Date: 19990615
Docket: 98-1040-IT-I
BETWEEN:
FRANÇOIS J. SUERMONDT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Bowman, J.T.C.C.
[1] This appeal is from an assessment for the appellant's 1991 taxation year. The issue is whether the appellant must pay tax on $72,500 which he received pursuant to a settlement of a wrongful dismissal action.
[2] Prior to 1991 the appellant was dismissed from his employment with a company known as Datapoint Canada Inc. He sued for damages and a settlement was reached in 1991.
[3] He had lawyers but the final settlement was negotiated by him personally. He testified that his understanding was that the settlement amount was $111,540, from which income tax as well as Canada Pension Plan and Unemployment Insurance premiums were to be deducted and remitted to the Receiver General and that he would receive a net amount of $72,500.
[4] That is not what happened. On February 4, 1991, the president of Datapoint, Mr. George D. Oyagt, wrote to the company's lawyer, Ms. Chantal C. Beaulieu of Ogilvy Renault as follows:
Re: François Suermondt vs Datapoint Canada Inc.
Please find enclosed two cheques made payable to Godin, Raymond, Harris, Thomas – In Trust in the amount of $72,500.00 and $500.00, being the amount of settlement with Mr. Suermondt and Mr. Suermondt's legal fees, respectively.
The settlement, I believe, is realistic under the circumstances. We have acknowledged that we owed François outstanding commissions of $36,000 (his claim $44,000), plus alleged outstanding twenty-two days of vacations. If we add into that, his claim for lost interest on commissions due him from August 1989, the six to nine man days of David Cunningham's and my time lost in presenting our case before the courts, and the potential award for wrongful dismissal (Suermondt's total claim of $115,000) the settlement is less painful. I have cleared this settlement with Mr. Philip Freeman, Senior Vice-President and Chief Legal Counsel for Intelogic Trace, Inc.
Along with a full release from Suermondt, would you please ensure that any unemployment insurance, income tax (Quebec and Federal), and other legal/governmental implications of this settlement are taken care of prior to the release of the cheques in order to save harmless Datapoint Canada Inc. and Intelogic Trace Canada Inc. from further liabilities and obligations relative to Mr. Suermondt.
It has been a pleasure dealing with you in this legal matter. Thank you for all your assistance in bringing about this out of court settlement.
[5] The letter is somewhat strange. Why would he send a cheque for $72,500 to his lawyers, payable to Mr. Suermondt's lawyers, and instruct them to ensure that "any unemployment insurance, income tax (Quebec and Federal), and other legal/governmental implications of this settlement are taken care of prior to the release of the cheques..."? The cheque was not payable to Ogilvy Renault and so Ms. Beaulieu could not have withheld any tax.
[6] Ms. Beaulieu testified, but given the passage of eight years and the unavailability of the files, she was unable to shed any light on the settlement.
[7] It does not appear that the settlement was reduced to writing.
[8] The Department of National Revenue received a T4A slip for 1991 from Intelogic Trace Canada Inc. (which had acquired Datapoint Canada Inc.) showing the payment to Mr. Suermondt of $72,500 as a retiring allowance, with no deductions.
[9] The Department of National Revenue contacted the appellant, who had not filed a return for 1994. When he did file he did not declare the amount of $72,500.
[10] The Minister assessed him on this amount.
[11] The appellant's principal contention is not that the amount was not a retiring allowance but rather that he was supposed, under the terms of the settlement, to have received it net of tax and that the responsibility of remitting tax on the amount of $111,540 lay with Datapoint. He sought to hold Datapoint to what he believed was the settlement he made with it, but found that in the meantime it had left Canada.
[12] I have no hesitation is believing Mr. Suermondt when he says that his understanding of the settlement was that he was to receive $72,500 net of tax and other applicable deductions.
[13] Unfortunately, the settlement was not reduced to writing and if that was the deal, Datapoint reneged.
[14] Where an employer withholds tax from an employee's wages or salary and fails to remit it, it is clear that the Minister cannot pursue the employee for the unremitted tax. Once it is withheld it is held in trust for Her Majesty.
[15] That is not the situation where there is an oral understanding that the employee will receive his or her salary or wages (or, as in this case, a taxable lump sum) "net of taxes". Such an understanding does not bind the Minister and does not amount to the type of withholding that could create a trust in favour of Her Majesty or a defence that the employee can use against a claim by the Minister for tax on the amount received by him.[1]
[16] I regret having to reach this conclusion. Mr. Suermondt has been deceived by Datapoint, which did not live up to its agreement with him. However that fact cannot redound to the detriment of the respondent.
[17] The appeal is dismissed.
Signed at Ottawa, Canada, this 15th day of June 1999.
"D.G.H. Bowman"
J.T.C.C.
[1] Another example of the problems that arise from oral and undocumented arrangements under which an employee is to receive a salary that is net of tax, CPP and Unemployment Insurance deductions is found in Skold (c.o.b. Grand Forks Recycling & Metals) v. Canada, [1999] T.C.J. No. 179 (Q.L.).