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Docket: 2004-943(IT)I |
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BETWEEN: |
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DON J. SWITZER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on October 26, 2004, at Edmonton, Alberta,
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By: The Honourable Justice Campbell J. Miller |
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Appearances: |
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For the Appellant: |
The Appellant himself
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Counsel for the Respondent: |
Marta E. Burns |
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JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 2001 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount of $42,711.72 is to be brought into the Appellant's income pursuant to paragraph 6(1)(f) of the Act.
Signed at Edmonton, Alberta, this 9th day March, 2005.
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"CampbellJ. Miller" |
Miller J.
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Citation: 2005TCC181 |
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Date: 20050309 |
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Docket: 2004-943(IT)I |
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BETWEEN: |
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DON J. SWITZER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Miller J.
[1] In 2001, Mr. Don Switzer received a payment pursuant to a negotiated settlement with Great-West Life Assurance Company in the amount of $53,455. Mr. Switzer did not bring any of that amount into his 2001 income for income tax purposes. The position of the Minister of National Revenue is that the portion representing an accrued but unpaid disability benefit is taxable pursuant to paragraph 6(1)(f) of the Income Tax Act. This case was heard a week before the Supreme Court of Canada heard the appeal in the case of Tsiaprailis v. Canada.[1] I reserved rendering my judgment pending clarification by the Supreme Court of Canada as to the application of paragraph 6(1)(f) to lump sum payments made pursuant to a negotiated settlement. The Supreme Court of Canada decision came out on February 25, 2005. Based on that decision, I must reject Mr. Switzer's argument that settlement proceeds representing a portion of past benefits payable are not taxable.
[2] Since 1977, Mr. Switzer worked as an aircraft technician with Spar Aerospace Limited, formerly Canadian Aviation Electronics, and formerly Northwest Industries. In February 1996, he became president of the local union, a position which involved labour negotiations and caused him to cross paths with a certain individual in the Human Resources Department of the employer. This, according to Mr. Switzer, resulted in a litany of woes. By August 1996, he was dismissed. Arbitration did not commence for a year after that and it then lasted for 22 days. On August 12, 1998, Mr. Switzer was reinstated with an award. The payment of the award was further delayed until July 1999 and approximately $33,000 was deducted from the award, for which Mr. Switzer has never received an accounting. During Mr. Switzer's reinstatement, he was fully monitored by the employer.
[3] By August 1999, Mr. Switzer was suffering depression, and a psychologist's report indicated that he could not continue to function safely in his position. He was put on medication. In November 1999, Dr. Hibbard confirmed that Mr. Switzer remained disabled and should continue treatment. Mr. Switzer sought short-term and long-term disability but was denied.
[4] Mr. Switzer stated that unbeknownst to him at the time, his employer terminated his entitlement to benefits. Mr. Switzer provided a copy of a GWL claimant's explanation of benefits form dated October 23, 1999 stating: "expenses incurred after termination of insurance are not covered". He was not made aware of this until after he ultimately settled with GWL.
[5] The Employee Benefits Handbook sets out the short-term ($40 a week for 15 weeks) and long-term (60% of regular monthly earnings) disability entitlements.
[6] Mr. Switzer hired a lawyer to pursue his claim against GWL. On July 12, 2001, his lawyer advised him by memo:
1. You will be terminated from insurance coverage immediately the agreement is signed;
2. They will pay the current LTD arrears, plus any medical benefits which would be normally covered under that clause of the policy to the policy limits during the term of the policy until it is discontinued; policy limit for dentures on an annual basis is $500; they calculate the arrears of LTD currently to be $37,600; they would also pay about $600 being their responsibility under the STD provision; they would pay expenses for medical reports and treatment within the policy limits.
3. ...
In 2001, Mr. Switzer accepted a settlement of $53,455.81 and signed a release which stated in part:
It is understood and agreed that this settlement is the compromise of a disputed claim or claims and, that payment is not to be construed as an admission of liability by Great-West Life for payment of benefits to me pursuant to the Policy, and that Great-West Life expressly denies such liability.
[7] Of the $53,455.81, $3,455 went directly to costs. From the remainder, Mr. Switzer's lawyer retained approximately $7,661 in legal expenses. Mr. Switzer received the balance. The Respondent varied its position from the assessment, to acknowledge that, of the $50,000 initially assessed as income subject to tax, only the portion reflecting the short-term and long-term disability payments should be so included. The short-term disability was $600. The Respondent calculated the long-term disability as being 84 weeks (January 31, 2000 to September 12, 2001) multiplied by $501.33, being the amount assumed in the Reply to the Notice of Appeal, for a total of $42,711.72. Mr. Switzer presented no evidence to refute the amount assumed in the Reply.
Analysis
[8] Paragraph 6(1)(f) of the Act is the operative section and it reads:
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:
(a) ...
(f) ... 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) ...
(ii) a disability insurance plan
[9] In the recent Supreme Court of Canada case of Tsiaprailis, the Court was similarly dealing with a taxpayer who received a lump sum payment representing her entitlement to past benefits under an insurance plan, as well as 75% of present value of future benefits plus an amount for costs, disbursements and GST. The issue was the application of paragraph 6(1)(f) of the Act to the portion intended to compensate her past benefits. As the Supreme Court of Canada stated, the question turns on whether the amount allocated for past benefits was "payable on a periodic basis" and "pursuant to a liability insurance plan". It found yes on both counts. It went on to analyze as follows:
15 The determinative questions are: (1) what was the payment intended to replace? And, if the answer to that question is sufficiently clear, (2) would the replaced amount have been taxable in the recipient's hands? In this case, the evidence of what the amount was intended to replace is clear and cogent. As my colleague noted, the evidence established that the negotiated lump sum was "based on three aspects of liability under the policy: an amount to extinguish Ms. Tsiaprailis' claim for accumulated arrears, an amount to extinguish her claim for future benefits, and an amount to extinguish her claim for costs" (para. 54 (emphasis added)). Hence, it 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.
[10] I find it as equally clear in Mr. Switzer's case that part of the $50,000 payment was intended to replace past benefits. This is evident from:
(i) the statement of claim filed by Mr. Switzer against GWL seeking an amount equal to unpaid disability payments; and
(ii) the memo from Mr. Switzer's lawyer of July 12, 2001 confirming GWL will pay short-term and long-term disability arrears.
Yet Mr. Switzer makes the point that as far back as September 1999, GWL had terminated his insurance coverage, and therefore any payments from GWL after that could not have been for benefits. This argument is not supportable, as the very basis for Mr. Switzer's lawsuit was the he was covered and GWL was obligated to pay benefits in accordance with that coverage. The lump sum settlement was determined on that basis notwithstanding that Mr. Switzer signed a release acknowledging payment is not to be construed as an admission of GWL's liability. A similar such denial of liability was present in the Tsiaprailis case.
[11] In answer to the Supreme Court of Canada's second question, again there is no question the amount of past benefits would have been taxable had they been paid to Mr. Switzer periodically as long-term disability payments.
[12] The Tsiaprailis case and the case before me are simply too similar to do anything other than answer the two questions posed by the Supreme Court of Canada in a manner that renders $42,711.72 received by Mr. Switzer as taxable pursuant to paragraph 6(1)(f). The arguments that might have swayed me otherwise are the arguments incorporated into the dissenting decision of the Supreme Court of Canada. That is unfortunate for Mr. Switzer.
[13] As this is less than the original assessment amount of $50,000, the appeal is allowed and referred back to the Minister for reassessment and reconsideration on the basis that the amount of $42,711.72 is to be brought into income in the 2001 taxation year, pursuant to paragraph 6(1)(f) of the Income Tax Act.
Signed at Edmonton, Alberta, this 9th day of March, 2005.
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"CampbellJ. Miller" |
Miller J.
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CITATION: |
2005TCC181 |
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COURT FILE NO.: |
2004-943(IT)I |
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STYLE OF CAUSE: |
Don J. Switzer and Her Majesty the Queen |
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PLACE OF HEARING: |
Edmonton, Alberta |
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DATE OF HEARING: |
October 26, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice Campbell J. Miller |
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DATE OF JUDGMENT: |
March 9, 2005 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Marta E. Burns |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |