Tax Court of Canada Judgments

Date: 20020326

Docket: 1999-4707-IT-G

BETWEEN:

THE ESTATE OF MARILYN JOHNSON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Rip, J.

[1]            The trustee of the Estate of Marilyn Johnson, deceased, appeals from reassessment of tax levied against the late Marilyn Johnson for 1995. The appellant claims that no amount received by Mrs. Johnson in 1995 from The Mutual Life Assurance Company of Canada ("Mutual Life") ought to be included in her income for the year as a disability benefit within the meaning of paragraph 6(1)(f) of the Income Tax Act ("Act").[1]

[2]            Mrs. Johnson died on June 5, 1998.

[3]            Mrs. Johnson was a special education teacher since 1963. In 1993, Mrs. Johnson was employed as a teacher by the East Parry Sound Board of Education ("School Board"). During 1993 the School Board maintained a group policy of disability insurance with Mutual Life to which the School Board made contributions ("Policy"). Mutual Life contracted to provide wage replacement benefits for employees of the School Board; in the event of the total disability of an employee, Mutual Life would pay benefits to the employee on a periodic basis.

[4]            Since 1967 Mrs. Johnson had been suffering from degenerative disk disease and experienced intermittent pain, according to her husband, Mr. Fred Johnson. She had been "on and off" medication for several years and had been examined by numerous medical specialists. However, in January 1993 she sustained a compression fracture to one of her mid-thoracic vertebrae and her prior symptoms worsened substantially. Mr. Fred Johnson described the resulting pain as "terrible". By November 1993, Mrs. Johnson was unable to continue working as a teacher and applied for wage replacement benefits under the Policy. The School Board stopped paying her salary once her accumulated sick days expired in January 1994. The Policy required a 70 day waiting period before benefits were to start.

[5]            Mutual Life denied Mrs. Johnson's claim in March 1994.

[6]            Notwithstanding her disability, due to economic needs of her family and contrary to the advice of her physician, Mrs. Johnson, according to her husband, was compelled to resume teaching in May 1994.

[7]            On November 22, 1994, Mrs. Johnson commenced legal action in the Ontario Court of Justice (General Division), (as it was then known), claiming, among other things, $500,000 in damages for breach of contract; $100,000 in aggravated, punitive and exemplary damages and a declaration that she was entitled to disability benefits for loss of income from employment pursuant to the Mutual Life Policy. In her Statement of Claim, Mrs. Johnson disclosed that in May 1994 she continued her employment with the School Board. In fact, she continued to work for the School Board until the end of the 1995 school year, that is, June 30th. Mr. Fred Johnson testified that his wife may have been paid by the School Board until August 1995, just before the next school term was to start. The Statement of Claim was filed by the law firm of Loopstra, Nixon & McLeish.[2] Mrs. Johnson's lawyers were of the view that on the basis of Adams v. Confederation Life Insurance Co.,[3] Mrs. Johnson's case "was a bad faith case" and that the conduct of Mutual Life was "outrageous". Therefore there were grounds to sue for aggravated, punitive and exemplary damages.

[8]            In February 1995, Mutual Life served its Statement of Defense to Mrs. Johnson's claim, denying she was totally disabled within the meaning of the Policy. Mutual Life denied knowledge of Mrs. Johnson's employment with the School Board in May 1994.

[9]            Thereafter, Ms. Catherine Motz, in-house counsel for Mutual Life at the time, and Mrs. Marilyn Johnson's solicitors exchanged correspondence. In a letter dated March 22, 1995, Mrs. Johnson's solicitor, Mr. John A. McLeish, sent results of the magnetic resonance imaging ("MRI") to Ms. Motz and advised that he was prepared to recommend settlement of the action on the basis that his client be paid arrears of long-term disability benefits to date plus interest, Mrs. Johnson's long-term disability benefit be reinstated immediately and that she receive agreed costs and disbursements. On April 17, Mr. McLeish withdrew his offer of settlement. Then, on April 12, 1995, Ms. Motz sent an offer of settlement to Mr. McLeish. The offer set out the amount of payment, that the amount was calculated to include retrospective benefits from March 22, 1995, with interest therein in one amount ("lump sum") and future benefits by monthly cheques thereafter. Ms. Motz testified Mutual Life changed its position only when it received the MRI.

[10]          In the letter of April 12, Ms. Motz asked Mr. McLeish to confirm whether or not Mrs. Johnson "is entitled to, has applied for or is in receipt of any categories of monies" that would reduce the Policy's benefits. Excerpts of the Policy under the heading "Amount of Monthly Disability Benefit" were enclosed with the latter. Mr. McLeish did not reply to this question and Ms. Motz did not pursue the matter at the time.

[11]          Mr. McLeish and Ms. Motz exchanged further correspondence during April and May 1995 in which the calculations of the settlement amount were reviewed. The amount of the "lump sum" was $52,846.66. Mr. McLeish, in a letter dated May 11, 1995, acknowledged that the cheque of $52,846.66 represented arrears of benefits, interest and costs. The full and final release also describes how the settlement amount was determined ("May Settlement").

[12]          Mutual Life calculated the $52,846.66 amount payable to Mrs. Johnson as follows:[4]

disability benefits from March 28, 1994 to April 28, 1995

              ($4,186 per month x 13 months)                                                          $54,418.00

+ interest at 2.8% per annum                                                                             1,512.72

- pension contribution (paid directly to pension plan)                                 -4,584.06

+ legal fees                                                                                                                           1,500.00

                                                                                                                                              $52,846.66

[13]          Ms. Motz insisted that Mutual Life made no payment for punitive damages or for breach of contract. Mr. John Johnson acknowledged that in its correspondence to his firm, Mutual Life referred only to disability payments to his mother.

[14]          Mr. Fred Johnson testified that he and his wife were not much interested as to how the settlement amount was calculated by Mutual Life; they were interested in the lump sum amount she was to receive, that is, the $52,846.66. Their son confirmed that how Mutual Life characterized the payment was not important; his mother wanted the money.

[15]          Subsequent to the May Settlement, Mutual Life discovered Mrs. Johnson had been working and refused to pay any further disability benefits. Mutual Life's position was that according to the Policy it could terminate Mrs. Johnson's claim for disability insurance and seek full reimbursement of all monies paid in respect of the claim. Mutual Life ceased paying monthly benefits to Mrs. Johnson as of April 29, 1995. Rather than enforcing its rights under the Policy, Ms. Motz advised Mrs. Johnson's solicitor on June 22, 1995, that Mutual Life was "prepared to regard Mrs. Johnson's work activity from May 24, 1994 through June 1995 as a rehabilitation program approved by it . . .". A Policy excerpt sent to Mr. McLeish by Ms. Motz with her letter of April 12, 1995 included provisions relating to the rehabilitation program that had to be approved by Mutual Life. The disability benefit would be abated depending on the insured's income. Ms. Motz suggested the rehabilitation program, she testified, "to avoid an all or nothing confrontation". She could not recall when the rehabilitation program with respect to Mrs. Johnson was first raised by Mutual Life or by whom copies of monthly rehabilitation calculation sheets showing the statement were sent to Mr. McLeish in June. Mrs. Johnson would have to return any overpayments.

[16]          During the trial of the appeal at bar, Ms. Motz indicated quite clearly that while she may have read the Statement of Claim when originally served on Mutual Life and may have read the allegation that Mrs. Johnson returned to work as a teacher in May 1994, once the Statement of Claim was filed away, she no longer referred to it. It was "out of sight, out of mind". She did not refer to the Statement of Claim when Mutual Life was "calculating" the benefit payable to Mrs. Johnson. Further, Ms. Motz' attitude was that the statement in the Statement of Claim that Mrs. Johnson returned to work was "only an allegation" without any particulars, for example, as to the duration of employment.

[17]          In August 1995 Mrs. Johnson's solicitors served a Notice of Motion on Mutual Life for judgment in the terms of the May Settlement, among other related matters. Mutual Life made a cross-motion for rectification of the May Settlement agreement.

[18]          On October 25, 1995, Hawkins J. of the Ontario Court of Justice (General Division), dismissed Mrs. Johnson's motion and ordered that the May Settlement be rectified to reduce the lump sum payable to Mrs. Johnson by the amount of $15,011.30 to account for disability benefits paid to her while she was working for the School Board in 1994 and 1995. He also ordered Mrs. Johnson to pay costs to Mutual Life of $1,500.

[19]          In his Reasons for Judgment Mr. Justice Hawkins stated that:

       Ms. Motz clearly forgot (if she ever consciously "knew") that Ms. Johnson had worked as a teacher for some period from and after May 1994 (as disclosed in the statement of claim). The most charitable reading one can give is that Mr. McLeish either forgot the fact that his client had worked and been paid for part of the period for which she subsequently received benefits under the policy or that he remembered that fact but was unaware of its relevance. One might also charitably conclude that Ms. Johnson was unaware that the wage loss arrears being paid to her included periods of time when she was working and being paid. It is beyond question that she is not entitled under the policy to be paid a wage loss benefit for periods when she is working and receiving wages.

[20]          He later added:

       In my view it would be unconscionable in the extreme to allow Ms. Johnson to retain money paid to her as wage loss compensation in respect of a period of time when she was in fact working and being paid.

[21]          Mrs. Johnson appealed the order of Mr. Justice Hawkins to the Ontario Court of Appeal but abandoned the appeal as part of a subsequent settlement with Mutual Life in December 1995 ("December Settlement").

[22]          Under the terms of the December Settlement, Mutual Life agreed to pay to Mrs. Johnson an additional $10,632.44 in disability benefits. Mutual Life computed the amount of $10,632.44 as follows:[5]

disability benefits from April 29, 1995 to December 28, 1995

              ($3,833.38 per month) not previously paid                                        $30,667.04

- Court ordered payment to Mutual Life                                                          -15,011.30

- ½ of total rehabilitation earning deduction applicable to May and

June 1995                                                                                                                             - 3,523.30

- Court ordered costs payable to Mutual Life                                                - 1,500.00

                                                                                                                                              $10,632.44

[23]          Mrs. Johnson received $10,632.44 from Mutual Life in December 1995. Mutual Life issued a T4A slip to Mrs. Johnson in February 1996 stating that it had paid wage loss replacement plan benefits to Mrs. Johnson during the 1995 taxation year totalling $69,018.78 computed as follows:

disability benefits from April 29, 1995 to December 28, 1995                         $30,667.04

                      ($3,833.38 x 8 months)

disability benefits from March 28, 1994 to April 28, 1995                                               54,418.00

Less: court ordered payment to Mutual Life                                                                    (15,011.30)

Less: ½ of total rehabilitation earning deduction applicable

                      to May and June 1995                                                                                                    (3,523.30)

Net Payment to Mrs. Johnson                                                                                            $66,550.44

amount paid to pension plan:                                                                                                             $2,468.34

                      (April 29, 1995 to December 28, 1995)

Amount reflected in T4A for 1995                                                                                      $69,018.78

[24]          The amount of $69,018.78 included amounts of $4,584.06 and $2,468.34 paid to Mrs. Johnson's pension plan. In reassessing Mrs. Johnson in September 1999, the Minister reduced the amount of $2,468.34 from Mrs. Johnson's income. Counsel for the respondent acknowledges that the amount of $4,584.06 also ought to have been deducted in computing Mrs. Johnson's income for the year in accordance with paragraph 8(1)(m) of the Act. I agree.

[25]          The remaining issue now before me is whether the lump sum payments made by Mutual Life to Mrs. Johnson, less the amount ordered by the Ontario Court to be repaid to the insurer, is to be included in Mrs. Johnson's income pursuant to paragraph 6(1)(f) of the Act. Paragraph 6(1)(f) provides that there shall be included in a taxpayer's income for a year as income from employment or an office, among other things:

(f) the aggregate of amounts received by him in the year that were payable to him on a periodic basis in respect of the loss of all or any part of his income from an office or employment, pursuant to

. . .

(ii) a disability insurance plan,

. . .

to or under which his employer has made a contribution . . .

[26]          The issue before me is to determine what amounts were paid in 1995 to Mrs. Johnson on a periodic basis pursuant to a disability insurance plan under which the School Board made a contribution and what amounts, if any, were paid to her by Mutual Life other than pursuant to a disability insurance plan.

[27]          I do not accept the appellant's position that the $69,018.78 was paid to Mrs. Johnson for breach of contract or as punitive damages. The evidence is to the contrary. There is no obligation for an insurer to accept at face value any claim by an insured without evidence supporting the claim. In the appeal at bar, the insurer was prepared to honour its obligations under the Policy once it received the MRI. The fact that the insured sued the insurer before providing the MRI to the insurer ought not, in most circumstances, change the payment of arrears of benefits to the payment of something else once the litigation is settled.

[28]          The payment in May 1995 by Mutual Life terminated the initial litigation. However, the payment was not the insurer's final or full liability under the Policy, as in Peel v. M.N.R.,[6] or Tsiaprailis v. The Queen[7] for example. The payment was simply the aggregate of arrears of amounts that were payable on a periodic basis under the Policy, plus interest and costs. The insurer paid what it ought to have paid under the Policy had it accepted Mrs. Johnson's application in March 1995, or earlier, and Mrs. Johnson received the arrears to which she was entitled under the Policy. Prior to the settlement, counsel for Mrs. Johnson and Mutual Life were "number crunching" to ensure that the lump sum amount aggregated the amounts she should have received had Mutual Life accepted her application when made, plus interest and costs of $1,500. Further, the Policy continued and Mrs. Johnson was to continue to receive monthly benefits. The insurer honoured the Policy and paid what it ought to have paid on a periodic basis. Mrs. Johnson relinquished no rights under the Policy to claim future benefits. Thus, under ordinary circumstances, the amounts received under the May Settlement ought to be included in Mrs. Johnson's income for 1995.

[29]          But these were not ordinary circumstances. Subsequently, Mutual Life realized - since it had been previously informed - that Mrs. Johnson was employed by the School Board since May 1994. Thus, in Mutual Life's view, its calculation of benefits to Mrs. Johnson according to the May Settlement was too high. Mutual Life wanted a return of the excess amounts. Mrs. Johnson moved for the May Settlement to be confirmed and Mutual Life cross-moved for rectification of the May Settlement. A settlement was reached in December 1995 pursuant to which Mutual Life paid Mrs. Johnson arrears of $10,632.44 and agreed to continue paying future benefits.

[30]          It is obvious Mrs. Johnson was paid benefits for the period May 1994 up to and including June 1995; under the Policy she was not entitled to benefits if she was employed. I do not share Mutual Life's view that the benefits paid with respect to the time Mrs. Johnson was working were rehabilitation earnings. There is no evidence that when Mrs. Johnson started again to work for the School Board, Mutual Life and the School Board considered the employment to be rehabilitation for purposes of the Policy. The rehabilitation clause in the Policy was resorted to in order to arrive at a settlement with Mrs. Johnson, as a way to calculate an amount that would be payable to her. In particular, it is apparent the characterization was made for Mutual Life's own internal purposes to justify a payment in addition to monthly long-term disability payments. In my view the rehabilitation payments were a fiction and were a means used to terminate litigation. The Canadian Customs and Revenue Agency ought not to have "bought" Mutual Life's treatment of the payment; a little more effort on the Agency's part would have indicated a different treatment was more realistic. I accept Mr. Johnson's evidence that Mrs. Johnson returned to work with the School Board because of financial pressure on the family and for no other reason. There was no rehabilitation program.

[31]          Mrs. Johnson was employed by the School Board during the period May 1994 to June 1995. That portion of the lump sum payment attributable to the period of employment of May 1994 to June 1995 cannot be said to have been paid, therefore, in respect of the loss of all or any part of her income from employment, she did not lose any employment income for the time she worked. How, then, can any payment by Mutual Life with respect to this period be for loss of employment income? No portion of any payment by Mutual Life attributable to the period May 1994 to June 1995, or later, for the time she was paid by the School Board is to be included in income of Mrs. Johnson pursuant to paragraph 6(1)(f) of the Act.[8] Only the portion of the payment for arrears with respect to the periods March and April 1994 and the months after June 1995 that the School Board ceased paying salary to Mrs. Johnson to December 1995 are to be included in income by virtue of paragraph 6(1)(f). (And income will be further reduced by the pension contribution of $4,584.06).

[32]          I agree with counsel that paragraph 6(1)(a) of the Act is of no assistance to the facts at bar. Both my colleagues Associate Chief Judge Bowman and Judge Lamarre have held that paragraph 6(1)(a) is a general provision and it is not intended to fill in all the gaps left by paragraph 6(1)(f).[9] Any amount of money Mrs. Johnson received from Mutual Life was as an insured and not as an employee of the School Board, which would be required if paragraph 6(1)(a) were to apply. The appeal depends on the application of paragraph 6(1)(f) alone.

[33]          The appeal will therefore be allowed, with costs.

Signed at Ottawa, Canada, this 26th day of March 2002.

"Gerald J. Rip"

J.T.C.C.

COURT FILE NO.:                                                 1999-4707(IT)G

STYLE OF CAUSE:                                               The Estate of Marilyn Johnson v. The Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           January 15 and 16, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge G.J. Rip

DATE OF JUDGMENT:                                       March 26, 2002

APPEARANCES:

Counsel for the Appellant: Richard G. Fitzsimmons

Counsel for the Respondent:              Elizabeth Chasson

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Richard G. Fitzsimmons

Firm:                  Fitzsimmons & Company

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

1999-4707(IT)G

BETWEEN:

THE ESTATE OF MARILYN JOHNSON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on January 15 and 16, 2002 at Toronto, Ontario, by

the Honourable Judge Gerald J. Rip

Appearances

Counsel for the Appellant:          Richard G. Fitzsimmons

Counsel for the Respondent:      Elizabeth Chasson

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1995 taxation year is allowed, with costs, and the matter is referred back to the Minister of National Revenue for reassessment and reconsideration on the basis that no amount of money received from Mutual Life with respect to the period Mrs. Johnson was employed by the East Parry Sound Board of Education be included in her income in 1995 and that the amount of $4,584.06 paid on her account as a contribution to a registered pension plan be deducted in computing her income for 1995.

Signed at Ottawa, Canada, this 26th day of March 2002.

"Gerald J. Rip"

J.T.C.C.

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