Killinger v. The Queen

Killinger v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2003-12-08 Neutral citation 2003 TCC 904 File numbers 2002-3739(IT)G Judges and Taxing Officers Diane Campbell Subjects Income Tax Act Decision Content Docket: 2002-3739(IT)G BETWEEN: CLIFFORD KILLINGER Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on November 6, 2003 at Edmonton, Alberta Before: The Honourable Justice Diane Campbell Appearances: Counsel for the Appellant: Carman R. McNary Counsel for the Respondent: John O'Callaghan ____________________________________________________________________ JUDGMENT The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is dismissed, with costs, in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 8th day of December 2003. "Diane Campbell" Campbell, J. Citation: 2003TCC904 Date: 20031208 Docket: 2002-3739(IT)G BETWEEN: CLIFFORD KILLINGER, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Campbell, J. INTRODUCTION [1] In each of the taxation years 1993 through 1997, the Appellant was employed by Noble International Services Ltd. ("NISL") and performed his employment duties outside Canada. The Appellant, like other Canadians employed by NISL, claimed the overseas employment tax credit (OETC") in his tax returns in each of these years, claiming a deduction from tax payable on the basis that NISL was a "specified employer" under the Income Tax Act (the "Act"). [2] In April 1998, the Minister issued reassessments to the Appellant, disallowing the claims for this credit for these years because NISL was not a specified employer. As a result the Appellant owed income tax and interest. By two instalments, on April 30, 1998 and June 9, 1998, NISL paid the Appellant the amount of $86,566.00, which was equivalent to his tax liability. The Appellant did not include this amount in computing his income for the 1998 taxation year. ISSUE [3] The issue is whether the Appellant must include this amount received from NISL as a taxable benefit in computing his income in the 1998 taxation year. LEGISLATION [4] A taxpayer's income for a year includes income from an office, employment, business, property or other source. The applicable provision of the Act reads: 3. The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer's income for the year determined by the following rules: (a) determine the total of all amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer's income for the year from each office, employment, business and property. [5] Subsection 5(1) provides that a taxpayer's income for the year from employment is salary, wages, and other remuneration, including gratuities, received in the year. [6] Paragraph 6(1)(a) states that included in computing a taxpayer's income for the year from employment is the value of other benefits received or enjoyed by the taxpayer in the course of or by virtue of the employment. That section states: 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) value of benefits - the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit (i) derived from the contributions of the taxpayer's employer to or under a registered pension plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy, (ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust, (iii) that was a benefit in respect of the use of an automobile, (iv) derived from counselling services in respect of (A) the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to an outlay or expense to which paragraph 18(1)(l) applies, or (B) the re-employment or retirement of the taxpayer, or (v) under a salary deferral arrangement, except to the extent that the benefit is included under this paragraph because of subsection (11); EVIDENCE [7] The Appellant gave evidence, as well as Gerald Ross Johnson, who was also an employee of NISL in 1996 and 1997. [8] NISL approached the Appellant and offered him the job of chief mechanic on a barge in Nigeria. He refused the offer, as the pay was too low. NISL contacted him again in January 1992 and advised him they would increase his rate of pay. During this phone call the NISL representative, Marc Overstreet, made comments to the Appellant that employees of NISL would qualify for the OETC. The Appellant was aware that this could mean tax savings for him. His evidence was that he considered this an extra bonus, as he would pay less tax. However he stated he would work for NISL without this incentive because NISL had agreed to pay him what he wanted. In each year an offer of employment was signed by the company and the Appellant (or his wife who had a power of attorney). These offers listed the terms and conditions of his employment but made no reference to the OETC. Form T-626, completed by a representative of NISL along with an earnings statement (equivalent of a T4), was supplied to the Appellant each year. Form T-626 certified that NISL was a specified employer under the Act. [9] Rumours that NISL might not qualify as a specified employer began to circulate in 1994. The Appellant himself wrote to NISL in April, 1994 inquiring into the company's status. Between 1994 and 1996, information was exchanged between the employer and employees on the OETC. In January 1996 Noble sent out another memo responding to questions and confirmed that NISL was a specified employer and that a T-626, together with an earnings statement, would issue for 1995. [10] When the Minister advised the Appellant in January 1997 that his claim, together with those of other NISL employees, was under review, the company stepped in and advised the employees not to contact Revenue Canada as the company would respond on behalf of the employees after determining a course of action. A further memo confirmed the company's intention to meet with Revenue Canada. On May 16, 1997 the company wrote to the Appellant confirming that they were working with Revenue Canada and their accountants to resolve the issue. [11] During this time period, informal discussions occurred among the employees on the barge to the effect that this situation was unfair to the employees and that a lawsuit might have to be pursued. However the Appellant did not contact a lawyer nor was he aware of any other employee that did. A lawsuit was never filed. [12] On April 29, 1998, the company paid the first of two instalments to the Appellant and a release agreement was executed. The Appellant testified that he understood this problem was the company's fault and that they accepted this and they agreed "...to pay the tab". [13] On June 4, 1998 the second instalment was paid and a second release agreement was signed. [14] The second witness, Mr. Johnson, had discussions with NISL prior to being hired and was also advised of the eligibility for this credit as an employee of NISL. He testified he was convinced that NISL qualified as a specified employer and that the OETC made some difference for him in respect to the overall employment package. However in agreeing to work for NISL, he was more concerned about the country he could work in and the type of weather it would offer him. In February 1997 he received a T-626 form. He left Noble's employment in 1997, as he wanted to work in South America for another company. When he received a notice of reassessment, he contacted Noble's representatives and was told the company would look after it. Eventually he too received money and subsequently signed a release. ANALYSIS [15] My decision in this case depends largely on the wording of paragraph 6(1)(a) of the Act. Canada v. Savage, [1983] 2 S.C.R. 428 is the leading case dealing with this provision. The Supreme Court interpreted paragraph 6(1)(a) very broadly in dealing with the term "benefits". The case reviewed English authorities and concluded that our Act has a wider scope when it speaks of a benefit "in respect of" an office or employment. At page 440, Dickson, J. wrote: ...The meaning of "benefits of whatever kind" is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of "benefit". Further, our Act speaks of a benefit "in respect of" an office or employment. In Nowegijick v. The Queen, [1983] S.C.R. 29 this Court said, at p. 39, that: The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters. [16] In Gernhart v. R., 96 DTC 1672, financial assistance provided to an Appellant by her employer to offset an increased tax burden imposed as a consequence of a change in residence from the United States to Canada, was found to be a benefit. [17] Although the Gernhart case can be distinguished from the facts of the present case, Justice Bonner made a number of statements which are nevertheless directly applicable. At paragraph 9 of that case, he wrote: 9. It is, I think, self-evident that a benefit in the form of a direct addition to the wealth of an employee is received when an employer discharges an income tax burden which would otherwise fall on the employee in his or her personal capacity. [18] The Federal Court of Appeal, in Mohawk Oil Co. v. R., [1992] 2 F.C. 485, held that in determining the character of the payment, made in respect to a settlement of a claim, it was important to look at its significance to the recipient rather that the payer. The Court concluded that although the amount was a settlement of a damage claim from the payer's viewpoint, it was replacement for lost income and compensation for loss of a depreciable capital asset. Justice Stone at page 496 stated: The findings of the learned Trial Judge were that the settlement payment was agreed to by Phillips in order to "get rid" of Mohawk's claim and to preserve its reputation and that it was in excess of the amount provided for in the limitation of damages clause contained in the January 27, 1978 purchase agreement. The manner in which a settlement amount has been characterized by the payor in the course of negotiations would seem to be an unsafe test for determining its true nature. The payor's motives for settling a dispute may be many and varied in any given case, and it must be a difficult thing to know precisely what his true motivation may have been, especially where the settlement amount is represented by a lump sum which the documentation does not assign to any particular head of claim. I do not see how the settlement amount can be viewed as being "akin to a windfall" merely because the respondent says it was paid by Phillips to get rid of the claim. ...The evidence is clear that, while Phillips would not agree, the respondent sought from the outset and throughout the settlement negotiations to be made whole including compensation for lost profits and expenditures thrown away. [19] In The Queen v. Blanchard, 95 DTC 5479, The Federal Court of Appeal concluded that a payment, being the equivalent of the estimated real estate commission which would be payable if the taxpayer were to sell his home, was an amount paid in respect of employment. In concluding there was an economic benefit to the taxpayer, Justice Linden wrote at page 5482: I disagree with both the respondent's submissions and the Trial Judge's conclusion that the ETAP payment arose from factors "extraneous" or "collateral" to the respondent's employment. There is no doubt that the payment to the taxpayer came about as part of a real estate transaction. But this transaction was not a mere "house deal", totally divorced from the employment relationship of the taxpayer, which might take it out of the reach of paragraph 6(1)(a). That section, if I am to respect its unambiguous wording, requires only some connection between the receipt of a payment and the recipient's employment--nothing seems to turn on the source of the payment. It makes no difference whether a receipt arises from a land deal, a boat deal, a livestock deal, or any other type of deal, as long as the receipt is linked to the recipient's employment. [20] In the present case, the Appellant has asked that I characterize the payment as damages arising from the tort of negligent misrepresentation while the Respondent asks that I accept the payment as being made in respect of the employment relationship. In arguing their respective positions, both counsel relied considerably on the wording of the two release agreements, which were essentially the same except that they were executed several months apart. In fact the Appellant suggested that I would dismiss the appeal if I decided that the release, being the consideration for the payment, was issued in respect of a claim that arose out of the employment relationship. I do not believe that as much reliance should be placed on the releases, as counsel suggested. [21] The release documents contain several references to the employment relationship. The parties are referred to as employers and employees, in lieu of the usual releasor and releasee. Although the document is drafted in a very general sense, as most releases are, releasing the company and its related corporate entities from present and future liability, the agreement does specifically state at paragraph 4.1: 4.1. The Company agrees to pay Employee the sum of Forty four thousand one hundred forty four United States Dollars (US$44,144.00), less applicable withholding, if any, legally required, in full settlement, release, discharge, accord and satisfaction of any and all claims that Employee may currently have, or could make or allege at any time in the future, against the Company or any other of the Released Parties growing out of, or connected with, or resulting in any way from amounts due and payable by Employee as Canadian taxes with respect to Employee's employment by the Company or any other of the Released Parties during the Disputed Years ... (Emphasis are mine.) [22] Paragraph 2.2 refers to Revenue Canada's assessment of additional tax and refers to this as the "disputed tax". At paragraph 2.3 it goes on to state in part: 2.3. The Company is not liable for the Disputed Tax assessed against Employee. Nevertheless, the Company desires to offer assistance to Employee as provided for in this Release. This Release does not in any manner constitute an admission of liability or wrongdoing on the part of the Company or any of the other Released Parties, and the Company and the other Released Parties in fact expressly deny any such liability or wrongdoing, and enter into this Release in order to assist Employee and for the sole purpose of avoiding further trouble or expense; (Emphasis are mine.) [23] And finally under the heading "Scope of Settlement", paragraph 2.4 states: 2.4. Employee desires to enter into this Release in order to provide for a full settlement, receipt, release, discharge, accord and satisfaction of any and all amounts to which Employee is or could claim to be entitled now or in the future from the Company or any other of the Released Parties on account of the Disputed Tax or any other amount of tax assessed by Revenue Canada for the Disputed Years. [24] The Appellant argued that the wording in these releases supports that the amounts paid by the company were in respect to representations that were made. However I do not see any such reference, either explicit or implicit. The release simply states that the employer is offering assistance and it is because the Appellant was involved in an employment relationship that the payment was made. In any event, I prefer to look to the overall relationship between the Appellant and his employer instead of focusing only on the release documents to determine the character of the payment. There was no evidence before me as to the motive of NISL in making these payments, and certainly no evidence that they felt they had made negligent misrepresentations, as the Appellant argued. The release simply states, as would be expected, that the employer makes no admissions respecting liability. The evidence before me points in one direction only and that is that the payment is connected to or at least incidental to the employment relationship. [25] The Appellant argued that the offers of employment contained nothing respecting the OETC, and therefore there was no obligation on NISL to provide the credit pursuant to an employment contract. Instead, the Appellant states, there were representations made prior to the employment and during the course of the employment through the issuance of T-626 forms and company correspondence which stated it was a qualified employer. Employees placed reliance on these direct representations when they applied for the credit each year. I do not agree with the Appellant that these payments were made outside the scope of the employment relationship. NISL discussed the credit with both the Appellant and Mr. Johnson. Although both individuals stated they would have worked for NISL regardless of the credit, I do believe that both parties in discussing the credit prior to accepting the job considered it one of the inducements of entering an employment relationship with NISL. That it continued to play a vital part of the overall ongoing employment relationship was reflected in the concern expressed by the Appellant and other employees when rumours surrounding the loss of this credit started circulating. In fact it prompted a written memo from the Appellant personally where he requested that the company clarify its position. He requested that his monthly salary be increased to compensate for this tax liability if NISL could not supply the credit. Both the Appellant and Mr. Johnson testified that the credit was part of an overall package. The documentation concerning this credit suggests that the ability of employees to claim this credit was an important aspect of their employment and inextricably tied to their wages. In fact the Appellant found the reassessments by CCRA "unpleasant" because it affected his wages and he did not "like anybody messing with your pay cheque". In the end what mattered to the Appellant was his net pay and his evidence points to the fact that he viewed the credit denial as adversely affecting his net pay. [26] Each of the offers of employment for the years 1994, 1995, 1997 and 1998 (at Tabs 1 through 4 of the Summary of Admissions) contained a final paragraph which stated: All employment with the Company is on an "at will" basis. This document is not intended to create, nor is it to be construed to constitute, a contract between the Company or any of its affiliates and any of its Employees. It would appear from this paragraph that NISL did not view this document or did not wish that it be viewed as an employment contract. In fact it is titled "offer of employment". I do not have to decide that issue here but it does create the impression that in addition to the conditions and terms specified in the offer of employment, there might be other items incidental to the relationship although not included in the offer. NISL obviously believed the credit to be a part of the employment relationship and one upon which employees had placed reliance because the company continued throughout this period to respond to employee inquiries. If it felt the credit did not form part of the employment relationship it could have said so. Even if I accept the Appellant's argument that the payment was a separate arrangement, I believe that it was connected to the Appellant's employment with NISL based on the evidence. [27] The true character of the payment, viewed solely from the perspective of the wording in the release, is contained at paragraph 2.3 where the paragraph states it is: "... to assist employees and for the sole purpose of avoiding further trouble and expense". However, as I mentioned before, I look to this wording as supportive, rather than the sole basis, in determining the character of the payment. When viewed in the overall context of the employment relationship, the true character of the payment was to make up amounts that the Appellant felt NISL owed him as an employee. There is no evidence to support a conclusion that the payment was made to release NISL from an action in tort. There was concern about the OETC status and the reassessment, but according to the evidence, neither the Appellant nor any of the other employees ever turned a collective mind to contacting a lawyer or instituting a lawsuit and there is certainly no evidence to suggest it would have been framed in the tort of negligent misrepresentation. [28] I do not view this payment as a severable and independent transaction based on a claim in tort. In all of the circumstances it cannot be completely divorced from the employment relationship. Because I have concluded that these payments are ancillary compensation which arose out of the employment relationship, they are caught by the broad wording of 6(1)(a) and the interpretation given to this provision pursuant to the Savage decision. In essence NISL paid the Appellant's tax liability which was assessed as a direct consequence of his employment. This is clearly a benefit caught by 6(1)(a) as it is paid in respect to or in connection with the Appellant's employment. I do not see any particular relevance to the Appellant's argument that the Savage decision and similar decisions can be distinguished based on the fact that the Appellant ceased to work for NISL on December 31, 1997. He was in fact still employed by the related group of Noble companies if not specifically NISL, but even if he were not employed, the payments in my view would still be made in respect of or by virtue of his employment even though the employment had ceased. As such the payment must be included in computing the Appellant's income for the 1998 taxation year. [29] Although I need not consider the Respondent's alternative argument that the payments could be salary, wages or other remuneration pursuant to subsection 5(1), I believe these payments could also be included in the Appellant's income pursuant to this subsection in light of my characterization of the payments as part of the Appellant's overall employment relationship. [30] The appeal is dismissed with costs. Signed at Ottawa, Canada this 8th day of December 2003. "Diane Campbell" Campbell, J. CITATION: 2003TCC904 COURT FILE NO.: 2002-3739(IT)G STYLE OF CAUSE: Clifford Killinger and Her Majesty the Queen PLACE OF HEARING: Edmonton, Alberta DATE OF HEARING: November 6, 2003 REASONS FOR JUDGMENT BY: The Honourable Justice Diane Campbell DATE OF JUDGMENT: December 8, 2003 APPEARANCES: Counsel for the Appellant: Carman R. McNary Counsel for the Respondent: John O'Callaghan COUNSEL OF RECORD: For the Appellant: Name: Carman R. McNary Firm: Fraser Milner Casgrain LLP Edmonton, Alberta For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada