disputed that such payments, had they been paid to Ms. Tsiaprailis, would have been taxable.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 68 | general authority to allocate global amounts without reference to s. 68 | 54 |