T-5457-82
Richard D. McNeil (Plaintiff)
v.
The Queen (Defendant)
INDEXED AS: MCNEILL v. CANADA
Trial Division, Rouleau J.—Ottawa, April 30 and
September 15, 1986.
Income tax — Income calculation — Relocation allowance
for social disruption and accommodation differential paid to
air traffic controllers transferred out of Quebec — Relocation
to relieve tension, threat to air safety due to intolerance of
francophone controllers towards certain colleagues — Trans
ferred controllers to live out of Quebec and give no press
releases — Whether allowance taxable income — Whether
income from office or employment as "other remuneration"
Whether deemed remuneration — Whether employer-
employee relationship or collateral arrangement source of
payment — Whether recipients rendering service or performing
duty for employer by moving — Whether "other benefits of
any kind" — Purpose of legislation to tax perks — Reim
bursement different from allowance — Taxpayer failing to
prove actual loss covered by social disruption allowance —
That portion of relocation allowance to be included in income
— Income Tax Act, S.C. 1970-71-72, c. 63, ss. 5(1), 6(1)(a),(b)
(as am. by S.C. 1974-75-76, c. 26, s. 1), (3), 248(1).
Public service — Labour relations — Department of Trans
port — Francophone air traffic controllers at Dorval intoler
ant of certain colleagues — Adopting militant attitude — Air
safety jeopardized by tension in tower — Relocation of anglo-
phone controllers to quell potential labour relations catas
trophe — Relocation allowance for social disruption and
accommodation differential authorized by Treasury Board
Whether payment taxable income.
The plaintiff was a fluently bilingual employee of the
Department of Transport who worked as an air traffic controll
er at Dorval Airport. In December, 1976, he was transferred to
Ottawa. The reason given for this transfer was the accelerated
implementation of bilingualization at the air traffic control
towers in Quebec. In truth, certain personnel, though bilingual,
were not welcomed by the francophone group at Dorval. Air
safety was threatened on account of the high degree of tension
in the tower. To defuse the situation, the Department of
Transport offered, among three options, to relocate the anglo-
phone employees. The plaintiff chose that option.
Treasury Board authorized an Air Traffic Control Linguistic
Relocation Allowance to compensate for higher housing costs in
other parts of the country (Accommodation Differential Allow
ance) and for the social disruption (Social Disruption Allow
ance). In return, the air traffic controllers were required to
execute an undertaking whereby they agreed not to live in the
Province of Quebec, not to make press releases, and agreed to
remain at their new destination for five years. The plaintiff
received an Accommodation Differential Allowance of $15,571
and a Social Disruption Allowance of $2,155.41.
The Crown's position is that the entire Relocation Allowance
constituted taxable income pursuant to subsection 5(1), para
graph 6(1)(a) or subsection 6(3) of the Income Tax Act. This
is an appeal from a Tax Review Board decision upholding that
assessment.
Held, the appeal should be allowed with respect to the
Accommodation Differential Allowance, but not as to the
Social Disruption Allowance.
The issue is whether the sum received by the taxpayer should
be considered as "other remuneration" within subsection 5(1)
of the Act, as "deemed remuneration" pursuant to subsection
6(3), as a benefit arising by reason of an office or employment
under paragraph 6(1)(a) or as an allowance for unexempted
personal or living expenses.
The allowance is not "other remuneration" within the mean
ing of section 5. Dictionary definitions and case law both
emphasize a connection between the rendering of service and
payment of the amount before compensation is to be considered
income from an office or employment. The payment herein did
not arise by virtue of the contract of employment. It was paid
pursuant to a special, collateral arrangement between employer
and employee. The scheme was designed to indemnify transfer
ring employees for a capital loss and to quell a potential labour
relations catastrophe.
The amount received cannot be deemed, pursuant to subsec
tion 6(3), to be remuneration for the purposes of section 5. The
taxpayer has met the evidentiary burden of proof required of
him to displace the presumption: he has established that the
amount does not fall within paragraph 6(3)(c),(d) or (e).
Money paid as an incentive to compensate for a capital loss
brought about by an involuntary transfer while remaining in
the employ of the same employer and providing no economic
benefit to either party is not caught by subsection 6(3).
Nor is the amount a benefit received in respect of, in the
course of or by virtue of an office or employment within the
meaning of paragraph 6(1)(a). The Crown has failed to estab
lish that the payment was made in relation to the plaintiff's
office or employment; in essence, it was made in order to avoid
a potential labour dispute and directed to the plaintiff as a
person rather than as an employee. The plaintiff has no choice
in accepting the transfer. The motivation was political and in
no way related to company policy, skill upgrading or career
advancement.
Although it may not be necessary to make a finding as to
whether the payment constituted a benefit, this appears to be
an appropriate case in which to examine the meaning of the
phrase "benefit of any kind whatever" as used in paragraph
6(I)(a) of the Act. This provision is intended to provide a
method to tax perks received in addition to salaries. It is not
intended to impose taxation upon an employee for an amount
received as reimbursement when it cannot be found in the
exemption provisions of paragraph 6(l)(b).
While it was suggested that the taxpayer did not have to
account for the payment and that he was under no obligation to
purchase a home in the Ottawa area, the fact is that the
plaintiff did purchase a house and was forced to accept the
transfer in order to retain his employment.
With respect to the Social Disruption Allowance, in the
absence of proof of actual loss, it must be found that a benefit
accrued to this plaintiff within the meaning of paragraph
6(1)(a) of the Act.
CASES JUDICIALLY CONSIDERED
APPLIED:
Ransom, Cyril John v. Minister of National Revenue,
[1968] 1 Ex.C.R. 293; (1967), 67 DTC 5235; Roy, J.L. v.
M.N.R. (1979), 80 DTC 1005 (T.R.B.); Lor-Wes Con
tracting Ltd. v. The Queen, [1986] I F.C. 346; [1985] 2
CTC 79 (C.A.); Stubart Investments Ltd. v. The Queen,
[1984] 1 S.C.R. 536.
DISTINGUISHED:
R. v. Savage, [1983] 2 S.C.R. 428; 83 DTC 5409; R. v.
Poynton, [ 1972] 3 O.R. 727; 72 DTC 6329 (C.A.).
CONSIDERED:
Phaneuf Estate v. R., [1978] 2 F.C. 564; 78 DTC 6001
(T.D.).
REFERRED TO:
Scanlan v. M.N.R. (1951), 51 DTC 84 (T.A.B.); Laidler
v. Perry (Inspector of Taxes), [1965] 2 All E.R. 121
(H.L.); Buchanan, George Smith v. Minister of National
Revenue, [1967] 1 Ex.C.R. 11; (1966), 66 DTC 5257; Le
Ministre du Revenu national v. Bhérer, Wilbrod, [1968]
1 Ex.C.R. 146; (1967), 67 DTC 5186; Martel v. M.N.R.,
[ 1970] Ex.C.R. 68; 70 DTC 6204; R. v. Pascoe, [ 1976] 1
F.C. 372; (1975), 75 DTC 5427 (C.A.); Lepine, G. v.
M.N.R. (1977), 78 DTC 1637 (T.R.B.); Dauphine, T. v.
The Queen (1980), 80 DTC 6267 (F.C.T.D.); R. v.
Demers, [1981] 2 F.C. 121; (1980), 81 DTC 5256 (T.D.);
Cutmore, R. H. et al. v. M.N.R. (1986), 86 DTC 1146
(T.C.C.); Gagnon v. The Queen, [1986] I S.C.R. 264; 86
DTC 6179.
COUNSEL:
Paul A. Webber, Q.C. for plaintiff.
Paul Plourde and Sandra E. Phillips for
defendant.
SOLICITORS:
Bell, Baker, Ottawa, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
ROULEAU J.: This is an appeal from a decision
of the Tax Review Board [(1982), 82 DTC 1192]
delivered on March 12, 1982. The plaintiff, an air
traffic controller, was employed by Transport
Canada at the Air Traffic Control Tower at
Dorval Airport until placed on a transfer roster
requiring him to leave on July 1, 1977. He, in fact,
relocated to the Ottawa International Airport ear
lier, on December 31, 1976. The official reason for
the plaintiff's transfer was stated to be accelerated
implementation of bilingualization in the air traf
fic control towers in Quebec where, until then, the
official working language had been English. The
issue to be determined concerns the tax liability of
a payment made by the employer to the taxpayer
termed "Air Traffic Control Linguistic Relocation
Allowance".
The plaintiff, a lifelong resident of the Montréal
area, was fluently bilingual. One cannot help but
conclude that his relocation was attributable to
some other reason than that which brought about
the transfer of those who were unilingual English-
speaking controllers and were unable or unwilling
to undertake specialized language training.
Though not expressly stated, one can infer from
the facts and circumstances that certain personnel,
though bilingual, were not welcomed by the fran-
cophone group whose voice dominated the Local.
A 'high degree of tension was prevalent in the
tower and serious personal relationship problems
had developed among the personnel, to the point
where air safety was in jeopardy owing to the
uncooperative and militant attitude adopted by
some of the employees over the language issue. For
these reasons, the Department of Transport sought
to defuse the atmosphere before it became uncon
trollable and thus offered three options to its
employees: preretirement, relocation or that they
undertake specialized language training in the air
traffic control field in order to achieve functional
bilingualism.
Negotiations between a group of anglophone
bilingual as well as unilingual air traffic controll
ers, who had accepted transfer, and Transport
Canada resulted in an approach to Treasury Board
in order to secure some compensation for those
who would incur relocation expenses.
Following a three-month study by a Special
Task Force, Treasury Board authorized a reloca
tion payment which was dubbed "Air Traffic Con
trol Linguistic Relocation Allowance". Two
aspects of compensation were intended. The first,
termed Accommodation Differential, assumed
from the Special Task Force report that the pur
chase of similar accommodation in another major
metropolitan centre would be costlier and would
result in an increased mortgage. This payment was
to lessen the impact of the cost of accommodation
brought about by increases in mortgage costs; it
was defined as follows:
—an annual payment for a period not to exceed the five years
to cover only the identified increases in mortgage costs at the
new place of duty based on the cost of interest, at recognized
current mortgage rates, when applied solely to the difference in
the appraised value or the sales price of the controller's accom
modation in Montreal and the assessed value of similar accom
modation at the new place of duty by applying residential
market costs reported quarterly by nation-wide reputable real
estate firms.
The second was referred to as a Social Disrup
tion Allowance and was calculated according to
the following formula: a lump sum payment of 1%
of the employee's annual salary multiplied by the
total number of years of service; the minimum
amount payable being $500, the maximum $5,000.
In return for the allowance, the transferring air
traffic controllers were required to execute an
undertaking in which they agreed not to live in the
Province of Quebec, not to make press releases,
and agreed to remain at their new destination for
five years. Failure to comply incurred repayment
of the allowance, pro rata, to the day of default.
In 1973 the plaintiff purchased a home in the
municipality of Pierrefonds, Quebec, for approxi
mately $16,500, assuming a $13,000 mortgage
with interest at 9 1 / 4 % per annum with monthly
payments of less than $150. It was ideally located
for easy commuting to work. Unable to sell his
home prior to leaving Dorval, it was assigned an
appraised value of $28,000 as at December 31,
1976. It was finally sold for $24,000 in April 1977.
Since the plaintiff had contracted not to take up
residence in the Province of Quebec upon transfer
ring to his new post in Ottawa, he could not avail
himself of the lower housing market in Hull,
Quebec. He was unable to find similarly-priced
accommodations within the city limits of Ottawa
itself and was constrained to looking to the out
skirts of the capital to purchase a home he could
reasonably afford. He settled in the township of
West Carleton, Ontario, a rural community some
40 miles from Ottawa. He purchased a house for
$82,000 which was encumbered by a $60,000
mortgage bearing interest at the rate of 11 1 / 2 % per
annum and monthly payments of $599. He
received an Accommodation Differential payment
totalling $15,571 to compensate over a five-year
period for the interest payable on the amount of
his increased mortgage as well as the increased
rate of interest. In addition, he was awarded a
further sum of $2,155.41 under the terms of the
Social Disruption Allowance.
The Crown has taken the position that the entire
amount of the Air Traffic Control Linguistic Relo
cation Allowance constituted taxable income in the
hands of the taxpayer for the 1976 taxation year.
To buttress that contention, Crown counsel
advanced three main arguments. He argued that
the sum paid to the plaintiff amounted to "other
remuneration" within the meaning of subsection
5(1) of the Income Tax Act [R.S.C. 1952, c. 148
(as am. by S.C. 1970-71-72, c. 63, s. 1)] ("the
Act") which provides:
5. (1) Subject to this Part, a taxpayer's income for a taxation
year from an office or employment is the salary, wages and
other remuneration, including gratuities, received by him in the
year.
An alternative argument on this point was also
advanced: if the money received by the plaintiff
did not constitute "other remuneration" per se, it
should nevertheless be regarded as deemed remu
neration for the purposes of section 5 of the Act by
virtue of subsection 6(3) of the Act which reads:
6....
(3) An amount received by one person from another
(a) during a period while the payee was an officer of, or in
the employment of, the payer, or
(b) on account or in lieu of payment of, or in satisfaction of,
an obligation arising out of an agreement made by the payer
with the payee immediately prior to, during or immediately
after a period that the payee was an officer of, or in the
employment of, the payer,
shall be deemed, for the purposes of section 5, to be remunera
tion for the payee's services rendered as an officer or during the
period of employment, unless it is established that, irrespective
of when the agreement, if any, under which the amount was
received was made or the form or legal effect thereof, it cannot
reasonably be regarded as having been received
(c) as consideration or partial consideration for accepting the
office or entering into the contract of employment,
(d) as remuneration or partial remuneration for services as
an officer or under the contract of employment, or
(e) in consideration or partial consideration for a covenant
with reference to what the officer or employee is, or is not, to
do before or after the termination of the employment.
Crown counsel submitted that none of the
exceptions contemplated by subsection 6(3)
applied. He also stressed that the source of the
payment was the employer-employee relationship.
Counsel conceded that the compensation was not
part of the initial employment contract, but he
asserted rather forcefully that it did not arise from
a collateral arrangement between employer and
employee either. He also appeared to argue that,
by moving, the plaintiff was rendering a service or
performing a duty for his employer.
Counsel for the Crown further contended that
sums paid to the plaintiff were amounts to be
included in his income from office or employment
by virtue of paragraphs 6(1)(a) and (b) [as am. by
S.C. 1974-75-76, c. 26, s.1] of the Act. Paragraph
6(1)(a) of the Act as it stood in 1976 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) the value of board, lodging and other benefits of any kind
whatever (except the benefit he derives from his employer's
contributions to or under a registered pension fund or 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) received or enjoyed by him in the year in respect of,
in the course of, or by virtue of an office or employment;
[My underlining.]
Crown counsel argued that the payment of this
so-called "allowance" to the taxpayer should be
treated as a benefit accruing to the latter by virtue
of his office or employment regardless of whether
or not the amount was sufficient to adequately
compensate the plaintiff for the real loss incurred
upon his transfer to Ottawa. Finally he pointed out
that the amount received by the plaintiff did not
qualify as one of the exceptions which are provided
in paragraph 6(1)(b) of the Act:
6. (1) ...
(b) all amounts received by him in the year as an allowance
for personal or living expenses or as an allowance for any
other purpose, except
(i) travelling or personal or living expense allowances
(A) expressly fixed in an Act of the Parliament of
Canada, or
(B) paid under the authority of the Treasury Board to a
person who was appointed or whose services were
engaged pursuant to the Inquiries Act, in respect of the
discharge of his duties relating to such appointment or
engagement,
(ii) travelling and separation allowances received under
service regulations as a member of the Canadian Forces,
(iii) representation or other special allowances received in
respect of a period of absence from Canada as a person
described in paragraph 250(1)(b), (c) or (d),
(iv) representation or other special allowances received by
an agent-general of a province in respect of a period while
he was in Ottawa as the agent-general of the province,
(v) reasonable allowances for travelling expenses received
by an employee from his employer in respect of a period
when he was employed in connection with the selling of
property or negotiating of contracts for his employer,
(vi) reasonable allowances received by a minister or cler
gyman in charge of or ministering to a diocese, parish or
congregation for expenses for transportation incident to
the discharge of the duties of his office or employment,
(vii) allowances (not in excess of reasonable amounts) for
travelling expenses received by an employee (other than an
employee employed in connection with the selling of prop
erty or negotiating of contracts for his employer) from his
employer if they were computed by reference to time
actually spent by the employee travelling away from
(A) the municipality where the employer's establish
ment at which the employee ordinarily worked or to
which he ordinarily made his reports was located, and
(B) the metropolitan area, if there is one, where that
establishment was located,
in the performance of the duties of his office or
employment,
(viii) such part of the aggregate of allowances received by
a volunteer fireman from a government, municipality or
other public authority for expenses incurred by him in
respect of, in the course of, or by virtue of the discharge of
his duties as a volunteer fireman, as does not exceed $300;
or
(ix) allowances (not in excess of reasonable amounts)
received by an employee from his employer in respect of
any child of the employee living away from the employee's
domestic establishment in the place where the employee is
required by reason of his employment to live and in
full-time attendance at a school in which the language
primarily used for instruction is the official language of
Canada primarily used by the employee if
(A) a school suitable for that child primarily using that
language of instruction is not available in the place
where the employee is so required to live, and
(B) the school that the child attends is the school closest
to that place in which that language is the language
primarily used for instruction;
Counsel for the plaintiff, on the other hand,
submitted that the payment did not constitute
income from office or employment. The effective
source of the income was not for services rendered
by the plaintiff to his employer, but rather a
separate and distinct contract between the parties.
In counsel's opinion, the payment of the money
was intended as an incentive for the employees to
leave the Province of Quebec without stirring up a
controversy.
He further argued that the compensation paid to
the air traffic controllers for their relocation did
not confer a benefit on them since it did not
improve their position vis-à-vis those employees
who remained in the Province of Quebec. To coun
sel's mind, the "allowance" was a one-shot pay
ment to compensate for what constituted a capital
loss brought about by the increased cost in change
of accommodation required by the transfer to
another place of employment.
Counsel for the plaintiff disputed the allegation
that the amount paid to the plaintiff was an
"allowance" within the meaning of the Act. He
conceded that there was no obligation placed upon
the recipients of the so-called "allowance" to actu
ally purchase another home in order to qualify, but
he had in fact purchased a residence and he main
tained that the amount in question could not be
considered an allowance as the taxpayer had, as
anticipated, increased mortgage costs.
Counsel also brought to my attention the fact
that the transfer of his client turned out to be a
demotion.
Concerning the Social Disruption Allowance,
counsel did not press his argument except to stress
that the sum failed to compensate adequately for
the dislocation and the inconvenience suffered by
the plaintiff and his family. He particulary pointed
out that the plaintiffs transfer caused his spouse,
who had eleven years' experience as a nurse, to
give up her job and prospects of advancement with
the Department of Veteran Affairs. She was
unable to transfer to a comparable hospital in
Ontario and remained unemployed for two
months. From an administrative position, his wife,
unilingual French-speaking, had to return to floor
duty; lifting patients in hospital led to a serious
injury which has left her semi-invalid.
With these facts in mind, I restate the issue to
be resolved: should the sum paid to the taxpayer in
the 1976 taxation year be considered other remu
neration, or a benefit arising by reason of an office
or employment, or, yet, an allowance for unex-
empted personal or living expenses or for any other
purpose and consequently be included in his
income for that year?
Much relevant authority dealing with subsection
5(1) and paragraphs 6(1)(a) and (b) of the Act
was referred to by counsel for the plaintiff. My
own research provided some useful decisions.
The plaintiff made reference to the following
cases: Scanlan v. M.N.R. (1951), 51 DTC 84
(T.A.B.); Laidler v. Perry (Inspector of Taxes),
[1965] 2 All E.R. 121 (H.L.); Buchanan, George
Smith v. Minister of National Revenue, [1967] 1
Ex.C.R. 11; (1966), 66 DTC 5257; Le Ministre du
Revenu national v. Bhérer, Wilbrod, [1968] 1
Ex.C.R. 146; (1967), 67 DTC 5186; Ransom,
Cyril John v. Minister of National Revenue,
[1968] 1 Ex.C.R. 293; (1967), 67 DTC 5235;
Martel v. M.N.R., [1970] Ex.C.R. 68; 70 DTC
6204; R. v. Pascoe, [1976] 1 F.C. 372; (1975), 75
DTC 5427 (C.A.); Lepine, G. v. M.N.R. (1977),
78 DTC 1637 (T.R.B.); Dauphinee, T. v. The
Queen (1980), 80 DTC 6267 (F.C.T.D.); R. v.
Demers, [1981] 2 F.C. 121; (1980), 81 DTC 5256
(T.D.); R. v. Savage, [1983] 2 S.C.R. 428; 83
DTC 5409; Cutmore, R. H. et al. v. M.N.R.
(1986), 86 DTC 1146 (T.C.C.); and Gagnon v.
The Queen, [1986] 1 S.C.R. 264; 86 DTC 6179.
Counsel for the Crown only relied on the
Ransom decision, supra.
Of the above, in my view, the most pertinent
dealing with two of the issues is the Ransom case
which was concerned with the reimbursement of
an employee for the loss on the sale of his house
upon transferring to another city. Others worthy of
detailed examination are the cases of Pascoe
(supra) and Gagnon (supra) which dealt with the
definition of "allowance" for the purposes of para
graph 6(1)(b) of the Act.
The remainder of the authorities appear con
fined to their own set of facts.
"Other Remuneration": Subsection 5(1)
The expression "other remuneration" is not
defined in the Act; it is included in section 5 in the
phrase "salary, wages and other remuneration,
including gratuities". Given its location, I am
inclined to give effect to the ejusdem generis rule
of interpretation and read "other remuneration" as
an amount of the same nature as its antecedents in
the sentence, namely "salary" and "wages". They
are defined in subsection 248(1) of the Act, but by
the express words of that subsection, they have no
application to section 5. It therefore becomes
necessary to look elsewhere in order to interpret
the word "remuneration", for the purposes of
section 5. In this respect, I have taken the liberty
of quoting from The Shorter Oxford English Dic
tionary (3rd ed.), Clarendon Press, Oxford, 1973:
Remunerate ... 1. trans. To repay, requite, make some
return for (services, etc.). 2. To reward (a person); to pay (a
person) for services rendered or work done....Hence Remuner
ation, reward, recompense, repayent; payment, pay.
Salary ... 1. Fixed payment made periodically to a person as
compensation for regular work; now usu. for non-manual or
non-mechanical work (as opp. to wages). 2. [obsolete] Remu
neration for services rendered; fee, honorarium ....
Wage ... [1. obsolete] 2. A payment to a person for service
rendered; now esp. the amount paid periodically for the labour
or service of a workman or servant. Freq. pi [The square
brackets are mine.]
These definitions presume compensation for a ser
vice rendered.
The Ransom case, supra, also emphasized a
similar connection between the rendering of ser
vice and the payment of the amount before the
compensation was to be considered income from
an office or employment. At the time of the
Ransom decision, the present subsection 5(1) was
combined with paragraphs 6(1)(a) and (b). Noël
J., referring to the old section 5 as a whole, wrote
at pages 307 Ex.C.R.; 5242 DTC:
In order, however, to properly evaluate its intent it is, I
believe, necessary to bear in mind firstly, that section 5 of the
Act is concerned solely with the taxation of income identified
by its relationship to a certain entity, namely, an office or
employment and in order to be taxable as income from an
office or employment, money received by an employee must not
merely constitute income as distinct from capital, but it must
arise from his office or employment ... Secondly, the question
whether a payment arises from an office or employment
depends on its causative relationship to an office or employ
ment, in other words, whether the services in the employment
are the effective cause of the payment.
The payment with which I am concerned did not
form any part of, or adjustment to, the plaintiff's
normal salary. He received his full annual wages;
the amount in question was in addition to normal
compensation and in no way related to services
performed by the taxpayer. The amount paid to
the plaintiff was intended to defray the additional
cost of a greater mortgage he would have to
assume upon relocating.
This payment, offered to transferring
employees, did not arise by virtue of the contract
of employment. Its source is the object of a special,
collateral arrangement between employer and
employee arrived at just prior to the transfer. This
arrangement was not part of the terms of employ
ment either before or after; the scheme was
designed to indemnify transferring employees for a
capital loss and to quell a possible labour relations
catastrophe. The payment never arose under the
contract of employment nor in relation to services
rendered to the employer by the employee; I fail to
see how this compensation can, on the face of it,
constitute "other remuneration" within the mean
ing of subsection 5(1) of the Act.
Deemed Remuneration: Subsection 6(3)
Subsection 6(3) of the Act creates a presump
tion that an amount paid by an employer to an
employee:
6(3)(a) during the course of the employment
period; or
6(3)(b) pursuant to an obligation arising out of
an agreement made between the
employer and the employee immedi
ately prior to, during, or after, such
period
constitutes remuneration for the purposes of sec
tion 5 of the Act. Prima facie, in the absence of
any evidence to the contrary, one would have to
conclude that the amount at issue falls within
subsection 6(3) and therefore becomes "remunera-
tion" for the purposes of section 5.
To rebut this presumption, that the payment is
to be treated as remuneration, the taxpayer must
establish that the amount could not reasonably be
regarded as one of three things:
6(3)(c) consideration or partial consideration
for accepting the office or entering into
the contract of employment;
6(3)(d) remuneration or partial remuneration
for services as an officer or under the
contract of employment;
6(3)(e) in consideration or partial consider
ation for a convenant with reference to
what the officer or employee is, or is
not, to do before or after the termina
tion of the employment.
Though counsel did not address this issue in
argument, I am satisfied that the taxpayer has met
the evidentiary burden of proof required of him to
displace the presumption that the amount he
received constituted remuneration under subsec
tion 6(3). On the facts of this case, it cannot be
supported:
—that the payment was made to entice the
plaintiff "into accepting the office or entering
into the contract of employment";
—that it was remuneration or partial remunera
tion for services;
'—that the payment was related to consideration
for a convenant undertaken by the employee
as to what he was to do or not do, before or
after termination of the employment.
Money paid as an incentive to compensate for a
capital loss brought about by an involuntary trans
fer while remaining in the employ of the same
employer and providing no economic benefit to
either party is not caught by subsection 6(3).
Benefit Received in Respect of, in the Course of or
by Virtue of an Office or Employment: Paragraph
6(1)(a)
Paragraph 6(1)(a) states that there is to be
included in an employee's income other benefits of
any kind whatever received or enjoyed by him in
the year in respect of, in the course of, or by virtue
of an office or employment. Exempt from tax are
benefits derived by an employee from his employ
er's contributions to or under a registered pension
fund or plan, group sickness or accident insurance
plan, supplementary unemployment benefit plan,
deferred profit sharing plan or group term life
insurance policy, under an employee benefit plan
or employee trust, or a benefit in relation to the
use of an automobile, except to_ the extent that it
relates to the operation of the automobile.
My interpretation of paragraph 6(1)(a) leads
me to the conclusion that a determination must be
made as to whether the payment received by the
taxpayer did in fact constitute a benefit and
whether it was received "in respect of, in the
course of, or by virtue of an office or
employment".
As previously stated, I am satisfied that the
payment made to the taxpayer in question did not
arise in relation to his office or employment; sub
stantially it was made in order to avoid a potential
labour dispute and directed to the plaintiff as a
person rather than in his capacity as an employee.
The case of Phaneuf Estate v. R., [1978] 2 F.C.
564; 78 DTC 6001 (T.D.) fashioned a test for
determining whether a payment constitutes an
employment benefit. Thurlow A.C.J. (as he then
was) said at pages 572 F.C.; 6005 DTC:
While the language of the statutes differ, the test expressed
by Viscount Cave L.C. (supra) appears to me to express, as
well as it can be expressed, the essence of what falls within the
taxing provision of the Income Tax Act. Is the payment made
"by way of remuneration for his services" or is it "made to him
on personal grounds and not by way of payment for his
services"? It may be made to an employee but is it made to him
as employee or simply as a person. Another way of stating it is
to say is it received in his capacity as employee, but that
appears to me to be the same test. To be received in the
capacity of employee it must, as I see it, partake of the
character of remuneration for services. That is the effect that,
as it seems to me, the words "in respect of, in the course of or
by virtue of an office or employment" in paragraph 6(1)(a)
have.
The Supreme Court of Canada in Savage
(supra) accepted this test but not without reserva
tion. It disagreed with the statement that, to be
received in the capacity of employee, the payment
had to be characterized as remuneration for ser
vices; it cited the passage from R. v. Poynton,
[1972] 3 O.R. 727; 72 DTC 6329 (C.A.) which
appears to be authority for the proposition of
"conferring an economic benefit". Evans J.A.,
speaking for the Court, said at pages 6335-6336
DTC; 738 O.R.:
I am of the opinion that there is no difference between
money and money's worth in calculating income. They are both
benefits and fall within the language of ss. 3 and 5 [now 6] of
the Act, being benefits received or enjoyed by the respondent in
respect of, in the course of, or by virtue of his office or
employment. 1 do not believe the language to be restricted to
benefits that are related to the office or employment in the
sense that they represent a form of remuneration for services
rendered. If it is a material acquisition which confers an
economic benefit on the taxpayer and does not constitute an
exemption, e.g., loan or gift, then it is within the all-embracing
definition of s. 3 [i.e. the definition of "income"]. [Square
brackets and underlining are mine.]
In Savage, supra, the Court in distinguishing
the Phaneuf case, supra, wrote as follows at pages
441-442 S.C.R.; 5414 DTC:
It is difficult to conclude that the payments by Excelsior to
Mrs. Savage were not in relation to or in connection with her
employment. As Mr. Justice Grant said, the employee took the
course to improve his or her knowledge and efficiency in the
company business and for better opportunity of promotion.
As Crown counsel submits, the sum of $300 received by Mrs.
Savage from her empoyer was a benefit and was received or
enjoyed by her in respect of, in the course of or by virtue of her
employment within the meaning of s. 6(1)(a) of the Income
Tax Act; it was paid by her employer in accordance with
company policy upon the successful completion of courses
"designed to provide a broad understanding of modern life
insurance and life insurance company operations" and "to
encourage self-upgrading of staff members"; the interest of the
employer "was that the courses would make her a more valu
able employee"; Mrs. Savage took the courses to "improve
[her] knowledge and efficiency in the company business and for
better opportunity for promotion". Distinguishing this case
from Phaneuf, there was no element of gift, personal bounty or
of considerations extraneous to Mrs. Savage's employment.
I would hold that the payments received by Mrs. Savage
were in respect of employment. That, of itself, makes them
income from a source under s. 3 of the Act.
It is clear to me that on the facts in Savage
there was no element of gift, personal bounty or of
consideration extraneous to the taxpayer's employ
ment. The Court was satisfied that the award of
$300 for having successfully completed a course
recommended by the company was "in accordance
with company policy ... designed to provide a
broad understanding of modern life insurance ...
to encourage self-upgrading of staff members ...
make ... [for] a more valuable employee ...
[more efficient] in the company business and for
better opportunity for promotion." These words
clearly imply that, though some relation between
the payment and employment are inevitable, the
primary purpose of the allowance, in order to
qualify as exempt, must be completely extraneous
to the employment and the amount should not
constitute a benefit either to the employer or to the
employee in relation to the employment. In the
case before me the payment was to the taxpayer in
his capacity as a person. The employee had no
choice in accepting the transfer. The motivation
was political and was brought about by a labour
dispute. The transfer to Ottawa was involuntary
and certainly did not improve traffic safety at the
Ottawa International Airport. The payment of this
sum cannot be related to company policy, to pro
viding greater understanding of air traffic control
or better understanding of company operations, to
upgrading the staff member, to making the tax
payer a more valuable employee nor did it create
an opportunity for promotion.
In the case of Roy, J.L. v. M.N.R. (1979), 80
DTC 1005 (T.R.B.), the employer had set up a
"redundancy program" under which it paid a sub
stantial sum to the taxpayer over a period of years
following his peremptory dismissal. The payments
were based on the taxpayer's length of service,
salary level, age, number of years to pension age,
insurance and so on. The Tax Review Board held
at page 1007:
The formula under the redundancy fund was carefully cal
culated and motivated by the company to preclude litigation or
threat thereof by an employee who was dismissed. The pay
ments made to the appellant under its redundancy fund were
not benefits received by virtue of the contract of employment of
the appellant but rather they arose under an arrangement
subsequent to the termination of the employment contract.
Similarly, in the present case, the payments
made to the transferring air traffic controllers did
not arise by virtue of the contract of employment
but rather pursuant to a separate agreement,
which was entered into before the effective date of
the transfers as opposed to after termination of the
employment as in Roy (supra). But more impor
tantly, the payment of the allowance with which I
am concerned was primarily motivated by con
siderations extraneous to the employment, namely
public and labour relations considerations. This is
further evidenced by the requirement that the
transferring employees avoid contact with the
media and not reside in the Province of Quebec for
five years and, further, failing which they would
have to reimburse.
For the above reasons I am of the opinion that
the Crown has failed to etablish that the payment
received by the plaintiff taxpayer in this case was
paid "in respect of, in the course of, or by virtue of
an office or employment" as required by para
graph 6(1)(a) of the Act.
Having so found, it is questionable whether I
need make a finding as to whether the payment in
question in fact constituted a benefit. Neverthe
less, this appears to be an appropriate case to
expound further upon the meaning of the phrase
"benefits of any kind whatever" as it is used in
paragraph 6(I)(a) of the Act.
I think it is clear that the purpose of paragraph
6(1)(a) is to include in the taxable income of a
taxpayer those economic benefits arising from his
employment which render the taxpayer's salary of
greater value to him. I am persuaded that if there
was a recipient of any alleged benefit which may
have arisen from the circumstances of this case, it
was certainly not the plaintiff taxpayer. I cannot
equate it to an economic advantage such as free
board and lodging which is mentioned in para
graph 6(1)(a).
I am of the view that paragraph 6(1)(a) is in the
Act to provide a method to tax all those individu
als who receive perks in addition to their salaries.
Employers may offer a wide variety of induce
ments ranging from pensions and death benefits to
liberal expense accounts and allowances, to more
immediate advantages, such as country club facili
ties and the use of company cars, boats and other
property. It is only fair that these items be added
to income and taxed. Those with greater economic
advantages should pay their fair share. A disparity
in the tax treatment of an employee who receives
all his compensation as salary and wages and one
who receives the same amount of compensation
but partly in the form of fringe benefits and
allowances is not defensible.
I think it is correct interpretation of paragraph
6(1)(a) in light of recent decisions in the Supreme
Court of Canada, in Stubart [Stubart Investments
Ltd. v. The Queen, [1984] 1 S.C.R. 536], supra,
etc., and Lor-Wes Contracting Ltd. v. The Queen,
[1986] 1 F.C. 346; [1985] 2 CTC 79 (C.A.) where
Mr. Justice MacGuigan wrote at pages 352 F.C.;
83 CTC:
The only principle of interpretation now recognized is a words-
in-total-context approach with a view to determining the object
and spirit of the taxing provisions.
Accordingly, the purpose of paragraph 6(1)(a)
is not to impose taxation upon an employee for an
amount received by him as reimbursement when it
cannot be found in the exemption provisions of
paragraph 6(1)(b). Although the Crown relied
heavily on the decision in Ransom (supra) sug
gesting that, if employment gave rise to a pay
ment, it necessarily constituted income unless
exempt, counsel failed to point out the true inter
pretation which Noël J. attributed to payments
made in these particular types of situations when
he wrote at pages 310-311 Ex.C.R.; 5244 DTC:
An allowance is quite a different thing from reimbursement.
It is, as already mentioned, an arbitrary amount usually paid in
lieu of reimbursement. It is paid to the employee to use as he
wishes without being required to account for its expenditure.
For that reason it is possible to use it as a concealed increase in
remuneration and that is why, I assume, "allowances" are
taxed as though they were remuneration.
It appears to me quite clear that reimbursement of an
employee by an employer for expenses or losses incurred by
reason of the employment (which as stated by Lord Mac-
Naughton in Tenant v. Smith ([1982] A.C. 150) puts nothing
in the pocket but merely saves the pocket) is neither remunera
tion as such or a benefit "of any kind whatsoever" so it does not
fall within the introductory words of section 5(1) or within
paragraph (a). It is equally obvious that it is not an allowance
within paragraph (b) for the reasons that I have already given.
Counsel for the Crown further suggested that
the payment received by the taxpayer was one for
which he was unaccountable and that the taxpayer
was under no obligation to purchase a home in the
Ottawa area. It was this argument which appears
to have persuaded the Tax Court and led it to the
following conclusion [at page 1195 DTC]:
It was his choice to acquire a home and he received money
without even having to prove a loss. The formula was set up
and the formula was followed. Had the appellant seen fit to
rent an apartment or live with relatives or friends, he still would
have received the same amount of money.
In my opinion, that reasoning is neither here nor
there. Firstly, the decision of the Tax Court is not
based on the facts of the case which are that the
plaintiff taxpayer did purchase a home. Secondly,
the taxpayer was forced to accept the transfer in
order to retain his employment. Under those cir
cumstances, I would think it was not only his
choice but his right to purchase a home in the
Ottawa area and attempt to put himself in the
same position he was in prior to being moved from
his home in Montréal. From the evidence adduced,
it is manifestly clear that the plaintiff "put nothing
in his pocket but merely saved the pocket".
It will be recalled that there were two aspects to
the Air Traffic Control Linguistic Relocation
"Allowance". Throughout my reasons for judg
ment, I have only dealt with the Accommodation
Differential, which, by virtue of the above, I con
clude is not to be computed in the plaintiff's
taxable income, be it as "other remuneration",
"deemed remuneration", another "benefit of any
kind whatever" or as an "allowance for any other
purpose" within the intendment of subsections
5(1) and 6(3) and paragraphs 6(1)(a) and (b) of
the Act, respectively. As far as the second aspect
of the "allowance" is concerned, that is the Social
Disruption "Allowance", in the absence of any
proof put forward by the plaintiff to show that he
actually suffered other losses due to his relocation
equal to the $2,155.41 he received, I must con
clude that a benefit accrued to him within the
meaning of paragraph 6(1)(a) of the Act. Such
amount did not constitute remuneration under
subsection 5(1), deemed remuneration for the pur
poses of subsection 6(3), or an allowance within
the purview of paragraph 6(1)(b) for the same
reasons as the Accommodation Differential does
not come under the above provisions.
I therefore allow this appeal and declare that
the Accommodation Differential Allowance in the
amount of $15,571 paid to the plaintiff by Her
Majesty the Queen in the Right of Canada is not
taxable; but that the Social Disruption Allowance
in the amount of $2,155.41 is to be included in
computing the taxpayer's income for 1976. Costs
to the plaintiff.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.