[OFFICIAL ENGLISH TRANSLATION]
2000-2021(IT)I
BETWEEN:
RAYMOND LAQUERRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 7, 2002, and judgment delivered orally on
January 10, 2002, at Trois-Rivières, Quebec, by
the Honourable Judge Pierre Archambault
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Vlad Zolia
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is allowed, with costs of $20 for expenses, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the sum of $59,165.85 does not constitute income for Mr. Laquerre. Since the Minister has previously excluded a sum of $13,506.35 (mistakenly deducted as a legal expense), the amount of the reduction of Mr. Laquerre's income resulting from this decision is therefore $45,659.50.
Signed at Ottawa, Canada, this 17th day of January 2002.
|
"Pierre Archambault" |
J.T.C.C.
Translation certified true
on this 26th day of August 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020516
Docket: 2000-2021(IT)I
BETWEEN:
RAYMOND LAQUERRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(delivered orally from the bench on
January 10, 2002, at Trois-Rivières, Quebec)
Archambault, J.T.C.C.
[1] Raymond Laquerre is disputing a notice of assessment made by the Minister of National Revenue (Minister) concerning the 1998 taxation year. The Minister included two large amounts in the taxpayer's income: a retirement benefit of $27,223.20 and an amount of $59,165.85 received as a disability insurance benefit within the meaning of paragraph 6(1)(f) of the Income Tax Act (Act).
[2] Mr. Laquerre disputes only the inclusion of the disability insurance benefit of $59,165.85. The Minister moreover allowed him a deduction of $13,506 for legal expenses. Mr. Laquerre acknowledges that he is not entitled to an amount greater than that.
Mr. Laquerre's Position
[3] Mr. Laquerre submits the following reasons in support of his objection. First of all, he contends that the amount of the disability insurance benefit was not paid on a periodic basis. Second, he says, the benefit was not payable on a periodic basis in respect of the loss of all or any part of income from an office or employment but was an amount paid to buy peace. Third, he claims that the tax treatment of amounts paid here compared with those paid by a government agency such as the CSST was unfair.
Respondent's Position
[4] The respondent contends that the Minister wrongly allowed the amount of $13,506 because paragraph 8(1)(b) of the Act acknowledges the right to deduct legal or extralegal expenses incurred solely to collect salary or wages, that is to say when a collection proceeding is instituted against an employer. In the respondent's view, the person sued in this instance was an insurer, not the employer. She admits, however, that this Court did not have jurisdiction to increase the amount of tax disputed by Mr. Laquerre.
The Facts
[5] Mr. Laquerre was an officer of the Royal Canadian Mounted Police (RCMP) for approximately 24 years. The social benefits provided by his employer included a long-term disability insurance plan (plan), which entered into effect on October 1, 1975, under which he could receive a benefit equal to 75 percent of his salary, reduced by the amount of his pension income.
[6] Mr. Laquerre did not file copies of the plan's conditions or any brochure summarizing its terms. No witness was able to inform the Court about those terms except Mr. Laquerre, who stated that under the plan, he could receive long-term disability benefits for two years after his dismissal by the RCMP. At the end of that period, the Great-West Life Assurance Company (GW) could ask him to undergo a medical examination to determine whether the beneficiary, Mr. Laquerre, was still unable to find equivalent employment with another employer. The RCMP and Mr. Laquerre paid GW premiums in the proportion of 60 percent and 40 percent respectively.
[7] In 1994, the RCMP sent Mr. Laquerre a notice of intent to dismiss for reasons of illness, to which he objected before the competent authorities of the RCMP. His objection was dismissed at the first level in the fall of 1994, and Mr. Laquerre appealed from that decision to a higher authority. At the same time, he asked GW to confirm that he would be eligible for disability benefits. GW then asked a physician it chose to conduct an assessment of Mr. Laquerre's condition. The medical report bears the date of December 12, 1994. According to GW's insurance officer, Mr. Laquerre was not eligible for benefits under the plan. Contrary to the instructions contained in the medical report, a GW representative forwarded it to the RCMP, which prepared a memorandum dated December 14, 1994, informing RCMP staff that Mr. Laquerre was dangerous, and a photograph of him was posted in certain public locations.
[8] On February 1, 1995, Mr. Laquerre discontinued his objection to the notice of intent to dismiss, as a result of which his employment with the RCMP was terminated. Mr. Laquerre subsequently began receiving his pension from the RCMP pension fund based on the number of years of service he had accumulated to that point.
[9] Since GW continued to refuse to pay him long-term disability benefits, despite an RCMP committee's recommendation that he be paid, Mr. Laquerre retained the services of a lawyer in September 1997 to sue GW. A formal demand was sent for the 32 disability benefit payments that were outstanding at that time. In his statement dated January 20, 1998, counsel for Mr. Laquerre claimed the 36 monthly disability benefit payments that GW had hitherto refused to make, for a total amount of $49,343.55. He also claimed damages of $250,000 from GW for unlawfully forwarding the medical report to the RCMP, thus causing Mr. Laquerre serious prejudice, in particular by forcing him, as he contends, to discontinue contesting his dismissal. A sum of $100,000 was also claimed as exemplary damages.
[10] The statement filed before the Superior Court reads as follows, at paragraph (4):
[TRANSLATION]
The medical board consisting of J. Robinson, M.D., Chairman, and J. Binet, M.D., and Grégoire, M.D., members, concluded that the applicant's medical condition was chronic and irreversible, and, furthermore, another of the findings of the said board's unanimous report was that returning to work in the service of the RCMP would aggravate the applicant's medical condition, as appears from the report entitled "MEDICAL BOARD - FINDINGS AND RECOMMENDATIONS OF THE MEDICAL BOARD" of the said tripartite board communicated to the respondent as Exhibit P-1 by means of a copy provided upon service of this statement.
[11] According to Mr. Laquerre, negotiations to settle the suit against GW commenced in earnest when he began to request information from the RCMP concerning the RCMP staff who had had access to his medical report. In April 1998, GW made an initial oral offer of $27,000, which Mr. Laquerre rejected. He continued his efforts to gain access to his file at the RCMP. His solicitor apparently told him that satisfactory progress was being made in the negotiations, without giving him further details on the matter.
[12] In June 1998, Mr. Laquerre was called to a meeting with his lawyer, who informed him that he had settled the case, then handed him thirty-four $1,000 bills and one $100 bill. Mr. Laquerre immediately had to sign the contract of transaction and release, which had the following stipulations:
[TRANSLATION]
1. In consideration of the payment by THE GREAT-WEST LIFE ASSURANCE COMPANY of an amount of $58,710.65 and for good and valuable consideration which the plaintiff, RAYMOND LAQUERRE, ackowledges having received from the defendant, THE GREAT-WEST LIFE ASSURANCE COMPANY, the plaintiff, RAYMOND LAQUERRE, hereby grants full and final release to the defendant in this case, THE GREAT-WEST LIFE ASSURANCE COMPANY, and to its agents, shareholders, directors, officers, subsidiaries, officials, employees, representatives, insurers and assigns, past, present and future, from any claim, demand or cause of action of any kind that he has or might have against the defendant, including principal and interest, arising directly or indirectly from the facts alleged in the statement attached to the writ of summons in the file of the Superior Court of the District of Montreal bearing number 500-05-038835-987;
. . .
3. Furthermore, the plaintiff, RAYMOND LAQUERRE, waives retroactively the benefits of the insurance coverages issued by the defendant, THE GREAT-WEST LIFE ASSURANCE COMPANY, and held by the Royal Canadian Mounted Police, bearing number 24892 LTD, and acknowledges that his inclusion in the policy held by the Royal Canadian Mounted Police is cancelled retroactively for all legal purposes;
4. The plaintiff, RAYMOND LAQUERRE, acknowledges that he is not at present, nor will he be in future, eligible for the benefits and coverages of the group insurance policy issued by the defendant, THE GREAT-WEST LIFE ASSURANCE COMPANY, and held by the Royal Canadian Mounted Police, bearing number 24892 LTD, and waives any such claim against the defendant, THE GREAT-WEST LIFE ASSURANCE COMPANY, its agents, shareholders, directors, officers, subsidiaries, officials, employees, representatives, insurers and assigns, past, present and future;
5. . . .
It is understood that the aforementioned settlement in no way constitutes an admission of liability on the part of the defendant, THE GREAT-WEST LIFE ASSURANCE COMPANY, and that it was reached for the sole purpose of disposing informally of the dispute between the two parties and avoiding additional costs.
[13] In addition to the sum of $58,710.65, GW paid Mr. Laquerre's solicitor the sum of $455.20 for legal expenses. Mr. Laquerre's solicitor did not come to testify to explain the nature of the amounts paid by GW or, in particular, to indicate the purpose of the amount of $58,710.65 or the basis of his agreement with GW's lawyer. The absence of Mr. Laquerre's lawyer may perhaps be explained by the fact that Mr. Laquerre had had to file a complaint against him with the Barreau du Québec to obtain payment of a portion of the amount this lawyer had unjustly retained. A copy of the arbitration award of January 26, 2000, was filed in evidence. That document states, inter alia, that the damages claimed for prejudice resulting from the violation of the confidentiality of Mr. Laquerre's medical report had not been the subject of negotiations between Mr. Laquerre's lawyer and that of GW. Mr. Laquerre stated that his lawyer had lied throughout the hearing of his complaint before the Barreau du Québec and that he did not believe that version of the facts. However, Mr. Laquerre did not see fit to summon GW's lawyer, who could have enlightened the Court, even though he had stated in his notice of appeal that he would have many witnesses to be heard and had asked the Court to explain to him the procedure for summoning them to appear.
[14] Mr. Laquerre stated that he had never been re-examined by another physician at GW's request two years after accepting his dismissal, and GW was thus unable to determine whether he was able to hold equivalent employment elsewhere than at the RCMP. In his view, he would have been able to do so. However, out of personal preference, he decided not to look for such employment, being content with his pension and the amount of the settlement received from GW. Even though he attached to his 1998 income return the information slips relating to the amount of $27,223 paid as pension and the amount of $59,165 paid by GW as an indemnity, Mr. Laquerre did not add those amounts to his income. In testifying, he admitted that he had been concerned during the negotiations with GW about the tax treatment of the amount GW would pay him and said that he spoke to his lawyer about it.
Analysis
[15] The relevant provision, and the only provision referred to by the respondent in support of her assessment, is paragraph 6(1)(f) of the Act, which is reproduced below:
6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:
. . .
(f) Employment insurance benefits - the total of all amounts received by the taxpayer in the year that were payable to the taxpayer on a periodic basis in respect of the loss of all or any part of the taxpayer's income from an office or employment, pursuant to
(i) a sickness or accident insurance plan,
(ii) a disability insurance plan, or
(iii) an income maintenance insurance plan . . .
One of the conditions of application of paragraph 6(1)(f) is that the total of all amounts received in the year must have been payable on a periodic basis in respect of the loss of all or any part of income from employment.
[16] In a very recent decision dated December 20, 2001, in Tsiaprailis v. The Queen, 2001 CarswellNat 3029, Associate Chief Judge Bowman ruled on an appeal in which the facts were quite similar to those of the instant case. There, too, GW had refused to pay disability insurance benefits. It was a case in which the employee had become disabled as a result of an automobile accident and had lost her job. The lump-sum amount of $105,000 paid as a result of the out-of-court settlement had included both a payment of arrears and an amount in respect of future payments.
[17] In the instant case, it seems to me that the amount paid by GW was essentially equal to the amount of the arrears. (By my own calculations, I come to an amount of approximately $56,433, which yields a surplus of $2,777.) Unfortunately, there is no express indication as to how that lump sum was established. It may be believed that the sum of $2,777 might represent interest or damages for failure to comply with the obligation of confidentiality or a payment in respect of fees for the solicitor representing Mr. Laquerre.
[18] In Tsiaprailis, Associate Chief Judge Bowman found that the condition stated in paragraph 6(1)(f), supra, that the amount be payable on a periodic basis was not met. He writes as follows at paragraph 18 of his decision:
Whether the Crown relies on paragraph 6(1)(f) or not it has no application. The lump sum payment arrived at after a law suit was commenced and negotiated as a compromise cannot on any basis of statutory interpretation be described as an "amount . . . payable to the taxpayer on a periodic basis".
[19] In my view, the scope of Associate Chief Judge Bowman's statement must be qualified. Not all lump-sum amounts made in payment of arrears lose the character of being paid on a periodic basis. On this matter, I rely in particular on the decision rendered by the Federal Court of Appeal in The Queen v. Sills, [1985] 2 F.C. 200, 85 DTC 5096. The headnote to that decision in the DTC version (at page 5096) contains the following statement of facts:
Under the terms of a written separation agreement the taxpayer was to receive a defined monthly payment from her husband. The taxpayer actually received three lump sum payments at random times during the taxation years in issue.
[20] The following is specifically how the trial judge described the facts and outlined his reasoning. This passage is quoted by the Federal Court of Appeal at pages 203 and 204 (F.C.) (page 5098 DTC):
Returning then to the facts of the present case, the 1974 agreement calls for payments of $300.00 per month while the situation remains as it was at the time of the agreement. The obligation to make the 1976 payments obviously springs from the 1974 agreement, but there is otherwise no relationship whatever between the terms of the agreement and these payments which were made at random times during 1976, and in varying amounts. I therefore confirm the disposition made in this matter by the Tax Review Board.
[21] The Tax Review Board had allowed the taxpayer's appeal. In the reasons for its decision allowing the respondent's appeal, the Court of Appeal made the following comment on the trial judge's decision (at pages 204 and 205, F.C., page 5098 DTC):
. . . On these facts, the $3,000 received by the Respondent from LaBrash was clearly paid by him and received by her to carry out the terms of the separation agreement. Some of the money was payable to the Respondent as alimony, the remainder was payable to her as maintenance for the dependant children. All of it was payable on a monthly basis as stipulated in the separation agreement. Where the Trial judge erred, in my view, was in not having due regard to the use of the word "payable" in the subsection. So long as the agreement provides that the monies are payable on a periodic basis, the requirement of the subsection is met. The payments do not change in character merely because they are not made on time.
[My emphasis.]
[22] However, the situation is entirely different if the lump-sum amount is paid in consideration of a release from a past and future obligation to pay amounts on a periodic basis. A relevant analysis is presented by my colleague Judge Lamarre in MacBurnie v. The Queen, 95 DTC 686, at pages 688 and 689. I refer to her comments on alimony at length. In my view, that analysis is equally valid with respect to disability benefits paid on a periodic basis. I agree with that analysis for the purposes of this appeal:
In his argument, Counsel for the Appellant made it clear that the issue turned around the question of how to qualify the amount of $27,500 paid to the Appellant by her ex-spouse. If it is qualified as being paid on account of past periodic payments due under the Separation Agreement, then the amount should be taxable in the hands of the Appellant under paragraph 56(1)(b) and 56(1)(c) of the Act. If, on the other hand, the payment is qualified as a lump sum payment in return of a release from future obligations or future liabilities, then this payment of $27,500 should not attract tax for the Appellant under the Act. As a matter of fact, Counsel for the Appellant relied on the decision of the Supreme Court of Canada in M.N.R. v. Armstrong, S.C.R. 446. In that decision, a divorce decree provided for monthly payments. The payments were made for two years and then the wife accepted a $4,000 lump sum in full settlement of all payments due or to become due. Kellock, J. said at page 448:
In my opinion, the payment here in question is not within the statute. It was not an amount payable "pursuant to" or "conformément à" (to refer to the French text) the decree but rather an amount paid to obtain release from the liability thereby imposed. . . . Such an outlay made in commutation of the periodic sums payable under the degree is in the nature of a capital payment to which the statute does not extend.
Counsel for the Appellant also relied on a decision of this Court in Jean-Guy Dubreuil v. M.N.R., 93 DTC 542, where Couture, J. found out that "indisputable that the payment in question was made by the appellant in order to terminate his obligations to his former wife under the judgment of the Superior Court, and not as alimony or other allowance." In that case, the taxpayer agreed to pay to his former wife a sum of $10,000 under a subsequent agreement to his former wife as "lump sum alimony" in return for which the former wife gave the taxpayer a full and final discharge. This payment was therefore treated as a capital payment for which the legislation does not authorize a deduction and therefore does not impose inclusion as income for the recipient.
Counsel for the Respondent relied on a decision of this Court in Norman C. Soldera v. M.N.R., 91 DTC 987, where he contended the situation was the same as in the present case. In Soldera, the taxpayer was ordered pursuant to a decree nisi of divorce to pay monthly support. The taxpayer fell into arrears and there was a second order which varied the first order. The second order specifically fixed the arrears of maintenance at $7,500. Garon, J. held that the second order did not change the nature of the taxpayer's liability but simply reduced the amount. In essence, the $7,500 represented a portion of the arrears which was an allowance payable on a periodic basis under the first order. The Court however noted that the second order did not have a "provision whereby the Appellant is released in express terms from any existing or future liability in respect of the maintenance of his children."
The principles laid down in determining the deductibility (or inclusion in income for the recipient) of lump sum payments made by a taxpayer to a spouse or former spouse in the context of the Act, have been reviewed by the Supreme Court of Canada in Armstrong, supra. The Chief Justice in that case said at page 1045:
The test is whether [the lump sum] was paid in pursuance of a decree, order or judgment and not whether it was paid by reason of a legal obligation imposed or undertaken.
In that case, the divorce decree provided the payment of $100 monthly to the taxpayer's wife for the maintenance of their daughter. The payments ordered were made until that time where the wife accepted a lump sum of $4,000 in full settlement of all amounts payable in the future. In concluding that the payment of $4,000 did not fall within the terms of paragraph 60(b) of the Act, the Court relied on the fact that "there was no obligation on the part of the [taxpayer] to pay, under the decree, a lump sum in lieu of the monthly sums directed to be paid" (page 1045).
The Federal Court of Appeal distinguished the Armstrong case in The Queen v. Barbara D. Sills, 85 DTC 5096. In this latter case, there was a written separation agreement under which the taxpayer was to receive monthly payments from her husband. In fact, she received three lump sums at random times during the taxation years in issue. After analyzing dictionary meanings of the word "pursuant" and the use of the word "payable" in paragraph 56(1)(b) of the Act, Heald, J., speaking for the Federal Court of Appeal, held that the payments were received pursuant to the separation agreement. He stated at page 5098:
So long as the agreement provides that the monies are payable on a periodic basis, the requirements of the subsection are met. The payments do not change their character merely because they are not made on time.
He then commented on the Armstrong case as follows at page 5099:
There is a clear distinction between the facts in Armstrong and those in the present case. In Armstrong . . . clearly the $4,000 was not paid pursuant to the divorce decree but in lieu thereof. However, in the case at bar, all monies were paid to carry out the terms of the separation agreement. The consequence and result of these payments was not to finally release the husband from his liabilities to his wife and children under the separation agreement as was the case in Armstrong . . .
In the present case, it seems obvious that the payment of $27,500 was made pursuant to the judgment of Soublière, J. dated September 19, 1992 incorporating the Minutes of Settlement agreed upon by the parties, and not pursuant to the terms of the previous Separation Agreement. Indeed, the payment was made in October 1992 in conformity with the judgment of Soublière, J. In my view, the payment was clearly made by Mr. Eyre in order to obtain a release from his liability under the Separation Agreement and to terminate his obligations to the Appellant under that Agreement. The wording of the judgment of Soublière, J. is supporting that conclusion in that it was clearly stated therein that Mr. Eyre would have no further or other obligation towards the Appellant after the payment of the sum of $27,500 and that the Appellant released Mr. Eyre from all obligations to provide her with support, maintenance and alimony.
Judge Lamarre goes on to say:
. . . Obviously, the judgment terminated Mr. Eyre's obligation to provide spousal support to the Appellant. On that aspect, the present situation is distinguishable from the one in the Soldera case. Moreover, I accept the explanation given by Mr. Braidek that the words "in full and final satisfaction of . . . and all arrears of support", were added to give Mr. Eyre a measure of comfort and that there was no intention to pursue him for any past arrears. Even if the evidence showed that Mr. Eyre owed more than $27,500 to the Appellant at the time of signing the Minutes of Settlement that were incorporated in the Judgment of Soublière, J., I am of the opinion that the Appellant and Mr. Eyre finally settled for the payment by the latter of an outlay that was in commutation of the periodic sums payable under the Separation Agreement. Such an outlay is in the nature of a capital payment as stated by the Supreme Court of Canada in Armstrong, which amount did not have to be included in the computation of the Appellant's income as it was not an alimony or maintenance payment within the meaning of paragraphs 56(1)(b) and 56(1)(c) of the Act.[1]
[23] Here it must be recalled that paragraphs 3 and 4 of the contract of transaction and release stipulate that the disability insurance contract is cancelled retroactively and confirm that Mr. Laquerre was not entitled to any amounts in the future. For example, paragraph 4 states:
[translation]
The plaintiff RAYMOND LAQUERRE acknowledges that he is not at present, nor will he be in future, eligible for the benefits and coverages of the group insurance policy issued by the defendant THE GREAT-WEST LIFE ASSURANCE COMPANY and held by the Royal Canadian Mounted Police, bearing number 24892 LTD, and waives any such claim against the defendant THE GREAT-WEST LIFE ASSURANCE COMPANY . . .
[24] As I mentioned at the hearing, I find it quite surprising that that contract stipulated that the disability insurance plan was cancelled retroactively. It is hard to understand how two parties can retroactively cancel a contract that has in fact existed. The reason behind the clause may have been Mr. Laquerre's tax considerations or GW's fear of being seen as having acted unethically by disclosing the medical report. This wording probably suited both parties.
[25] In my view, the effect of the contract, if not the parties' actual intention, was to release GW from any obligation arising from the disability insurance plan. In those circumstances, the principles stated by the Supreme Court of Canada in Armstrong and by the Tax Court of Canada in MacBurnie and Tsiaprailis apply here and the amount in question was therefore not an amount "payable on a periodic basis" but rather an amount paid to release GW from its past, present and future obligations under the disability insurance plan. Paragraph 6(1)(f) of the Act therefore does not apply in the instant case.
[26] Having regard to these conclusions, there is no need to comment on the other reasons given by Mr. Laquerre.
[27] Consequently, Mr. Laquerre's appeal is allowed with costs of $20, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the sum of $59,165.85 does not constitute income for Mr. Laquerre. Since the Minister has previously excluded the sum of $13,506, which was mistakenly deducted as a legal expense, the amount of the reduction of Mr. Laquerre's income resulting from this decision is therefore $45,659.
Signed at Ottawa, Canada, this 16th day of May 2002.
|
"Pierre Archambault" |
J.T.C.C.
Translation certified true
on this 26th day of August 2003.
Sophie Debbané, Revisor
[1] See other decisions in which the same approach as that of Judge Lamarre was adopted, in particular, White v. The Queen, 97 DTC 1108, p. 1115; and Borsellino v. The Queen, 97 DTC 446.