Tax Court of Canada Judgments

Date: 19971125

Docket: 95-3761-IT-G

BETWEEN:

PHILLIP T. OVERIN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

[1] Phillip T. Overin is appealing from a reassessment for the 1992 taxation year in which the Minister of National Revenue (“Minister”) rejected his claim that money he received from the Province of British Columbia was a payment on account of capital representing proceeds of disposition of his “rights, interest and remedies” which he had against his former employer and which he assigned to the Province. The Minister denied the claim on the basis that the payment received by the appellant from the Province was a “retiring allowance” as defined in subsection 248(1) of the Income Tax Act (“Act”) which is to be included in income under subparagraph 56(1)(a)(ii) of the Act.

[2] The parties proceeded to trial by way of a Statement of Agreed Facts. The relevant portions of the Statement of Agreed Facts are as follows:

1. The Appellant is an individual ... .

2. Cassiar Mining Corporation (the “Company”) was a corporation that had its head office at 2000-1055 West Hastings Street, Vancouver, B.C., V6E 3V3 and mining operations in the Town of Cassiar, B.C.

3. The Appellant was an employee of the Company as at February 4, 1992, working at the Company’s head office in Vancouver, British Columbia.

4. On February 4, 1992, (the “Appointment Date”) Arthur Anderson Inc. (the “Receiver”) was appointed the Receiver of the Company pursuant to an order of the Supreme Court of British Columbia.

5. The terms of the Receiver’s appointment required it to close down the operation of the Company and take the necessary steps to safeguard and preserve the Company’s assets.

6. In furtherance of this requirement, by letter dated February 5, 1992, the Receiver notified the Appellant and all of the other employees of the Company that their employment with the Company was terminated effective immediately.

7. By a second letter dated February 5, 1992, the Receiver offered employment to the Appellant and all of the other employees of the Company.

8. This offer of employment was subject to the terms and conditions set out in the February 5, 1992 letter, a copy of which is attached as Schedule “A” to [these reasons for judgment].

9. At the time that the Appellant was terminated, the Company did not provide any severance or other pay to the Appellant or to any of the other employees of the Company.

10. At the time that the Appellant was terminated, no prior notice of termination was provided to the Appellant or to any of the other employees by the Company or the Receiver.

11. On March 23, 1992, the Appellant was presented with and executed an agreement in the form attached as Schedule “B” to [these reasons for judgment].

12. Pursuant to an agreement reached between the Province of British Columbia (the “Province”) and the terminated employees of the Company, the Appellant received a payment equal to 8 weeks of salary on the basis that he was employed by the Company for less than 10 years.

13. Arthur Andersen Inc., in addition to being the Receiver of the Company, was the agent of the Province and became a trustee of a settlement fund created by the Province. As agent for the Province, Arthur Andersen Inc. made a payment to the Appellant on March 23, 1992 in the amount of $9,416.

14. In his 1992 tax return, the Appellant characterized his payment from the Province as proceeds of disposition received on the disposition of a capital property. The Appellant included three-quarters of the resulting capital gain (or $7,062) in his income, and claimed a deduction of $7,062 in respect of the payment from the Province under subsection 110.6(3) of the Income Tax Act (Canada).

15. On September 1, 1995, the Minister of National Revenue confirmed a Notice of Reassessment dated December 22, 1993.

[3] Counsel also acknowledged that because of the impact the closing of Cassiar had on the Town of Cassiar, the British Columbia government decided to make the payment to former employees of Cassiar, including the appellant. The payments were described as a “political bail out”.

[4] The appellant says that when Cassiar closed down in 1992 his employment was terminated without Cassiar or the Receiver paying any severance or termination pay. The Province made a payment to him pursuant to the terms of the Assignment and was substituted for him in respect of his rights against Cassiar. Since the property he disposed of had no adjusted cost base to him, the appellant realized a capital gain equal to the proceeds of disposition, three-quarters of which is to be included in his income under paragraph 3(b) of the Act.

Counsel relied on the definition of “property” in subsection 248(1) of the Act and the definitions of “disposition” and “proceeds of disposition” in section 54. The word ‘property’ means property of any kind whatever whether real or personal or corporeal or incorporeal, and ... includes a right of any kind whatever, a share or a chose in action ...”. The word “disposition” includes “any transaction or event entitling a taxpayer to proceeds of disposition of property”. The term “proceeds of disposition” includes “the sale price of property that has been sold”.

[6] The appellant’s rights against Cassiar constituted a chose in action and the right of action was assigned, or disposed of, to the Province. By the terms of the Assignment, the appellant disposed of that property and received proceeds of disposition in excess of his adjusted cost base of the property. This gives rise, counsel submitted, to a capital gain pursuant to paragraph 39(1)(a) of the Act.

[7] Appellant’s counsel referred me to several decisions in support of the proposition that a disposition of an interest in a law suit is a disposition of property under the Act which may give rise to a capital gain to the person disposing of the interest: Pe Ben Industries Company Limited v. The Queen, 88 DTC 6347 (FCTD) and Cormier v. MNR, 90 DTC 1167 (TCC). I agree with counsel that this is a valid proposition of law.

[8] The appellant’s counsel stressed that the payment was not a retiring allowance as claimed by the Minister. A “retiring allowance” is defined in subsection 248(1) of the Act as follows:

“retiring allowance” means an amount ... received

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his long service, or

(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal

by the taxpayer ...

[9] Counsel insisted the payment received by the appellant does not fall within the scope of the definition of a retiring allowance. In the alternative, even if it does fall within the scope of the definition of retiring allowance, the Act will purport to tax the payment under two provisions, as a capital gain and as a retiring allowance. To resolve this conflict, he stated, the capital gains provision is to be preferred as it more specifically addresses the character of the payment. Counsel referred to the decision of Richardson v. The Queen, 88 DTC 1134 (TCC), a decision of Tremblay, J.T.C.C. for the proposition that a payment of damages in respect of a loss of an office or employment is not a retiring allowance unless the damages originate from the breach of the contract of employment. Counsel argued that since the payment originated with the Province and the Province acquired the appellant’s rights to damages against Cassiar, the payment was consideration for a sale of those rights; the payment did not originate with the employer or stem from the contract of employment.

[10] Counsel also referred to a judgment of the Supreme Court of Canada in Schwartz v. The Queen, 96 DTC 6103, for the proposition that not every payment which has a connection to one’s employment will fall within the definition of a retiring allowance and, in particular, that an amount in respect of damages from the loss of intended employment did not constitute a retiring allowance. Counsel concluded from these two cases that there must be a clear connection between the payment and the contract of employment for the definition of retiring allowance to apply. Counsel also referred to Niles v. MNR, 91 DTC 806 (TCC). In the appellant’s view a retiring allowance must have a direct link to a contract of employment and there is no direct link in the appeal at bar.

[11] I am unable to agree with the appellant’s submission.

[12] In Richardson, supra, Tremblay, J.T.C.C. found that there was no contract of employment and therefore the wording of the retiring allowance provision had not been met.[1] In Schwartz, supra, the Supreme Court of Canada held that there had only been an intended employment, therefore there was no actual employment that could have been lost for the purposes of applying the definition of retiring allowance. In the case at bar, there was a contract of employment. The authorities cited by the appellant are distinguishable.

[13] I agree with appellant’s counsel that the payment by the Province to the appellant was proceeds of disposition of capital property. There is no doubt the appellant transferred its rights to sue Cassiar, or its successor, for damages for breach of an employment contract in return for the payment. However, the payment received by the appellant from the Province did not constitute a damage award or a payment in lieu of damages. Rather, the Province and the appellant entered into a legally binding arm’s length agreement under which the appellant assigned his rights to the Province in consideration for the payment received.

[14] However this is not determinative of the matter before me. I must determine the true nature of the transaction. The disposition of the appellant’s chose in action cannot be considered in a vacuum. The former employer, Cassiar, was in receivership. The provincial government intervened and came to an agreement with the former employee pursuant to which the appellant received the payment in question. I think, to resolve this issue, the question that must be answered is: would the appellant have received any payment from the Province had he not lost his employment with Cassiar?

[15] The appellant submitted that since the payment originated with the Province and consideration did not flow from employment or from the employment contract the receipt is not caught by the definition of “retiring allowance”. I cannot agree. The definition of “retiring allowance” in subsection 248(1) is unequivocal, words should not be imported into the provision when Parliament has not seen fit to use them.[2] The language of the provision is clear and does not impose the requirement that the payment originate with the employer.[3]

[16] The use of the words “in respect of” in the definition of retiring allowance has been recognized as conveying a connection between a taxpayer’s loss of employment and the subsequent receipt.[4] In order for the retiring allowance provision to have real meaning, however, some limit must be placed on the ambit or scope of the required connection between a receipt and a loss of employment. In this regard two decisions may be of some assistance. First, in Merrins, supra, Pinard, J. observed at 6670:

There is no doubt that the amount was received by the plaintiff in respect of the loss of his employment with AECL. Had there been no loss of employment, there would have been no grievance, no settlement, no award and, therefore, no payment of the sum to the plaintiff.

What is implied from Pinard, J.’s analysis is that in determining the limit to be placed on the connection between a payment and a loss of employment, the appropriate test is to ask “but for the loss of employment would the amount have been received?” If the answer to that question is in the negative, then a sufficient nexus exists between the receipt and the loss of employment for the payment to be considered a retiring allowance.

[17] In Leest, supra, Dussault, J.T.C.C. observed:

As there is no doubt in my mind that the appellant lost, for all practical purposes and effect his employment for a lengthy period, although not permanently as he was later reinstated by the Arbitration Board, I also conclude that the award of damages by the Arbitration Board was directly related to that loss and directed at compensating it.

In that sense, the amount was "with respect of" the loss of employment. This being so, such damages can rightly be considered a "retiring allowance" as that term is now defined by subsection 248(1) of the Act. They are thus taxable by virtue of subparagraph 56(1)(a)(ii) of the Act.

[18] It is quite clear then that in addition to the “but/for” test, where the purpose of a payment is to compensate a loss of employment it may be considered as having been received “with respect to” that loss.

[19] In the case at bar, the appellant lost his employment. The transaction between the appellant and the Province and his loss of employment with Cassiar cannot be put in two separate watertight compartments. But for the loss of employment the appellant would not have received any money from the Province of British Columbia. That Cassiar was in receivership and the Province intervened to assure a payment was made does not, in my opinion, alter this conclusion. To the extent that the purpose and effect of the Province’s intervention was to counterbalance the effect of the appellant’s loss of employment by compensating the appellant, the payment may be considered to have been received in respect of a loss of employment because of its compensatory nature. The payment, therefore, can reasonably be considered to be a “retiring allowance” within the meaning of subsection 248(1).

[20] In the event the receipt from the Province may be characterized as both a capital gain and a retiring allowance, counsel for the appellant argued that the provisions governing these two concepts are in conflict and that the capital gains provision should be applied because it is more “appropriate and natural” and specific to the circumstances.

[21] Driedger on the Construction of Statutes observes at 177 with regard to the interpretative presumption of coherence that:[5]

[I]f the provisions cannot both apply without conflict, the courts resort to one of the conflict avoidance or conflict resolution techniques at their disposal. These include (1) interpretation to avoid conflict; (2) the paramountcy of some categories of legislation over others; (3) implied exception (generalia specialibus non derogant); and (4) implied repeal.

[22] In my opinion, the appropriate technique to consider in the present matter is that of implied exception. It is noted in Driedger at 186 and 187:

Where two provisions are in conflict and one of them deals specifically with the matter in question while the other is of general application, the conflict may be avoided by applying the specific provision to the exclusion of the more general one. The specific prevails over the general; it does not matter which was enacted first.

[...]

A key consideration in any implied exception analysis is determining which provision states the general rule and which is the specific exception.

[23] The retiring allowance provision, in my view, is more specific than the capital gains provisions of the Act. Payments flowing from capital gains and enumerated sources are included in income pursuant to the general scheme of the Act. The retiring allowance provision includes in income payments flowing from a discrete source of income (i.e. the loss of employment) that is not enumerated in section 3 of the Act. Presumably the provision has been enacted to expressly ensure that amounts flowing from this source are included in computing income. In the present circumstances, in the absence of paragraph 56(1)(a) the amount in question would be a capital payment. Paragraph 56(1)(a), however, is a specific exception to the general rule.

[24] In the circumstances, therefore, the appeal will be dismissed with costs.

"Gerald J. Rip"

J.T.C.C.

Schedule “A”

Arthur Andersen

February 5, 1992

To: All Employees of the Cassiar Mining Corporation

Dear Sirs:

We confirm that we were appointed Receiver of Cassiar Mining Corporation (the “Company”) on February 4, 1992 (the “Appointment Date”) pursuant to an order of the Supreme Court of British Columbia pronounced in Action No. A920429, Vancouver Registry.

The terms of our appointment require that we close down the operations of the Company and take the necessary steps to safeguard and preserve the corporate assets. For this purpose we, as Receiver of the Company, are prepared to offer you new employment on the following express terms and conditions:

1. Arthur Andersen Inc. will incur no liability, ... with respect to any claims you may have against the Company as an employee ... with relate to the period to and including the Appointment Date. ...

2. ...

3. ... you will be an employee of the Receiver of the Company and you will be paid an hourly rate (or salary), annual vacation pay and holiday pay on the same basis as prior to the appointment. ...

At this point, we are unable to provide you with any commitment regarding duration of your employment or the possibility of ongoing employment with a potential purchaser of the Company’s assets.

Please confirm your acceptance of these amended terms of employment by signing and returning to us the enclosed duplicate copy of this letter.

Yours very truly,

ARTHUR ANDERSEN INC.

Receiver of Cassiar Mining Corporation

By

James C. Stuart

KS/0123E

Enclosure

I accept and agree to the terms as above set forth this ___________ day of ________, 1992.

Signed: ______________________

Schedule “B”

ASSIGNMENT

In consideration for $_________ paid to me by Her Majesty the Queen in right of the Province of British Columbia (the “Province”), receipt of which is hereby acknowledged, I ______________, of Vancouver, British Columbia, assign to the Province all my rights, interest and remedies in connection with any claim I may have against Cassiar Mining Corporation (my “Employer”), now or in the future, for pay in lieu of notice of termination of my employment with my Employer, or damages for or arising from termination of that employment (“Termination Pay”), or any award or settlement in that connection.

This Assignment includes full power of substitution of the Province for me in connection with my claim.

I authorize my Employer (including any person in possession or control of the property, assets or undertaking of my Employer, or in whom that property is or may become vested) to pay the amount of my claim for Termination Pay to the Province on presentation of this Assignment.

Upon receipt of any such payment by the Province, I release my Employer from liability with respect to my claim for Termination Pay.

I authorize the Province, on my behalf, to sign any cheques and receipts required to collect the amount of my claim for Termination Pay from my Employer, and to furnish evidence of the payment of that amount.

...

I acknowledge that this is an absolute and unconditional assignment of my claim for Termination Pay and merges with any previous assignment to the Province of all or part of my claim in that regard, any payment in consideration of a previous assignment is hereby deemed to be paid in consideration of this Assignment, and in the event of any inconsistency between the terms of this Assignment and the terms of any previous assignment, the terms of this Assignment apply.

Dated at ____________________, British Columbia, on ______________,1992.

Witness:

________________________ ______________________________

(signed)

Name:

Address:

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